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, 1998
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 Identification No.)
organization)
1671 S. Broadway
Carrollton, Texas 75006
(Address of principal (Zip code)
executive offices)
(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 11, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $8,547,625.
As of September 11, 1998, 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, 1998 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
<PAGE>
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 70% 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 Toyota Motor Sales,
U.S.A., Inc. ("Toyota"), Navistar International Transportation
Corporation ("Navistar"), and Mitsubishi Motor Sales of America,
Inc. ("Mitsubishi"). 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
Motorola, Inc. ("Motorola"), Crane National Vendors, the Balance
Systems Division of Amesburg Group, Inc., and a variety of
distributors for industrial/hydraulic clutches.
In order to create a more flexible corporate structure for making
acquisitions, engaging in capital raising activities and for tax
efficiency, the Company was reorganized on January 30, 1998 by
transferring all of its assets to Hilite Industries - Texas, Inc.,
a Delaware corporation ("Hilite Texas"), a wholly-owned subsidiary
of the Company. Hilite Texas simultaneously transferred 99% of
those assets to Hilite Industries - Delaware, Inc., a newly formed
Delaware corporation ("Hilite Delaware") in exchange for all of the
issued and outstanding shares of common stock of Hilite Delaware.
Hilite Texas and Hilite Delaware then contributed those assets to
Hilite Industries Automotive, LP ("Hilite LP"), a newly formed
Texas limited partnership. Hilite LP is now performing all of the
manufacturing, sales and product development activities previously
performed by Hilite in the state of Texas. In this Report, the
term the "Company" refers collectively to the Company, Hilite
Texas, Hilite Delaware, Hilite LP and North American Spring and
Stamping Corp. ("NASS"), a Delaware corporation and a wholly-owned
subsidiary of Hilite. The reorganization had no affect on NASS.
NASS remains a wholly-owned subsidiary of Hilite.
Except for historical information, certain statements contained
herein are forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," or variations of such
words and similar expressions are intended to identify such forward-
<PAGE>
looking statements. These statements are not guarantees of future
performance and involve unknown risks and uncertainties which may
cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among
others, risks associated with changes in automotive and non-
automotive build rates as well as risks associated with the
manufacturing process and start-up of new products and risks related
to technological changes in components which affect the life of the
product. 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 18.6%, 1.2%, and 61.8% in fiscal years
1998, 1997, and 1996, 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 15.5 million in 1998, 14.9 million in 1997,
and 15.0 million in 1996.
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.
<PAGE>
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, 1998:
<TABLE>
Year ended June 30,
1998 1997 1996
<S> (dollars in thousands)
Net sales: <C> <C> <C> <C> <C> <C>
Brake valves $27,524 31.6% $22,195 30.2% $23,909 32.9%
Power transmission
components 23,762 27.3 21,762 29.6 21,533 29.7
Specialty components
and assemblies 35,881 41.1 29,535 40.2 27,200 37.4
Total net sales $87,167 100.0% $73,492 100.0% $72,642 100.0%
</TABLE>
BRAKE VALVES
Brake valves sales were $27,524,000, accounting for 31.6% of the
Company's net sales for the 1998 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,
as well as relief valves and actuator assemblies which were new
products introduced in fiscal 1998. 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.
<PAGE>
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 worldwide trend toward anti-
lock brake systems ("ABS"). Recently the trend seems to be away
from ABS systems as a number of customer's question if the increase
in braking performance is justified by the additional cost.
Therefore, the automotive manufacturers are reducing the number of
vehicles with ABS in an effort to reduce costs. As brake systems
are redesigned, Hilite usually benefits because Company engineers
support our customers with cost effective designs and engineered
prototypes to meet their new requirements.
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 in fiscal 1998 began 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 22%.
POWER TRANSMISSION COMPONENTS
Power transmission component sales were $23,762,000, accounting for
27.3% of the Company's net sales for 1998. 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 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. In fiscal 1995, the
Company began shipping air conditioning clutches to Navistar and
Motivair and began shipping clutch components in transmissions to
Borg-Warner in fiscal 1998.
<PAGE>
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 developing relationships with
Japanese companies doing business in the United States. These
relationships began with Denso, a first tier supplier of Toyota. The
Company has supplied products to Honda both direct and through
Calhac, a wholly owned system supplier for Honda, and currently
supplies product to Mitsubishi and Isuzu. 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 North America. The Company plans to expand these
relationships. The Company has received the top awards for quality
and delivery from both Honda and Denso in the last several years.
SPECIALTY COMPONENTS AND ASSEMBLIES
Specialty components and assemblies sales were $35,881,000,
accounting for 41.1% of the Company's net sales for the 1998 fiscal
year. This division was originally founded in 1950 as Shaffer
Spring Company and subsequently changed its name to North American
Spring and Stamping Corp. ("NASS") in 1976. This division is
restructuring to provide stronger focus on high volume, precision
stampings and automated assemblies and to de-emphasize commodity
products.
Currently, 64% of the division's business is OEM automotive with the
remaining 36% 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.
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, directed an intense effort to implement a restructuring
plan that returned the division to profitability in 1998.
<PAGE>
The restructuring plan was presented and approved by the Board of
Directors in June 1997 and consisted of the following elements:
1. Identify the core products of the division which fit with the
division's strengths.
2. Identify unprofitable, commodity type products and implement a
plan for their orderly disposition.
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 was 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 expected 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).
During 1998, the Company successfully negotiated a price increase on
certain parts which were identified for disposition to more
accurately reflect the manufacturing and support costs during the
disposition period. At the end of fiscal 1998, virtually all of
these identified parts were resourced to other suppliers. As a
result of restructuring the division, among other factors, sales to
Ford and its divisions are currently expected to be approximately
$5,000,000 lower for the fiscal year ended 1999 as compared to the
fiscal year ended 1998.
The division regained its Q1 rating with Ford during fiscal 1998,
but has not regained its Q1 status at Visteon, a division of Ford.
While on probation, the division is prohibited from being considered
for additional business from Visteon, 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.
There can be no assurance, at this time, that the Q1 status can be
regained or what effect the continued probation or possible
revocation will have on future sales. Sales to Visteon represent
approximately 50% and 21% of this division's and the Company's
sales, respectively, for the fiscal year ended June 30, 1998.
Also during fiscal 1998, Hilite was able to quickly respond to a
critical non-automotive customer requirement for a significant
increase in production by developing a unique flexible manufacturing
process within greatly reduced lead time parameters. As a result,
Hilite received over $4,000,000 in additional sales from this one
time opportunity.
<PAGE>
PRODUCT DESIGN, RESEARCH AND DEVELOPMENT
The Company employs a staff of over 44 engineers and technicians, 19
of whom devote full time on new product design and on developing and
improving products for the existing customer base, primarily for the
brake valve division. The remaining engineers are involved in
production and manufacturing process improvements and implementing
tooling on new projects
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 1998, 1997, and 1996 fiscal years, the Company's research
and development expenditures were approximately $1,200,000,
$882,000, and $945,000, respectively. Of these expenditures,
$257,000, $240,000, and $343,000, respectively, were sponsored by
customers and the balance of which were sponsored by the Company.
CUSTOMERS
The Company's customers include automotive manufacturers as well as
major first-tier and second-tier suppliers of brake and transmission
systems to automotive manufacturers. Approximately 70% of the
Company's total net sales for the 1998 fiscal year were to the
automotive industry. The Company's five largest customers with their
percentages of the Company's net sales for the 1998, 1997, and 1996
fiscal years were as follows:
<TABLE>
Percentage of Net Sales
Year ended June 30,
Customer 1998 1997 1996
<S> <C> <C> <C>
Ford ..................... 26% 30% 30%
Borg-Warner .............. 9 6 7
Bosch (formerly AlliedSignal) 7 6 7
Chrysler ................. 7 7 7
Motorola ................. 7 3 --
</TABLE>
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
primarily in the automotive industry and, as a result, the Company
is impacted by the overall economic conditions within the industry.
<PAGE>
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 agency which was responsible for
sales to Ford. This agency was replaced by the same 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.
