<PAGE> 1
SCHEDULE 14C
(Rule 14c-101)
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d) (2))
[X] Definitive Information Statement
HILITE INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
Payment of filing Fee (check the appropriate box):
[ ] No fee required
[X] Fee computed on the table below per Exchange Act Rules 14c-5(g) and
0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, par value $0.01 per share, of Hilite
Industries, Inc. (the "Shares").
(2) Aggregate number of securities to which transaction applies:
52,907 outstanding shares of Common Stock, par value $0.01 per
Share, of Hilite Industries, Inc.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
$14.25
(4) Proposed maximum aggregate value of transaction: $753,925*
- --------
* The amount previously paid was based on the purchase of (1) 4,900,000
outstanding shares of Common Stock of Hilite Industries, Inc. and (ii)
120,200 shares of Common Stock of Hilite Industries, Inc. which may be
issued upon exercise of outstanding options, in each case, at $14.25 in
cash per share. The amount of the filing fee, which was calculated in
accordance with Regulation 240.0-11 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), equaled 1/50 of one percent of
the value of the shares purchased. On June 1, 1999, Hilite Industries,
Inc. consummated its offer (the "Offer") to purchase all of its
outstanding shares, purchasing 4,730,791 shares of Common Stock. This
Information Statement relates to the merger (the "Merger") of Hilite
Mergeco, Inc. with and into Hilite Industries, Inc., whereby 52,907
shares of Common Stock not tendered in the Offer will be converted into
$14.25 in cash per share. The total fee with respect to the securities
as to which the Merger applies is $151, which was previously paid as
part of the $14,308 paid pursuant to Hilite Industries, Inc.'s May 3,
199 Schedule 13E-4 filing.
<PAGE> 2
(5) Total fee paid: $151*
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $14,308
(2) Form, Schedule or Registration Statement No.: Schedule 13E-4
(3) Filing Party: Hilite Industries, Inc.
(4) Date Filed: May 3, 1999
<PAGE> 3
HILITE INDUSTRIES, INC.
Terminal Tower
50 Public Square
32nd Floor
Cleveland, Ohio 44113
(216) 771-6700
INFORMATION STATEMENT
This Information Statement is being furnished by the Board of Directors
(the "Board of Directors") of Hilite Industries, Inc., a Delaware corporation
(the "Company"), to the holders of outstanding shares of Common Stock, par value
$0.01 per share (the "Shares"), of the Company in connection with the Agreement
and Plan of Merger, dated as of April 26, 1999 (the "Merger Agreement"), by and
among the Company, Hilite Holdings, LLC, a Delaware limited liability company
("Buyer"), and Hilite Mergeco, Inc., a Delaware corporation, providing for the
merger of Merger Subsidiary with and into the Company (the "Merger"). At the
effective time of the Merger, each Share issued and outstanding immediately
prior to the effective time of the Merger, other than Shares as to which
dissenters' rights of appraisal have been duly asserted and perfected under the
Delaware General Corporation Law ("DGCL"), Shares owned by the Continuing
Stockholders (as defined below) and Shares owned by Buyer, will be canceled and
converted automatically into the right to receive $14.25 per Share in cash
without interest thereon (the "Merger Consideration"). A copy of the Merger
Agreement is attached hereto as Schedule I.
The Merger is the final step in a series of transactions proposed under the
Merger Agreement pursuant to which Buyer will complete its acquisition of a
majority equity interest in the Company. On May 3, 1999, the Company made an
offer to purchase all of its outstanding Shares at a price of $14.25 per Share
(the "Offer Price"), net to Seller in cash without interest thereon (the
"Offer"). On June 1, 1999, the Company consummated the Offer by accepting for
payment and paying for 4,730,791 Shares, representing approximately 96% of the
Company's total outstanding Shares. Immediately prior to the consummation of the
Offer, Buyer purchased from the Company 1,681,414 newly issued Shares at a price
of $14.25 per Share (the "Stock Purchase" and together with the Offer and the
Merger, the "Transactions"). After the consummation of the Offer and the Stock
Purchase, Buyer owns 89.6% of the Company's total outstanding Shares. In
addition, pursuant to a Stockholders Agreement, dated as of April 26, 1999, by
and among Buyer, Merger Subsidiary and certain stockholders listed on Annex A
thereto (the "Continuing Stockholders"), Buyer holds an irrevocable proxy to
vote the 143,148 Shares owned or controlled by the Continuing Stockholders.
Accordingly, Buyer owns or has the right to vote 1,824,562 Shares, which
represents 97.2% of the Company's total outstanding Shares.
As a result of the consummation of the Offer and the Stock Purchase, Buyer
owns and has the right to vote a sufficient number of outstanding Shares to
adopt the Merger Agreement without the affirmative vote of any other holder of
Shares, thereby assuring such adoption. Buyer has executed and delivered to the
Company a written consent in lieu of a meeting of stockholders adopting the
Merger Agreement and authorizing the consummation of the Merger. Such written
consent is sufficient under Delaware law to adopt the Merger Agreement.
Such written consent provides that the Merger will become effective no
earlier than 20 calendar days after this Information Statement is first mailed
to stockholders of the Company. The Company currently anticipates that the
effective time of the Merger will be on or about July 19, 1999.
Under Delaware law, holders of Shares who do not vote to adopt the Merger
Agreement and who otherwise strictly comply with applicable requirements of
Section 262 of the DGCL may dissent from the Merger and demand payment in cash
from the Company of the fair value of their Shares. This Information Statement
constitutes notice of appraisal rights to holders of Shares pursuant to the
DGCL. Holders of Shares who wish to assert appraisal rights, if available,
should comply with the procedures set forth in Section 262 of the DGCL(a copy of
which is attached as SCHEDULE III to this Information Statement). Appraisal
rights under Section 262 of the DGCL are also discussed in this Information
Statement under the heading "APPRAISAL RIGHTS."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. PLEASE DO NOT SEND IN ANY OF YOUR STOCK CERTIFICATES AT THIS TIME.
This Information Statement is first being mailed to the stockholders of the
Company on or about June 28, 1999. This Information Statement constitutes notice
to the Company's stockholders of corporate action by stockholders without a
meeting as required by Section 228(d) of the DGCL.
This Information Statement is dated June 25, 1999.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY..................................................... 1
The Companies............................................. 1
General................................................... 1
Action by Written Consent................................. 2
Payment for Shares........................................ 2
Purpose of the Merger..................................... 2
Conditions to the Merger.................................. 2
Opinion of Bowles Hollowell............................... 2
The Background to the Transactions........................ 3
Regulatory Matters........................................ 3
Certain Federal Income Tax Consequences of the Merger..... 3
Accounting Treatment...................................... 3
Appraisal Rights.......................................... 3
SELECTED FINANCIAL INFORMATION OF THE COMPANY............... 4
ACTION BY WRITTEN CONSENT................................... 6
THE MERGER.................................................. 6
Background of the Transactions............................ 6
Recommendation of the Disinterested Directors and the
Board; Fairness of the Transactions.................... 10
Opinion of Bowles Hollowell............................... 11
Payment for Shares........................................ 14
Appraisal Rights.......................................... 15
Certain U.S. Federal Income Tax Consequences.............. 18
Certain Legal Matters and Regulatory Approvals............ 18
Effect of the Merger on the Market for the Shares;
Exchange Act Registration.............................. 19
PURPOSES AND REASONS FOR THE TRANSACTIONS................... 20
Purposes and Reasons of the Company for the
Transactions........................................... 20
Purposes and Reasons of Buyer and the Continuing
Stockholders for the Transactions...................... 20
RECAPITALIZATION............................................ 20
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS............. 21
Change in Control Agreements.............................. 21
Bonuses................................................... 22
The Agreement Among Stockholders.......................... 22
PROJECTIONS AND CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS................................ 22
THE MERGER AGREEMENT........................................ 25
The Offer................................................. 25
The Stock Purchase........................................ 25
The Merger................................................ 25
Certificate of Incorporation and By-laws.................. 26
Agreements of the Company and Buyer....................... 26
No Solicitation; Acquisition Proposals.................... 27
Indemnification; Directors' and Officers' Liability....... 28
Best Efforts.............................................. 29
Representations and Warranties............................ 29
Conditions to Effect the Merger........................... 30
Termination............................................... 30
Expenses and Termination Fee.............................. 31
Amendments; No Waivers.................................... 32
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STOCKHOLDERS AGREEMENT...................................... 33
THE STOCK SUBSCRIPTION AGREEMENTS........................... 33
CERTAIN INFORMATION CONCERNING THE COMPANIES................ 33
The Company............................................... 33
Buyer..................................................... 34
Merger Subsidiary......................................... 34
RECENT DEVELOPMENTS......................................... 34
BENEFICIAL OWNERSHIP OF SHARES.............................. 34
MARKET PRICES AND DIVIDENDS................................. 35
AVAILABLE INFORMATION....................................... 36
</TABLE>
<TABLE>
<S> <C>
SCHEDULE I Agreement and Plan of Merger, dated as of April 26, 1999,
among Hilite Industries, Inc., Hilite Holdings, LLC and
Hilite Mergeco, Inc.
SCHEDULE II Opinion of Bowles Hollowell Conner & co., a division of
First Union Capital Markets Corp.
SCHEDULE III Section 262 of the General Corporation Law of the State of
Delaware
SCHEDULE IV Audited Financial Statements (and Related Notes) for the
Company as of June 30, 1998 and June 30, 1997 and for the
three years ended June 30, 1998
SCHEDULE V Unaudited Balance Sheet for the Company as of March 31, 1999
and June 30, 1998, the Statements of Operations for the
Three and Nine-Month Periods ended March 31, 1999 and 1998
and Statements of Cash Flows for the Nine-Month Periods
ended March 31, 1999 and 1998
SCHEDULE VI Management's Discussion and Analysis of Financial Condition
and Consolidated Results of Operations
</TABLE>
ii
<PAGE> 6
SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this Information
Statement and the Schedules hereto. STOCKHOLDERS ARE URGED TO READ THIS
INFORMATION STATEMENT AND THE SCHEDULES THERETO IN THEIR ENTIRETY. WE ARE NOT
ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THE COMPANIES
The Company. The Company is a Delaware corporation that designs,
manufactures and sells a diversified line of highly-engineered products
primarily for automotive applications. The mailing address and telephone number
of the principal executive offices of the Company are Terminal Tower, 50 Public
Square, 32nd Floor, Cleveland, Ohio 44113, (216) 771-6700.
Buyer. Buyer is a Delaware limited liability company managed by Carreras,
Kestner & Co., L.L.C., newly formed for the purpose of effecting the Stock
Purchase and the Merger. The mailing address and telephone number of the
principal executive offices of Buyer are Terminal Tower, 50 Public Square, 32nd
Floor, Cleveland, Ohio 44113, (216) 771-6700.
Merger Subsidiary. Merger Subsidiary is a Delaware corporation and a wholly
owned subsidiary of Buyer, newly formed for the purpose of effecting the Merger.
The mailing address and telephone number of the principal executive offices of
Merger Subsidiary are Terminal Tower, 50 Public Square, 32nd Floor, Cleveland,
Ohio 44113, (216) 771-6700.
GENERAL
This Information Statement is being delivered in connection with the
Merger. At the effective time of the Merger, each issued and outstanding Share,
other than Shares as to which dissenters' rights of appraisal have been duly
asserted and perfected under the DGCL, Shares owned by the Continuing
Stockholders and Shares owned by Buyer, will be converted into the right to
receive the Merger Consideration, without interest thereon, and the equity
interest of all pre-Merger stockholders in the Company (other than Buyer and the
Continuing Stockholders) will be terminated.
The Merger is the final step in a series of transactions proposed under the
Merger Agreement pursuant to which Buyer will complete its acquisition of a
majority equity interest in the Company. On May 3, 1999, the Company made an
offer to purchase all of its outstanding Shares at a price of $14.25 per Share,
net to Seller in cash without interest thereon (the "Offer"). On June 1, 1999,
the Company consummated the Offer by accepting for payment and paying for
4,730,791 Shares, representing approximately 96% of the Company's total
outstanding Shares. Immediately prior to the consummation of the Offer, Buyer
purchased from the Company 1,681,414 newly issued Shares at a price of $14.25
per Share (the "Stock Purchase" and together with the Offer and the Merger, the
"Transactions"). After the consummation of the Offer and the Stock Purchase,
Buyer owns 89.6% of the Company's total outstanding Shares. In addition,
pursuant to a Stockholders Agreement, dated as of April 26, 1999, by and among
Buyer, Merger Subsidiary and certain stockholders listed on Annex A thereto (the
"Continuing Stockholders"), Buyer holds an irrevocable proxy to vote the 143,148
Shares owned or controlled by the Continuing Stockholders. Accordingly, Buyer
owns or has the right to vote 1,824,562 Shares, which represents 97.2% of the
Company's total outstanding Shares.
Pursuant to Section 1.03 of the Merger Agreement, following the
consummation of the Offer, (i) the size of the Board of Directors of the Company
was increased to seven, (ii) James D. Gerson, Ronald G. Assaf, John F. Creamer
and James E. Lineberger resigned as directors, and (iii) Mary Lynn Putney,
Joseph W. Carreras, Michael T. Kestner, John F. Kirby and Michael B. Goldberg
were appointed as directors of the Company.
<PAGE> 7
ACTION BY WRITTEN CONSENT
Under the Company's Certificate of Incorporation and the DGCL, the
affirmative vote of a majority of the outstanding Shares is required to adopt
the Merger Agreement and the transactions contemplated thereby. As a result of
the consummation of the Offer and the Stock Purchase, Buyer owns and has the
right to vote a sufficient number of Shares to cause the Merger to be approved
without the concurrence of any other holder of Shares. Buyer has executed and
delivered to the Company a written consent in lieu of a stockholders meeting
approving and adopting the Merger Agreement and authorizing the consummation of
the Merger. Such written consent provides that the Merger will become effective
no earlier than 20 calendar days after this Information Statement is first
mailed to stockholders of the Company.
PAYMENT FOR SHARES
Upon consummation of the Merger, the Company will make available to
Continental Stock Transfer & Trust Co., as paying agent (the "Paying Agent") for
the holders of record of Shares, as needed, the amount of cash to be paid in
respect of the Shares converted into the right to receive the Merger
Consideration pursuant to the Merger. Holders of record should use the Letter of
Transmittal to be provided under separate cover to effect the surrender of
certificates evidencing Shares in exchange for the Merger Consideration. All
certificates so surrendered will be canceled. Upon consummation of the Merger
and surrender of a certificate evidencing Shares, together with a duly executed
Letter of Transmittal, the holder thereof will receive in exchange for each
Share surrendered the Merger Consideration. Any cash held by the Paying Agent
that remains unclaimed by stockholders for one year after the effective time of
the Merger will be returned to the Company, as the Surviving Corporation in the
Merger, upon demand, and thereafter stockholders may look, subject to applicable
abandoned property, escheat and other similar laws, only to the Company for
payment thereof.
A Letter of Transmittal will be sent to all stockholders of the Company
under separate cover. The Letter of Transmittal will advise each stockholder of
the procedures for surrendering to the Paying Agent certificates evidencing
Shares in exchange for the Merger Consideration. See "THE MERGER -- Payment for
Shares."
PURPOSE OF THE MERGER
The Board of Directors of the Company has unanimously approved the Merger
Agreement and concluded that its terms are fair to, and in the best interests
of, the holders of Shares. The purpose of the Merger is to enable Buyer, by
virtue of its majority equity interest in the Company, to direct and control the
policies of the Company, including decisions relating to mergers, sales of
assets and similar transactions. See "THE MERGER -- Recommendation of the
Disinterested Directors and the Board; Fairness of the Transactions" and
"PURPOSES AND REASONS FOR THE TRANSACTIONS."
CONDITIONS TO THE MERGER
The Merger is subject to the satisfaction of certain conditions, including
the approval of the Merger by the stockholders of the Company in compliance with
the DGCL and the absence of any provision of applicable law or regulation or
judgment, injunction, order or decree prohibiting the consummation of the
Merger. See "THE MERGER AGREEMENT -- Conditions to Effect the Merger." Assuming
the satisfaction of such conditions, the Company currently anticipates that the
effective time of the Merger will be on or about July 19, 1999, or as promptly
as practicable thereafter.
OPINION OF BOWLES HOLLOWELL
Bowles Hollowell Conner & Co., a division of First Union Capital Markets
Corp. ("Bowles Hollowell"), the Company's financial advisor, has delivered to
the Company its written opinion that the consideration to be received by the
stockholders of the Company pursuant to the Merger Agreement is fair to such
stockholders from a financial point of view. The complete opinion of Bowles
Hollowell, which sets forth the assumptions made, matters considered and limits
of its review, is attached as SCHEDULE II to this Information Statement and
should be read in its entirety, see "THE MERGER -- Opinion of Bowles Hollowell."
2
<PAGE> 8
THE BACKGROUND TO THE TRANSACTIONS
For a description of the events leading to the approval of the Merger
Agreement by the Board of Directors of the Company, see "THE
MERGER -- Background of the Transactions."
REGULATORY MATTERS
No regulatory approval is required for the consummation of the Merger. See
"THE MERGER -- Certain Legal Matters and Regulatory Approvals."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of cash pursuant to the Merger Agreement or the exercise of
appraisal rights will be a taxable transaction to stockholders of the Company
for U.S. federal income tax purposes. See "THE MERGER -- Certain U.S. Federal
Income Tax Consequences of the Merger." STOCKHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO THEM,
INCLUDING THE APPLICABILITY AND THE EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Transactions have been structured so as to qualify for recapitalization
accounting treatment. See "RECAPITALIZATION."
APPRAISAL RIGHTS
Under Delaware law, holders of Shares who do not vote to approve the Merger
and who otherwise strictly comply with the applicable requirements of the DGCL
may dissent from the Merger and demand payment in cash from the Company of the
fair value of their Shares. See "THE MERGER -- Appraisal Rights."
3
<PAGE> 9
SELECTED FINANCIAL INFORMATION OF THE COMPANY
The following table sets forth selected consolidated financial data with
respect to the Company for each of the five years as of and for the years ended
June 30, 1998 and should be read in conjunction with (i) the audited financial
statements (including the related notes thereto) included as SCHEDULE IV to this
Information Statement, (ii) the unaudited financial statements included as
SCHEDULE V to this Information Statement and (iii) the Company's Management's
Discussion and Analysis of Financial Condition and Consolidated Results of
Operations included as SCHEDULE VI to this Information Statement.
<TABLE>
<CAPTION>
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>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
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 56,199 30,248 26,013
Long-term obligations(1)... 12,957 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>
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(1) Excludes current portion of long-term debt obligations.
The Company's ratio of earnings to fixed charges for the fiscal years ended
June 30, 1998 and June 30, 1997 and the nine-month period ended March 31, 1999
was 6.3, (45.9) and 8.1, respectively.
COMPARATIVE PER SHARE DATA
The following table sets forth certain per share data related to net
income, cash dividends declared and book value on a historical basis for the
Company based on the number of Shares outstanding at or during those periods.
Buyer and Merger Subsidiary are newly-formed privately-held companies and thus
have no financial data available to provide a meaningful comparison to the
Company's per share data set forth below. The following
4
<PAGE> 10
information should be read in conjunction with the audited financial statements
(including the notes thereto) and the unaudited financial statements included as
SCHEDULE IV and SCHEDULE V, respectively, to this Information Statement.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------- ----------------
1998 1997 1996 1999 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Earnings (loss) per share:
Basic............................................ $ .92 $(.34) $ .74 $ .88 $ .65
Diluted.......................................... $ .92 $(.34) $ .74 $ .87 $ .65
Stockholders' equity per share..................... $5.34 $4.49 $4.83 $6.14 $5.09
Cash Dividends declared per share.................. $ .00 $ .00 $ .10 $.075 $ .05
</TABLE>
5
<PAGE> 11
ACTION BY WRITTEN CONSENT
On April 26, 1999, the Board of Directors of the Company unanimously
approved the Merger Agreement and determined that the terms of the Merger are
fair to, and in the best interests of, the holders of Shares. Under the DGCL,
the affirmative vote of the holders of a majority of the outstanding Shares is
required to adopt the Merger Agreement. As of June 2, 1999 (the "Record Date"),
there were issued and outstanding 1,877,469 Shares. Holders of record of Shares
at the close of business on the Record Date are entitled to one vote per share
of common stock of the Company held on all matters submitted to a vote of
stockholders.
After consummation of the Offer and the Stock Purchase, Buyer owns
approximately 89.6% of the Company's total outstanding Shares. On June 2, 1999,
Buyer executed and delivered to the Company a written consent in lieu of a
stockholders meeting adopting the Merger Agreement and authorizing the
consummation of the Merger. Such written consent is sufficient under the DGCL to
adopt the Merger Agreement without the concurrence of any other holder of
Shares. Therefore, no further action by the stockholders of the Company is
necessary to adopt the Merger Agreement or consummate the Merger and no such
approval is sought. Accordingly, the Company is not asking any stockholder of
the Company for a proxy and the stockholders of the Company are requested not to
send a proxy. No meeting of the stockholders of the Company will be held to
consider adoption of the Merger Agreement.
THE MERGER
BACKGROUND OF THE TRANSACTIONS
In early 1998, Daniel W. Brady, the Company's Chief Executive Officer, and
Samuel M. Berry, the Company's President and Chief Operating Officer, noted
several significant changes taking place in the automotive industry, which were
potential obstacles to the future growth prospects for the Company. These
included the expressed goal of the major automotive manufacturers to reduce
their number of suppliers, favoring larger companies who were capable of
supplying component systems and companies with a global presence. In addition,
the merger activity taking place among automotive suppliers in response to these
trends was increasing. In subsequent months, Mr. Brady began to gather
information on acquisition and merger transactions involving automotive
component suppliers and on prices being paid for such suppliers from publicly
available reports and industry seminars.
On April 22, 1998, at a regular Board meeting, Mr. Brady initiated a
discussion regarding the trends affecting the Company and its business,
including automotive supplier consolidation and the increasing importance of
size and a global presence for continued growth. He also expressed his opinion
that the private sale value of the Company may be substantially greater than the
public value of the Company. Mr. Brady indicated that since Hilite went public
in January 1994 at $9.00 per share, the earnings of the Company had almost
doubled, but that the current market price of the stock was at only $8.00 per
share, $1.00 per share less than the Company's initial public offering price.
Thereafter, the Board discussed the issues raised by Mr. Brady and concluded
that the Company's stock price was undervalued in the public markets and did not
reflect the Company's operating results. The Board determined that such
undervaluation was in part attributable to generally low multiples for small-cap
companies and, specifically, for automotive components suppliers, as well as the
limited public float for the Shares. Acknowledging its primary goal of
maximizing stockholder value over the long term, the Board encouraged Messrs.
Brady, Berry and James E. Lineberger to explore the Company's strategic options,
including the option of selling the Company.
During May and June 1998, Messrs. Brady, Berry and Lineberger interviewed
and requested presentations from several investment banking firms, some of which
they had met with earlier to discuss strategic alternatives for the Company.
Three firms made presentations with respect to the Company. These presentations
indicated that the stockholders of the Company could realize significantly
higher value for their Shares through the sale of the Company rather than
through trading such Shares in the public markets.
At a regular meeting of the Board on July 1, 1998, the investment banking
presentations were evaluated and discussed. Mr. Brady reported that, because of
the Company's excellent operating results, the currently strong automotive
market and the intense merger and acquisition activity taking place in the auto
industry, it was an
6
<PAGE> 12
excellent time for the Board to consider its strategic options. He then made a
recommendation that the Board engage Bowles Hollowell for the purpose of
pursuing options for maximizing stockholder value including the possible sale of
the Company. The Board discussed this recommendation as well as the merits of
the proposal made by another investment bank. The Board unanimously authorized
Mr. Brady to negotiate and enter into on behalf of the Company an engagement
letter with Bowles Hollowell. On July 28, 1998, the Company and Bowles Hollowell
signed an engagement letter.
From August 1998 through January 1999, Bowles Hollowell conducted due
diligence on the Company and, together with the Company's management, developed
a summary of the Company, its history and projections for future growth to
present to potential purchasers. The Company also assembled in one location on
its premises the primary documents a potential purchaser would be interested in
reviewing when conducting its own due diligence review of the Company. However,
from October through December 1998, the process of identifying strategic
alternatives proceeded along a slower path than originally envisioned, as the
Company's attention was focused on resolving an issue with a major customer. As
that situation may have had an effect on the sale price of the Company,
contacting potential purchasers was delayed until the issue was settled in
December 1998, without a material effect on the Company.
On November 18, 1998, Mr. Brady updated the Board on Bowles Hollowell's
work and presented a list of potential buyers to the Board for review.
Subsequent to the meeting, Board members contacted Mr. Brady with suggested
additions or changes to the list. On November 23, 1998, John Creamer, an outside
director, and Mr. Brady reviewed the list and suggested certain changes to
Bowles Hollowell.
Also, on November 18, 1998, Mr. Brady submitted to the Company's
Compensation Committee proposed Change in Control Retention Bonus,
Non-competition and Severance Agreements for key Company management and for
Lineberger & Co. LLC, a strategic consultant affiliated with the Company's
Chairman of the Board which is under contract with the Company. The proposed
agreements with management included a non-compete provision, which was intended
to protect both the Company and any prospective purchaser of the Company from
competition by these individuals for a specified time. The Board's primary
reasons for considering these proposed agreements were to insure the retention
of key management during a period of uncertainty that could result in a change
of control of the Company and to provide motivation for them to maximize
stockholder value. Additionally, the Board determined that the agreements would
(i) acknowledge the importance of the management team to the value of the
Company, (ii) provide a measure of security for anyone not being retained by a
new owner and (iii) provide additional value to a prospective purchaser of the
Company by determining the amount of severance costs that would be payable by
the Company for employees who would not be retained. The Compensation Committee
revised the agreements to provide that the change of control bonus payable
pursuant to such agreements would be paid only if the price per share paid to
the stockholders in the transactions giving rise to the change in control was at
least a 15% premium over the trading price of the Company's stock at the close
of business on that day or over the average of the closing prices for the thirty
day period beginning 60 days prior to Board's approval of a change in control.
The Compensation Committee approved these agreements as revised and the
agreements were subsequently approved by the Board. These agreements were
executed in December 1998 and January 1999.
On January 12, 1999, Bowles Hollowell began to initiate contact with a
number of potential purchasers for the Company, including both financial and
strategic buyers. This process continued through March 11, 1999. During this
process, 102 companies were contacted, of which 40 signed confidentiality
agreements and were sent certain confidential information for review. Six
companies, all financial buyers, submitted indications of interest. These
companies visited the Company's corporate office and main plant outside Dallas,
Texas where they received a plant tour and presentations by management. They
were also given the opportunity to review the due diligence information
assembled by the Company.
On February 4, 1999, Mr. Brady reviewed the status and timetable of the
solicitation process with the Board at its regular meeting. At the meeting, the
Board also discussed severance compensation for the outside directors in the
event of a change of control of the Company. After such discussions, the Board
(not including the outside directors) approved a termination bonus for each of
the three outside directors upon a sale or merger of the Company. The bonus is
equal to the excess, if any, of the merger consideration paid per share over the
closing bid
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price per share of the Company's common stock on the date of the meeting ($9 5/8
per Share) multiplied by a number assigned to each director ranging from 7,500
to 10,000.
On March 11, 1999, Bowles Hollowell requested final bids and comments to a
draft merger agreement that the Company and its counsel had prepared from the
six most interested parties and established a deadline for final bids of March
24, 1999. The letter that Bowles Hollowell distributed included an update of the
Company's financial results through February 1999 and stated that the objective
of the Board was to agree upon terms which result in the highest possible value
to the Company's stockholders and to consummate a transaction expeditiously. The
letter established guidelines for the proposals, including stating a specific
price per share for all the issued and outstanding Shares of common stock and
common stock options, the source of financing supported by third party
commitment letters, the additional due diligence required and identification of
any changes to the proposed purchase agreement or the structure of the
transaction. The letter concluded by stating that it was the Company's intention
to enter into exclusive negotiations with the party whose proposal was
considered the most attractive by the Board. Three bids were subsequently
received by the deadline.
After the bid proposals were received, Bowles Hollowell prepared a report
for the Board that described the competitive process leading up to these bids
and which summarized the bids and compared them to each other and to other
recent transactions involving public automotive components suppliers. This
report, which included copies of each bid, was sent to each Board member for
evaluation. In addition, the Company's counsel was asked to review the legal
comments made by each bidder to the draft acquisition agreement.
A telephonic meeting of the Board was held on March 29, 1999 to discuss the
solicitation process and the bids received. At this meeting, the Board was
advised that the proposals received reflected prices ranging from $13.13 to
$14.25 per share, with an investment group led by Carreras, Kestner & Co.,
L.L.C. ("CK & Co.") bidding $14.25 per share in cash for all of the outstanding
Shares. The Board discussed the various financing and other contingencies
included in each bid and was given an opportunity to ask questions of Bowles
Hollowell and legal counsel regarding such bids. After discussion, the Board
unanimously (with one director absent) authorized management to enter into
detailed discussions and negotiations exclusively with CK & Co. for the purpose
of concluding a definitive agreement for subsequent submission to the Board for
approval.
Between March 29, 1999 and April 22, 1999, management of the Company,
together with Bowles Hollowell and legal counsel, began to negotiate the
specific terms of the transaction other than price. During that period, CK & Co.
indicated its desire to structure the transaction to qualify for
recapitalization accounting. In order to obtain this accounting treatment,
certain of the Company's existing stockholders would be required to maintain an
equity interest in the Company after consummation of the Transactions. CK & Co.,
after discussions with the Continuing Stockholders about their willingness to
retain an equity position in the recapitalized Company, proposed to restructure
their offer to provide for a tender offer by the Company for all of its
outstanding Shares and a simultaneous closing of the Stock Purchase and the
financing arranged for the benefit of the Company by Buyer, consisting of (i)
borrowings under a $65,000,000 senior secured credit facility and (ii) the
proceeds from the sale of $15,000,000 of 12.5% senior unsecured subordinated
notes (the "Subordinated Notes") (collectively, the "Debt Financing"). The
Company and CK & Co. engaged in extensive discussions regarding this transaction
structure and ultimately agreed to proceed based on CK & Co.'s proposed
structure. In order to facilitate this structure and induce Buyer to enter into
these Transactions, the Continuing Stockholders agreed to retain certain of
their Shares which in the aggregate represents 2.9% of the outstanding Shares.
