<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, 1998
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. |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 22, 1999 was approximately $66,651,300.
The number of shares of Registrant's Common Stock outstanding on
March 22, 1999 was 7,405,700.
The Company's definitive Proxy Statement dated March 22, 1999 is
incorporated by reference in Part III of this Form 10-K.
Exhibit Index can be found on page 51 of this document.
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AMERICAN PRECISION INDUSTRIES INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 1998
TABLE OF CONTENTS
Item Page
---- ----
Part I 1 Business
a. Products and Marketing............................... 3-5
b. Competition.......................................... 5
c. Backlog.............................................. 5
d. Suppliers............................................ 5
e. Patents and Licenses................................. 6
f. Customers............................................ 6
g. Research and Development............................. 6
h. Environmental Matters................................ 6-8
i. Employees............................................ 8
j. Lines of Business and Industry Segment Information... 8
k. Foreign Operations................................... 9
2 Properties............................................... 9-10
3 Legal Proceedings........................................ 10
4 Submission of Matters to a Vote of Security Holders...... 10
Part II 5 Market For Registrant's Common Equity and Related
Stockholder Matters.................................. 11
6 Selected Financial Data.................................. 12
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 13-17
7A Quantitative and Qualitative Disclosures About Market
Risk ................................................ 17-18
8 Financial Statements and Supplementary Data.............. 19-41
9 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure............... 41
Part III 10 Directors and Executive Officers of the Registrant....... 42
11 Executive Compensation................................... 42
12 Security Ownership of Certain Beneficial Owners
and Management....................................... 42
13 Certain Relationships and Related Transactions........... 42
Part IV 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................ 43-48
Signatures............................................... 49-50
2
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PART I
ITEM 1. BUSINESS
a. Products and Marketing
The registrant and its subsidiaries (the "Company" or "API") conduct
operations in two major business segments, namely, Motion
Technologies and Heat Transfer.
The Company's objective is to consolidate a major share of target
market segments in electromechanical and electronic motion control
and industrial heat transfer. It further seeks to diversify into
select market segments and geographic markets through internal
growth and strategic acquisitions focused on enhancing and
complementing its existing technology base.
API Motion Inc
API Motion Inc., comprised of API Controls, API Deltran, API Gettys,
API Harowe, API Portescap, API Positran, API Elmo, API Delevan, and
API SMD is a designer and manufacturer of high performance precision
motion control products and systems and inductive devices.
API Controls 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, winding equipment, positioning tables and
electronics assembly applications. Efforts continue on the
development of network communications capabilities for its
Intelligent Servo, Microstepper and Centennial drives.
API Deltran designs and manufactures high quality, precision
electromagnetic clutches, brakes and clutch/brake assemblies used in
sophisticated rotary motion control applications. A new line of
permanent magnet brakes was introduced in 1998 for the European
motor markets.
API Gettys designs and manufactures precision servo and step motors
for a broad range of applications. Product families include DC brush
and AC servo motors and NEMA-standard step motors with linear
actuating assemblies. New high-performance Turbo series of step and
servo motors were delivered to customers for testing during 1998.
The Turbo series motors include several frame sizes and a variety of
mechanical interface options with over 100 different electrical
variations.
API Harowe designs and manufactures high performance resolvers,
encoders, and other specialty rotating electromagnetic components
for industrial, medical, military and commercial aviation
applications. Their Digital Resolver feedback package provides an
ideal feedback solution for rugged operations such as welding,
machine tools, and similar industrial applications.
API Portescap, acquired on July 8, 1997, participates in the market
for high performance, miniature motors. It develops, manufactures
and markets ironless DC motors, brushless DC motors, disc magnet
stepper motors and complementary reduction gearboxes, DC
tachogenerators, and magnetic encoders. API Portescap also offers a
line of small frame brushless DC motors that can be provided in over
3,600 different model variations, allowing it to respond to a wide
variety of markets such as medical instrumentation. In addition, API
Portescap markets higher power ironless-rotor motors, iron core DC
motors, and electronic drive circuits.
API Portescap's products are used by a number of business sectors.
Applications for these products typically include the following
features: (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.
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API Positran offers high quality gearboxes designed and manufactured
in its ISO 9001 certified facility. 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 more efficiently. This results in less heat loss and smaller
actuators.
API Elmo, acquired February 1, 1999, develops and manufactures a
wide range of customer-specific single phase and three phase
induction and servo motors of rated power up to 25kW. Their
computerized database includes 3,000 different motor models.
Products are supplied to a number of leading industrial companies
and feature compliance with international standards such as CSA and
UL. Applications include use in industrial washing machines, looms
and knitting machines, ventilation systems, medical and printing
equipment, robotics and electric fork lift trucks.
API Delevan and API SMD design, manufacture and market an extensive
line of quality printed circuit board through-hole and surface-mount
inductors 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. Both of these operations have been ISO 9001 Certified
since 1994.
The markets served by API Delevan and API SMD are comprised of a
small number of large suppliers 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. Sales growth is oriented toward specialty niche
markets and custom components to augment its large offering of
standard catalog products.
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, food and
dairy, and many of their support industries. Products range from
small standard units to large custom-designed heat exchangers, and
include industrial and portable compressors, refrigeration
equipment, turbines, and applications in the food and beverage and
chemical processing markets. API Basco, API Airtech, and API
Schmidt-Bretten GmbH are ISO 9001 certified, an important element in
the Company's plans for international growth.
API Basco 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 manufactures a complete line of air-cooled aluminum heat
exchangers. Its operations are based in a two-year old 82,000 square
foot facility which will accommodate future growth needs.
API Ketema has a strong position in both the general industrial and
refrigeration heat transfer marketplace. This division manufactures
shell and tube heat exchangers, chiller barrels, condensers, flooded
evaporators and industrial packaged chillers.
API Schmidt-Bretten, 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 primarily in
Germany, has established a conduit to distribute plate products into
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the U.S. market. It also allows API to market heat transfer products
manufactured at various U.S. locations into Europe.
Euro Conversion
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies
and the European Union's common currency (Euro). The transition
period for the introduction of the Euro is between January 1, 1999
and January 1, 2002.
The Company has conducted an internal review of the potential
effects of the Euro conversion and determined that the modification
of existing business systems to accommodate the Euro are not
expected to be material. Other factors such as competitive
implications of increased price transparency, currency exchange rate
risk and derivative exposures, continuity of material contracts and
potential tax consequences are not expected to have a material
impact on the Company's financial condition, liquidity or results of
operations.
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. Some of these competitors are larger and
have greater resources. The Company continues to be faced with
strong global competition and cost reduction pressures.
The Company relies primarily on the depth of its engineering
expertise in motion control and heat transfer technologies and on
the quality of its extensive products and services 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, 1998 was approximately $75,507,000. 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 two business segments:
<TABLE>
<CAPTION>
API Heat
(In thousands) API Motion Transfer Total
--------------- ---------------- ---------------
<S> <C> <C> <C>
1998 $51,274 $24,233 $75,507
1997 $47,868 $27,716 $75,584
</TABLE>
The increase in backlog in the Motion Technologies segment is
principally due to increased orders for motors, brakes and clutches.
Backlog has decreased for the Heat Transfer segment primarily due to
weakness in the U.S. industrial compressor market and reductions in
orders for air-cooled and shell and tube heat exchangers.
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. The Company has
commenced initiatives to establish company-wide preferred suppliers
for significant raw materials. This objective will result in closer
alliances with suppliers and includes a focus on cost reductions and
improved service.
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e. Patents and Licenses
The Company has patents in multiple jurisdictions covering the
design of certain API Portescap products including, in particular,
the disc magnet motor, whose patent expires on July 21, 2004. Also
API Portescap's escap(R) tradename is registered in multiple
jurisdictions. The Company recently registered the tradename Turbo
Servo, and the tradename Turbo Stepper for its new API Gettys' motor
products.
The Company has patents in multiple jurisdictions covering the
design of its API Elmo synchronous servomotors. Expiration of these
patents occurs in 2008.
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 API Delevan. None of
these patents expire prior to the year 2006.
The Company was issued a patent in December 1998 covering heat
exchangers utilized in compressed air drying systems. This patent
expires in 2017.
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 1998, 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 $4,917,000,
$3,667,000, and $1,759,000, in 1998, 1997, and 1996, respectively.
h. Environmental Matters
o In April 1998, API Harowe Inc. ("Harowe") was notified by the
owner of the real property in West Chester, Pennsylvania, at
which Harowe leases its facility, that there was alleged
contamination at the facility. The owner claims that Harowe is
responsible for the remediation cost and other damages arising
out of that alleged contamination. The owner, on its own
initiative, undertook certain soil remediation activities at
its own expense.
Harowe has retained an environmental consultant to assist it
in determining what, if any, liability Harowe has with respect
to the alleged contamination. In its Supplemental Site
Characterization Report dated November 17, 1998, the
consultant concluded that (1) although select volatile organic
compounds ("VOCs") were detected in soil samples, none of
these VOCs exceeds the limits set by the Pennsylvania
Department of Environmental Protection ("PADEP"), and (2)
ground water samples found five VOCs at concentration levels
in excess of the PADEP's limits. The consultant's report
concludes by stating that although the exact sources of these
VOCs have not been identified, it is possible that they could
be due to historical releases from underground storage tanks
on the site or to past or present releases from the sanitary
sewer line.
On January 26, 1999, the consultant submitted a proposal to
conduct a remedial investigation and risk assessment of the
site for an estimated cost of $76,050. The estimated cost does
not include any of the costs for remedial action activities,
attainment
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monitoring, or activities associated with entering into a
formal process of receiving liability protection from the
PADEP's land recycling program.
In a letter dated February 2, 1999, the owner's attorney
advised Harowe that he did not believe that the consultant's
proposed timetable was aggressive enough to move the process
forward expeditiously, and that he did not agree with the
consultant's suggestion to hold off contacting PADEP until all
investigatory work was complete. The owner's attorney also
demanded that Harowe reimburse the owner for all of its past
costs, including those costs incurred to assess and remediate
contaminated soils, which amounted to $77,360 through 1998. He
also suggested that Harowe would be liable for any damages
incurred by the owner if the owner was unable to close on its
planned sale of the site due to the presence of contamination
in either the soil or ground water.
Harowe intends to proceed along the lines suggested in the
consultant's proposal, without admitting responsibility for
all of the contamination found on the site. The Company has
also made a demand on Hawker Siddeley Holdings Inc., from whom
the Company purchased Harowe, to indemnify and hold the
Company harmless from any damages arising out of this
situation.
o 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
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approximately $830,000 and the proposal to connect residents
to a public water supply would cost approximately $2,340,000.
The EPA has held a public hearing on these matters and will
make a final determination as to which alternative or
combination of alternatives, if any, to adopt. Once the EPA
selects a remediation plan, it is likely to assert a claim
against the PRPs named in its August 1995 unilateral order to
recover the costs of remediation. Those PRPs may assert a
claim against Portescap U.S. Inc. for contribution. In that
event, Portescap intends to deny any liability, and to assert
a counterclaim for contribution against the other PRPs.
However, there is no assurance that it will prevail on either
its denial of liability or its claim for contribution.
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, 1998, 1,976 persons were employed by the Company.
j. Lines of Business and Industry Segment Information
API's manufacturing operations in 1998 were carried on through
subsidiaries. Effective December 31, 1998, a number of U.S.
subsidiaries were merged into their parent corporation. Operations
are classified into two 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:
API MOTION INC.:
API Controls Servo and stepper motor drives,
power supplies and motion
controllers
API Deltran Electro-magnetic clutches and brakes
API Deltran (St. Kitts) Electro-magnetic clutches and brakes
API Gettys AC and DC servo motors and stepper
motors
API Harowe Resolvers and encoders
API Harowe (St. Kitts) Resolvers and DC motors
API Portescap DC and disc magnet stepper motors
API Positran Gearboxes and actuators
API Elmo Specialty electric induction and
servo motors
API Delevan Axial-leaded inductors
API SMD Surface mounted inductors
API HEAT TRANSFER INC.:
API Basco Shell and tube heat exchangers
API Airtech Air cooled aluminum heat exchangers
API Ketema Packaged chillers, refrigeration
condensers, and shell and tube heat
exchangers
API Schmidt-Bretten (Germany) Plate heat exchangers, evaporators
and thermal processing systems
API Schmidt-Bretten (U.S.) Plate heat exchangers, evaporators
and thermal processing systems
Amounts of revenue from sales to unaffiliated customers, operating
profit or loss, and identifiable assets for the three years ended
December 31, 1998, are included in Note L of the notes to
consolidated financial statements included in this report.
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k. Foreign Operations
Export sales, principally to Europe, Canada, and Mexico, were
approximately 31%, 29%, and 16%, of consolidated sales for 1998,
1997, and 1996, 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 L of the notes to consolidated financial
statements included in this report.
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 MOTION INC.
API Controls and API Deltran, 43,700
Amherst, New York (Hazelwood Drive)
API Gettys, Racine Wisconsin 88,000
(North Green Bay Road)
API Harowe and API Portescap U.S., 34,500
West Chester, Pennsylvania
(Westtown Road)
API Harowe (St. Kitts) Ltd. and 11,500
API Deltran (St. Kitts.) Ltd., St. Kitts, West
Indies (Bourkes Road)
API Portescap, 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 Elmo AB, Flen Sweden 152,000
(Industrivagen 7)
API Delevan, East Aurora, New York 50,000
(Quaker Road)
API SMD, Arcade, New York 23,500
(North Street)
API HEAT TRANSFER INC.
API Basco, Buffalo, New York 115,600
(Walden Avenue)
API Airtech and API Schmidt-Bretten, 82,000
Arcade, New York (North Street)
API Ketema, Grand Prairie, Texas 150,000
(West Marshall Drive)
API Schmidt-Bretten GmbH, Bretten, Germany 100,000
(Pforzheim Strasse)
</TABLE>
Of the facilities listed above, the API Gettys, API Portescap, API
Positran, API Elmo, API Delevan, API SMD, API Basco, API Airtech,
and API Ketema facilities are owned by API.
The facilities occupied by API Airtech and API Schmidt-Bretten, API
Ketema, and API SMD constitute collateral for three industrial
revenue bond financings. The land and buildings owned by API
Portescap in Switzerland, API Positran in England, and API Elmo in
Sweden have been pledged as security for certain mortgage loans.
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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 API Deltran (St. Kitts) Ltd.) $ 14,000 2003
Hazelwood Drive (API Controls and API Deltran) $157,000 2002
Westtown Road (API Harowe) $205,000 2000/2001
Pforzheim Strasse (API Schmidt-Bretten GmbH) $198,000 2001
</TABLE>
In addition, subsidiaries of API Portescap 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. The approximate aggregate
annual rentals for these sales offices is $217,000. The lease terms
range from 1999 to 2003, and the aggregate square footage is
approximately 15,500.
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).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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>
Quarterly Stock Price Data
----------------------------------------------
<S> <C> <C>
Fiscal Year 1998 High Low
First Quarter $21.00 $17.00
Second Quarter $19.50 $14.38
Third Quarter $16.56 $11.00
Fourth Quarter $14.50 $ 9.50
Fiscal Year 1997
First Quarter $20.38 $16.75
Second Quarter $20.19 $16.25
Third Quarter $23.81 $19.00
Fourth Quarter $26.00 $20.50
</TABLE>
As of December 31, 1998, there were 862 shareholders of record. Effective
in the first quarter of 1997, the Company decided to eliminate its
quarterly cash dividend and to retain the cash for expansion and
acquisitions.