<PAGE>
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. 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.
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 includes 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.
<PAGE>
The Company's products, which are primarily sold to automotive
manufacturers and their first- and second-tier suppliers, are
utilized in over sixty major car models. Products for each of these
models represent significant sales for 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 which we believe has favorably
positioned the Company for future growth.
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.
<PAGE>
BACKLOG
The Company's backlog at June 30, 1998 was approximately
$23,168,000, as compared to $22,300,000 at June 30, 1997,
representing an increase of 4%. All of the backlog at June 30, 1998
is expected to be delivered during the 1999 fiscal year. The
increase in backlog is primarily due to significantly higher brake
valve sales partially offset by the decreases in sales discussed
earlier by the specialty components and assemblies division.
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, 1998, the Company had 743 employees, of whom 615 were
paid hourly wages. These hourly employees were primarily engaged in
manufacturing, maintenance and warehousing. Of the 743 employees,
438 were employed in Texas, 303 were employed in Illinois and two
employed elsewhere.
Approximately 134 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 expires on September 20, 2000. A separate agreement with
Local Union #1023 of the IUEE covering approximately 177 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 252 hourly employees in Illinois are
represented by the AFL-CIO Local unions #10 and #24. The contract
with Local Union #10, which covers approximately 221 employees
expires on January 1, 2001; the contract with Local Union #24, which
covers 31 employees, expires on November 30, 1999. The Company
believes that it has good relations with its employees.
<PAGE>
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 26%, 30% and 30% of the Company's total sales in fiscal
1998, 1997 and 1996, respectively. No other customer represented
more than 10% of the Company's total sales in fiscal 1998, 1997 and
1996. While the Company has a long-standing relationship with Ford
and sells a variety of products to each of its divisions, the loss
of a significant portion of its sales to any of the Company's major
customers could have a material adverse effect on the Company. See
"Loss of Q1 Status at the Specialty Components and Assemblies
Division" and "Business."
Loss of Q1 Status at the Specialty Components and Assemblies
Division - In late September 1996, the specialty components and
assemblies division was put on Q1 quality probation by Ford as a
result of certain concerns regarding its products. During 1998, the
Company regained its Q1 rating with Ford, but has not regained its
Q1 status at Visteon, a Ford-owned supplier. While on probation,
the division is prohibited from being considered for additional
business from Visteon (although certain existing programs in the
development stages are allowed to continue). Sales to Visteon
represent approximately 50% and 21% of this division's and the
Company's sales, respectively for the fiscal year ended 1998. A
team of corporate and division management have developed and are
implementing a restructuring plan focused on regaining Q1 status by
the end of the fiscal year.
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 over 50% of the Company's total annual sales. While the Company
has maintained a close relationship with this agency for over ten
years, any disruption of 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. Significant declines in North American
passenger vehicles and light truck sales could have an adverse
effect upon the Company.
<PAGE>
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, Product Liability and Recalls - 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.
On January 28, 1998, the Company announced that it had been notified
by Visteon, a division of Ford Motor Company, that a part
manufactured by the Company's specialty components and assemblies
division may be involved in a recall regarding a fuel gauge accuracy
problem with certain 1997 model year vehicles. Based upon
information currently available to the Company, management believes
that this matter will be resolved in a manner not materially adverse
to 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."
<PAGE>
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
demands of it customers. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and
Capital Resources."
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 8 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 March 1999.
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.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
In May 1997, the Company initiated a suit in the United States
District Court for the Northern District of Illinois (Eastern
Division) against the former owners of NASS. The Company alleged,
among other things, that the former owners made material
misrepresentations in connection with the acquisition of NASS. On
February 13, 1998 an agreement was reached between the Company and
the former owners of NASS to settle the suit. Under the terms of
the Settlement Agreement, the Company is relieved of its obligation
to pay approximately $2 million in principal and interest under the
Note issued as part of the consideration for the acquisition of
NASS. The reduction in the principal amount of the note was
credited against goodwill. The Company will not be required to make
any future payments under the employment and non-compete agreements
with the former owners and, in addition, the former owners
reimbursed the Company for a portion of its legal fees incurred in
connection with the law suit. The former owners, however, remain
bound by the non-competition provisions in their respective
employment agreements. In addition, the parties executed limited
mutual general releases.
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, 1998.
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:
<TABLE>
<S> High Low
Fiscal 1997: <C> <C>
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
Fiscal 1998:
First Quarter 6 1/4 4 1/4
Second Quarter 7 1/8 5 1/4
Third Quarter 7 7/8 6 3/4
Fourth Quarter 9 3/4 7 1/2
</TABLE>
<PAGE>
(b) Holders
As of September 11, 1998, the approximate number of security holders
of record of the Company were 46. The Company believes that the
number of beneficial shareholders is much larger.
(c) Dividends
Dividends of $0.025 per share on 4,900,000 shares were paid on each
of November 17, 1997, February 23, 1998, and May 18, 1998. The
Board of Directors of the Company anticipate continuing the
quarterly cash dividend program into fiscal 1999. However,
subsequent quarterly dividends depend upon future operating results.
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, 1998 are derived from the Company's
consolidated financial statements.
<TABLE>
Year ended June 30,
1998 1997 1996 1995 1994
(Dollars in thousands, except share
and per share data)
<S> <C> <C> <C> <C> <C>
Net sales.............. $87,167 $73,492 $72,642 $44,900 $36,896
Cost of sales.......... 69,764 63,938 57,711 34,849 28,517
Gross profit........... 17,403 9,554 14,931 10,051 8,379
Selling, general and
administrative....... 9,026 10,340 7,576 4,286 3,696
Operating income (loss) 8,377 (786) 7,355 5,765 4,683
Interest expense, net.. 1,320 1,714 1,659 130 234
Income (loss) before
income taxes......... 7,057 (2,500) 5,696 5,635 4,449
Income tax provision
(benefit)............ 2,545 (843) 2,064 2,016 1,668
Net income (loss)...... $ 4,512 $(1,657) $ 3,632 $ 3,619 $ 2,781
Earnings (loss) per share:
Basic.................. $ .92 $ (.34) $ .74 $ .74 $ .66
Diluted................ $ .92 $ (.34) $ .74 $ .74 $ .66
Shares used in computing earnings
per share:
Basic..................4,900,000 4,900,000 4,900,000 4,900,000 4,235,479
Diluted................4,912,655 4,900,000 4,903,951 4,900,000 4,235,479
</TABLE>
<PAGE>
<TABLE>
June 30,
1998 1997 1996 1995 1994
<S> (In thousands)
Balance sheet data: <C> <C> <C> <C> <C>
Working capital ....... $10,569 $ 8,329 $ 11,285 $ 8,048 $ 9,779
Property, plant and
equipment, net....... 27,616 26,323 27,790 16,664 9,725
Total assets .......... 57,356 57,219 56,198 30,243 26,013
Long-term
obligations (1)...... 15,380 18,271 19,533 3,419 2,255
Total liabilities...... 31,209 35,216 32,538 10,219 9,603
Stockholders' equity... 26,148 22,004 23,661 20,029 16,410
</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 1998, net sales increased approximately 18.6% to
$87,167,000 from $73,492,000 in fiscal 1997. Net income for the
1998 fiscal year was $4,512,000 ($0.92 per share) compared to a net
loss of $1,657,000 ($0.34 per share) for the fiscal year ended 1997.
The 1997 net loss, which was entirely attributable to the specialty
components and assemblies division, included 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 increased 24.0% in the 1998 fiscal year to sales of
$27,524,000 from reported sales of $22,195,000 in fiscal 1997. Net
sales of power transmission components increased 9.2% in the 1998
fiscal year with sales of $23,762,000 compared to $21,762,000 in the
1997 fiscal year. The specialty components and assemblies division
experienced a 21.5% increase in sales over the prior year with sales
of $35,881,000 compared to $29,535,000 in 1997. Management of the
Company expects that the sales growth rate of the Company will
exceed the growth rate of the automobile industry as a whole over
the next two years. The Company's backlog at June 30, 1998 was
approximately $23,168,000, which represents an increase of 3.8% over
the backlog of approximately $22,300,000 at June 30, 1997.