These retained Shares are expected to represent approximately 7.8% of the
outstanding common stock of the Company after consummation of the Transactions.
During April 1999, the Company and Buyer continued to negotiate the various
terms of the Merger Agreement, including the conditions to the Offer,
termination rights and the amount and triggers of a break-up fee requested by
the Buyer. As a result of these negotiations, the Company reduced the amount of
the break-up fee requested by Buyer and narrowed certain of the payment triggers
for the fee. As the negotiations regarding the Merger Agreement progressed, each
of the Board members received periodic updates from Mr. Brady regarding the
status of the negotiations.
On April 22, 1999, a telephonic meeting of the Board was held and the
status of the negotiations was reviewed, including the changes to the structure
of the transaction. Bowles Hollowell reviewed with the Board the financial
analyses performed by Bowles Hollowell in connection with its evaluation of the
proposed transaction
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<PAGE> 14
and indicated that it was in a position to be able to render an opinion that the
Offer Price was fair from a financial point of view to the holders of Shares
(other than the Continuing Stockholders with respect to their retained Shares).
At this time, the Board engaged in discussions with Bowles Hollowell and legal
counsel regarding the negotiations and the proposed transactions. The Board then
considered the financial performance of the Company for the third fiscal quarter
ended March 31, 1999, which the Company was in the process of finalizing. The
report indicated that the results would be extremely positive with the Company
reporting an increase in sales of 16% and an increase in earning per share of
33% over the third quarter of fiscal 1998. Management explained that these
results were higher than anticipated, but indicated that it was unlikely that
these results could be sustained in the next quarter. The Board then asked
Bowles Hollowell if these results would affect its evaluation of the fairness of
the Offer Price and Bowles Hollowell preliminarily advised that it would not,
but agreed to perform additional analyses to discuss with the Board before it
approved the Transactions. The Board then unanimously (with one director absent)
agreed to authorize management to complete negotiations with CK & Co. regarding
the Merger Agreement and to prepare for release of the third quarter results to
the public as expeditiously as possible. Negotiations between the Company and
Buyer regarding the terms of the Merger Agreement continued through April 26,
1999.
On April 26, 1999, Messrs. Assaf, Gerson and Creamer (the "Disinterested
Directors") held a telephonic meeting with Bowles Hollowell and with legal
counsel, at which the Disinterested Directors were given a separate opportunity
to evaluate the proposed transaction, its structure and its fairness. In
connection with this evaluation, the Disinterested Directors reviewed the
interests of the Continuing Stockholders in the Transactions and determined that
the retained ownership of Shares by the Continuing Stockholders at the agreed
upon level (7.8% of the recapitalized Company or 2.9% of the outstanding Shares
prior to the recapitalization) did not affect their assessment that the
Transactions were fair to the Company's stockholders. In reaching this
determination, the Disinterested Directors acknowledged that the Transactions
would eliminate the opportunity for the stockholders, other than the Continuing
Stockholders, to participate in the future growth of the Company, but also
recognized that the Transactions would limit the stockholders' exposure to the
risks of any future decrease in the value of the Company. In addition, the
Disinterested Directors focused on the fact that the Offer Price was determined
prior to any discussions regarding the Continuing Stockholders' retention of
certain Shares to facilitate recapitalization accounting treatment. Bowles
Hollowell, after performing additional analyses and taking into consideration
the Company's third quarter results, advised the Disinterested Directors that
such analyses and considerations did not effect its original determination as to
the fairness of the Offer Price and the Transactions. After consideration of
Bowles Hollowell's updated analysis, the Disinterested Directors reaffirmed that
the Offer Price was determined before the negotiations that resulted in the
Continuing Stockholders maintaining their interests in the Company, agreed that
the Offer and Merger were fair to, and in the best interests of, the
stockholders, and unanimously recommended that the Board approve the
Transactions. Following the Disinterested Directors meeting, the full Board met
with Bowles Hollowell and legal counsel. Bowles Hollowell reviewed with the
Board the updated analysis presented to the Disinterested Directors and rendered
to the Board an oral opinion (which opinion was subsequently confirmed by
delivery of a written opinion dated April 26, 1999) to the effect that, as of
the date of such opinion and based upon and subject to certain matters stated
therein, the Offer Price was fair from a financial point of view to the holders
of the Shares (other than the Continuing Stockholders with respect to their
retained Shares). Thereafter, the directors unanimously determined, after giving
careful consideration to a number of factors including the recommendation of the
Disinterested Directors, that the Transactions, taken together, were fair to,
and in the best interests of, the Company and its stockholders, and unanimously
approved the Transactions.
On April 26, 1999, the Company entered into the Merger Agreement with Buyer
and Merger Subsidiary and the Continuing Stockholders entered into the
Stockholders Agreement with Buyer and Merger Subsidiary. The Company publicly
announced the proposed Transactions prior to the commencement of trading of the
Company's stock on April 27, 1999. The Offer was commenced on May 3, 1999 and
was consummated on June 1, 1999. The Stock Purchase was also consummated on June
1, 1999. As a result, Buyer owns approximately 89.6% of the Company's total
outstanding Shares.
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<PAGE> 15
RECOMMENDATION OF THE DISINTERESTED DIRECTORS AND THE BOARD; FAIRNESS OF THE
TRANSACTIONS
Recommendation of Disinterested Directors and the Board. The Disinterested
Directors and the Board at a special meeting held on April 26, 1999 each
unanimously (i) determined that the Offer and the Merger are fair to, and in the
best interests of, the stockholders of the Company, whether affiliated or
unaffiliated, (ii) approved the Merger Agreement, the Stockholders Agreement and
the Transactions and (iii) recommended that the Company's stockholders accept
the Offer and tender their Shares thereunder.
Factors Considered by the Disinterested Directors and the Board in Reaching
its Recommendation. In determining that the Transactions, taken together, are
fair to, and in the best interests of, the stockholders of the Company, the
Disinterested Directors and the Board of Directors considered, among other
things, the following:
- that the $14.25 per Share price represents a premium of approximately 31%
over the closing price of the Shares on Nasdaq on April 26, 1999, the
last day of trading prior to the announcement of the Offer, and a premium
of approximately 35% over the average of the closing prices of the Shares
on Nasdaq for the thirty trading days ending on April 26, 1999;
- the financial and other terms and conditions of the Merger Agreement, the
Offer and the Merger, including the amount and form of the consideration
being offered, the parties' representations, warranties and covenants and
the conditions to their respective obligations;
- the financial condition, results of operations, cash flows and prospects
of the Company, as well as the Boards' knowledge of the business,
operations, assets and properties of the Company on both a historical and
prospective basis;
- the recent and historical market prices and trading volume of the
Company's common stock and the premium to such market prices represented
by the Offer Price;
- the current status of the industry in which the Company competes,
including significant trends affecting such industry, and the Company's
position in that industry;
- the financial resources and business reputation of the Buyer and its
ability to obtain funding for the Offer and complete the Merger in a
timely manner;
- the extensive solicitation and auction process leading up to the Buyer's
bid, which was considered by the Board to be the most attractive bid made
for the Company, and the arms-length negotiations between Buyer and the
Company that resulted in the Merger Agreement and the Offer Price;
- the fact that the Merger Agreement permits the Company's Board, in the
exercise of its fiduciary duties, to terminate the Merger Agreement in
favor of a superior proposal and that the break-up fee payable upon such
termination ($3,000,000 plus up to $1,000,000 of documented expenses)
would not effectively preclude a superior proposal;
- the opinion of Bowles Hollowell dated April 26, 1999 to the effect that
based upon its analysis and subject to certain matters stated therein,
the Offer Price to be received by the stockholders of the Company
pursuant to the Transactions (other than the Continuing Stockholders with
respect to their retained Shares) is fair from a financial point of view
to such stockholders;
- the view of the Board, based in part upon the presentations of Bowles
Hollowell, that after taking into consideration the extensive
solicitation and auction process completed by the Company, it would be
unlikely that a superior proposal would be presented;
- the alternatives available to the Company, including continuing to
maintain the Company as an independent company and the possibility that
if the Company remained as an independent public corporation, the price
that might be received by the holders of the Shares in the open market or
in a future transaction might be less than the Offer Price because of a
decline in the market price of the Shares or the stock market in general;
and
- the fact that the Continuing Stockholders agreed to tender approximately
97% of their Shares (excluding employee stock options) in the Offer.
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<PAGE> 16
The Board and the Disinterested Directors determined that it was not
necessary to appoint a committee of independent directors or an unaffiliated
representative to act solely on behalf of the unaffiliated stockholders of the
Company for the purpose of negotiating the terms of the Merger agreement. In
making such determination, the Board and the Disinterested Directors carefully
considered the fact that proposals to acquire the Company were solicited on
behalf of the Company prior to any consideration of whether any stockholders
would retain an equity interest in the Surviving Corporation, and noted that the
Disinterested Directors are not employed by the Company and will have no
financial interest in the Company following consummation of the Merger. The
Disinterested Directors were given an opportunity to separately meet with Bowles
Hollowell and legal counsel and evaluate the fairness of the Transactions to
unaffiliated stockholders. Thereafter, all of the Directors, including the
Disinterested Directors, voted to approve the Transactions.
In connection with its deliberations, the Board did not consider, and did
not request that Bowles Hollowell evaluate the Company's liquidation value. The
Board did not view the Company's liquidation value to be a relevant measure of
valuation, given that the Offer Price significantly exceeded the book value per
Share of the Company, and it was the Board's view that the Company is more
valuable as a going concern than its net book value per Share. However, there
can be no assurance that the liquidation value would not produce a higher
valuation of the Company than its value as a going concern.
The foregoing discussion of factors considered by the Board and the
Disinterested Directors is not intended to be exhaustive. Neither the Board nor
the Disinterested Directors assigned relative weights to the above factors or
determined that any factor was of particular importance. Rather, the Board and
the Disinterested Directors each viewed its position and recommendations as
being based on the totality of the information presented and considered by it.
In addition, it is possible that different members of the Board and different
Disinterested Directors assigned different weights to the factors.
OPINION OF BOWLES HOLLOWELL
The Company engaged Bowles Hollowell to act as its exclusive financial
advisor in connection with the Offer and the Merger. On April 26, 1999, at a
meeting of the Board held to evaluate the proposed Transactions, Bowles
Hollowell rendered to the Board an oral opinion (which opinion was subsequently
confirmed by delivery of a written opinion dated April 26, 1999) to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the Offer Price and the Merger Consideration to be received in the
Offer and the Merger by the holders of Shares (other than Continuing
Stockholders with respect to their retained Shares) was fair from a financial
point of view to such holders. No limitations were imposed by the Board upon
Bowles Hollowell with respect to the investigations made or the procedures
followed by it in rendering its opinion.
The full text of the written opinion of Bowles Hollowell dated April 26,
1999, which sets forth the assumptions made, matters considered, and limitations
of the review undertaken, is attached as SCHEDULE II to this Information
Statement and is incorporated herein by reference. Bowles Hollowell's opinion is
directed to the Board, addresses only the fairness of the Offer Price to be
received in the Offer and the Merger by the holders of Shares (other than the
Continuing Stockholders with respect to their retained Shares) from a financial
point of view, and does not constitute a recommendation to any stockholder as to
whether or not such stockholder should tender Shares in the Offer. The summary
of the opinion of Bowles Hollowell set forth herein is qualified in its entirety
by reference to the full text of such opinion.
In arriving at its opinion, Bowles Hollowell reviewed and analyzed certain
publicly available financial information and other information concerning the
Company and certain internal analyses and other information furnished to Bowles
Hollowell by the Company. Bowles Hollowell also held discussions with members of
senior management of the Company regarding the business and prospects of the
Company. In addition, Bowles Hollowell (i) reviewed the reported prices and
trading activity for the Shares, (ii) compared certain financial and stock
market information for the Company with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which Bowles Hollowell deemed
comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement
as furnished to Bowles Hollowell in draft form dated April 25, 1999, and (v)
performed such other studies and analyses and considered such other factors as
Bowles Hollowell deemed appropriate. In addition, at the request of the Board,
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<PAGE> 17
Bowles Hollowell reviewed the Company's third quarter results and determined
that such results did not impact on its opinion as to the fairness to the
stockholders of the Company of the Transactions.
As described in its opinion, Bowles Hollowell assumed and relied upon,
without independent verification, the accuracy, completeness, and fairness of
the information furnished to or otherwise reviewed by or discussed with Bowles
Hollowell for purposes of its opinion. With respect to the information relating
to the prospects of the Company, Bowles Hollowell assumed that such information
reflected the best currently available judgments and estimates of the management
of the Company as to the likely future financial performance of the Company.
Bowles Hollowell did not make nor was it provided with an independent evaluation
or appraisal of the assets or liabilities of the Company. In connection with its
engagement to provide financial advisory services to the Board concerning
strategic alternatives, Bowles Hollowell was requested to solicit, and did
solicit, interest from third parties with respect to the acquisition of the
Company. In arriving at its opinion, Bowles Hollowell considered the nature,
scope, and results of such solicitation. Bowles Hollowell's opinion was based on
market, economic, and other conditions as they existed and could be evaluated as
of the date of its opinion. Although Bowles Hollowell evaluated the Offer Price
from a financial point of view, the type and amount of consideration payable in
the Transactions was determined through negotiation between the Company and
Buyer.
The following is a summary of the material analyses and factors considered
by Bowles Hollowell in connection with its opinion to the Board dated April 26,
1999:
Analysis of Selected Public Company Trading and Financial Information.
Bowles Hollowell compared certain financial and stock market information
for the Company with similar information for six selected publicly held
companies in the original equipment manufacturing ("OEM") sector of the
automotive components industry: Autocam Corporation, Borg-Warner
Automotive, Inc., Citation Corporation, Dana Corporation, Linamar
Corporation and Simpson Industries, Inc. (collectively, the "Selected
Companies"). Bowles Hollowell calculated market values relative to each
company's earnings per share ("EPS") for the latest 12 months and calendar
year 1999, and enterprise values (equity market value, plus debt, less cash
and equivalents) relative to each company's revenues, earnings before
interest and taxes ("EBIT"), and earnings before interest, taxes,
depreciation, and amortization ("EBITDA") for the latest 12 months. All
multiples were based on closing stock prices on April 20, 1999. EPS
estimates for the Selected Companies were based on analysts' estimates as
reported by First Call or I/B/E/S, both of which are market research
databases, and EPS estimates for the Company were based on analysts'
estimates as reported by First Call. This analysis indicated multiples for
the Selected Companies of latest 12 months and estimated calendar 1999 EPS
of 8.3x to 17.6x (with a median of 13.5x) and 7.2x to 11.5x (with a median
of 8.9x), respectively, and latest 12 months revenues, EBIT and EBITDA of
0.6x to 1.7x (with a median of 0.9x), 8.2x to 12.2x (with a median of
10.0x) and 4.7x to 8.6x (with a median of 6.3x), respectively. Implied
multiples for the Company based on the Offer Price of latest 12 months and
estimated calendar 1999 EPS of 13.8x (based on latest 12 months EPS), 13.4x
(based on calendar 1999 EPS estimates as reported by First Call),
respectively, and latest 12 months revenues, EBIT and EBITDA of 1.0x, 9.7x
and 6.8x, respectively, compare favorably with the preceding multiples for
the Selected Companies. Although the implied multiple of EBIT is slightly
below the median EBT multiple of the Selected Companies, the implied
multiple is well within the range of multiples for the Selected Companies.
Furthermore, Bowles Hollowell believes that implied multiples of the
Company (market capitalization of $53.1 million) compared to the Selected
Companies (market capitalization ranging from $55.2 million to $7.8
billion, with a median of $651.1 million). Bowles Hollowell believes its
analysis of the Selected Companies supports its conclusion as to the
fairness of the Offer Price from a financial point of view.
Analysis of Selected Merger and Acquisition Transactions. Bowles
Hollowell reviewed the purchase price and implied transaction multiples
paid in twenty selected merger and acquisition transactions in the OEM
sector of the automotive components industry, consisting of
(acquiror/target): Hayes Lemmerz International, Inc./CMI International,
Inc., TRW Inc./Lucas Varity plc(pending), Borg-Warner Automotive,
Inc./Kuhlman Corporation, Federal-Mogul Corporation/Cooper Automotive,
Oxford Automotive, Inc./Eaton Suspension Division, Federal-Mogul
Corporation/T&N plc, Newcor, Inc./Turn-Matic, Inc., Newcor, Inc./ The Deco
Group, Newcor, Inc./Machine Tool & Gear, Inc., Delco Remy International,
Inc./Ballantrae Corporation, Dura Automotive Systems, Inc./GT Automotive
Systems, Inc., Oxford Automotive, Inc./
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<PAGE> 18
Howell Industries, Inc., GKN plc/Sinter Metals, Inc., Kaydon
Corporation/Great Bend Industries (Hein-Werner), Tower Automotive,
Inc./A.O. Smith Automotive Products, Intermet Corporation/Sudbury, Inc.,
Gecamex Technologies, Inc./Tarxien Corporation, Borg-Warner Automotive,
Inc./Three Divisions of Coltec Automotive, Venture Holdings Trust/Bailey
Corporation, and Eaton Corporation/Capco Automotive Products Corporation
(the "Selected Merger and Acquisition Transactions"). All multiples were
based on publicly available information at the time of announcement of such
transaction. This analysis indicated multiples of latest 12 months EPS and
latest 12 months revenues, EBIT and EBITDA in the Selected Merger and
Acquisition Transactions of 6.5x to 25.9x (with a median of 15.7x), 0.2x to
1.5x (with a median of 1.0x), 6.3x to 16.8x (with a median of 10.0x), and
4.6x to 10.4x (with a median of 6.7x). All of the Selected Merger and
Acquisition Transactions involved strategic buyers. Implied multiples for
the Company based on the Offer Price of latest 12 months EPS revenues,
EBIT, and EBITDA of 13.8x, 1.0x, 9.7x, and 6.8x, respectively, compare
favorably with the preceding multiples for the Selected Merger and
Acquisition Transactions. Bowles Hollowell also compared the premiums paid
in the Selected Merger and Acquisition Transactions with the premium
payable in the Transactions. The premiums paid in the Selected Merger and
Acquisition Transaction, based on the target company's closing stock price
30 days prior to public announcement of such transaction, were 5.3% to
78.1% (with a median of 40.5%). The premium payable in the Offer and the
Merger, based on the closing stock price of the Shares 30 days prior to the
Board meeting held on April 22, 1999 to evaluate the proposed Transactions,
was 39.0%. Although the implied multiples of latest 12 months EPS and EBIT
and the premium payable are slightly below the median comparable multiples
of premium paid of the Selected Merger and Acquisition Transactions, the
implied multiples and premium payable are well within the range of
multiples and premiums paid of the Selected Merger and Acquisition
Transactions. Furthermore, Bowles Hollowell believes the implied multiples
and premium payable compare favorably to the Selected Merger and
Acquisition Transactions multiples and premiums paid given the Company's
small size (enterprise value of $69.1 million) compared to the Selected
Merger and Acquisition Transactions (enterprise value ranging from $17.5
million to $6.6 billion, with the median of $110.0 million). Bowles
Hollowell believes its analysis of Selected Merger and Acquisition
Transaction supports its conclusion as to the fairness of the Offer Price
from a financial point of view.
Discounted Cash Flow Analysis. Bowles Hollowell performed a discounted
cash flow analysis of the Company to estimate the present value of the
stand-alone, unlevered, after-tax free cash flows that the Company could
generate over the fiscal years 2000 through 2004, based on internal
estimates of the management of the Company. Bowles Hollowell did not
discount or otherwise risk-adjust management's growth and EBITDA estimates.
The stand-alone discounted cash flow analysis of the Company was determined
by (i) adding (x) the present value at June 30, 1999 of projected free cash
flows over the five-year period 2000 through 2004, and (y) the present
value at June 30, 1999 of the estimated perpetual value of the Company in
year 2004 and (ii) subtracting the projected net debt of the Company at
June 30, 1999. The range of estimated perpetual values for the Company at
the end of the five-year period was calculated by applying perpetual growth
rates ranging from 2.0% to 4.0%. The cash flows and perpetual values of the
Company were discounted to present value using discount rates ranging from
12.9% to 14.9%. This analysis yielded an equity reference range for the
Company of approximately $12.03 to $18.40 per Share as compared to the
Offer Price.
Certain Other Factors. In connection with its opinion, Bowles
Hollowell also reviewed and considered, among other things, (i) the
indications of interest and bids of third parties other than CK & Co., (ii)
the historical and pro forma financial profile of the Company, (iii) the
historical trading volumes and market prices for the Shares, and movements
in the Shares relative to the S&P 500 Index, the Nasdaq Composite, and the
common stock of the Selected Companies, and (iv) the ownership profile of
the Company.
The summary set forth above does not purport to be a complete description
of the opinion of Bowles Hollowell to the Board or the financial analyses
performed and factors considered by Bowles Hollowell in connection with its
opinion. A copy of Bowles Hollowell's written presentation to the Board with
respect to its opinion has been filed as an exhibit to the Schedule 13E-3 filed
with the Securities and Exchange Commission with respect to the Transaction and
will be available for inspection and copying at the principal executive offices
of the Company during regular business hours by any interested stockholder of
the Company or representative of
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<PAGE> 19
such stockholder who has been designated in writing and may be inspected,
copied, and obtained by mail from the Commission. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Bowles Hollowell believes
that its analyses and the summary set forth above must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
or selecting portions of the above summary, without considering all factors and
analyses, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In performing its analyses, Bowles
Hollowell made numerous assumptions with respect to industry performance,
general business, economic, market, and financial conditions and other matters,
many of which are beyond the control of the Company. No company, transaction, or
business used in such analyses as a comparison is identical to the Company or
the proposed Transactions, nor is an evaluation of the results of such analyses
entirely mathematical; rather, such analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading, or other values of the
companies, business segments, or transactions being analyzed. The estimates
contained in such analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Bowles Hollowell's
opinion and financial analyses were only one of many factors considered by the
Board in its evaluation of the proposed Transactions and should not be viewed as
determinative of the views of the Board or management with respect to the
Transactions or the consideration payable in the Transactions.
Bowles Hollowell is a nationally recognized investment banking firm and, as
a part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers,
acquisitions, tender offers, divestitures, leveraged buyouts, and private
placements of debt and equity securities. The Company selected Bowles Hollowell
to serve as its financial advisor based on Bowles Hollowell's reputation,
expertise, and familiarity with the Company. Affiliates of Bowles Hollowell have
also participated, with the consent of the Board, as syndication agent and
lender in connection with the Debt Financing and as the dealer manager with
respect to the Offer, for which services such affiliates will receive customary
compensation. See "FINANCING OF THE TRANSACTIONS". In the ordinary course of
business, affiliates of Bowles Hollowell may actively trade the securities of
the Company for their own account and the accounts of its customers and,
accordingly, may at any time hold a long or short position in securities of the
Company.
Pursuant to the terms of Bowles Hollowell's engagement, the Company paid to
Bowles Hollowell upon consummation of the Offer an aggregate financial advisory
fee of $1,511,773 for its services as financial advisor. In addition, the
Company has agreed to reimburse Bowles Hollowell for its reasonable
out-of-pocket expenses, including reasonable fees and disbursements of counsel,
and to indemnify Bowles Hollowell and certain related parties against certain
liabilities, including certain liabilities under the federal securities laws,
relating to, or arising out of, its engagement.
PAYMENT FOR SHARES
General. At the effective time of the Merger, the Company will make
available to the Paying Agent for the holders of record of Shares, as needed,
the amount of cash to be paid in respect of those Shares converted into the
right to receive the Merger Consideration pursuant to the Merger. Holders of
record should use the Letter of Transmittal to be provided under separate cover
to effect the surrender of certificates evidencing Shares in exchange for the
Merger Consideration. All certificates so surrendered will be canceled. Upon
consummation of the Merger and surrender of certificates evidencing Shares,
together with a duly executed Letter of Transmittal, the holder of record
thereof will receive the Merger Consideration in exchange for each Share
surrendered. Any cash held by the Paying Agent that remains unclaimed by
stockholders for one year after the effective time of the Merger will be
returned to the Company, as the Surviving Corporation of the Merger, upon
demand, and thereafter stockholders may look, subject to applicable abandoned
property, escheat and other similar laws, only to the Company for payment
thereof.
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Letter of Transmittal. A Letter of Transmittal will be sent to all
stockholders of the Company under separate cover. The Letter of Transmittal will
advise each stockholder of the procedures for surrendering certificates
evidencing Shares to the Paying Agent in exchange for the Merger Consideration.
Valid Surrender of Shares. For Shares to be validly surrendered pursuant to
the Merger, a Letter of Transmittal (or a manually signed facsimile thereof),
properly completed and duly executed, with any required signature guarantees,
must be received by the Paying Agent, at one of its addresses set forth in the
Letter of Transmittal and either (i) certificates representing Shares must be
received by the Paying Agent or (ii) Shares must be delivered by book-entry
transfer.
Book-Entry Transfer. The Paying Agent will establish an account with
respect to the Shares at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Merger. Any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of Shares by causing the Book-Entry Transfer Facility to transfer such
Shares into the Paying Agent's account at the Book-Entry Transfer Facility in
accordance with the procedures for such transfer.
Signature Guarantees. Signatures on Letters of Transmittal must be
guaranteed by a member firm of a registered national securities exchange
(registered under Section 6 of the Exchange Act) or of the National Association
of Securities Dealers, Inc., or by a commercial bank or trust company having an
office or correspondent in the United States or by any other "Eligible Guarantor
Institution" (as defined in Rule 17Ad-15 under the Exchange Act) (each of the
foregoing constituting an "Eligible Institution"), unless the Shares delivered
therewith are delivered (i) by a registered holder of Shares who has not
completed either the box entitled "Special Delivery Instructions" or the box
entitled "Special Payment Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution. If the certificates representing Shares
are registered in the name of a person other than the signer of the Letter of
Transmittal or if payment is to be made to a person other than the registered
holder, then the certificates representing Shares must be endorsed or
accompanied by appropriate stock powers, in each case signed exactly as the name
or names of the registered holder or holders appear on the certificates, with
the signatures on the certificates or stock powers guaranteed as described above
and as provided in the Letter of Transmittal.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE
STOCKHOLDER. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
Backup Federal Income Tax Withholding. To prevent backup federal income tax
withholding of 31% of the aggregate Merger Consideration payable to a
stockholder, stockholders must provide the Paying Agent with his or her correct
taxpayer identification number and certify that such number is correct and that
he or she is not subject to backup withholding of federal income tax by
completing the substitute Form W-9 included in the Letter of Transmittal.
APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, any stockholder who does not wish to
accept the Merger Consideration to be paid pursuant to the Merger Agreement may
dissent from the Merger and elect to have the fair value of such stockholder's
Shares (exclusive of any element of value arising from the accomplishment or
expectation of the Merger) judicially determined and paid to such stockholder in
cash, together with a fair rate of interest, if any, provided that such
stockholder complies with the provisions of Section 262 of the DGCL. The
following discussion is not a complete statement of the law pertaining to
appraisal rights under Delaware law, and is qualified in its entirety by the
full text of Section 262 of the DGCL, which is attached as SCHEDULE III to this
Information Statement. All references in Section 262 of the DGCL and in this
summary to a "stockholder" are to the record holder of Shares as to which
appraisal rights are asserted.
Under Section 262 of the DGCL, where a proposed merger is approved by
written consent of stockholders, the corporation must notify each of its
stockholders that appraisal rights are available, and must include in such
notice a copy of Section 262 of the DGCL. This Information Statement constitutes
such notice to stockholders of
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the Company. ANY STOCKHOLDER WHO WISHES TO EXERCISE SUCH APPRAISAL RIGHTS OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO SHOULD REVIEW CAREFULLY SCHEDULE III TO
THIS INFORMATION STATEMENT BECAUSE FAILURE TO COMPLY WITH THE PROCEDURES
SPECIFIED IN SECTION 262 OF THE DGCL TIMELY AND PROPERLY WILL RESULT IN THE LOSS
OF APPRAISAL RIGHTS. Moreover, because of the complexity of the procedures for
exercising appraisal rights, the Company believes that stockholders who consider
exercising such rights should seek the advice of counsel.
Any stockholder wishing to exercise the right to dissent from the Merger
and demand appraisal under Section 262 of the DGCL must satisfy each of the
following conditions:
- Such stockholder must deliver to the Company a written demand for
appraisal of such stockholder's shares within 20 days after the date of
mailing of this notice of appraisal, which demand will be sufficient if
it reasonably informs the Company of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
stockholder's shares;
- A demand for appraisal should be executed by or on behalf of the
stockholder of record, fully and correctly, as such stockholder's name
appears on the certificates representing the Shares, should specify the
stockholder's name and mailing address, the number of Shares owned and
that such stockholder intends thereby to demand appraisal of such
stockholder's Shares; and
- Such stockholder must continuously hold such shares from the date of
making the demand through the effective time of the Merger. Accordingly,
a stockholder who is the record holder of Shares on the date the written
demand for appraisal is made but who thereafter transfers such shares
prior to the effective time of the Merger will lose any right to
appraisal in respect of such Shares.
If the Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the Shares are owned of record by more than one person as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all owners. An authorized agent, including one or more joint owners,
may execute a demand for appraisal on behalf of a stockholder; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is acting as agent for such owner or
owners. A record holder such as a broker who holds Shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the Shares held
for one or more beneficial owners while not exercising such rights with respect
to the Shares held for one or more beneficial owners; in such case, the written
demand should set forth the number of Shares as to which appraisal is sought,
and where no number of Shares is expressly mentioned the demand will be presumed
to cover all Shares held in the name of the record owner. Stockholders who hold
their Shares in brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their brokers to determine
the appropriate procedures for the making of a demand for appraisal by such a
nominee.
