-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L9ZSuSQvXJPAV2HBgwDQhraj28azIQ19xANRu0tjz0LPYkw+XDzXD+eAom5aGkJt AO9uXTvYpAW9Tv/yjhhrPA== 0000950152-99-002859.txt : 19990402 0000950152-99-002859.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002859 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PRECISION INDUSTRIES INC CENTRAL INDEX KEY: 0000005657 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 161284388 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05601 FILM NUMBER: 99581144 BUSINESS ADDRESS: STREET 1: 2777 WALDEN AVE CITY: BUFFALO STATE: NY ZIP: 14225 BUSINESS PHONE: 7166849700 MAIL ADDRESS: STREET 1: 2777 WALDEN AVENUE CITY: BUFFALO STATE: NY ZIP: 14225 10-K405 1 AMERICAN PRECISION INDUSTRIES INC. 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. 2 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 3 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. 3 4 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 4 5 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:
API Heat (In thousands) API Motion Transfer Total --------------- ---------------- --------------- 1998 $51,274 $24,233 $75,507 1997 $47,868 $27,716 $75,584
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. 5 6 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 6 7 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 7 8 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. 8 9 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:
Floor Area Location (Sq. Ft.) ------------------------------------------------------ ----------- 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)
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. 9 10 The facilities leased by API are as follows:
Approximate Annual Leased Facility Location Rental Until --------------------------------------------- ------------ --------- 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
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 10 11 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.
Quarterly Stock Price Data ---------------------------------------------- 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
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. 11 12 ITEM 6. SELECTED FINANCIAL DATA Five Year Financial Summary (Dollars in thousands, except per share amounts)
Operations 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------ 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
12 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 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 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 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 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:
(Dollars in thousands) 1998 1997 1996 -------------------------------------------------------------------- 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
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 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 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 20 CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data) 1998 1997 - -------------------------------------------------------------------------------- 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
See Accompanying Notes to Consolidated Financial Statements 20 21
(Dollars in thousands, except per share data) 1998 1997 - -------------------------------------------------------------------------------- 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
See Accompanying Notes to Consolidated Financial Statements 21 22 CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- 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
See Accompanying Notes to Consolidated Financial Statements 22 23 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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 - ---------------------------------------------------------------------------------------------------------------------------- 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 $ -- Minimum Pension Treasury Stock (in thousands, Liability -------------- except per share data) Change Share Amount - ------------------------------------------------------------------ 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
See Accompany Notes to Consolidated Financial Statements 23 24 CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ 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
See Accompanying Notes to Consolidated Financial Statements 24 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 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 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 28 Pro forma results with acquisitions:
(In thousands, except per share data) 1997 1996 - ----------------------------------------------------- (unaudited) Revenues $ 215,735 $ 222,883 Net earnings $ 5,619 $ 8,624 Earnings Per Common Share Basic $ .76 $ 1.20 Diluted $ .60 $ .96
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:
(In thousands) 1998 1997 - ------------------------------------------------------- Finished goods $ 11,751 $ 9,133 Work in process 8,509 10,807 Raw Materials 23,455 18,570 - ------------------------------------------------------- $ 43,715 $ 38,510
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 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:
(in thousands) 1998 1997 - -------------------------------------------------------------------------------- Portescap (primarily Switzerland) $ 8,646 $ 6,326 Schmidt-Bretten 5,512 7,230 API -- 530 - -------------------------------------------------------------------------------- $14,158 $14,086
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:
(In thousands) 1998 1997 - ------------------------------------------------------- Portescap $ 1,045 $ 2,149 Schmidt-Bretten 2,475 2,781 API 1,544 3,332 - ------------------------------------------------------- $ 5,064 $ 8,262
(2) Long-Term Obligations consist of the following:
(In thousands) 1998 1997 - ------------------------------------------------------- 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
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 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:
1998 1997 - ------------------------------------------------- Industrial Revenue Bonds 3.9% 4.3% Revolving Credit Debt 5.8% 6.5% Portescap Debt 4.3% 5.1%
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 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:
1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Harowe Harowe Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG (In thousands) Plan Plan Plan Plan Plan Plan Plan Plan - ----------------------------------------------------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------------------------------------------------
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 32