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ITEM 6. SELECTED FINANCIAL DATA
Five Year Financial Summary
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Operations 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $216,615 $184,070 $116,783 $ 82,403 $ 64,896
Gross profit $ 66,301 $ 56,863 $ 39,131 $ 27,114 $ 21,626
Earnings before Interest, Taxes,
Depreciation and Amortization $ 23,508 $ 22,534 $ 15,074 $ 10,053 $ 7,800
Interest and debt expense,
net of investment (income) $ 3,356 $ 2,753 $ 968 $ (19) $ (149)
Depreciation and amortization $ 9,411 $ 7,434 $ 3,785 $ 2,594 $ 2,275
Net earnings $ 6,358 $ 8,291 $ 6,525 $ 4,731 $ 3,431
Capital expenditures $ 9,285 $ 8,737 $ 8,319 $ 4,585 $ 1,857
Balance Sheet
Working capital $ 43,395 $ 36,296 $ 24,192 $ 18,463 $ 14,197
Current ratio 2.0 1.8 2.4 2.4 2.3
Property, plant and equipment, net $ 53,660 $ 52,647 $ 27,206 $ 12,269 $ 10,202
Total assets $169,265 $162,670 $ 82,012 $ 57,791 $ 45,344
Long-term liabilities $ 40,559 $ 40,298 $ 24,674 $ 10,292 $ 3,523
Shareholders' equity $ 84,468 $ 76,600 $ 40,544 $ 34,347 $ 30,905
Ratio Analysis
Gross profit (% of sales) 30.6% 30.9% 33.5% 32.9% 33.3%
Earnings before income tax
(% of sales) 4.9% 6.6% 8.6% 8.8% 8.2%
Net earnings (% of sales) 2.9% 4.5% 5.6% 5.7% 5.3%
Long-term liabilities to total
capitalization 48.0% 52.6% 60.9% 30.0% 11.4%
Interest coverage ratio 4.1 5.2 8.7 31.3 25.1
Per Common Share
Market price range:
High $ 21.00 $ 26.00 $ 20.25 $ 14.75 $ 8.25
Low $ 9.50 $ 16.25 $ 10.75 $ 7.63 $ 6.25
Year-end $ 10.31 $ 20.81 $ 20.25 $ 11.13 $ 7.75
Net earnings per weighted
average common share:
- basic $ 0.85 $ 1.12 $ 0.91 $ 0.67 $ 0.49
- diluted $ 0.68 $ 0.97 $ 0.88 $ 0.65 $ 0.49
Shareholders' equity per
common share $ 7.80 $ 6.78 $ 5.56 $ 4.82 $ 4.38
Other
Number of shares outstanding
at year end 7,479 7,438 7,292 7,128 7,064
Weighted average shares outstanding:
- basic 7,464 7,381 7,190 7,090 7,062
- diluted 9,378 8,537 7,452 7,262 7,069
Effective tax rate 40.5% 32.0% 34.7% 34.5% 35.3%
Shareholders 862 948 1,015 1,076 1,074
Employees 1,976 2,043 1,309 1,033 847
</TABLE>
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REVIEW - OPERATIONS
NET SALES
Consolidated net sales in 1998 were $216.6 million, compared with
$184.1 million in 1997, an increase of $32.5 million or 17.7%. Of
the increase, $31.1 million was due to ownership for a full 12
months in 1998 of Portescap, acquired July 8, 1997, and
Schmidt-Bretten, acquired January 31, 1997. The remaining increase
resulted from higher sales of API Motion's feedback devices,
components, brakes and clutches and of API Heat Transfer's
air-cooled and plate and frame products which were somewhat offset
by lower sales of shell and tube heat exchangers due to weak
compressor industry demand and lower sales of turbo motors and
motion controls due to weak semiconductor industry demand and
product introduction delays.
In 1997, API's consolidated net sales were $184.1 million, an
increase of 57.6% compared with 1996 net sales of $116.8 million.
The 1997 acquisitions of Schmidt- Bretten and Portescap and the
ownership for a full 12 months in 1997 of Gettys and Ketema (both
acquired in April 1996) accounted for the majority of the increase.
COST OF PRODUCTS SOLD
In 1998, cost of products sold was $150.3 million, compared with
$127.2 million in 1997. Of the $23.1 million increase, $21.2 million
reflects the ownership for a full 12 months in 1998 of
Schmidt-Bretten and Portescap. Cost of products sold as a percent of
net sales was 69% in 1998 and 1997. API Heat Transfer lowered its
cost of products sold as improved efficiencies and lower costs
offset the impact of higher sales and early 1998 manufacturing
inefficiencies at the air-cooled products facility. API Motion's
cost of products sold increased as higher sales volumes and new
product development and introduction costs more than offset the
benefit of a $1.2 million reduction in Portescap's inventory
obsolescence reserve resulting from the availability of new
information and experience acquired.
In 1997, cost of products sold increased $49.6 million over the
previous year. The 1997 acquisitions of Schmidt-Bretten and
Portescap and the ownership of Ketema and Gettys for a full twelve
months in 1997 accounted for 90% of the increase. As a percent of
net sales, cost of products sold was 69% in 1997 and 66% in 1996.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were $47.3 million in 1998
compared with $38.0 million in 1997. Over 78% of the increase is the
result of owning Schmidt-Bretten and Portescap for a full 12 months
in 1998. The remainder of the increase was related to product
redesign and introduction at API Motion and higher sales volumes of
plate heat exchangers, components, brakes and clutches.
Selling and administrative expense in 1997 was $38.0 million
compared with $26.4 million in 1996. The increase resulted primarily
from the two acquisitions in 1997 and the ownership of Ketema and
Gettys for a full 12 months that same year.
13
<PAGE> 14
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses were $4.9 million in 1998,
compared with $3.7 million in the prior year. Nearly 80% of the
increase reflects ownership of Schmidt-Bretten and Portescap for a
full 12 months in 1998. Research and product development costs for
API Heat Transfer's air-cooled products and for API Motion's turbo
motors, brakes and clutches accounted for the remainder of the
increase.
Research and product development costs in 1997 increased to $3.7
million from $1.8 million in 1996. The 1997 acquisitions, the
ownership of Gettys for 12 months in 1997 and investment in new
motion control and turbo motor products are reflected in the
increase.
INTEREST AND DEBT EXPENSE, NET OF INVESTMENT INCOME
Interest and debt expense in 1998 was $3.4 million, compared with
$2.8 million in 1997. The increase reflects the ownership of
Portescap for a full year in 1998, costs associated with
establishing a $100 million multi-currency credit facility in August
1998 and lower interest income. This was partially offset by lower
interest rates in Switzerland and the U.S.
Interest and debt expense increased $1.8 million between 1996 and
1997 of which 89% was interest on debt incurred for, or acquired
with, the acquisitions of Schmidt-Bretten and Portescap. The balance
of the increase was interest expense for a full twelve-month period
on debt incurred for the April 1996 acquisitions of Ketema and
Gettys.
INCOME TAXES AND OTHER EXPENSE
There was no other expense in 1998.
Other expense in 1997 of $210 thousand included costs of $331
thousand related to a settlement agreement with the United States
Government offset by a gain of $121 thousand from the sale of a
non-operating investment.
Income taxes in 1998 were $4.3 million, a rate of 40.5% of earnings
before income taxes. This included $589 thousand of tax expense
resulting from the granting of a 10-year tax holiday for API
Portescap by the Swiss canton of Neuchatel. The holiday applies to
Portescap's pre-tax earnings on manufactured products and provides
100% relief from cantonal taxes for 1999 through 2002 and 50% relief
for the six years thereafter. API Portescap currently remains
subject to Swiss federal taxes. The $589 thousand charge reflected
in the 1998 tax provision resulted primarily from the write-down of
net operating losses placed on the balance sheet at Portescap's
acquisition which have a lower future value as a result of the tax
holiday. The benefit of the tax holiday began January 1, 1999 and is
estimated to lower API's consolidated tax rate with unusual charges
excluded by approximately 2%.
Excluding the unusual charge, API's 1998 consolidated tax rate was
35.0% as compared with 32.0% in 1997. The increase in rate reflects
changes in the geographic mix of earnings. Non-recurring adjustments
to pre-1997 provisions following the completion of audits also
lowered the 1997 rate.
Income taxes expressed as a percent of earnings before taxes were
32.0% and 34.7% in 1997 and 1996 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 1998 were $6.4 million, compared with $8.3 million
in 1997. Costs related to manufacturing inefficiencies in the first
six months of 1998 at Heat Transfer's air-cooled products facility,
a productivity decline in the second quarter in micromotor
production during conversion to a new manufacturing technology,
product development and introduction costs for motion control
devices and turbo motors and the unusual tax charge were not fully
offset by cost
14
<PAGE> 15
reductions, productivity improvements, the benefit of a reduction in
Portescap's inventory reserve and ownership for a full 12 months in
1998 of Schmidt-Bretten and Portescap.
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.
BUSINESS SEGMENT DISCUSSION
API Motion: In 1998, net sales of $121.5 million were 33% ($30.4
million) higher than 1997 net sales. Of the increase, $29.2 million
was due to the ownership for a full 12 months in 1998 of Portescap.
The balance was the result of growing markets, product extensions
and new application development which produced a 17% increase in
sales of brakes and clutches, components and feedback devices.
Offsetting this increase were lower sales of control products and
Gettys motors due to lower demand from the weak semiconductor
industry and delays in new product introductions.
Motion's 1998 operating profit fell to $9.5 million in 1998 from
$10.9 million in 1997. The profit from the higher sales of feedback
devices, components, brakes and clutches and the ownership of
Portescap for a full year was not sufficient to offset the adverse
impact to profit of the lower volume, the cost of product
development and introduction at Gettys and Controls and Portescap
production inefficiencies that occurred during the second quarter.
API Heat Transfer: In 1998, net sales were $95.1 million compared
with $93.0 million in 1997. The 2.2% increase was the net result of
a 14% increase in sales of air-cooled heat exchangers and a 9%
increase in plate and frame heat exchangers, offset by a 7.5%
decline in sales of shell and tube heat exchangers. Demand for shell
and tube products reflected weakness in the U.S. capital goods
sector. This weakness began to affect demand for air-cooled products
in the third quarter of 1998. Schmidt-Bretten, API Heat Transfer's
German supplier of plate and frame heat exchangers, experienced good
demand throughout 1998.
Heat Transfer's 1998 operating profit increased 9.8%, to $9.1
million from $8.3 million in 1997. For shell and tube products, cost
reductions and productivity improvements offset the impact of the
lower sales, resulting in a 1998 operating profit slightly above the
1997 result. For air-cooled products, the benefit of higher sales
was more than offset by manufacturing losses in the first half of
1998. For plate and frame products, volume and cost control and
productivity in the German plant increased this product line's 1998
profitability significantly as compared with 1997.
YEAR 2000 INITIATIVES
The Company is addressing through its business groups the business
and technology issues presented by the year 2000 ("Y2K") and the
possibility that computer programs may not properly recognize the
turn of the century. The Company oversees its Y2K efforts through a
committee chaired by the Company's Chief Financial Officer. The
committee includes a business executive and information technology
("IT") manager from each business group. Outside computer
consultants are utilized as the need arises. Periodic status reports
are provided to the Company's Audit Committee.
The Y2K Committee has organized its efforts to address IT Systems,
Non-IT Areas, Products & Customers and Suppliers. The primary focus
is on assuring that mission critical systems are or will become Y2K
compliant before year-end 1999.
U.S. Status: An inventory and assessment of API's IT systems
occurred in mid-1997. Most of the non-compliant systems required
software upgrades available from the software package suppliers.
Such upgrades are either complete or will be so by the end of the
second quarter of 1999. Written certification of compliance is being
secured from the suppliers of the release upgrades. Ongoing tests
are performed to assure compliance. In non-IT areas, evaluation of
15
<PAGE> 16
production, testing and office equipment and of facilities has
identified no mission critical non-compliance issues. The Company
continues to monitor this area.
Reviews have not identified any U.S. products which would be
non-compliant. However, the Company is limited in its ability to
identify and review all products that were sold in the past,
particularly by its Motion Group. The Company cannot be certain that
there are not older products still in use which contain embedded
logic which may be non-Y2K compliant.
The Company's review of its U.S. raw material requirements has
indicated it is not dependent upon a sole supplier for critical
materials or components. The Company has been surveying its
suppliers of materials and services to assess their compliance
status. To date, the results of these surveys have not identified
any areas of significant concern.
European Status: Status reviews at Schmidt-Bretten and Portescap
identified critical systems requiring upgrade.
Schmidt-Bretten is in the process of replacing its operating and
administrative systems. This project is on target for completion in
mid-1999. Reviews of non-IT areas have identified several
non-compliant items and remedies are in process. The identified
items are not considered to be significant. Raw material reviews
have identified no significant Y2K issues.
Portescap's Y2K review identified as non-compliant the integrated
manufacturing and administrative system which supports its Swiss
facilities. A program begun in the third quarter of 1998 is designed
to bring this system into substantial compliance by the end of the
third quarter of 1999.
Elmo, acquired by API on February 1, 1999, was in the process of
implementing a Y2K compliance program prior to its acquisition. The
program covers the areas discussed above and has identified no
significant areas of non-compliance. Upgrades to its operational and
administrative systems are expected to be complete in the second
quarter of 1999.
Management estimates that U.S. costs incurred to date for Y2K
related hardware and software upgrades to be less than $200 thousand
and costs for outside consultants to be less than $100 thousand.
Future costs are currently not expected to exceed an additional $200
thousand. The 1999 cost to complete the implementation of the system
at Schmidt-Bretten is estimated to be under $200 thousand. The
remaining compliance cost for Elmo is expected to be less than $100
thousand. Future costs specifically related to Y2K compliance at the
Swiss micromotor subsidiary are estimated to be $500 thousand.
At this time, the Company does not have reason to believe that there
will be any significant interruption in the Company's operations
caused by a Y2K problem that is unique to the Company, and,
therefore, the Company has not adopted a contingency plan for such
an event. However, the Y2K Committee continues to monitor this
possibility and will attempt to identify cost effective and timely
solutions should a problem in this regard be likely.
FINANCIAL POSITION
The Company's liquidity is primarily generated from operations. In
addition, short-term lines of credit totaling $5.1 million and
revolving credit of $81.8 million were available at December 31,
1998.
On August 31, 1998, the Company signed an agreement with Marine
Midland Bank and Fleet National Bank for a $100 million,
multi-currency, five-year unsecured Revolving Credit Facility. This
replaced the Company's $20 million Revolving Credit Facility.
Twenty-five million dollars of the new facility is available for
general corporate purposes. The balance is available for potential
acquisitions. The facility is guaranteed by the Company's U.S.
subsidiaries.
16
<PAGE> 17
At December 31,1998, borrowings under the Revolving Credit Facility
were $18.2 million. On February 1, 1999, the Company borrowed 189.9
million Swedish kronor ($24.2 million) of the available facility to
fund the acquisition of ELMO Industrier AB, a Swedish motor
manufacturer. In February 1999, the Company approved a program that
authorizes the repurchase from time to time of up to $5 million of
its common stock. Funding for any repurchase under this program will
be from the cash flow of the Company or from additional borrowing
under its Revolving Credit Facility.
Information on the Company's liquidity position for the past three
years is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Net working capital $43,395 $36,296 $24,192
Current ratio 2.0 1.8 2.4
Cash flow from Operating Activities $11,178 $ 6,336 $ 7,755
Cash, cash equivalents and marketable
securities $ 3,856 $ 2,313 $ 2,412
Capital expenditures $ 9,285 $ 8,737 $ 8,319
</TABLE>
The higher net working capital is partially the result of the
increase in net inventory as Portescap converted to a new
manufacturing technology. Currency translation rates also increased
the U.S. dollar value of inventory held at API's foreign locations.
Cash flow from operations increased to $11.2 million in 1998 from
$6.3 million in 1997. The 1997 cash flow was adversely affected by a
prepayment in the fourth quarter of U.S. income taxes, payments for
Portescap liabilities accrued but unpaid at the July 8, 1997
acquisition date, and payments in 1997 of EVA(R)-based incentive
compensation. These items accounted for the decrease in cash flow in
1997 as compared with 1996.
Capital expenditures in 1998 were $9.3 million compared with $8.7
million in 1997. Expenditures at API Heat Transfer declined to $3.8
million in 1998 from $4.5 million in 1997. Included in 1998 capital
spending was productivity enhancing equipment for Basco and Airtech,
installation cost for the new Airtech furnace and the new computer
system at Schmidt-Bretten. Expenditures at API Motion were $5.2
million and $3.9 million in 1998 and 1997 respectively. Higher
spending at Portescap related to the 1998 conversion to a flow
manufacturing system offset by lower spending at other units
following their 1997 conversion to the new flow manufacturing system
accounted for the increase.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its financing and international
operating activities, is exposed to market risk from changes in
interest rates and foreign currency exchange rates which may
adversely affect its results of operations and financial position.
The Company seeks to minimize the risks from these interest rate and
foreign currency exchange rate fluctuations through its normal
operating and financing activities. When deemed appropriate, the
Company utilizes forward contracts to minimize the foreign currency
exchange rate risk. The Company does not use derivative financial
instruments for trading or other speculative purposes.
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's debt obligations which consist of
a revolving credit facility, industrial revenue bonds and various
term loans. The majority of these debt obligations have variable
interest rates, primarily based on the London Interbank Offered Rate
(LIBOR) and an index rate based on short-term federal tax exempt
obligations. At December 31, 1998, the carrying value and fair value
were approximately $49 million under these obligations. If these
variable interest rates
17
<PAGE> 18
were to change by 10%, the impact on consolidated interest expense
would be approximately $225 thousand annually.
The Company's exposure to market risk for changes in foreign
currency exchange rates arises from investment in and intercompany
balances with foreign subsidiaries, receivables, payables, and firm
commitments arising from international transactions. The Company
attempts to have all such transaction exposures hedged with internal
natural offsets to the fullest extent possible and, once these
opportunities have been exhausted, selectively through derivative
financial instruments with third parties using forward agreements.