A stockholder who elects to exercise appraisal rights should mail or
deliver a written demand to: Hilite Industries, Inc., Terminal Tower, 50 Public
Square, 32nd Floor, Cleveland, Ohio 44113, Attention: Chief Executive Officer.
Within 120 days after the effective time of the Merger, but not thereafter,
either the Surviving Corporation or any stockholder who has complied with the
requirements of Section 262 of the DGCL and who is otherwise entitled to
appraisal rights, may file a petition in the Delaware Chancery Court demanding a
determination of the value of the Shares held by all dissenting stockholders.
The Company does not presently intend to file such a petition, and stockholders
seeking to exercise appraisal rights should not assume that the Surviving
Corporation will file such a petition or that the Surviving Corporation will
initiate any negotiations with respect to the fair value of such Shares.
Accordingly, stockholders who desire to have their Shares appraised should
initiate any petitions necessary for the perfection of their appraisal rights
within the time periods and in the manner prescribed in Section 262 of the DGCL.
Inasmuch as the Company has no obligation to file such a petition, the failure
of a stockholder to do so within the period specified could nullify such
stockholder's previous written demand for appraisal. In any event, at any time
within 60 days after the effective time of the Merger (or at any time thereafter
with the written consent of the Company), any stockholder who has demanded
appraisal has the right to withdraw the demand and to accept payment of the
Merger Consideration.
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Pursuant to the Merger Agreement, the Company has agreed to give Buyer
prompt notice of any demands for appraisal received by the Company, and, prior
to the effective time of the Merger:
- Buyer has the right to direct all negotiations and proceedings with
respect to such demands, and
- The Company will not, except with the prior written consent of Buyer,
make any payment with respect to, or settle or offer to settle, any such
demands.
Within 120 days after the effective time of the Merger, any stockholder who
has complied with the provisions of Section 262 of the DGCL to that point in
time will be entitled to receive from the Surviving Corporation, upon written
request, a statement setting forth the aggregate number of Shares not voted in
favor of the Merger Agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such Shares. The
Surviving Corporation must mail such statement to the stockholder within 10 days
of receipt of such request.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Chancery Court will determine which stockholders are
entitled to appraisal rights and will appraise the "fair value" of their Shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. The costs of the action may be
determined by the Delaware Chancery Court and taxed upon the parties as the
Delaware Chancery Court deems equitable. Upon application of a dissenting
stockholder, the Delaware Chancery Court may also order that all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all of
the Shares entitled to appraisal. Section 262 of the DGCL provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." STOCKHOLDERS CONSIDERING SEEKING
APPRAISAL SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED
UNDER SECTION 262 OF THE DGCL COULD BE MORE THAN, THE SAME AS OR LESS THAN THE
CONSIDERATION THEY WOULD RECEIVE PURSUANT TO THE MERGER AGREEMENT IF THEY DID
NOT SEEK APPRAISAL OF THEIR SHARES.
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 of the DGCL will not, after the effective time of the Merger, be
entitled to vote the Shares subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those Shares
(except dividends or other distributions payable to holders of record of Shares
as of a record date prior to the effective time of the Merger).
At any time within 60 days after the effective time of the Merger, any
stockholder who has demanded appraisal rights will have the right to withdraw
such demand for appraisal and to accept the terms offered in the Merger; after
this period, the stockholder may withdraw such demand for appraisal only with
the consent of the Surviving Corporation. If no petition for appraisal is filed
with the Delaware Chancery Court within 120 days after the effective time of the
Merger, or if any such demanding stockholder has withdrawn such demand for
appraisal as discussed in the preceding sentence, stockholders' rights to
appraisal will cease, and all holders of Shares will be entitled to receive the
Merger Consideration. Any stockholder may withdraw such stockholder's demand for
appraisal by delivering to the Surviving Corporation a written withdrawal of
such stockholder's demand for appraisal and acceptance of the Merger, except
that (i) any such attempt to withdraw made more than 60 days after the effective
time of the Merger will require written approval of the Surviving Corporation
and (ii) no appraisal proceeding in the Delaware Chancery Court will be
dismissed as to any stockholder without the approval of the Delaware Chancery
Court, and such approval may be conditioned upon such terms as the Delaware
Chancery Court deems just. If (i) the Surviving Corporation does not approve a
stockholder's request to withdraw a demand for appraisal when such approval is
required or (ii) the Delaware Chancery Court does not approve the dismissal of
an appraisal proceeding, the stockholder would be entitled to receive only the
appraised value determined in any such appraisal proceeding, which value could
be lower than the value of the Merger Consideration.
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH IN SECTION 262 OF
THE DGCL WILL RESULT IN THE LOSS OF A STOCKHOLDER'S STATUTORY APPRAISAL RIGHTS.
CONSEQUENTLY, ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS IS ADVISED TO
CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for Shares pursuant to the Merger or in connection with
the exercise of appraisal rights will be a taxable transaction for U.S. federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code") and may also be a taxable transaction under applicable state, local or
foreign tax laws. In general, a stockholder will recognize gain or loss for U.S.
federal income tax purposes equal to the difference between the amount of cash
received in exchange for the Shares sold and such stockholder's adjusted tax
basis in such Shares. Assuming the Shares constitute capital assets in the hands
of the stockholder, such gain or loss will be capital gain or loss. In the case
of an individual stockholder, such capital gain generally will be subject to a
maximum federal income tax rate of 20% if the individual has held the Shares for
more than one year. Gain or loss will be calculated separately for each block of
Shares converted pursuant to the Merger. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors in this regard.
In general, in order to prevent backup federal income tax withholding at a
rate of 31% on the cash consideration to be received pursuant to the Merger,
each stockholder who is not otherwise exempt from such requirements must provide
such stockholder's correct taxpayer identification number (and certain other
information) by completing the Substitute Form W-9 in the Letter of Transmittal.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
STOCKHOLDERS, INCLUDING BROKER-DEALERS, STOCKHOLDERS WHO ACQUIRED SHARES
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION,
INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN
CORPORATIONS.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW, WHICH IS SUBJECT TO
CHANGE POSSIBLY WITH RETROACTIVE EFFECT. STOCKHOLDERS ARE URGED TO CONSULT THEIR
TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER AND THE
MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
TAX LAWS.
CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
General. Except as set forth in this Information Statement, the Company is
not aware of any license or regulatory permit that appears to be material to its
business that might be adversely affected by the consummation of the Merger or
of any approval or other action by any government or governmental,
administrative or regulatory authority or agency, domestic or foreign, that
would be required for the consummation of the Merger. Should any such approval
or other action be required, the Company currently contemplates that it will
seek such approval or other action. There can be no assurance that any such
approval or other action, if needed, would be obtained or would be obtained
without substantial conditions or that the failure to obtain any such approval
or other action might not result in adverse consequences to the Company's
business. The Company intends to make all required filings under the Exchange
Act.
Antitrust. The Merger is not subject to compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
and the rules and regulations promulgated thereunder by the Federal Trade
Commission, based upon an analysis of the "size of person test" as set forth in
the HSR Act.
Delaware Business Combination Statute. Section 203 of the DGCL, in general,
prohibits a Delaware corporation such as the Company, from engaging in a
"Business Combination" (defined as a variety of transactions, including mergers,
as set forth below) with an "Interested Stockholder" (defined generally as a
person that is the beneficial owner of 15% or more of a corporation's
outstanding voting stock) for a period of three years following the date that
such person became an Interested Stockholder unless (a) prior to the date such
person became an Interested Stockholder, the board of directors of the
corporation approved either the Business Combination or the transaction that
resulted in the stockholder becoming an Interested Stockholder, (b) upon
consummation of the transaction that resulted in the stockholder becoming an
Interested Stockholder, the Interested Stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also officers of the
corporation and employee stock ownership plans that do not provide employees
with the right to determine confidentially whether Shares
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held subject to the plan will be tendered in a tender or exchange offer or (c)
on or subsequent to the date such person became an Interested Stockholder, the
Business Combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders, and not by written consent, by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the corporation not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things (a) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203; (b)
the corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment of the certificate of incorporation or by-laws must be approved by the
affirmative vote of a majority of the Shares entitled to vote, which amendment
would not be effective until 12 months after the adoption of such amendment and
would not apply to any Business Combination between the corporation and any
person who became an Interested Stockholder of the corporation on or prior to
the date of such adoption (a bylaw amendment adopted pursuant to this paragraph
shall not be further amended by the board of directors); (c) the corporation
does not have a class of voting stock that is (1) listed on a national
securities exchange, (2) authorized for quotation on an inter-dealer quotation
system of a registered national securities association or (3) held of record by
more than 2,000 stockholders, unless any of the foregoing results from action
taken, directly or indirectly, by an Interested Stockholder or from a
transaction in which a person became an Interested Stockholder; or (d) a
stockholder became an Interested Stockholder "inadvertently" and thereafter
divests itself of a sufficient number of Shares so that such stockholder ceases
to be an Interested Stockholder. Under Section 203, the restrictions described
above also do not apply to certain Business Combinations proposed by an
Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
Section 203 provides that, during such three-year period, the corporation
may not merge or consolidate with an Interested Stockholder or any affiliate or
associate thereof, and also may not engage in certain other transactions with an
Interested Stockholder or any affiliate or associate thereof, including, without
limitation, (a) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets (except proportionately as a stockholder of the
corporation) having an aggregate market value equal to 10% or more of the
aggregate market value of all assets of the corporation determined on a
consolidated basis or the aggregate market value of all the outstanding stock of
a corporation; (b) any transaction which results in the issuance or transfer by
the corporation or by certain subsidiaries thereof of any stock of the
corporation or such subsidiaries to the Interested Stockholder, except pursuant
to a transaction that effects a pro rata distribution to all stockholders of the
corporation; (c) any transaction involving the corporation or certain
subsidiaries thereof which has the effect of increasing the proportionate share
of the stock of any class or series, or securities convertible into the stock of
any class or series, of the corporation or any such subsidiary which is owned
directly or indirectly by the Interested Stockholder (except as a result of
immaterial changes due to fractional share adjustments); or (d) any receipt by
the Interested Stockholder of the benefit (except proportionately as a
stockholder of such corporation) of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation.
The provisions of Section 203 are not applicable to the Merger as a result
of the approval by the Board of Directors of the Company of the Merger Agreement
and each of the transactions contemplated thereby prior to the execution of the
Merger Agreement.
EFFECT OF THE MERGER ON THE MARKET FOR THE SHARES; EXCHANGE ACT REGISTRATION
Upon consummation of the Offer, Buyer and the Company discontinued the
listing of the Shares on Nasdaq and terminated the registration of the Shares
under the Exchange Act. Because the Shares are delisted, the ability to buy and
sell the Shares has been adversely affected. In addition, the termination of the
registration of the Shares under the Exchange Act has substantially reduced the
information required to be furnished by the Company to holders of Shares and to
the Commission and would make certain provisions of the Exchange Act, such as
the short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with stockholders' meetings and the
requirements of Rule 13e-3 under the Exchange Act
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with respect to the "going private" transactions, no longer applicable to the
Shares. In addition, "affiliates" of the Company and persons holding "restricted
securities" of the Company will be unable to dispose of such securities pursuant
to Rule 144 promulgated under the Securities Act of 1933, as amended.
PURPOSES AND REASONS FOR THE TRANSACTIONS
PURPOSES AND REASONS OF THE COMPANY FOR THE TRANSACTIONS
The purpose of the Offer was to provide the Company's stockholders with
liquidity for their Shares by enabling them to sell their Shares at a fair price
and at a substantial premium over recent and historical market prices. The
Company's management believed that the limited supply of Shares traded in the
public market limited the liquidity of the Shares and negatively impacted the
market price of the Shares.
The acquisition of the Shares was structured as a cash tender offer
followed by a cash merger in order to (i) effect a prompt and orderly transfer
of ownership of the Company from the stockholders to Buyer and the Continuing
Stockholders and (ii) provide stockholders with cash for all of their Shares
more quickly than through alternative transaction structures that had been
considered by the Board.
The structure of the Transactions was the result of extensive negotiations
between Buyer and the Company. In connection with such negotiations, Buyer
indicated its desire to structure the Transactions to qualify for
recapitalization accounting. In order to induce Buyer to proceed with the
Transactions and to provide the Company's stockholders with the benefits of
Buyer's offer for the Company, the Company ultimately agreed to proceed based on
Buyer's proposed structure.
The Board of Directors decided to pursue the Transactions at this time
because of (i) the anticipated impact of certain trends affecting the Company
and its business, including automotive supplier consolidation and the increasing
importance of size and global presence for continuous growth, (ii) the perceived
undervaluation of the Shares in the market, and (iii) the lack of liquidity for
the Shares and the determination that a private sale of the Company would likely
provide substantially greater value to the Company's stockholders than could be
obtained through the public market.
PURPOSES AND REASONS OF BUYER AND THE CONTINUING STOCKHOLDERS FOR THE
TRANSACTIONS
Buyer. Buyer's purpose for engaging in the Transactions is to enable Buyer
to obtain a majority ownership interest in the Company, thereby becoming
entitled to all benefits that result from such ownership. Such benefits include
management and investment discretion with regard to the future conduct of the
business of the Company, the benefits of the profits generated by the operations
of the Company and any increase in the Company's value. Similarly, Buyer will
also bear the risk of any decrease in the value of the Company.
Continuing Stockholders. The Continuing Stockholders' purpose for engaging
in the Transactions was to be able to obtain the Offer Price with respect to a
portion of their respective holdings of the Shares or Shares issuable upon
exercise of outstanding stock options while also maintaining an ownership
position in the Company.
Upon the consummation of the Merger, Buyer and the Continuing Stockholders
will own approximately 92.2% and 7.8%, respectively, of the outstanding Shares.
RECAPITALIZATION
The Transactions have been undertaken as part of a comprehensive plan to
recapitalize the Company through the Company's purchase of the Shares in the
Offer and the Stock Purchase by Buyer. Following consummation of the
Transactions, approximately 2.9% of the Shares outstanding prior to the
Transactions on a fully diluted basis will remain outstanding and will represent
approximately 7.8% of the Shares of the recapitalized Company. Following
consummation of the Offer, Buyer will be able, by virtue of its majority equity
interest in the Company, to direct and control the policies of the Company,
including decisions relating to mergers, sales of
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assets and similar transactions. The Transactions have been structured so as to
qualify for recapitalization accounting treatment.
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
Stockholders should be aware that each of the directors of the Company
prior to the consummation of the Offer (the "Pre-Offer Directors") had, to some
degree, interests which may have presented such directors with actual or
potential conflict of interests in connection with the Transactions. The
Pre-Offer Directors and executive officers of the Company or their affiliates
have received, as a result of the Transactions an aggregate of approximately
$51,400,000 in cash for the Shares beneficially owned by them and their options
to purchase Shares. In addition, the Continuing Stockholders, including those
Continuing Stockholders who are officers and directors of the Company, will have
retained a portion of their Shares.
CHANGE IN CONTROL AGREEMENTS
In December 1998 and January 1999, the Company entered into Change in
Control Retention Bonus and Employment Agreements with seven officers and
directors of the Company: Messrs. Maher, Vercher, Wiegmann, Curto, Reinke,
Johnson and Sundararajan (the "Executive Change in Control Agreements"), and
into Change in Control Retention Bonus NonCompetition and Severance Agreements
with two officers and directors of the Company: Messrs. Berry and Brady (the
"Senior Executive Change in Control Agreement") and with a consultant of the
Company: Lineberger & Co., LLC (the "Consultant Change in Control Agreement",
and together with the Executive Change in Control Agreements and the Senior
Executive Change in Control Agreements, collectively the "Change in Control
Agreements"). The Change in Control Agreements were intended to provide these
executives and the consultant with security against changes in their
relationships with the Company in the event of a change in control of the
Company. The Change in Control Agreements provide that each officer, director or
consultant covered by the agreements is entitled to certain benefits in the
event of a change in control of the Company (as defined in such agreements).
Each Executive Change in Control Agreement provides for a lump-sum cash payment
of one times the executive's annual compensation from the Company (and any
entity in which the Company directly or indirectly owns a majority of the voting
interest) as reflected on the executive's Form W-2 for the last year preceding
the change in control, and for an equal severance payment in case the
executive's employment is terminated within two years following a change in
control for any reason other than by the Company for cause or by the executive
without good reason. The Consultant Change in Control Agreement provides that
upon a change in control, the Company will pay Lineberger & Co., LLC a change in
control bonus of two times its annual consulting fees from the Company (and any
entity in which the Company directly or indirectly owns a majority of the voting
interest) as reflected on the consultant's Form 1099 for the last year preceding
the change in control, and a payment in respect of the Consultant's
non-competition covenant of one time that annual fee. The Senior Executive
Change in Control Agreements provide for a lump-sum cash payment of two times
the senior executive's annual compensation from the Company (and any entity in
which the Company directly or indirectly owns a majority of the voting interest)
as reflected on his Form W-2 for the last year preceding the change in control,
and for one times that annual compensation as a payment in respect of the senior
executive's non-competition covenant; these Senior Executive Change in Control
Agreements also provide for continuation for three years after the termination
of the senior executive's employment of equivalent health, dental, life
insurance and other death benefit programs as in effect at the time of
termination. Each Change in Control Agreement provides that if any portion of
the benefits under the agreement would constitute an excess parachute payment
for purposes of the Code, benefits will be reduced so that the executive will be
entitled to receive an amount equal to the maximum amount which he could receive
without becoming subject to the excise tax imposed by the Code on such certain
excess parachute payments. The consummation of the Offer and the Stock Purchase
constituted a change of control pursuant to the Change in Control Agreements.
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<PAGE> 27
The aggregate cash consideration that was received by officers and
directors of the Company under their respective Change in Control Agreements as
a result of the consummation of the Offer and the Stock Purchase was as follows:
<TABLE>
<S> <C>
Daniel W. Brady............................................. $879,081
Samuel M. Berry............................................. 976,458
Roy Wiegmann................................................ 118,004
Donald M. Maher............................................. 178,465
Arthur D. Johnson........................................... 152,771
Ronald E. Reinke............................................ 124,574
Lineberger & Co., LLC....................................... 924,999
</TABLE>
The Company has agreed to pay Lineberger & Co., LLC its change of control
payment of $924,999 over the next three years and to pay Mr. Brady his change in
control payment of $879,081 in January, 2000.
BONUSES
In connection with the consummation of the Offer and the Stock Purchase,
each of James D. Gerson, Ronald G. Assaf and John F. Creamer, the Company's
outside directors, received the following amounts as termination bonuses,
respectively: $46,250, $46,250 and $34,688.
THE AGREEMENT AMONG STOCKHOLDERS
In connection with the consummation of the Offer and the Stock Purchase,
Buyer, the Continuing Stockholders and First Fidelity Capital, Inc. and
Magnetite Asset Investors L.L.C. (collectively, the "Warrant Holders") entered
into an Agreement Among Stockholders, dated as of June 1, 1999 (the "Agreement
Among Stockholders"). Pursuant to the Agreement Among Stockholders, the parties
agreed to, among other things, (i) restrict the transferability of their
respective Shares, (ii) provide for a right of first refusal to the Company and
subsequently to the other stockholders in the event of any proposed transfer of
Shares, and (iii) provide certain co-sale, drag-along and pre-emptive rights.
The Agreement Among Stockholders also provides that the Board of Directors of
the Company will initially consist of five members: Joseph W. Carreras, Michael
T. Kestner and three representatives designated by certain members of Buyer. In
addition, the Agreement Among Stockholders provides for the repurchase of Shares
owned by members of management of the Company in certain circumstances,
including death, disability and termination of employment of such individuals.
PROJECTIONS AND CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements that
involve risks and uncertainties. Forward-looking statements include the
projections set forth in this Information Statement (the "Projections"). Such
information has been included in this Information Statement for the limited
purpose of giving the Company's stockholders access to financial projections
made by the Company's management in connection with the Transactions. Such
information was prepared by the Company's management for internal use and not
with a view to publication. The Projections were based on assumptions concerning
the Company's products and business prospects in 1999 through 2003, including
the assumption that the Company would continue to operate under the same
ownership structure as then existed except as otherwise noted. The Projections
were also based on other revenue and operating assumptions. Information of this
type is based on estimates and assumptions that are inherently subject to
significant economic and competitive uncertainties and contingencies, all of
which are difficult to predict and many of which are beyond the Company's
control. Accordingly, there can be no assurance that the projected results would
be realized or that actual results would not be significantly higher or lower
than those set forth above. In addition, the Projections were not prepared with
a view to public disclosure or compliance with the published guidelines of the
Commission, or the guidelines established by the American Institute of Certified
Public Accountants regarding projections and forecasts and are included in the
Offer only
22
<PAGE> 28
because such information was made available to Buyer by the Company. Neither
Buyer's nor the Company's independent accountants have examined, compiled or
applied any agreed upon procedures to this information and, accordingly, assume
no responsibility for this information. 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.
The above described projections were calculated based on the following
assumptions:
- The Company's sales department estimated monthly quantity estimates for
fiscal year 1999 and quarterly quantity for fiscal years 2000 and 2001.
The part number sales estimates were based upon an annual build rate of
15 million unit U.S. automotive production. Based on that information,
the existing standard cost in the Company's system was applied to the
related part numbers to calculate the standard gross margin. For new
programs that did not have a standard cost in the Company's system, an
estimated cost was determined based upon bid estimates.
- Material, labor and overhead variances were estimated on a divisional
basis based upon past experience and other known factors. Gross margin
was then computed based upon these results. The gross margin percentages
were reviewed for consistency and reasonableness.
- Detailed selling, general and administrative expenses were estimated
based upon historical experience and other known factors.
- Interest was calculated on estimated loan balances using scheduled
interest rates with no fluctuations expected in rates in the future.
- Taxes were applied on a straight 37.5% of the Company's profit with
respect to the Company's Dallas, Texas operations and 38% at the
Company's subsidiary, North American Spring & Stamping, Inc., consistent
with past practices.
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<PAGE> 29
The Company provided potential bidders with the following projections in
connection with the bid solicitation process conducted by the Company and Bowles
Hollowell:
SUMMARY PROJECTED FINANCIAL RESULTS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDING JUNE 30,
------------------------------------------------------
1999P 2000P 2001P 2002P 2003P
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales:
Brake valves.......................... $34,173 $36,495 $ 42,768 $ 48,168 $ 59,918
Power transmission components......... 28,015 33,254 36,694 38,965 40,737
Specialty components and assemblies... 23,869 21,720 22,320 22,920 23,820
------- ------- -------- -------- --------
Net sales............................. $86,057 $91,469 $101,782 $110,053 $124,475
Gross profit.......................... $17,958 $19,846 $ 22,860 $ 26,341 $ 30,642
Gross profit margin................... 20.9% 21.7% 22.5% 23.9% 24.6%
EBIT(1)............................... $10,058 $11,184 $ 13,536 $ 16,863 $ 20,598
EBIT margin........................... 11.7% 12.2% 13.3% 15.3% 16.5%
EBITDA(1)............................. $13,688 $15,160 $ 17,832 $ 21,579 $ 26,004
EBITDA margin......................... 15.9% 16.6% 17.5% 19.6% 20.9%
Depreciation and amortization......... $ 3,630 $ 3,976 $ 4,296 $ 4,716 $ 5,406
Capital expenditures.................. 3,162 3,073 3,096 6,400 4,400
Basic earnings per share (EPS)(2)..... $ 1.13 $ 1.33 $ 1.68 $ 2.15 $ 2.64
</TABLE>
- ---------------
(1) Excludes expenses related to CEO salary and management fees, and corporate
costs resulting from the public ownership of the Company's stock.
(2) Assumes average weighted number of shares outstanding of 4,900,000 and
annual effective tax rates of 37%.
In addition to the above, the March 11, 1999 letter requesting final bids
sent by Bowles Hollowell to all bidders, indicated that Net Sales and adjusted
EBITDA of the Company for the twelve months ended February 28, 1999 were
approximately $90.2 million and $14.2 million, respectively. Additionally, the
letter indicated the Company's belief that adjusted EBITDA for the fiscal year
ending June 30, 1999 was expected to exceed $14 million.
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<PAGE> 30
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement and is qualified in its entirety by reference to the complete
text of the Merger Agreement, which is included as Schedule I to this
Information Statement.
THE OFFER
The Merger Agreement provided for the commencement of the Offer as promptly
as practicable, but in no event later than five business days after the initial
public announcement of the terms of the Merger Agreement. The obligation of the
Company to commence the Offer, to consummate the Offer and to accept for payment
and to pay for any Shares validly tendered and not withdrawn was subject to the
fulfillment of a number of conditions (the "Offer Conditions"), including, among
other things, there being validly tendered and not withdrawn prior to the
expiration of the Offer at least 2,510,101 Shares. In accordance with the terms
of the Merger Agreement, the Company commenced the Offer on May 3, 1999, and, on
June 1, 1999, purchased all of the 4,730,791 Shares validly tendered and not
withdrawn.
THE STOCK PURCHASE
Pursuant to the Merger Agreement, prior to the consummation of the Offer on
June 1, 1999, the Company sold to Buyer 1,681,414 newly-issued Shares (the
"Buyer Shares") for an aggregate purchase price of $23,960,149 (the number of
Buyer Shares multiplied by $14.25) (the "Purchase Price").
As a condition to the Company's obligation to consummate the Stock
Purchase, Buyer arranged for the Company to receive financing which, together
with the Purchase Price, equaled or was greater than the price paid per share
pursuant to the Offer multiplied by the number of Shares tendered.
THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
conditions set forth therein, and in accordance with the DGCL, the Merger is to
be effected as soon as practicable after satisfaction or waiver of all of the
conditions to the Merger, and Merger Subsidiary is to be merged with and into
the Company upon the filing of a certificate of merger with the Delaware
Secretary of State, or at such later time as specified in the Certificate of
Merger. At the effective time of the Merger, the separate existence of Merger
Subsidiary will cease and the Company will continue as the Surviving Corporation
and will continue to be governed by the laws of the State of Delaware. At the
effective time of the Merger, by virtue of the Merger and without any action on
the part of any stockholder:
- each Share issued and outstanding immediately prior to the effective time
of the Merger will, except Shares to which properly exercised dissenters'
rights are available under the DGCL and exercised and except as otherwise
provided in the following paragraphs, be canceled and converted into the
right to receive the Merger Consideration upon surrender and exchange of
the certificates representing such Shares;
- each Share held by the Company as treasury stock or owned by Merger
Subsidiary or any other subsidiary of Buyer or the Company immediately
prior to the effective time of the Merger will be canceled, and no
payment will be made with respect thereto;
- each share of common stock of Merger Subsidiary outstanding immediately
prior to the effective time of the Merger will be converted and exchanged
for one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation; and
- the Buyer Shares and the Shares retained by the Continuing Stockholders
will not be canceled as provided above, but will remain outstanding.
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<PAGE> 31
CERTIFICATE OF INCORPORATION AND BY-LAWS
The Merger Agreement provides that the Certificate of Incorporation and
By-laws of the Company be, at the effective time of the Merger, the Certificate
of Incorporation and By-laws of the Surviving Corporation.
AGREEMENTS OF THE COMPANY AND BUYER
Pursuant to the Merger Agreement, the Company agreed to cause a meeting of
its stockholders to be duly called and held as soon as reasonably practicable
after the consummation of the Stock Purchase and the Offer for the purpose of
voting on the approval and adoption of the Merger Agreement and the Merger
unless a vote of stockholders of the Company is not required by Delaware law. As
discussed above (see "ACTION BY WRITTEN CONSENT"), Buyer, on June 2, 1999,
acting as a stockholder and the holder of the proxies of the Continuing
Stockholders, adopted the Merger Agreement by written consent in lieu of a
meeting of the stockholders in accordance with the provisions of Section 228 of
the DGCL.
Except as provided for in the Merger Agreement, from the date of the Merger
Agreement until the effective time of the Merger, the Company and its
subsidiaries agreed to conduct their business in the ordinary course consistent
with past practice and in compliance with all applicable laws and regulations
and to use their best efforts to preserve intact their business organizations
and relationships with third parties and to keep available the services of their
present officers and employees. The Merger Agreement provided further that from
the date of the Merger Agreement until the effective time of the Merger:
- the Company would not adopt or propose any change in its Certificate of
Incorporation or By-laws;
- except for the Merger, the Company would not, and would not permit any of
its subsidiaries to, merge or consolidate with any other person or entity
or acquire a material amount of assets of any other person or entity;
- the Company would not, and would not permit any of its subsidiaries to,
sell, lease, license or otherwise dispose of any material assets or
property except (i) pursuant to existing contracts or commitments and
(ii) inventory in the ordinary course consistent with past practice;
- the Company would not, and would not permit any of its subsidiaries to,
(i) take or agree or commit to take any action that would make any
representation and warranty of the Company under the Merger Agreement
inaccurate in any material respect at, or as of any time prior to, the
effective time of the Merger, or (ii) omit, or agree or commit to omit,
to take any action necessary to prevent any such representation or
warranty from being inaccurate in any material respect at any such time;
- the Company would not, and would not permit any of its subsidiaries to,
agree or commit to do any of the foregoing; and
- the Company would not, and would not permit any of its subsidiaries to,
take any of the following actions (other than the Offer and the Stock
Purchase):
O declare, set aside or pay any dividend or other distribution with
respect to any Shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire any outstanding Shares of
capital stock or other securities of, or other ownership interests
in, the Company or any of its subsidiaries (other than the quarterly
dividends paid on the Shares) or split, combination or
reclassification of any of its capital stock or issuance or
authorization of the issuance of any other securities in respect of,
in lieu of or in substitution for Shares of its capital stock;
O incur, assume or guarantee any indebtedness for borrowed money other
than in the ordinary course of business and in amounts and on terms
consistent with past practices;
O make any loan, advance or capital contribution to or investment in
any person or entity other than advances to employees in the
ordinary course of business consistent with past practice and other
than loans, advances or capital contributions to or investments in
wholly-owned subsidiaries of the Company made in the ordinary course
of business consistent with past practices;
26
<PAGE> 32
O cause damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the
Company or any of its subsidiaries which, individually or in the
aggregate, has had or could reasonably be expected to have a
Material Adverse Effect (as defined in this Information Statement);
O (i) make any grant of any severance or termination pay to any
director, officer or employee of the Company or any subsidiary, (ii)
enter into any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any
director, officer or employee of the Company or any of its
subsidiaries, (iii) increase benefits payable under any existing
severance or termination pay policies or employment agreements, (iv)
increase compensation, bonus or other benefits payable to directors,
officers or employees of the Company or any of its subsidiaries, or
(v) enter into any collective bargaining agreements;
O issue, deliver, sell, pledge or otherwise encumber or subject to any
lien any Shares of the Company's or any of its subsidiaries' capital
stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such
Shares, voting securities or convertible securities;
O enter into commitments for capital expenditures involving more than
$100,000 in the aggregate except (i) as may be necessary for the
maintenance of existing facilities, machinery and equipment in good
operating condition and repair in the ordinary course of business,
(ii) as reflected in the capital plan of the Company previously
provided to Buyer, or (iii) tooling costs that are reimbursable by
customer;
O change the accounting principles used by it unless required by
generally accepted accounting principles of the United States
consistently applied;
O make or rescind any express or deemed election or settlement or
compromise of any claim or action relating to U.S. Federal, state or
local taxes, or change any of its methods of accounting or of
reporting income or deductions for U.S. Federal income tax purposes;
O satisfy any claims or liabilities, other than, in the ordinary
course of business consistent with past practice, in accordance with
their terms, liabilities reflected or reserved against in, or
contemplated in, the consolidated financial statements (or the notes
to the financial statements) of the Company included in any of the
Company's Form 10-K's or Form 10-Q's or incurred in the ordinary
course of business consistent with past practice;
O other than in the ordinary course of business consistent with past
practice, (A) modify, amend or terminate any material contract, (B)
waive, release, relinquish or assign any material contract, right or
claim or (C) cancel or forgive any material indebtedness owed to the
Company or any of its subsidiaries; provided, however, that the
Company may not under any circumstance waive or release any of its
rights under any standstill or confidentiality agreement to which it
is party; or
O authorize, commit or agree to take, any of the foregoing actions.
