SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 1997
Commission file number 0-22924
HILITE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2147742
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1671 S. Broadway
Carrollton, Texas 75006
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(972) 466-0475
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value (Title of Class)
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 [_]
Based upon the closing price on the NASDAQ National Market System on September
12, 1997, the aggregate market value of the voting stock held by non-affiliates
of the registrant was $6,463,000.
As of September 12, 1997, the Company had 4,900,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which Definitive Proxy Statement is anticipated to be
filed within 120 days after the end of the registrant's fiscal year ended June
30, 1997 is incorporated by reference in Part III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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. Yes [X] No [_]
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PART I
ITEM 1 - BUSINESS
Hilite Industries, Inc. (the "Company") designs, manufactures and sells a
diversified line of highly-engineered products primarily for automotive
applications. These products include brake valves such as proportioning valves,
power transmission components such as electromagnetic clutches, mounting
brackets and pulleys, and specialty components and assemblies such as stampings,
specialty springs and automated assemblies. Some of the Company's products are
engineered in close cooperation with the Company's customers to meet their
specific performance requirements. Approximately 75% of the sales of the Company
are to automotive companies and their suppliers for passenger cars and light
trucks sold in the United States. The Company's customers include all three
domestic automotive companies: Ford Motor Company ("Ford"), General Motors
Corporation ("General Motors") and Chrysler Corporation ("Chrysler") as well as
other automotive companies such as Mitsubishi Motor Sales of America, Inc.
("Mitsubishi"), Honda of America Mfg., Inc. ("Honda"), Toyota Motor Sales,
U.S.A., Inc. ("Toyota") and Navistar International Transportation Corporation
("Navistar"). The Company also sells products to first-tier suppliers including
Borg-Warner Corporation ("Borg-Warner"), Bosch Braking Systems Corporation
("Bosch"), Denso of Los Angeles, Inc. ("Denso"), Motivair Corporation
("Motivair") and ITT Automotive of North America, Inc. Significant
non-automotive customers include Crane National Vendors, the Balance Systems
Division of Amesburg Group, Inc., Motorola, Inc. and a variety of distributors
for industrial/hydraulic clutches.
Except for the historical information contained herein, the document contains
forward looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the sections entitled Risk Factors, Competition, Raw
Materials and Regulations.
The Company's revenues have grown in recent years through both internal growth
and acquisition. Sales increases in each of the previous three years were 1.2%,
61.8% and 21.7% in fiscal years 1997, 1996 and 1995, respectively. According to
Ward's Automotive Reports, U.S. sales of automobiles and light trucks have
remained flat over the past three years. Vehicles sold in the U.S., by model
year (July - June), were 14.9 million in 1997, 15.0 million in 1996 and 14.9
million in 1995. A net loss of $1,657,000 was reported in fiscal year 1997 which
interrupts a five year record of exceptional growth and profitability for the
Company. The net loss for the year was entirely attributable to the specialty
components and assemblies division and includes a fourth quarter after tax
charge of $1,757,000 related to the restructuring of the division. The charge
includes provisions for the termination of certain contracts, the write down of
certain assets to estimated fair value, net of selling costs and other costs
related to the reorganization.
The Company believes that its quick response to customer requirements, creative
engineering and ability to design and manufacture high volumes of
competitively-priced products to meet or exceed the quality standards of the
automotive industry are the principal reasons it has been successful in
increasing its market share and in growing faster than the domestic automotive
industry. The Company has made significant investments in capital equipment and
state-of-the-art manufacturing processes in order to continuously improve its
productivity and maintain its position as a low cost, high quality manufacturer.
The Company's goal is to continue to increase sales and income from operations
by further expanding its number of customers and by increasing the sales dollar
content per United States light vehicle sold. The Company's strategy is to
continue to invest in new and efficient production equipment and to capitalize
on opportunities in niche or emerging markets by expanding its engineering
capabilities to other automotive products. Additionally, the Company may pursue
selected acquisitions which complement its existing business.
On July 21, 1995, the Company acquired 100% of the outstanding common stock of
North American Spring and Stamping Corp. ("NASS"). NASS manufactures and sells a
diversified line of assembled components, stampings and specialty springs,
primarily for electronic automotive applications, and is referred to as the
specialty
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components and assemblies division. The acquisition was accounted for by the
purchase method of accounting and NASS' assets and liabilities were recorded at
their fair value at the date of the acquisition. The Company's statements of
operations include the results of operations of NASS subsequent to July 21,
1995.
Early in fiscal 1997 the specialty components and assemblies division was
confronted with a rapidly deteriorating situation resulting from the loss of
Ford's Q1 rating and mounting losses on the start-up of new business. The
Company responded with a new management team for the division who began an
aggressive program to contain the immediate problems, maintain positive
communications with customers and develop a plan to return the division to
profitability. The new management team, along with top Company management, has
directed an intense effort to create a restructuring plan that will
substantially cut the division's losses in the near term while providing a
foundation for rebuilding the business to profitability at the operating income
level in fiscal 1998. The restructuring plan was presented and approved by the
Board of Directors in June 1997 and consists of the following elements:
1. Identify the core products of the division which fit with the Company's
strengths. The division will focus on value added stampings and assemblies
and some specialty spring products, which represented approximately 70% of
fiscal 1997 sales. Improvements in pricing, processes and systems are being
implemented to increase the profitability of these products.
2. Identify unprofitable, commodity-type products and implement a plan for
their orderly disposition which is intended to result in a 60% reduction in
part numbers. This disposition plan involves products with fiscal 1997
sales of approximately 30%. Based upon discussions with our customers, an
orderly transfer of these products to other vendors will take an estimated
nine month period. Effective August 1, 1997, a price increase will occur on
these parts to more accurately reflect our manufacturing and support costs
during the transition period.
3. Streamline the plant operating and overhead structure to adjust to the
downsized production levels while increasing quality and engineering
capability.
4. Upgrade quality systems and manufacturing and management processes to
enable the division to qualify for a QS-9000 rating and to regain the Q1
status at Ford.
As a result of implementing this restructuring plan a pre-tax charge of
$2,700,000 ($1,757,000 after-tax) was recorded in the fiscal 1997 results. The
charge is comprised of a reduction (approximately $900,000) in the net book
value of certain assets primarily machinery, equipment and tooling, to their
estimated fair value, net of estimated selling costs, accrual of certain costs
which the Company expects to incur in terminating contractual obligations, but
for which no future economic benefit will be received (approximately $1,600,000)
and other costs (approximately $200,000). Operating losses, which may occur
during the phase-out period, have not been accrued.
As of June 30, 1997 the plan was substantially in place although much difficult
work lies ahead. Operating losses may continue at the division but, at a much
reduced rate, in the first two or three quarters of the 1998 fiscal year.
Management's goal is to have a small operating profit in the division for the
year and a business unit that is streamlined, focused on quality, engineered
products that fits well with the Company's strengths and which will provide a
foundation for future growth. The achievement of this goal is dependent upon
regaining Q1 status with Ford and achieving QS-9000 certification. Not achieving
this goal may have a significant adverse effect on the division's profitability.
See Risk Factors.
PRODUCTS
The following table sets forth the Company's net sales for brake valves, power
transmission components and specialty components and assemblies divisions
together with their corresponding percentages of total net sales for each of the
three fiscal years ended June 30, 1997:
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Year ended June 30,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(dollars in thousands)
Net sales:
Brake valves $22,195 30.2% $23,909 32.9% $22,503 50.1%
Power transmission
components 21,762 29.6 21,533 29.7 22,397 49.9
Specialty components
and assemblies 29,535 40.2 27,200 37.4 -- 0.0
------- ------ ------- ------ ------- ------
Total net sales $73,492 100.0% $72,642 100.0% $44,900 100.0%
======= ====== ======= ====== ======= ======
BRAKE VALVES
Brake valves sales were $22,195,000, accounting for 30.2% of the Company's net
sales for the 1997 fiscal year. Brake proportioning valves, the principal
product of this division, provide the proper amount of pressure to the front and
rear brakes to facilitate a controlled stop within a minimum distance. These
valves are found on both conventional and anti-lock braking systems for most
passenger cars and light trucks. The Company manufactures various types of brake
valves, including in-line valves and remote valves, and will produce two new
types of products in fiscal year 1998, relief valves and actuator assemblies.
The relief valve is an integral part of a power brake booster system used on
vehicles which have inadequate vacuum to support power braking. An actuator
assembly is used with a height sensing brake valve to modify the pressure
distributed to the rear wheels based on the changing loads in the vehicle.
Brake proportioning valves have been used in automotive brake systems since the
1960s. The primary function of the proportioning valve is to provide, at a
specific point, reduced hydraulic pressure to the rear brakes of the vehicle to
proportion the pressure between the front and rear brakes in relation to the
shift in dynamic weight distribution during stopping. Controlled reduction of
this pressure minimizes vehicle stopping instability. The range of vehicle
performance during braking is subject to certain federally-mandated guidelines.
The need for a different brake valve for each vehicle model is a result of
various factors such as automobile size and specifications. Brake valves are
used both in automobiles which are equipped with anti-lock brakes as well as
traditional brake systems.
The Company's proprietary and patented in-line valves are generally installed
directly in the master cylinder of the brake system. In-line valves offer
advantages to automotive manufacturers, including lower cost, reduced size and
flexibility. The remote valve, which is installed away from the master cylinder,
is a more sophisticated proportioning valve used in applications where
additional functions are required, such as metering, switching and sending an
electrical signal to a dashboard light indicating brake malfunction. During the
past decade, there has been a trend for the Company's customers to select
in-line valves for new brake system applications.
Since the late 1980s, there has been a trend toward anti-lock brake systems
("ABS"). ABS technology reduces vehicle stopping distances, under certain
conditions, with improved handling capability. Most vehicles must have a brake
proportioning valve, whether or not they have ABS. The features of ABS are
engaged only under specific circumstances such as unusual road surface
conditions or "panic" stops. Proportioning valves, like those produced by the
Company, are required in normal braking functions and act as a backup to ABS.
Moreover, the trend to use ABS and consumer demand for shorter stopping
distances and improved braking control in adverse situations has motivated
automotive manufacturers to redesign many brake systems resulting in additional
opportunities for the Company.
The Company supplies valves for many well-known car and mini-van models for all
three major automotive companies and is expanding the applications of the
Company's brake valves. In the second half of fiscal 1997, the Company began
supplying brake valves on General Motors "P90" and "W" car models and will, in
fiscal 1998,
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begin shipping relief valves to Bosch and actuator assemblies to Chrysler. The
Company believes, based on its estimate of the number of brake proportioning
valves used in automobiles and light trucks, that its market share of brake
proportioning valves sold in the United States is approximately 21%.
POWER TRANSMISSION COMPONENTS
Power transmission component sales were $21,762,000, accounting for 29.6% of the
Company's net sales for 1997. This division's products fall into two broad
categories: electromagnetic clutches and other power transmission products.
Electromagnetic Clutches. Electromagnetic clutches provide the on-off control of
rotary motion. They are used in a wide range of applications, including sport
utility vehicles, hydraulic pumps, automotive air conditioning compressors,
generators, alternators and water pumps. The Company's clutches can also be
found on various trucks, fishing boats and manufacturing and construction
equipment. The Company has received the Borg-Warner Automotive Certified Quality
Vendor Award every year since 1987. Electromagnetic clutches have been
manufactured since 1956 under the trade name Pitts Industries. Recent favorable
exchange rates between the U.S. dollar and the Japanese yen have improved the
opportunities for the Company to supply clutches to the heavy truck market. In
fiscal 1995, the Company began shipping air conditioning clutches to Navistar
and Motivair and will begin shipping clutch components in transmissions to Borg
Warner in fiscal 1998.
Other Power Transmission Products. The Company's other products, manufactured
under the MAPCO trade name, consist primarily of mounting brackets, pulleys and
fans. These products generally require less engineering than brake valves or
clutches. Mounting brackets are used in a variety of applications, including the
installation of automotive air conditioning compressors which are primarily sold
to Japanese companies for cars sold in the United States. Pulleys and fans are
sold in a variety of specifications for a wide range of automotive and truck
applications.
In the early 1980s the Company began supplying Japanese companies doing business
in the United States with precision machined automotive components. These
relationships began with Denso, a first-tier supplier of Toyota. The Company now
supplies products to Honda both directly and through Calhac, a wholly-owned
system supplier for Honda, and to Mitsubishi. The Company's experience in
understanding, implementing and producing products which meet the quality
requirements and other specifications of its Japanese customers provide the
Company with an opportunity for growth with its existing customers and with
other Japanese companies doing business in the United States. The Company plans
to expand these relationships. The Company has received the top awards for
quality and delivery from both Honda and Denso over the last several years.
SPECIALTY COMPONENTS AND ASSEMBLIES
Specialty components and assemblies sales were $29,535,000, accounting for 40.2%
of the Company's net sales for the 1997 fiscal year. NASS was originally founded
in 1950 as Shaffer Spring Company and subsequently changed its name to North
American Spring and Stamping Corp. in 1976. This division is restructuring to
provide stronger focus on high volume, precision stampings and automated
assemblies and to de-emphasize and eliminate commodity products.
The specialty components and assemblies division primarily manufactures products
for OEM automotive customers with Ford Motor Company being the largest customer
at 58% of this division's total sales in fiscal 1997. Currently, 75% of the
division's business is OEM automotive with the remaining 25% in non-automotive
applications. Some of the applications using components and assemblies
manufactured by the division for the automotive industry include electronic
controllers for engines, air bags, fuel systems and anti-lock brakes. In
addition to Ford, the division sells automotive components to Delco Electronics
and ITT Automotive. Products sold for non-automotive applications include
delivery coils for vending machines, components used in the telecommunications
industry, window counter-balance springs and various other products. These
products will continue to be supplied by the division after the restructuring is
complete.
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In late September 1996, the division was placed on Q1 probation by Ford as a
result of certain quality concerns regarding its products. While on probation,
the division is prohibited from being considered for additional business from
Ford (although existing programs in the development stages are allowed to
continue). A team of corporate and division management has developed a
restructuring plan focused on returning the division to profitability and
regaining Q1 status by the end of the fiscal year. In fiscal 1997, sales to Ford
by the division were approximately $17,000,000; there can be no assurance, at
this time, that the Q1 status can be regained or what effect the continued
probation or revocation will have on future sales.
PRODUCT DESIGN, RESEARCH AND DEVELOPMENT
The Company employs a staff of over 40 engineers and technicians, one-third of
whom devote full time to new product design and research and development,
primarily for the brake valve division. The remaining engineers are involved in
production, manufacturing processes and tooling.
The design of new brake valve products generally begins several years before
production. The process begins when the automotive manufacturers or system
suppliers request the assistance of the Company's engineering department in
designing products to meet their cost and performance requirements for future
vehicle models. The Company's engineering department works closely with the
customer by providing drawings and prototype samples. These drawings and samples
frequently undergo numerous revisions until a design is accepted. The Company
believes that its expertise in this area as well as the quick response of its
engineering department are critical elements of the success of its brake valves
and other products.
During the 1997, 1996 and 1995 fiscal years, the Company's research and
development expenditures were approximately $882,000, $945,000 and $879,000,
respectively. Of these expenditures, $240,000, $343,000 and $596,000,
respectively, were sponsored by customers and $642,000, $602,000 and $283,000,
respectively, were sponsored by the Company.