Additionally, customer commitments for new tooling at June 30, 1998
were approximately $600,000, as compared to approximately $1,700,000
at June 30, 1997.
<PAGE>
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:
<TABLE>
<S> 1998 1997 1996
Net sales: <C> <C> <C>
Specialty components and assemblies.. 41.1% 40.2% 37.4%
Brake valves ........................ 31.6 30.2 32.9
Power transmission components........ 27.3 29.6 29.7
Total net sales ................... 100.0 100.0 100.0
Cost of sales ....................... 80.0 87.0 79.4
Gross profit ........................ 20.0 13.0 20.6
Selling, general and
administrative expenses ........... 10.4 14.1 10.5
Operating income (loss) ............. 9.6 (1.1) 10.1
Interest expense, net ............... 1.5 2.3 2.3
Income (loss) before income taxes.... 8.1 (3.4) 7.8
Income tax provision (benefit)....... 2.9 (1.1) 2.8
Net income (loss) ................... 5.2% (2.3)% 5.0%
</TABLE>
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Net sales in fiscal year 1998 were $87,167,000 compared to
$73,492,000 for the prior fiscal year, representing an increase of
$13,675,000 (18.6%). 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 1998 were $35,881,000, an
increase of $6,346,000 (21.5%) over sales of $29,535,000 in the
prior year. The increase is primarily due to a $4,000,000
nonrecurring sales opportunity of certain non-automotive products.
This division benefited by price increases totaling $2,800,000
primarily for parts which were being phased out as a result of the
restructuring plan. However, lower sales volumes associated with
these parts offset the added price increases. Brake valve sales for
fiscal year 1998 were $27,524,000, an increase of $5,329,000 (24.0%)
from sales of $22,195,000 in the prior year. The increase is
attributable to additional new business for brake valve and related
products in 1998 primarily pressure relief valves for Bosch and an
actuator assembly for Chrysler. Power transmission components sales
were $23,762,000 in fiscal 1998, an increase of $2,000,000 (9.2%)
over sales of $21,762,000 in the prior year. The increased sales
are attributable to a significant new program for certain transfer
case components as well as strong sales of clutches used in the
heavy truck industry. The impact of price changes, other than those
discussed above, was not significant.
Fiscal year 1998 gross profit increased by $7,849,000 (82.2%) to
$17,403,000, representing 20.0% of net sales, as compared to gross
profit of $9,554,000 or 13.0% of net sales in the same period of the
prior fiscal year. The primary reason for the increase in gross
profit is due to the price increases mentioned above and additional
costs resulting from the problems experienced in fiscal 1997 at the
specialty components and assemblies division and the resulting
<PAGE>
reorganization plan. As a result of the plan, a pre-tax charge of
$2,700,000 ($1,000,000 in cost of sales and $1,700,000 in selling,
general and administrative costs) was recognized. This charge
includes termination of certain contracts, write-down of certain
assets to fair value, net of estimated selling costs and other costs
related to the reorganization.
The gross profit percentage at the brake valve division increased
over the prior year primarily because fixed costs did not increase
at the same rate of sales. Gross profit percentages at the power
transmission components division were lower than the prior year due
primarily to startup expenses associated with the new significant
program for certain transfer case components.
Selling, general and administrative costs in the 1998 fiscal year
were $9,026,000 (10.4% of net sales) as compared to $10,339,000
(14.0% of net sales) in the 1997 fiscal year, representing a
decrease of $1,313,000 (12.7%). The decrease is primarily due to
expenses associated with the restructuring charge at the specialty
components and assemblies division in the prior year. These
decreases are offset by increases in certain selling, general and
administrative expenses, primarily additional engineering expenses
associated with increased research and development costs.
Net interest expense of $1,320,000 for the year ended June 30, 1998
represents a $394,000 decrease from the prior year. The decrease
results from lower average debt balances due to the repayment of
bank debt during fiscal year 1998.
Net income was $4,512,000 for the fiscal year ended June 30, 1998
compared to the net loss of $1,657,000 for the prior fiscal year.
The 1997 loss was attributable to problems encountered at the
specialty components and assemblies division. The net income for
the 1998 fiscal year represented an 18.7% return on equity and debt
represented 37% of total capitalization.
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.
<PAGE>
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 fair value, net of estimated selling costs
and other costs related to the reorganization. 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the 1998 fiscal year, cash provided by operations before changes
in operating assets and liabilities substantially improved as it had
been adversely affected in the 1997 fiscal year 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
$8,712,000 in fiscal 1998 as compared to $4,123,000 in fiscal 1997.
However, there was a net increase in operating assets and
liabilities of $1,745,000 in fiscal 1998 as compared to a net
decrease in operating assets and liabilities of $1,861,000 in fiscal
1997. The increase in operating assets and liabilities was
primarily due to increases in trade receivables and inventory,
partially offset by higher accounts payable. These additional
working capital requirements were primarily associated with
additional sales volumes, particularly in the last quarter of 1998
as compared to the sales levels at the end of the 1997 fiscal year.
Net cash flow from operations for the year of $6,967,000 generated
sufficient resources to fund capital expenditures of $3,070,000, to
pay down the Company's debt by $3,897,000 and to pay dividends of
$368,000. In addition, debt was further reduced by $1,785,000 in a
non-cash transaction as part of a lawsuit settlement with the former
owners of NASS (See Note 4 of Notes to the Consolidated Financial
Statements). As a result of the reduction in debt, the Company's
ratio of debt to capitalization was reduced to 37% at June 30, 1998
compared to 48% in the prior year.
The average days sales outstanding as of June 30, 1998 was unchanged
from the 44 days at June 30, 1997. Throughout fiscal 1998 and
during the fourth quarter of fiscal 1997, the Company benefited from
a temporary acceleration in payments by a significant customer
associated with a special project. These special terms expired on
June 30, 1998 and, as a result, the number of days sales outstanding
are expected to increase in fiscal 1999. As of June 30, 1998, no
significant receivables were considered uncollectible.
The Company made expenditures of $3,070,000 in 1998 for capital
equipment to improve productivity and increase capacity. Capital
spending in fiscal 1997 was $4,824,000. Capital spending in fiscal
1999 is expected to be approximately $3,500,000.
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, 1998 of $8,043,000
and $603,000, 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.
<PAGE>
The Company has a revolving credit agreement of $12,000,000, subject
to certain availability amounts, 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, 1999. As of June 30, 1998, $5,436,000 was
available under the credit agreement and $3,000,000 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 8 of Notes to the Consolidated Financial Statements.
The current ratio of the Company was 1.7 to 1 at June 30, 1998 and
1.6 to 1 at June 30, 1997. The book value per share increased to
$5.34 at June 30, 1998 compared to $4.49 at June 30, 1997.
Management anticipates that cash flow from operations and bank
credit availability will be adequate to fund the existing debt,
dividend payments, anticipated capital and tooling requirements and
working capital needs for the next two years. However, due to the
change in terms of a significant customer and the typically high
working capital requirements in the first quarter, debt is expected
to increase early in fiscal 1999, but to be reduced below fiscal
1998 levels by the end of fiscal 1999.
FORWARD LOOKING STATEMENTS
Looking toward fiscal 1999, the Company anticipates sales to
increase in both the brake valve and power transmission divisions by
12% to 15% over the 1998 fiscal year sales. Sales in the specialty
components and assemblies division are expected to decrease by
approximately 27% to $26,000,000. The decrease is due to the
restructuring plan that has eliminated non-profitable parts and to
the one-time $4,000,000 sales opportunity which occurred in fiscal
1998. The strong sales improvement for both the brake valve and
power transmission components division is expected to substantially
offset the planned reduction in sales of the specialty components
and assemblies division. Given that the sales growth is expected to
be in more profitable product lines, improvement in earnings for the
Company should be achieved in fiscal 1999. These statements assume
that automotive build rates remain strong throughout the year. In
addition all statements made herein are subject to all of the
cautionary statements contained in "Item 1 -- Business General" and
"Risk Factors."
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.