1998 1997 ------------------------------------------------------------------------------------------------- Harowe Harowe Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG Plan Plan Plan Plan Plan Plan Plan Plan -------------------------------------------------------------------------------------------------- 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
Net periodic pension cost associated with the plans reflected in the table on the previous page for 1998 and 1997 included the following components:
1998 1997 -------------------------------------------------------------------------------------- Harowe Harowe Salaried Hourly Portescap SBG Salaried Hourly Portescap SBG (In thousands) Plan Plan Plan Plan Plan Plan Plan Plan -------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------
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 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:
(In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------ 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
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:
1998 1997 1996 - ---------------------------------------------------------------- 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%
33 34 The weighted average fair value of options granted in 1998, 1997, and 1996 was $6.00, $9.35 and $6.32, respectively. A summary of the status of options granted under all employee plans, including the options granted to the Company's Chief Executive Officer in 1992, is presented below.
NUMBER OF WEIGHTED SHARES AVERAGE SUBJECT EXERCISE TO OPTIONS PRICE ($) - -------------------------------------------------------- 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
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
WEIGHTED- AVERAGE WEIGHTED- RANGE OF REMAINING AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE PRICES ($) OUTSTANDING LIFE PRICE ($) - ------------------------------------------------------------------ 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
OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE EXERCISE NUMBER EXERCISE PRICE PRICES ($) EXERCISABLE ($) - -------------------------------------------------- 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
34 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 36 K. Income Taxes Earnings before provision for income taxes consisted of:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. $ 3,879 $ 6,945 $9,603 Foreign 6,807 5,241 391 - -------------------------------------------------------------------------------- $10,686 $12,186 $9,994
The provision for income taxes consisted of the following:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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:
1998 1997 1996 - -------------------------------------------------------------------------------- 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%
36 37 Deferred tax assets (liabilities) at December 31, 1998 and December 31, 1997 consisted of the following:
(In thousands) 1998 1997 - -------------------------------------------------------------------------------- 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
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 38 Information by industry segment is as follows:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 39 Geographic operating data is as follows:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 40 N. Selected Quarterly Financial Data (Unaudited)
(In thousands, Fiscal except per share data) First Second Third Fourth Year - -------------------------------------------------------------------------------- 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
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.
(In thousands, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- 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
40 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 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 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 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 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 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 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 48 AMERICAN PRECISION INDUSTRIES INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(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 - ------------------------------- ------------ ------------- ---------- ------------ ---------- 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
48 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 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 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 EX-4.D 2 EXHIBIT 4(D) 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. 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- 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- 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- 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- 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- 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- 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- 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- 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. -10- 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 -11- 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 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 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 -2- 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- 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 -4- 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- 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- 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 -7- 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- 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 -9- 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- 23 AMERICAN PRECISION INDUSTRIES INC. By ------------------------------------------ Kurt Wiedenhaupt, Chairman, President and Chief Executive Officer (CORPORATE SEAL) ATTEST: - ------------------------------- James J. Tanous, Secretary -11- 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 EX-10.D.II 3 EXHIBIT 10-D(II) 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- 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- 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- 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- 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- 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. EX-21 4 EXHIBIT 21 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%). EX-23 5 EXHIBIT 23 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 EX-27 6 EXHIBIT 27
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,856 0 33,309 971 43,715 87,633 85,356 31,696 169,265 44,238 34,484 0 26,156 5,234 53,078 169,265 216,615 216,615 150,314 150,314 4,917 0 3,356 10,686 4,328 0 0 0 0 6,358 .85 .68
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