CUSTOMERS
The Company's customers include automotive manufacturers as well as major
first-tier suppliers of brake and transmission systems to automotive
manufacturers. Approximately 75% of the Company's total net sales for the 1997
fiscal year were to the automotive industry. The Company's five largest
customers with their percentages of the Company's net sales for the 1997, 1996
and 1995 fiscal years were as follows:
Percentage of Net Sales
-----------------------
Year ended June 30,
-------------------
Customer 1997 1996 1995
- -------- ---- ---- ----
Ford....................................... 30% 30% 23%
Chrysler................................... 7 7 1
Borg-Warner................................ 6 7 17
General Motors............................. 6 9 12
Bosch (formerly AlliedSignal).............. 6 7 10
Sales for NASS are included from the acquisition date, July 21, 1995. During
fiscal 1996 Bosch purchased the braking systems division from AlliedSignal. The
percentages above reflect the sales to the manufacturing facilities previously
operated by AlliedSignal, as if no change in ownership occurred. The Company's
customers are
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primarily in the automotive industry and, as a result, the Company is impacted
by the overall economic conditions within the industry.
SALES AND MARKETING
The Company utilizes a non-exclusive, independent sales representative company
based in Detroit, Michigan to assist the Company in selling its brake valves.
The representative's employees work directly with the engineering and purchasing
personnel of the automotive manufacturers and their first-tier suppliers. This
sales representative, who has considerable experience in selling brake valves,
is paid by commission based upon sales. The Company believes this sales method
has contributed to the sales growth of the Company's brake valves, is cost
effective, assists the Company in identifying new applications for its products
and fosters good relations with its customers.
Company employed sales and customer service personnel are primarily used for
selling power transmission components. Clutches and machined products are sold
by the Company's direct sales personnel who utilize trade journal advertising
and direct customer contacts. Clutches are also sold through distributors
throughout the United States which sell to the marine and mobile equipment
industries. The Company believes these sales methods are cost effective, assist
the Company in identifying new customers and applications for its products and
foster good relations with its customers.
Sales of the specialty components and assemblies division are predominantly made
through independent sales representatives. As part of the restructuring plan at
the division, effective July 1997, the Company terminated the sales
representative responsible for sales to Ford. They were replaced by the same
Ford sales representative agency used by the brake valve division. This agency
has a long standing relationship and excellent contacts at all three major
automotive companies. The move was made to reduce costs and to broaden the
future sales growth opportunities for the division. The other nonexclusive sales
representatives for the division operate under agreements pursuant to which the
representative is paid a commission based upon sales.
Inventory is delivered to various customer locations throughout the country,
based on automotive release schedules using common carriers that are typically
selected by the customers. Consistent with industry practice, outbound freight
is generally paid by the customer.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company holds several patents for brake valves including a patent for the
manufacturing method of the in-line brake proportioning valve. This method
provides a cost advantage to the Company since it reduces material costs. In
addition, the Company uses many proprietary processes and technologies which are
either not patentable or are not yet patented. The Company's trade secrets
includes proprietary engineering designs and manufacturing processes.
COMPETITION
The automotive industry is highly specialized and competitive. There are
approximately four principal competitors of the Company that supply brake valves
to the major domestic automotive manufacturers. All of these companies are
larger and more diversified than the Company. However, the Company believes it
has the second largest brake proportioning valve market share and its market
share is growing. The Company believes that it has a competitive advantage
compared to these competitors in that it is the only brake valve manufacturer
capable of manufacturing both in-line and remote brake proportioning valves.
Furthermore, the Company is the only manufacturer of brake proportioning valves
that does not compete with its customers. In addition, one of its competitors,
General Motors, has begun outsourcing some of its brake valves to the Company.
Because of the capital investment in facilities and automated machining, testing
and assembly equipment, the Company has a state-of-the-art brake valve
manufacturing capability and believes it is the low cost producer of brake
valves.
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There are two principal competitors which dominate the high volume automotive
clutch market, one of which is a Japanese company. The Company participates in
specialized niches in the lower volume heavy truck clutch market which has few
competitors. The Company also manufactures a specialized clutch for a first-tier
automotive supplier of transmission systems.
There are several manufacturers which supply machined products similar to the
Company's machined products, certain of which are larger and have greater
financial resources than the Company. In addition, the Company's customers
manufacture, engineer and design components which compete with the Company's
products and they could expand this activity, thereby reducing opportunities for
the Company.
There are numerous smaller and a few larger companies located throughout the
United States which produce products similar to those of the specialty
components and assemblies division. Management believes that its niche will be
stampings and automated assemblies that provide more value added benefits
through investment in equipment and engineering thus avoiding parts that fall
exclusively into "commodity" categories. Growth opportunities have been achieved
in the electronics area with a number of automated assemblies and specialty
stampings which are the primary area on which this division will concentrate
according to the restructuring plan.
A favorable trend has been for major automotive manufacturers and their large
first-tier suppliers to outsource the manufacture of specialty components and
assemblies such as brake valves, clutches and machined brackets. The Company has
benefited from this trend which is expected to continue. However, many of these
companies have the engineering and financial resources to manufacture these
products themselves should they choose to do so.
The Company's products, which are primarily sold to automotive manufacturers and
their first-tier suppliers, are utilized in over sixty major car models. Each of
these models represents significant sales to the Company. Although the Company
generally is the sole supplier of the Company's parts for the life of the model,
customer's marketing and engineering decisions can limit the life of a car model
or technological changes can cause a particular part to become obsolete. The
Company competes for business during the development of new models and upon the
redesign of certain existing models by its customers. Development of new and
redesigned models usually begins several years prior to their introduction to
the public. In recent years, the Company has been successful in obtaining new
business for new and redesigned models. However, there can be no assurance that
the sales of products for use in new models will fully offset the potential
reduction in volume caused by discontinued models.
The Company believes that it must compete on the basis of responsiveness,
pricing, quality and breadth of product line and that it is competitive with
respect to each of these areas. The Company's business is characterized by
technological change. New technology may be developed by the Company's
competitors as well as its customers. If the Company does not successfully adapt
to these changes, it may lose part of its customer base. To maintain a
technologically competitive position, the Company must make significant
expenditures for new machinery and manufacturing processes. The Company has
incurred substantial capital expenditures during recent years which have enabled
it to adapt to technological changes in the automotive industry.
RAW MATERIALS
The Company uses a variety of raw materials in the production of its products,
including aluminum, copper and steel as well as specialty parts. The automotive
companies and first-tier suppliers require specific practices and quality
standards to be maintained by the Company over their suppliers of raw materials
and purchased components. These practices are reflected in the Company's
purchasing policies. The Company believes that its supplies of raw materials for
manufacturing requirements are adequate and are available from multiple sources.
It is common, however, for customers to require their prior approval before
certain raw materials or components can be used, thereby possibly reducing
sources of supply that would otherwise be available. The Company believes that
there are adequate numbers of its suppliers which meet these standards.
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BACKLOG
The Company's backlog at June 30, 1997 was approximately $22,300,000, as
compared to $20,500,000 at June 30, 1996, representing an increase of 9%. All of
the backlog at June 30, 1997 is expected to be delivered during the 1998 fiscal
year. The increase in backlog is primarily due to the large number of new
programs starting up during the first quarter of fiscal 1998. Backlog at any
particular date may not be indicative of sales during the entire fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
REGULATION
The Company is subject to various federal, state and local regulations relating
to the operation of its business and the manufacture of its products. The
Company believes that its manufacturing processes and facilities have been and
are being operated in compliance in all material respects with applicable
regulations including those relating to environmental, health and safety laws
and regulations. Automobiles are subject to federal safety regulations which
require, among other things, that brakes perform within certain stopping
distances. Moreover, automobiles are often marketed on the basis of enhanced
safety features. While the Company is not directly responsible for compliance
with these safety standards, it must manufacture its products in a manner which
permits its customers to comply. These regulations are subject to change and no
assurance can be given that existing laws and regulations will not be amended or
new laws and regulations will not be adopted that will impose more extensive
regulations on the Company and its customers.
EMPLOYEES
At June 30, 1997, the Company had 697 employees, of whom 572 were paid hourly
wages. These hourly employees were primarily engaged in manufacturing,
maintenance and warehousing. Of the 697 employees, 389 were employed in Texas,
306 were employed in Illinois and two were employed elsewhere.
Approximately 102 hourly employees who are engaged in clutch manufacturing are
covered under a collective bargaining agreement with the International Union of
Electronic, Electrical, Salaried Machine and Furniture Workers, AFL-CIO ("IUEE")
Local Union #1007 which expired on September 20, 1997. A new agreement is
currently under negotiation. A separate agreement with Local Union #1023 of the
IUEE covering approximately 145 employees, engaged in brake valve manufacturing,
expires on May 20, 1999. All of the employees of the IUEE are located in Texas,
a right-to-work state. Approximately 270 hourly employees in Illinois are
represented by the AFL-CIO Local unions #10 and #24. One contract, which covers
approximately 231 employees expires on January 1, 1998; the other contract,
which covers 39 employees, expired on November 30, 1996. A new contract is being
negotiated.
Management anticipates that satisfactory contracts will be negotiated with each
of these employee unions without a work stoppage or a material increase in cost,
of which there can be no assurance. The Company believes that it has good
relations with its employees.
RISK FACTORS
The risk factors below, along with those discussed in Business, Competition, Raw
Materials and Regulations sections of this Annual Report on Form 10-K, are some,
but not necessarily all, of the matters which present risks and uncertainties
which could have a material adverse affect on the Company's ability to operate
its business successfully or in a manner consistent with historical operating
results. The Company's actual results could differ materially from projected
results due to some or all of the factors discussed below.
Reliance on Major Customers - The Company's sales to Ford represented 30% of the
Company's total sales in fiscal 1997 and represented 30% and 23% of the
Company's total sales in fiscal 1996 and 1995, respectively. No other
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customer represented more than 10% of the Company's total sales in fiscal 1997
and 1996. In fiscal 1995, Borg-Warner, General Motors and AlliedSignal Brake
Systems North America had sales in excess of 10% of the Company's total sales,
but with the acquisition of NASS, the sales percentage fell below 10%, while the
amount of sales did not significantly change. While the Company has
long-standing relationships with these companies and sells a variety of products
to various divisions of each company, the loss of a significant portion of its
sales to any of these customers could have a material adverse effect on the
Company. See "Business."
Reliance on Sales Representatives - With the hiring of the same sales
representative agency that represents the Company for the brake valve division
to represent the Company's specialty components and assemblies division with
Ford, this agency is now responsible for approximately 50% of the Company's
total annual sales. While the Company has maintained a close relationship with
this agency for over ten years, any break with this relationship could have a
material adverse affect on the Company. See "Sales and Marketing."
Automotive Industry Cyclicality and Conditions - The automotive industry is
cyclical and subject to fluctuations based on general economic conditions. Unit
sales of passenger cars and light trucks have been essentially flat since 1993.
Significant declines in North American passenger vehicles and light truck sales
could have an adverse effect upon the Company.
In recent years, there has been substantial and continuing pressure from the
major automotive manufacturers to reduce costs, including reduction in prices by
outside suppliers such as the Company. As a result, certain of the Company's
customers have requested and the Company has agreed on occasion to provide
selling price reductions and absorb inflationary cost increases. There can be no
assurance that the Company can sustain current profit margins under these
business conditions. See "Business."
Quality Control and Product Liability - While the Company maintains quality
assurance procedures in the event a defect in its products is not detected prior
to shipment to a customer, or use by a consumer, substantial costs could be
incurred by the Company relating to a recall claim. While this has not been
material in the past, a recall could have a material effect on the Company.
In addition, the sale of the Company's products could expose the Company to
liability claims. The Company currently has liability insurance which it
believes is adequate for its current activities. There can be no assurance that
the Company will be able to maintain insurance at a reasonable cost, if at all,
or that insurance will be adequate to cover liabilities resulting from product
liability claims or that the Company will have funds available to pay any claims
over the limit of its insurance. While the Company has had no material liability
claims to date, either an underinsured or an uninsured claim could have a
material adverse effect on the Company.
Competition, Rapidly Changing Markets and Capital Intensive Business - The
automotive parts industry is highly competitive. The Company competes with many
automotive parts suppliers, many of which are larger and have greater financial
resources than the Company. Although the trend has been for the major U.S.
automobile manufacturers and their suppliers to outsource the manufacture of
specialty components such as brake valves, clutches and assemblies, many of
these companies have the engineering and financial resources, to manufacture
these products internally. If this were to occur, it could have a material
adverse effect on the Company. See "Business - Competition."
The market for the Company's products continues to change as customers redesign
their vehicles, introduce new models and change technologies. A decline in the
demand for the Company's products due to changes in technologies or market
conditions may have an adverse effect on the Company. See "Business -
Customers."
To remain competitive, the Company is required to continue to make significant
capital investments in new machinery and manufacturing processes. There can be
no assurance, however, that the financial resources will be available to enable
the Company to continue to effectively respond to future technological changes
or market
10
<PAGE>
demands of it customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
Loss of Ford's Q1 Status at the Specialty Components and Assemblies Division -
In late September 1996, this division was put on Q1 quality probation by Ford as
a result of certain concerns regarding its products. While on probation, the
division is prohibited from being considered for additional business from Ford
(although certain existing programs in the development stages are allowed to
continue). A team of corporate and division management have developed a
restructuring plan focused on returning the division to profitability and
regaining Q1 status by the end of the fiscal year. In fiscal 1997, sales to Ford
by the division were approximately $17,000,000; there can be no assurance, at
this time, that the Q1 status can be regained or what effect the continued
probation or revocation would have on future sales.
ITEM 2 - PROPERTIES
The Company owns its primary facility which is located on seven acres of land in
Carrollton, Texas, approximately 12 miles from Dallas, Texas. The facility
consists of 106,000 square feet of manufacturing space for brake valves and
clutches, and approximately 25,000 square feet of corporate office space. The
Company has granted a security interest in its plant and equipment to
collateralize certain bank loans. See Note 7 of Notes to Consolidated Financial
Statements.
The Company leases approximately 70,000 square feet of space in Fort Worth,
Texas, 66,000 square feet for the manufacture of machined components and 4,000
square feet of office space. The lease for this space expires in August 2001.
NASS is located in Elk Grove, Illinois, a suburb of Chicago, where it operates
its main manufacturing facility. This real estate and facility, consisting of
74,500 square feet of manufacturing space and 2,500 square feet of office space,
is owned by NASS. In addition, NASS leases 21,150 square feet of space in nearby
Lombard, Illinois where it manufactures non-automotive springs.
Certain inventory for the Elk Grove plant and for after-market products are
maintained in a leased warehouse, consisting of 40,000 square feet, in Elk
Grove, Illinois. The lease expires in December 2001. An after-market sales
office, located in Atlanta, Georgia, uses 250 square feet of space; its lease
expires in January 1998. As part of the restructuring plan these offices are
expected to be vacated during fiscal 1998 and sublease arrangements pursued.
The Company believes that the owned and leased space is sufficient for its
current manufacturing needs but supplemental warehousing space, in Texas, may be
necessary for anticipated sales increases over the next three years. Sufficient
available warehouse space exists in the area to fulfill any planned expansion.