<PAGE>
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.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." FAS 131
established standards for reporting information about operating
segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial
reports issued to shareholders. FAS 131 also establishes standards
for related disclosure about products and services, geographic areas
and major customers. FAS 131 is effective for financial statements
for periods beginning after December 5, 1997, and requires the
restatement of disclosures for earlier periods for comparative
purposes unless the information is not readily available, in which
case a description of unavailable information is required. The
Company plans to adopt the disclosure standards during fiscal 1999.
In June 1998, the FASB issued No. 133, "Accounting for Derivatives,
Investments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative financial
statements, including certain derivative financial instruments
imbedded in other contracts and for hedging activities. FAS 133 is
effective for all fiscal quarters beginning after June 15, 1999.
This pronouncement is not expected to significantly impact the
Company.
YEAR 2000
Until recently, computer programs were written to store only two
digits of date-related information in order to more efficiently
handle and store data. As a result, these programs were unable to
properly distinguish between the year 1900 and the year 2000. This
is frequently referred to as the "Year 2000 Problem." The Company
recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. The Company began
addressing Year 2000 compliance during fiscal 1998 and has
determined that all significant software and machinery are expected
to be Year 2000 ready. However, certain personal computers will
need to be replaced and ancillary software will be upgraded for an
estimated cost of $100,000. The majority of this will be expended
during fiscal 1999.
During fiscal 1998 the Company began the process of surveying all
suppliers of raw materials and supplies to determine their readiness
for the Year 2000 problem and attempt to measure what impact, if
any, it will have on the Company. The survey will be completed
during fiscal 1999 so it is uncertain at this time as to what impact
supplier problems will have on the Company's operations. The
Company expects to use manual processing in the event of any system
failure. It is not expected that manual processing will cause
significant disruption to the Company's operations.
<PAGE>
The Company does not expect the Year 2000 compliance to have a
significant effect on operations, nor does it expect the cost to be
material to the Company's consolidated results of operations or
financial position. The costs of Year 2000 modifications and the
date of completion will be closely monitored and are based on
management's best estimates. Actual results, however, could differ
from those anticipated.
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.
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, 1998.
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, 1998.
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, 1998.
<PAGE>
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, 1998.
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, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6 - F-16
Consolidated Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves
for the years ended June 30, 1998, 1997 and 1996 F-17
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.
<PAGE>
(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 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)
10.3 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)
10.4 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)
10.5 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)
<PAGE>
10.6 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)
10.7 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)
10.8 Second Amended and Restated Secured Loan
Agreement dated January 30, 1998 among Hilite
Industries, Inc., Hilite Industries Automotive, LP,
and Comerica Bank _ Texas. (Incorporated herein by
reference to Exhibit 10.1 of the Company's report on
Form 10-Q for the fiscal quarter ended December 31, 1997
File No. 0-22924)
10.9 Settlement Agreement and Mutual General Release
dated February 13, 1998 among Hilite Industries,
Inc., Michael L. McKee, Donald P. Degenhardt and
Robert S. Johnson. (Incorporated herein by reference
to Exhibit 10.2 of the Company's report on Form 10-Q
for the fiscal quarter ended December 31, 1997, File
No. 0-22924)
10.10 Assignment and Assumption Agreement dated December
31, 1997 between Hilite Industries, Inc. and Hilite
Industries -- Texas, Inc. (Incorporated herein by
reference to Exhibit 10.3 of the Company's report on
Form 10-Q for the fiscal quarter ended
December 31, 1997, File No. 0-22924)
10.11 Assignment and Assumption Agreement dated December
31, 1997 between Hilite Industries -- Texas, Inc. and
Hilite Industries -- Delaware, Inc. (Incorporated
herein by reference to Exhibit 10.4 of the Company's
report on Form 10-Q for the fiscal quarter ended
December 31, 1997, File No. 0-22924)
10.12 Limited Partnership dated December 31, 1997 between
Hilite Industries -- Texas, Inc. and Hilite Industries --
Delaware, Inc. (Incorporated herein by reference to
Exhibit 10.5 of the Company's report on Form 10-Q for
the fiscal quarter ended December 31, 1997, File No.
0-22924)
10.13 Employment Agreement dated July 1, 1998 between
the Company and Samuel M. Berry.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
<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, 1998 and 1997, and
the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
July 28, 1998
F-1
<PAGE>
<TABLE>
HILITE INDUSTRIES, INC.
Consolidated Balance Sheets
As of June 30,
<S> 1998 1997
ASSETS <C> <C>
Current assets:
Cash and cash equivalents.......... $ 0 $ 0
Accounts receivable, less allowance
for doubtful accounts of $193,015
at June 30, 1998 and $195,427 at
June 30, 1997.................... 11,289,779 9,991,098
Tooling receivable................. 716,700 96,734
Inventories........................ 9,927,849 10,075,786
Income taxes receivable............ 542,188 0
Deferred income taxes.............. 1,817,012 1,774,082
Assets held for disposal........... 532,533 0
Prepaid expenses and other current
assets........................... 1,015,764 739,803
Total current assets............... 25,841,825 22,677,503
Property, plant and equipment...... 43,538,367 38,400,240
Less accumulated depreciation and
amortization..................... (15,921,909) (12,077,533)
Property, plant and equipment, net. 27,616,458 26,322,707
Assets held for disposal........... 0 2,330,800
Goodwill, net of accumulated
amortization..................... 3,898,209 5,888,167
TOTAL ASSETS....................... $57,356,492 $57,219,177
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $12,849,981 $11,875,962
Long-term debt - current portion... 2,422,945 2,422,950
Income taxes payable............... 0 49,883
Total current liabilities.......... 15,272,926 14,348,795
Long-term debt..................... 12,956,896 16,486,252
Subordinated debt.................. 0 1,785,184
Deferred income taxes.............. 2,978,761 2,595,392
Total non-current liabilities...... 15,935,657 20,866,828
Commitments and Contingencies (See Note 12.)
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000
shares authorized, none issued and
outstanding...................... 0 0
Common stock, $.01 par value;
15,000,000 shares authorized,
4,900,000 isssued and outstanding at
June 30, 1998 and 1997........... 49,000 49,000
Additional paid-in capital......... 9,105,674 9,105,674
Retained earnings.................. 16,993,235 12,848,880
Total stockholders' equity......... 26,147,909 22,003,554
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $57,356,492 $57,219,177
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
HILITE INDUSTRIES, INC.