NO SOLICITATION; ACQUISITION PROPOSALS
Pursuant to the Merger Agreement, the Company agreed that it would not, nor
would it permit any of its subsidiaries to, nor would it authorize (and would
use its best efforts not to permit) any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, the Company
or any of its subsidiaries to
- solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed or reasonably likely to
facilitate, any inquiry or the making of any proposal which constitutes
or reasonably may give rise to any inquiry, proposal or offer from any
person other than the Buyer and Merger Subsidiary relating to any (A)
direct or indirect acquisition or purchase of a business that constitutes
15% or more of the net revenues, net income or the assets of the Company
and its subsidiaries, taken as a whole, (B) direct or indirect
acquisition or purchase of 15% or more of any class of equity
27
<PAGE> 33
securities of the Company or any of its subsidiaries whose business
constitutes 15% or more of the net revenues, net income or assets of the
Company and its Subsidiaries, taken as a whole, (C) tender offer or
exchange offer for Shares of any class of equity securities of the
Company or any of its subsidiaries, or (D) merger, consolidation,
business combination, recapitalization, liquidation, dissolution or
similar transaction involving the Company or any of its subsidiaries
other than the transactions contemplated by the Merger Agreement (each, a
"Takeover Proposal"), or
- participate in any discussions or negotiations regarding any Takeover
Proposal.
Notwithstanding the foregoing, if at any time prior to the date the Company
purchases Shares in the Offer (the "Offer Completion Date"), the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that failure to do so would result in a breach of its fiduciary
duties to the Company's stockholders under applicable law, the Company may, in
response to any proposal made by a third party to acquire, for consideration
consisting of cash and/or securities, more than 50% of the combined voting power
of the Shares of Common Stock of the Company then outstanding or all or
substantially all the assets of the Company, and otherwise on terms which the
Board of Directors of the Company determines in its good faith judgment (based
on the advice of a financial advisor of nationally recognized reputation) to be
more favorable to the Company's stockholders than the Offer and the Merger, and
for which financing, to the extent required, is then committed or which, in the
good faith judgment of the Board of Directors of the Company, is reasonably
capable of being obtained by such third party (a "Superior Proposal"), which
Superior Proposal was not solicited by the Company or which did not otherwise
result from a breach of this section and subject to providing prior written
notice of its decision to take such action to Buyer,
- furnish information with respect to the Company and its subsidiaries to
any person making a Superior Proposal pursuant to a customary
confidentiality agreement, and
- participate in discussions or negotiations regarding such Superior
Proposal. Pursuant to the Merger Agreement, the Company, its affiliates
and their respective officers, directors, employees, representatives and
agents agreed to cease all existing activities, discussions and
negotiations with any parties with respect to any Takeover Proposal and
request the return of all confidential information regarding the Company
provided to any such parties pursuant to the terms of any confidentiality
agreement or otherwise.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' LIABILITY
From the effective time of the Merger through the sixth anniversary of the
date on which the effective time of the Merger occurs, Buyer agreed to cause the
Surviving Corporation to indemnify and hold harmless each present and former
officer, director, employee or agent of the Company, including, without
limitation, each person or entity controlling any of the foregoing persons or
entities (each, an "Indemnified Party"), against all claims, losses,
liabilities, damages, judgments, fines, fees, costs or expenses, including,
without limitation, attorneys' fees and disbursements, incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining to
matters existing or occurring at or prior to the effective time of the Merger
(including, without limitation, the Merger Agreement, the Offer Documents (as
defined in the Merger Agreement), the Transactions and the actions contemplated
thereby and giving effect to the consummation of such transactions and actions),
whether asserted or claimed prior to, at or after the effective time of the
Merger, to the fullest extent permitted under the Certificate of Incorporation
or By-Laws of the Company or indemnification agreements in effect on the date of
the Merger Agreement, including provisions relating to advancement of expenses
incurred in the defense of any claim, action, suit, proceeding or investigation.
If any claim, action, suit, proceeding or investigation is brought against an
Indemnified Party (whether arising before or after the effective time of the
Merger), the Indemnified Party may retain counsel satisfactory to such
Indemnified Party and Buyer or the Surviving Corporation will advance the fees
and expenses of such counsel for the Indemnified Party in accordance with the
Certificate of Incorporation or By-Laws of the Company in effect on the date of
the Merger Agreement. Buyer and the Company agree that all rights to
indemnification and all limitations on liability existing in favor of any such
officer, director, employee or agent as provided in the Company's Certificate of
Incorporation and By-laws as in effect as of the date of the Merger
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<PAGE> 34
Agreement survive the Merger and continue in full force and effect unless
required to be amended under applicable law and except to make changes permitted
by law that would enlarge an Indemnified Party's right to indemnification. Any
determination required to be made with respect to whether a person or entity is
entitled to indemnification is to be made by independent legal counsel selected
mutually by such person or entity, and reasonably satisfactory to Buyer;
provided, that Buyer will not be liable for any settlement effected without its
written consent. On or prior to the effective time of the Merger, Buyer agreed
to cause the Surviving Corporation to pre-pay, at no expense to the
beneficiaries, officers' and directors' liability insurance, which will be in
effect for no less than six years after the effective time of the Merger, in
respect of acts or omissions occurring prior to the effective time of the Merger
covering each such person or entity currently covered by the Company's officers'
and directors' liability insurance policy, on terms with respect to coverage and
amount no less favorable than those of such policy in effect on the date of the
Merger Agreement; provided, however, that in no event will Buyer be required to
pay aggregate premiums for such insurance during such six-year period in excess
of nine times the annual premium paid by the Company in 1998 for such purpose;
provided, further, that if the aggregate premiums of such insurance coverage
exceed such amount, Buyer will be obligated to obtain a policy with the best
coverage available, in the reasonable judgment of the Board of Managers of
Buyer, for a cost up to but not exceeding such amount. Buyer agrees to cause the
insurance policy to be in full force and effect with the premiums therefor
prepaid in full, which policy shall by its terms be noncancellable. Buyer agrees
to cause the Surviving Corporation to continue to indemnify, in accordance with
the Company's past practice, certain employees of the Company in respect of
certain lawsuits described in the Merger Agreement.
The Merger Agreement also provides that if any claim is made against any
Indemnified Party, neither the Surviving Corporation nor Buyer will do anything
that would forfeit, jeopardize, restrict or limit the insurance coverage
available for that claim until the final disposition thereof. If any claim,
action, suit, proceeding or investigation is made against any Indemnified Party,
on or prior to the sixth anniversary of the effective time of the Merger, the
indemnity provisions will continue in effect until the final disposition of such
claim, action, suit, proceeding or investigation. The Surviving Corporation and
Buyer agree that if either of them (i) consolidates with or merges into any
other person or entity and is not the continuing or the Surviving Corporation or
entity of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person or entity, proper
provision will be made so that their successors and assigns succeed to the
indemnity obligations prior to the consummation of such transaction.
BEST EFFORTS
Pursuant to the terms of the Merger Agreement and subject to the conditions
thereof, the Company, Buyer and Merger Subsidiary agreed to, and the Company
agreed to cause each of its subsidiaries to, cooperate and each party will use
its best efforts to take, or cause to be taken, all actions and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the Merger and the Transactions.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties. These include representations and warranties by the Company with
respect to, among other things, (i) corporate existence and power, (ii)
corporate and governmental authorization, (iii) non-contravention, (iv)
capitalization of the Company, (v) investments of the Company or any Subsidiary,
(vi) SEC filings, (vii) financial information, (viii) disclosure documents, (ix)
absence of certain changes or events, (x) no undisclosed material liabilities,
(xi) litigation and permits, (xii) taxes, (xiii) employee matters, (xiv) labor
matters, (xv) compliance with laws, (xvi) finder's fees, (xvii) environmental
matters, (xviii) property, (xix) insurance, (xx) intellectual property, (xxi)
material contracts, (xxii) the absence of a stockholders rights agreement,
(xxiii) voting requirements with respect to the Transactions, (xxiv) opinion of
financial advisor, (xxv) year 2000 issues, (xxvi) transaction fees, and (xxvii)
insider interests. The representations and warranties do not survive the closing
of the Merger.
Buyer and Merger Subsidiary are also making certain representations and
warranties with respect to, among other things, (i) corporate existence and
power, (ii) corporate and governmental authorization, (iii) non-
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<PAGE> 35
contravention, (iv) disclosure documents, (v) finder's fees, (vi) financing,
(vii) share ownership, (viii) Merger Subsidiary's operations, and (ix) due
diligence.
Certain representations and warranties in the Merger Agreement are
qualified as to "materiality" or "Material Adverse Effect". For the purposes of
the Merger Agreement, "Material Adverse Effect" with respect to any person means
a material adverse effect on the condition (financial or otherwise), business,
assets or results of operations of the Company and the subsidiaries of the
Company, taken as a whole, that is not a result of general changes in the
economy or the industries in which the Company and its subsidiaries operate
which prevents or materially delays the Company's ability to consummate the
transactions contemplated in the Merger Agreement.
CONDITIONS TO EFFECT THE MERGER
The Merger Agreement provides that the obligations of the Company, Buyer
and Merger Subsidiary to effect the Merger are subject to the satisfaction or
waiver on or prior to the closing of the Merger of the following conditions:
- if required by the DGCL and the Certificate of Incorporation, the Merger
Agreement and the Transactions being duly adopted by the stockholders of
the Company;
- any applicable waiting period under the HSR Act relating to the Merger
expiring;
- no provision of any applicable law or regulation and no judgment,
injunction, order or decree prohibiting the consummation of the Merger
(each party agreeing to use its best efforts to have any such order
reversed or injunction lifted);
- the Company accepting for payment Shares tendered pursuant to the Offer;
- Buyer having received or being reasonably satisfied that it will receive
all material consents and approvals in connection with the consummation
of the Merger or to enable the Surviving Corporation to continue to carry
on the business of the Company and its subsidiaries as presently
conducted in all material respects; and
- Buyer having purchased the Buyer Shares.
TERMINATION
The Merger Agreement may be terminated and the Transactions may be
abandoned at any time prior to the effective time of the Merger (notwithstanding
any approval of the Merger Agreement by the stockholders of the Company):
- by mutual written consent duly authorized by each of the Boards of
Directors or Managers, as the case may be, of the Company and Buyer;
- by either the Company or Buyer, if the Offer Completion Date has not
occurred by June 30, 1999; provided, however, that the right to terminate
this Agreement under this paragraph is not available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the
cause of, or resulted in, the failure to meet the date requirements of
this paragraph;
- by either the Company or Buyer, if any judgment, injunction, order or
decree enjoining Buyer or the Company from consummating the Merger or
accepting for payment or paying for Shares in the Offer is entered by any
governmental entity and such judgment, injunction, order or decree shall
become final and nonappealable;
- by either the Company or Buyer, if the Offer expires or is terminated or
withdrawn pursuant to its terms without any Shares being purchased
thereunder by the Company as a result of a failure of any of the
conditions to the Offer set forth on Annex I of the Merger Agreement to
be satisfied or waived prior to the expiration of the Offer or any
extension thereof;
30
<PAGE> 36
- by the Company at any time prior to the Offer Completion Date, if Buyer
or Merger Subsidiary materially breaches or fails in any material respect
to perform or comply with any of its covenants and agreements contained
in the Merger Agreement or breaches its representations and warranties in
any material respect which materially adversely effects (or materially
delays) the consummation of the Offer or the other Transactions, which
breach or failure to perform cannot be or has not been cured within ten
days of the receipt of written notice of such breach by Buyer or Merger
Subsidiary from the Company; or
- by Buyer at any time prior to the Offer Completion Date, if the Company
materially breaches or fails in any material respect to perform or comply
with any of its covenants and agreements contained in the Merger
Agreement or breaches its representations and warranties in any material
respect, which breach or failure to perform cannot be or has not been
cured within ten days of the receipt of written notice of such breach by
the Company from Buyer;
- by the Company at any time prior to the Offer Completion Date, pursuant
to a good faith determination of the Board of Directors of the Company,
after the Company has received a Superior Proposal and after consultation
with outside counsel, that failure to
O withdraw or modify or propose publicly to withdraw or modify, in a
manner adverse to Buyer, the approval or recommendation by such Board
of Directors or such committee of the Offer, the Merger or the Merger
Agreement,
O approve or recommend, or propose publicly to approve or recommend, any
Takeover Proposals, or
O cause or authorize the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar
agreement related to any Takeover Proposal; provided, however, that
such termination under this clause will not be effective until payment
of the fee listed in the Fees and Expenses section below and provided,
further, that the Merger Agreement may not be terminated pursuant to
this clause until the expiration of the Offer; or
- by Buyer or Merger Subsidiary at any time prior to the Offer Completion
Date if,
O the Board of Directors of the Company has (i) withdrawn or modified or
changed in a manner adverse to Buyer its approval or recommendation of
this Agreement, the Offer, the Merger or the other Transactions, (ii)
approved or recommended, or proposed publicly to approve or recommend,
a Takeover Proposal, (iii) caused or authorized the Company or any of
its subsidiaries to enter into a Company Acquisition Agreement, (iv)
approved the breach of the Company's non-solicitation obligations, or
(v) resolved or publicly disclosed any intention to take any of the
foregoing actions, or
O Bowles Hollowell has withdrawn or modified or changed in a manner
adverse to Buyer its opinion relating to the Merger Consideration.
EXPENSES AND TERMINATION FEE
The Merger Agreement provides that except as otherwise provided in this
section, all costs and expenses incurred in connection with the Merger Agreement
are to be paid by the party incurring such cost or expense. All costs and
expenses related to the preparation, printing, filing and mailing (as
applicable) of the Offer documents and all SEC filing fees are to be considered
to be costs and expenses of Buyer.
The Merger Agreement provides that the Company will pay to Buyer an amount
equal to $3,000,000 (the "Termination Fee") plus up to $1,000,000 of Buyer's
documented expenses in any of the following circumstances:
- The Merger Agreement is terminated pursuant to the provisions of the last
two paragraphs in the section entitled "Termination" above.
- The Merger Agreement is terminated by either Buyer or the Company if the
Offer Completion Date had not occurred by June 30, 1999; provided,
however, that the right to terminate this Agreement under this paragraph
is not available to any party whose failure to fulfill any obligation
under the Merger Agreement
31
<PAGE> 37
has been the cause of, or resulted in, the failure to meet the date
requirements of this paragraph, and each of the following items occurs:
O at the time of such termination the Minimum Condition has not been
satisfied,
O at the time of such termination the Company does not have the right to
terminate the Merger Agreement pursuant to paragraph (e) in the
section entitled "Termination" above,
O prior to such termination, a Takeover Proposal involving at least 50%
of the assets of the Company and its subsidiaries, taken as a whole,
or 50% of any class of equity securities of the Company (any such
Takeover Proposal, a "Competing Proposal"), is (A) publicly disclosed
or has been made directly to stockholders of the Company, or (B) any
person or entity (including without limitation the Company or any of
its subsidiaries) publicly announces an intention (whether or not
conditional) to make such a Competing Proposal (each, a "Takeover
Proposal Event"), and
O prior to or within 12 months after the termination of the Merger
Agreement, the Company or one of its subsidiaries enters into a
Company Acquisition Agreement or the transactions contemplated by a
Competing Proposal are consummated (such an agreement, a "Competing
Proposal Agreement").
- The Merger Agreement is terminated by either Buyer or the Company
pursuant to the provisions of the fourth paragraph in the section
entitled "Termination" above, and each of the following items occurs:
O at the time of such termination the Minimum Condition has not been
satisfied,
O at the time of such termination the Company does not have the right to
terminate the Merger Agreement pursuant to paragraph (e) in the
section entitled "Termination" above,
O prior to such termination a Takeover Proposal Event has occurred, and
O prior to or within 12 months after the termination of the Merger
Agreement, the Company or one of its subsidiaries enters into a
Competing Proposal Agreement or the transactions contemplated by a
Competing Proposal are consummated.
- The Merger Agreement is terminated by Buyer at any time prior to the
Offer Completion Date, if the Company materially breaches or fails in any
material respect to perform or comply with any of its covenants and
agreements contained in the Merger Agreement or breaches its
representations and warranties in any material respect, which breach or
failure to perform cannot be or has not been cured within ten days of the
receipt of written notice of such breach by the Company from Buyer, and
each of the following items occurs:
O prior to such termination a Takeover Proposal Event has occurred, and
O prior to or within 12 months after the termination of the Merger
Agreement, the Company or one of its subsidiaries enters into a
Competing Proposal Agreement or the transactions contemplated by a
Competing Proposal are consummated unless, in either case, the
purchaser pursuant to such Competing Proposal Agreement or otherwise,
waives the breach (or failure) of the representation, warranty,
covenant or agreement that constituted the basis for Buyer's
termination, so long as the Company's breach or failure was not
intentional.
AMENDMENTS; NO WAIVERS
The Merger Agreement provides that any provision of the Merger Agreement
may be amended or waived prior to the effective time of the Merger if such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company, Buyer and Merger Subsidiary or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that after the
adoption of this Agreement by the stockholders of the Company, no such amendment
or waiver will, without the further approval of such stockholders, alter or
change (i) the amount or kind of consideration to be received in exchange for
any Shares of capital stock of the Company, or (ii) any of the terms or
conditions of this Agreement if such alteration or change could adversely affect
the holders of any Shares of capital stock of the Company.
32
<PAGE> 38
STOCKHOLDERS AGREEMENT
Buyer and Merger Subsidiary have entered into a Stockholders Agreement with
the Continuing Stockholders, which provides, subject to certain conditions, for:
- the tender by the Continuing Stockholders of certain of the Shares owned
or controlled by them within 5 business days of the commencement of the
Offer,
- the agreement by the Continuing Stockholders not to tender certain of the
Shares owned or controlled by them, and
- the grant of an irrevocable proxy to Buyer by the Continuing Stockholders
to vote all Shares owned or controlled by them in favor of the Merger.
THE STOCK SUBSCRIPTION AGREEMENTS
Merger Subsidiary, Buyer and the Company have entered into separate Stock
Subscription Agreements with the members of Buyer. Under these Stock
Subscription Agreements, the members have agreed, upon the occurrence of a final
and non-appealable judgment against Merger Subsidiary or Buyer in favor of the
Company relating to the Merger Agreement or the transactions contemplated
thereunder, to purchase shares of common stock of Merger Subsidiary for an
aggregate purchase price of $2.0 million in cash. Merger Subsidiary and Buyer
are jointly and severally liable for any such judgments.
The Stock Subscription Agreements may not be amended without the prior
written consent of the Company. The Company is a third-party beneficiary of the
Stock Subscription Agreements and will be entitled to enforce them on behalf of
Merger Subsidiary.
CERTAIN INFORMATION CONCERNING THE COMPANIES
THE COMPANY
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, General Motors Corporation and Daimler-Chrysler Corporation as
well as heavy truck companies such as Navistar International Transportation
Corporation. The Company also sells products to first-tier suppliers including
Borg-Warner Corporation, Bosch Braking Systems Corporation, Denso of Los
Angeles, Inc., and ITT Automotive of North America, Inc. Significant
non-automotive customers include Motorola, Inc., Crane National Vendors, and a
variety of distributors for industrial/hydraulic clutches.
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. By
comparison, 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.
33
<PAGE> 39
BUYER
Buyer is a Delaware limited liability company managed by Carreras, Kestner
& Co., L.L.C., newly formed for the purpose of effecting the Transactions,
including the Stock Purchase. The Buyer did not have any significant assets or
liabilities and did not engage in any activities other than those incident to
the Transactions and the financing thereof prior to the consummation of the
Offer. The principal executive offices of Buyer are located at Terminal Tower,
50 Public Square, 32nd Floor, Cleveland, Ohio 44113.
Buyer was formed pursuant to an investment program among Carreras, Kestner
& Co., L.L.C., Carreras, Kestner Investors, L.L.C., Citicorp Venture Capital
Corporation, Key Equity Capital Corporation/Key Equity Partners 99 and Kelso &
Company, L.P. Each investor is a member of Buyer. Carreras, Kestner & Co.,
L.L.C., as the manager of the investment program was responsible for finding,
structuring, negotiating and causing Buyer to enter into the Merger Agreement
after receiving approval of the Transactions from an investment board comprised
of designees of the investors. The role of the members of Buyer other than
Carreras, Kestner & Co., L.L.C. in connection with the Transactions has been,
and will continue to be, limited to funding their respective capital commitments
with respect to the equity portion of the financing.
MERGER SUBSIDIARY
Merger Subsidiary is a Delaware corporation, newly formed by Buyer for the
purpose of effecting the Merger. Merger Subsidiary did not have any significant
assets or liabilities and did not engage in any activities other than those
incident to the Transactions and the financing thereof prior to the consummation
of the Offer. The principal executive offices of Merger Subsidiary are located
at Terminal Tower, 50 Public Square, 32nd Floor, Cleveland, Ohio 44113.
RECENT DEVELOPMENTS
On April 27, 1999, the Company reported its financial results for the
quarter ending March 31, 1999. Sales for the quarter ended March 31, 1999 were
$25,631,000, an increase of $3,524,000 or 16% over sales of $22,107,000 for the
third fiscal quarter of 1998. Earnings in the third quarter were $1,942,000 or
$0.40 per share, increasing 33% over the earnings of $1,463,000 ($0.30 per
share) in the third quarter last year. Sales for the nine months ended March 31,
1999 were $68,214,000, increasing 7% over sales of $63,764,000 for the same
period of the prior year. Earnings for the nine-month period were $4,298,000
($0.88 per share), a 34% increase over earnings of $3,194,000 ($0.65 per share)
in the prior year. Shareholders' equity per share was $6.14 at March 31, 1999,
compared to $5.34 per share at June 30, 1998.
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth, as of June 1, 1999, the ownership of Shares
by each person who is known by the Company to be the beneficial owner of more
than five percent of the issued and outstanding Shares and the ownership of
Shares by each of the Company's named executive officers and directors of the
Company that
34
<PAGE> 40
served as such at the end of the last completed fiscal year. Unless otherwise
noted, such persons have sole voting and dispositive power with respect to such
amounts.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------- ----------------------- ----------------
<S> <C> <C>
Hilite Holdings, LLC
Terminal Tower
50 Public Square
32nd Floor
Cleveland, Ohio 44113..................................... 1,681,414 85%
Samuel M. Berry........................................... 21,053(2) 1%
Daniel W. Brady........................................... 7,018(3) *
Arthur D. Johnson......................................... 9,035(2) *
Donald M. Maher........................................... 9,035(2) *
All officers and directors as a group (4 individuals)..... 46,141 2.3%
</TABLE>
- ---------------
* Less than one percent
(1) Pursuant to the Stockholders Agreement, the Continuing Stockholders have
granted Hilite Holdings, LLC the proxy to vote the 143,148 Shares
collectively owned by the Continuing Stockholders in favor of the Merger. As
a result of such proxy, Buyer, Merger Subsidiary and the Continuing
Stockholders, as a group, also may be deemed to beneficially own those
143,148 Shares.
(2) By virtue of the proxy granted in the Stockholders Agreement described in
footnote 1 to this table, this person has shared voting and dispositive
power with respect to all of his Shares.
(3) Represents 7,018 Shares owned by The Brady Family Limited Partnership, of
which Mr. Brady is the sole general partner.
MARKET PRICES AND DIVIDENDS
Until the listing of the Shares on the Nasdaq National Market System
("NASDAQ") was discontinued effective June 1, 1999, the Shares were traded on
NASDAQ under the symbol "HILI". The following table sets forth the high and low
sale prices of the Shares for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997:
- ------------
First Quarter............................................... 10 1/4 5
Second Quarter.............................................. 6 4 1/4
Third Quarter............................................... 5 1/2 4 3/4
Fourth Quarter.............................................. 5 1/2 3 1/4
Fiscal 1998:
- ------------
First Quarter............................................... 6 1/4 4 1/4
Second Quarter.............................................. 7 1/8 5 1/4
Third Quarter............................................... 7 1/8 6 3/4
Fourth Quarter.............................................. 9 3/4 7 1/2
Fiscal 1999:
- ------------
First Quarter............................................... 9 7 5/8
Second Quarter.............................................. 9 1/2 7 5/8
Third Quarter............................................... 11 8 7/8
</TABLE>
35
<PAGE> 41
The high and low sale prices of the Shares on April 26, 1999 (the date
preceding public announcement of the proposed transaction) were $10.875 and
$10.688.
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, August 19, 1998,
November 19, 1998, February 19, 1999 and on April 26, 1999, a dividend of $0.025
per share on 4,900,000 Shares was paid on or about May 25, 1999 to holders of
record on May 11, 1999.
AVAILABLE INFORMATION
On June 4, 1999, the registration of the Shares under the Exchange Act was
terminated. Until such time, the Company was subject to the reporting
requirements of the Exchange Act and, in accordance therewith, was required to
file reports and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information should be available for inspection at the public reference
facilities of the Commission located at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located in the Northwestern
Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies should be
obtainable, by mail, upon payment of the Commission's customary charges, by
writing to the Commission's principal office at 450 Fifth Street, N.W.,
Washington D.C. 20549. The Commission also maintains an Internet site on the
World Wide Web at http://www.sec.gov that contains reports, proxy statements and
other information.
36
<PAGE> 42
SCHEDULE I
Agreement and Plan of Merger
Dated as of
April 26, 1999
Among
Hilite Industries, Inc.
Hilite Holdings, LLC
and
Hilite Mergeco, Inc.
I-1
<PAGE> 43
TABLE OF CONTENTS(1)
ARTICLE I
THE OFFER
<TABLE>
<S> <C> <C>
Section 1.01 The Offer................................................... I-9
Section 1.02 Company Action.............................................. I-10
Section 1.03 Directors................................................... I-11
ARTICLE II
STOCK PURCHASE AND SALE
Section 2.01 Purchase and Sale of Shares................................. I-12
Section 2.02 Purchase Price.............................................. I-12
Section 2.03 Closing..................................................... I-12
Section 2.04 Closing Deliveries by the Company........................... I-12
Section 2.05 Closing Deliveries by Buyer................................. I-12
ARTICLE III
THE MERGER
Section 3.01 The Merger.................................................. I-13
Section 3.02 Conversion of Shares........................................ I-13
Section 3.03 Surrender and Payment....................................... I-13
Section 3.04 Dissenting Shares........................................... I-14
Section 3.05 Stock Options............................................... I-15
Section 3.06 Merger Without Meeting of Stockholders...................... I-15
Section 3.07 Closing..................................................... I-15
Section 3.08 Certificate of Incorporation................................ I-15
Section 3.09 By-Laws..................................................... I-16
Section 3.10 Directors and Officers...................................... I-16
Section 3.11 Effects of the Merger....................................... I-16
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01 Corporate Existence and Power............................... I-16
Section 4.02 Corporate Authorization..................................... I-16
Section 4.03 Governmental Authorization.................................. I-17
Section 4.04 Non-Contravention........................................... I-17
Section 4.05 Capitalization.............................................. I-17
Section 4.06 Subsidiaries................................................ I-18
Section 4.07 Investments................................................. I-18
Section 4.08 SEC Filings................................................. I-18
Section 4.09 Financial Statements........................................ I-19
</TABLE>
- ---------------
(1) The Table of Contents is not a part of this Agreement.