At December 31, 1998 one forward agreement with a settlement date of
April 30, 1999 was outstanding with a fair value of approximately
$300 thousand. A 10% change in foreign exchange rates would not have
a material impact on the fair value of the forward agreement or the
Company's results of operations or cash flows related to that
contract.
The above discussion and the estimated amounts generated from the
sensitivity analyses referred to above include forward-looking
statements of market risk which assume that certain adverse market
conditions may occur. Actual future market conditions may differ
materially from such assumptions. Accordingly, the forward-looking
statements should not be considered projections by the Company of
future events of losses.
In 1998, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133),
effective for fiscal years beginning after June 15, 1999. SFAS No.
133 requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted
for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company is conducting an analysis of SFAS
No. 133, which is not expected to have a material impact on the
Company's results of operations or financial position.
18
<PAGE> 19
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 comprehensive
income, 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, 1998 and 1997,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Buffalo, New York
February 10, 1999
19
<PAGE> 20
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,856 $ 2,313
Accounts receivable less allowance for
doubtful accounts of $971 and $1,124 33,309 32,163
Inventories - net 43,715 38,510
Prepaid expenses 4,081 4,744
Deferred income taxes 2,672 4,338
- --------------------------------------------------------------------------------
Total Current Assets 87,633 82,068
- --------------------------------------------------------------------------------
Other Assets
Cost in excess of net assets acquired - net 20,129 19,853
Prepaid pension costs 1,747 1,669
Net cash value of life insurance 3,752 3,199
Other 2,344 2,251
Investments -- 686
- --------------------------------------------------------------------------------
Total Other Assets 27,972 27,658
- --------------------------------------------------------------------------------
Deferred Income Taxes -- 297
Property, Plant and Equipment
Land 3,509 3,409
Buildings and improvements 21,276 20,327
Machinery, equipment and furniture 58,086 51,427
Construction in process 2,485 2,689
- --------------------------------------------------------------------------------
85,356 77,852
Less accumulated depreciation 31,696 25,205
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment 53,660 52,647
- --------------------------------------------------------------------------------
Total Assets $169,265 $162,670
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
20
<PAGE> 21
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term obligations $ 14,158 $ 14,086
Accounts payable 14,784 15,792
Accrued compensation and payroll taxes 6,838 6,585
Other liabilities and accrued expenses 7,071 7,980
Current portion of long-term obligations 1,387 1,329
- --------------------------------------------------------------------------------
Total Current Liabilities 44,238 45,772
- --------------------------------------------------------------------------------
Deferred Income Taxes 2,111 1,926
Other Noncurrent Liabilities 3,964 3,488
Long-Term Obligations, less current portion 34,484 34,884
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 26,156
Common stock, par value $.66 2/3 a share
Authorized - 30,000,000 shares
Issued - 7,853,635 and 7,812,215 shares 5,234 5,207
Additional paid-in capital 13,707 13,107
Retained earnings 41,930 35,572
Accumulated other comprehensive income 279 (604)
- --------------------------------------------------------------------------------
87,306 79,438
Less cost of 374,262 treasury shares 2,838 2,838
- --------------------------------------------------------------------------------
Total Shareholders' Equity 84,468 76,600
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 169,265 $ 162,670
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
21
<PAGE> 22
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 216,615 $ 184,070 $ 116,783
Costs and Expenses
Cost of products sold 150,314 127,207 77,652
Selling and administrative 47,342 38,047 26,410
Research and product development 4,917 3,667 1,759
Interest and debt expense, net of
investment income 3,356 2,753 968
Other expense -- 210 --
- --------------------------------------------------------------------------------
205,929 171,884 106,789
- --------------------------------------------------------------------------------
Earnings Before Income Taxes 10,686 12,186 9,994
Income Taxes 4,328 3,895 3,469
- --------------------------------------------------------------------------------
Net Earnings $ 6,358 $ 8,291 $ 6,525
- --------------------------------------------------------------------------------
Other Comprehensive Income (Loss), net of
tax:
Foreign Currency Translation Adjustment 1,113 (526) --
Minimum Pension Liability Adjustment (230) (4) (74)
Net Unrealized Gain (Loss) on
Marketable Securities -- -- (23)
- --------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 883 (530) (97)
- --------------------------------------------------------------------------------
Comprehensive Income $ 7,241 $ 7,761 $ 6,428
- --------------------------------------------------------------------------------
Earnings Per Common Share
Basic $ .85 $ 1.12 $ .91
Diluted $ .68 $ .97 $ .88
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
22
<PAGE> 23
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated other
comprehensive income
--------------------------
Equity Net
Adjustment Unrealized
from Gain (Loss)
Preferred Stock Common Stock Additional Foreign on
(in thousands, --------------------------------- Paid-in Retained Currency Marketable
except per share data) Shares Amount Shares Amount Capital Earnings Transactions Securities
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at -- $ -- 7,502 $5,001 $ 9,532 $ 22,629 $ -- $ 23
December 29, 1995 -- -- -- -- -- 6,525 -- --
Net earnings - 1996 -- -- 164 109 1,533 -- -- --
Stock options exercised, net -- -- -- -- -- -- -- --
Cash dividends declared,
$.26 per share -- -- -- -- -- (1,873) -- --
Minimum pension liability,
net of tax -- -- -- -- -- -- -- --
Net unrealized loss on
marketable securities -- -- -- -- -- -- -- (23)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at
January 3, 1997 -- -- 7,666 5,110 11,065 27,281 -- --
Net earnings - 1997 -- -- -- -- -- 8,291 -- --
Stock options exercised, net -- -- 146 97 1,518 -- -- --
Securities issued in
Portescap acquisition:
Series B preferred stock 1,236 26,156 -- -- -- -- -- --
Warrants -- -- -- -- 524 -- -- --
Minimum pension liability,
net of tax -- -- -- -- -- -- -- --
Equity adjustment from foreign
currency translation -- -- -- -- -- -- (526) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 1,236 26,156 7,812 5,207 13,107 35,572 (526) --
Net earnings - 1998 -- -- -- -- -- 6,358 -- --
Stock options exercised, net -- -- 42 27 418 -- -- --
Directors options -- -- -- -- 182 -- -- --
Minimum pension liability
net of tax -- -- -- -- -- -- -- --
Equity adjustment from foreign
currency translation -- -- -- -- -- -- 1,113 --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 1,236 $26,156 7,854 $5,234 $13,707 $ 41,930 $ 587 $ --
<CAPTION>
Minimum
Pension Treasury Stock
(in thousands, Liability --------------
except per share data) Change Share Amount
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at $ -- 374 $2,838
December 29, 1995 -- -- --
Net earnings - 1996 -- -- --
Stock options exercised, net -- -- --
Cash dividends declared,
$.26 per share -- -- --
Minimum pension liability,
net of tax (74) -- --
Net unrealized loss on
marketable securities -- -- --
- ------------------------------------------------------------------
Balance at
January 3, 1997 (74) 374 2,838
Net earnings - 1997 -- -- --
Stock options exercised, net -- -- --
Securities issued in
Portescap acquisition:
Series B preferred stock -- -- --
Warrants -- -- --
Minimum pension liability,
net of tax (4) -- --
Equity adjustment from foreign
currency translation -- -- --
- ------------------------------------------------------------------
Balance at
December 31, 1997 (78) 374 2,838
Net earnings - 1998 -- -- --
Stock options exercised, net -- -- --
Directors options -- -- --
Minimum pension liability
net of tax (230) -- --
Equity adjustment from foreign
currency translation -- -- --
- ------------------------------------------------------------------
Balance at
December 31, 1998 $(308) 374 $2,838
</TABLE>
See Accompany Notes to Consolidated Financial Statements
23
<PAGE> 24
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 6,358 $ 8,291 $ 6,525
Adjustments to reconcile net income to cash and
cash equivalents provided by operating activities:
Depreciation and amortization 9,411 7,434 3,785
Stock compensation programs (180) 198 582
Change in various allowance accounts (1,421) (614) (639)
Other 370 170 182
(Increase) Decrease in:
Accounts receivable (766) (2,537) (472)
Inventories (3,229) (389) (2,006)
Prepaid expenses 1,619 (1,904) (109)
Deferred income tax assets 1,736 1,086 (691)
Other assets, net (879) (202) (892)
Increase (Decrease) in:
Accounts payable & accrued expenses (2,200) (4,030) 1,228
Deferred income tax liabilities 277 (1,277) 199
Other noncurrent liabilities 82 112 63
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,178 6,336 7,755
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investments in acquisitions, net of cash &
cash equivalents acquired -- (9,286) (17,359)
Purchases of Investments and marketable securities (15) (68) (127)
Capital expenditures (9,285) (8,737) (8,319)
Proceeds from investments & marketable securities 702 2,660 6,609
Proceeds from sale of fixed assets 90 289 46
- ------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (8,508) (15,142) (19,150)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Exercise of stock options 322 1,615 1,642
Payment of long-term obligaions, including current maturities (1,272) (1,292) (1,785)
Dividends paid -- (471) (1,865)
Increase in long-term obligations 626 4,423 15,931
Increase (Decrease) in short-term borrowings (705) 5,018 (2,602)
- ------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (1,029) 9,293 11,321
- ------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes (98) (586) --
Net Increase (Decrease) in Cash and Cash Equivalents 1,543 (99) (74)
Cash and Cash Equivalents at Beginning of Year 2,313 2,412 2,486
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 3,856 $ 2,313 $ 2,412
- ------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 3,006 $ 2,424 $ 1,038
Income taxes net of tax refunds $ 2,026 $ 3,037 $ 3,598
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
For the years ended December 31, 1998, December 31, 1997 and January 3, 1997.
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 precision motion
control devices and products for the heat transfer industry. 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. The 1996 fiscal year consisted of 53 weeks of activity.
(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 Comprehensive
Income and the 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 reported in Accumulated other
comprehensive income. The tax effect on the foreign currency translation was
zero for 1998 and 1997. Income and expense items are translated at average
monthly rates of exchange.
The Company utilizes forward foreign currency exchange contracts to manage
exposures resulting from fluctuations in foreign currency exchange rates on
monetary assets and liabilities denominated in foreign currencies arising from
its operations. Gains and losses on foreign currency transactions are recorded
in income and are not material during the periods presented. The Company does
not engage in foreign currency speculation.
As of December 31, 1998 and December 31, 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, 1998 and December 31, 1997 inventories
comprising approximately 25% of consolidated inventories each year 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.
25
<PAGE> 26
Total depreciation expense for 1998, 1997, and 1996 was $8,669, $6,900, and
$3,562, respectively.
(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 $724, $455, and $163 in
1998, 1997, and 1996, respectively. Accumulated amortization of goodwill at
December 31, 1998 and 1997 was $1,512 and $764, respectively.
(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.
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 or income is
recorded with respect to changes in the 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 1998, 1997,
and 1996 was $2,098, $1,661, and $879, 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.
26
<PAGE> 27
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. 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, 1998 and
December 31, 1997, actual costs incurred against this reserve were approximately
$1,900, and $700, respectively. Future costs related to the remaining liability
are expected to be primarily incurred in 1999.
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 for 1997
and 1996 as if the acquisitions of HTD and Gettys had occurred at the beginning
of fiscal year 1996, and the acquisitions of SBG and Portescap had occurred at
the beginning of the 1997 and 1996 fiscal years, 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 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.
27
<PAGE> 28
Pro forma results with acquisitions:
<TABLE>
<CAPTION>
(In thousands,
except per share data) 1997 1996
- -----------------------------------------------------
(unaudited)
<S> <C> <C>
Revenues $ 215,735 $ 222,883
Net earnings $ 5,619 $ 8,624
Earnings Per
Common Share
Basic $ .76 $ 1.20
Diluted $ .60 $ .96
</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 in 1997 were comprised of funds obtained under an industrial revenue
bond financing. Use of these funds was restricted and could 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.
D. Inventories
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Finished goods $ 11,751 $ 9,133
Work in process 8,509 10,807
Raw Materials 23,455 18,570
- -------------------------------------------------------
$ 43,715 $ 38,510
</TABLE>
Had the cost of all inventories at December 31, 1998 and December 31, 1997 been
determined by the FIFO method, these amounts would have been greater by $915 and
1,052, respectively.
28
<PAGE> 29
E. Other Noncurrent Liabilities
In 1998 and 1997, other noncurrent liabilities is primarily comprised of accrued
pension costs for Schmidt-Bretten and API Harowe Inc. This balance also includes
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.
F. Short and Long-Term Obligations
(1) Short-Term Obligations At December 31, 1998 and 1997, short-term bank
borrowings consisted of:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Portescap (primarily Switzerland) $ 8,646 $ 6,326
Schmidt-Bretten 5,512 7,230
API -- 530
- --------------------------------------------------------------------------------
$14,158 $14,086
</TABLE>
The weighted average interest rate on the outstanding short-term debt at
December 31, 1998 was 4.6% and was 4% at December 31, 1997.
The short-term credit facilities available at December 31, 1998 and December 31,
1997 consisted of:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Portescap $ 1,045 $ 2,149
Schmidt-Bretten 2,475 2,781
API 1,544 3,332
- -------------------------------------------------------
$ 5,064 $ 8,262
</TABLE>
(2) Long-Term Obligations consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Industrial Revenue Bonds $ 11,165 $ 12,294
Revolving Credit Debt 18,250 17,300
Portescap Debt:
Mortgage loans 3,860 3,765
Other long-term loans 1,775 1,820
Supplemental benefit program 821 1,034
- -------------------------------------------------------
35,871 36,213
Less current obligations 1,387 1,329
- -------------------------------------------------------
Long-term obligations $ 34,484 $ 34,884
</TABLE>
On August 31, 1998, the Company signed an agreement with Marine Midland Bank and
Fleet National Bank for a $100 million, multi-currency, five-year unsecured
Revolving Credit Facility. This replaced the Company's $20 million Revolving
Credit Facility. The credit facility is available for general corporate purposes
and potential acquisitions. The facility is guaranteed by the Company's U.S.
subsidiaries. At December 31, 1998, $82 million of the revolving credit facility
29
<PAGE> 30
was available. The Company used $24.2 million of this amount on February 1, 1999
to acquire the assets of ELMO Industrier AB. The interest rate on the Revolving
Credit, under the LIBOR Rate Option in the Credit Agreement, averaged 5.8% as of
December 31, 1998 and 6.8% as of December 31, 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 $11,587 at December 31, 1998 and $12,359 at December
31, 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.
There were no unexpended revenue bond proceeds at December 31, 1998. At December
31, 1997 this balance was $686.
The following are the weighted average interest rates at December 31, 1998 and
1997 for long-term debt:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------
<S> <C> <C>
Industrial Revenue Bonds 3.9% 4.3%
Revolving Credit Debt 5.8% 6.5%
Portescap Debt 4.3% 5.1%
</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.
Costs related to the acquisition of long-term debt are amortized over the life
of the debt instrument. Fees are expensed as incurred. Together, these items
comprise debt expense, which was $286 in 1998 and $235 in 1997. 1998 expense
includes amortization costs and fees related to the $100 million credit facility
established August 31, 1998.
Under the supplemental benefit program, the Company provides retirement or death
benefits to certain officers meeting specified service requirements.
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 $116 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 the lives of certain 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 $1,387 in 1999, $2,934 in 2000, $1,577 in 2001, $4,321 in 2002,
and $995 in 2003. 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: 1999 - $1,026; 2000 - $902; 2001 - $723; 2002 -
$261; 2003 - $12. Total rental expense for 1998, 1997, and 1996 was $1,917,
$1,554, and $730, respectively.