Consolidated Statements of Operations
For the Year Ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Net sales....................... $87,166,468 $73,492,117 $72,641,500
Cost of sales................... 69,763,754 63,938,186 57,710,737
Gross profit.................... 17,402,714 9,553,931 14,930,763
Selling, general and adminis-
trative expenses.............. 9,026,028 10,339,722 7,575,953
Operating income (loss)......... 8,376,686 (785,791) 7,354,810
Interest expense................ 1,319,957 1,713,763 1,659,373
Income (loss) before income
taxes......................... 7,056,729 (2,499,554) 5,695,437
Income tax provision (benefit).. 2,544,874 (842,569) 2,063,580
Net income (loss)............... $ 4,511,855 $ (1,656,985) $ 3,631,857
Earnings (loss) per share:
Basic........................... $ 0.92 $ (0.34) $ 0.74
Diluted......................... $ 0.92 $ (0.34) $ 0.74
Shares used in computing earnings
per share:
Basic........................... 4,900,000 4,900,000 4,900,000
Diluted......................... 4,912,655 4,900,000 4,903,951
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
<S> 1998 1997 1996
Cash flows from operations: <C> <C> <C>
Net income (loss)................ $ 4,511,855 $ (1,656,985) $ 3,631,857
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation..................... 3,574,599 3,517,792 3,005,474
Goodwill amortization............ 285,019 307,123 316,968
Restructuring charge............. 0 2,738,352 0
Increase (decrease) in net
deferred income taxes.......... 340,439 (783,652) 647,962
Cash provided from operations
before changes in operating
assets and liabilities......... 8,711,912 4,122,630 7,602,261
Changes in operating assets and liabilities:
(Increase) decrease in
accounts receivable............ (1,298,681) 1,365,379 (2,491,920)
(Increase) decrease in tooling
receivable..................... (619,966) 664,248 (106,215)
(Increase) decrease in inventories 147,937 (1,370,079) (149,820)
(Increase) decrease in prepaid
expenses and other current
assets......................... (275,961) (370,017) 332,406
Increase (decrease) in accounts
payable and accrued expenses... 893,772 1,285,554 (80,014)
Increase (decrease) in income
taxes payable.................. (592,070) 285,498 (248,952)
Total changes in operating
assets and liabilities......... (1,744,969) 1,860,583 (2,744,515)
Net cash provided by operations.. 6,966,943 5,983,213 4,857,746
Cash flows from investing activities:
Additions to property, plant
and equipment, net............. (3,070,083) (4,824,375) (5,764,817)
Acquisition of subsidiary........ 0 0 (7,789,000)
Net cash used in investing
activities..................... (3,070,083) (4,824,375) (13,553,817)
Cash flows from financing activities:
Proceeds from acquisition
financing...................... 0 0 15,397,000
Dividends paid................... (367,500) 0 0
Repayment of subordinated debt... 0 (75,000) 0
Proceeds from long-term debt..... 0 1,212,258 1,841,085
Repayments of long-term debt..... (3,529,360) (2,296,096) (9,662,557)
Net cash provided by (used in)
financing activities........... (3,896,860) (1,158,838) 7,575,528
Net decrease in cash and cash
equivalents.................... 0 0 (1,120,543)
Cash and cash equivalents at
beginning of period............ 0 0 1,120,543
Cash and cash equivalents at
end of period.................. $ 0 $ 0 $ 0
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Paid-in Retained Stockholders'
Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
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
Dividends
paid.......... - - - (367,500) (367,500)
Net income for
the year ended
June 30, 1998... - - - 4,511,855 4,511,855
Balance
June 30, 1998... 4,900,000 49,000 $9,105,674 $16,993,235 $26,147,909
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
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. During fiscal
1998, as a result of a lawsuit settlement, the Company was
relieved of its obligation to pay approximately $2 million in
principal and interest on subordinated notes associated with the
acquisition (See Footnote 4). 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.
<PAGE>
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 generally reimbursed by customers. To
the extent that expenditures do not equal related reimbursements,
the difference is capitalized and included in property, plant and
equipment (other) and amortized 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 are recorded in accounts payable and accrued expenses
until expended.
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. Amortization expense was $285,000,
$307,000, and $317,000 as of June 30, 1998, 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
1998, 1997, or 1996 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 $1,280,000, $882,000, and
$945,000 for the years ended June 30, 1998, 1997, and 1996,
respectively. Of these expenditures, $257,000, $240,000, and
$343,000, respectively, were sponsored by customers and
$1,023,000, $642,000, and $602,000, respectively, was sponsored
by the Company.
<PAGE>
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.
Earnings Per Share - Effective December 31, 1997, the Company
adopted Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128"). FAS 128 establishes standards for computing
and presenting earnings per share ("EPS"). The statement
requires dual presentation of basic and diluted EPS on the
income statement for entities with complex capital structures
and requires reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS excludes the effect of
potential dilutive securities while diluted EPS reflects the
potential dilution that would have occurred if securities or
other contracts to issue common stock were exercised, converted,
or resulted in the issuance of common stock that would have then
shared in the earnings of the entity. EPS data for the year
ended June 30, 1998 and all prior periods presented herein have
been restated to conform with the provisions of this statement.
The table below is a reconciliation of the numerator and
denominator used in the basic and diluted EPS calculations.
Options to purchase 69,800 shares of common stock in 1998, and
warrants to purchase 100,000 shares of common stock in 1998 and
1996 were not included in the computation of diluted earnings
per common share in 1998 and 1996 because the excercise price of
these equity instruments was greater than the average market
price of the common stock during the year. In 1997, 120,200
options and 100,000 warrants to purchase common stock were not
included in the computation of diluted earnings per common share
because the Company was in a loss position and their inclusion
would have been antidilutive.
<PAGE>
<TABLE>
<S> 1998 1997 1996
Net income (loss) <C> <C> <C>
available to shareholders $4,511,855 $(1,656,985) $3,631,857
Weighted average number
of shares in basic EPS 4,900,000 4,900,000 4,900,000
Effect of dilutive securities:
Stock options 12,655 -- 3,951
Weighted average number of
common shares and dilutive
potential common shares used
in diluted EPS 4,912,655 4,900,000 4,903,951
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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.
During fiscal 19998, as a result of a lawsuit settlement, the
Company was relieved of its obligation to pay approximately $2
million in principal and interest on subordinated notes
associated with the acquisition. The reduction in the principal
of the note was credited against goodwill. (See Footnote 4.)
<PAGE>
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.
<TABLE>
1996
<S> <C>
Net sales ..................... $ 73,744,530
Net income .................... 3,597,833
Net income per share .......... 0.73
</TABLE>
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.
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 adminis-
trative costs). The charge is comprised of a reduction (approxi-
mately $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). During the year ending June 30, 1998,
the restructuring plan was substantially completed and
approximately $950,000 had been charged against the accrual for
terminating contractual obligations and approximately $30,000 had
been charged against the accrual for other costs. As of June 30,
1998, approximately $830,000 of the restructuring accrual
remained and is expected to be paid during fiscal 1999.
4. LAWSUIT SETTLEMENT
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 former owners of NASS (now known
as the specialty components and assemblies division). The
Company alleged, among other things, that the former owners of
NASS made material misrepresentations in connection with the
Company's acquisition of NASS. On February 13, 1998, an
agreement was reached between the Company and the former owners
<PAGE>
of NASS to settle the suit. Under the terms of the Settlement
Agreement, the Company is relieved of its obligation to pay
approximately $2 million in principal and interest under the
Note issued as part of the consideration for the acquisition of
NASS. The reduction in the principal amount of the note was
credited against goodwill. The Company will not be required to
make any future payments under the employment and non-compete
agreements with the former owners and, in addition, the former
owners reimbursed the Company for a portion of its legal fees
incurred in connection with the lawsuit. The former owners,
however, remain bound by the non-competition provisions in their
respective employment agreements. In addition, the parties
executed limited mutual general releases. As a result of the
settlement, selling, general and administrative expense and
interest expense in 1998 were reduced by approximately $52,000
and $84,000, respectively.
5. INVENTORIES
Inventories at June 30, 1998 and 1997 consisted of the following:
<TABLE>
1998 1997
<S> <C> <C>
Raw materials ............... $ 4,401,069 $ 3,916,344
Work in process ............. 2,244,363 2,254,960
Finished goods .............. 3,282,417 3,904,482
$ 9,927,849 $10,075,786
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1998 and 1997 consisted
of the following:
<TABLE>
1998 1997
<S> <C> <C>
Land ........................ $ 1,150,000 $ 1,150,000
Building and improvements ... 7,414,306 6,855,531
Machinery and equipment ..... 34,714,567 29,834,599
Other........................ 259,494 560,110
43,538,367 38,400,240
Less accumulated depreciation
and amortization............. (15,921,909) (12,077,533)
$27,616,458 $26,322,707
</TABLE>
Progress payments for machinery ordered and not placed in
service totaling $1,434,450 and $1,635,000 as of June 30, 1998
and 1997, respectively, are included in machinery and equipment.
Open commitments to purchase machinery and equipment at June 30,
1998 totaled $1,001,000.
<PAGE>
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 on June 30, 1997. During
fiscal 1998, the Company decided to retain certain of these
assets with a net book value of $1,600,000. Depreciation expense
on these assets for a full year is included in the 1998 results
of operations. As of June 30, 1998, net fixed assets of $532,533
(fixed assets of $1,071,577 and accumulated depreciation of
$539,019) are classified as assets held for disposal. On July 1,
1998, the Company entered into an agreement to sell $475,000 of
the assets held for disposal which represented their net book
value.
Retirements of machinery and equipment were $242,000 and $644,310
during fiscal year 1998 and 1997, respectively. There were no
significant disposals during fiscal year 1996.