ITEM 3 - LEGAL PROCEEDINGS
In May 1997 the Company initiated a law suit in the United States District Court
for the Northern District of Illinois (Eastern Division) against the selling
shareholders ("Selling Shareholders") of NASS (now known as the specialty
components and assemblies division). The Company alleges, among other things,
the Selling Shareholders made material misrepresentations in connection with the
Company's acquisition of NASS. The Company is seeking that the Selling
Shareholders pay substantial damages to the Company and/or that the transaction
be rescinded. The Selling Shareholders have responded by denying all claims of
the Company and countersuing for recovery of legal costs. Management of the
Company intends to vigorously prosecute this action.
11
<PAGE>
In the normal course of business, the Company is subject to certain claims and
litigation related to on-the-job injuries. The Company does not believe that any
claims will have a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended June 30,
1997.
PART II
ITEM 5 - MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
The Common Stock of the Company is traded on the NASDAQ National Market
System. The quarterly range of prices per share in the last two fiscal
years was as follows:
High Low
---- ---
1996:
- ----
First Quarter ............................. 9 1/4 7 1/4
Second Quarter ............................ 11 3/4 8 3/4
Third Quarter ............................. 11 3/4 8 3/4
Fourth Quarter ............................ 11 7
1997:
- ----
First Quarter ............................. 10 1/4 5
Second Quarter ............................ 6 4 1/4
Third Quarter ............................. 5 1/2 4 3/4
Fourth Quarter ............................ 5 1/2 3 1/4
(b) Holders
As of September 12, 1997, the approximate number of security holders of
record of the Company were 48. The Company believes that the number of
beneficial shareholders is much larger.
(c) Dividends
There were no dividends declared or paid in the past three fiscal years.
ITEM 6 - CONSOLIDATED SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data with respect
to the Company and should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Consolidated Results of
Operations," which are included elsewhere in this document. The selected
consolidated financial data presented below for each of the five years as of and
for the years ended June 30, 1997 are derived from the Company's consolidated
financial statements and reflect the acquisition of NASS and its results from
the acquisition date of July 21, 1995.
12
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Net sales ................................... $ 73,492 $ 72,642 $ 44,900 $ 36,896 $ 27,241
Cost of sales ............................... 63,938 57,711 34,849 28,517 20,654
----------- ----------- ----------- ----------- -----------
Gross profit .............................. 9,554 14,931 10,051 8,379 6,587
Selling, general and administrative ......... 10,340 7,576 4,286 3,696 3,019
----------- ----------- ----------- ----------- -----------
Operating income (loss) ................... (786) 7,355 5,765 4,683 3,568
Interest expense, net ....................... 1,714 1,659 130 234 370
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ......... (2,500) 5,696 5,635 4,449 3,198
Income tax provision (benefit) .............. (843) 2,064 2,016 1,668 1,227
----------- ----------- ----------- ----------- -----------
Net income (loss) ......................... $ (1,657) $ 3,632 $ 3,619 $ 2,781 $ 1,971
=========== =========== =========== =========== ===========
Earnings (loss) per share ................... $ (.34) $ .74 $ .74 $ .66 $ .53
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding................................ 4,900,000 4,900,000 4,900,000 4,235,479 3,743,752
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital ........................ $ 8,329 $ 11,285 $ 8,048 $ 9,779 $ (29)
Property, plant and equipment, net...... 26,323 27,790 16,664 9,725 7,763
Total assets ........................... 57,219 56,199 30,248 26,013 14,305
Long-term obligations (1) .............. 18,271 19,533 3,419 2,255 2,343
Total liabilities ...................... 35,216 32,538 10,219 9,603 9,695
Stockholders' equity ................... 22,004 23,661 20,029 16,410 4,610
</TABLE>
(1) Includes noncurrent portion of long-term debt obligations.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND CONSOLIDATED RESULTS OF OPERATIONS
OVERVIEW
For fiscal 1997, sales increased approximately 1.2% to $73,492,000 from
$72,642,000 in fiscal 1996. For the first time since the Company's initial
public offering in fiscal 1994, a net loss was recorded for the year. The net
loss of $1,657,000 in fiscal 1997 was a significant decline from the net income
of $3,632,000 in fiscal 1996. The net loss for the year, which was entirely
attributable to the specialty components and assemblies division, includes a
fourth quarter after tax charge of $1,757,000, or $0.36 per share, related to
the restructuring of the division. The net sales of the Company's brake valve
products decreased 7.2% in the 1997 fiscal year to sales of $22,195,000 from
reported sales of $23,909,000 in fiscal 1996. Net sales of power transmission
components increased 1.1% in the 1997 fiscal year with sales of $21,762,000
compared to $21,533,000 in the 1996 fiscal year. The specialty components and
assemblies division experienced an 8.6% increase in sales over the prior year
with sales of $29,535,000 compared to $27,200,000. Management of the Company
expects that the sales growth of the Company will exceed the growth in sales of
the automobile industry as a whole over the next two years. The Company's
backlog at June 30, 1997 was
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<PAGE>
approximately $22,300,000, which represents an increase of 8.7% over the backlog
of approximately $20,500,000 at June 30, 1996. Additionally, customer
commitments for new tooling at June 30, 1997 were approximately $1,700,000, as
compared to approximately $900,000 at June 30, 1996.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in the Company's statements of operations:
1997 1996 1995
----- ----- -----
Net sales:
Specialty components and assemblies... 40.2% 37.4% 0.0%
Brake valves.......................... 30.2 32.9 50.1
Power transmission components......... 29.6 29.7 49.9
----- ----- -----
Total net sales................... 100.0 100.0 100.0
----- ----- -----
Cost of sales.............................. 87.0 79.4 77.6
----- ----- -----
Gross profit............................... 13.0 20.6 22.4
Selling, general and
administrative expenses................... 14.1 10.5 9.5
----- ----- -----
Operating income (loss).................... (1.1) 10.1 12.9
Interest expense, net...................... 2.3 2.3 0.3
----- ----- -----
Income (loss) before income taxes.......... (3.4) 7.8 12.6
Income tax provision (benefit)............. (1.1) 2.8 4.5
----- ----- -----
Net income (loss).......................... (2.3)% 5.0% 8.1%
===== ===== =====
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Net sales in fiscal year 1997 were $73,492,000 compared to $72,642,000 for the
comparable period of the prior fiscal year, representing an increase of $850,000
(1.2%). Net sales are comprised of sales from the Company's three divisions:
specialty components and assemblies, brake valves and power transmission
components. Specialty components and assemblies sales for fiscal 1997 were
$29,535,000, an increase of $2,335,000 (8.6%) over sales of $27,200,000 in the
prior year. The increase is primarily due to a full year's sales from the
division which was acquired on July 21, 1995 and increased sales of spring
assemblies used in the telecommunication industry. Brake valve sales for fiscal
year 1997 were $22,195,000, a decrease of $1,714,000 (7.2%) from sales of
$23,909,000 in the prior year. The decrease was a result of products that had
lower volumes or were being phased out by customers. Power transmission
components sales were $21,762,000, an increase of $229,000 (1.1%) over sales of
$21,533,000 in the prior year. The impact of price changes was not significant.
Fiscal year 1997 gross profit decreased by $5,377,000 (36.0%) to $9,554,000,
representing 13.0% of net sales, as compared to gross profit of $14,931,000 or
20.6% of net sales in the same period of the prior fiscal year. The primary
reason for the decrease in gross profit is due to the problems experienced in
the specialty components and assemblies division. Early in the fiscal year the
division was confronted with a rapidly deteriorating situation resulting from
the loss of its Q1 quality rating from Ford Motor Company and mounting losses on
the start-up of new business. A new management team was put in place to
immediately address customer concerns, to focus division personnel on
engineering, manufacturing and quality problems, to implement short term
corrective action and to develop a longer term plan for restoring the division
to profitability. In order to accomplish the short term tasks, significant
amounts were expended for quality and engineering resources and increased
maintenance and tooling on equipment. The long-term plan, which was approved by
the Board of Directors in June 1997, involves the orderly disposition of certain
unprofitable commodity type products, representing approximately $8,000,000 of
fiscal 1997 revenues, and focuses the division on value added assemblies,
stampings and specialty springs. As a result of the plan, a pre-tax charge of
$2,738,000 ($986,000 in cost of sales and $1,752,000 in selling, general and
administrative costs) was recognized which includes termination of certain
contracts, write down of certain assets to
14
<PAGE>
fair value, net of estimated selling costs and other costs related to the
reorganization. The long term plan projects substantial reductions in the
operating losses for the division in fiscal 1998, a continued commitment to
regaining Q1 status at Ford Motor Company and a return of the division to
profitability at the operating income level by the third quarter of fiscal year
1998. The impact of price increases on materials was not significant during the
period.
The gross profit percentage at the brake valve division declined slightly over
the prior year primarily due to the decline in sales without a similar decline
in fixed costs. Gross profit percentages at the power transmission components
division were slightly higher than the prior year due to a favorable change in
product mix and operating efficiencies.
Selling, general and administrative costs in the 1997 fiscal year were
$10,340,000 (14.1% of net sales) as compared to $7,576,000 (10.5% of net sales)
in the 1996 fiscal year, representing an increase of $2,764,000 (36.5%). The
increase is primarily due to expenses associated with the restructuring charge
at the specialty components and assemblies division. The remaining increase is
primarily due to higher commissions, legal expenses and salary and travel costs
associated with the replacement of management at the specialty components and
assemblies division.
Net interest expense of $1,714,000 for the year ended June 30, 1997 represents a
$54,000 increase over the prior year. The increase results from higher average
debt balances due to increases in bank debt.
The net loss was $1,657,000 for the 1997 fiscal year compared to net income of
$3,632,000 for the same period of the prior fiscal year. The loss was entirely
attributable to problems encountered at the specialty components and assemblies
division. The net loss for the 1997 fiscal year represented a 7% negative return
on equity and debt represents 48% of total capitalization.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Net sales in fiscal year 1996 were $72,642,000 compared to $44,900,000 for the
comparable period of the prior fiscal year, representing an increase of
$27,742,000 (61.8%). Net sales are comprised of sales of brake valves, power
transmission components and specialty components and assemblies. The increase
primarily resulted from sales of $27,200,000 by the specialty components and
assemblies division, which was acquired on July 21, 1995. The brake valve
division sales increased by $1,406,000 (6.2%) to $23,909,000 compared to
$22,503,000 in the 1995 fiscal year. The increase is primarily due to supplying
a full year's production to Chrysler for the mini-van and mid-size 1996 car
lines. This increase in sales was partially offset by a decline in year-on-year
production levels for Ford and General Motors. Sales of power transmission
components of $21,533,000 in the 1996 fiscal year decreased by $864,000 (3.9%)
from sales of $22,397,000 for the prior year. Increased sales of clutches for
the heavy truck market were offset by declining demand for "shift on the fly
clutches" and lower sales of air conditioning mounting brackets which had been
significant in the prior year. The impact of price changes was not significant.
Fiscal year 1996 gross profit increased by $4,881,000 (48.6%) to $14,931,000,
representing 20.6% of net sales, as compared to gross profit of $10,050,000 or
22.4% of net sales in the same period of the prior fiscal year. The primary
reason for the increase in gross profit is increased sales volume due to the
acquisition of the specialty components and assemblies division. The decline in
the gross profit percentage in comparison to the same period of the prior year
was affected by the acquired company, whose gross margin percentage is slightly
lower than that of the combined margins of the already existing divisions. Also,
the gross margin percentage is affected by the timing and extent of the changes
in product mix, sales volume, new product start-up costs and numerous other
factors. Brake valve gross margins improved throughout fiscal 1996 as new
equipment was put into place and efficiencies were realized. The brake valve
facility expansion completed in November 1995 also contributed significantly to
improvement in the second half of the year. The power transmission gross margin
percentage decreased due to the under utilization of capacity resulting from
lower sales and changing product mix. The impact of price increases on materials
was not significant during the period.
15
<PAGE>
Selling, general and administrative costs in the 1996 fiscal year were
$7,576,000 (10.5% of net sales) as compared to $4,286,000 (9.5% of net sales) in
the 1995 fiscal year, representing an increase of $3,290,000 (76.8%). The
increase is primarily due to expenses associated with the acquisition and
amortization expense on goodwill of $317,000. The selling, general and
administrative expenses of the Company, excluding those attributable to the
acquired business, increased approximately $317,000 over the prior year due to
higher net research and development expenses.
Net interest expense of $1,659,000 for the year ended June 30, 1996 includes
interest income of $9,000 which was earned on excess cash balances prior to the
acquisition. Before deducting interest income, interest expense was $1,669,000
as compared to $254,000 for the year ended June 30, 1995. The increase was due
to the debt incurred in connection with the acquisition of the specialty
components and assemblies division.
Net income was $3,632,000 (5.0% of net sales) for the 1996 fiscal year compared
to $3,619,000 (8.1% of net sales) for the same period of the prior fiscal year,
representing an increase of $13,000 (0.4%). Net income as a percentage of net
sales is lower in the current year primarily due to lower gross margins and the
impact of goodwill amortization and interest associated with the acquisition.
Net income for the 1996 fiscal year represented a 18% return on equity and debt
represents 48% of total capitalization.
LIQUIDITY AND CAPITAL RESOURCES
For the 1997 fiscal year both cash flow and working capital were affected by the
operational problems and resulting restructuring charge at the specialty
components and assemblies division. Cash provided by operations before changes
in operating assets and liabilities amounted to $4,123,000. Additional cash was
provided by a net decrease in operating assets and liabilities of $1,860,000,
resulting in net cash provided by operations of $5,983,000. Cash provided by
operations before changes in operating assets and liabilities was $7,602,000 and
$5,749,000 for fiscal 1996 and 1995, respectively; cash was used for net
increases in operating assets and liabilities of $2,745,000 and $3,037,000 in
fiscal 1996 and 1995, respectively; the net cash provided by operations was
$4,858,000 in fiscal 1996 and $2,712,000 in fiscal 1995. Despite the net loss
reported for the year, the Company generated positive cash flow from operations
which was adequate to fund capital expenditures of $4,824,000 and to pay down
the Company's debt by $1,159,000.
The net change in operating assets and liabilities for the year ended June 30,
1997 which increased cash provided by operations by $1,860,000 is primarily due
to a decrease in trade accounts receivable of $1,365,000. The effect of an
increase in inventory was substantially offset by an increase in accounts
payable and accrued expenses. The average days sales outstanding decreased to 44
days at June 30, 1997 from 52 days at June 30, 1996, based upon the three months
sales prior to the end of the period. The decrease in the number of days sales
outstanding is primarily due to a temporary acceleration in payment by a
significant customer associated with a special project. As of June 30, 1997, no
significant receivables were considered uncollectible.
The Company made expenditures of $4,824,000 in 1997 for capital equipment to
improve productivity and increase capacity and to correct the production and
quality problems at the specialty components and assemblies division. Capital
spending in fiscal 1996 was $5,765,000. Capital spending in fiscal 1998 is
expected to be approximately $4,000,000.
The Company's long-term debt includes consolidated term and mortgage notes
(original principal amounts of $13,700,000 and $960,000, respectively, and
current balances at June 30, 1997 of $9,973,000 and $667,000, respectively)
which are payable in monthly installments of $163,095 and $5,333, respectively,
plus interest at either LIBOR plus 1 1/2% or the bank's prime rate. All amounts
borrowed under the consolidated term and mortgage notes are secured by the
Company's real estate, accounts receivable, inventory, machinery and equipment
and have maturities of August 1, 2002 and November 1, 2007, respectively.