30
<PAGE> 31
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. Reconciliations of the Benefit Obligation, Plan
Assets and Funded Status of certain defined benefit retirement plans are as
follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Harowe Harowe
Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG
(In thousands) Plan Plan Plan Plan Plan Plan Plan Plan
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in Projected Benefit Obligation:
Benefit Obligation - Beginning of Period $ 7,672 $ 780 $ 48,419 $ 2,695 $ 6,561 $ 724 $ 45,592 $ 2,950
Service Cost 780 28 2,320 -- 691 24 2,077 --
Interest Cost 592 56 2,323 160 512 53 2,067 161
Actuarial Loss 177 120 5,759 248 -- 24 -- 29
Distributions Paid (420) -- (4,301) (176) (275) (45) (2,545) (183)
Foreign Currency Exchange Rate -- -- 1,939 222 -- -- (1,186) (262)
Impact of Plan Changes -- -- 4,786 -- -- -- 2,414 --
Other -- -- -- -- 183 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit Obligation - End of Period $ 8,801 $ 984 $ 61,245 $ 3,149 $ 7,672 $ 780 $ 48,419 $ 2,695
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair Value of Plan Assets -
Beginning of Period $ 11,749 $ 499 $ 55,015 $ 427 $ 10,396 $ 385 $ 49,379 $ 540
Actual Return on Plan Assets 344 30 2,765 23 1,674 17 2,416 27
Employer Contributions -- -- 2,039 -- -- -- 2,185 --
Distributions Paid (471) -- (4,301) (90) (321) (45) (2,545) (94)
Foreign Currency Exchange Rate -- 93 1,920 29 -- 142 (1,304) (46)
Asset Gain -- -- 1,032 -- -- -- 4,884 --
- -----------------------------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets - End of Period $ 11,622 $ 622 $ 58,470 $ 389 $ 11,749 $ 499 $ 55,015 $ 427
- -----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of Funded Status:
Funded Status $ 2,821 $(362) $ (2,775) $(2,760) $ 4,077 $(281) $ 6,596 $(2,268)
Unrecognized Net Actuarial (Gain) Loss (1,161) 234 (4,730) 305 (2,146) 111 (9,338) 39
Unrecognized Transition Amount (246) -- 1,028 -- (368) -- 1,093 --
Unrecognized Prior Service Cost 309 10 6,713 -- 339 20 2,224 --
Additional minimum liability -- (244) -- (305) -- (131) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost $ 1,723 $(362) $ 236 $(2,760) $ 1,902 $(281) $ 575 $(2,229)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998 and December 31, 1997, the tax effect on the gross
additional minimum pension liability was $230 and $50, respectively.
The following factors have been assumed in determining the actuarial present
value of projected benefit obligation shown in the previous table:
31
<PAGE> 32
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------
Harowe Harowe
Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG
Plan Plan Plan Plan Plan Plan Plan Plan
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Rate 7.75% 6.5% 4.0% 6.0% 7.75% 7.75% 4.5% 6.0%
Rate of increase
in compensation 4.0% N/A 2.5-3.5% N/A 4.0% N/A 2.5-3.5% N/A
Annual increase
in pensions N/A N/A 1.5% 2.0% N/A N/A 1.5% 2.0%
Expected long-term
rate of return 9.0% 6.5% 5.0% 6.0% 9.0% 6.5% 5.0% 6.0%
NA - not applicable
</TABLE>
Net periodic pension cost associated with the plans reflected in the table on
the previous page for 1998 and 1997 included the following components:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------------
Harowe Harowe
Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG
(In thousands) Plan Plan Plan Plan Plan Plan Plan Plan
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service costs-
benefits earned during
the period $ 780 $ 28 $ 2,320 $ -- $ 691 $ 24 $ 2,072 $ --
Interest on projected
benefit obligations 592 56 2,323 174 512 53 2,063 156
Actual return on assets (335) (35) (2,765) (20) (1,601) (16) (2,411) (27)
Amortization of
transition assets
and deferrals (858) 13 586 -- 539 -- 272 --
Employee contributions N/A N/A (891) -- N/A N/A (863) N/A
- --------------------------------------------------------------------------------------------------------------------
Net periodic
pension cost $ 179 $ 62 $ 1,573 $ 154 $ 141 $ 61 $ 1,133 $ 129
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The data included in the above table for the Portescap and SBG plans are for the
full year of 1997.
In 1998, the Company adopted the provisions of FASB Statement No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits". This
statement specified changes in the disclosure requirements related to pension
and other postretirement benefits.
The total expense for all retirement plans was $2,426, $1,247, and $392, in
1998, 1997, and 1996, respectively.
I. Fair Value of Financial Instruments
The Company has 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, 1998 and December
31, 1997, management believes the carrying amounts of its financial instruments
approximates 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
32
<PAGE> 33
("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 U.S. employees after one year of employment. The grants
were made at an exercise price of not less than 100% of the market value on the
date of grant. Options may be exercised in cumulative annual increments of 20%
for ISOs and 50% for NQOs beginning one year from the date of grant. All options
expire ten years from date of grant.
The Company applies APB Opinion No. 25 in accounting for its stock option plans.
Accordingly, no compensation expense has been charged to earnings for options
granted in 1998, 1997, and 1996 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
after 1994 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) 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $ 6,358 $ 8,291 $ 6,525
Pro forma $ 5,318 $ 7,653 $ 6,217
Earnings per common share:
As reported - basic $ .85 $ 1.12 $ .91
As reported - diluted $ .68 $ .97 $ .88
Pro forma - basic $ .71 $ 1.03 $ .86
Pro forma - diluted $ .57 $ .90 $ .83
</TABLE>
The fair value of each option granted in 1998, 1997, and 1996, was estimated
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.6% 6.9% 6.6%
Dividends $ -- $ -- $ --
Expected term in years 6.9 9.1 9.2
Annual standard deviation (volatility) 33% 26% 25%
</TABLE>
33
<PAGE> 34
The weighted average fair value of options granted in 1998, 1997, and 1996 was
$6.00, $9.35 and $6.32, respectively.
A summary of the status of options granted under all employee plans, including
the options granted to the Company's Chief Executive Officer in 1992, is
presented below.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
SUBJECT EXERCISE
TO OPTIONS PRICE ($)
- --------------------------------------------------------
<S> <C> <C>
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
Granted in 1998 528,800 17.83
Exercised in 1998 (46,480) 8.71
Forfeited in 1998 (24,707) 19.39
- --------------------------------------------------------
Outstanding Dec. 31, 1998 1,502,553 13.42
</TABLE>
The number of shares subject to options exercisable at the end of 1998, 1997,
and 1996 were 619,158, 504,215, and 488,087, respectively.
The following tables summarize information about options outstanding at December
31, 1998:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES ($) OUTSTANDING LIFE PRICE ($)
- ------------------------------------------------------------------
<S> <C> <C> <C>
6.625-9.500 538,625 4.37 years 7.89
10.500-13.000 226,778 6.64 years 12.15
15.125-17.875 411,300 8.86 years 17.41
18.063-24.625 325,850 9.19 years 18.41
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
RANGE OF WEIGHTED-AVERAGE
EXERCISE NUMBER EXERCISE PRICE
PRICES ($) EXERCISABLE ($)
- --------------------------------------------------
<S> <C> <C>
6.625-9.500 456,500 7.78
10.500-13.000 107,668 11.91
15.125-17.875 44,290 17.43
18.063-24.625 10,700 20.44
</TABLE>
34
<PAGE> 35
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 income of
$525 in 1998 and expense of $53 and $452 in 1997 and 1996, respectively, in
connection with the change in the 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. This 1997 Plan was approved by the shareholders at the Annual
Shareholders Meeting in April, 1998. Two years from the date of grant, 40,000
shares become exercisable and 40,000 additional shares become exercisable
annually thereafter. The excess of the common stock market value of $18.06 over
the exercise price of $17.50 per share, multiplied by 200,000 shares will become
a charge against the Company's earnings over the vesting period ending in April
2003. The shares relating to this option are included in the shares granted in
1998.
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, 1998
totaled 82,963 shares, of which 52,606 were exercisable on that date, and 50,554
shares were available for future grants of options under the plan.
On April 24, 1998, the Board of Directors adopted a Director Stock Option Award
Plan under the 1995 Director Plan. Under this program, each director will
receive a grant of stock options ("Discretionary Options") on the date of the
annual meeting of shareholders based upon a formula which uses the average
compensation earned by all directors during the prior year and a multiplier
related to the Company's EVA(R) performance for that year. Using this formula, a
ten-year Discretionary Option for 1,500 shares exercisable at $18.0625 per share
was granted to each non-employee director on April 24, 1998.
Prior to 1998, eligible directors with five or more years of continuous service
were entitled to a benefit of $10,000 a year payable over ten years upon
termination of their services as prescribed in the retirement plan. On April 24,
1998, the Board of Director's approved a plan to replace this retirement plan
with a one-time grant of stock options. The grant was determined by replacing
the present value of each individual retirement plan with the present fair value
of a grant of options determined by utilizing the Black-Scholes option pricing
model. Under this plan, a total of 27,400 options were granted at $18.0625 per
share.
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 in 1997.
35
<PAGE> 36
K. Income Taxes
Earnings before provision for income taxes consisted of:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 3,879 $ 6,945 $9,603
Foreign 6,807 5,241 391
- --------------------------------------------------------------------------------
$10,686 $12,186 $9,994
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal $ 748 $ 1,757 $ 3,432
State 502 481 527
Foreign 715 409 2
- --------------------------------------------------------------------------------
Total current tax provision $ 1,965 $ 2,647 $ 3,961
- --------------------------------------------------------------------------------
Deferred tax provision (benefit):
U.S. Federal 173 5 (421)
State (3) (219) (71)
Foreign 2,193 1,462 --
- --------------------------------------------------------------------------------
Total deferred tax provision
(benefit) 2,363 1,248 (492)
- --------------------------------------------------------------------------------
Total provision for income taxes $ 4,328 $ 3,895 $ 3,469
- --------------------------------------------------------------------------------
</TABLE>
The provision for foreign deferred income taxes for 1998 includes tax expense of
$589 due to the reduction of the Swiss net deferred tax asset at December 31,
1998 as a result of securing a partial Swiss tax holiday commencing in 1999.
The provision for income taxes does not include the tax benefits of $122, $440,
and $346 for 1998, 1997, and 1996, respectively, associated with the exercise of
stock options which have been credited to paid-in-capital.
The provision for income tax differs from the federal statutory rate of 34% due
to the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes,
less federal effect 3.0 1.4 2.9
Unremitted earnings and tax rate
differences of foreign subsidiaries (0.5) 0.7 (1.3)
Effect of Swiss tax holiday on net
deferred tax asset 5.5 -- --
Adjustment of prior years' taxes (1.8) (1.8) --
Other 0.3 (2.3) (0.9)
- --------------------------------------------------------------------------------
Effective tax rate 40.5% 32.0% 34.7%
</TABLE>
36
<PAGE> 37
Deferred tax assets (liabilities) at December 31, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirement and death benefits $ 452 $ 571
Deferred compensation 338 495
Inventories 1,283 2,200
Accrued vacation pay 606 584
Various reserves 456 826
Accrued pension costs 720 602
Net operating loss carryforwards 400 870
Tax credits 218 100
Other 59 263
- --------------------------------------------------------------------------------
Total deferred tax assets 4,532 6,511
- --------------------------------------------------------------------------------
Property, plant & equipment (2,772) (2,545)
Prepaid pension costs (572) (737)
Goodwill (415) (347)
Other (212) (173)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,971) (3,802)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 561 $ 2,709
</TABLE>
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. Undistributed earnings amounted to approximately $12,553 at December
31, 1998. If earnings of such foreign subsidiaries were not reinvested, a
deferred tax liability, before applicable foreign tax credits, of approximately
$4,268 would have been required. In addition, foreign withholding taxes would be
imposed on actual distributions.
L. Business Segment Data
The Company operates in two business segments: Motion Technologies and Heat
Transfer. The Company's reportable segments are strategic business units that
offer different products and services. The segments are managed separately based
on the fundamental differences of their operations.
Operations of the Motion Technologies segment is focused on the precision motion
control market with product lines that include servo and stepper motors,
micromotors, drives, clutches, brakes, magnetic components, feedback devices and
gear boxes.
The Heat Transfer segment includes the production and sale of shell & tube,
plate & frame and air-cooled aluminum heat exchangers, packaged chillers and
refrigeration condensers.
Total net sales by segment consist entirely of sales to unaffiliated customers.
Operating profit is net sales 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 consists principally of cash
and cash equivalents, insurance-related assets and other assets.
37
<PAGE> 38
Information by industry segment is as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Motion $ 121,531 $ 91,063 $ 53,247
Heat Transfer 95,084 93,007 63,536
- --------------------------------------------------------------------------------
Consolidated $ 216,615 $ 184,070 $ 116,783
- --------------------------------------------------------------------------------
Operating Profit
Motion $ 9,526 $ 10,870 $ 6,208
Heat Transfer 9,065 8,253 8,230
- --------------------------------------------------------------------------------
Combined 18,591 19,123 14,438
General Corporate expense, net (4,549) (4,184) (3,476)
Interest and debt expense,
net of investment income (3,356) (2,753) (968)
- --------------------------------------------------------------------------------
Earnings Before Income Taxes $ 10,686 $ 12,186 $ 9,994
- --------------------------------------------------------------------------------
Identifiable Assets
Motion $ 97,970 $ 93,555 $ 28,762
Heat Transfer 57,690 56,916 42,357
General Corporate 13,605 12,199 10,893
- --------------------------------------------------------------------------------
Total Identifiable Assets $ 169,265 $ 162,670 $ 82,012
- --------------------------------------------------------------------------------
Depreciation and Amortization
Motion $ 5,670 $ 3,991 $ 2,239
Heat Transfer 3,572 3,318 1,442
General Corporate 169 125 104
- --------------------------------------------------------------------------------
Total Depreciation and Amortization $ 9,411 $ 7,434 $ 3,785
- --------------------------------------------------------------------------------
Capital Expenditures
Motion $ 5,182 $ 3,917 $ 2,344
Heat Transfer 3,838 4,517 5,898
General Corporate 265 303 77
- --------------------------------------------------------------------------------
Total Capital Expenditures $ 9,285 $ 8,737 $ 8,319
- --------------------------------------------------------------------------------
</TABLE>
The Company has adopted FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement revised the manner in
which an enterprise must report information concerning its' operating segments.
Adoption of this statement by the Company did not require significant changes in
the way segments were disclosed.
During 1998, the Electronic Components segment was integrated into the Motion
business segment. This action allowed the Motion segment to fully utilize
process technologies of the Electronic Components segment. Prior year business
segment data has been adjusted to reflect this change.
38
<PAGE> 39
Geographic operating data is as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales from Unaffiliated Customers
North America $140,381 $130,541 $114,419
Europe 67,574 47,978 --
Other 8,660 5,551 2,364
- --------------------------------------------------------------------------------
Total Net Sales from Unaffiliated
Customers $216,615 $184,070 $116,783
- --------------------------------------------------------------------------------
Export Sales
North America $ 7,711 $ 9,462 $ 5,131
Europe 47,541 33,340 7,772
Other 11,613 9,814 5,784
- --------------------------------------------------------------------------------
Total Export Sales $ 66,865 $ 52,616 $ 18,687
- --------------------------------------------------------------------------------
Operating Profit
North America $ 3,879 $ 6,945 $ 9,603
Europe 6,202 4,595 --
Other 605 646 391
- --------------------------------------------------------------------------------
Total Operating Profit $ 10,686 $ 12,186 $ 9,994
- --------------------------------------------------------------------------------
Identifiable Assets
North America $ 87,087 $ 87,155 $ 80,614
Europe 75,550 70,152 --
Other 6,628 5,363 1,398
- --------------------------------------------------------------------------------
Total Identifiable Assets $169,265 $162,670 $ 82,012
- --------------------------------------------------------------------------------
</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 policies 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.
M. Comprehensive Income
In 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income". Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources". Under this statement, the term "comprehensive income"
is used to describe the total net earnings plus other comprehensive income. For
the Company, Other comprehensive income includes currency translation
adjustments on foreign subsidiaries, minimum pension liability not yet
recognized as net periodic pension cost, and unrealized gains or losses on
available-for-sale securities.
The adoption of SFAS 130 had no impact on the Company's results of operations or
its financial position. The financial statements presented for the periods prior
to 1998 were required to be reclassified to reflect application of the
provisions of SFAS 130.
39
<PAGE> 40
N. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(In thousands, Fiscal
except per share data) First Second Third Fourth Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net Sales $55,013 $53,659 $54,995 $52,948 $216,615
Gross profit 16,486 16,060 16,453 17,302 66,301
Net earnings 1,559 1,024 1,886 1,889 6,358
Earnings per common
share:
Basic 0.21 0.14 0.25 0.25 0.85
Diluted 0.17 0.11 0.20 0.20 0.68
1997
Net Sales $35,843 $39,572 $55,014 $53,641 $184,070
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 0.25 0.24 0.23 0.97
</TABLE>
O. Earnings per Share
The following earnings per share amounts reflect the 1997 adoption 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 required the 1996 earnings per share data to 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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $6,358 $8,291 $6,525
Weighted average common shares outstanding (basic) 7,464 7,381 7,190
Incremental shares from assumed conversions:
Stock options and warrants 375 395 262
Series B convertible preferred stock 1,539 761 --
- --------------------------------------------------------------------------------
Weighted average common shares outstanding (diluted) 9,378 8,537 7,452
Earnings per share:
Basic $ .85 $ 1.12 $ 91
Diluted $ .68 $ .97 $ .88
</TABLE>
40
<PAGE> 41
P. Subsequent Events
On February 1, 1999, API Elmo AB, a newly formed wholly-owned subsidiary of the
Company organized under the laws of Sweden, purchased the on-going business and
related assets of ELMO Industrier AB, a Swedish limited liability corporation
with facilities located in Flen, Sweden. The seller is a subsidiary of
Vatterledens Invest AB, a privately-owned Swedish limited liability corporation.