Routine repairs and maintenance charged to expense were
$2,012,716, $1,847,735, and $1,355,757 for the years ended June
30, 1998, 1997, and 1996, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at June 30, 1998 and
1997 consisted of the following:
<TABLE>
1998 1997
<S> <C> <C>
Trade accounts payable ...... $ 7,442,026 $ 5,531,022
Restructuring accrual........ 828,212 2,082,026
Accrued payroll and payroll
related ................... 1,584,400 1,447,151
Accrued employee benefit plan
costs ..................... 813,508 698,539
Accrued health plan claims .. 268,324 291,961
Accrued occupational injury
plan costs ................ 140,000 475,000
Other accrued expenses ...... 1,773,511 1,350,263
Total ....................... $12,849,981 $11,875,962
</TABLE>
8. LONG-TERM DEBT
Long-term debt at June 30, 1998 and 1997 consisted of the
following:
<TABLE>
1998 1997
<S> <C> <C>
Consolidated term loans ...... $ 8,043,052 $ 9,973,385
Revolving line of credit ..... 5,394,062 6,500,477
Equipment acquisition term
notes payable ............... 1,340,060 1,768,673
Real estate term note payable. 602,667 666,667
15,379,841 18,909,202
Less current portion ......... (2,422,945) (2,422,950)
$12,956,896 $16,486,252
</TABLE>
<PAGE>
Effective August 30, 1997, the bank increased the revolving line
of credit to $12 million and on September 18, 1997 the bank
increased the availability under the equipment acquisition
facility to $3 million to reflect new credit facilities totaling
$28,700,000. The credit facilities, as of June 30, 1998,
consist of the following:
1) Term loans of $13,700,000 original principal balance and
$8,043,052 outstanding at June 30, 1998. 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%
(7.525% at June 30, 1998). The term loans were used for
funding the acquisition of NASS and for refinancing Company
debt,
2) A revolving line of credit of $12,000,000, subject to
availability requirements, with interest payable monthly at
either the bank's prime rate less 1/2% (8.00% at June 30,
1998) or a blended rate of 6-month and 12-month LIBOR plus 1
1/4 % (7.070%) at June 30, 1998. As of the balance sheet
date, the revolving line of credit was due to expire on
July 21, 1999 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, 1998, $5,394,062 had been used on the line of
credit and $5,435,891 is available,
3) An equipment acquisition facility of $3,000,000 for the
financing of equipment is available at June 30, 1998. 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%.
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 $602,667 outstanding balance at June
30, 1998, is payable in monthly installments of $5,333 plus
interest at the prime rate (8.50% at June 30, 1998). The
Company also has two equipment acquisition term notes payable
with the same bank that expire on March 1, 2001 and June 1,
2002, respectively. The notes, which have an original principal
amount of $1,498,000 and $645,000, respectively, and an
outstanding balance of $823,704 and $516,356, respectively, on
June 30, 1998, are payable in monthly installments of $24,961
and $10,750, respectively, plus interest at LIBOR plus 1 1/2%
(7.241% at June 30, 1998).
<PAGE>
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 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 $2,422,945, $2,422,945, $2,348,063, $2,123,437,
$385,724, and $282,665, respectively. Interest payments during
the years ended June 30, 1998, 1997 and 1996 were $1,425,865,
$1,662,215, and $1,659,373, respectively.
9. INCOME TAXES
The provision for federal income taxes for the years ended June
30, 1998, 1997, and 1996 consisted of the following:
<TABLE>
<S> 1998 1997 1996
Current: <C> <C> <C>
Federal ................... $ 2,040,099 $ (205,251) $ 1,274,580
State ..................... 164,336 145,699 113,000
Deferred .................. 340,439 (783,017) 676,000
Total ..................... $ 2,544,874 $ (842,569) $ 2,063,580
</TABLE>
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, 1998, 1997, and 1996:
<TABLE>
<S> 1998 1997 1996
Pre-tax book income at <C> <C> <C>
statutory rate .......... $ 2,399,288 $ (849,897) $ 1,936,450
State taxes ............... 131,506 33,257 113,000
Other ..................... 14,080 (25,929) 14,130
$ 2,544,874 $ (842,569) $ 2,063,580
</TABLE>
The components of net deferred tax assets and liabilities at of
June 30, 1998 and 1997 consisted of the following:
<TABLE>
<S> 1998 1997
Deferred assets:
Book accruals and reserves in excess <C> <C>
of cumulative tax deductions ...... $ 1,345,094 $ 1,599,293
Inventory capitalization ............ 471,918 174,789
Total ............................... $ 1,817,012 $ 1,774,082
Deferred liability - tax depreciation
in excess of book ................. $ 2,978,761 $ 2,595,392
</TABLE>
Tax payments during the years ended June 30, 1998, 1997, and
1996 were $1,935,000, $139,000, and $1,630,000, respectively.
<PAGE>
10. SALES TO MAJOR CUSTOMERS
The Company's five largest customers with their percentages of
the Company's net sales for the 1998, 1997 and 1996 fiscal years
were as follows:
<TABLE>
Percentage of Net Sales
Customer 1998 1997 1996
<S> <C> <C> <C>
Ford ..................... 26% 30% 30%
Borg-Warner .............. 9 7 7
Bosch (formerly
AlliedSignal) .......... 7 6 7
Chrysler ................. 7 6 7
Motorola ................. 7 3 --
</TABLE>
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.
11. TRANSACTIONS WITH RELATED PARTIES
During the year ended June 30, 1998, 1997, and 1996, the Company
paid management fees of $283,750, $235,000, and $235,000
respectively, 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.
In March, 1998, the Company entered into an agreement with a
Director's automotive aftermarket consulting firm for business
and marketing development. For the year ended June 30, 1998, the
Company paid fees of $10,000.
12. CONTINGENCIES
On January 28, 1998, the Company announced that it had been
notified by Visteon, a division of Ford Motor Company, that a
part manufactured by the Company's specialty components and
assemblies division is involved in a recall regarding a fuel
gauge accuracy problem with certain 1997 model year vehicles.
Based upon information currently available to the Company,
management believes that this matter will be resolved in a
manner not materially adverse to the Company.
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.
<PAGE>
13. LEASE COMMITMENTS
The following is a schedule of future minimum lease payments
under operating leases with initial lease terms in excess of one
year:
<TABLE>
Operating
Leases
<S>
Year ending June 30, <C>
1999 ...................... $ 380,610
2000 ...................... 194,007
2001 ...................... 105,009
2002 ...................... 25,517
2003 ...................... 8,100
Thereafter ................ -
Total minimum lease payments $ 713,243
</TABLE>
Total minimum lease payments have been reduced by $224,000 to
reflect the total minimum lease payments expected to be received
under a noncancelable sublease arrangement.Rental expense for
the years ended June 30, 1998, 1997, and 1996 was $373,165,
$500,047, and $419,231, respectively.
14. 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, 1998, 1997 and 1996, employer contribution were expensed
of $380,000, $346,000, and $360,000, 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. As of June 30, 1998, there were
sufficient plan assets and Company reserves to satisfy the asset
distribution.
<PAGE>
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, 1998, 1997 and 1996, the Company incurred expense
of $1,724,000, $1,637,000, and $1,230,000, 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, 1998,
1997, and 1996 totaling $737,000, $682,000, and $613,000,
respectively.
15. STOCK-BASED COMPENSATION
During November 1993, the stockholders of the Company approved a
stock option plan and 100,000 shares (increased to 125,000 upon
shareholder approval in November 1997) 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.
A summary of stock option activity is as follows:
<TABLE>
1998 1997 1996
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
<S> Shares Price Shares Price Shares Price
Options outstanding
at beginning of <C> <C> <C> <C> <C> <C>
year.............. 120,200 $ 7.38 69,800 $ 9.00 69,800 $ 9.00
Options granted..... - - 50,400 5.13 - -
Options exercised... - - - - - -
Options cancelled... - - - - - -
Options outstanding
at end of year... 120,200 $ 7.38 120,200 $ 7.38 69,800 $ 9.00
Options exercisable
at end of year... 120,200 $ 7.38 116,200 $ 7.32 53,396 $ 9.00
</TABLE>
The following information is presented for stock options outstanding
at June 30, 1998.