16
<PAGE>
The Company has a revolving credit agreement of $10,000,000 and an equipment
acquisition facility of $3,000,000 (collectively the "Credit Facilities") for
working capital and capital equipment needs. The Credit Facilities mature on
July 21, 1998. As of June 30, 1997, $3,500,000 was available under the credit
agreement and $1,231,000 was available under the equipment acquisition facility.
An annual fee of one quarter of one percent is payable monthly on the unused
portion of the Credit Facilities. The bank has the right to accelerate each of
the maturity dates of the consolidated term note and real estate note to
coincide with the maturity date of the Credit Facilities. See Note 7 of Notes to
the Consolidated Financial Statements.
Subsequent to June 30, 1997 the Company's bank increased the credit agreement to
$12,000,000 and extended the maturity date by one year to July 21, 1999. The
Company's bank also increased the remaining availability under the equipment
acquisition facility from $1,231,327 to $3,000,000.
The current ratio of the Company declined to 1.6 to 1 at June 30, 1997 compared
to 2.0 to 1 at June 30, 1996 primarily due to the accruals associated with the
restructuring charge at NASS. The book value per share decreased to $4.49 at
June 30, 1997 from $4.83 at June 30, 1996. Management anticipates that cash flow
from operations and bank credit availability will be adequate to fund the
existing debt, anticipated capital and tooling requirements and working capital
needs for the next two years.
SEASONALITY
Net sales and operating results do not follow a predictable seasonal pattern
from quarter to quarter because the development and initial production of new
products may occur at different times of the year. Generally, in these periods
certain inefficiencies are experienced which result in higher costs to the
Company. In addition, the Company usually experiences somewhat lower sales in
the quarters ended December 31 and September 30 as automobile manufacturers
traditionally close their plants for vacations or model changeovers during these
periods resulting in lower demand for the Company's products.
INFLATION
The Company believes that the relatively moderate rate of inflation in recent
years has not had a significant impact on the Company's revenues or
profitability.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 8, see "Consolidated
Financial Statements and Schedules" on pages F-1 through F-16 of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required for this Item 10 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.
ITEM 11 - EXECUTIVE COMPENSATION
Information required for this Item 11 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required for this Item 12 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required for this Item 13 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.
PART IV
ITEM 14 - EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) and (2) Consolidated Financial Statements and Schedules
The consolidated financial statements and schedules of Hilite Industries, Inc.
are included in Part IV of this report on the pages indicated below: Page
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-15
Consolidated Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves
for the years ended June 30, 1997, 1996 and 1995 F-16
Consolidated Financial Statement Schedules Omitted
- --------------------------------------------------
Certain consolidated financial statement schedules are omitted because of the
absence of conditions under which they are required because the required
information is presented in the financial statements or notes thereto.
(a) (3) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 33-72014)
3.2 Amended and Restated Bylaws of the Company (Incorporated herein
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, Registration No. 33-72014)
4.1 Specimen of Common Stock certificate (Incorporated herein by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-1, Registration No. 33-72014)
4.2 Form of Representative's Share Purchase Option (Incorporated
herein by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-1, Registration No. 33-72014)
10.1 1993 Stock Option Plan (Incorporated herein by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 33-72014)
10.2 Employment Agreement dated July 1, 1993 between the Company and
Samuel M. Berry (Incorporated herein by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-1, Registration
No. 33-72014)
10.3 Lease Agreement between the Company and Roger C. Hunsacker d/b/a
Hunsacker Properties dated September 2, 1993 (Incorporated herein
by reference to Exhibit 10.4 of the Company's Registration
Statement on Form S-1, Registration No. 33-72014)
10.4 Lease Agreement between the Company and Leonard Properties dated
August 1992 and Amendment No. 1 thereto (Incorporated herein by
reference to Exhibit 10.5 of the Company's Registration Statement
on Form S-1, Registration No. 33-72014)
10.5 Equipment Acquisition Note dated December 12, 1994 (Incorporated
herein by reference to Exhibit 10.1 of the Company's Report on
Form 10-Q for the fiscal quarter ended December 31, 1994, File
No. 0-22924)
10.6 Equipment Acquisition Note dated June 26, 1995 (Incorporated
herein by reference to Exhibit 10.13 of the Company's Report on
Form 10-K for the year ended June 30, 1995, File No. 0-22924)
10.7 Stock Purchase Agreement dated July 21, 1995, among Hilite
Industries, Inc., a Delaware Corporation, Registrant and Michael
L. McKee, Donald P. Degenhardt and Robert S. Johnson
(Incorporated herein by reference to Exhibit 10.1 of the
Company's Report on Form 8-K on August 7, 1995, File No. 0-22924)
10.8 Amended and Restated Secured Loan Agreement ("Loan Agreement")
dated July 21, 1995, among Hilite Industries, Inc. and COMERICA
Bank - Texas (Incorporated herein by reference to Exhibit 10.2 of
the Company's Report on Form 8-K on August 7, 1995, File No.
0-22924)
10.9 Management contract between the Company and Lineberger & Co., LLC
dated July 1, 1996. (Incorporated herein by reference to Exhibit
10.16 of the Company's Report on Form 10-K for the year ended
June 30, 1996, File No. 0-22924)
10.10 First Amendment to Loan Agreement dated August 21, 1997.
10.11 Second Amendment to Loan Agreement dated August 30, 1997.
23.1 Consent of Price Waterhouse LLP
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 1997.
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hilite Industries, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 19 present fairly, in all material
respects, the financial position of Hilite Industries, Inc. and its subsidiary
at June 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's m anagement; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
August 12, 1997, except as to the last paragraph of Note 7, which is as of
September 18, 1997.
F-1
<PAGE>
HILITE INDUSTRIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of June 30,
---------------------------
1997 1996
------------ ------------
ASSETS
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ -- $ --
Accounts receivable, less allowance for doubtful accounts of
$195,427 at June 30, 1997 and $91,100 at June 30, 1996 ... 9,991,098 11,356,477
Tooling receivable ......................................... 96,734 760,982
Inventories ................................................ 10,075,786 8,845,457
Income taxes receivable .................................... 235,615
Deferred income taxes ...................................... 1,774,082 472,627
Prepaid expenses and other current assets .................. 739,803 542,089
Total current assets ..................................... 22,677,503 22,213,247
Property, plant and equipment ................................ 38,400,240 38,139,671
Less accumulated depreciation and amortization ............... (12,077,533) (10,349,569)
------------ ------------
Property, plant and equipment, net ........................... 26,322,707 27,790,102
------------ ------------
Assets held for disposal ..................................... 2,330,800 --
Goodwill, net of accumulated amortization .................... 5,888,167 6,195,290
------------ ------------
TOTAL ASSETS ................................................. $ 57,219,177 $ 56,198,639
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................... $ 11,875,962 $ 8,607,287
Long-term debt - current portion ........................... 2,422,950 2,320,672
Income taxes payable ....................................... 49,883 --
------------ ------------
Total current liabilities ................................ 14,348,795 10,927,959
------------ ------------
Long-term debt ............................................... 16,486,252 17,672,368
Subordinated debt ............................................ 1,785,184 1,860,184
Deferred income taxes ........................................ 2,595,392 2,077,589
------------ ------------
Total non-current liabilities ............................ 20,866,828 21,610,141
------------ ------------
Commitments and Contingencies (See Note 11.)
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000 shares authorized,
none issued and outstanding .............................. -- --
Common stock, $.01 par value; 15,000,000 shares authorized,
4,900,000 isssued and outstanding at June 30, 1997 and
1996...................................................... 49,000 49,000
Additional paid-in capital ................................. 9,105,674 9,105,674
Retained earnings .......................................... 12,848,880 14,505,865
------------ ------------
Total stockholders' equity ............................... 22,003,554 23,660,539
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 57,219,177 $ 56,198,639
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
HILITE INDUSTRIES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................ $73,492,117 $72,641,500 $44,899,515
Cost of sales ........................................ 63,938,186 57,710,737 34,849,251
----------- ----------- -----------
Gross profit ......................................... 9,553,931 14,930,763 10,050,264
Selling, general and administrative expenses ......... 10,339,722 7,575,953 4,286,120
----------- ----------- -----------
Operating income (loss) .............................. (785,791) 7,354,810 5,764,144
Interest income ...................................... -- 9,390 124,873
Interest expense ..................................... 1,713,763 1,668,763 254,376
----------- ----------- -----------
Income (loss) before income taxes .................... (2,499,554) 5,695,437 5,634,641
Income tax provision (benefit) ....................... (842,569) 2,063,580 2,016,000
----------- ----------- -----------
Net income (loss).................................... $(1,656,985) $ 3,631,857 $ 3,618,641
=========== =========== ===========
Per share data:
Earnings (loss) per share............................ $ (0.34) $ 0.74 $ 0.74
=========== =========== ===========
Weighted average number of shares outstanding ........ 4,900,000 4,900,000 4,900,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss)...................................... $ (1,656,985) $ 3,631,857 $ 3,618,641
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Depreciation ...................................... 3,517,792 3,005,474 1,649,518
Goodwill amortization ............................. 307,123 316,968 --
Restructuring charge .............................. 2,738,352 --
Increase (decrease) in net deferred income taxes .. (783,652) 647,962 481,000
------------ ------------ ------------
Cash provided from operations before changes in
operating assets and liabilities .................... 4,122,630 7,602,261 5,749,159
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable ...... 1,365,379 (2,491,920) 280,734
(Increase) decrease in tooling receivable ....... 664,248 (106,215) (385,618)
Increase in inventories ......................... (1,370,079) (149,820) (1,807,335)
(Increase) decrease in prepaid expenses and
other current assets .......................... (370,017) 332,406 371,154
Increase (decrease) in accounts payable and
accrued expenses .............................. 1,285,554 (80,014) (1,306,850)
Increase (decrease) in income taxes payable ..... 285,498 (248,952) (188,747)
------------ ------------ ------------
Total changes in operating assets and liabilities .. 1,860,583 (2,744,515) (3,036,662)
------------ ------------ ------------
Net cash provided by operations ........................ 5,983,213 4,857,746 2,712,497
------------ ------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment, net ...... (4,824,375) (5,764,817) (8,589,351)
Acquisition of subsidiary ............................ -- (7,789,000) --
------------ ------------ ------------
Net cash used in investing activities .................. (4,824,375) (13,553,817) (8,589,351)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from acquisition financing .................. -- 15,397,000 --
Repayment of subordinated debt ....................... (75,000) --
Proceeds from long-term debt ......................... 1,212,258 1,841,085 2,600,000
Repayments of long-term debt ......................... (2,296,096) (9,662,557) (916,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities .... (1,158,838) 7,575,528 1,684,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... -- (1,120,543) (4,192,854)
Cash and cash equivalents at beginning of period ....... -- 1,120,543 5,313,397
------------ ------------ ------------
Cash and cash equivalents at end of period............. $ -- $ -- $ 1,120,543
============ ============ ============
</TABLE>
As part of the acquisition of North American Spring and Stamping Corp. on July
21, 1995, $2,000,000 in subordinated notes were issued to the sellers as
consideration for the purchase price. The issuance of the subordinated notes
increased the price for the acquisition. See Note 2 of Notes to the Consolidated
Financial Statements.
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 ....... 4,900,000 49,000 9,105,674 7,255,367 16,410,041
Net income for the year ended
June 30,1995 .............. -- -- -- 3,618,641 3,618,641
----------- ----------- ----------- ----------- -----------
Balance June 30, 1995 ....... 4,900,000 49,000 9,105,674 10,874,008 20,028,682
Net income for the year ended
June 30,1996 .............. -- -- -- 3,631,857 3,631,857
----------- ----------- ----------- ----------- -----------
Balance June 30, 1996 ....... 4,900,000 49,000 9,105,674 14,505,865 23,660,539
Net loss for the year ended
June 30,1997 .............. -- -- -- (1,656,985) (1,656,985)
----------- ----------- ----------- ----------- -----------
Balance June 30, 1997 ....... 4,900,000 $ 49,000 $ 9,105,674 $12,848,880 $22,003,554
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hilite Industries, Inc. ("Hilite" or the "Company") is engaged in the
manufacture of products used primarily in the automotive industry. The
Company's products are sold primarily to manufacturers of automobiles
and their suppliers, pursuant to credit terms customarily extended in
the industry. The Company operates separately under the names Pitts
Industries ("Pitts"), Surfaces, Machine Parts Company ("MAPCO") and
North American Spring and Stamping Corp. ("NASS"). Pitts manufactures
electromagnetic clutches for various applications. Surfaces manufactures
brake proportioning valves for automotive brake systems. MAPCO
manufactures mounting brackets, fan blades and pulleys. NASS
manufactures specialty springs, stamping products and assemblies.
On July 21, 1995, the Company acquired 100% of the outstanding common
stock of North American Spring and Stamping Corp. from its three
stockholders ("Selling Shareholders"). In consideration for the
transaction, the Company paid $17,397,000. The acquisition was accounted
for by the purchase method of accounting and NASS' assets and
liabilities were recorded at their fair value at the date of the
acquisition. The Company's consolidated statements of operations include
the results of operation of NASS subsequent to July 21, 1995.
The Company's significant accounting policies are as follows:
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand and short-term investments with original maturities of three months
or less.
Inventory - Inventories are stated at the lower of cost or market, cost
being determined on a first in-first out ("FIFO") basis.
Property, Plant and Equipment - Property, plant and equipment are
carried at cost. Depreciation and amortization are computed on the
straight line basis over the estimated useful lives of the assets as
follows:
Buildings and improvements 20 years or remaining useful life
Machinery and equipment 5 to 10 years
Other assets 3 years
Repair and maintenance expenditures are charged to operations as
incurred and expenditures for major renewals and betterments are
capitalized. When units of property are disposed of, the cost and
related accumulated depreciation are removed from the accounts, and the
resulting gains or losses are included in the results of operations.
Property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset or group of assets may not be recoverable. The impairment review
includes a comparison of future cash flows expected to be generated by
the asset or group of assets with their associated carrying value. If
the carrying value of the asset or group of assets exceeds expected cash
flows (undiscounted and without interest charges), an impairment loss is
recognized to the extent carrying amounts exceed fair value.
The Company routinely makes expenditures for tooling fixtures and
equipment required for production of specific products for customers.
These costs are often reimbursed by customers. To the extent that
expenditures exceed related reimbursements, the excess is capitalized
and included in property, plant and equipment (other) and depreciated
over the related production life. Net costs expended for tooling which
are expected to be reimbursed within one year are included in prepaid
expenses and other current assets. Net reimbursements in excess of
amounts expended which are expected to be fully expended are recorded in
accounts payable and accrued expenses until expended.
F-6
<PAGE>
Goodwill - The excess of cost over the fair value of net assets acquired
in an acquisition (goodwill) is being amortized over 20 years on a
straight-line basis. The recoverability of goodwill is assessed by the
Company on an ongoing basis by comparing the undiscounted value of
expected future operating cash flows to the carrying value of goodwill.
Accumulated amortization was $624,000 and $317,000 as of June 30, 1997
and 1996, respectively.
Revenue Recognition - Sales revenue and related cost of sales are
recognized as products are shipped. In the ordinary course of business,
certain products sold by the Company are subject to retroactive price
adjustments. No material retroactive price adjustments were recorded in
the financial statements for the 1997, 1996 or 1995 fiscal years. The
Company's management believes that there are no sales recorded in the
financial statements for periods which are subject to material
retroactive adjustment.