The seller is not affiliated with the Company or any of its' affiliates.
The assets acquired include real property, inventory, machinery & equipment,
accounts receivable, intercompany receivables, patents, trademarks, the trade
name "ELMO", and customer and supplier contracts. The Company assumed the
seller's bank debt and certain business related payables. The purchase price
consisted of a net cash payment of Swedish kronor (SEK) 169,910 plus the
assumption of SEK 44,200 of bank debt (aggregate of approximately $27.5 million
U.S.) based on the January 31, 1999 unaudited balance sheet. The Company funded
the cash portion of this transaction with funds borrowed under its existing
Credit Agreement with Marine Midland Bank and Fleet National Bank. The
acquisition will be accounted for as a purchase in 1999 in accordance with APB
No. 16 Business Combinations.
FORWARD-LOOKING INFORMATION - SAFE HARBOR STATEMENT
Certain information set forth herein (other than historical data and
information) may constitute forward-looking statements based upon current
expectations and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve certain assumptions, risks and uncertainties that could cause actual
results to differ materially from those included in, or contemplated, by the
statements. These assumptions, risks and uncertainties include, but are not
limited to, the success of the actions taken to improve profitability, the cost
savings initiatives not being realized, market acceptance of new products, and
the Company's effectiveness at gaining market share, as well as general economic
conditions in North America, Western Europe and Asia. The Company disclaims any
obligation to update any forward-looking statements as a result of developments
occurring after the date hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements with
PricewaterhouseCoopers LLP on accounting or financial disclosure.
41
<PAGE> 42
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.
42
<PAGE> 43
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 19
Consolidated Balance Sheet 20-21
Consolidated Statement of Earnings and Comprehensive
Income 22
Consolidated Statement of Shareholders' Equity 23
Consolidated Statement of Cash Flows 24
Notes to Consolidated Financial Statements 25-41
2. Financial Statement Schedule
Report of Independent Accountants for each of the three
years in the period ended December 31, 1998 47
II. Valuation and Qualifying Accounts 48
All other schedules and statements have been omitted as the
required information is inapplicable or is presented in the
financial statements or notes thereto.
b) Reports on Form 8-K
During the three months ended December 31, 1998, the Company did not
file any reports on Form 8-K.
c) Exhibits
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
(incorporated by reference to Exhibit 4(a) in the Registration
Statement on Form S-8, No. 33-31315, filed September 28, 1989).
3(i)-B Certificate of Amendment to the Restated Certificate of
Incorporation dated April 26, 1991 (incorporated by reference to
Exhibit A in the definitive Proxy Statement dated March 22, 1991).
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 (incorporated by reference to Exhibit 3(i)C
in Form 10-K for the fiscal year ended December 31, 1997).
3(i)-D Certificate of Amendment to the Certificate of Incorporation of
American Precision Industries Inc. filed in Delaware on November 14,
1997 (incorporated by reference to Exhibit 3(i)D in Form 10-K for
the fiscal year ended December 31, 1997).
3(ii) Restated By-Laws, as amended on June 16, 1992 (incorporated by
reference to Exhibits B(i)-(ii) in Form 10-Q for fiscal quarter
ended October 1, 1993).
43
<PAGE> 44
4-A Rights Agreement between American Precision Industries Inc. and
American Securities Transfer & Trust, Inc. dated July 24, 1988
(incorporated by reference to Exhibit 4 in Form 8-A dated July 24,
1998).
4-B Amended and Restated Rights Agreement dated January 29, 1999, by and
between American Precision Industries Inc. and American Securities
Transfer & Trust, Inc., as Rights Agent (incorporated by reference
to Exhibit 4(A) in Form 8-K dated February 5, 1999).
4-C Warrant Agreement issued to Patricof & Co. Capital Corp. dated July
8, 1997 (incorporated by reference to Exhibit 99 in Form 10-Q for
the fiscal quarter ended July 4, 1997).
4-D Warrant Agreement Certificates No. 1 and No. 2 dated January 1, 1998
issued to Decision Processes International (Connecticut, Ltd.) on
July 1, 1998 and December 31, 1998, respectively. *
10-A Credit Agreement between American Precision Industries Inc. and
Marine Midland Bank and Fleet National Bank dated August 31, 1998
(incorporated by reference to Exhibit 4(A) in Form 8-K dated
September 8, 1998).
10-B First Amendment to Credit Agreement dated as of January 29, 1999, by
and among American Precision Industries Inc., Marine Midland Bank
and Fleet National Bank (incorporated by reference to Exhibit 4(B)
in Form 8-K dated February 5, 1999).
10-C Form of Agreement relating to the Directors Supplemental Death
Benefit and Fee Continuation Plan, as amended March 11, 1991
(incorporated by reference to Exhibit 10A in Form 10-K for fiscal
year ended December 28, 1990). #
10-D(i) Form of Agreement relating to the Executive Supplemental Death
Benefit and Retirement Plan, as amended on March 11, 1991
(incorporated by reference to Exhibit 10B in Form 10-K for fiscal
year ended December 28, 1990). #
10-D(ii) Form of Life Insurance Split-Dollar Agreement between American
Precision Industries Inc. and James W. Bingel, Bruce McH. Kirchner,
James R. Schwinger, and Richard S. Warzala. #*
10-E Form of Indemnification Agreement with directors dated February 25,
1991 (incorporated by reference to Exhibit 10C in Form 10-K for
fiscal year ended December 28, 1990).
10-F Form of Indemnification Agreement with officers dated February 25,
1991 (incorporated by reference to Exhibit 10D in Form 10-K for
fiscal year ended December 28, 1990).
10-G 1989 Stock Option Plan (incorporated by reference to Exhibit A in
definitive Proxy Statement dated March 15, 1989. #
10-H Amendment to 1989 Stock Option Plan (incorporated by reference to
Exhibit C(B) in the definitive Proxy Statement dated March 24,
1995). #
44
<PAGE> 45
10-I 1993 Employees Stock Option Plan (incorporated by reference to
Exhibit A in the definitive Proxy Statement dated March 22, 1993). #
10-J Amendment to 1993 Employees Stock Option Plan (incorporated by
reference to Exhibit C(A) in the definitive Proxy Statement dated
March 24, 1995). #
10-K 1995 Directors Stock Option Plan (incorporated by reference to
Exhibit B in the definitive Proxy Statement dated March 24, 1995). #
10-L 1995 Employees Stock Option Plan (incorporated by reference to
Exhibit A in the definitive Proxy Statement dated March 24, 1995). #
10-M 1997 Officers Stock Option Plan (incorporated by reference to Annex
B in the definitive Proxy Statement dated March 25, 1998). #
10-N 1998 Employees Stock Option Plan (incorporated by reference to Annex
A in the definitive Proxy Statement dated March 25, 1998). #
10-O 1995 Directors Stock Option Plan, as amended and restated
(incorporated by reference to Annex C in the definitive Proxy
Statement dated March 25, 1998). #
10-P Amendment to the American Precision Industries Inc. 1998 Employees
Stock Option Plan (incorporated by reference to Exhibit 10A in Form
10-Q for fiscal quarter ended June 30, 1998). #
10-Q Amendment to the American Precision Industries Inc. 1995 Employees
Stock Option Plan (incorporated by reference to Exhibit 10B in Form
10-Q for fiscal quarter ended June 30, 1998). #
10-R Amendment No. 1 to the American Precision Industries Inc. 1997
Officers Stock Option Plan (incorporated by reference to Exhibit 10A
in Form 10-Q for the fiscal quarter ended September 30, 1998). #
10-S Amendment No. 1 to the American Precision Industries Inc. 1995
Directors Stock Option Plan (incorporated by reference to Exhibit
10B in Form 10-Q for the fiscal quarter ended September 30, 1998). #
10-T Amendment No. 2 to the American Precision Industries Inc. 1998
Employees Stock Option Plan (incorporated by reference to Exhibit
10C in Form 10-Q for the fiscal quarter ended September 30, 1998). #
10-U Amendment No. 2 to the American Precision Industries Inc. 1995
Employees Stock Option Plan (incorporated by reference to Exhibit
10D in Form 10-Q for the fiscal quarter ended September 30, 1998). #
10-V Amendment No. 2 to the American Precision Industries Inc. 1993
Employees Stock Option Plan (incorporated by reference to Exhibit
10E in Form 10-Q for the fiscal quarter ended September 30, 1998). #
10-W Amendment No. 2 to the American Precision Industries Inc. 1989
Employees Stock Option Plan (incorporated by reference to Exhibit
10F in Form 10-Q for the fiscal quarter ended September 30, 1998). #
45
<PAGE> 46
10-X Stock Option and Tandem Stock Appreciation Rights Agreement dated
June 16, 1992 between Kurt Wiedenhaupt and American Precision
Industries Inc. (incorporated by reference to Exhibit 10(ii) in Form
10-Q for fiscal quarter ended July 3, 1992). #
10-Y Form of Change in Control Agreement between American Precision
Industries Inc. and James W. Bingel, Bruce McH. Kirchner, Craig J.
VanTine, Richard S. Warzala and Bradley Holcomb (incorporated by
reference to Exhibit 10 (i) in Form 10-Q for the fiscal quarter
ended September 27, 1996). #
10-Z Change in Control Agreement between American Precision Industries
Inc. and Kurt Wiedenhaupt dated July 1, 1996 (incorporated by
reference to Exhibit 10(ii) in Form 10-Q for the fiscal quarter
ended September 27, 1996). #
10-AA First Amendment to American Precision Industries Inc. Grant of
Restricted Stock and Bonus to Kurt Wiedenhaupt dated July 1, 1996
(incorporated by reference to Exhibit 10(iv) in Form 10-Q for the
fiscal quarter ended September 27, 1996). #
10-BB Executive Supplemental Retirement Plan (as restated) between
American Precision Industries Inc. and Kurt Wiedenhaupt dated July
1, 1996 (incorporated by reference to Exhibit 10(v) in Form 10-Q for
the fiscal quarter ended September 27, 1996). #
10-CC Life Insurance Split-Dollar Agreement (as restated) between American
Precision Industries Inc. and Kurt Wiedenhaupt dated July 1, 1996
(incorporated by reference to Exhibit 10(vii) in Form 10-Q for the
fiscal quarter ended September 27, 1996). #
10-DD Executive Employment Agreement effective as of July 1, 1997 between
Kurt Wiedenhaupt and American Precision Industries Inc.
(incorporated by reference to Exhibit 10(ii) in Form 10-Q for the
fiscal quarter ended October 3, 1997). #
10-EE Amended and Restated Stock Purchase Agreement by and among InterScan
Holding Ltd., Portescap and API Portescap Inc. and American
Precision Industries Inc. dated July 3, 1997 (incorporated by
reference to Appendix A to definitive Proxy Statement dated October
9, 1997).
10-FF Asset Purchase Agreement by and among Vatterledens Invest AB and
ELMO Industrier AB and American Precision Industries Inc. and API
Elmo AB, dated January 28, 1999 (incorporated by reference to
Exhibit 2 in Form 8-K dated February 5, 1999).
21 Subsidiaries of the Registrant*
23 Consents of independent accountants*
27 Financial Data Schedule*
- ----------
* Documents filed herewith.
# Management contract or compensatory plan or arrangement.
46
<PAGE> 47
Report of Independent Accountants
To the Board of Directors and Shareholders of
American Precision Industries Inc.
Our report on the consolidated financial statements of American Precision
Industries Inc. as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998, is included on page 19 of this Form 10-K.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed on page 48 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Buffalo, New York
February 10, 1999
47
<PAGE> 48
AMERICAN PRECISION INDUSTRIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Dollars in thousands) Amounts Reserve at
Balance at charged Deductions Date of Balance at
beginning of (credited) to from Business end of
Description year expense reserves Acquisitions year
- ------------------------------- ------------ ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998 :
Allowance for inventory reserves $6,910 $(1,454) $(1,549) $ -- $3,907
Year ended December 31, 1997 :
Allowance for inventory reserves $2,330 $ 1,005 $(2,043) $5,618 $6,910
Year ended January 3, 1997 :
Allowance for inventory reserves $ 876 $ 334 $(1,604) $2,724 $2,330
</TABLE>
48
<PAGE> 49
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 25, 1999 By: /s/ Kurt Wiedenhaupt
----------------------------------
Kurt Wiedenhaupt
President and Director
March 25, 1999 By: /s/ Bruce McH. Kirchner
----------------------------------
Bruce McH. Kirchner
Chief Financial Officer
March 25, 1999 By: /s/ Mark E. Wood
----------------------------------
Mark E. Wood
Corporate Controller
49
<PAGE> 50
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 March 25, 1999
- ---------------------------------------------------------- ------------------
Kurt Wiedenhaupt President, CEO and
Chairman of the Board
/s/ John M. Albertine March 25, 1999
- ---------------------------------------------------------- ------------------
John M. Albertine Director
/s/ Holger Hjelm March 25, 1999
- ---------------------------------------------------------- ------------------
Holger Hjelm Director
/s/ Bernard J. Kennedy March 25, 1999
- ---------------------------------------------------------- ------------------
Bernard J. Kennedy Director
/s/ Douglas J. MacMaster, Jr. March 25, 1999
- ---------------------------------------------------------- ------------------
Douglas J. MacMaster, Jr. Director
/s/ Klaus Oertel March 25, 1999
- ---------------------------------------------------------- ------------------
Klaus K. Oertel Director
/s/ Victor A. Rice March 25, 1999
- ---------------------------------------------------------- ------------------
Victor A. Rice Director
/s/ Jerre Stead March 25, 1999
- ---------------------------------------------------------- ------------------
Jerre L. Stead Director
50
<PAGE> 51
EXHIBIT INDEX
4-D Warrant Agreement Certificates No. 1 and No. 2 dated January 1, 1998
issued to Decision Processes International (Connecticut, Ltd.) on
July 1, 1998 and December 31, 1998, respectively.
10-D(ii) Form of Life Insurance Split-Dollar Agreement between American
Precision Industries Inc. and James W. Bingel, Bruce McH. Kirchner,
James R. Schwinger, and Richard S. Warzala
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
51
<PAGE> 1
EXHIBIT 4-D
Warrant Certificate No. 1 Warrant to Purchase
3,077 Shares
WARRANT AGREEMENT
Dated as of January 1, 1998
To Subscribe for and Purchase Common Stock of
AMERICAN PRECISION INDUSTRIES INC.
-----------------------
THIS CERTIFIES THAT, for value received, DECISION PROCESSES
INTERNATIONAL (CONNECTICUT, LTD.) (herein called "DPI"), or its permitted
assigns, is entitled to subscribe for and purchase from AMERICAN PRECISION
INDUSTRIES INC., a Delaware corporation (herein called the "Company"), at the
price of Nineteen Dollars and 50 Cents ($19.50) per share (subject to
adjustments as provided herein) at any time after the date hereof to and
including December 31, 2007, THREE THOUSAND SEVENTY-SEVEN (3,077) fully paid and
non-assessable shares of the Company's Common Stock, $.66-2/3 par value.
This Warrant was originally issued in connection with execution by the
Company and DPI of a Retainer Agreement dated as of January 1, 1998 (herein
called the "Retainer Agreement"). As used herein, "this Warrant" and "the
Warrants" shall mean the Warrant originally issued to DPI pursuant to the
Retainer Agreement and any Warrants that may be issued in substitution or
exchange therefor. All Warrants shall be dated said original issue date.
This Warrant is subject to the following terms and conditions:
1. EXERCISE OF WARRANT.
(a) Exercise. The rights represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not as to a
fractional share of Common Stock), by written notice of exercise
delivered to the Company and by the surrender of this Warrant (properly
endorsed if required) at the principal business office of the Company
and upon payment to it of the purchase price for such shares. The
Company agrees that the shares so purchased shall be, and shall be
deemed to be, issued to the holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant
shall have been surrendered and payment made for such shares.
Certificates for the shares of stock so purchased shall be delivered to
the holder hereof within a reasonable time, not exceeding ten (10)
days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant
representing the number of shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to
the holder hereof within such time.