I-2
<PAGE> 44
<TABLE>
<S> <C> <C>
Section 4.10 Disclosure Documents........................................ I-19
Section 4.11 Absence of Certain Changes.................................. I-19
Section 4.12 No Undisclosed Material Liabilities......................... I-20
Section 4.13 Litigation; Permits......................................... I-21
Section 4.14 Taxes....................................................... I-21
Section 4.15 Employee Matters............................................ I-22
Section 4.16 Labor Matters............................................... I-24
Section 4.17 Compliance with Laws........................................ I-24
Section 4.18 Finders' Fees............................................... I-24
Section 4.19 Environmental Matters....................................... I-25
Section 4.20 Property.................................................... I-26
Section 4.21 Insurance................................................... I-26
Section 4.22 Patents and Trademarks...................................... I-27
Section 4.23 Material Contracts.......................................... I-27
Section 4.24 Shareholder Rights Agreement................................ I-27
Section 4.25 Voting Requirements......................................... I-27
Section 4.26 Opinion of Financial Advisor................................ I-27
Section 4.27 Year 2000 Issues............................................ I-28
Section 4.28 Transaction Fees............................................ I-28
Section 4.29 Insider Interests........................................... I-28
Section 4.30 Full Disclosure............................................. I-28
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY
Section 5.01 Corporate Existence and Power............................... I-28
Section 5.02 Corporate Authorization..................................... I-28
Section 5.03 Governmental Authorization.................................. I-29
Section 5.04 Non-Contravention........................................... I-29
Section 5.05 Disclosure Documents........................................ I-29
Section 5.06 Finders' Fees............................................... I-29
Section 5.07 Financing................................................... I-29
Section 5.08 Share Ownership............................................. I-30
Section 5.09 Merger Subsidiary's Operations.............................. I-30
Section 5.10 Due Diligence............................................... I-30
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.01 Conduct of the Company...................................... I-30
Section 6.02 Stockholder Meeting; Proxy Material......................... I-31
Section 6.03 Access to Information....................................... I-31
Section 6.04 Other Offers................................................ I-31
Section 6.05 Notices of Certain Events................................... I-33
</TABLE>
I-3
<PAGE> 45
<TABLE>
<S> <C> <C>
ARTICLE VII
COVENANTS OF BUYER
Section 7.01 Obligations of Merger Subsidiary............................ I-33
Section 7.02 Voting of Shares............................................ I-33
Section 7.03 Director and Officer Liability.............................. I-33
Section 7.04 Merger Subsidiary Subscription Agreements................... I-34
ARTICLE VIII
COVENANTS OF BUYER AND THE COMPANY
Section 8.01 Best Efforts................................................ I-35
Section 8.02 Certain Filings............................................. I-35
Section 8.03 Public Announcements........................................ I-35
Section 8.04 Conveyance Taxes............................................ I-35
Section 8.05 Further Assurances.......................................... I-35
Section 8.06 Employee Matters............................................ I-36
Section 8.07 Certain Litigation.......................................... I-36
Section 8.08 Recapitalization............................................ I-36
Section 8.09 Stop Transfer Order......................................... I-36
ARTICLE IX
CONDITIONS TO THE STOCK PURCHASE AND THE MERGER
Section 9.01 Conditions to the Stock Purchase............................ I-37
Section 9.02 Conditions to the Merger.................................... I-38
ARTICLE X
TERMINATION
Section 10.01 Termination................................................. I-38
Section 10.02 Effect of Termination....................................... I-39
ARTICLE XI
MISCELLANEOUS
Section 11.01 Notices..................................................... I-39
Section 11.02 Survival of Representations and Warranties.................. I-40
Section 11.03 Amendments; No Waivers...................................... I-40
Section 11.04 Expenses.................................................... I-40
Section 11.05 Successors and Assigns...................................... I-42
Section 11.06 Governing Law............................................... I-42
Section 11.07 Severability................................................ I-42
Section 11.08 Third Party Beneficiaries................................... I-42
Section 11.09 Entire Agreement............................................ I-42
Section 11.10 Counterparts; Effectiveness................................. I-43
Section 11.11 Jurisdiction................................................ I-43
Section 11.12 Knowledge................................................... I-43
</TABLE>
I-4
<PAGE> 46
TABLE OF CONTENTS
<TABLE>
<S> <C>
Company Disclosure Letter
Section 4.01: Licenses
Section 4.03: Governmental Authorization
Section 4.04: Non-Contravention
Section 4.05: Stock Options
Section 4.06: Subsidiaries
Section 4.07: Investments
Section 4.11: Absence of Certain Changes
Section 4.12: Material Liabilities
Section 4.13: Litigation, Permits
Section 4.15: Employee Matters
Section 4.16: Labor Matters
Section 4.17: Compliance with Laws
Section 4.19: Environmental Matters
Section 4.20: Property
Section 4.21: Insurance
Section 4.22: Patents and Trademarks
Section 4.23: Material Contracts
Section 4.28: Transaction Fees
Section 4.29: Insider Interests
Section 5.10: Data Room Index
Section 7.03: Director and Officer Liability
Section 8.06: Employee Bonuses
Exhibit A -- Confidentiality Agreement
</TABLE>
I-5
<PAGE> 47
DEFINITIONS
The following terms which may appear in more than one Section of this
Agreement are defined in the following Sections:
<TABLE>
<CAPTION>
TERMS SECTION OR OTHER LOCATION
----- -------------------------
<S> <C>
Active Subsidiary Section 4.06(a)
Advisor Section 1.02(a)
Agreement Preamble
Balance Sheet Section 4.09
Balance Sheet Date Section 4.09
Benefit Arrangement Section 4.15(a)(A)
Business Day Section 1.01(a)
Buyer Preamble
Buyer Shares Section 2.01(a)
By-Laws Section 1.02(a)
CBA Section 4.16
Certificate of Incorporation Section 1.02(a)
Code Section 4.14(a)
Company Preamble
Company 10-K Section 4.06(a)
Company 10-Qs Section 4.08(a)
Company Acquisition Agreement Section 6.04(b)
Company Designees Section 1.03(a)
Company Disclosure Documents Section 4.10
Company Disclosure Letter Section 4.01
Company Notice Section 6.04
Company Permits Section 4.13
Company Proxy Statement Section 6.02
Company Securities Section 4.05
Company SEC Documents Section 4.08(a)
Company Stockholder Meeting Section 6.02
Competing Proposal Section 11.04(b)(i)(B)(3)
Competing Proposal Agreement Section 11.04(b)(i)(B)(4)
Confidentiality Agreement Section 6.03
DGCL Preamble
Depositary Section 3.03(a)
Effective Time Section 3.01(b)
Employee Agreement Section 4.15(a)(B)
Employee Plan Section 4.15(a)(C)
Environmental Law Section 4.19(b)
Environmental Permits Section 4.19(a)(viii)
ERISA Section 4.15(a)(D)
ERISA Affiliate Section 4.15(a)(E)
</TABLE>
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<TABLE>
<CAPTION>
TERMS SECTION OR OTHER LOCATION
----- -------------------------
<S> <C>
Exchange Act Section 1.01(a), 4.03
Expenses Section 11.04(b)(i)(D)(1)(iv)
Expiration Date Section 1.01(a)
Fiduciary Duties Section 1.02(c)
Financing Section 5.07
GAAP Section 4.09
Governmental Entity Section 4.03
HSR Act Section 4.03
HSR Authority Section 8.01(a)
Indemnified Parties Section 7.03
Leases Section 4.20(c)
Licenses Section 4.01
Lien Section 4.04
Loan Agreement Section 4.06(b)
Material Adverse Effect Section 4.01
Material Contracts Section 4.23(a)
Material Patents and Trademarks Section 4.22(a)
Merger Section 3.01(a)
Merger Closing Section 3.07
Merger Closing Date Section 3.07
Merger Consideration Section 3.02(a)
Merger Subsidiary Preamble
Minimum Condition Section 1.01(a)
Multiemployer Plan Section 4.15(a)(F)
Offer Preamble
Offer Completion Date Section 6.04
Offer Documents Section 1.01(b)
Offer Price Section 1.01(a)
Offer to Purchase Section 1.01(b)
Option Section 3.05(a)
Option Consideration Section 3.05(a)
Outside Termination Date Section 10.01(ii)
PBGC Section 4.15(d)
Person Section 3.03(c)
Pre-Closing Tax Period Section 4.14(b)
Purchase Price Section 2.02
Real Property Section 4.20(b)
Retained Employees Section 8.06(a)
Returns Section 4.14(a)
Schedule 13E-3 Section 1.01(b)
Schedule 13E-4 Section 1.01(b)
</TABLE>
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<TABLE>
<CAPTION>
TERMS SECTION OR OTHER LOCATION
----- -------------------------
<S> <C>
SEC Section 1.01(b)
Secretary Section 3.01(b)
Share(s) Preamble
Stockholders Agreement Preamble
Stock Purchase Closing Section 2.03
Stock Purchase Closing Date Section 2.03
Subsidiary Section 4.06(a)
Subsidiary Agreement Section 4.06(b)
Subsidiary Securities Section 4.06(b)
Superior Proposal Section 6.04(a)
Surviving Corporation Section 3.01(a)
Takeover Proposal Section 6.04(a)
Takeover Proposal Event Section 11.04(b)(i)(C)(3)
Tax Asset Section 4.14(a)
Taxes Section 4.14(b)
Termination Fee Section 11.04(b)(i)
Title IV Plan Section 4.15(a)(G)
Transactions Section 1.01(b)
Transaction Fees Section 4.28
Trigger Event Section 11.04(b)
UST's Section 4.19(a)(iii)
</TABLE>
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<PAGE> 50
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of April 26, 1999 (this "AGREEMENT")
among HILITE INDUSTRIES, INC., a Delaware corporation (the "COMPANY"), HILITE
HOLDINGS, LLC, a Delaware limited liability company ("BUYER"), and HILITE
MERGECO, INC., a Delaware corporation and a wholly owned subsidiary of Buyer
("MERGER SUBSIDIARY").
WHEREAS, the Boards of Managers or Directors, as the case may be, of Buyer,
Merger Subsidiary and the Company have each determined that it is in the best
interests of their respective members or stockholders for Buyer to acquire the
Company upon the terms and subject to the conditions set forth herein; and
WHEREAS, in furtherance of such acquisition, it is proposed that the
Company shall make a cash tender offer (the "OFFER") to acquire all of the
issued and outstanding shares of Common Stock, par value $.01 per share, of the
Company (referred to collectively as the "SHARES" and individually as a
"SHARE"), for $14.25 per Share net to the seller in cash, upon the terms and
subject to the conditions of this Agreement and the Offer; and
WHEREAS, in furtherance of such acquisition, Buyer, Merger Subsidiary and
certain significant stockholders of the Company have entered into a Stockholders
Agreement (the "STOCKHOLDERS AGREEMENT") pursuant to which such Stockholders
agree, among other things, to tender pursuant to the Offer all of their Shares,
except for certain Shares to be retained by such stockholders in accordance with
the Stockholders Agreement; and
WHEREAS, the Board of Directors of the Company has unanimously approved the
making of the Offer and resolved and agreed to recommend that holders of Shares
tender their Shares pursuant to the Offer; and
WHEREAS, also in furtherance of such acquisition, the respective Boards of
Managers or Directors, as the case may be, of Buyer and the Company has each
approved the purchase by Buyer and the sale by the Company (the "Stock
Purchase") of 1,681,414 Shares for the Offer Price immediately prior to the
consummation of the Offer; and
WHEREAS, the parties hereto intend that the acquisition be treated as a
recapitalization for financial accounting purposes; and
WHEREAS, also in furtherance of such acquisition, the Boards of Managers or
Directors, as the case may be, of Buyer, Merger Subsidiary and the Company have
each approved the merger of Merger Subsidiary with and into the Company in
accordance with the General Corporation Law of the State of Delaware (the
"DGCL") following the consummation of the Offer and upon the terms and subject
to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Buyer, Merger Subsidiary and the Company hereby agree as follows:
ARTICLE I
THE OFFER
SECTION 1.01. THE OFFER.
(a) Provided that nothing shall have occurred that would result in a
failure to satisfy any of the conditions set forth in Annex I hereto, the
Company shall commence, within the meaning of Rule 13e-4(a)(4) under the
Securities Exchange Act of 1934 (the "EXCHANGE ACT"), as promptly as practicable
after the date hereof, but in no event later than five business days (as such
term is defined in Rule 14d-1 under the Exchange Act, a "BUSINESS DAY")
following the public announcement of the terms of this Agreement, the Offer to
purchase all of the outstanding Shares at a price of $14.25 per Share (the
"OFFER PRICE"), net to the sellers in cash, subject to any amounts required to
be withheld under applicable federal, state, local or foreign income tax
regulations. Subject to the extension of the Offer as provided below, the
obligation of the Company to commence the Offer, to consummate the Offer and to
accept for payment and to pay for any Shares validly tendered and not withdrawn
shall be subject only to: (i) the condition that there shall be validly tendered
in accordance with the terms of the Offer prior to the expiration date of the
Offer and not withdrawn a number of Shares which represents at least a
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majority of the Shares outstanding on a fully diluted basis (the "MINIMUM
CONDITION"), and (ii) the satisfaction or waiver of the other conditions set
forth in Annex I hereto. At Buyer's request, the Company shall increase the
price per Share payable in the Offer and make such other changes to the Offer as
Buyer may request, provided, however, that the Company will not be required to
make any changes which decrease the price per Share payable in the Offer, which
change the form of consideration to be paid in the Offer, which reduce the
maximum number of Shares to be purchased in the Offer, which impose conditions
to the Offer in addition to those set forth in Annex I hereto or which broaden
the scope of such conditions. The Company shall make no other changes to the
Offer or waive any conditions to the Offer or take any other action, including,
without limitation, notice of acceptance of tendered Shares to the Depositary,
with respect to the Offer without Buyer's prior written consent. The Offer will
remain open (unless the Company, at the written request of Buyer, terminates the
Offer upon the occurrence of an event in Annex I) for a period of twenty
Business Days from the commencement of the Offer in accordance with applicable
law (the "EXPIRATION DATE") unless the Company, at the request of Buyer, extends
the period of time for which the Offer is open as may be permitted or required
by this Agreement, or applicable laws in which case the term "Expiration Date"
will mean the latest time and date at which the Offer as so extended by the
Company expires. Notwithstanding the foregoing, the Company shall extend the
Offer at any time up to the Outside Termination Date (as defined in Section
10.01) for one or more periods of not more than an aggregate of 10 Business
Days, if at the initial expiration date of the Offer, or any extension thereof,
the condition to the Offer requiring the expiration or termination of any
applicable waiting periods under the HSR Act (as defined in Section 4.03) is not
satisfied or required. In addition, the Offer Price may be increased and the
Offer may be extended to the extent required by law in connection with such
increase in each case only at the request of Buyer. The Company shall, at
Buyer's request, extend the Offer beyond the initial Expiration Date for a
period of up to 10 Business Days, if, on the date of such extension, more than
85% but less than 90% of the outstanding Shares on a fully diluted basis have
been tendered. Subject to the terms and conditions of the Offer and subject to
the closing of the Stock Purchase as set forth in Article II herein, the Company
shall pay, as promptly as practicable after expiration of the Offer, for all
Shares validly tendered and not withdrawn. Notwithstanding the foregoing, the
Company shall not be required to consummate the Offer or pay the Offer Price for
the Shares tendered unless it shall have received the proceeds from the sale of
the Buyer Shares and the Financing or other funds arranged for by Buyer in an
amount which shall be equal to or greater than the Offer Price multiplied by the
number of Shares tendered.
(b) As soon as practicable on the date of commencement of the Offer, the
Company shall file with the Securities and Exchange Commission (the "SEC"), an
Issuer Tender Offer Statement on Schedule 13E-4 with respect to the Offer which
will contain the offer to purchase and form of the related letter of transmittal
(together with any supplements or amendments thereto, the "SCHEDULE 13E-4"), and
the Company, Buyer and Merger Subsidiary shall file with the SEC a Rule 13E-3
Transaction Statement on Schedule 13E-3 (together with all amendments and
supplements thereto, the "SCHEDULE 13E-3") with respect to the Offer, the Stock
Purchase, the Merger and the other transactions contemplated by this Agreement
(collectively, the "TRANSACTIONS"). The Schedule 13E-4 and Schedule 13E-3 shall
contain or shall incorporate by reference an offer to purchase (the "OFFER TO
PURCHASE") and forms of the related letter of transmittal and any other
documents related to the Offer (the Schedule 13E-4, together with the Schedule
13E-3, the Offer to Purchase and such other documents, together with any
supplements or amendments thereto, are collectively referred to herein as the
"OFFER DOCUMENTS"). Buyer and the Company each agree promptly to correct any
information provided by it for use in the Offer Documents if and to the extent
that it shall have become false or misleading in any material respect. Buyer and
the Company agree to take all steps necessary to cause the Offer Documents as so
corrected to be filed with the SEC and to be disseminated to holders of Shares,
in each case as and to the extent required by applicable federal securities
laws. Buyer and its counsel shall be given a reasonable opportunity to review
and comment on the Offer Documents prior to their being filed with the
applicable authorities.
SECTION 1.02. COMPANY ACTION.
(a) The Company hereby approves and agrees to undertake the Offer and
represents that its Board of Directors, at a meeting duly called and held on
April 26, 1999, has (i) unanimously determined that this Agreement and the
Transactions are fair to and in the best interest of the Company's stockholders,
(ii) unanimously approved this Agreement, the Stockholders Agreement and the
Transactions, which approval
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satisfies in full the requirements of the DGCL including Section 203 of the
DGCL, and the Amended and Restated Certificate of Incorporation (the
"CERTIFICATE OF INCORPORATION") and the Amended and Restated By Laws (the
"BY-LAWS") of the Company and (iii) subject to Section 6.04 (b), unanimously
resolved to recommend acceptance of the Offer and approval and adoption of this
Agreement and the Merger by its stockholders. The Company shall include a
statement of such recommendation and approval in the Offer Documents.
The Company represents that Bowes Hollowell Conner & Co. (the "ADVISOR") as
financial advisors to the Company, has delivered to the Company's Board of
Directors its written opinion that the cash consideration to be received in the
Offer and the Merger by the holders of Shares (other than any holders of Shares
who will retain Shares following consummation of the Offer and the Merger) is
fair from a financial point of view to such holders. The Company has been
advised that all of its directors and executive officers intend to tender their
Shares pursuant to the Offer (except to the extent provided in the Stockholders
Agreement). The Company agrees to, and has been authorized by the financial
advisor to permit, subject to prior review and consent of the financial advisor
(such consent not to be unreasonably withheld), the inclusion of the fairness
opinion (or a reference thereto) in the Offer Documents.
(b) The Company shall take all action as may be necessary to effect the
Offer as contemplated by this Agreement, including, without limitation, promptly
mailing the Offer Documents to the record holders and beneficial owners of the
Shares.
(c) References herein to the "FIDUCIARY DUTIES" of the members of the Board
of Directors of the Company mean the fiduciary duties of such members to the
holders of Shares.
SECTION 1.03. DIRECTORS.
(a) Promptly upon the consummation of the Stock Purchase and the acceptance
for payment by the Company of any Shares, Buyer shall be entitled to designate
the number of directors, rounded up to the next whole number, on the Company's
Board of Directors that equals the product of (i) the total number of directors
on the Company's Board of Directors (giving effect to the election of any
additional directors pursuant to this Section) and (ii) the percentage that the
number of Shares owned by Buyer bears to the total number of Shares outstanding,
and the Company shall take all action necessary to cause Buyer's designees to be
elected or appointed to the Company's Board of Directors, including, without
limitation, increasing the number of directors and seeking and accepting
resignations of incumbent directors. At such times, the Company will use its
best efforts to cause individuals designated by Buyer to constitute the same
percentage as such individuals represent on the Company's Board of Directors of
(x) each committee of such Board (other than any committee of such Board
established to take action under this Agreement), (y) each board of directors of
each Subsidiary (as defined in Section 4.06) and (z) each committee of each such
board. Notwithstanding the foregoing, until the Effective Time (as defined in
Section 2.01(b)), the Company shall retain as members of its Board of Directors
at least two directors who are directors of the Company on the date hereof (the
"COMPANY DESIGNEES").
(b) The Company's obligations to appoint designees to the Board of
Directors shall be subject to Section 14(f) of the Exchange Act (as defined in
Section 4.03) and Rule 14f-1 promulgated thereunder. The Company shall promptly
take all actions required pursuant to Section 14(f) and Rule 14f-i in order to
fulfill its obligation under this Section 1.03 and shall include in the Schedule
13E-4 such information with respect to the Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill its
obligations under this Section 1.03. Buyer will supply to the Company in writing
and be solely responsible for any information with respect to itself and its
nominees, officers, directors and affiliates required by Section 14(f) and Rule
14f-1.
(c) From and after the time, if any, that Buyer's designees constitute a
majority of the Company's Board of Directors until the Effective Time, any
amendment of this Agreement, any termination of this Agreement by the Company,
any extension of time for performance of any of the obligations of Buyer or
Merger Subsidiary hereunder, any waiver of any condition to the obligations of
the Company or any of the Company's rights hereunder or other action by the
Company hereunder may be effected only by the action of a majority of the
directors of the Company then in office who were directors of the Company on the
date hereof, which action shall
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be deemed to constitute the action of the full Board of Directors; PROVIDED that
if there shall be no such directors, such actions may be effected by majority
vote of the entire Board of Directors of the Company.
ARTICLE II
STOCK PURCHASE AND SALE
SECTION 2.01. PURCHASE AND SALE OF SHARES.
(a) Upon the terms and subject to the conditions of this Agreement, at the
Stock Purchase Closing (as defined herein), the Company shall sell to Buyer and
Buyer shall purchase from the Company, 1,681,414 Shares (the "BUYER SHARES").
(b) The Buyer Shares will be validly issued, fully paid and nonassessable,
and will be issued free of preemptive rights or any Liens.
SECTION 2.02. PURCHASE PRICE.
The aggregate purchase price for the Buyer Shares shall be the number of
Buyer Shares multiplied by the Offer Price or such increased price per share
payable in the Offer in accordance with Section 1.01(a) (the "PURCHASE PRICE").
SECTION 2.03. CLOSING.
Upon the terms and subject to the conditions of this Agreement, the sale
and purchase of the Buyer Shares contemplated by this Agreement shall take place
at a closing (the "STOCK PURCHASE CLOSING") to be held at the offices of Jones,
Day, Reavis & Pogue, 599 Lexington Avenue, New York, New York, at 10:00 a.m., on
the day after the Offer is scheduled to expire, or at such other place or at
such other time or on such other date as the Company and Buyer may mutually
agree upon in writing (the day on which the Closing takes place being the "STOCK
PURCHASE CLOSING DATE").
SECTION 2.04. CLOSING DELIVERIES BY THE COMPANY.
At the Stock Purchase Closing, the Company shall deliver or cause to be
delivered to Buyer:
(a) stock certificates evidencing the Buyer Shares;
(b) a receipt for the Purchase Price; and
(c) the certificates and other documents required to be delivered
pursuant to Section 9.01(b)(iii).
SECTION 2.05. CLOSING DELIVERIES BY BUYER.
At the Stock Purchase Closing, Buyer shall deliver to the Company:
(a) the Purchase Price by wire transfer of immediately available funds
to an account at a United States bank designated in writing by the Company,
which designation shall be received by Buyer at least three Business Days
prior to the Stock Purchase Closing;
(b) the certificates and other documents required to be delivered
pursuant to Section 9.01(c)(iii); and
(c) Buyer shall arrange for the Company to receive financing which,
together with the Purchase Price, shall be equal to or greater than the
Offer Price multiplied by the number of Shares tendered.
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ARTICLE III
THE MERGER
SECTION 3.01. THE MERGER.
(a) At the Effective Time (as defined in Section 3.01(b)), Merger
Subsidiary shall be merged (the "MERGER") with and into the Company in
accordance with the DGCL, whereupon the separate existence of Merger Subsidiary
shall cease, and the Company shall be the surviving corporation (the "SURVIVING
CORPORATION").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and Merger
Subsidiary will file a certificate of merger with the Secretary of State of the
State of Delaware (the "SECRETARY") and make all other filings or recordings
required by the DGCL in connection with the Merger. The Merger shall become
effective on such date as the certificate of merger is duly filed with the
Secretary or at such later date as is specified in the certificate of merger
(the "EFFECTIVE TIME").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities, liabilities and duties of the Company and
Merger Subsidiary, all as provided under the DGCL.
(d) Buyer may, with the consent of the Company, modify the structure of the
Merger if Buyer determines it advisable to do so because of tax or other
considerations, and the parties hereto shall promptly enter into any amendment
to this Agreement necessary or desirable to accomplish such structure
modification, provided that no such amendment shall reduce the Merger
Consideration or delay the Stock Purchase Closing or the Effective Time.
SECTION 3.02. CONVERSION OF SHARES.
At the Effective Time by virtue of the Merger and without any action on the
part of any stockholder:
(a) each Share outstanding immediately prior to the Effective Time
shall, except as otherwise provided in Section, 3.02(b) or 3.02(d) or as
provided in Section 3.04 with respect to Shares as to which properly
exercised dissenters rights are available under the DGCL, be canceled and
converted into the right to receive the Offer Price in cash or any higher
price paid for each Share in the Offer, without interest (the "MERGER
CONSIDERATION") upon surrender and exchange of the certificates
representing such Shares in accordance with Section 3.03. Any payment made
pursuant to this Section 3.02(a) will be made net of applicable withholding
taxes to the extent such withholding is required by law.
(b) each Share held by the Company as treasury stock or owned by
Merger Subsidiary or any other subsidiary of Buyer or the Company
immediately prior to the Effective Time shall be canceled, and no payment
shall be made with respect thereto;
(c) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted and exchanged
for one validly issued, fully paid and nonassessable share of Common Stock
of the Surviving Corporation; and
(d) the aggregate number of Shares owned by certain stockholders and
by existing management which shall be retained by such persons pursuant to
the Stockholders Agreement and the Buyer Shares, shall not be canceled as
provided above, but shall remain outstanding.
SECTION 3.03. SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, Buyer shall appoint a depositary (the
"DEPOSITARY") for the purpose of exchanging certificates representing Shares for
the Merger Consideration. The Depositary shall at all times be a commercial bank
having a combined capital and surplus of at least $100,000,000. Buyer will
arrange for financing for the Company in an amount sufficient for the Company to
pay to the Depositary immediately available funds in amounts necessary to make
payments pursuant to Section 3.02 and this Section 3.03 to holders of Shares
entitled thereto. Promptly after the Effective Time, the Company will send, or
will cause the Depositary
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to send, but in no event later than three Business Days after the Effective
Time, to each holder of Shares at the Effective Time a letter of transmittal for
use in such exchange (which shall specify that the delivery shall be effected,
and risk of loss and title shall pass, only upon proper delivery of the
certificates representing Shares to the Depositary).
(b) Each holder of Shares that have been converted into a right to receive
the Merger Consideration, upon surrender to the Depositary of a certificate or
certificates properly representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares. Until so
surrendered, each such certificate shall, after the Effective Time, represent
for all purposes, only the right to receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of the Shares represented by the certificate or
certificates surrendered in exchange therefor, it shall be a condition to such
payment that the certificate or certificates so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the Person
requesting such payment shall pay to the Depositary any transfer or other taxes
required as a result of such payment to a Person other than the registered
holder of such Shares or establish to the satisfaction of the Depositary that
such tax has been paid or is not payable. For purposes of this Agreement,
"PERSON" means an individual, a corporation, limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
(d) After the Effective Time, there shall be no further registration of
transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they shall be canceled and
exchanged for the consideration provided for, and in accordance with the
procedures set forth, in this Article III.
(e) Any portion of the Merger Consideration paid to the Depositary pursuant
to Section 3.03(a) that remains unclaimed by the holders of Shares one year
after the Effective Time shall be returned to the Surviving Corporation, upon
demand, and any such holder who has not exchanged his Shares for the Merger
Consideration in accordance with this Section prior to that time shall
thereafter look only to Surviving Corporation for payment of the Merger
Consideration in respect of his Shares. Notwithstanding the foregoing, Buyer,
Merger Subsidiary and the Surviving Corporation shall not be liable to any
holder of Shares for any amount paid to a public official pursuant to applicable
abandoned property laws.
(f) Any portion of the Merger Consideration paid to the Depositary pursuant
to Section 3.03(a) to pay for Shares for which dissenter's rights have been
exercised shall be returned to Surviving Corporation upon demand.
(g) If any Certificate has been lost, stolen, or destroyed, upon the making
of an affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Surviving Corporation, the posting
by such person of a bond in such reasonable amount as the Surviving Corporation
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Depositary shall issue in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration due to such
person pursuant to this Agreement.
SECTION 3.04. DISSENTING SHARES.
Notwithstanding Section 3.02, Shares outstanding immediately prior to the
Effective Time and held by a holder who has not voted in favor of the Merger or
consented thereto in writing and who has demanded appraisal for such Shares in
accordance with the DGCL shall not be converted into a right to receive the
Merger Consideration, unless such holder fails to perfect or withdraws or
otherwise loses his right to appraisal. If after the Effective Time such holder
fails to perfect or withdraws or loses his right to appraisal, such Shares shall
be treated as if they had been converted as of the Effective Time into a right
to receive the Merger Consideration. The Company shall give Buyer prompt notice
of any demands received by the Company for appraisal of Shares, and Buyer shall
have the right to direct all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of Buyer,
make any payment with respect to, or settle or offer to settle, any such
demands.
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SECTION 3.05. STOCK OPTIONS.
(a) Immediately prior to the Effective Time, each outstanding employee
stock option (an "OPTION") to purchase Shares granted under any employee stock
option or compensation plan or arrangement of the Company shall be canceled, and
each holder of any such Option, whether or not then vested or exercisable, shall
be paid by the Company at the Effective Time for each such Option an amount
determined by multiplying (i) the excess, if any, of the Merger Consideration
per Share over the applicable exercise price of such Option by (ii) the number
of Shares such holder could have purchased (assuming full vesting of all
Options) had such holder exercised such option in full immediately prior to the
Effective Time (the "OPTION CONSIDERATION").
(b) The consideration due under this Section 3.05 shall be payable without
interest after (a) verification by the Depositary of the ownership and terms of
the particular Option by reference to the Company's records and (b) delivery in
the manner provided in Section 3.03 of a written instrument duly executed by the
owner of the Option, in a form to be provided by the Depositary promptly after
the Effective Time, setting forth (i) the aggregate number of Shares of Common
Stock acquirable by such Option holder upon exercise of all Options held by such
holder whether or not such Options are immediately exercisable, the respective
issue dates of each Option and the exercise price of each Option; (ii) a
representation by the person that he or she is the owner of all Options
described pursuant to clause (a), and that none of those Options has expired or
ceased to be exercisable; and (iii) a consent to the treatment of such Options
pursuant to this Section 3.05 in full satisfaction of all rights relating to
such Options.