Research and Development - The Company is engaged in numerous research
and development projects. Costs associated with these projects are
charged to operations when incurred. Research and development costs,
which are included in general and administrative expenses, totaled
$882,000, $945,000 and $879,000 for the years ended June 30, 1997, 1996
and 1995, respectively. Of these expenditures, $240,000, $343,000 and
$596,000, respectively, were sponsored by customers and $642,000,
$602,000 and $283,000, respectively, were sponsored by the Company.
Income Taxes - Deferred income taxes are provided for using the
liability method. Under this method, deferred tax assets and liabilities
are recognized on the tax effect of differences between the financial
statement and tax basis of assets and liabilities using presently
enacted tax rates.
Use of Estimates - Financial statements prepared in conformity with
generally accepted accounting principles require management to make
estimates and assumptions about reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and
reported amounts of revenue and expenses. Management must also make
estimates and judgments about future results of operations related to
specific elements of the business in assessing recoverability of assets
and recorded values of liabilities. Actual results could differ from
these estimates.
Stock-Based Compensation - The Company adopted, on a disclosure basis
only, Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, in fiscal 1996. The Company continues to
measure compensation costs under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. NASS ACQUISITION
On July 21, 1995, the Company acquired 100% of the outstanding common
stock of North American Spring and Stamping Corp. from its three
stockholders. In consideration for the transaction, the Company paid
$17,397,000. The amount paid at closing included:
Cash paid to Selling Shareholders......................... $ 7,789,000
Cash used to refinance certain long-term debt of NASS..... 7,608,000
------------
Total cash portion of acquisition...................... 15,397,000
Subordinated notes payable ("Subordinated Notes") issued
to the Selling Shareholders.............................. 2,000,000
------------
Total........................................ $ 17,397,000
============
F-7
<PAGE>
The Subordinated Notes bear interest at 9% and the interest is payable
quarterly. Interest payments on these notes were suspended effective
April 30, 1997 pending the outcome of the claim against the Selling
Shareholders (See footnote 11.). During the year ended June 30, 1996
certain adjustments were made to the purchase price as a result of tax
considerations which lowered the Subordinated Notes balance to
$1,860,184. The Subordinated Notes mature on July 21, 2002 at which time
the entire balance is due to the Selling Shareholders. The Company may
elect to prepay the Subordinated Notes at any time prior to the maturity
date at its discretion.
The acquisition was accounted for by the purchase method of accounting
and NASS' assets and liabilities were recorded at their fair value at
the date of the acquisition. The Company's consolidated statements of
operations include the results of operations of NASS subsequent to July
21, 1995. In connection with the acquisition, goodwill of $6,512,000 was
recorded.
Supplemental Proforma Results of Operations (Unaudited)
The following unaudited proforma summary presents the consolidated
results of operations as if the acquisition occurred at the beginning of
fiscal 1995 and does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of
results which may occur in the future.
1996 1995
---- ----
Net sales.............. $ 73,744,530 $ 74,140,211
Net income............. 3,597,833 4,113,712
Net income per share... 0.73 0.84
Adjustments made in arriving at the proforma unaudited results of
operations include the difference in depreciation expense resulting from
the change in the carrying value of property and equipment to their
estimated fair values, differences in cost of sales for the change in
inventory valued on the FIFO method of inventories rather than the LIFO
method and increase in goodwill amortization resulting from the
transaction.
3. RESTRUCTURING CHARGE
As a result of operating problems and inefficiencies at the NASS
division, the Company's Board of Directors approved a plan, in June
1997, to substantially restructure the NASS operations. The
restructuring plan includes the orderly discontinuance of a significant
number of commodity-type products currently manufactured and distributed
by NASS. A leased warehouse facility is scheduled to be closed and
certain contracts including a sales representative arrangement has been
terminated. In addition, certain members of NASS management have been
released. It is expected that the orderly discontinuance of these
products and transitions with customers will occur over an approximate
nine-month period.
In conjunction with this plan, the Company recorded a charge to pre-tax
earnings totaling approximately $2,700,000 ($1,000,000 in cost of sales
and $1,700,000 in selling, general and administrative costs). The charge
is comprised of a reduction (approximately $900,000) in the net book
value of certain assets, primarily machinery, equipment and tooling, to
their estimated fair value, net of estimated selling costs, accrual of
certain costs which the Company expects to incur in terminating
contractual obligations, but for which no future economic benefit will
be received (approximately $1,600,000) and other costs (approximately
$200,000). Operating losses, which may occur during the phase-out
period, have not been accrued.
F-8
<PAGE>
4. INVENTORIES
Inventories at June 30, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Raw materials............... $ 3,916,344 $ 3,432,454
Work in process............. 2,254,960 2,194,099
Finished goods.............. 3,904,482 3,218,904
----------- -----------
$10,075,786 $ 8,845,457
=========== ===========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
Land........................ $ 1,150,000 $ 1,150,000
Building and improvements... 6,855,531 6,428,585
Machinery and equipment..... 29,834,599 29,644,173
Other....................... 560,110 916,913
------------ ------------
38,400,240 38,139,671
Less accumulated depreciation
and amortization........... (12,077,533) (10,349,569)
------------ ------------
$ 26,322,707 $ 27,790,102
============ ============
Progress payments for machinery ordered and not placed in service
totaling $1,635,000 and $1,149,000 as of June 30, 1997 and 1996,
respectively, are included in machinery and equipment. Open commitments
to purchase machinery and equipment at June 30, 1997 totaled $1,353,000.
As part of the restructuring plan at NASS, net fixed assets of
$2,330,800 (fixed assets of $3,476,318 and accumulated depreciation of
$1,146,518) were reclassified on the balance sheet as assets held for
disposal. During fiscal year 1997, retirements of fully depreciated
machinery and equipment were $644,310. There were no significant
disposals during fiscal year 1996 and 1995.
Routine repairs and maintenance charged to expense were $1,847,735,
$1,355,757 and $1,334,532 for the years ended June 30, 1997, 1996 and
1995, respectively.
F-9
<PAGE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at June 30, 1997 and 1996
consisted of the following:
1997 1996
---- ----
Trade accounts payable...... $ 5,531,022 $ 5,193,615
Restructuring accrual....... 2,082,026 --
Accrued payroll and payroll
related.................... 1,447,151 1,196,754
Accrued employee benefit
plan costs................. 698,539 660,181
Accrued health plan claims.. 291,961 235,335
Accrued occupational injury
plan costs................. 475,000 50,640
Other accrued expenses...... 1,350,263 1,270,762
----------- -----------
Total....................... $11,875,962 $ 8,607,287
=========== ===========
7. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Consolidated term loans..... $ 9,973,385 $11,905,952
Revolving line of credit.... 6,500,477 5,933,659
Equipment acquisition
term notes payable......... 1,768,673 1,422,762
Real estate term note
payable.................... 666,667 730,667
----------- -----------
18,909,202 19,993,040
Less current portion........ (2,422,950) (2,320,672)
----------- -----------
$16,486,252 $17,672,368
=========== ===========
Effective July 21, 1995, the Company, in conjunction with its
acquisition of NASS, executed an amendment to its existing loan
agreement ("the Agreement") with a bank to reflect new credit facilities
totaling $26,700,000. The credit facilities, as of June 30, 1997,
consist of the following:
1) Term loans of $13,700,000 original principal balance and
$9,973,385 outstanding at June 30, 1997. Principal payments on
the term loan of approximately $163,000 together with interest
are payable monthly. The maturity date of the term loans is
August 1, 2002. The term loans bear interest at a blended rate
of 6 month and 12 month LIBOR plus 1 1/2% (7.428% at June 30,
1997). The term loans were used for funding the acquisition of
NASS and for refinancing Company debt,
2) A revolving line of credit of $10,000,000 with interest payable
monthly at either the bank's prime rate less 1/2% (8.00% at June
30, 1997) or a blended rate of 6 month and 12 month LIBOR plus 1
1/4 % (7.9375%) at June 30, 1997. As of the balance sheet date,
the revolving line of credit was due to expire on July 21, 1998
and is reflected as a long-term liability on the financial
statements. A commitment fee of 1/4%, per annum, is charged on
the average unused portion of the revolving line of credit to
the bank, payable quarterly. As of June 30, 1997, $6,500,477 had
been used on the line of credit, of which $5,590,000 was used to
complete financing on the acquisition of NASS, and $3,499,523 is
available,
F-10
<PAGE>
(3) An equipment acquisition facility of $3,000,000 for the
financing of equipment purchases with term loans of $2,142,440
original principal balance used under the facility and
$1,768,673 outstanding and $1,231,327 available under the
facility at June 30, 1997. Any term notes payable issued under
this facility bear interest, at the Company's option, at either
prime rate or LIBOR plus 1 1/2% (7.727% at June 30, 1997).
Principal payments on the equipment acquisition facility of
approximately $35,700 together with interest are payable monthly
and have a five year term;
In addition to the above credit facility, the Company has a fifteen year
real estate note with the same bank that expires on November 1, 2007.
The note, which has an original principal amount of $960,000 and a
$666,667 outstanding balance at June 30, 1997, is payable in monthly
installments of $5,333 plus interest at the prime rate (8.50% at June
30, 1997).
All of the notes and line of credit are collateralized by the accounts
receivable, inventory, equipment and real estate of the Company. The
bank has the right to accelerate each of the maturity dates of the
consolidated term note and real estate note to coincide with the
maturity date of the revolving line of credit. The Agreement contains
certain covenants relating to tangible effective net worth, debt and
cash flow coverage ratio.
Principal payments on long-term debt, excluding the revolving line of
credit, due in each of the next five fiscal years and thereafter are
$2,422,950, $2,422,950, $2,422,950, $2,348,067, $2,123,421 and $668,387,
respectively. Interest payments during the years ended June 30, 1997,
1996 and 1995 were $1,662,215, $1,659,373 and $283,377, respectively.
As of August 30, 1997, the bank increased the revolving line of credit
to $12 million and extended the expiration date to July 21, 1999.
Effective September 18, 1997 the bank increased the remaining
availability under the agreement from $1,231,327 to $3,000,000.
8. INCOME TAXES
The provision for federal income taxes for the years ended June 30,
1997, 1996 and 1995 consisted of the following:
1997 1996 1995
---- ---- ----
Current:
Federal ................ $ (205,251) $1,274,580 $1,411,000
State .................. 145,699 113,000 123,000
Deferred ............... (783,017) 676,000 482,000
---------- ---------- ----------
Total ................... $ (842,569) $2,063,580 $2,016,000
========== ========== ==========
The following is a reconciliation between the Company's income tax
expense calculated using the statutory federal income tax rate and the
tax expense calculated using the effective income tax rate for the years
ended June 30, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Pretax book income at
statutory rate..............$ (849,897) $1,936,450 $1,916,000
State taxes..................... 33,257 113,000 123,000
Other........................... (25,929) 14,130 (23,000)
---------- ---------- ----------
$ (842,569) $2,063,580 $2,016,000
========== ========== ==========
F-11
<PAGE>
The components of net deferred tax assets and liabilities at of June 30,
1997 and 1996 consisted of the following:
1997 1996
---- ----
Deferred assets:
Book accruals and reserves
in excess of cumulative tax
deductions...................... $ 1,599,293 $ 413,627
Inventory capitalization........... 174,789 59,000
----------- -----------
Total.............................. $ 1,774,082 $ 472,627
=========== ===========
Deferred liability - tax
depreciation in excess of book.... $ 2,595,392 $ 2,077,589
=========== ===========
Tax payments during the years ended June 30, 1997, 1996 and 1995 were $139,000,
$1,630,000 and $1,725,000, respectively.
9. SALES TO MAJOR CUSTOMERS
The Company's five largest customers with their percentages of the
Company's net sales for the 1997, 1996 and 1995 fiscal years were as
follows:
Percentage of Net Sales
-----------------------
Customer 1997 1996 1995
---- ---- ----
Ford........................................ 30% 30% 23%
Chrysler.................................... 7 7 1
Borg-Warner................................. 6 7 17
General Motors.............................. 6 9 12
Bosch (formerly AlliedSignal)............... 6 7 10
The Company's customers are primarily in the automotive industry and, as
a result, the Company is impacted by the overall economic conditions
within the industry.
10. TRANSACTIONS WITH RELATED PARTIES
During the year ended June 30, 1997, 1996 and 1995 the Company paid
management fees of $235,000 to Lineberger & Co., LLC, an entity owned by
the Company's Chairman of the Board.
In connection with the acquisition of North American Spring and Stamping
Corp. on July 21, 1995, Lineberger & Co., LLC was paid a transaction fee
of $150,000.
11. CONTINGENCIES
In May 1997 the Company initiated a suit in the United States District
Court for the Northern District of Illinois (Eastern Division) against
the Selling Shareholders of NASS (now known as the specialty components
and assemblies division). The Company alleges, among other things, that
the Selling Shareholders made material misrepresentations in connection
with the Company's acquisition of NASS and the Company is seeking that
the Selling Shareholders pay substantial damages to the Company and/or
that the transaction be rescinded. The Selling Shareholders have
responded in
F-12
<PAGE>
court by denying all claims of the Company and countersuing for recovery
of legal costs. Management of the Company intends to vigorously
prosecute this action.
In the normal course of business, the Company is subject to certain
claims and litigation related to on-the-job injuries. The Company does
not believe that any claims will have a material adverse effect on the
Company.
12. LEASE COMMITMENTS
The following is a schedule of future minimum lease payments under
operating leases with initial lease terms in excess of one year:
Operating
Leases
-----------
Year ending June 30,
1998................................. $ 362,531
1999................................. 352,593
2000................................. 210,520
2001................................. 83,399
2002................................. 4,624
Thereafter........................... --
-----------
Total minimum lease payments......... $ 1,013,667
===========
Total minimum lease payments have been reduced by $171,000 to reflect
the total minimum lease payments expected to be received under a
noncancelable sublease arrangement. Rental expense for the years ended
June 30, 1997, 1996 and 1995 was $500,047, $419,231 and $202,426,
respectively.
13. EMPLOYEE BENEFITS
The Company sponsors three defined contribution retirement plans for
Company employees. Employees are eligible to participate in the plan
upon attaining certain age and service requirements. Under these plans,
eligible employees may contribute amounts through payroll deductions.
Employer contributions are made either through matching contributions of
employee deductions or through a discretionary contribution. During the
years ended June 30, 1997, 1996 and 1995, a discretionary contribution
was expensed of $346,000, $360,000 and $231,000, respectively.
The Company has noncontributory defined benefit pension plans covering
NASS salaried and bargaining unit employees. Pension plan assets are
primarily invested in marketable equity securities and corporate and
government securities. Benefits are generally based on years of service,
age at retirement and the employee's compensation. The Company's funding
policy is to contribute amounts equal to, or exceeding, minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). The projected benefit obligation, plan assets and net
periodic pension cost associated with these defined benefit pension
plans are not significant to the Company's consolidated financial
statements.
In December 1995, the Company froze all benefits in the NASS defined
benefit pension plan for salaried employees. In June 1997, the Board of
Directors of the Company approved the termination of the plan. Those
participants who are vested and receiving benefits will continue to
receive benefit
F-13
<PAGE>
payments through termination date when all remaining assets will be
distributed in accordance with the plan provisions.
The Company sponsors two self-funded employee benefit plans which
provide comprehensive medical benefits and life and accidental death and
dismemberment insurance to Company employees and their dependents.