<PAGE> 2
(b) Payment of Exercise Price. Payment of the exercise price
for the shares to be issued upon the exercise of this Warrant shall be
made by certified or official bank check; provided, however, the holder
hereof shall also have the right, at its election, in lieu of paying
the exercise price by certified or official bank check, to instruct the
Company in the Form For Exercise of Warrant to retain, in payment of
the exercise price, a number of shares of Common Stock (the "Payment
Shares") equal to the quotient of (i) the aggregate exercise price of
the shares as to which this Warrant is then being exercised divided by
(ii) the "Average Closing Price" as of the date of exercise and to
deduct the number of Payment Shares from the shares to be delivered to
the holder hereof. "Average Closing Price" means, as of any date, (x)
if shares of Common Stock are listed on a national securities exchange,
the average of the closing sales prices therefor on the largest
securities exchange on which such shares are traded on the last ten
trading days before such date, (y) if such shares are listed on the
NASDAQ National Market System but not on any national securities
exchange, the average of the closing sales prices therefor on the
NASDAQ National Market System on the last ten trading days before such
date or (z) if such shares are not listed on either a national
securities exchange or the NASDAQ National Market System, the average
of the sales prices therefor on the last twenty trading days before
such date.
2. VALIDITY OF ISSUANCE AND RESERVATION OF SHARES. The Company
covenants and agrees that all shares which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance,
be duly authorized and issued, fully paid, nonassessable, and free from
all taxes, liens, charges and pre-emptive rights with respect to the
issue thereof, and, without limiting the generality of the foregoing,
the Company covenants and agrees that it will from time to time take
all such action as may be requisite to assure that the par value per
share of the Common Stock is at all times equal to or less than the
then effective purchase price per share of the Common Stock issuable
pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant, a sufficient number of
shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
3. WARRANT ADJUSTMENTS. The above provisions are, however, subject to
the following:
(a) Adjustment of Shares. The warrant purchase price and the
number of shares purchasable pursuant hereto shall be subject to
adjustment from time to time as hereinafter provided.
(b) Adjustment of Price for Stock Sales. Except as provided in
paragraph (h) below, if and whenever the Company shall issue or sell
any shares of its Common Stock for a consideration per share less than
the warrant purchase price in effect immediately prior to the time of
such issue or sale, and/or the Company shall issue or sell any shares
of its Common Stock for a consideration per share less than the market
price on the date of such issue or sale, then, forthwith upon such
issue or sale, the warrant purchase price shall be reduced to the lower
of the prices (calculated to the nearest cent) determined as follows:
-2-
<PAGE> 3
(i) by dividing (1) an amount equal to the sum of
(aa) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then
existing warrant purchase price, and (bb) the consideration,
if any, received by the Company upon such issue or sale, by
(2) the total number of shares of Common Stock outstanding
immediately after such issue or sale; or
(ii) by multiplying the warrant purchase price in
effect immediately prior to the time of such issue or sale by
a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding immediately prior
to such issue or sale multiplied by the market price
immediately prior to such issue or sale, plus (2) the
consideration received by the Company upon such issue or sale,
and the denominator of which shall be the product of (3) the
total number of shares of Common Stock outstanding immediately
after such issue or sale, multiplied by (4) the market price
immediately prior to such issue or sale.
No adjustment of the warrant purchase price, however, shall be made in
an amount less than $.01 per share, but any such lesser adjustment
shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which together with any adjustments
so carried forward shall amount to $.01 per share or more.
(c) Further Provisions with respect to Stock Sales. For the
purposes of paragraph (b), the following provisions (i) to (vii),
inclusive, shall also be applicable:
(i) In case at any time the Company shall grant
(whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options for
the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such rights or
options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the
price per share at which Common Stock is issuable upon the
exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by
dividing (aa) the total amount if any, received or receivable
by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the
exercise of such rights or options, plus, in the case of such
rights or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (bb) the total
maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or
exchange of all such Convertible Securities issuable upon the
exercise of such rights or options) shall be less than the
warrant purchase price in effect immediately prior to the time
of the granting of such rights or options (or less than the
market price determined as of the date of granting such rights
or options, as the case may be), then the total maximum number
of shares of Common Stock issuable upon the exercise of rights
or options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the date of
granting of such rights or options) be deemed to have been
issued for such price per share. Except
-3-
<PAGE> 4
as provided in paragraph (f) below, no further adjustments of
the warrant purchase price shall be made upon the actual issue
of such Common Stock or of such Convertible Securities upon
exercise of such rights or options or upon the actual issue of
such Common Stock upon conversion or exchange of such
Convertible Securities.
(ii) In case the Company shall issue (whether
directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined by dividing (aa)
the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (bb) the total maximum
number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less
than the warrant purchase price in effect immediately prior to
the time of such issue or sale (or less than the market price,
determined as of the date of such issue or sale of such
Convertible Securities, as the case may be), then the total
maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been
issued for such price per share, provided that (x) except as
provided in paragraph (f) below, no further adjustments of the
warrant purchase price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such
Convertible Securities, and (y) if any such issue or sale of
such Convertible Securities is made upon exercise of any
rights to subscribe for or to purchase or any option to
purchase any such Convertible Securities for which adjustments
of the warrant purchase price have been or are to be made
pursuant to other provisions of this paragraph (c), no further
adjustment of the warrant purchase price shall be made by
reason of such issue or sale.
(iii) In case the Company shall declare a dividend or
make any other distribution upon any stock of the Company
payable in Common Stock or Convertible Securities, any Common
Stock or Convertible Securities, as the case may be, issuable
in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration.
(iv) In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be
issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Company
therefor, without deduction therefrom of any expenses incurred
or any underwriting commissions or concessions paid or allowed
by the Company in connection therewith. In case any shares of
Common Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other
than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair market
value of such consideration as determined by the Board of
Directors of the Company,
-4-
<PAGE> 5
without deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase
such Common Stock or Convertible Securities shall be issued in
connection with any merger or consolidation in which the
Company is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair market
value as determined by the Board of Directors of the Company
of such portion of the assets and business of the
non-surviving corporation or corporations as such Board shall
determine to be attributable to such Common Stock, Convertible
Securities, rights or options, as the case may be. In the
event of any consolidation or merger of the Company in which
the Company is not the surviving corporation or in the event
of any sale of all or substantially all of the assets of the
Company for stock or other securities of any corporation, the
Company shall be deemed to have issued a number of shares of
its Common Stock for stock or securities of the other
corporation computed on the basis of the actual exchange ratio
on which the transaction was predicated and for a
consideration equal to the fair market value on the date of
such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment
of the warrant purchase price, the determination of the number
of shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such merger, conversion or sale,
for purposes of paragraph 3(h) shall be made after giving
effect to such adjustment of the warrant purchase price.
(v) In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them
(aa) to receive a dividend or other distribution payable in
Common Stock or in Convertible Securities, or (bb) to
subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date
of the granting of such right of subscription or purchase, as
the case may be.
(vi) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common
Stock for the purposes of this paragraph (3).
(vii) "Market price" shall mean the average of the
high and low prices of the Common Stock sales on all exchanges
on which the Common Stock may at the time be admitted to
trading, or, if there shall have been no sales on any such
exchange on any such day, the average of the bid and asked
prices at the end of such day, or, if the Common Stock shall
not be so admitted to trading, the average of the bid and
asked prices at the end of the day in the over-the-counter
market, in each case averaged over a period of 20 consecutive
business days prior to the date as of which "market price" is
being determined. If at any time the Common Stock is not
admitted to trading on any exchange or quoted in the
over-the-counter market, the "market price" shall be deemed to
be the fair market value thereof determined in good faith by
the Board of Directors of the Company as of a date which is
within 15 days of the date as of which the determination is to
be made.
-5-
<PAGE> 6
(d) Adjustment of Price for Corporate Distributions. In case
the Company shall declare a dividend upon the Common Stock payable
otherwise than out of consolidated earnings or consolidated earned
surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (except in Common Stock or
Convertible Securities, but including other securities), the warrant
purchase price in effect immediately prior to the declaration of such
dividend shall be reduced by an amount equal, in the case of a dividend
in cash, to the amount thereof payable per share of the Common Stock
or, in the case of any other dividend, to the fair market value thereof
per share of the Common Stock as determined by the Board of Directors
of the Company. For the purposes of the foregoing, a dividend other
than in cash shall be considered payable out of earnings or surplus
(other than revaluation or paid-in-surplus) only to the extent that
such earnings or surplus are charged an amount equal to the fair market
value of such dividend as determined by the Board of Directors of the
Company. Such reductions shall take effect as of the date on which a
record is taken for the purpose of such dividend, or, if a record is
not taken, the date as of which the holders of Common Stock of record
entitled to such dividend are to be determined.
(e) Adjustment of Price for Subdivisions and Combinations of
Shares. In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the warrant
purchase price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Company shall be combined into a smaller number
of shares, the warrant purchase price in effect immediately prior to
such combination shall be proportionately increased.
(f) Readjustments. Upon the happening of any of the following
events, namely, if the purchase price provided for in any rights or
options referred to in clause (i) of paragraph (c), the additional
consideration, if any, payable upon the conversion or exchange of
Convertible Securities referred to in clause (i) or (ii) of paragraph
(c), or the rate at which any Convertible Securities referred to in
clause (i) or clause (ii) of paragraph (c) are convertible into or
exchangeable for Common Stock shall change (other than under or by
reason of provisions designed to protect against dilution), the warrant
purchase price in effect at the time of such event shall forthwith be
readjusted to the warrant purchase price which would have been in
effect at such time had such rights, options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or
exchange such Convertible Securities, the warrant purchase price then
in effect hereunder shall forthwith be increased to the warrant
purchase price which would have been in effect at the time of such
expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) of paragraph (c) or the rate at which any Convertible
Securities referred to in clause (i) or clause (ii) of paragraph (c)
are convertible into or exchangeable for Common Stock, shall decrease
at any time under or by reason of provisions with respect thereto
designed to protect against
-6-
<PAGE> 7
dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of
any such Convertible Securities, the warrant purchase price then in
effect hereunder shall forthwith be decreased to such lower price, if
any, as would have been obtained had such right, option or Convertible
Securities never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock
delivered as aforesaid.
(g) Adjustment of Number of Shares Purchasable. Except as
provided in paragraph (h) below, upon each adjustment of the warrant
purchase price (or upon the happening of any event described herein
which would have required an adjustment in the warrant purchase price
but for the fact that the consideration paid or payable to the Company
by reason of such event is not less than the warrant purchase price in
effect immediately prior thereto or the market price of the shares of
Common Stock issued or issuable by reason thereof), the holder of this
Warrant shall thereafter be entitled to purchase, at the warrant
purchase price resulting from such adjustment (or, if there has not
been any adjustment in such price, at the then existing warrant
purchase price), the number of shares (calculated to the nearest share)
determined as follows:
(i) In all cases other than adjustments in the
warrant purchase price arising under paragraph (d):
(1) by dividing (aa) the number of shares of
Common Stock purchasable pursuant to this Warrant
immediately prior thereto by (bb) the total number of
shares of Common Stock outstanding immediately prior
thereto; and
(2) multiplying the result by the total
number of shares of Common Stock outstanding
immediately thereafter.
(ii) In the case of an adjustment in the warrant
purchase price arising under paragraph (d):
(1) by multiplying the warrant purchase
price in effect immediately prior to such adjustment
by the number of shares purchasable pursuant to this
Warrant immediately prior to such adjustment; and
(2) dividing the product thereof by the
warrant purchase price resulting from such
adjustment.
For purposes of the foregoing computation, the total number of shares
of Common Stock outstanding at any time shall be deemed to include the
total number of shares of Common Stock issuable upon (x) the exercise
of all then outstanding rights to subscribe for or to purchase, and
options for the purchase of, Common Stock or Convertible Securities,
and (y) the conversion or exchange of such Convertible Securities and
all other outstanding Convertible Securities, but shall not be deemed
to include any shares of Common Stock issuable upon the exercise of any
unexercised portion of this Warrant.
(h) Exclusions. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any
adjustment of the warrant purchase price in connection
-7-
<PAGE> 8
with any shares of Common Stock reserved for issuance (x) upon the
exercise of stock options granted to the Directors, officers and
employees of the Company which have been granted or are available for
grant pursuant to stock option plans in effect on the date hereof or at
the time of the holder's exercise of this Warrant, or (y) upon the
exercise of any conversion rights held by the holder or holders of the
Company's Series B Seven Percent (7%) Cumulative Convertible Preferred
Stock, Fifty Dollars ($50.00) par value per share, or any securities
issued in exchange or in payment or redemption of said Series B Seven
Percent (7%) Cumulative Convertible Preferred Stock, or (z) upon the
exercise of any rights to purchase 50,000 shares of Common Stock set
forth in the Warrant Agreement dated July 8, 1997, granted by the
Company to Patricof & Co. Capital Corp.
(i) Reorganizations. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation, or the sale of all
or substantially all of its assets or outstanding capital stock to
another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant and
in lieu of the shares of the Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in
any such case appropriate provisions shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions fore
adjustments of the warrant purchase price and of the number of shares
purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof.
(j) Notice of Adjustments. Upon any adjustment of the warrant
purchase price or the number of shares purchasable pursuant hereto,
then and in each such case the Company shall give written notice
thereof to the registered holder of this Warrant, which notice shall
state the warrant purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable upon
the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is
based.
4. COMMON STOCK. As used herein, the term "Common Stock" shall mean and
include the Company's presently authorized shares of capital stock and
shall also include any capital stock of any class of the Company
hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof
to participate in dividends or in the distribution of assets upon the
voluntary or
-8-
<PAGE> 9
involuntary liquidation, dissolution or winding up of the Company;
provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of
original issue of this Warrant or, in the case of any reclassification
of the outstanding shares thereof, the stock, securities or assets
provided for in paragraph 3(i) above.
5. NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the
Company.
6. NOTICE OF PROPOSED TRANSFERS. The holder of this Warrant, by
acceptance hereof, agrees to give written notice to the Company before
transferring this Warrant or transferring any Common Stock issuable or
issued upon the exercise hereof, of such holder's intention to do so,
describing briefly the manner of any such proposed transfer. Promptly
after such written notice is received by the Company, copies thereof
shall be presented to counsel for the Company and to counsel for such
holder. If in the opinion of each such counsel the proposed transfer
may be effected without registration or qualification (under any
Federal or State law) of this Warrant or the shares of Common Stock
issuable or issued on the exercise hereof, the Company, as promptly as
practicable, shall notify such holder of such opinion, whereupon such
holder shall be entitled to effect such transfer in accordance with the
terms of the notice delivered by such holder to the Company, provided
that an appropriate legend may be endorsed on this Warrant or the
certificates for such shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel for the
Company to prevent transfers which would be in violation of Section 5
of the Securities Act of 1933, as amended (herein called the "1933
Act").
7. INVESTMENT REPRESENTATION; RESALE LIMITATIONS; REGISTRATION RIGHTS.
(a) Investment Representation. The holder of this Warrant, by
acceptance hereof, represents and warrants that this Warrant and shares
of Common Stock purchased by the holder pursuant to the exercise of
this Warrant, are and will be acquired by the holder for investment and
not with a view to, or for sale in connection with, any distribution
thereof, nor with any present intention, of selling, transferring or
disposing of the same.
(b) Resale Limitations. The shares of Common Stock which may
be purchased hereunder may not be offered for sale, sold or otherwise
transferred, unless:
(i) A registration statement with respect to such
securities shall be effective under the 1933 Act, together
with proof satisfactory to counsel for the Company that the
holder of this Warrant shall have complied with applicable
state securities laws, or
(ii) The Company shall have received an opinion of
counsel satisfactory to the Company that no violation of the
1933 Act, or such other applicable law, will be involved in
such transfer, or
(iii) The Company shall receive a "no action" letter
from the Securities and
-9-
<PAGE> 10
Exchange Commission (herein called the "SEC") and the
equivalent ruling or letter pursuant to applicable state law
in form satisfactory to the Company covering such transfer,
and the Company may withhold transfer, registration and delivery of
such securities until one of the three conditions set forth in this
paragraph 7(b) shall have been met.
(c) Legend. All certificates representing the shares of Common
Stock issued upon the exercise of this Warrant shall contain an
appropriate legend indicating the fact that the shares have not been
registered under the 1933 Act and the conditions affecting the
transferability of such shares. A similar notation will be placed in
the Company's stock transfer ledger.
8. NOTICES. Any notice or other thing required or desired to be served,
given or delivered hereunder shall be in writing, and shall be deemed
to have been validly served, given or delivered upon deposit in the
United States registered or certified mail with proper postage prepaid
and addressed to the party to be notified as follows:
(a) If to the Company at:
American Precision Industries Inc.
2777 Walden Avenue
Buffalo, New York 14225
Attention: President
(b) If to the holder of this Warrant at:
Decision Processes International
(Connecticut, Ltd.)
10 Bay Street, Suite 116
Westport, Connecticut 06880
Attention: President
or to such other address as either party may hereafter designate for
itself by written notice to the other party in the manner herein
prescribed.