(c) Prior to the Effective Time, the Company shall (i) use its best efforts
to obtain any consents from holders of Options and (ii) make any amendments to
the terms of such stock option or compensation plans or arrangements, to the
extent such consents or amendments are necessary to give effect to the
transactions contemplated by Section 3.05(a). Notwithstanding any other
provision of this Section, payment may be withheld in respect of any Option
until necessary consents are obtained.
(d) Except as otherwise agreed to in writing by the parties, (i) the
Options and other equity plans will terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company or
any subsidiary thereof will be canceled as of the Effective Time, and (ii) the
Company shall use its reasonable efforts to assure that following the Effective
Time no participant in any of such plans, or other plans, programs or
arrangements, will have any right thereunder to acquire equity securities of the
Company, the Surviving Corporation or any subsidiary thereof.
SECTION 3.06. MERGER WITHOUT MEETING OF STOCKHOLDERS.
Notwithstanding Section 6.02 hereof, in the event that Buyer, Merger
Subsidiary or any other subsidiary of Buyer shall acquire at least 90% of the
outstanding shares of capital stock of the Company, the parties hereto agree to
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after such acquisition, without a meeting of
stockholders of the Company, in accordance with the DGCL.
SECTION 3.07. CLOSING.
The closing of the Merger (the "MERGER CLOSING") will take place at a time
and on a date to be specified by the parties, which is to be no later than the
second Business day after satisfaction or waiver (subject to applicable law) of
the conditions (excluding conditions that, by their terms, cannot be satisfied
until the Merger Closing Date) set forth in Article IX, unless another time or
date is agreed to by parties to this Agreement. The Merger Closing will be held
at the offices of Jones, Day, Reavis & Pogue, 901 Lakeside Avenue, Cleveland,
Ohio, or such other location as the parties to this Agreement agree to in
writing. The date on which the Merger Closing occurs is hereinafter referred to
as the "MERGER CLOSING DATE."
SECTION 3.08. CERTIFICATE OF INCORPORATION.
The certificate of incorporation of Surviving Corporation in effect at the
Effective Time shall be the certificate of incorporation of the Company until
amended in accordance with applicable law.
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SECTION 3.09. BY-LAWS.
The By-Laws of Surviving Corporation in effect at the Effective Time shall
be the by-laws of the Company.
SECTION 3.10. DIRECTORS AND OFFICERS.
From and after the Effective Time, until successors are duly elected or
appointed and qualified in accordance with applicable law, the directors of the
Company at the Effective Time shall be the initial directors of the Surviving
Corporation and the officers of the Company at the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected and appointed or qualified.
SECTION 3.11. EFFECTS OF THE MERGER.
The Merger shall have the effects set forth in Section 259 of the DGCL.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Buyer and Merger Subsidiary that:
SECTION 4.01. CORPORATE EXISTENCE AND POWER.
The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware, and except as set forth
on Section 4.01 of the letter delivered to the Company simultaneously herewith
(the "COMPANY DISCLOSURE LETTER"), has all corporate powers and authority to
own, lease and operate its properties and to carry on its business as it is now
being conducted and has all governmental licenses, authorizations, consents,
permits and approvals (collectively, "LICENSES") required to carry on its
business as now conducted except where the failure to have any such License
would not, individually or in the aggregate, have a Material Adverse Effect (as
defined below). The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, have a Material
Adverse Effect. As used herein, the term "MATERIAL ADVERSE EFFECT" means a
material adverse effect on the condition (financial or otherwise), business,
assets or results of operations of the Company and the Subsidiaries, taken as a
whole, that is not a result of general changes in the economy or the industries
in which the Company and its Subsidiaries operate or which prevents or
materially delays the Company's ability to consummate the transactions
contemplated hereby. The Company has heretofore delivered to Buyer true and
complete copies of the Company's Certificate of Incorporation and By-Laws as
currently in effect.
SECTION 4.02. CORPORATE AUTHORIZATION.
The execution, delivery and performance by the Company of this Agreement
and the consummation by the Company of the transactions contemplated hereby are
within the Company's corporate powers and authority and, except for any required
approval by the Company's stockholders in connection with the consummation of
the Merger, have been duly authorized by all necessary corporate action. This
Agreement, assuming due and valid authorization, execution and delivery by the
Buyer and Merger Subsidiary, has been duly executed and delivered by the Company
and, constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except that (i) enforcement
may be subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect, affecting creditors' rights
generally and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought. The
Company has taken all actions necessary to render the prohibitions of Section
203 of the DGCL to be inapplicable to the execution and delivery of this
Agreement, the Stockholders Agreement and the transactions contemplated hereby
and thereby, including the acquisition of the Shares pursuant to the Offer and
the Merger.
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No other "fair price," "merger moratorium," "control share acquisition" or other
anti-takeover statute or similar statute or regulation applies or purports to
apply to the Merger, this Agreement, the Stockholders Agreement or any of the
transactions contemplated hereby.
SECTION 4.03. GOVERNMENTAL AUTHORIZATION.
Except as set forth in Section 4.03 of the Company Disclosure Letter, the
execution, delivery and performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated hereby require no
action by or in respect of, or filing with, any governmental body, agency,
official or authority (each, a "GOVERNMENTAL ENTITY") other than: (i) the filing
of a certificate of merger in accordance with the DGCL; (ii) compliance with any
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR ACT") and (iii) compliance with any applicable requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "EXCHANGE ACT").
SECTION 4.04. NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this Agreement
and the consummation by the Company of the transactions contemplated hereby do
not and will not (i) contravene or conflict with the Certificate of
Incorporation or By-Laws of the Company or comparable organizational documents
of its Subsidiaries, (ii) except as set forth in Section 4.04 of the Company
Disclosure Letter and assuming compliance with the matters referred to in
Section 4.03, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to the Company or any Subsidiary, (iii) except as set forth
in Section 4.04 of the Company Disclosure Letter, with or without the giving of
notice or passage of time or both, constitute a default under or give rise to a
right of termination, cancellation or acceleration of any right or obligation of
the Company or any Subsidiary or to a loss of any benefit to which the Company
or any Subsidiary is entitled under any provision of any agreement, contract or
other instrument binding upon the Company or any Subsidiary or any license,
franchise, permit or other similar authorization held by the Company or any
Subsidiary, or (iv) result in or require the creation or imposition of any Lien
on any asset of the Company or any Subsidiary excluding from the foregoing
clauses (ii), (iii) or (iv) such violations, breaches, defaults or Liens which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company and its Subsidiaries taken as a whole, and which will not materially
impair the ability of the Company to consummate the transactions contemplated
hereby. For purposes of this Agreement, "LIEN" means, with respect to any asset,
any mortgage, lien, pledge, charge, security interest or encumbrance of any kind
in respect of such asset.
SECTION 4.05. CAPITALIZATION.
The authorized capital stock of the Company consists of 15,000,000 shares
of common stock, par value $0.01 per Share, and 5,000,000 shares of preferred
stock. As of January 31, 1999, there were outstanding 4,900,000 shares of common
stock, no shares of preferred stock and Options to purchase an aggregate of
120,200 Shares, both vested and unvested. Section 4.05 of the Company Disclosure
Letter accurately sets forth information regarding the exercise prices of the
Options. All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
set forth in this Section, there are outstanding (i) no shares of capital stock
or other voting securities of the Company, (ii) no securities of the Company or
of any Subsidiary convertible into or exchangeable for shares of capital stock
or voting securities of the Company, (iii) no options, warrants, calls or other
rights to acquire from the Company, and no obligation of the Company to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company or its
Subsidiaries, and (iv) no outstanding obligations of the Company or any of its
Subsidiaries to issue, sell or deliver, or cause to be issued, sold or delivered
any securities issuable by the Company or the Subsidiaries (the items in clauses
(i), (ii), (iii) and (iv) being referred to collectively as the "COMPANY
SECURITIES"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any Company Securities.
Neither the
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Company nor any Subsidiary is subject to any voting agreement with respect to
the voting of the Company Securities.
SECTION 4.06. SUBSIDIARIES.
(a) Each Subsidiary that is actively engaged in any business or owns any
material assets (an "ACTIVE SUBSIDIARY") (i) is a limited partnership or a
corporation duly formed, validly existing and in good standing under the laws of
its jurisdiction of incorporation, (ii) except as set forth in Section 4.06 of
the Company Disclosure Letter, has all corporate or partnership powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted and (iii) is duly qualified to do
business as a foreign corporation or limited partnership and is in good standing
in each jurisdiction where the character of the property owned or leased by it
or the nature of its activities makes such qualification necessary, except in
each case to the extent that the failure of this representation and warranty to
be true would not have a Material Adverse Effect. For purposes of this
Agreement, "SUBSIDIARY" means any corporation, limited partnership or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing
similar functions are directly or indirectly owned by the Company. All Active
Subsidiaries and their respective jurisdictions of organization are either
identified in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 (the "COMPANY 10-K") or in Section 4.06 of the Company Disclosure
Letter.
(b) Except that the stock of the Active Subsidiaries is pledged under the
Loan Agreement set forth in Section 4.04 of the Company Disclosure Letter (the
"LOAN AGREEMENT") which Loan Agreement restricts the sale, transfer,
disposition, pledge or hypothecation of such stock, all of the outstanding
capital stock of, or other ownership interests in, each Active Subsidiary, is
owned by the Company, directly or indirectly, free and clear of any Lien and
free of any other limitation or restriction (including any restriction on the
right to vote, sell or otherwise dispose of such capital stock or other
ownership interests); there are no outstanding (i) securities of the Company or
any Subsidiary convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary, or (ii)
options or other rights to acquire from the Company or any Subsidiary, and no
other obligation of the Company or any Subsidiary to issue, any capital stock,
voting securities or other ownership interests in, or any securities convertible
into or exchangeable for any capital stock, voting securities or ownership
interests in, any Subsidiary (the items in clauses (i) and (ii) being referred
to collectively as the "SUBSIDIARY SECURITIES"); and, there are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities. All outstanding capital stock or
other equity interests of each of the Subsidiaries has been validly issued and
is fully paid and nonassessable.
SECTION 4.07. INVESTMENTS.
Except as disclosed in Section 4.07 of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries, directly or indirectly, owns
any shares or has any ownership interest in any other Person other than the
Subsidiaries.
SECTION 4.08. SEC FILINGS.
(a) The Company has delivered to Buyer (i) its Annual Reports on Form 10-K
for its fiscal years ended June 30, 1998, 1997 and 1996, (ii) its Quarterly
Reports on Form 10-Q for its fiscal quarters ended September 30, 1998 and
December 31, 1998 (such reports are hereinafter referred to as the "COMPANY
10-QS"), (iii) its proxy or information statements relating to its annual
meeting held on November 18, 1998 and all meetings of, or actions taken without
a meeting by, the stockholders of the Company held since June 30, 1998, and (iv)
all of its other reports, statements, schedules and registration statements
filed by the Company with the SEC since June 30, 1996 (collectively the "COMPANY
SEC DOCUMENTS").
(b) As of its respective filing date or as later modified by an amendment
thereto or by subsequent Company SEC Documents, each of the Company's SEC
Documents (i) did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading,
and (ii) complied in all material respects with the
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requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations promulgated thereunder applicable to such SEC
Documents.
SECTION 4.09. FINANCIAL STATEMENTS.
The audited consolidated financial statements and unaudited consolidated
interim financial statements of the Company included in the Company SEC
Documents fairly present, in conformity with generally accepted accounting
principles applied on a consistent basis (except as may be indicated in the
notes thereto and, in the case of the interim financial statements included in
the Company SEC Documents, except for the absence of certain footnotes that
would be required under Generally Accepted Accounting Principles herein referred
to as "GAAP"), the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and their consolidated results
of operations and cash flows for the periods then ended (subject to normal
year-end adjustments in the case of any unaudited interim financial statements).
The financial statements of the Company included in the Company SEC Documents
comply as to form, as of their respective date of filing with the SEC, in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. For purposes of this
Agreement, "BALANCE SHEET" means the consolidated balance sheet of the Company
as of December 31, 1998 set forth in the Company 10-Qs and "BALANCE SHEET DATE"
means December 31, 1998.
SECTION 4.10. DISCLOSURE DOCUMENTS.
Each document required to be filed by the Company with the SEC in
connection with the transactions contemplated by this Agreement (the "COMPANY
DISCLOSURE DOCUMENTS"), including, without limitation, the Schedule 13E-4,
Schedule 13E-3 and the Company Proxy Statement, if any, will, when filed, (i)
comply as to form in all material respects with the applicable requirements of
all applicable law, including without limitation, the Exchange Act and (ii) will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading (in the case of the Company Proxy Statement at the time it or any
amendment or supplement thereto is first mailed to stockholders of the Company)
at the time the stockholders vote on adoption of this Agreement and at the
Effective Time and in the case of any other Company SEC Documents, at the time
of filing thereof and at the time of distribution thereof. Notwithstanding the
foregoing, the Company makes no representation or warranty with respect to the
statements made in any of the foregoing documents based on written information
supplied by or on behalf of either Buyer, Merger Subsidiary or any of their
respective affiliates specifically for inclusion therein.
SECTION 4.11. ABSENCE OF CERTAIN CHANGES.
Since the Balance Sheet Date, and except as set forth in Section 4.11 of
the Company Disclosure Letter or as contemplated by this Agreement, the Company
and Subsidiaries have conducted their business in the ordinary course consistent
with past practice, there has not been a Material Adverse Effect, the Company
and its Subsidiaries have not taken any action that if taken after the date of
this Agreement would constitute a violation of Section 6.01, neither the Company
nor any of its Subsidiaries has incurred nor shall there have arisen any
liabilities (direct, contingent or otherwise) which would have a Material
Adverse Effect and there has not been:
(a) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company, or
any repurchase, redemption or other acquisition by the Company or any
Subsidiary of any outstanding shares of capital stock or other securities
of, or other ownership interests in, the Company or any Subsidiary other
than the quarterly dividends paid on the shares or split, combination or
reclassification of any of its capital stock or issuance or authorization
of the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock;
(b) any incurrence, assumption or guarantee by the Company or any
Subsidiary of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with
past practices;
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(c) any making of any loan, advance or capital contribution to or
investment in any Person other than advances to employees in the ordinary
course of business consistent with past practice and loans, advances or
capital contributions to or investments in wholly-owned Subsidiaries made
in the ordinary course of business consistent with past practices;
(d) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company or
any Subsidiary which, individually or in the aggregate, has had or could
reasonably be expected to have a Material Adverse Effect;
(e) any (i) grant of any severance or termination pay to any director,
officer or employee of the Company or any Subsidiary, (ii) entering into of
any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or
employee of the Company or any Subsidiary, (iii) increase in benefits
payable under any existing severance or termination pay policies or
employment agreements, (iv) increase in compensation, bonus or other
benefits payable to directors, officers or employees of the Company or any
Subsidiary, other than compensation, bonus or other benefits payable to
employees at the Company in the ordinary course of business consistent with
past practices or (v) enter into any collective bargaining agreements;
(f) any issuance, delivery, sale, pledge or other encumbrance or
subjecting to any Lien any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible
securities;
(g) any entering into of commitments for capital expenditures
involving more than $100,000 in the aggregate except (i) as may be
necessary for the maintenance of existing facilities, machinery and
equipment in good operating condition and repair in the ordinary course of
business, (ii) as reflected in the capital plan of the Company previously
provided to Buyer, or (iii) tooling costs which are reimbursable by
customer;
(h) any change in the accounting principles used by it unless required
by GAAP;
(i) any making or rescinding of any express or deemed election or
settlement or compromise of any claim or action relating to U. S. Federal,
state or local taxes, or change of any of its methods of accounting or of
reporting income or deductions for U.S. federal income tax purposes;
(j) any satisfaction of any claims or liabilities, other than the
satisfaction, in the ordinary course of business consistent with past
practice, in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the consolidated financial
statements (or the notes thereto) of the Company included in the Company
10-K or Company 10-Qs or incurred in the ordinary course of business
consistent with past practice;
(k) other than in the ordinary course of business consistent with past
practice, any (A) modification, amendment or termination of any material
contract, (B) waiver, release, relinquishment or assignment of any material
contract (or any of the Company's rights thereunder), right or claim or (C)
canceling or forgiveness of any material indebtedness owed to the Company
or the Subsidiaries; provided, however, that the Company may not under any
circumstance waive or release any of its rights under any standstill or
confidentiality agreement to which it is party; or
(l) any authorization of, or commitment or agreement to take, any of
the foregoing actions.
SECTION 4.12. NO UNDISCLOSED MATERIAL LIABILITIES.
Except as set forth in Section 4.12 of the Company Disclosure Letter, there
are no liabilities of the Company or any Subsidiary of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise
other than:
(a) liabilities disclosed or provided for in the Balance Sheet and in
the Company's SEC Documents;
(b) other liabilities the presence of which, individually or in the
aggregate, do not have and could not reasonably be expected to have a
Material Adverse Effect;
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(c) liabilities incurred in the ordinary course of business consistent
with past practice since the Balance Sheet Date; and
(d) liabilities under this Agreement or in connection with this
Agreement or disclosed hereunder.
SECTION 4.13. LITIGATION; PERMITS.
Except as set forth in the Company SEC Documents or in Section 4.13 of the
Company Disclosure Letter, there is no action, suit, investigation or proceeding
pending against, or to the knowledge of the Company threatened against or
affecting, the Company or any Subsidiary or any of their respective properties
before any court or arbitrator or any governmental body, agency or official
which, if determined or resolved adversely to the Company or any Subsidiary
could reasonably be expected to have a Material Adverse Effect. Except as set
forth in Section 4.13 of the Company Disclosure Letter, the Company, its
subsidiaries and employees hold all permits, licenses, variances, exemptions,
orders, registrations and approvals of all Governmental Entities which are
required for the operation of the businesses of Company and its Subsidiaries
(collectively the "COMPANY PERMITS"), except where the failure to have any such
Company Permits individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect. The Company and its Subsidiaries are
in compliance with the terms of the Company Permits and all applicable statutes,
laws, ordinances, rules and regulations, except where failure so to comply
individually or in the aggregate has not had a Material Adverse Effect.
SECTION 4.14. TAXES.
(a) (i) All income and other material Tax returns, statements, reports and
forms (including estimated Tax returns and reports and information returns and
reports) required to be filed with any taxing authority with respect to any
Pre-Closing Tax Period (as defined herein) by or on behalf of the Company or any
Subsidiary (collectively, the "RETURNS") have been filed; (ii) to the Company's
knowledge as of the time of filing such Returns correctly reflected in all
material respects the facts regarding the income, business, assets, operations,
activities and status of the Company, the Subsidiaries and any other information
required to be shown therein; (iii) the Company and the Subsidiaries have timely
paid, or withheld and remitted to the appropriate taxing authority, all Taxes
shown as due and payable on the Returns that have been filed; (iv) the charges,
accruals and reserves for Taxes with respect to the Company and any Subsidiary
for any Pre-Closing Tax Period (including any Pre-Closing Tax Period for which
no Return has yet been filed) reflected on the books of the Company and the
Subsidiaries (excluding any provision for deferred income taxes) are adequate
(in accordance with GAAP) to cover such Taxes; (v) neither the Company nor any
Subsidiary of the Company has been a member of an affiliated group (as defined
in Section 1504 of the Internal Revenue Code of 1986, as amended (the "CODE"))
other than one of which the Company was the common parent, or filed or been
included in a combined, consolidated or unitary Return other than one filed by
the Company; (vi) the Company is not and has not been within five years of the
date hereof a "United States real property holding corporation" as defined in
Section 897 of the Code; (vii) there is no claim, action, suit or proceeding now
pending or threatened in writing against or in respect of any Tax or "tax asset"
of the Company or any Subsidiary the resolution of which would as proposed, or
audit or investigation now pending or threatened in writing against or in
respect of any Tax or "tax asset" of the Company or any Subsidiary the
resolution of which the Company believes would (taking into account any changes,
accruals and reserves referred to in clause (iv) above), individually or in the
aggregate, have a Material Adverse Effect. (The term "TAX ASSET" means any net
operating loss, net capital loss, investment tax credit, foreign tax credit,
charitable deduction or any other credit or tax attribute which could reduce
Taxes); and (viii) the only states in which the Company or any Subsidiary files
income Tax returns are Georgia, Illinois (on a non-unitary basis), Michigan and
Texas.
(b) As used in this Section 4.14, "TAXES" mean all (i) Federal, state,
local and foreign income, franchise, alternative or add-on minimum tax, gross
receipts, transfer, withholding on amounts paid to or by the Company or any of
its Subsidiaries, payroll, employment, license, property, sales, use, excise and
other taxes, tariffs or governmental charges of any nature whatsoever, together
with any interest, penalty or additional tax attributable to such taxes; (ii)
liability of the Company or any Subsidiary for the payment of any amounts of the
type described in clause (i) of this paragraph as a result of being a member of
an affiliated, consolidated, combined or unitary group, or being a party to any
agreement or arrangement whereby liability of the Company or any
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Subsidiary for payments of amounts was determined or taken into account with
reference to the liability of any other person; and (iii) liability of the
Company or any Subsidiary for the payment of any amounts as a result of being
party to any tax sharing agreement or with respect to the payment of any amounts
of the type described in clauses (i) or (ii) of this paragraph as a result of
any express or implied obligation to indemnify any other person.
"PRE-CLOSING TAX PERIOD" means any Tax period (or portion thereof) ending
on or before the close of business on the Effective Time.
SECTION 4.15. EMPLOYEE MATTERS.
(a) For purposes of this Section, the following terms shall have the
meanings set forth below:
(A) "BENEFIT ARRANGEMENT" means any material contract (other than the
Employee Agreements), arrangement or policy, or any plan or arrangement
(whether or not written) providing for severance benefits, insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock appreciation rights or other forms of incentive compensation
or post-retirement insurance, compensation or benefits that (i) is not an
Employee Plan, (ii) is entered into or maintained, as the case may be, by
the Company or any of its Subsidiaries and (iii) covers any employee or
former employee of the Company or any of its Subsidiaries.
(B) "EMPLOYEE AGREEMENT" means all written employment agreements and
severance agreements with employees of the Company or any of its
Subsidiaries
(C) "EMPLOYEE PLAN" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is maintained, administered or contributed
to by the Company, any Subsidiary or any of their ERISA Affiliates for
employees or former employees of the Company or any of its Subsidiaries and
(ii) covers any employee or former employee of the Company or any of its
Subsidiaries.
(D) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute thereto, and the rules and
regulations promulgated thereunder.
(E) "ERISA AFFILIATE" of any entity means any other entity which,
together with such entity, would be treated as a single employer under
Section 4001(b)(1) of ERISA or Section 414 (b), (c), (m) or (o) of the
Code.
(F) "MULTIEMPLOYER PLAN" means each Employee Plan that is a
multiemployer plan, as defined in Section 3(37) of ERISA.
(G) "TITLE IV PLAN" means an Employee Plan, other than any
Multiemployer Plan, subject to Title IV of ERISA.
(b) Section 4.15 of the Company Disclosure Letter identifies each Employee
Plan. The Company has furnished or made available to Buyer copies of the
Employee Plans (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof together with (i) the two most
recent annual reports prepared in connection with any material Employee Plan
(Form 5500 including, if applicable, Schedule B thereto), (ii) the most recent
actuarial valuation report prepared in connection with any Employee Plan and
(iii) such other related information as is reasonably requested by Buyer.
(c) With respect to each Employee Plan: (i) no "prohibited transaction", as
defined in Section 406 of ERISA or Section 4975 of the Code or any breach of
fiduciary duty, has, to the knowledge of the Company, occurred with respect to
any Employee Plan; (ii) neither (A) disputes in the ordinary course of the
operation of an Employee Plan that might reasonably be expected to have a
Material Adverse Effect nor (B) disputes outside the ordinary course of the
operation of an Employee Plan, are pending, or to the knowledge of the Company,
threatened; (iii) all contributions required to be made to each Employee Plan as
of the date hereof (taking into account any extensions permitted by the Code or
the IRS) have been made in full.
(d) Except as set forth in Section 4.15 of the Company Disclosure Letter,
no liability under Title IV of ERISA has been incurred by the Company or any
ERISA Affiliate that has not been satisfied in full and to the
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knowledge of the Company, no condition exists that presents a material risk to
the Company or its ERISA Affiliates of incurring any material liability to the
Pension Benefit Guaranty Corporation (the "PBGC"), Department of Labor or the
plan participants (other than routine claims for benefits). No Employee Plan has
incurred an accumulated funding deficiency, as defined in Section 302 of ERISA
or Section 312 of the Code, whether or not waived.
(e) If a "complete withdrawal" by the Company, all its Subsidiaries and all
of their ERISA Affiliates were to occur as of the Effective Time with respect to
all Multiemployer Plans, none of the Company, any of its Subsidiaries or any of
their ERISA Affiliates would incur any material withdrawal liability under Title
IV of ERISA.
(f) Except as set forth in Section 4.15 of the Company Disclosure Letter,
each Employee Plan that is intended to be qualified under Section 401(a) of the
Code is and has been determined by the Internal Revenue Service to be so
qualified and no event has occurred since the date of such determination that,
to the knowledge of the Company, would adversely affect such qualification, and
each trust created under any such Employee Plan has been determined by the
Internal Revenue Service to be exempt from Tax under Section 501(a) of the Code
and no event has occurred since the date of such determination that, to the
knowledge of the Company, would adversely affect such exemption. The Company has
provided or made available to Buyer the most recent determination letter of the
Internal Revenue Service relating to each such Employee Plan. Except as set
forth in Section 4.15 of the Company Disclosure Letter, each Employee Plan has
been maintained in substantial compliance (to include timely, complete and
substantially correct filing of Form 5500 and any attachments) with its terms
and with the requirements prescribed by any and all applicable statutes, orders,
rules and regulations, including but not limited to ERISA and the Code. No
Employee Plan is or has been audited or is or has been under investigation by
the Department of Labor or the Internal Revenue Service.
(g) All contributions to each Employee Plan have been or will be deductible
in accordance with the applicable provisions of the Code.
(h) With respect to any insurance policy providing funding for benefits
under any Employee Plan, there is no liability of the Company or any of its
Subsidiaries, in the nature of a retroactive rate adjustment, loss sharing
arrangement, or other actual or contingent liability, nor would there be any
such liability if such insurance policy was terminated on the date hereof, and
no insurance company issuing any such policy is in receivership,
conservatorship, liquidation or similar proceeding and, to the knowledge of the
Company, no such proceedings with respect to any such insurer are imminent.
(i) Neither the Company nor any of its Subsidiaries or ERISA Affiliates has
any liability with respect to any "employee benefit plans" (within the meaning
of Section 3(3) of ERISA) previously maintained or contributed to by the
Company, its Subsidiaries or ERISA Affiliates or to which any such entity
previously had an obligation to contribute.
(j) Except as set forth on Section 4.15 of the Company Disclosure Letter,
the execution and performance of this Agreement will not (i) constitute a stated
triggering event under any Employee Plan, Benefit Arrangement or Employee
Agreement that will result in any payment (whether of severance pay or
otherwise) becoming due from any director, officer, employee, or former employee
(or dependents of such employee), or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due to any employee, officer or
director of the Company or the Subsidiaries.
(k) Section 4.15 of the Company Disclosure Letter identifies each material
Benefit Arrangement. The Company has furnished or made available to Buyer copies
or descriptions of each material Benefit Arrangement. Each such Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all applicable statutes, orders,
rules and regulations.
(l) Section 4.15 of the Company Disclosure Letter identifies by name all
Employee Agreements in effect or committed to be put in effect as of the date
hereof.
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(m) Neither the Company nor any of its ERISA Affiliates has any material
current or projected liability in respect of post-employment or post-retirement
health or medical or life insurance benefits for retired or former employees of
the Company.
(n) There has been no amendment or announcement by the Company or any of
its ERISA Affiliates relating to, or change in benefits, employee participation
or coverage under, any Employee Plan or Benefit Arrangement, that would increase
materially the expense of maintaining such Employee Plan or Benefit Arrangement
above the level of the expense incurred in respect thereof for the fiscal year
ended June 30, 1998.
(o) Except as set forth in Section 4.15 of the Company Disclosure Letter,
the Company is not aware of any Employee Agreement or other contract, agreement,
plan or arrangement covering any employee or former employee of the Company
that, individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to the terms of Section 280G of the Code.
(p) No excise Tax under Section 4980B or other provision of the Code has
been incurred by the Company or an ERISA Affiliate in respect of any Employee
Plan.
(q) Section 4.15 of the Company Disclosure Letter lists by policy number
and issuer all corporate owned life insurance policies owned by the Company or
an ERISA Affiliate and with respect to each such policy lists the (1) current
cash surrender value, net of any loan, (2) name of insured and (3) the face
amount. Each policy so identified is a life insurance contract within the
meaning of Section 7702 of the Code.
SECTION 4.16. LABOR MATTERS.
Except as set forth in Section 4.16 of the Company Disclosure Letter, (i)
there are no controversies pending or, to the best knowledge of the Company,
threatened between the Company or any Subsidiary and any of their respective
employees which individually or in the aggregate would have a Material Adverse
Effect; and (ii) neither the Company nor any Subsidiary is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by the Company or any Subsidiary (any such agreement or
contract a "CBA"), nor, to the knowledge of the Company, are there any
activities or proceedings of any labor union to organize any such employees. The
Company has furnished or made available, to Buyer true and complete copies of
all CBAs. Except as set forth in Section 4.16 of the Company Disclosure Letter,
at no time since December 31, 1995 has the Company or the Subsidiaries
experienced any strikes or work stoppages by any union or labor organization or
any other group of employees, or been involved in or the subject of any
grievance, dispute or controversy by or with any union or labor organization or
any other group of employees or any pending or threatened legal proceeding based
on or related to any employment grievance, dispute or controversy or received
any notice of any of the foregoing which individually or in the aggregate have
had a Material Adverse Effect.