Eligible employees include all employees (excluding union employees at
the NASS location) who work full-time (at least thirty hours per week)
and have completed either thirty or sixty days of continuous full-time
employment, depending on their classification. During the years ended
June 30, 1997, 1996 and 1995, the Company incurred expense of
$1,637,000, $1,230,000 and $1,084,000, respectively, under these plans.
Union employees at the NASS location receive medical benefits through a
trust administered by a third party. The Company paid premiums into the
trust during the years ended June 30, 1997 and 1996 totaling $682,000
and $613,000, respectively.
Prior to September 1, 1995 the Company elected to use a Texas
Occupational Injury Program in lieu of standard Texas workers'
compensation coverage as permitted by state law. Under this program,
occupational injuries sustained in the course and scope of an
individual's employment with the Company were handled by the Company
through self-insured and insured programs. On September 1, 1995, the
Company acquired Texas workers' compensation coverage which entitles all
employees, through premium payments made by the Company, to full work
related injury benefits as stipulated by state law. Employees at the
NASS facilities are covered under Illinois workers' compensation
coverage.
14. STOCK BASED COMPENSATION
During November 1993, the stockholders of the Company approved a stock
option plan and 100,000 shares of Common Stock were reserved for
issuance upon exercise of the options to be granted to employees,
officers and directors of the Company under the plan. Options
exercisable for 57,800 shares were granted at $9.00 per share, the
initial public offering price of the common stock. All options are
exercisable at June 30, 1997, and no options were exercised during the
years ending June 30, 1997, 1996 and 1995.
Effective November 18, 1994 the Company granted ten year incentive stock
options to four of its officers to each purchase 3,000 shares of the
Company's Common Stock, par value $0.01 per share, at an exercise price
of $9.00, the fair market value at the date of grant. The options become
exercisable as to 1,000 shares on November 18, 1995, 1,000 shares on
November 18, 1996 and 1,000 shares on November 18, 1997.
Effective January 29, 1997, the Company granted ten year incentive stock
options to five of its officers and one other employee. The options,
exercisable for 30,200 shares, were granted at $5.13 per share, the fair
market value at the date of grant. All options are exercisable as of
June 30, 1997. The Company granted an additional 20,200 shares to the
officers and employee pending stockholder approval of an amendment to
the 1993 Stock Option Plan to increase the number of shares authorized
thereunder to 125,000. These options have been accounted for herein as
granted and vested as of June 30, 1997 as management and directors own
sufficient common stock to ensure the amendment will be adopted.
In conjunction with the public offering, 100,000 warrants were issued to
certain Underwriters. The exercise price for these warrants is $10.80
per share. At June 30, 1997 all of these warrants are outstanding and
exercisable.
F-14
<PAGE>
In fiscal 1996, the Company adopted the disclosure-only option under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). If the Company had recorded
compensation expense in fiscal 1997 and 1996 for the stock options
granted in accordance with the provisions of FAS 123, the proforma net
income (loss) would have been ($1,754,457) and $3,631,857 and the pro
forma net income (loss) per share would have been ($0.36) and $0.74 for
the year ended June 30, 1997 and 1996, respectively. The estimated fair
value of the options granted during the year ended June 30, 1997, using
the Black-Scholes pricing model, is $147,017.
The significant assumptions used to estimate the fair value of the stock
options granted in fiscal 1997 include a risk-free rate of return of
6.70%, expected option life of ten years, expected volatility of 29.48%
and no expected dividend payments.
A summary of stock option activity is as follows:
Summary of Stock Options
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 69,800 $ 9.00 69,800 $ 9.00 57,800 $ 9.00
Options granted 50,400 $ 5.13 -- $ -- 12,000 $ 9.00
Options exercised -- $ -- -- $ -- -- $ --
Options canceled -- $ -- -- $ -- -- $ --
------ ------- ------ ------- ------ -------
Options outstanding at
end of year 120,200 $ 7.38 69,800 $ 9.00 69,800 $ 9.00
======= ======= ====== ======= ====== =======
Options exercisable at
end of year 116,200 $ 7.32 53,396 $ 9.00 40,998 $ 9.00
======= ======= ====== ======= ====== =======
</TABLE>
The following information is presented for stock options outstanding at
June 30, 1997.
Outstanding Exercisable
-------------------------------- ----------------------
Average Average Average
Life Exercise Exercise
Shares (in years) Price Shares Price
-------------------------------- ----------------------
69,800 7 $ 9.00 65,800 $ 9.00
50,400 10 $ 5.13 50,400 $ 5.13
------- ------- ------- -------
120,200 116,200
======= =======
F-15
<PAGE>
SCHEDULE II
HILITE INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
------------------------
Charged to
Balance Charged to other Increases/ Balance
at beginning costs and accounts (Deductions) at end
Description of period expenses describe describe of period
----------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1995 $ 70,000 $ -- $ -- $ -- $ 70,000
========= ========= ========= ======== =========
Year ended June 30, 1996 $ 70,000 $ -- $ -- $ 21,100 (1) $ 91,100
========= ========= ========= ======== =========
Year ended June 30, 1997 $ 91,100 $ 104,327 (2) $ -- $ -- $ 195,427
========= ========= ========= ======== =========
</TABLE>
(1) Amount represents reserve on receivables for North American Spring and
Stamping Corp., acquired on July 21, 1995.
(2) Amount represents specific reserves for primarily pricing disputes at
the specialty components and assemblies division.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HILITE INDUSTRIES, INC.
(Registrant)
September 26, 1996 /s/Daniel W. Brady
----------------------------
Daniel W. Brady
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
September 26, 1996 /s/James E. Lineberger
----------------------------
James E. Lineberger
Chairman of the Board
September 26, 1996 /s/Daniel W. Brady
----------------------------
Daniel W. Brady
Chief Executive Officer and Director
(Principal Executive Officer)
September 26, 1996 /s/Samuel M. Berry
----------------------------
Samuel M. Berry
President, Chief Operating Officer and
Director
September 26, 1996 /s/Ronald G. Assaf
----------------------------
Ronald G. Assaf
Director
September 26, 1996 /s/James D. Gerson
----------------------------
James D. Gerson
Director
September 26, 1996 /s/Roy Wiegmann
----------------------------
Roy Wiegmann
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
21
FIRST AMENDMENT TO AMENDED AND RESTATED SECURED
LOAN AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED SECURED LOAN AGREEMENT
AND WAIVER (the "AMENDMENT"), dated as of August 21, 1997, but effective as of
June 30, 1997 (the "EFFECTIVE DATE") is among HILITE INDUSTRIES, INC., a
Delaware corporation ("BORROWER"), NORTH AMERICAN SPRING & STAMPING CORP.
(DELAWARE), a Delaware corporation ("GUARANTOR") and COMERICA BANK-TEXAS, a
Texas banking association ("LENDER").
RECITALS:
Borrower and Lender have entered into that certain Amended and
Restated Secured Loan Agreement dated as of July 21, 1995 (such Loan Agreement,
as amended or otherwise modified from time to time, the "AGREEMENT").
Borrower and Lender desire to amend the Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS. Capitalized terms used in this Amendment,
to the extent not otherwise defined herein, shall have the same meanings as in
the Agreement, as amended hereby.
ARTICLE II
AMENDMENT
Section 2.1. AMENDMENT TO SECTION 6.7. Effective as of the Effective
Date, SECTION 6.7 of the Agreement is hereby amended and restated in its
entirety as follows:
6.7 MAINTAIN CASH FLOW COVERAGE RATIO. Maintain at all
times the ratio of its Cash Flow to its Current Maturities of Long
Term Debt (on a consolidated and consolidating basis if Borrower then
has any Subsidiaries) at not less than (a) .60 to 1.0 during the
period beginning on June 30, 1997 and ending on December 31, 1997,
(b) 1.0
FIRST AMENDMENT TO LOAN AGREEMENT - Page 1
<PAGE>
to 1.0 during the period beginning on January 1, 1998 and ending on
June 30, 1998, and (c) 1.75 to 1.0 thereafter. Such ratio shall be
calculated on a rolling twelve-month basis.
ARTICLE III
CONDITIONS PRECEDENT
The effectiveness of this Amendment is subject to the conditions that
Lender shall have received the following documents as of the date hereof, in
form and substance satisfactory to Lender:
resolutions of the Board of Directors of Borrower certified
by a senior officer of Borrower which authorize the execution,
delivery, and performance by Borrower of this Amendment.
ARTICLE IV
Ratifications and Other Agreements
Section 4.1. RATIFICATIONS. The terms and provisions set forth in
this Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Agreement and except as expressly modified and superseded by
this Amendment, the terms and provisions of all other documents executed in
connection with the Agreement are hereby ratified and confirmed and shall
continue in full force and effect. Borrower and Lender agree that the Agreement
as amended hereby and all other documents executed in connection with the
Agreement or this Amendment to which Borrower is a party shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 4.2. REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants to Lender that (a) the execution, delivery and
performance of this Amendment and any and all other documents executed and/or
delivered in connection herewith have been authorized by all requisite corporate
action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower or any agreement to which Borrower or any of
its properties is bound, (b) neither the articles of incorporation nor the
bylaws of Borrower have been amended or revoked since the date of the Agreement
and such articles of incorporation and bylaws are in full force and effect, (c)
the representations and warranties contained in the Agreement, as amended
hereby, and any other documents executed in connection therewith or herewith are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (d) other than the Specified Default, no Event of Default has
occurred and is continuing and no event or condition has occurred that with the
giving of notice or lapse of time or both would be an Event of Default, and (e)
after giving effect to this Amendment, Borrower is in full compliance with all
covenants and agreements contained in the Agreement as amended hereby.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 2
<PAGE>
ARTICLE V
MISCELLANEOUS
Section 5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment or any other document
executed in connection herewith shall survive the execution and delivery of this
Amendment, and no investigation by Lender or any closing shall affect the
representations and warranties or the right of Lender to rely upon them.
Section 5.2. REFERENCE TO AGREEMENT. Each of the Agreement and any
and all other agreements, documents, or instruments now or hereafter executed
and delivered pursuant to the terms hereof or pursuant to the terms of the
Agreement as amended hereby, are hereby amended so that any reference in such
documents to the Agreement shall mean a reference to the Agreement as amended
hereby.
Section 5.3. EXPENSES OF LENDER. As provided in the Agreement,
Borrower agrees to pay on demand all reasonable costs and expenses incurred by
Lender in connection with the preparation, negotiation, and execution of this
Amendment and any other documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including without limitation
the costs and reasonable fees of Lender's legal counsel, and all costs and
expenses incurred by Lender in connection with the enforcement or preservation
of any rights under the Agreement, as amended hereby, or any other document
executed in connection therewith, including without limitation the costs and
reasonable fees of Lender's legal counsel.
Section 5.4. SEVERABILITY. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.5. APPLICABLE LAW. This Amendment and all other documents
executed pursuant hereto shall be deemed to have been made and to be performable
in Dallas, Dallas County, Texas and shall be governed by and construed in
accordance with the laws of the State of Texas.
Section 5.6. SUCCESSORS AND ASSIGNS. This Amendment is binding upon
and shall inure to the benefit of Lender, Borrower, Pledgor and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of Lender.
Section 5.7. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
FIRST AMENDMENT TO LOAN AGREEMENT - Page 3
<PAGE>
Section 5.8. EFFECT OF WAIVER. No consent or waiver, express or
implied, by Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any obligated party shall be deemed a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 5.9. HEADINGS. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Annotated Texas
Statutes, Article 5069-15) are specifically declared by the parties not to be
applicable to this Amendment or any of the Loan Documents or the transactions
contemplated hereby.
Section 5.11. ENTIRE AGREEMENT. THE AGREEMENT, THIS AMENDMENT AND ALL
OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION
WITH THE AGREEMENT OR THIS AMENDMENT REPRESENT THE FINAL AGREEMENTS AMONG THE
PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above, but effective as of June
30, 1997.
BORROWER:
HILITE INDUSTRIES, INC.
By: /s/ Sam M. Berry
------------------------
Name: Sam M. Berry
Title:President and CEO
LENDER:
COMERICA BANK-TEXAS
By: /s/ J. Michael Park
------------------------
J. Michael Park
Vice President
FIRST AMENDMENT TO LOAN AGREEMENT - Page 4
<PAGE>
GUARANTOR:
NORTH AMERICAN SPRING & STAMPING
CORP. (DELAWARE)
By: /s/ Sam M. Berry
------------------------
Name: Sam M. Berry
Title:President and CEO
DA972110533
080797 v5
316:3134-488
FIRST AMENDMENT TO LOAN AGREEMENT - Page 5
SECOND AMENDMENT TO AMENDED AND RESTATED SECURED
LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED SECURED LOAN AGREEMENT
(the "AMENDMENT"), dated as of August 23, 1997, is among HILITE INDUSTRIES,
INC., a Delaware corporation ("BORROWER"), NORTH AMERICAN SPRING & STAMPING
CORP. (DELAWARE), a Delaware corporation ("GUARANTOR") and COMERICA BANK-TEXAS,
a Texas banking association ("LENDER").
RECITALS:
Borrower and Lender have entered into that certain Amended and
Restated Secured Loan Agreement dated as of July 21, 1995, as amended by that
certain First Amendment to Amended and Restated Secured Loan Agreement effective
as of June 30, 1997 (such Loan Agreement, as heretofore or hereafter amended or
otherwise modified from time to time, the "AGREEMENT").
Borrower and Lender desire to amend the Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS. Capitalized terms used in this Amendment,
to the extent not otherwise defined herein, shall have the same meanings as in
the Agreement, as amended hereby.
ARTICLE II
AMENDMENT
Section 2.1. AMENDMENT TO SECTION 1.1. Effective as of the date
hereof, SECTION 1.1 of the Agreement is hereby amended as follows:
(a) by deleting the reference to "$10,000,000" in the definition of
"Revolving Credit Commitment Amount" and substituting therefor
"$12,000,000"; and
SECOND AMENDMENT TO LOAN AGREEMENT - Page 1
<PAGE>
(b) by deleting the reference to "July 21, 1998" in the definition of
"Termination Date" and substituting therefor "July 21, 1999."
Section 2.2. AMENDMENT TO SECTION 10.10. Effective as of the date
hereof, SECTION 10.10 is hereby amended by deleting the current address listed
for the Bank for notice purposes and substituting therefor:
"If to Bank: Comerica Bank-Texas
P.O. Box 650282
Mail Code 6528
Dallas, Texas 75265-0282
Attention: J. Michael Park
WITH A COPY TO: Winstead, Sechrest & Minick, P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-2199
Attention: Joe T. Hyde, Esq."
Section 2.3. REPLACEMENT OF EXHIBIT "C-1". EXHIBIT "C-1" of the
Agreement is hereby deleted in its current form and replaced with EXHIBIT "C-1"
attached hereto as ANNEX I.
ARTICLE III
CONDITIONS PRECEDENT
The effectiveness of this Amendment is subject to satisfaction of the
following conditions precedent:
(a) The Lender shall have received all of the following,
each dated (unless otherwise indicated) the date of this Amendment,
in form and substance satisfactory to the Lender:
(1) AMENDED AND RESTATED REVOLVING CREDIT NOTE.
The Fourth Amended and Restated Revolving Credit Note,
duly executed by the Borrower, in the original principal
amount of $12,000,000.
(2) COMMITMENT FEE. Payment of a commitment fee
in the amount of $10,000, in immediately available funds,
which commitment fee is non-refundable and shall be deemed
fully earned as of the date of the execution of this
Amendment.