9. GENERAL. This Warrant shall be construed in accordance with the laws
of the State of Delaware. Whenever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and
valid under the applicable law, but, if any provision of this Warrant
shall be held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or
the remaining provisions of this Warrant. The paragraph headings herein
are for convenience only and shall not affect the interpretation of any
of the provisions hereof.
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<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed at
Buffalo, New York by its duly authorized officers under its corporate seal, and
this Warrant is dated July 1, 1998.
AMERICAN PRECISION INDUSTRIES INC.
By
-----------------------------------------
Kurt Wiedenhaupt, Chairman,
President and Chief Executive Officer
(CORPORATE SEAL)
ATTEST:
- -------------------------------
James J. Tanous, Secretary
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<PAGE> 12
FORM
FOR
EXERCISE OF WARRANT
The undersigned hereby elects to purchase _________ shares of Common
Stock, $.66-2/3 par value, of AMERICAN PRECISION INDUSTRIES INC. (the "Company")
in accordance with the WARRANT AGREEMENT dated ___________, 19__. The
undersigned hereby delivers the following to the Company in full payment for the
shares purchased hereby:
Exercise Price ($______ per share) x ______ shares purchased =
Aggregate Exercise Price $
Paid by: certified or official bank check payable
to "American Precision Industries Inc."
OR
--
By the retention by the Company of ______ shares
per paragraph 1(b) of the WARRANT AGREEMENT.
(Aggregate Exercise Price Average Closing Price =
Payment Shares)
(Total shares purchased - Payment Shares = Shares
to be issued to undersigned)
Please register these shares as follows:
Name of record owner:
Address:
Social Security No.:
Please mail shares to [above address] or
Dated:
----------------
---------------------------------
Signature of Warrant Holder
<PAGE> 13
Exhibit 4-D
Warrant Certificate No. 2 Warrant to Purchase
6,154 Shares
WARRANT AGREEMENT
Dated as of January 1, 1998
To Subscribe for and Purchase Common Stock of
AMERICAN PRECISION INDUSTRIES INC.
--------------------
THIS CERTIFIES THAT, for value received, DECISION PROCESSES
INTERNATIONAL (CONNECTICUT, LTD.) (herein called "DPI"), or its permitted
assigns, is entitled to subscribe for and purchase from AMERICAN PRECISION
INDUSTRIES INC., a Delaware corporation (herein called the "Company"), at the
price of Nineteen Dollars and 50 Cents ($19.50) per share (subject to
adjustments as provided herein) at any time after the date hereof to and
including December 31, 2007, SIX THOUSAND ONE HUNDRED FIFTY-FOUR (6,154) fully
paid and non-assessable shares of the Company's Common Stock, $.66-2/3 par
value.
This Warrant was originally issued in connection with execution by the
Company and DPI of a Retainer Agreement dated as of January 1, 1998 (herein
called the "Retainer Agreement"). As used herein, "this Warrant" and "the
Warrants" shall mean the Warrant originally issued to DPI pursuant to the
Retainer Agreement and any Warrants that may be issued in substitution or
exchange therefor. All Warrants shall be dated said original issue date.
This Warrant is subject to the following terms and conditions:
1. EXERCISE OF WARRANT.
(a) Exercise. The rights represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not as to a
fractional share of Common Stock), by written notice of exercise
delivered to the Company and by the surrender of this Warrant (properly
endorsed if required) at the principal business office of the Company
and upon payment to it of the purchase price for such shares. The
Company agrees that the shares so purchased shall be, and shall be
deemed to be, issued to the holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant
shall have been surrendered and payment made for such shares.
Certificates for the shares of stock so purchased shall be delivered to
the holder hereof within a reasonable time, not exceeding ten (10)
days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant
representing the number of shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to
the holder hereof within such time.
(b) Payment of Exercise Price. Payment of the exercise price
for the shares to be issued upon the exercise of this Warrant shall be
made by certified or official bank
<PAGE> 14
check; provided, however, the holder hereof shall also have the right,
at its election, in lieu of paying the exercise price by certified or
official bank check, to instruct the Company in the Form For Exercise
of Warrant to retain, in payment of the exercise price, a number of
shares of Common Stock (the "Payment Shares") equal to the quotient of
(i) the aggregate exercise price of the shares as to which this Warrant
is then being exercised divided by (ii) the "Average Closing Price" as
of the date of exercise and to deduct the number of Payment Shares from
the shares to be delivered to the holder hereof. "Average Closing
Price" means, as of any date, (x) if shares of Common Stock are listed
on a national securities exchange, the average of the closing sales
prices therefor on the largest securities exchange on which such shares
are traded on the last ten trading days before such date, (y) if such
shares are listed on the NASDAQ National Market System but not on any
national securities exchange, the average of the closing sales prices
therefor on the NASDAQ National Market System on the last ten trading
days before such date or (z) if such shares are not listed on either a
national securities exchange or the NASDAQ National Market System, the
average of the sales prices therefor on the last twenty trading days
before such date.
2. VALIDITY OF ISSUANCE AND RESERVATION OF SHARES. The Company
covenants and agrees that all shares which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance,
be duly authorized and issued, fully paid, nonassessable, and free from
all taxes, liens, charges and pre-emptive rights with respect to the
issue thereof, and, without limiting the generality of the foregoing,
the Company covenants and agrees that it will from time to time take
all such action as may be requisite to assure that the par value per
share of the Common Stock is at all times equal to or less than the
then effective purchase price per share of the Common Stock issuable
pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant, a sufficient number of
shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
3. WARRANT ADJUSTMENTS. The above provisions are, however, subject to
the following:
(a) Adjustment of Shares. The warrant purchase price and the
number of shares purchasable pursuant hereto shall be subject to
adjustment from time to time as hereinafter provided.
(b) Adjustment of Price for Stock Sales. Except as provided in
paragraph (h) below, if and whenever the Company shall issue or sell
any shares of its Common Stock for a consideration per share less than
the warrant purchase price in effect immediately prior to the time of
such issue or sale, and/or the Company shall issue or sell any shares
of its Common Stock for a consideration per share less than the market
price on the date of such issue or sale, then, forthwith upon such
issue or sale, the warrant purchase price shall be reduced to the lower
of the prices (calculated to the nearest cent) determined as follows:
(i) by dividing (1) an amount equal to the sum of
(aa) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by
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<PAGE> 15
the then existing warrant purchase price, and (bb) the
consideration, if any, received by the Company upon such issue
or sale, by (2) the total number of shares of Common Stock
outstanding immediately after such issue or sale; or
(ii) by multiplying the warrant purchase price in
effect immediately prior to the time of such issue or sale by
a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding immediately prior
to such issue or sale multiplied by the market price
immediately prior to such issue or sale, plus (2) the
consideration received by the Company upon such issue or sale,
and the denominator of which shall be the product of (3) the
total number of shares of Common Stock outstanding immediately
after such issue or sale, multiplied by (4) the market price
immediately prior to such issue or sale.
No adjustment of the warrant purchase price, however, shall be made in
an amount less than $.01 per share, but any such lesser adjustment
shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which together with any adjustments
so carried forward shall amount to $.01 per share or more.
(c) Further Provisions with respect to Stock Sales. For the
purposes of paragraph (b), the following provisions (i) to (vii),
inclusive, shall also be applicable:
(i) In case at any time the Company shall grant
(whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options for
the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such rights or
options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the
price per share at which Common Stock is issuable upon the
exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by
dividing (aa) the total amount if any, received or receivable
by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the
exercise of such rights or options, plus, in the case of such
rights or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (bb) the total
maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or
exchange of all such Convertible Securities issuable upon the
exercise of such rights or options) shall be less than the
warrant purchase price in effect immediately prior to the time
of the granting of such rights or options (or less than the
market price determined as of the date of granting such rights
or options, as the case may be), then the total maximum number
of shares of Common Stock issuable upon the exercise of rights
or options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the date of
granting of such rights or options) be deemed to have been
issued for such price per share. Except as provided in
paragraph (f) below, no further adjustments of the warrant
purchase price shall be made upon the actual issue of such
Common Stock or of such
-3-
<PAGE> 16
Convertible Securities upon exercise of such rights or options
or upon the actual issue of such Common Stock upon conversion
or exchange of such Convertible Securities.
(ii) In case the Company shall issue (whether
directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined by dividing (aa)
the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (bb) the total maximum
number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less
than the warrant purchase price in effect immediately prior to
the time of such issue or sale (or less than the market price,
determined as of the date of such issue or sale of such
Convertible Securities, as the case may be), then the total
maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been
issued for such price per share, provided that (x) except as
provided in paragraph (f) below, no further adjustments of the
warrant purchase price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such
Convertible Securities, and (y) if any such issue or sale of
such Convertible Securities is made upon exercise of any
rights to subscribe for or to purchase or any option to
purchase any such Convertible Securities for which adjustments
of the warrant purchase price have been or are to be made
pursuant to other provisions of this paragraph (c), no further
adjustment of the warrant purchase price shall be made by
reason of such issue or sale.
(iii) In case the Company shall declare a dividend or
make any other distribution upon any stock of the Company
payable in Common Stock or Convertible Securities, any Common
Stock or Convertible Securities, as the case may be, issuable
in payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration.
(iv) In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase
any such Common Stock or Convertible Securities shall be
issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Company
therefor, without deduction therefrom of any expenses incurred
or any underwriting commissions or concessions paid or allowed
by the Company in connection therewith. In case any shares of
Common Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other
than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair market
value of such consideration as determined by the Board of
Directors of the Company, without deduction of any expenses
incurred or any underwriting commissions or concessions paid
or allowed by the Company in connection therewith. In case any
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<PAGE> 17
shares of Common Stock or Convertible Securities or any rights
or options to purchase such Common Stock or Convertible
Securities shall be issued in connection with any merger or
consolidation in which the Company is the surviving
corporation, the amount of consideration therefor shall be
deemed to be the fair market value as determined by the Board
of Directors of the Company of such portion of the assets and
business of the non-surviving corporation or corporations as
such Board shall determine to be attributable to such Common
Stock, Convertible Securities, rights or options, as the case
may be. In the event of any consolidation or merger of the
Company in which the Company is not the surviving corporation
or in the event of any sale of all or substantially all of the
assets of the Company for stock or other securities of any
corporation, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities
of the other corporation computed on the basis of the actual
exchange ratio on which the transaction was predicated and for
a consideration equal to the fair market value on the date of
such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment
of the warrant purchase price, the determination of the number
of shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such merger, conversion or sale,
for purposes of paragraph 3(h) shall be made after giving
effect to such adjustment of the warrant purchase price.
(v) In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them
(aa) to receive a dividend or other distribution payable in
Common Stock or in Convertible Securities, or (bb) to
subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date
of the granting of such right of subscription or purchase, as
the case may be.
(vi) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common
Stock for the purposes of this paragraph (3).
(vii) "Market price" shall mean the average of the
high and low prices of the Common Stock sales on all exchanges
on which the Common Stock may at the time be admitted to
trading, or, if there shall have been no sales on any such
exchange on any such day, the average of the bid and asked
prices at the end of such day, or, if the Common Stock shall
not be so admitted to trading, the average of the bid and
asked prices at the end of the day in the over-the-counter
market, in each case averaged over a period of 20 consecutive
business days prior to the date as of which "market price" is
being determined. If at any time the Common Stock is not
admitted to trading on any exchange or quoted in the
over-the-counter market, the "market price" shall be deemed to
be the fair market value thereof determined in good faith by
the Board of Directors of the Company as of a date which is
within 15 days of the date as of which the determination is to
be made.
(d) Adjustment of Price for Corporate Distributions. In case
the Company shall
-5-
<PAGE> 18
declare a dividend upon the Common Stock payable otherwise than out of
consolidated earnings or consolidated earned surplus, determined in
accordance with generally accepted accounting principles, including the
making of appropriate deductions for minority interests, if any, in
subsidiaries (except in Common Stock or Convertible Securities, but
including other securities), the warrant purchase price in effect
immediately prior to the declaration of such dividend shall be reduced
by an amount equal, in the case of a dividend in cash, to the amount
thereof payable per share of the Common Stock or, in the case of any
other dividend, to the fair market value thereof per share of the
Common Stock as determined by the Board of Directors of the Company.
For the purposes of the foregoing, a dividend other than in cash shall
be considered payable out of earnings or surplus (other than
revaluation or paid-in-surplus) only to the extent that such earnings
or surplus are charged an amount equal to the fair market value of such
dividend as determined by the Board of Directors of the Company. Such
reductions shall take effect as of the date on which a record is taken
for the purpose of such dividend, or, if a record is not taken, the
date as of which the holders of Common Stock of record entitled to such
dividend are to be determined.
(e) Adjustment of Price for Subdivisions and Combinations of
Shares. In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the warrant
purchase price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Company shall be combined into a smaller number
of shares, the warrant purchase price in effect immediately prior to
such combination shall be proportionately increased.
(f) Readjustments. Upon the happening of any of the following
events, namely, if the purchase price provided for in any rights or
options referred to in clause (i) of paragraph (c), the additional
consideration, if any, payable upon the conversion or exchange of
Convertible Securities referred to in clause (i) or (ii) of paragraph
(c), or the rate at which any Convertible Securities referred to in
clause (i) or clause (ii) of paragraph (c) are convertible into or
exchangeable for Common Stock shall change (other than under or by
reason of provisions designed to protect against dilution), the warrant
purchase price in effect at the time of such event shall forthwith be
readjusted to the warrant purchase price which would have been in
effect at such time had such rights, options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such
option or right or the termination of any such right to convert or
exchange such Convertible Securities, the warrant purchase price then
in effect hereunder shall forthwith be increased to the warrant
purchase price which would have been in effect at the time of such
expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) of paragraph (c) or the rate at which any Convertible
Securities referred to in clause (i) or clause (ii) of paragraph (c)
are convertible into or exchangeable for Common Stock, shall decrease
at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Stock upon the exercise of any such right or option or upon
conversion or exchange of any such Convertible Securities, the warrant
-6-
<PAGE> 19
purchase price then in effect hereunder shall forthwith be decreased to
such lower price, if any, as would have been obtained had such right,
option or Convertible Securities never been issued as to such Common
Stock and had adjustments been made upon the issuance of the shares of
Common Stock delivered as aforesaid.
(g) Adjustment of Number of Shares Purchasable. Except as
provided in paragraph (h) below, upon each adjustment of the warrant
purchase price (or upon the happening of any event described herein
which would have required an adjustment in the warrant purchase price
but for the fact that the consideration paid or payable to the Company
by reason of such event is not less than the warrant purchase price in
effect immediately prior thereto or the market price of the shares of
Common Stock issued or issuable by reason thereof), the holder of this
Warrant shall thereafter be entitled to purchase, at the warrant
purchase price resulting from such adjustment (or, if there has not
been any adjustment in such price, at the then existing warrant
purchase price), the number of shares (calculated to the nearest share)
determined as follows:
(i) In all cases other than adjustments in the
warrant purchase price arising under paragraph (d):
(1) by dividing (aa) the number of shares of
Common Stock purchasable pursuant to this Warrant
immediately prior thereto by (bb) the total number of
shares of Common Stock outstanding immediately prior
thereto; and
(2) multiplying the result by the total
number of shares of Common Stock outstanding
immediately thereafter.
(ii) In the case of an adjustment in the warrant
purchase price arising under paragraph (d):
(1) by multiplying the warrant purchase
price in effect immediately prior to such adjustment
by the number of shares purchasable pursuant to this
Warrant immediately prior to such adjustment; and
(2) dividing the product thereof by the
warrant purchase price resulting from such
adjustment.
For purposes of the foregoing computation, the total number of shares
of Common Stock outstanding at any time shall be deemed to include the
total number of shares of Common Stock issuable upon (x) the exercise
of all then outstanding rights to subscribe for or to purchase, and
options for the purchase of, Common Stock or Convertible Securities,
and (y) the conversion or exchange of such Convertible Securities and
all other outstanding Convertible Securities, but shall not be deemed
to include any shares of Common Stock issuable upon the exercise of any
unexercised portion of this Warrant.
(h) Exclusions. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any
adjustment of the warrant purchase price in connection with any shares
of Common Stock reserved for issuance (x) upon the exercise of stock
options granted to the Directors, officers and employees of the Company
which have been
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<PAGE> 20
granted or are available for grant pursuant to stock option plans in
effect on the date hereof or at the time of the holder's exercise of
this Warrant, or (y) upon the exercise of any conversion rights held by
the holder or holders of the Company's Series B Seven Percent (7%)
Cumulative Convertible Preferred Stock, Fifty Dollars ($50.00) par
value per share, or any securities issued in exchange or in payment or
redemption of said Series B Seven Percent (7%) Cumulative Convertible
Preferred Stock, or (z) upon the exercise of any rights to purchase
50,000 shares of Common Stock set forth in the Warrant Agreement dated
July 8, 1997, granted by the Company to Patricof & Co. Capital Corp.