<TABLE>
Outstanding Exercisable
Average Average Average
Life Exercise Exercise
Shares (in years) Price Shares Price
<C> <C> <C> <C> <C>
69,800 7 $ 9.00 69,800 $ 9.00
50,400 10 $ 5.13 50,400 $ 5.13
120,200 120,200
</TABLE>
<PAGE>
In conjunction with the Company's initial public offering,
100,000 warrants were issued to certain Underwriters. The
exercise price for these warrants is $10.80 per share. At June
30, 1998, all of these warrants are outstanding and exercisable.
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"). For the
purposes of pro forma disclosures, the estimated fair value of
the options and restricted share awards is amortized to expense
over the vesting period. The estimated fair value of the
options granted during the year ended June 30, 1997, using the
Black-Scholes pricing model, is $147,017.
If the Company had recorded compensation expense in the fiscal
years ended 1998, 1997, and 1996 in accordance with the
provisions of FAS 123, the pro forma net income (loss) and
earnings (loss) per share for these periods would have been as
follows:
<TABLE>
<S> 1998 1997 1996
Net income (loss) available <C> <C> <C>
to shareholders.......... $ 4,511,855 $ (1,754,457) $ 3,631,857
Earnings (loss) per
common share:
Basic...................... $ 0.92 $ (0.36) $ 0.74
Diluted.................... $ 0.92 $ (0.36) $ 0.74
</TABLE>
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.
The effects of applying FAS 123 in this pro forma disclosure are
not indicative of future amounts as the pro forma amounts do not
include the impact of stock option awards granted prior to
fiscal 1996.
<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 28, 1998 /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 28, 1998 /s/James E. Lineberger
James E. Lineberger
Chairman of the Board
September 28, 1998 /s/Daniel W. Brady
Daniel W. Brady
Chief Executive Officer and Director
(Principal Executive Officer)
September 28, 1998 /s/Samuel M. Berry
Samuel M. Berry
President, Chief Operating Officer and
Director
September 28, 1998 /s/Ronald G. Assaf
Ronald G. Assaf
Director
September 28, 1998 /s/James D. Gerson
James D. Gerson
Director
September 28, 1998 /s/John F. Creamer
John F. Creamer
Director
September 28, 1998 /s/Roy Wiegmann
Roy Wiegmann
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") by and between Hilite
Industries Automotive, LP, a Texas Limited Partnership (the
"Company"), and Samuel M. Berry (the "Executive") effective as of
the 30th day of January, 1998 (the "Effective Date").
W I T N E S S E T H:
1. TERMS OF EMPLOYMENT
1.1 Employment. The Company hereby employs the Executive
as President and Chief Operating Officer of the Company for and
during the term hereof, subject to the direction of the Board of
Directors of the Company and the terms and conditions hereof. The
Executive hereby accepts employment under the terms and conditions
set forth in this Agreement.
1.2 Duties of Executive. Upon the Effective Date, the
Executive shall perform in the capacity described in Section 1.1
hereof and as previously performed by the Executive prior to the
date hereof and shall have such duties, as may be reasonably
assigned to him from time to time by the Board of Directors of the
Company consistent with his executive status and with his mutual
consent. The Executive agrees to devote his full business time and
services to the faithful performance of the duties,
responsibilities, and are consistent with his executive status under
Section 1.1 of this Agreement.
1.3 Term. This Agreement shall become effective as of
the Effective Date and shall continue in force and effect for a term
of one year expiring on the first anniversary of the Effective Date,
unless sooner terminated as provided in Section 1.5 hereof or
renewed or extended by written agreement between the Company and the
Executive pursuant to terms and conditions mutually acceptable to
each provided that this Agreement shall be automatically renewed on
a year-to-year basis unless terminated by a party not later than 60
days prior to any anniversary date. Notwithstanding anything to the
contrary, Executive shall have the right to terminate this Agreement
at any time without liability except that the provisions of Section
1.7 hereof shall remain in full force and effect.
1.4 Compensation. The Company shall pay the Executive,
as compensation for services rendered by the Executive under this
Agreement, as follows:
(a) Base Salary. The Company shall pay the Executive a
minimum base salary ("Salary") of One Hundred Sixty Two Thousand
and Two Hundred Dollars ($162,200) per year. The Salary shall be
subject to review and adjustment on an annual basis beginning
July 1, 1998, (if this contract is then in effect) or, at the
Company's discretion, on such earlier date as the Company may
designate; provided, however, that in no event shall the Executive's
Salary be adjusted below the Salary designated herein.
<PAGE>
(b) Bonus Compensation. The Company shall also pay the
Executive annual bonus compensation ("Bonus Compensation") based on
the success of business operations and the pre-tax profits of the
Company and upon the performance of the Executive as determined
by the Board of Directors of the Company which Bonus Compensation
shall be paid by the Company within thirty (30) days after
completion of the audited financial results of the Company.
1.5 Termination. The Agreement may be terminated at any
time during the term hereof only by reason of and in accordance with
the following:
(a) Death. If the Executive dies during the term of
this Agreement and while in the employ of the Company, this
Agreement shall automatically terminate as of the date of the
Executive's death; and the Company shall have no further
obligation to the Executive or his estate, except to pay to the
estate of the Executive any accrued, but unpaid Salary, any Bonus
Compensation determined by the Board of Directors of the Company and
any vacation, sick leave, insurance or other benefits, which have
accrued as of the date of death, but were then unpaid or unused.
(b) Disability. If, during the term of this Agreement,
the Executive shall be prevented from performing his duties
hereunder by reason of becoming totally disabled, then the company,
on ninety (90) days' prior notice to the Executive, may terminate
this Agreement. For purposes of this Agreement, the Executive
shall be deemed to have become totally disabled when (i) he receives
"total disability benefits" under the Company's disability plan
(whether funded with insurance or self-funded by the Company), or
(ii) the Board of Directors of the Company, upon the written report
of a qualified physician (after complete examination of the
Executive) designated by the Board of Directors of the Company,
shall have determined that the Executive has become physically
or mentally incapable of performing his duties under this Agreement
on a permanent basis.
(c) Termination by the Company for Cause. Prior to the
expiration of the term of this Agreement, the Company may discharge
the Executive for cause and terminate this Agreement without any
further liability hereunder to the Executive or his estate, except
to pay any accrued, but unpaid, Salary and vacation benefits to him.
For purposes of this Agreement, a "discharge for cause" shall mean
termination of the Executive upon written notification to the
Executive limited, however, to one or more of the following reasons:
(i) Fraud, misappropriation or embezzlement by the
Executive in connection with the Company; or
(ii) Gross mismanagement or gross neglect of duties
which has a detrimental effect on the Company after written notice
to the Executive of the particular details thereof and a period of
thirty (30) days to correct such mismanagement or neglect, if
any; or
<PAGE>
(iii) Conviction by a court of competent
jurisdiction in the United States of a felony or a crime involving
moral turpitude; or
(iv) Willful and unauthorized disclosure of infor-
mation confidential to the Company; or
(v) The Executive's breach of any material term or
provision of this Agreement, after written notice to the Executive
of the particular details thereof and a period of not less than
thirty (30) days thereafter within which to cure such breach,if any
(a) Termination by the Company with Notice. The
Company may terminate this Agreement, for a reason other than as
set forth in this Subparagraph (c) of the Section 1.5 at any time
upon sixty (60) days' written notice to the Executive. Unless
terminated for cause as defined in Paragraph (c) of this Section
1.5, the Executive shall be paid his then prevailing Salary
prorated to the date of termination, plus any accrued but unused
vacation benefits, and, in addition, a termination allowance equal
to six (6) months Salary based upon the highest annual rate paid
the Executive prior to such notice. The termination allowance may,
at the option of the company, be paid in periodic installments over
the applicable period immediately following termination in
accordance with the Company's regular payroll periods or such
lesser period as the Company may determine.