SECTION 4.17. COMPLIANCE WITH LAWS.
Except as set forth in Section 4.17 of the Company Disclosure Letter,
neither the Company nor any Subsidiary is in violation of any provisions of any
laws, statutes, ordinances orders, judgements, decrees, rules or regulations
except where such violations, individually or in the aggregate, would not have a
Material Adverse Effect.
SECTION 4.18. FINDERS' FEES.
Except for the Advisor, a copy of whose engagement agreement has been
provided to Buyer, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of the
Company or any Subsidiary who would be entitled to any fee or commission from
the Company, any Subsidiary, Buyer or any of its affiliates upon consummation of
the transactions contemplated by this Agreement.
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SECTION 4.19. ENVIRONMENTAL MATTERS.
(a) To the Company's knowledge, except as set forth in the Company SEC
Documents or in Section 4.19 of the Company Disclosure Letter:
(i) the Company and its Subsidiaries has not received any (A) written
communication from any person or entity (including any Governmental Entity)
stating that (x) it or its Subsidiaries may be a potentially responsible
party under Environmental Law (as defined in (c) below) with respect to any
actual or alleged environmental contamination or (y) any Governmental
Entity is conducting or has conducted any environmental remediation or
environmental investigation which could reasonably be expected to result in
liability for the Company or its Subsidiaries under Environmental Law; or
(B) request for information under Environmental Law from any Governmental
Entity with respect to any actual or alleged environmental contamination,
except, in each case, for communications, environmental remediation and
investigations and requests for information which would not, individually
or in the aggregate, have a Material Adverse Effect;
(ii) the Company and its Subsidiaries have not received any written
communication from any person or entity (including any Governmental Entity)
stating or alleging that the Company or its Subsidiaries may have violated
any Environmental Law, or that the Company or its Subsidiaries has caused
or contributed to any environmental contamination that has caused any
property damage or personal injury under Environmental Law, except, in each
case, for statements and allegations of violations and statements and
allegations of responsibility for property damage and personal injury which
would not, individually or in the aggregate, have a Material Adverse
Effect;
(iii) all underground storage tanks ("UST'S") on property currently
owned or leased by the Company currently comply with and for the past three
years have compiled with applicable Environmental Law, except for failures
to comply which would not, individually or in the aggregate, have a
Material Adverse Effect.
(iv) with respect to UST's other than those covered by Section
4.19(a)(iii), to the Company's knowledge, all obligations for which the
Company and its Subsidiaries have retained liability either contractually
or by operation of law would not have a Material Adverse Effect; and
(v) the Company and its Subsidiaries have no liabilities under any
Environmental Laws which individually or in the aggregate would reasonably
be expected to result in a Material Adverse Effect.
(vi) the Company and its Subsidiaries are and for the past three years
have been in material compliance with all applicable Environmental Laws;
(vii) the Company has made available to Buyer all information
including such studies, analyses and test results, in the possession,
custody or control of or otherwise known and available to the Company or
its Subsidiaries relating to the environmental conditions on, under or
about any of the properties or assets owned, leased or operated by the
Company or its Subsidiaries at any time or any other property for which the
Company or its Subsidiaries may bear some liability for under applicable
Environmental Laws; and
(viii) the Company and its Subsidiaries hold all permits, licenses or
authorizations required under applicable Environmental Laws ("ENVIRONMENTAL
PERMITS") and have submitted on a timely basis complete applications for
the renewal of any Environmental Permit which has expired but has not yet
been renewed or which will expire within the period of time after the
Closing Date, the length of which is the number of days prior to expiration
that a renewal application for any such Environmental Permit is required to
be submitted.
(b) For purposes of this Section 4.19, "ENVIRONMENTAL LAW" means all
applicable state, federal and local laws, regulations and rules, including
common law, judgments, decrees and orders relating to pollution, the
preservation of the environment and the release of material into the
environment.
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SECTION 4.20. PROPERTY.
(a) The Company and the Subsidiaries have good title to all assets other
than the Real Property (as defined herein) necessary to conduct the business of
the Company as currently conducted except to the extent the failure of this
representation and warranty to be true would not have a Material Adverse Effect.
(b) Section 4.20 of the Company Disclosure Letter contains a complete and
accurate legal description of each parcel of real property owned, leased or used
in any manner by the Company and the Subsidiaries (collectively, the "REAL
PROPERTY"), indicating, in each case, whether such property is owned or leased.
The Real Property constitutes all of the Real Property necessary to the conduct
of the Business as currently conducted. The Company and its Subsidiaries have
good and marketable title to the Real Property which it owns and to all plants,
buildings and improvements thereon, free and clear of any Liens, claims,
charges, imperfections of title, encroachments, easements, rights-of-way,
squatters' rights, encumbrances, covenants, conditions or restrictions of any
kind or nature whatsoever, other than those described in Section 4.20 of the
Company Disclosure Letter.
(c) The Company and the Subsidiaries have a valid and enforceable leasehold
interest, free and clear of all Liens, in each parcel or tract of leased Real
Property attributable to it pursuant to a lease (the "LEASES"). The Company or
the Subsidiaries, as applicable, has performed all of the obligations required
to be performed by the tenant under the Leases, possesses and quietly enjoys the
Real Property demised under each of the Leases and has not released any of its
rights under the Leases.
(d) Neither of the Company or the Subsidiaries is a foreign person within
the meaning of Section 1445 of the Code.
(e) There are not currently any pending or, to the knowledge of the
Company, threatened (i) condemnation, eminent domain or similar proceedings that
would affect any parcel of Real Property, or (ii) any future improvements by any
Governmental Entities, any part of the cost of which would be assessed against
the Real Property. Since the Balance Sheet Date, all Real Property has been
maintained, repaired and replaced consistent with past practice in a manner that
is appropriate for the continued operation of the business of the Company. To
the knowledge of the Company, the ownership, occupancy, operation or use by the
Company of each parcel of Real Property including, without limitation, all
buildings, structures and improvements located on such property (i) complies
with and does not violate any restriction imposed by any declaration, covenant
running with the land, lease, permit, deed of restriction or other contract
affecting such Real Property; (ii) complies with and does not violate any Law,
including, without limitation, fire and zoning Laws; and (iii) there are no
pending changes in Laws affecting any of the Real Property (including zoning)
that will render any part of the business of the Company as presently conducted
illegal or uneconomical. To the knowledge of the Company, there is no plan,
study or effort with respect to any of the Real Property by any Governmental
Authorities or of any other Person that could adversely affect any of the
business of the Company.
SECTION 4.21. INSURANCE.
Section 4.21 of the Company Disclosure Letter contains an accurate and
complete list and a brief description (including the insurer, policy number,
type of insurance, coverage limits, deductibles, current premium, expiration
dates and any special cancellation conditions) of all material policies of fire,
liability (including but not limited to product liability), workers'
compensation and other forms of insurance owned or held by either the Company or
the Subsidiaries or pursuant to which any of their assets are insured. Such
policies (i) are carried by insurers of recognized responsibility; (ii) are in
full force and effect; and (iii) to the Company's knowledge, are sufficient for
compliance with all requirements of law and insure the assets, business and
operations of the Company or the Subsidiaries against all liabilities, claims,
hazards and risks against which businesses in industries similar to the Company
or the Subsidiaries customarily insure. All such insurance shall be in effect
through the Effective Time. No insurance coverage of either the Company or the
Subsidiaries is maintained through self-insurance except as set forth in Section
4.21 of the Company Disclosure Letter.
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SECTION 4.22. PATENTS AND TRADEMARKS.
(a) The Company and the Subsidiaries own all right, title and interest to,
or possess valid and enforceable licenses or other rights to use all patents,
trademarks, trademark rights, trade names and trade name rights (including any
applications for any of the foregoing) material to the Company's business and
operations (collectively, "MATERIAL PATENTS AND TRADEMARKS") used or held for
use in connection with the business of the Company and the Subsidiaries as
currently conducted free and clear of all Liens, licenses and other
restrictions. All Material Patents and Trademarks owned by the Company or its
Subsidiaries are validly registered or registrations have been applied for.
(b) Except as set forth in Section 4.22 of the Company Disclosure Letter,
the Company is unaware of any assertion or claim challenging the validity of any
Material Patent and Trademark. Except as set forth in Section 4.22 of the
Company Disclosure Letter, the conduct of the business of the Company and the
Subsidiaries as currently conducted does not conflict with any patent, patent
application, trademark or trademark application of any third party in a manner
that could reasonably be expected to have a Material Adverse Effect. To the
knowledge of the Company, there are no material infringements of any Material
Patents and Trademarks.
(c) Each of the Company's employees set forth in Section 4.22(c) of the
Company Disclosure Letter has entered into an agreement with the Company
regarding intellectual property matters in the form provided to Buyer.
SECTION 4.23. MATERIAL CONTRACTS.
(a) Except as set forth in Section 4.23 of the Company Disclosure Letter,
the Company SEC Documents list each material contract or agreement (including,
but not limited to, all material leases, licensing agreements, manufacturing,
production or distribution contracts and any material contracts or agreements
pursuant to which the Company or any Subsidiary has licensed intellectual
property to a third party) (collectively, the "MATERIAL CONTRACTS") to which the
Company or any of its Subsidiaries is a party, other than purchase orders with
customers entered into in the ordinary course of business.
(b) To the knowledge of the Company, each Material Contract is in full
force and effect and is enforceable in all material respects against the parties
thereto (other than the Company and the Subsidiaries) in accordance with its
terms and no condition or state of facts exists that, with notice or the passage
or time, or both, would constitute a material default by the Company or any
Subsidiary or, to the knowledge of the Company, any third party under any
Material Contract.
SECTION 4.24. SHAREHOLDER RIGHTS AGREEMENT.
The Company currently is not, and no resolution or other action has been
taken providing for the Company to become at a later date, a party to a
shareholder rights agreement, "poison pill" or any other agreement of like
nature.
SECTION 4.25. VOTING REQUIREMENTS.
The affirmative vote of the holders of a majority of the Shares at the
Company Stockholder Meeting to adopt this Agreement is the only vote of the
holders of any class or series of the Company's capital stock necessary to adopt
and approve this Agreement, and the Merger and the transactions contemplated
hereby and thereby.
SECTION 4.26. OPINION OF FINANCIAL ADVISOR.
The Company has received the opinion of Bowles Hollowell Conner, dated the
date of this Agreement, to the effect that, as of such date, the Merger
Consideration and the Offer Price are fair from a financial point of view to
holders of shares of Common Stock, a signed copy of which opinion will be made
available to Buyer promptly after the date hereof.
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SECTION 4.27. YEAR 2000 ISSUES.
The Company has adopted and implemented commercially reasonable measures to
investigate and correct any "year 2000 problems" associated with (i) the
operation of the Company's business, and (ii) the products manufactured and
distributed by the Company. The Company has provided to Buyer a written
explanation of the costs that the Company and Company Subsidiaries have incurred
in each of the past two fiscal years to investigate and correct the "year 2000
problem," as well as a written report of its estimates of the costs to be
incurred in the future to investigate and correct the "year 2000 problem."
SECTION 4.28. TRANSACTION FEES.
Section 4.28 of the Company Disclosure Letter sets forth all fees and
expenses paid by the Company, and the Company's estimate of any additional fees
and expenses which it expects to incur, as a result of or in connection with the
Offer and the transactions contemplated by this Agreement, including legal,
accounting and investment banking fees and expenses as well as any and all
payments made or to be made pursuant to any change in control, severance or
other agreements to which the Company is a party (collectively, the "TRANSACTION
FEES"). As of the Offer Completion Date and the Closing Date, the Transaction
Fees shall not exceed $5,900,000, unless the Company shall incur additional
expenses in defending lawsuits brought by stockholders of the Company that arise
as a result of the transactions contemplated by this Agreement in which case the
amount of the Transaction Fees may exceed $5,900,000 by the amount such
litigation expenses, together with the legal expenses otherwise incurred by the
Company in connection with the transactions contemplated by this Agreement,
exceed $250,000.
SECTION 4.29. INSIDER INTERESTS.
Except as set forth in Section 4.29 to the Company Disclosure Letter or the
Company SEC Documents, no officers, directors, employees or stockholders of the
Company or its Subsidiaries and no entity controlled by such persons has a
relationship with the Company that would be required to be disclosed under Item
404 of Regulation S-K promulgated under the Securities Act of 1933, as amended,
if such Item 404 applied to all of such persons.
SECTION 4.30. FULL DISCLOSURE.
To the Company's knowledge, no representation or warranty made by the
Company in this Agreement or in any schedule hereto contains any untrue
statement of material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF BUYER AND MERGER SUBSIDIARY
Buyer and Merger Subsidiary represent and warrant to the Company that:
SECTION 5.01. CORPORATE EXISTENCE AND POWER.
Each of Buyer and Merger Subsidiary is a corporation duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation.
SECTION 5.02. CORPORATE AUTHORIZATION.
The execution, delivery and performance by Buyer and Merger Subsidiary of
this Agreement and the consummation by Buyer and Merger Subsidiary of the
transactions contemplated hereby are within the corporate powers and authority
of Buyer and Merger Subsidiary and have been duly authorized by all necessary
corporate action. This Agreement, assuming due and valid authorization,
execution and delivery by the Company, constitutes a legally valid and binding
agreement of each of Buyer and Merger Subsidiary enforceable against the Buyer
and Merger Subsidiary in accordance with its terms, except that (i) enforcement
may be subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect,
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affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
SECTION 5.03. GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by Buyer and Merger Subsidiary of
this Agreement and the consummation by Buyer and Merger Subsidiary of the
transactions contemplated by this Agreement require no action by or in respect
of, or filing with, any Governmental Entity, other than (i) the filing of a
certificate of merger in accordance with the DGCL; (ii) compliance with any
applicable requirements of the HSR Act and (iii) compliance with any applicable
requirements of the Exchange Act.
SECTION 5.04. NON-CONTRAVENTION.
The execution, delivery and performance by Buyer and Merger Subsidiary of
this Agreement and the consummation by Buyer and Merger Subsidiary of the
transactions contemplated hereby do not and will not (i) contravene or conflict
with the certificate of incorporation or by-laws of Merger Subsidiary or Buyer,
(ii) assuming compliance with the matters referred to in Section 5.03,
contravene or conflict with any provision of law, regulation, judgment, order or
decree binding upon Buyer or Merger subsidiary, or (iii) constitute a default
under or give rise to any right of termination, cancellation or acceleration of
any right or obligation of Buyer or Merger Subsidiary or to a loss of any
benefit to which Buyer or Merger Subsidiary is entitled under any agreement,
contract or other instrument binding upon Buyer or Merger Subsidiary, except in
the case of clauses (ii) and (iii) as would not materially impair the
consummation of the Offer or the Merger.
SECTION 5.05. DISCLOSURE DOCUMENTS.
The information with respect to Buyer and its subsidiaries and Merger
Subsidiary that Buyer and Merger Subsidiary furnish to the Company in writing
specifically for use in any Offer Document will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading (i) in the case of the Company Proxy Statement (as
defined in Section 6.02 herein) at the time the Company Proxy Statement or any
amendment or supplement thereto is first mailed to stockholders of the Company,
at the time the stockholders vote on adoption of this Agreement and at the
Effective Time, and (ii) in the case of any Offer Document other than the
Company Proxy Statement, at the time of the filing thereof and at the time of
any distribution thereof. The Schedule 13E-3, when filed, will comply as to form
in all material respects with the applicable requirements of the Exchange Act.
The Schedule 13E-3 will not at the time of the filing thereof, at the time of
any distribution thereof or at the time of consummation of the Offer, contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading; provided that this representation
and warranty will not apply to statements or omissions in the Offer Documents
based upon information furnished to Buyer or Merger Subsidiary in writing by the
Company specifically for use therein.
SECTION 5.06. FINDERS' FEES.
There is no investment banker, broker, finder or other intermediary who
might be entitled to any fee or commission from the Company or any of its
affiliates upon consummation of the transactions contemplated by this Agreement.
SECTION 5.07. FINANCING.
Buyer has received commitments from financing sources to provide debt and
equity financing to Buyer and/or the Company sufficient to finance the
Transactions, including the Buyer Shares, the Option Consideration and the
Transaction Fees, and to perform the obligations of Buyer and Merger Subsidiary
hereunder (the "FINANCING").
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SECTION 5.08. SHARE OWNERSHIP.
As of the date hereof and except pursuant to the Stockholders Agreement,
Buyer and Merger Subsidiary do not beneficially own any Shares.
SECTION 5.09. MERGER SUBSIDIARY'S OPERATIONS.
Merger Subsidiary was formed solely for the purpose of engaging in the
transactions contemplated hereby and has not engaged in any business activities,
conducted any operations or incurred any obligations other than in connection
with the transactions contemplated hereby.
SECTION 5.10. DUE DILIGENCE.
Buyer and its representatives have received a copy of such documents
relating to the Company as requested by Buyer (including without limitation the
Data Room Index attached hereto as Section 5.10 of the Company Disclosure Letter
and all documents referred to therein), has had the opportunity to obtain any
additional information necessary to verify the accuracy of the information
contained in such documents and has been given the opportunity to meet with
representatives of the Company and to have them answer any questions and provide
any additional information requested, and all such questions have been answered
and requested information provided to Buyer's full satisfaction.
ARTICLE VI
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 6.01. CONDUCT OF THE COMPANY.
From the date hereof until the Effective Time, the Company and the
Subsidiaries shall conduct their business in the ordinary course consistent with
past practice and in compliance with all applicable laws and regulations and
shall use their best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, from the date hereof until the Effective Time:
(a) the Company will not adopt or propose any change in its
certificate of incorporation or by-laws;
(b) except for the Merger, the Company will not, and will not permit
any Subsidiary to, merge or consolidate with any other Person or acquire a
material amount of assets of any other Person;
(c) the Company will not, and will not permit any Subsidiary to, sell,
lease, license or otherwise dispose of any material assets or property
except (i) pursuant to existing contracts or commitments and (ii) inventory
in the ordinary course consistent with past practice;
(d) the Company will not, and will not permit any Subsidiary to, take
any action other than the Offer and the Stock Purchase that would
constitute a violation of Section 4.11 (in the case of Section 4.11(e)(iv),
without giving effect to the ordinary course of business qualifier);
(e) the Company will not, and will not permit any Subsidiary to (i)
take or agree or commit to take any action that would make any
representation and warranty of the Company hereunder inaccurate in any
material respect at, or as of any time prior to, the Effective Time or (ii)
omit, or agree or commit to omit, to take any action necessary to prevent
any such representation or warranty from being inaccurate in any material
respect at any such time; and
(f) the Company will not, and will not permit any Subsidiary to, agree
or commit to do any of the foregoing.
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SECTION 6.02. STOCKHOLDER MEETING; PROXY MATERIAL.
The Company shall cause a meeting of its stockholders (the "COMPANY
STOCKHOLDER MEETING") to be duly called and held as soon as reasonably
practicable after the Offer Completion Date for the purpose of voting on the
approval and adoption of this Agreement and the Merger unless a vote of
stockholders of the Company is not required by the DGCL. The directors of the
Company shall, subject to Section 6.04(b) recommend approval and adoption of
this Agreement and the Merger by the Company's stockholders. In connection with
such meeting, the Company (i) will promptly, after the consummation of the
Offer, prepare and file with the SEC, will use its best efforts to have cleared
by the SEC and will thereafter mail to its stockholders as promptly as
practicable the proxy or information statement and all other proxy materials for
such meeting (the "COMPANY PROXY STATEMENT"), (ii) will use its best efforts to
obtain the necessary approvals by its stockholders of this Agreement and the
transactions contemplated hereby and (iii) will otherwise comply with all legal
requirements applicable to such meeting. Without limiting the generality of the
foregoing but subject to its rights pursuant to Section 6.04, the Company agrees
that its obligations pursuant to the first sentence of this Section 6.02 shall
not be affected by the commencement, public proposal, public disclosure or
communication to the Company or any Takeover Proposal.
SECTION 6.03. ACCESS TO INFORMATION.
From the date hereof until the Effective Time, the Company will give Buyer,
its counsel, financial advisors, auditors and other authorized representatives
reasonable access during normal business hours to the offices, properties, books
and records of the Company and the Subsidiaries, will furnish to Buyer, its
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such Persons may
reasonably request and will instruct the Company's employees, counsel and
financial advisors to cooperate with Buyer in its investigation of the business
of the Company and the Subsidiaries; provided that all requests for information,
to visit plants or facilities or to interview the Company's employees or agents
should be directed to and coordinated with an executive officer of the Company
and provided further that no investigation pursuant to this Section shall affect
any representation or warranty given by the Company to Buyer hereunder and any
information received by Buyer or its representatives shall remain subject to the
Confidentiality Agreement between Buyer and the Company (the "CONFIDENTIALITY
AGREEMENT") which is attached hereto as Exhibit A. The Company agrees to
provide, and will cause its Subsidiaries and its and their respective officers,
employees and advisors to provide, all cooperation reasonably necessary in
connection with the arrangement of the Financing, including, without limitation,
participation in meetings, due diligence sessions and assisting Buyer or its
lenders in obtaining landlord consents or estoppel certificates or any other
financing related agreement or document.
SECTION 6.04. OTHER OFFERS.
(a) The Company shall not, nor shall it permit any of its Subsidiaries to,
nor shall it authorize or permit any of its directors, officers or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its Subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage (including
by way of furnishing information), or take any other action designed or
reasonably likely to facilitate, any inquiries or the making of any proposal
which constitutes or reasonably may give rise to any Takeover Proposal (as
defined below) or (ii) participate in any discussions or negotiations regarding
any Takeover Proposal. Notwithstanding the foregoing, if, at any time prior to
the date the Company purchases Shares in the Offer (the "OFFER COMPLETION
DATE"), the Board of Directors of the Company determines in good faith, after
consultation with outside counsel that failure to do so would result in a breach
of its fiduciary duties to the Company's stockholders under applicable law, the
Company may, in response to a Superior Proposal (as defined in Section 6.04(b))
which was not solicited by it or which did not otherwise result from a breach of
this Section 6.04 and subject to providing prior written notice of its decision
to take such action to Buyer (the "COMPANY NOTICE") and compliance with Section
6.04(c), (x) furnish information with respect to the Company and its
Subsidiaries to any person making a Superior Proposal pursuant to a customary
confidentiality agreement (as determined by the Company after consultation with
its outside counsel) that is no less restrictive than the Confidentiality
Agreement and (y) participate in discussions or negotiations regarding such
Superior Proposal. The Company, its affiliates and their respective officers,
directors, employees, representatives and agents shall immediately cease all
existing activities, discussions and negotiations with any parties conducted
heretofore with respect to any Takeover Proposal and request the return of all
confidential
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information regarding the Company provided to any such parties prior to the date
hereof pursuant to the terms of any confidentiality agreements or otherwise. For
purposes of this Agreement, "TAKEOVER PROPOSAL" means any inquiry, proposal or
offer from any person other than the Buyer and Merger Subsidiary relating to any
(v) direct or indirect acquisition or purchase of a business that constitutes
15% or more of the net revenues, net income or the assets of the Company and its
Subsidiaries, taken as a whole, (w) direct or indirect acquisition or purchase
of 15% or more of any class of equity securities of the Company or any of its
Subsidiaries whose business constitutes 15% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole, (x)
tender offer or exchange offer for Shares of any class of equity securities of
the Company or any of its Subsidiaries, or (y) merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its Subsidiaries other than the transactions
contemplated by this Agreement.
(b) Except as expressly permitted by this Section 6.04(b), neither the
Board of Directors of the Company nor any committee thereof shall (i) withdraw
or modify or propose publicly to withdraw or modify, in a manner adverse to
Buyer, the approval or recommendation by such Board of Directors or such
committee of the Offer, the Merger or this Agreement, (ii) approve or recommend,
or propose publicly to approve or recommend, any Takeover Proposal or (iii)
cause or authorize the Company to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement (each a "COMPANY
ACQUISITION AGREEMENT") related to any Takeover Proposal. Notwithstanding the
foregoing, if prior to the Offer Completion Date, the Board of Directors of the
Company determines in good faith, after the Company has received a Superior
Proposal and after consultation with outside counsel, that failure to do so
would result in a breach of its fiduciary duties to the Company's stockholders
under applicable law, the Board of Directors of the Company may (subject to this
and the following sentences and Section 11.04) terminate this Agreement in order
to concurrently enter into such Company Acquisition Agreement with respect to a
Superior Proposal, provided, however, that the Company may not terminate this
Agreement pursuant to this Section 6.04(b) unless and until (i) five Business
Days have elapsed following the delivery to Buyer of the Company Notice and (x)
the Company has delivered to Buyer the written notice required by Section
6.04(c) below, and (y) during such five Business Day period, the Company
otherwise cooperates with Buyer with respect to the Takeover Proposal that
constitutes a Superior Proposal with the intent of enabling Buyer to engage in
good faith negotiations so that the transactions contemplated hereby may be
effected, and (ii) at the end of such five Business day period the Board of
Directors of the Company continues reasonably to believe that the Takeover
Proposal constitutes a Superior Proposal. For purposes of this Agreement, a
"SUPERIOR PROPOSAL" means any proposal made by a third party to acquire,
directly or indirectly, including pursuant to a tender offer, exchange offer,
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of Common
Stock of the Company then outstanding or all or substantially all the assets of
the Company and otherwise on terms which the Board of Directors of the Company
determines in its good faith judgment (based on the advice of a financial
advisor of nationally recognized reputation) to be more favorable to the
Company's stockholders than the Offer and the Merger and for which financing, to
the extent required, is then committed or which, in the good faith judgment of
the Board of Directors of the Company, is reasonably capable of being obtained
by such third party.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 6.04, the Company shall immediately advise Buyer
orally and in writing of any request for information or of any Takeover
Proposal, the material terms and conditions of such request or Takeover
Proposal, and the identity of the person making such request or Takeover
Proposal and promptly furnish to Buyer a copy of any such written proposal in
addition to any information provided to or by any third-party relating thereto.
The Company shall keep Buyer reasonably informed of the status and details
(including amendments and proposed amendments) of any such request or Takeover
Proposal.
(d) Nothing contained in this Section 6.04 prohibits the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or making any disclosure to the
Company's stockholders if, in the good faith judgment of the Board of Directors
of the Company, after consultation with outside counsel, failure so to disclose
would result in breach of its fiduciary duties to the Company's stockholders
under applicable law; provided, however that except as expressly permitted
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by paragraph (b) of this Section 6.04 in connection with a Superior Proposal,
neither the Company nor its Board of Directors nor any committee thereof shall
withdraw or modify, or propose publicly to withdraw or modify, its position with
respect to the Offer, this Agreement or the Merger or approve or recommend, or
propose publicly to approve or recommend, a Takeover Proposal.
SECTION 6.05. NOTICES OF CERTAIN EVENTS.
The Company shall promptly notify Buyer of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement;
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge, threatened against, relating to
or involving or otherwise affecting the Company or any Subsidiary which, if
pending on the date of this Agreement, would have been required to have
been disclosed pursuant to Section 4.13 or which relate to the consummation
of the transactions contemplated by this Agreement;
(iv) the occurrence or non-occurrence of any event whose occurrence or
non-occurrence would be likely to cause either (A) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time or
(B) any condition set forth in Annex I to be unsatisfied in any material
respect at any time from the date hereof to the date Buyer purchases Shares
pursuant to the Offer; and
(v) any material failure of the Company, or any officer, director,
employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
6.05 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
ARTICLE VII
COVENANTS OF BUYER
Buyer agrees that:
SECTION 7.01. OBLIGATIONS OF MERGER SUBSIDIARY.
Buyer will take all action necessary to cause Merger Subsidiary to perform
its obligations under this Agreement and to consummate the Merger on the terms
and conditions set forth in this Agreement.
SECTION 7.02. VOTING OF SHARES.
Buyer agrees to vote all Shares beneficially owned by it or by its
Subsidiaries in favor of adoption of this Agreement at the Company Stockholder
Meeting.
SECTION 7.03. DIRECTOR AND OFFICER LIABILITY.
From the Effective Time through the sixth anniversary of the date on which
the Effective Time occurs, Buyer shall cause the Surviving Corporation to
indemnify and hold harmless each present and former officer, director, employee
or agent of the Company, including, without limitation, each Person controlling
any of the foregoing Persons (the "INDEMNIFIED PARTIES"), against all claims,
losses, liabilities, damages, judgments, fines, fees, costs or expenses,
including, without limitation, attorneys' fees and disbursements (collectively,
"Costs"), incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Effective Time (including, without limitation, this Agreement, the Offer
Documents, the Transactions and actions contemplated hereby and thereby and
giving effect to the consummation of such transactions and actions), whether
asserted or
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claimed prior to, at or after the Effective Time, to the fullest extent
permitted under the Articles of Incorporation or By-Laws of the Company or
indemnification agreements in effect on the date hereof, including provisions
relating to advancement of expenses incurred in the defense of any claim,
action, suit, proceeding or investigation. Without limiting the foregoing, in
the event that any claim, action, suit, proceeding or investigation is brought
against an Indemnified Party (whether arising before or after the Effective
Time), the Indemnified Party may retain counsel satisfactory to such Indemnified
Party and Buyer shall, or shall cause the Surviving Corporation to, advance the
fees and expenses of such counsel for the Indemnified Party in accordance with
the Articles of Incorporation or By-Laws of the Company in effect on the date of
this Agreement. Buyer and the Company agree that all rights to indemnification
and all limitations on liability existing in favor of any such officer,
director, employee or agent as provided in the Company's Certificate of
Incorporation and By-laws as in effect as of the date hereof shall survive the
Merger and shall continue in full force and effect unless required to be amended
under applicable law and except to make changes permitted by law that would
enlarge the Indemnified Parties' right to indemnification. Any determination
required to be made with respect to whether any of the foregoing Persons is
entitled to indemnification as set forth above shall be made by independent
legal counsel selected mutually by such Person and reasonably satisfactory to
Buyer; provided, however, that Buyer will not be liable for any settlement
effected without its written consent. On or prior to the Effective Time, Buyer
will cause the Surviving Corporation to pre-pay, at no expense to the
beneficiaries, officers' and directors' liability insurance, which will be in
effect for no less than six years after the Effective Time, in respect of acts
or omissions occurring prior to the Effective Time covering each such Person
currently covered by the Company's officers' and directors' liability insurance
policy on terms with respect to coverage and amount no less favorable than those
of such policy in effect on the date hereof; provided, however, that in no event
will Buyer be required to pay aggregate premiums for such insurance during such
six-year period under this Section 7.03 in excess of nine times the annual
premium paid by the Company in 1998 for such purpose; provided, further, that if
the aggregate premiums of such insurance coverage exceed such amount, Buyer will
be obligated to obtain a policy with the best coverage available, in the
reasonable judgment of the Board of Directors of Buyer, for a cost up to but not
exceeding such amount. Buyer will on the Effective Time cause the policy
referred to in the preceding sentence to be in full force and effect with the
premiums therefore prepaid in full, which policy shall by its terms be
noncancelable. Buyer shall cause the Surviving Corporation to continue to
indemnify in accordance with the Company's past practices each of the employees
listed in Section 7.03 of the Company Disclosure Letter in respect of the
lawsuit set forth opposite such employee's name in Section 7.03 of the Company
Disclosure Letter.