(i) Reorganizations. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation, or the sale of all
or substantially all of its assets or outstanding capital stock to
another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant and
in lieu of the shares of the Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in
any such case appropriate provisions shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions fore
adjustments of the warrant purchase price and of the number of shares
purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof.
(j) Notice of Adjustments. Upon any adjustment of the warrant
purchase price or the number of shares purchasable pursuant hereto,
then and in each such case the Company shall give written notice
thereof to the registered holder of this Warrant, which notice shall
state the warrant purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable upon
the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is
based.
4. COMMON STOCK. As used herein, the term "Common Stock" shall mean and
include the Company's presently authorized shares of capital stock and
shall also include any capital stock of any class of the Company
hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof
to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant
shall include shares designated as Common Stock
-8-
<PAGE> 21
of the Company on the date of original issue of this Warrant or, in the
case of any reclassification of the outstanding shares thereof, the
stock, securities or assets provided for in paragraph 3(i) above.
5. NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the
Company.
6. NOTICE OF PROPOSED TRANSFERS. The holder of this Warrant, by
acceptance hereof, agrees to give written notice to the Company before
transferring this Warrant or transferring any Common Stock issuable or
issued upon the exercise hereof, of such holder's intention to do so,
describing briefly the manner of any such proposed transfer. Promptly
after such written notice is received by the Company, copies thereof
shall be presented to counsel for the Company and to counsel for such
holder. If in the opinion of each such counsel the proposed transfer
may be effected without registration or qualification (under any
Federal or State law) of this Warrant or the shares of Common Stock
issuable or issued on the exercise hereof, the Company, as promptly as
practicable, shall notify such holder of such opinion, whereupon such
holder shall be entitled to effect such transfer in accordance with the
terms of the notice delivered by such holder to the Company, provided
that an appropriate legend may be endorsed on this Warrant or the
certificates for such shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel for the
Company to prevent transfers which would be in violation of Section 5
of the Securities Act of 1933, as amended (herein called the "1933
Act").
7. INVESTMENT REPRESENTATION; RESALE LIMITATIONS; REGISTRATION RIGHTS.
(a) Investment Representation. The holder of this Warrant, by
acceptance hereof, represents and warrants that this Warrant and shares
of Common Stock purchased by the holder pursuant to the exercise of
this Warrant, are and will be acquired by the holder for investment and
not with a view to, or for sale in connection with, any distribution
thereof, nor with any present intention, of selling, transferring or
disposing of the same.
(b) Resale Limitations. The shares of Common Stock which may
be purchased hereunder may not be offered for sale, sold or otherwise
transferred, unless:
(i) A registration statement with respect to such
securities shall be effective under the 1933 Act, together
with proof satisfactory to counsel for the Company that the
holder of this Warrant shall have complied with applicable
state securities laws, or
(ii) The Company shall have received an opinion of
counsel satisfactory to the Company that no violation of the
1933 Act, or such other applicable law, will be involved in
such transfer, or
(iii) The Company shall receive a "no action" letter
from the Securities and Exchange Commission (herein called the
"SEC") and the equivalent ruling or letter pursuant to
applicable state law in form satisfactory to the Company
covering such
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<PAGE> 22
transfer,
and the Company may withhold transfer, registration and delivery of
such securities until one of the three conditions set forth in this
paragraph 7(b) shall have been met.
(c) Legend. All certificates representing the shares of Common
Stock issued upon the exercise of this Warrant shall contain an
appropriate legend indicating the fact that the shares have not been
registered under the 1933 Act and the conditions affecting the
transferability of such shares. A similar notation will be placed in
the Company's stock transfer ledger.
8. NOTICES. Any notice or other thing required or desired to be served,
given or delivered hereunder shall be in writing, and shall be deemed
to have been validly served, given or delivered upon deposit in the
United States registered or certified mail with proper postage prepaid
and addressed to the party to be notified as follows:
(a) If to the Company at:
American Precision Industries Inc.
2777 Walden Avenue
Buffalo, New York 14225
Attention: President
(b) If to the holder of this Warrant at:
Decision Processes International
(Connecticut, Ltd.)
10 Bay Street, Suite 116
Westport, Connecticut 06880
Attention: President
or to such other address as either party may hereafter designate for
itself by written notice to the other party in the manner herein
prescribed.
9. GENERAL. This Warrant shall be construed in accordance with the laws
of the State of Delaware. Whenever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and
valid under the applicable law, but, if any provision of this Warrant
shall be held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or
the remaining provisions of this Warrant. The paragraph headings herein
are for convenience only and shall not affect the interpretation of any
of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed at
Buffalo, New York by its duly authorized officers under its corporate seal, and
this Warrant is dated December 31, 1998.
-10-
<PAGE> 23
AMERICAN PRECISION INDUSTRIES INC.
By
------------------------------------------
Kurt Wiedenhaupt, Chairman,
President and Chief Executive Officer
(CORPORATE SEAL)
ATTEST:
- -------------------------------
James J. Tanous, Secretary
-11-
<PAGE> 24
FORM
FOR
EXERCISE OF WARRANT
The undersigned hereby elects to purchase _________ shares of Common
Stock, $.66-2/3 par value, of AMERICAN PRECISION INDUSTRIES INC. (the "Company")
in accordance with the WARRANT AGREEMENT dated ___________, 19__. The
undersigned hereby delivers the following to the Company in full payment for the
shares purchased hereby:
Exercise Price ($______ per share) x ______ shares purchased =
Aggregate Exercise Price $
Paid by: certified or official bank check payable
to "American Precision Industries Inc."
OR
--
By the retention by the Company of ______ shares
per paragraph 1(b) of the WARRANT AGREEMENT.
(Aggregate Exercise Price Average Closing Price =
Payment Shares)
(Total shares purchased - Payment Shares = Shares
to be issued to undersigned)
Please register these shares as follows:
Name of record owner:
Address:
Social Security No.:
Please mail shares to [above address] or
Dated:
--------------
----------------------------------
Signature of Warrant Holder
<PAGE> 1
EXHIBIT 10-D(ii)
LIFE INSURANCE SPLIT-DOLLAR AGREEMENT
AGREEMENT by and between AMERICAN PRECISION INDUSTRIES INC., a
Delaware corporation with its principal office at 2777 Walden Avenue, Buffalo,
New York 14225 (the "Company"), and _________________________ ("Employee"),
residing at _______________________________________, dated as of ______________.
W I T N E S S E T H
WHEREAS, the Employee is a capable, efficient, and valued
employee of the Company; and
WHEREAS, the Company desires to continue to assist the
Employee in providing protection for the Employee's family (or other
beneficiaries) in the event of the Employee's death while employed by the
Company and in augmenting his assets at the time of his retirement or other
termination of employment; and
WHEREAS, the Company has determined that this assistance can
best be provided under a "split-dollar" arrangement; and
WHEREAS, the Employee is the owner of insurance policy no.
______________ issued by Guardian Life Insurance Company (the "Insurer") in the
original face amount of $_______ on the life of the Employee (the "Policy"),
NOW, THEREFORE, the parties agree as follows:
1. OWNERSHIP OF POLICY. The Employee will continue to be the
owner of the Policy in accordance with the terms and provisions of this
Agreement.
2. ASSIGNMENT. The Employee has executed a collateral
assignment (the "Assignment") of a partial interest in the Policy to the Company
in accordance with the terms of Paragraph 5 of this Agreement. The "Assignee's
Interest" to which the Assignment refers means the Company's interests in the
Policy's death benefit and cash surrender value as described in Paragraph 5 of
this Agreement. The Assignment shall terminate upon the termination of this
Agreement in accordance with the terms of Paragraph 11 of this Agreement.
-1-
<PAGE> 2
3. PAYMENT OF PREMIUMS. On or before the due date of each
annual premium on the Policy, or within the grace period allowed by the Policy
or the Insurer for the payment of such annual premium, and for so long as the
Employee is employed by the Company before attaining the age of 65, the Company
shall pay a portion of the annual premium on the Policy. The portion of each
annual premium to be paid by the Company shall be determined by the Company in
its discretion from year to year. The Employee shall pay the balance of each
such annual premium, on or before its due date or within the grace period
allowed by the Policy or the Insurer for the payment of such annual premium.
4. ADDITIONAL COMPENSATION. The Company shall pay to the
Employee as additional compensation an amount equal to (a) the portion of each
annual premium to be paid by the Employee pursuant to Paragraph 3 of this
Agreement plus (b) an amount such that, after payment of taxes at the marginal
rate (as defined in Schedule A to this Agreement) on the entire additional
compensation payment, the Employee would have left an amount equal to the
portion of the annual premium payment to be paid by the Employee. The Company
shall pay such additional compensation to the Employee, subject to any
applicable payroll tax withholding, by the end of the grace period allowed by
the Policy or the Insurer for the payment of the annual premium.
5. ALLOCATION OF POLICY VALUES. During the term of this
Agreement, the Employee shall retain a death benefit from the Policy equal to
the amount specified in Schedule A to this Agreement. The remaining proceeds
payable from the Policy upon the death of the Employee shall be payable to the
Company under the Assignment. During the term of this Agreement, the Company's
interest in the cash surrender value of the Policy pursuant to the Assignment
shall be equal to the greater of (a) the sum of premiums paid by the Company on
the Policy or (b) the excess of the cash surrender value of the Policy over two
times the Employee's current annual base salary at the time of determination or
termination of employment if earlier. The Company's interest in the cash
surrender value shall be payable to the Company in accordance with Paragraph 10.
The Company shall furnish to the Employee a schedule after each anniversary of
the Policy showing the relative allocations of the cash surrender value of the
Policy.
6. DESIGNATION OF BENEFICIARY. The Employee shall have the
right to designate the beneficiary or beneficiaries of the Policy, who, upon the
death of the Employee, shall receive the proceeds of the Employee's interest in
the death benefit of the Policy in accordance with Paragraph 7 below. If the
Employee elects to designate someone other than his spouse as beneficiary, a
written consent from the spouse shall be required.
-2-
<PAGE> 3
7. DEATH CLAIMS. In the event of the Employee's death, the
Employee's personal representative and the Company shall promptly take all steps
necessary to cause the death benefits provided under the Policy to be paid by
the Insurer. The Policy shall provide by endorsement or otherwise that in the
event of the death of the Employee while the Policy is in full force and effect
during the term of this Agreement, there shall be paid to the beneficiary or
beneficiaries designated by the Employee as provided in Paragraph 6 of this
Agreement, that portion of the death benefit retained by the Employee as
provided in Paragraph 5 of this Agreement, and the remaining proceeds from the
Policy shall be paid directly to the Company.
8. POLICY LOANS. While this Agreement is in effect and except
as provided in Paragraph 10 of this Agreement, there shall be no loans made to
the Company or the Employee secured by the Policy.
9. NO TERMINATION OF POLICY. The Employee agrees that while
this Agreement is in full force and effect, he shall not, without the consent of
the Company, sell, transfer, surrender, assign, or otherwise terminate the
Policy.
10. TERMINATION OF EMPLOYMENT; Attainment of Age 65; Related
Events.
(a) Upon the occurrence of an event listed in subparagraph
(b), the Employee shall pay to the Company (through a full or partial surrender
of the policy or a loan secured by the Policy or from other funds) an amount
equal to the Company's interest in the cash surrender value of the Policy (as
specified in Paragraph 5 of this Agreement). Upon such payment no other amount
shall be due to the Company under this Agreement and the Company shall release
the Assignment. The Employee shall thereafter own the Policy free from the terms
of this Agreement.
(b) The events to which subparagraph (a) refers are:
(1) the involuntary termination of the Employee's
employment with the Company before the Employee's 65th birthday; or
(2) the Company's election to terminate its interest
in the Policy coincident with or following the Employee's voluntary termination
of employment with the Company before his 65th birthday; or
(3) the Employee's 65th birthday.
-3-
<PAGE> 4
11. TERMINATION OF AGREEMENT. This Agreement shall terminate
upon the occurrence of an event listed in Paragraph 10(b) of this Agreement and
the satisfaction of the Company's interest in the Policy under the Assignment as
provided in Paragraph 10(a) of this Agreement or, if earlier, upon the
Employee's death and the satisfaction of the Company's interest in the Policy as
provided in Paragraph 7 of this Agreement.
12. EMPLOYEE WAIVER. The Employee acknowledges and agrees that
if the Agreement and the benefits described in the Agreement constitute an
employee benefit plan or part of an employee benefit plan for purposes of Title
I of the Employee Retirement Income Security Act, as amended ("ERISA"), (a) the
plan is a welfare plan and not a pension plan and, therefore, is exempt from the
participation, vesting, benefit accrual, joint and survivor and preretirement
survivor annuity, and other requirements of Title I of ERISA, and (b) the
Employee irrevocably waives, on behalf of himself and any spouse to whom he may
now or in the future be married, any rights and claims the Employee or his
spouse or both of them may have now or in the future under Title I of ERISA with
respect to such plan, even if it should be construed as a pension plan. The
Employee has had sufficient opportunity to review this waiver with counsel. The
Company shall administer this Agreement, construe its terms, and make all
determinations necessary under this Agreement and shall have complete discretion
in doing so.
13. AMENDMENT OF AGREEMENT. This Agreement shall not be
modified or amended except by a written amendment signed by the Company and the
Employee. This Agreement shall be binding on the beneficiaries, heirs, and
personal representatives of the Employee and the successors and assigns of the
Company.
14. STATE LAW. This Agreement shall be subject to and shall be
construed under the laws of the State of New York.
15. PARAGRAPH READINGS. Paragraph headings as to contents of
particular paragraphs of this Agreement are inserted only for convenience and
are in no way to be construed as part of the provisions of this Agreement or as
a limitation on the scope of particular paragraphs to which they refer.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Employee has executed this Agreement,
and the Company, pursuant to the authorization of the Board of Directors, has
caused this Agreement to be executed, as of the day and year first above
written.
AMERICAN PRECISION INDUSTRIES INC.
By
-------------------------------------------
-------------------------------------------
-5-
<PAGE> 6
SCHEDULE A
Effective as of ___________
I. Marginal Tax Rate
-----------------
The marginal tax rate is the marginal tax rate applicable to the
Employee on the date as of which a premium payment is made, as
determined by the Company. The Company shall determine the marginal tax
rate applicable to the Employee as of the premium payment date, taking
into account federal, state, and local income tax rates; the hospital
insurance tax rate under the Federal Insurance Contribution Act; the
deduction (for income tax purposes) for state and local income taxes;
and no income other than income attributable to the Company.
II. Death Benefit
-------------
The death benefit allocable to the Employee during the term of this
Agreement shall be an amount equal to three times his current annual
base salary at the date of death or upon the termination of his
employment, if earlier, but not more than the Policy proceeds.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
AMERICAN PRECISION INDUSTRIES INC. (Delaware)
API Heat Transfer Inc. (New York)
API Schmidt-Bretten Beteiligungs GmbH (Germany)
API Schmidt-Bretten Verwaltung GmbH (Germany)
Schmidt-Bretten GmbH & Co. KG (Germany)
Schmidt-Bretten Nederland B.V. (Netherlands)
API Motion Inc. (New York)
API Gettys Inc. (Wisconsin)
API Deltran (St. Kitts) Ltd.
API Harowe (St. Kitts) Ltd.
API Delevan Inc. (New York)
API Elmo AB (Sweden)
API Portescap (Switzerland)
API Portescap International (Switzerland)
API Portescap Deutschland GmbH (Germany)
API Portescap Scandinavia AB (Sweden)
API Portescap Polska Sp.zo.o (Poland)
API Portescap France SA (France)
API Portescap Japan Ltd. (Japan)
API Positran Limited (England)
API Portescap (UK) Limited (England)
Note: API-FS Corporation, API of Canada Inc., American Precision Industries Inc.
(UK) Ltd., API Development Corporation, and Portescap U.S. Inc. 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 consent to the incorporation by reference in the registration statements of
American Precision Industries Inc. on Form S-8 (Nos. 33-31315, 33-61734,
33-71839, and 333-56091) of our reports dated February 10, 1999, on our audits
of the consolidated financial statements and financial statement schedule of
American Precision Industries Inc. as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, which reports are
included on pages 19 and 47 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Buffalo, New York
March 25, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,856
<SECURITIES> 0
<RECEIVABLES> 33,309
<ALLOWANCES> 971
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<BONDS> 34,484
0
26,156
<COMMON> 5,234
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<TOTAL-LIABILITY-AND-EQUITY> 169,265
<SALES> 216,615
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