1.6 Employment Benefits. In addition to the Salary and
Bonus Compensation payable to the Executive hereunder, the
Executive shall be entitled to the following benefits, subject
to the following limitations:
(a) Sick Leave Benefits and Disability
Insurance. During his absence due to illness or other incapacity,
the Executive shall be paid sick leave benefits at his then pre-
vailing Salary rate, reduced by the amounts, if any, or worker's
compensation, social security entitlements or disability benefits
under the Company's group disability insurance plan, if any. The
Company, at its expense shall provide the Executive with the
maximum amount of disability insurance benefits allowed for one in
the position of the Executive with the Company under and
consistent with its group disability insurance plan, if the Company
has such a plan.
(b) Life Insurance. The Company, at its expense,
shall provide the Executive with the maximum amount of life
insurance benefits allowed for one in the position of the
Executive with the company under and consistent with its group term
life insurance plan.
<PAGE>
(c) Hospitalization, Major Medical and Dental
Insurance. The Company, at its expense, shall provide the
Executive and all dependents of the Executive with group
hospitalization, major medical and dental insurance in amounts of
coverage available to senior executives of the Company to be
substantially equivalent to the plans in effect prior to the date
hereof.
(d) Stock and Options. The Executive shall be
eligible to receive and/or earn stock options from the Company
covering its capital stock at such time, if any, as the Company
has adopted appropriate stock option or investment plans for its
executive employees.
(e) Profits and Pension Plan Benefits. The
Company, at its expense, shall provide the Executive during the
term of this Agreement with profit sharing and pension benefits
substantially equivalent to similar rights and benefits provided
by the Company to the Executive immediately prior to the Effective
Date of this Agreement.
(f) Vacations. The Executive shall be entitled to
a paid vacation each year during the term of this Agreement
equivalent to four (4) weeks of time, which vacation shall be taken
by the Executive in accordance with the business requirements
of the company at the time and its personnel policies then in
effect relative to this subject.
(g) Working Facilities and Expenses. The
Executive is authorized to incur ordinary, necessary and
reasonable expenses for the promotion of the business and
activities of the Company during the term hereof, including, but
not limited to, expenses for necessary travel and other items
of expense required in the normal and routine course of employment
and in the performance of the duties and responsibilities of the
Executive during the term of this Agreement. The Company shall
reimburse the Executive for all such expenses upon presentation by
the Executive of an itemized account of such expenditures with
the supporting vouchers, invoices and related information attached
thereto.
(h) Automobiles and Related Expenses. The Executive
shall be entitled to receive the sum of Six Hundred Dollars ($600)
per month as an automobile allowance provided at the expense of the
Company from the Effective Date of this Agreement and during the
term hereof, which allowance shall include and cover all expenses
related to insurance, repairs, maintenance, fuel and oil for such
automobile. In addition, the Company shall reimburse the Executive
at the rate dictated by IRS regulations for all actual documented
mileage incurred by the Executive while in the course of conducting
business on behalf of the Company. Notwithstanding the foregoing,
the Company may, at its option, elect to provide the Executive
an automobile of the make, model and year mutually agreeable
<PAGE>
by the Company and the Executive and all costs associated with
insurance, fuel, oil, repairs maintenance and other expenses in
lieu of the above described automobile allowances, as may be
mutually agreed between the Executive and the Company. Executive
acknowledges that some or all of the foregoing will be deemed
compensation to him.
1.7 Protective Covenants. Because (i) Executive will
become fully familiar with all aspects of the Company's business
during the period of his employment with the Company, (ii) certain
information of which the Executive will gain knowledge during his
employment is proprietary and confidential information which if of
special and peculiar value to the Company, (iii) if any such
proprietary and confidential information were imparted to or became
known by any persons, including Executive, engaging in a business
in competition with that of the company, hardship, loss and
irreparable injury and damage could result to the Company, the
measurement of which would be difficult if not impossible to
ascertain, and (iv) it is necessary for the Company to protect
its business from such damage, the following covenants
constitute a reasonable and appropriate means, consistent with
the best interests of both the Executive and the Company, to
protect the company against such damage and shall apply to and
be binding upon the Executive as provided herein:
(a) Non-Competition by Executive. Executive
covenants that, while he is an employee of the Company or in any
other individual or representative capacity and for a period of one
year after the expiration or termination of the Agreement, he will
not engage in or participate in any business whose product
lines are in direct competition to the product lines of the Company.
(b) Trade Secrets, Proprietary and Confidential
Information. Executive recognizes that his position with the
Company is one of the highest trust and confidence by reason of
Executive's access to any contact with trade secrets and
confidential and proprietary information of the company. Executive
shall use his best efforts and exercise utmost diligence to protect
and safeguard the trade secrets and confidential and proprietary
information of the Company. Executive covenants that, while he is
an employee of the Company and for one year thereafter, he will not
disclose, disseminate or distribute to another, nor induce any
other person to disclose, disseminate, or distribute, any trade
secret or proprietary or confidential information of the Company,
directly or indirectly, either for Executive's own benefit or for
the benefit of another, whether or not acquired, learned, obtained
or developed by Executive use or cause to be used any trade secret,
proprietary or confidential information in any way except a as is
required in the course of his employment with the Company. All
confidential information relating to the business of the Company
whether prepared by Executive or otherwise coming into his
possession, shall remain the exclusive property of the Company and
shall not be removed from the premises of the Company under any
circumstances whatsoever without the prior written consent of the
Company.
<PAGE>
(c) Remedies. In the event of breach or threatened
breach by Executive of any provision of this Section 1.7, the
Company shall be entitled to relief by temporary restraining
order, temporary injunction, or permanent injunction or which it
may be entitled, including any and all monetary damages which the
Company may incur as a result of said breach, violation or
threatened breach or violation. The Company may pursue any remedy
available to it concurrently or consecutively in any order as to
any breach, violation, and the pursuit of one of such remedies at
any time will not be deemed an election of remedies or waiver of
the right to pursue any other of such remedies as to such
breach, violation, or threatened breach or violation, or as to any
other breach, violation, or threatened breach or violation.
Merger or Acquisition. In the event the Company
should consolidate or merge into another corporation, or transfer
all or substantial all of its assets to another entity, or
divide its assets among a number of entitles, this Agreement shall
continue in full force and effect.
2. GENERAL PROVISIONS
2.1 Notices. All notices, requested, consents, and other
communications under this Agreement shall be in writing and shall be
deemed to have been delivered on the date personally delivered or on
the date deposited in a receptacle maintained by the United States
Postal Service for such purpose, postage pre-paid, by certified
mail, return receipt requested, addressed to the respective parties
as follows:
If to the Executive:
Samuel M. Berry
9515 Rocky Branch
Dallas, Texas 75243
If to the Company:
Hilite Industries Automotive, LP
1671 S. Broadway
Carrollton, Texas 75006
Either party hereto may designate a different address by providing
written notice of such new address to the other party hereto.
2.2 Severability. If any provision contained in this
Agreement is determined to be void, illegal or unenforceable, in
whole or in part, then the other provisions contained herein shall
remain in full force and effect as if the provision which was
determined to be void, illegal, or unenforceable had not been
contained herein.
<PAGE>
2.3 Waiver, Modification and Integration. The waiver by
any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent
breach of any party. This instrument contains the entire agreement
of the parties concerning employment and supersedes any and all
other agreements, either oral or in writing, between the parties
hereto with respect to the employment of the Executive by the
Company and contains all of the covenants and agreements between the
parties with respect to such employment in any manner whatsoever.
This Agreement may not be modified, altered or amended except by
written agreement of all the parties hereto.
2.4 Binding Effect. This Agreement shall be binding and
effective upon the Company and its successors and permitted assigns,
and upon the Executive, his heirs and representatives; provided,
however, that the Company shall not assign this Agreement without
the written consent of the Executive.
2.5 Governing Law. This Agreement shall be governed by
the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first above written.
HILITE INDUSTRIES AUTOMOTIVE, LP
By: /s/DANIEL W. BRADY
/s/SAMUEL M. BERRY
________________________________
Samuel M. Berry
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
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0
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