(3) RATIFICATION OF GUARANTY. A Ratification of
Guaranty duly executed by North American Spring & Stamping
Corp. (Delaware).
SECOND AMENDMENT TO LOAN AGREEMENT - Page 2
<PAGE>
(4) ADDITIONAL INFORMATION. The Lender shall
have received such additional documents, instruments and
information as the Lender or its legal counsel, Winstead
Sechrest & Minick P.C., may reasonably request.
(b) The representations and warranties contained herein
and in all other Loan Documents, as amended hereby, shall be true and
correct as of the date hereof as if made on the date hereof.
(c) No Event of Default shall have occurred and be
continuing and no event or condition shall have occurred that with
the giving of notice or lapse of time or both would be an Event of
Default.
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments, and other legal matters incident thereto shall be
satisfactory to the Lender and its legal counsel, Winstead Sechrest &
Minick P.C.
ARTICLE IV
RATIFICATIONS AND OTHER AGREEMENTS
Section 4.1. RATIFICATIONS. The terms and provisions set forth in
this Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Agreement and except as expressly modified and superseded by
this Amendment, the terms and provisions of all other documents executed in
connection with the Agreement are hereby ratified and confirmed and shall
continue in full force and effect. Borrower and Lender agree that the Agreement
as amended hereby and all other documents executed in connection with the
Agreement or this Amendment to which Borrower is a party shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 4.2. REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants to Lender that (a) the execution, delivery and
performance of this Amendment and any and all other documents executed and/or
delivered in connection herewith have been authorized by all requisite corporate
action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower or any agreement to which Borrower or any of
its properties is bound, (b) neither the articles of incorporation nor the
bylaws of Borrower have been amended or revoked since the date of the Agreement
and such articles of incorporation and bylaws are in full force and effect, (c)
the representations and warranties contained in the Agreement, as amended
hereby, and any other documents executed in connection therewith or herewith are
true and correct on and as of the date hereof as though made on and as of the
date hereof, (d) no Event of Default has occurred and is continuing and no event
or condition has occurred that with the giving of notice or lapse of time or
both would be an Event of Default, and (e) after giving effect to this
Amendment, Borrower is in full compliance with all covenants and agreements
contained in the Agreement as amended hereby.
SECOND AMENDMENT TO LOAN AGREEMENT - Page 3
<PAGE>
ARTICLE V
MISCELLANEOUS
Section 5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment or any other document
executed in connection herewith shall survive the execution and delivery of this
Amendment, and no investigation by Lender or any closing shall affect the
representations and warranties or the right of Lender to rely upon them.
Section 5.2. REFERENCE TO AGREEMENT. Each of the Agreement and any
and all other agreements, documents, or instruments now or hereafter executed
and delivered pursuant to the terms hereof or pursuant to the terms of the
Agreement as amended hereby, are hereby amended so that any reference in such
documents to the Agreement shall mean a reference to the Agreement as amended
hereby.
Section 5.3. EXPENSES OF LENDER. As provided in the Agreement,
Borrower agrees to pay on demand all reasonable costs and expenses incurred by
Lender in connection with the preparation, negotiation, and execution of this
Amendment and any other documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including without limitation
the costs and reasonable fees of Lender's legal counsel, and all costs and
expenses incurred by Lender in connection with the enforcement or preservation
of any rights under the Agreement, as amended hereby, or any other document
executed in connection therewith, including without limitation the costs and
reasonable fees of Lender's legal counsel.
Section 5.4. SEVERABILITY. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.5. APPLICABLE LAW. This Amendment and all other documents
executed pursuant hereto shall be deemed to have been made and to be performable
in Dallas, Dallas County, Texas and shall be governed by and construed in
accordance with the laws of the State of Texas.
Section 5.6. SUCCESSORS AND ASSIGNS. This Amendment is binding upon
and shall inure to the benefit of Lender, Borrower, Pledgor and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of Lender.
Section 5.7. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 5.8. EFFECT OF WAIVER. No consent or waiver, express or
implied, by Lender to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any
SECOND AMENDMENT TO LOAN AGREEMENT - Page 4
<PAGE>
obligated party shall be deemed a consent or waiver to or of any other breach of
the same or any other covenant, condition or duty.
Section 5.9. HEADINGS. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. NON-APPLICATION OF CHAPTER 15 OF TEXAS CREDIT CODE. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Annotated Texas
Statutes, Article 5069-15) are specifically declared by the parties not to be
applicable to this Amendment or any of the Loan Documents or the transactions
contemplated hereby.
Section 5.11. ENTIRE AGREEMENT. THE AGREEMENT, THIS AMENDMENT AND ALL
OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION
WITH THE AGREEMENT OR THIS AMENDMENT REPRESENT THE FINAL AGREEMENTS AMONG THE
PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
BORROWER:
HILITE INDUSTRIES, INC.
By: /s/ Daniel W. Brady
-----------------------
Name: Daniel W. Brady
Title:Chief Executive Officer
LENDER:
COMERICA BANK-TEXAS
By: /s/ J. Michael Park
-----------------------
J. Michael Park
Vice President
DA972240513
082197 v3
316:3134-488
SECOND AMENDMENT TO LOAN AGREEMENT - Page 5
<PAGE>
Annex 1
-------
REPLACEMENT EXHIBIT C-1
<PAGE>
EXHIBIT C-1
FOURTH AMENDED AND RESTATED REVOLVING CREDIT NOTE
COMERICA Bank-Texas
$12,000,000.00 Dallas, Texas
August 23, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
COMERICA BANK-TEXAS (the "BANK") at 1601 Elm Street, Dallas, Texas 75201, on the
Termination Date, the principal sum or so much of the principal sum of Twelve
Million and No/100ths Dollars ($12,000,000.00) as may from time to time have
been advanced and be outstanding hereunder, plus all accrued but unpaid interest
hereon.
All capitalized terms used but not defined herein, shall have the
meanings given to such terms in that certain Amended and Restated Secured Loan
Agreement, dated July 21, 1995, between the undersigned and Bank (as amended,
renewed, extended, modified and restated from time to time, the "AGREEMENT").
Bank may disburse the principal of this Note to Borrower in one or
more Revolving Loans from time to time, in accordance with the Agreement, so
long as the outstanding principal balance hereof never at any time exceeds the
lesser of (i) the Commitment Amount or (ii) the Borrowing Base in effect at such
time. Borrower shall pay to Bank, on demand, any amount by which the aggregate
unpaid principal amount of all Revolving Loans evidenced hereby exceeds the
lesser of (i) the Commitment Amount or (ii) the Borrowing Base in effect at such
time, together with all interest accrued and unpaid on the amount of such
excess. This Note is a Master Note under which sums may or must be repaid from
time to time and under which new Revolving Loans are to be made by Bank pursuant
to the terms and conditions of the Agreement, and the books and records of Bank
shall constitute the best evidence of the amount of the Indebtedness at any time
owing hereunder. This Note is the "REVOLVING CREDIT NOTE" referred to in the
Agreement, and is subject to the terms and provisions thereof, and the holder
hereof is entitled to the benefits thereof and may enforce the agreements
contained therein and exercise the remedies provided for thereby or otherwise in
respect thereof, all in accordance with the terms thereof.
The unpaid principal amount of this Note shall bear interest (i)
until maturity (whether by acceleration or otherwise) at all times during which
there has not occurred or then exist an Event of Default, at a fluctuating rate
per annum equal to the lesser of (a) the Applicable Rate or (b) the Legal Rate
(as hereinafter defined); and (ii) after maturity, as well as at all times
during which there has occurred or then exists an Event of Default, at a
fluctuating rate per annum equal to the lesser of (a) three percent (3.0%) per
annum above the Applicable Rate (the "DEFAULT RATE") or (b) the Legal Rate (the
Applicable Rate and the Default Rate, whichever is in effect at any particular
time, being hereinafter referred to as the "CONTRACT RATE"). Interest shall be
payable to the extent accrued on the first (1st) day of each consecutive
calendar month,
<PAGE>
beginning September 1, 1997, until maturity (whether by acceleration or
otherwise) and from and after such maturity, on demand.
The term "APPLICABLE RATE" shall mean (i) with respect to any Prime
Rate Balance, a fluctuating per annum rate of interest equal to one-half of one
percent below the Prime Rate and (ii) with respect to any LIBOR Balance, a per
annum rate of interest equal to one and one-quarter of one percent above the
LIBOR Rate. Each determination by Bank of the LIBOR Rate or Prime Rate, as the
case may be, shall, in the absence of manifest error, be conclusive and binding.
The term "PRIME RATE" shall mean that annual rate of interest
designated by the Bank as its prime rate and which is changed by the Bank from
time to time. The Bank's prime rate is a reference rate and does not necessarily
represent the lowest or best rate actually charged by the Bank to any of its
customers. The Bank may make commercial loans at rates of interest at, above or
below its prime rate.
The term "LIBOR RATE" shall mean, with respect to any LIBOR Interest
Period, the interest rate per annum conclusively determined by the Bank to be
the per annum, rate (as adjusted for any applicable reserve requirements
applicable to "eurocurrency liabilities" pursuant to Regulation D or any other
applicable regulation of the Board of Governors (or any successor) which
prescribes reserve requirements applicable to "eurocurrency liabilities" as
presently defined in Regulation D, or any eurocurrency funding) at which
deposits in immediately available funds in U.S. dollars are offered to the Bank
(at such time as the Bank elects on the first day of such LIBOR Interest Period)
by prime banks in the interbank eurodollar market selected by Bank for delivery
on the first day of such LIBOR Interest Period in an amount equal to the
principal amount of the corresponding LIBOR Balance for a period equal to the
length of such LIBOR Interest Period.
The term "LIBOR INTEREST PERIOD" shall mean a period commencing on
the date upon which, pursuant to an Interest Notice, the LIBOR Balance begins to
accrue interest at the LIBOR Rate (or, in the case of a rollover to a successive
LIBOR Interest Period, the last day of the immediately preceding LIBOR Interest
Period) and ending 30, 60, 90, 180 or 360 days (whichever is selected by the
undersigned in the applicable Interest Notice) after the commencement date;
provided, that, (i) any LIBOR Interest Period which would otherwise end on a day
which is not a LIBOR Business Day shall be extended to the next succeeding LIBOR
Business Day (unless such LIBOR Business Day falls in another calendar month, in
which case such LIBOR Interest Period shall end on the next preceding LIBOR
Business Day); and (ii) any LIBOR Interest Period which begins on the last LIBOR
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such LIBOR Interest
Period) shall, subject to clause (i) above, end on the last LIBOR Business Day
of a calendar month.
The term "LIBOR BUSINESS DAY" shall mean a day on which dealings in
U.S. dollars are carried out in the interbank eurodollar market selected by
Bank.
- 2 -
<PAGE>
The term "INTEREST NOTICE" shall mean the written notice given by the
undersigned of the Interest Option selected hereunder and specifying the amount
of principal to bear interest at the rate selected.
Subject to the provisions hereof, the undersigned shall have the
option (an "INTEREST OPTION") exercisable from time to time to designate
portions of the unpaid principal balance of this Note to bear interest at the
Prime Rate (such portions being herein referred to as a "PRIME RATE BALANCE") or
at the LIBOR Rate (such portions being referred to as a "LIBOR BALANCE");
provided, however, that no LIBOR Balance designated for any LIBOR Interest
Period shall be less than $500,000. The Interest Option shall be exercisable,
subject to the other limitations in this Note, by the undersigned only in the
manner provided below:
(i) If the undersigned desires the initial Revolving Loan
made hereunder, or a portion thereof, to be a LIBOR Balance, the
undersigned shall give the Bank the initial Interest Notice and the
initial amounts of the Prime Rate Balance and LIBOR Balance at least
two (2) LIBOR Business Days prior to the date hereof. If the required
Interest Notice shall not have been timely received by the Bank or
the undersigned fails to designate all or any portion of the unpaid
principal balance of this Note as either a Prime Rate Balance or a
LIBOR Balance, the undersigned shall be deemed conclusively to have
designated such amounts to be Prime Rate Balances and to have given
the Bank notice of such designation.
(ii) At least two (2) LIBOR Business Days prior to the
termination of any LIBOR Interest Period for a LIBOR Balance, the
undersigned shall give the Bank an Interest Notice specifying the
Interest Option which is to be applicable to such LIBOR Balance upon
the expiration of such LIBOR Interest Period; provided, however, no
Interest Option specifying an interest rate based on the LIBOR Rate
shall end after the Termination Date. If the required Interest Notice
shall not have been timely received by the Bank prior to the
expiration of such LIBOR Interest Period, the undersigned shall be
deemed conclusively to have designated such LIBOR Balance to become a
Prime Rate Balance immediately upon the expiration of such LIBOR
Interest Period and to have given the Bank notice of such
designation.
(iii) The undersigned shall have the right to convert an
eligible portion of the Prime Rate Balance to a LIBOR Balance by
giving the Bank an Interest Notice of such designation at least two
(2) LIBOR Business Days prior to the effective date of such exercise.
An Interest Notice shall be irrevocable and binding on the
undersigned and the undersigned shall indemnify Bank against any loss
or expense incurred by Bank due to sums paid or payable to fund the
LIBOR Balance when such LIBOR Balance is not made on such date.
Each change in the interest rate applicable to the Prime Rate Balance
or the LIBOR Balance shall become effective without prior notice to the
undersigned automatically as of the opening of business on the date of such
change in the Prime Rate or the LIBOR Rate, as the case may be; provided, that,
the LIBOR Rate shall not change during any applicable LIBOR Interest
- 3 -
<PAGE>
Period. Interest on this Note shall be calculated on the basis of a 360-day year
for the actual number of days outstanding.
If the Bank determines that deposits in U.S. dollars (in the
applicable amounts) are not being offered to the Bank in the interbank
eurodollar market selected by the Bank for such LIBOR Interest Period, or that
the rate at which such dollar deposits are being offered will not adequately and
fairly reflect the cost to the Bank of making or maintaining a LIBOR Balance for
the applicable LIBOR Interest Period, the Bank shall forthwith give notice
thereof to the undersigned, whereupon until the Bank notifies the undersigned
that such circumstances no longer exist, (i) the right of the undersigned to
select an Interest Option based upon the LIBOR Rate shall be suspended, and (ii)
each LIBOR Balance in effect shall thereupon automatically be converted into a
Prime Rate Balance in accordance with the provisions hereof. If notice has been
given by the Bank to the undersigned requiring a LIBOR Balance to be repaid or
converted, then unless and until the Bank notifies the undersigned that the
circumstances giving rise to such repayment or conversion no longer apply, the
only Interest Option available shall be a rate based upon the Prime Rate. If the
Bank notifies the undersigned that the circumstances giving rise to such
repayment or conversion no longer apply, the undersigned may thereafter select a
rate based upon the LIBOR Rate in accordance with the terms of this Note.
If the adoption of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it unlawful or
impractical for the Bank to make or maintain a LIBOR Balance, the Bank shall so
notify the undersigned and any then-existing LIBOR Balance shall automatically
convert to a Prime Rate Balance either (i) on the last day of the then-current
LIBOR Interest Period applicable to such LIBOR Balance, if the Bank may lawfully
continue to maintain and fund such LIBOR Balance to such day, or (ii)
immediately, if the Bank may not lawfully continue to maintain such LIBOR
Balance to such day.
If either (i) the adoption of any applicable law, rule or regulation,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by the Bank
with any request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency shall subject the Bank to any
tax (including without limitation any United States interest equalization or
similar tax, however named), duty or other charge with respect to any LIBOR
Balance, this Note or the Bank's obligation to compute interest on the principal
balance of this Note at a rate based upon the LIBOR Rate, or shall change the
basis of taxation of payments to the Bank of the principal of or interest on any
LIBOR Balance or any other amounts due under this Note in respect of any LIBOR
Balance or the Bank's obligation to compute the interest on the balance of this
Note at a rate based upon the LIBOR Rate, or (ii) any governmental authority,
central bank or other comparable authority shall at any time impose, modify or
deem applicable any reserve (including, without limitation, any imposed by the
Board of Governors of the Federal Reserve System) other
- 4 -
<PAGE>
than as is included above, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by, the Bank, or
shall impose on the Bank (or its eurodollar lending office) or any relevant
interbank eurodollar market any other condition affecting any LIBOR Balance,
this Note or the Bank's obligation to compute the interest on the balance of
this Note at a rate based upon the LIBOR Rate; and the result of any of the
foregoing is to increase the cost to the Bank of maintaining any LIBOR Balance,
or to reduce the amount of any sum received or receivable by the Bank under this
Note by an amount deemed by the Bank to be material, then upon demand by the
Bank, the undersigned shall pay to the Bank such additional amount or amounts as
will compensate the Bank for such increased cost or reduction. The Bank will
promptly notify the undersigned of any event of which it has knowledge,
occurring after the date hereof, which will entitle the Bank to compensation
pursuant to this paragraph. A certificate of the Bank claiming compensation
under this paragraph and setting forth the additional amount or amounts to be
paid to the Bank hereunder shall be conclusive in the absence of manifest error.
The undersigned may not repay any LIBOR Balance or convert all or any
portion of a LIBOR Balance to a Prime Rate Balance prior to the expiration of
the applicable LIBOR Interest Period, unless (i) such repayment or conversion is
specifically required by the terms of this Note, (ii) the Bank demands that such
repayment or conversion be made, or (iii) the Bank, in its sole discretion,
consents to such repayment or conversion. If for any reason any LIBOR Balance is
repaid or converted prior to the expiration of the corresponding LIBOR Interest
Period, the undersigned shall pay to the Bank on demand any amounts required to
compensate the Bank for any losses, costs or expenses which it may incur as a
result of such repayment or conversion. A certificate of the Bank claiming
compensation under this paragraph and setting forth the additional amount or
amounts to be paid to the Bank hereunder shall be conclusive in the absence of
manifest error.
This Note is secured by the Collateral described in the Agreement
(including, without limitation, all Accounts, Chattel Paper, Documents,
Equipment, Fixtures, Real Property, General Intangibles, Goods, Instruments and
Inventory of North American Spring & Stamping Corp. (Delaware) and the
undersigned), and reference is hereby made to the Agreement for, among other
things, the conditions under which this Note may or must be paid in whole or in
part prior to its due date or its due date accelerated. Bank is hereby granted a
security interest in all property of the undersigned at any time in the
possession of Bank or any Affiliate of Bank (or as to which Bank or any
Affiliate of Bank at any time controls possession by documents or otherwise) and
in all balances of deposit or other accounts (including, without limitation, an
account evidenced by a certificate of deposit) of the undersigned from time to
time with Bank or any Affiliate of Bank.
If an Event of Default occurs and is not cured within the time, if
any, provided for by the Agreement, or the undersigned or any indorser,
guarantor or accommodation party (or any of them) fails to pay this Note or any
Indebtedness when due (by demand, upon maturity, upon acceleration or
otherwise), Bank may at its option and without prior notice to the undersigned
or any indorser, guarantor or accommodation party (or any of them) exercise any
one or more of the rights and remedies granted by the Agreement or any document
contemplated thereby or
- 5 -
<PAGE>
given to a secured party under applicable law, including, without limitation,
the right to accelerate this Note and any other Indebtedness and the right to
sell or liquidate all or any portion of the Collateral, and may set off against
the principal of and interest on this Note or against any other Indebtedness (i)
any amount owing by Bank to the undersigned, (ii) any property of the
undersigned at any time in the possession of Bank or any Affiliate of Bank, and
(iii) any amount in any deposit or other account (including, without limitation,
an account evidenced by a certificate of deposit) of the undersigned with Bank
or any Affiliate of Bank.
If at any time the relevant Contract Rate exceeds the Legal Rate, the
interest payable hereunder shall be computed upon the basis of the Legal Rate,
but any subsequent reduction in the relevant Contract Rate shall not reduce the
applicable interest rate hereunder below the Legal Rate until the aggregate
amount of interest accrued and payable hereunder equals the total amount of
interest which would have accrued hereunder if the applicable interest rate
hereunder had been at all times computed solely on the basis of the relevant
Contract Rate.
No agreements, conditions, provisions or stipulations contained in
this Note, or the default of the undersigned, or the exercise by the holder
hereof of the right to accelerate the payment or the maturity of principal and
interest, or to exercise any option whatsoever contained herein, or in any other
agreements between the undersigned and Bank, or the arising of any contingency
whatsoever, shall entitle the holder of this Note to collect, in any event,
interest exceeding the maximum rate of nonusurious interest allowed from time to
time by applicable state or federal law as now or as may hereinafter be in
effect, including, as to article 5069-1.04 Vernon's Texas Civil Statutes (and as
the same may be incorporated by reference in other Texas statutes), but
otherwise without limitation, that rate based upon the "indicated rate ceiling"
(the "LEGAL RATE") and in no event shall the undersigned be obligated to pay
interest exceeding such Legal Rate; and all agreements, conditions or
stipulations, if any, which may in any event or contingency whatsoever operate
to bind, obligate or compel the undersigned to pay a rate of interest exceeding
the Legal Rate shall be without binding force or effect, at law or in equity, to
the extent only of the excess of interest over such Legal Rate. In the event any
interest is charged in excess of the Legal Rate (the "EXCESS"), the undersigned
acknowledges and stipulates that any such charge shall be the result of an
accidental and bona fide error, and such Excess shall be first applied to reduce
the principal then unpaid hereunder; second, applied to reduce any obligation
for other Indebtedness of the undersigned to Bank; and third, returned to the
undersigned, it being the intention of the parties hereto not to enter at any
time into an usurious or other illegal relationship. The undersigned recognizes
that such an unintentional result could inadvertently occur. By the execution of
this Note, the undersigned covenants that (i) the credit or return of any Excess
shall constitute the acceptance by the undersigned of such Excess, and (ii) the
undersigned shall not seek or pursue any other remedy, legal or equitable,
against Bank or any holder hereof based, in whole or in part, upon the charging
or receiving of any interest in excess of the Legal Rate. For the purpose of
determining whether or not any Excess has been contracted for, charged or
received by Bank or any holder hereof, all interest at any time contracted for,
charged or received by Bank or any holder hereof, in connection with this Note,
shall be amortized, prorated, allocated and spread in equal parts during the
entire term of the Notes. For the sole purpose of computing the extent of the
Indebtedness and obligations of the undersigned asserted hereunder by Bank or
any holder hereof, the figures set forth herein and the
- 6 -
<PAGE>
provisions hereof shall be automatically recomputed by the undersigned, and by
any court considering the same, to give effect to the adjustments or credits
required by this paragraph. Except for any applicable unused line fees incurred
pursuant to the terms of the Agreement, no interest shall accrue hereunder until
the date of the first Revolving Loan made by Bank; thereafter, interest on all
Revolving Loans shall accrue and be computed on the principal balance
outstanding from time to time hereunder until the same is paid in full.
All notices required or permitted under this Note shall be in writing
and shall be deemed to have been delivered when delivered in accordance with the
provisions of the Agreement.
THE UNDERSIGNED AND ALL ACCOMMODATION PARTIES, GUARANTORS AND
ENDORSERS, IF ANY, (I) WAIVE DEMAND AND NOTICE OF DEMAND, (II) WAIVE
PRESENTMENT, NOTICE OF INTENTION TO DEMAND, PROTEST AND NOTICE OF PROTEST,
NOTICE OF DISHONOR, NOTICE OF INTENTION TO ACCELERATE, NOTICE OF ACCELERATION,
AND ALL OTHER NOTICES OTHER THAN AS EXPRESSLY PROVIDED IN THE AGREEMENT, (III)
AGREE THAT NO EXTENSION OR INDULGENCE TO THE UNDERSIGNED OR RELEASE OR
NON-ENFORCEMENT OF ANY SECURITY, WHETHER WITH OR WITHOUT NOTICE, SHALL AFFECT
THE OBLIGATIONS OF ANY ACCOMMODATION PARTY, GUARANTOR OR ENDORSER, AND (IV)
AGREE TO REIMBURSE THE HOLDER OF THIS NOTE FOR ANY AND ALL COSTS AND EXPENSES
INCURRED IN COLLECTING OR ATTEMPTING TO COLLECT ANY AND ALL PRINCIPAL AND
INTEREST UNDER THIS NOTE (INCLUDING, BUT NOT LIMITED TO, COURT COSTS AND
REASONABLE ATTORNEYS' FEES, WHETHER IN-HOUSE OR OUTSIDE COUNSEL IS USED AND
WHETHER SUCH COSTS AND EXPENSES ARE INCURRED IN FORMAL OR INFORMAL COLLECTION
ACTIONS, FEDERAL BANKRUPTCY PROCEEDINGS, APPELLATE PROCEEDINGS, PROBATE
PROCEEDINGS, OR OTHERWISE).
THIS NOTE SHALL BE CONSTRUED UNDER AND GOVERNED BY THE LAWS OF THE
STATE OF TEXAS AND APPLICABLE FEDERAL LAW, BUT IN ANY EVENT CHAPTER 15 OF TITLE
79, VERNON'S TEXAS CIVIL STATUTES (AND AS THE SAME MAY BE INCORPORATED BY
REFERENCE IN OTHER TEXAS STATUTES) SHALL NOT APPLY TO THE INDEBTEDNESS EVIDENCED
BY THIS NOTE.
The indebtedness evidenced by this Note is in renewal, extension and
modification, but not in extinguishment or novation, of the indebtedness
evidenced by that certain Third Amended and Restated Revolving Credit Note,
dated July 20, 1995, in the original principal amount of $10,000,000, executed
by the undersigned and payable to the order of Bank, and the provisions of this
Note are in renewal, extension, modification and replacement of the provisions
of such note.
This Note shall bind the undersigned and the undersigned's respective
heirs, personal representatives, successors and assigns.
- 7 -
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note this 23
day of August, 1997.
HILITE INDUSTRIES, INC.
By: /S/ Daniel W. Brady
-----------------------
Daniel W. Brady
Chief Executive Officer
DA972250118
082197 v4
316:3134-488
- 8 -
<PAGE>
RATIFICATION OF GUARANTY
This RATIFICATION OF GUARANTY ("RATIFICATION") is made as of the 23rd
day of August, 1997 by NORTH AMERICAN SPRING & STAMPING CORP. (DELAWARE), a
Delaware corporation ("OBLIGATED PARTY"), for the benefit of COMERICA BANK-TEXAS
("LENDER").
R E C I T A L S:
WHEREAS, Lender has agreed to amend that certain Amended and Restated
Secured Loan Agreement dated as of July 21, 1995 executed by and between Lender
and Hilite Industries, Inc. ("BORROWER"), as amended by that certain First
Amendment to Amended and Restated Secured Loan Agreement, effective as of June
30, 1997 (as amended, the "LOAN AGREEMENT") in order to, among other things,
increase the amount of the Revolving Credit Commitment Amount and extend the
Termination Date;
WHEREAS, Lender has conditioned its obligation to amend the Loan
Agreement on the Obligated Party's execution of this Ratification;
NOW, THEREFORE, for and in consideration of the premises herein
contained, and for other good and valuable consideration, the receipt and
sufficiently of which are hereby acknowledged and confessed, Obligated Party
agrees as follows:
A G R E E M E N T S:
1. Obligated Party ratifies and confirms that certain Guaranty dated
as of July 21, 1995, executed by Obligated Party in favor of Lender
("GUARANTY"), and agrees that the Guaranty remains in full force and effect,
continues to be legal, valid, binding, and enforceable in accordance with its
terms, and guarantees the repayment of the Indebtedness (as defined in the
Guaranty), including, without limitation all indebtedness arising under the
Fourth Amended and Restated Revolving Credit Note, and all renewals, extensions,
and modifications thereof, in accordance with, and to the extent of, the
respective terms of the Guaranty.
2. The Obligated Party hereby acknowledges, agrees, and represents
that the Guaranty is a valid and subsisting agreement and that there are no
claims or offsets against, or defenses or counterclaims to, the terms and
provisions of the Guaranty. The Obligated Party further agrees, acknowledges and
represents that the Obligated Party has no claims, offsets or defenses or
counterclaims arising from any of the Lender's acts or omissions or the Lender's
performance under the Guaranty.
3. The representations and warranties of Obligated Party contained in
the Guaranty are true and correct representations of Obligated Party on and as
of the date hereof as though made on and as the date hereof.
4. The Obligated Party represents to Lender that Obligated Party is
not in default under the terms of the Guaranty or any other agreement and that
no event has occurred which, with the passage of time, giving of notice, or
both, would constitute a default under the terms
<PAGE>
of the Guaranty. Obligated Party further represents that it is in compliance in
all material respects with all covenants and agreements contained in the
Guaranty.
5. To the extent the Obligated Party now has any claims, offsets,
defenses, or counterclaims against the Lender or the repayment of the Guaranteed
Indebtedness or any portion thereof, whether known or unknown, fixed or
contingent, the same are hereby forever irrevocably waived and released in their
entirety.
6. This Ratification shall be governed by, and construed in
accordance with, the laws of the State of Texas.
7. THE GUARANTY AS RATIFIED BY THIS RATIFICATION REPRESENTS THE FINAL
AGREEMENT BETWEEN OBLIGATED PARTY AND LENDER RELATING TO THE SUBJECT MATTER
HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF OBLIGATED PARTY AND LENDER.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OBLIGATED PARTY AND LENDER.
EXECUTED as of the 23rd day of August, 1997.
OBLIGATED PARTY:
NORTH AMERICAN SPRING &
STAMPING CORP. (DELAWARE),
a Delaware corporation
By: /s/ Daniel W. Brady
-----------------------
Name: Daniel W. Brady
Title:Chief Executive Officer
DA972330068
082297 v2
316:3134-488
- 2 -
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 3372014) of Hilite Industries, Inc. of our report
dated August 12, 1997, except as to the last paragraph of Note 7, which is as of
September 18, 1997, appearing on page F-1 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915197
<NAME> HILITE INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,283,259
<ALLOWANCES> (195,427)
<INVENTORY> 10,075,786
<CURRENT-ASSETS> 22,677,503
<PP&E> 38,400,240
<DEPRECIATION> (12,077,533)
<TOTAL-ASSETS> 57,219,177
<CURRENT-LIABILITIES> 14,348,795
<BONDS> 0
0
0
<COMMON> 49,000
<OTHER-SE> 21,954,554
<TOTAL-LIABILITY-AND-EQUITY> 57,219,177
<SALES> 73,492,117
<TOTAL-REVENUES> 73,492,117
<CGS> 63,938,186
<TOTAL-COSTS> 74,277,908
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,713,763
<INCOME-PRETAX> (2,499,554)
<INCOME-TAX> (842,569)
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</TABLE>