In the event any claim is made against present or former directors,
officers or employees of the Company that is covered or potentially covered by
insurance, neither the Surviving Corporation nor Buyer shall do anything that
would forfeit, jeopardize, restrict or limit the insurance coverage available
for that claim until the final disposition thereof.
Notwithstanding anything herein to the contrary, if any claim, action, suit
proceeding or investigation (whether arising before, at or after the Effective
Time) is made against any Indemnified Party, on or prior to the sixth
anniversary of the Effective Time, the provisions of this Section 7.03 shall
continue in effect until the final disposition of such claim, action, suit,
proceeding or investigation.
In the event that the Surviving Corporation or Buyer or any of their
respective successors or assigns (i) consolidates with or merges into any other
Person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such case, to
the extent necessary to effectuate the purposes of this Section 7.03, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation or Buyer shall succeed to the obligations set forth in this Section
7.03 and none of the actions described herein shall be taken until such
provision is made.
SECTION 7.04. MERGER SUBSIDIARY SUBSCRIPTION AGREEMENTS.
Certain stockholders of Merger Subsidiary shall enter into agreements to
subscribe for shares of capital stock of Merger Subsidiary in form and substance
satisfactory to the Company.
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ARTICLE VIII
COVENANTS OF BUYER
AND THE COMPANY
The parties hereto agree that:
SECTION 8.01 BEST EFFORTS.
(a) Subject to the terms and conditions of this Agreement, the Company,
Buyer and Merger Subsidiary shall, and the Company shall cause each of its
subsidiaries to, cooperate and each party will use its best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement; provided that Buyer
and its affiliates shall not be required to agree to any consent decree or order
in connection with any objections of the Department of Justice or Federal Trade
Commission (each an "HSR AUTHORITY") to the transactions contemplated by this
Agreement.
(b) The Company and Buyer shall coordinate in advance of sending any
communications to or scheduling any meetings with any Governmental Entity
relating to this Agreement, the Offer or the Merger and shall promptly share all
correspondence or other communication received from any Governmental Entity
relating to this Agreement, the Offer or the Merger.
(c) The Company shall, upon the request of Buyer, take all reasonable steps
to assist in any challenge by Buyer to the validity or applicability to the
transactions contemplated by this Agreement, including the Merger, of any state
takeover law.
SECTION 8.02 CERTAIN FILINGS.
The Company and Buyer shall cooperate with one another (a) in connection
with the preparation of the Company Disclosure Documents and the Offer
Documents, (b) in determining whether any action by or in respect of, or filing
with, any governmental body, agency or official, or authority is required, or
any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts (including, without limitation, lessors under
material leases), in connection with the consummation of the transactions
contemplated by this Agreement (including, without limitation, the consummation
of the Financing in accordance with the terms thereof) and (c) in seeking any
such actions, consents, approvals or waivers or making any such filings,
furnishing information required in connection therewith or with the Company
Disclosure Documents or the Offer Documents and seeking timely to obtain any
such actions, consents, approvals or waivers.
SECTION 8.03. PUBLIC ANNOUNCEMENTS.
Buyer and the Company will consult with each other before issuing, and
provide each other the opportunity to review, comment upon and concur with, any
press release or making any public statement with respect to this Agreement and
the transactions contemplated hereby and, except as may be required by
applicable law, court process or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 8.04. CONVEYANCE TAXES.
Buyer and the Company shall cooperate in the preparation, execution and
filing of all returns, questionnaires, applications, or other documents
regarding any real property transfer or gains, sales, use, transfer, value
added, stock transfer and stamp taxes, any transfer, recording, registration and
other fees, and any similar Taxes which become payable in connection with the
transactions contemplated hereunder that are required or permitted to be filed
on or before the Effective Time.
SECTION 8.05. FURTHER ASSURANCES.
At and after the Effective Time, the officers and directors of the
Surviving Corporation will be authorized to execute and deliver, in the name and
on behalf of the Company or Merger Subsidiary, any deeds, bills of sale,
assignments or assurances and to take and do, in the name and on behalf of the
Company or Merger Subsidiary, any other actions and things to vest, perfect or
confirm of record or otherwise in the Surviving Corporation any
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and all right, title and interest in, to and under any of the rights, properties
or assets of the Company acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger. The Company shall use its
best efforts to obtain a release from each Person owed any Transaction Fees.
SECTION 8.06. EMPLOYEE MATTERS.
(a) Buyer and Merger Subsidiary agree that, effective as of the Effective
Time and for the six-month period following the Effective Time, the Surviving
Corporation and its Subsidiaries and successors shall continue for those persons
who, immediately prior to the Effective Time, were employees of the Company or
its Subsidiaries ("RETAINED EMPLOYEES") the Employee Plans and material Benefit
Arrangements or provide benefits that are not less favorable in the aggregate to
such Employee Plans and Benefit Arrangements. Service accrued by such Retained
Employees during employment with the Company and its Subsidiaries prior to the
Effective Time shall be recognized to the extent and for the purposes such
service was recognized prior to the Effective Time by the applicable Employee
Plan or Benefit Arrangements or benefits plans established after the Effective
Time. Except as provided in the Employee Agreements, nothing contained in the
foregoing is intended to preclude the Surviving Corporation from terminating the
employment of any Retained Employee after the Effective Time.
(b) Buyer and Merger Subsidiary agree to honor, and cause the Surviving
Corporation to honor, without modification, the Employee Agreements on the same
terms as disclosed in Section 4.15 of the Company Disclosure Letter hereof
(whether or not executed as of the date hereof) which Employee Agreements are
listed on Section 4.15 of the Company Disclosure Letter hereto. Buyer and Merger
Subsidiary acknowledge that the consummation of the Offer shall constitute a
change in control for purposes of the Employee Agreements.
(c) Buyer and Merger Subsidiaries agree to honor, and cause the Surviving
Company to pay, without modification, no later than the earlier of July 31, 1999
or such employee's last day of work for the Company to each employee listed in
Section 8.06(c) of the Company Disclosure Letter, the bonus amounts set forth
opposite such employee's names listed in Section 8.06 of the Company Disclosure
Letter.
(d) In the event Buyer or Merger Subsidiary or the Surviving Corporation or
any of their successors or assigns (i) consolidates with or merges into any
other Person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger, or (ii) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in each
such case, to the extent necessary to effectuate the purposes of this Section
8.06, proper provision shall be made so that the successors and assigns of
Buyer, Merger Subsidiary or the Surviving Corporation, as the case may be,
assume the obligations set forth in this Section 8.06 and none of the actions
described in clauses (i) and (ii) shall be taken until such provision is made.
SECTION 8.07 CERTAIN LITIGATION.
Buyer and Merger Subsidiary have the right to participate in the defense of
any stockholder litigation against the Company and its officers, directors,
employees, representatives and agents relating to the transactions contemplated
by this Agreement. The Company agrees that it shall not settle any such
litigation without the prior written consent of Buyer, which consent shall not
be unreasonably withheld.
SECTION 8.08. RECAPITALIZATION.
Each of the Company, Buyer and Merger Subsidiary agrees to use its best
efforts to cause the transactions contemplated by this Agreement, including the
Merger, to be accounted for as a recapitalization and such accounting treatment
to be accepted by their respective accountants and the SEC, and each of the
Company, Buyer and Merger Subsidiary agrees that it shall take no action that
would cause such accounting treatment not to be obtained in the event the Merger
is consummated.
SECTION 8.09. STOP TRANSFER ORDER.
The Company shall instruct the Company's transfer agent that, except as
provided in the Stockholders Agreement, there is a stop transfer order with
respect to all of the Shares (as defined in the Stockholders Agreement) and that
the Stockholders Agreement places limits on the transfer of such Shares.
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ARTICLE IX
CONDITIONS TO THE STOCK PURCHASE AND THE MERGER
SECTION 9.01. CONDITIONS TO THE STOCK PURCHASE
(a) The respective obligations of the Company and Buyer to consummate the
Stock Purchase are subject to the satisfaction (or waiver) at or prior to the
Stock Purchase Closing Date of the following conditions:
(i) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Stock
Purchase (each party agreeing to use its best efforts to have any such
order reversed or injunction lifted); and
(ii) the conditions to the Offer set forth in Annex I shall have been
satisfied and the Company shall simultaneously with the Stock Purchase
Closing purchase all Shares validly tendered and not withdrawn pursuant to
the Offer.
(b) The obligation of Buyer to consummate the Stock Purchase are subject to
the satisfaction (or waiver) at or prior to the Stock Purchase Closing Date to
each of the following additional conditions:
(i) (A) the representations and warranties of the Company set forth in
the first sentence of Section 4.01 and in Sections 4.02, 4.05 and 4.10 of
this Agreement shall be true and correct as of the Stock Purchase Closing
Date as though made on such date, (B) the representations and warranties
set forth in this Agreement other than those contained in the first
sentence of Section 4.01 and in Sections 4.02, 4.05 and 4.10 shall be true
and correct (without giving effect to the materiality or material adverse
effect limitations contained therein) except for any breach or breaches
which individually or in the aggregate, do not have, and could not
reasonably expected to have, a Material Adverse Effect; and (C) clauses A
and B of this paragraph shall be limited to the extent that representations
and warranties set forth in this Agreement that address matters only as of
a particular date shall be true and correct in all material respects only
as of such specified date;
(ii) the Company shall have performed or complied in all material
respects with all obligations and agreements, and complied in all materials
respects with covenants, contained in this Agreement to be performed or
complied with by it prior to or on the Stock Purchase Closing Date;
(iii) the Company shall have delivered a certificate of the Company,
dated as of the Stock Purchase Closing Date, signed by an executive officer
of the Company to evidence satisfaction of the conditions set forth in
Sections 9.01(b)(i) and (ii); and
(iv) all Directors of the Company, to the extent requested by Buyer,
shall have tendered their resignations effective as of the Stock Purchase
Closing and shall have been replaced by nominees acceptable to Buyer.
(c) The obligation of the Company to effect the Stock Purchase is also
subject to the satisfaction (or waiver) at or prior to the Stock Purchase
Closing Date of each of the following additional conditions:
(i) the representations and warranties of Buyer set forth in this
Agreement shall be true and correct in all material respects on the Stock
Purchase Closing Date, with the same force and effect as though such
representations and warranties had been made on and as of the Stock
Purchase Closing Date, except for representations and warranties that are
made as of a specified date or time which shall be true and correct in all
material respects only as of such specific date or time;
(ii) Buyer shall have performed in all material respect all
obligations and agreements, and complied in all material respects with the
covenants, contained in this Agreement to be performed or complied with by
it prior to or on the Stock Purchase Closing Date; and
(iii) the Company shall have received certificates of Buyer, dated as
of the Stock Purchase Closing Date, signed by an executive officer of Buyer
to evidence satisfaction of the conditions set forth in Section 9.01(c)(i)
and (ii).
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SECTION 9.02 CONDITIONS TO THE MERGER.
The respective obligations of the Company, Buyer and Merger Subsidiary to
consummate the Merger are subject to the satisfaction at or prior to the Merger
Closing Date of the following conditions:
(i) if required by the DGCL and the Certificate of Incorporation, this
Agreement and the transactions contemplated hereby shall have been adopted
by the stockholders of the Company in accordance therewith;
(ii) any applicable waiting period under the HSR Act relating to the
Merger shall have expired;
(iii) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Merger (each party agreeing to use its best efforts to have any such
order reversed or injunction lifted);
(iv) the Company shall have accepted for payment Shares tendered
pursuant to the Offer;
(v) Buyer shall have received or be reasonably satisfied that it will
receive all material consents and approvals contemplated by Section 4.04 in
connection with the consummation of the Merger or to enable the Surviving
Corporation to continue to carry on the business of the Company and the
Subsidiaries as presently conducted in all material respects; and
(vi) Buyer shall have purchased the Buyer Shares.
ARTICLE X
TERMINATION
SECTION 10.01. TERMINATION.
This Agreement may be terminated and the Transactions may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of this
Agreement by the stockholders of the Company):
(i) by mutual written consent of the Board of Directors of each of
Company and Buyer;
(ii) by either the Company or Buyer if the Offer Completion Date shall
not have occurred by June 30, 1999 (the "OUTSIDE TERMINATION DATE");
provided, however, that the right to terminate this Agreement under this
paragraph shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure to meet the date requirements of this paragraph;
(iii) by either the Company or Buyer, if any judgment, injunction,
order or decree enjoining Buyer or the Company from consummating the Merger
or accepting for payment or paying for Shares in the Offer is entered by
any Governmental Entity and such judgment, injunction, order or decree
shall become final and nonappealable;
(iv) by either the Company or Buyer if the Offer expires or is
terminated or withdrawn pursuant to its terms without any Shares being
purchased thereunder by the Company as a result of a failure of any of the
conditions to the Offer set forth in ANNEX I to be satisfied or waived
prior to the Expiration Date or any extension thereof;
(v) by the Company at any time prior to the Offer Completion Date, if
Buyer or Merger Subsidiary materially breaches or fails in any material
respect to perform or comply with any of its covenants and agreements
contained herein or breaches its representations and warranties in any
material respect which materially adversely affects (or materially delays)
the consummation of the Offer or the other Transactions, which breach or
failure to perform cannot be or has not been cured within ten days of the
receipt of written notice of such breach by Buyer or Merger Subsidiary from
the Company; or
(vi) by Buyer at any time prior to the Offer Completion Date, if the
Company materially breaches or fails in any material respect to perform or
comply with any of its covenants and agreements contained herein or
breaches its representations and warranties in any material respect, which
breach or failure to perform cannot be or has not been cured within ten
days of the receipt of written notice of such breach by the Company from
Buyer;
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(vii) by the Company at any time prior to the Offer Completion Date,
pursuant to the second sentence of Section 6.04(b), provided that such
termination under this clause (vii) shall not be effective until payment of
the fee required by Section 11.04 hereof and provided, further, that this
Agreement may not be terminated pursuant to this clause (vii) until the
Expiration Date of the Offer; or
(viii) by Buyer or Merger Subsidiary at any time prior to the Offer
Completion Date, if, (A) the Board of Directors of the Company shall have
(i) withdrawn or modified or changed in a manner adverse to Buyer its
approval or recommendation of this Agreement, the Offer, the Merger or the
other Transactions, (ii) approved or recommended, or proposed publicly to
approve or recommend, a Takeover Proposal, (iii) caused or authorized the
Company or any of its subsidiaries to enter into a Company Acquisition
Agreement, (iv) approved the breach of the Company's obligations in Section
6.04(b), or (v) resolved or publicly disclosed any intention to take any of
the foregoing actions or (B) the Advisor shall have withdrawn or modified
or changed in a manner adverse to Buyer its opinion relating to the Merger
Consideration.
The party desiring to terminate this Agreement pursuant to clauses (ii),
(iii), (iv), (v), (vi), (vii) or (viii) shall give written notice of such
termination to the other party.
SECTION 10.02. EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to Section 10.01, this Agreement
shall become void and of no effect with no liability on the part of any party
hereto, except that the agreements contained in Section 11.04 and the
Confidentiality Agreement shall survive the termination hereof and nothing
herein shall relieve any party from liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. NOTICES.
All notices, requests and other communications to any party hereunder shall
be in writing (including telecopy or similar writing) and shall be given,
if to Buyer or Merger Subsidiary, to:
Carreras, Kestner & Co., LLC
Terminal Tower
50 Public Square, 32nd Floor
Cleveland, Ohio 44113
Telecopy: 216-344-7631
Attention: Chief Financial Officer
with a copy to:
Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Telecopy: 216-579-0212
Attention: Patrick J. Leddy, Esq.
if to the Company, to:
Hilite Industries, Inc.
1671 S. Broadway
Carrollton, Texas 75006
Telecopy: 972-242-6140
Attention: Samuel M. Berry, President and Chief Operating Officer
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with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telecopy: (212) 704-6288
Attention: Edward R. Mandell, Esq.
or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate telecopy confirmation is received or (ii) if given by any other
means, when delivered at the address specified in this Section.
SECTION 11.02. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained herein and in any certificate
or other writing delivered pursuant hereto shall not survive the Effective Time
or the termination of this Agreement. All covenants and agreements contained
herein which by their terms are to be performed in whole or in part subsequent
to the Effective Time shall survive the Merger in accordance with their terms
and shall be enforceable by the party entitled to the benefit thereof. Nothing
contained in this Section 11.02 shall relieve any party from liability for any
breach of this Agreement.
SECTION 11.03 AMENDMENTS; NO WAIVERS.
(a) Any provision of this Agreement may be amended or waived prior to the
Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company, Buyer and Merger Subsidiary
or in the case of a waiver, by the party against whom the waiver is to be
effective; provided that after the adoption of this Agreement by the
stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the amount or kind of
consideration to be received in exchange for any shares of capital stock of the
Company or (ii) any of the terms or conditions of this Agreement if such
alteration or change could adversely affect the holders of any shares of capital
stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 11.04. EXPENSES.
(a) Except as otherwise provided in this Section, all costs and expenses
incurred in connection with this Agreement shall be paid by the party incurring
such cost or expense. All costs and expenses related to the preparation,
printing, filing and mailing (as applicable) of the Offer Documents and all SEC
filing fees shall be considered to be costs and expenses of Buyer.
(b) (i) The Company will pay to Buyer an amount equal to $3,000,000 (the
"TERMINATION FEE") in any of the following circumstances:
(A) This Agreement is terminated at such time that this Agreement is
terminable pursuant to Sections 10.01(vii) or 10.01(viii);
(B) This Agreement is terminated by either Buyer or the Company
pursuant to Section 10.01(ii), and each of the following items occurs:
(1) at the time of such termination the Minimum Condition shall not
have been satisfied,
(2) at the time of such termination the Company shall not have the
right to terminate this Agreement pursuant to Section 10.01(v),
(3) prior to such termination, a Takeover Proposal involving at
least 50% of the assets of the Company and its subsidiaries, taken as a
whole, or 50% of any class of equity securities of the Company (any such
Takeover Proposal, a "COMPETING PROPOSAL"), is (x) publicly disclosed or
has
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been made directly to stockholders of the Company generally or (y) any
Person (including without limitation the Company or any of its
Subsidiaries) publicly announces an intention (whether or not
conditional) to make such a Competing Proposal, and
(4) prior to the termination of this Agreement or within 12 months
after the termination of this Agreement, the Company or a Subsidiary
enters into a Company Acquisition Agreement providing for a Competing
Proposal (any such agreement, a "COMPETING PROPOSAL AGREEMENT") or the
transactions contemplated by a Competing Proposal are consummated;
(C) This Agreement is terminated by either Buyer or the Company
pursuant to Section 10.01(iv), and each of the following items occurs:
(1) at the time of such termination the Minimum Condition shall not
have been satisfied,
(2) at the time of such termination the Company shall not have the
right to terminate this Agreement pursuant to Section 10.01(v),
(3) prior to such termination an event referred to in Section
11.04(b)(i)(B)(3) (a "TAKEOVER PROPOSAL EVENT") shall have occurred, and
(4) prior to the termination of this Agreement or within 12 months
after the termination of this Agreement, the Company or a Subsidiary
thereof enters into a Competing Proposal Agreement or the transactions
contemplated by a Competing Proposal are consummated; or
(D) This Agreement is terminated by Buyer pursuant to Section
10.01(vi), and each of the following shall have occurred:
(1) prior to such termination a Takeover Proposal Event shall have
occurred, and
(2) prior to the termination of this Agreement or within 12 months
after the termination of this Agreement, the Company or a subsidiary
thereof enters into a Competing Proposal Agreement or the transactions
contemplated by a Competing Proposal are consummated unless, in either
case, the purchaser pursuant to such Competing Proposal Agreement or
otherwise waives the breach (or failure) of the representation,
warranty, covenant or agreement that constituted the basis for Buyer's
termination pursuant to Section 10.01(vi), so long as the Company's
breach or failure was not intentional.
(ii) If this Agreement is terminated in circumstances where a
Termination Fee is then payable, then in any such case the Company
will promptly, but in no event later than two Business Days after
submission of a request therefor, pay Buyer up to $1,000,000 of
Buyer's documented Expenses.
(iii) If a Termination Fee is payable pursuant to Section
10.01(b)(i)(B), 10.01(b)(i)(C) or 10.01(b)(i)(D), then the Company
will pay the Termination Fee to Buyer upon the signing of a Competing
Proposal Agreement or, if no Competing Proposal Agreement is signed,
then at the closing (and as a condition to the closing) of a
Competing Proposal. Notwithstanding any other provision hereof, (A)
in no event may the Company enter into a Competing Proposal Agreement
unless, prior thereto, the Company has paid any amount due under
Section 10.01(b) or which will become due under Section 10.01(b), (B)
the Company may not terminate this Agreement under Sections 6.04(b)
or 10.01(vii) unless prior thereto it has paid all amounts due under
Section 10.01(b) to Buyer, (C) all amounts due in the event that this
Agreement is terminated under Section 10.01(vii) or 10.01(viii) and
in circumstances in which the Company has not entered into a
Competing Proposal Agreement will be payable promptly, but in no
event more than two Business Days after request therefor is made, and
(d) all amounts due under this Section 10.01(b) will be paid on the
date due in immediately available funds wire transferred to the
account designated by the Person entitled to such payment.
(iv) This Section 11.04 will survive any termination of this
Agreement. For purposes of this Agreement, the term "EXPENSES" means
all actual out-of-pocket fees, costs and other expenses incurred or
assumed by Buyer or Merger Subsidiary or incurred on their behalf in
connection with
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<PAGE> 83
this Agreement or any of the transactions contemplated hereby,
including, without limitation, in connection with the negotiation,
preparation, execution and performance of this Agreement, the
structuring and financing of the Merger and the other transactions
contemplated hereby, or any commitments or agreements relating to
such financing, including without limitation, fees and expenses
payable to all banks, investment banking firms, other financial
institutions and other Persons and their respective agents and
counsel for arranging, committing to provide or providing any
financing for the Merger and any other transactions contemplated
hereby or structuring, negotiating or advising with respect to such
transactions or financing, and all fees and expenses of counsel,
accountants, experts and computer, environmental, actuarial,
insurance and other consultants to Buyer or Merger Subsidiary.
(v) The Company acknowledges that the agreements contained in
this Section 11.04 are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements,
Buyer and Merger Subsidiary would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the amount due
pursuant to this Section 11.04, and, in order to obtain such payment,
Buyer or Merger Subsidiary commences a suit which results in a
judgment against the Company for a fee set forth in this Section
11.04, the Company will pay to Buyer and Merger Subsidiary their
documented Expenses (including attorneys' fees and expenses) in
connection with such suit, together with interest on the amount of
the fee at the prime rate of Citibank N.A. in effect on the date such
payment was required to be made.
SECTION 11.05. SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
provided that except as provided in Section 11.02, no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto except that Buyer may transfer
or assign, in whole or from time to time in part, (i) to one or more of its
direct or indirect wholly owned subsidiaries, the right to purchase Shares
pursuant to the Offer, but such transfer or assignment will not relieve Buyer of
its obligations under the Offer or prejudice the rights of tendering
stockholders to receive payment for Shares validly tendered and accepted for
payment pursuant to the Offer or (ii) its rights under this Agreement as
collateral to the Lender, its successors and assigns, providing the Financing.
SECTION 11.06. GOVERNING LAW.
This Agreement shall be construed in accordance with and governed by the
law of the State of Delaware without regard to conflicts of laws.
SECTION 11.07. SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated herein is not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other provisions is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner.
SECTION 11.08 THIRD PARTY BENEFICIARIES.
No provision of this Agreement other than Sections 7.03 and 8.06 and the
second sentence of Section 11.02 is intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder.
SECTION 11.09. ENTIRE AGREEMENT.
This Agreement (including any exhibits or schedules hereto), Annex A, the
Stockholders Agreement and the Confidentiality Agreement, which will survive the
execution and delivery of this Agreement, constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto, both
written and oral. No addition to or modification of
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<PAGE> 84
any provision of this Agreement will be binding upon any party hereto unless
made in writing and signed by all parties hereto.
SECTION 11.10. COUNTERPARTS; EFFECTIVENESS.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement shall become effective when
each party hereto shall have received counterparts hereof signed by all of the
other parties hereto.
SECTION 11.11. JURISDICTION.
Any legal action or proceeding with respect to this Agreement or any
matters arising out of or in connection with this Agreement, and any Action for
enforcement of any judgment in respect thereof shall be brought exclusively in
the courts of the State of New York or of the United States of America for the
Southern District of New York, and, by execution and delivery of this Agreement,
the Company, Buyer and Merger Subsidiary each hereby accepts for itself and in
respect of its property, generally and unconditionally, the exclusive
jurisdiction of the aforesaid courts and appellate courts thereof. The Company,
Buyer and Merger Subsidiary irrevocably consent to service of process out of any
of the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, or by
recognized international express carrier or delivery service, to the Company,
Buyer or Merger Subsidiary at their respective addresses referred to in Section
11.01 hereof. The Company, Buyer and Merger Subsidiary each hereby irrevocably
waives any objection which it may now or hereafter have to the laying of venue
of any of the aforesaid actions or proceedings arising out of or in connection
with this Agreement or otherwise brought in the courts referred to above and
hereby further irrevocably waives and agrees, to the extent permitted by
applicable law, not to plead or claim in any such court that any such action or
proceedings brought in any such court has been brought in an inconvenient forum.
Nothing herein shall affect the right of any party hereto to serve process in
any other manner permitted by law.
SECTION 11.12. KNOWLEDGE.
The phrase "to the Company's knowledge" when used throughout this Agreement
shall mean the actual knowledge of the officers of the Company preparing the
Company Disclosure Letter after reasonable inquiry, including, without
limitation, the following officers: Samuel Berry, Daniel Brady, Roy Wiegmann and
Chris Curto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
HILITE INDUSTRIES, INC.
By: /s/ SAMUEL M. BERRY
------------------------------------
Name: Samuel M. Berry
Title: President and Chief Operating
Officer
HILITE HOLDINGS, LLC
By: /s/ JOSEPH W. CARRERAS
------------------------------------
Name: Joseph W. Carreras
Title: President
HILITE MERGECO, INC.
By: /s/ JOSEPH W. CARRERAS
------------------------------------
Name: Joseph W. Carreras
Title: President
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<PAGE> 85
ANNEX I
CONDITIONS TO THE OFFER
------------------------------------
Notwithstanding any other provisions of the Offer, and in addition to (and
not in limitation of) the Company's rights to extend and amend the Offer
pursuant to the provisions of the Merger Agreement, the Company shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating
to the Company's obligation to pay for or return tendered Shares promptly after
termination or withdrawal of the Offer), to pay for, and may delay the
acceptance for payment of or, subject to the restriction referred to above, the
payment for, any tendered Shares, and may terminate the Offer if (i) any
applicable waiting period under the HSR Act has not expired or terminated prior
to the expiration of the Offer, (ii) the Minimum Condition has not been
satisfied, (iii) the Stock Purchase Closing shall not have occurred other than
due to any breach of this Agreement by Buyer or Merger Subsidiary, (iv) the
Company shall not have received the proceeds of the debt portion of the
Financing or otherwise obtained funds sufficient to finance the Transactions
except that the foregoing condition shall not apply in the event such proceeds
are not received due to (x) the failure of the lenders in the Financing and
Buyer to agree on definitive documentation for the Financing or (y) the failure
of Buyer and/or Merger Subsidiary to receive the equity portion of the
Financing, or (v) at any time on or after the date of the Merger Agreement, and
on or before the Expiration Date (whether or not any Shares have heretofore been
accepted for payment or paid for pursuant to the Offer), any of the following
conditions shall exist (each of paragraphs (a) through (g) providing for a
separate and independent condition to the Company's obligations pursuant to the
Offer):
(a) there shall be instituted and pending by any Governmental Entity
(or the staff of any HSR Authority shall have recommended the commencement
of) any action or proceeding which (1) seeks to prohibit, or impose any
material limitations on, Buyer's or Merger Subsidiary's ownership or
operation of all or a material portion of the businesses or assets of the
Company and its Subsidiaries, taken as a whole, or to compel Buyer or any
of its subsidiaries or affiliates to dispose of or hold separate all or any
material portion of the business or assets of the Company and its
Subsidiaries, taken as a whole, or of Buyer or its subsidiaries, (2) seeks
to impose limitations on the ability of Buyer or render Buyer unable to
accept for payment, payment for or purchase some or all of the Shares
pursuant to the Offer and the Merger or the consummation of the Offer or
the Merger, (3) challenges or seeks to make illegal, to delay materially or
to restrain or prohibit, the making of the Offer, the consummation of the
Merger or the other Transactions, or seeks to restrain or limit the ability
of the Company, or renders the Company unable, to accept for payment, pay
for or purchase some or all of the Shares, to consummate the Merger or the
other Transactions, or seeks material damages relating to the transactions
contemplated by the Offer, the Merger or the other Transactions or (4)
imposes limitations on the ability of Merger Subsidiary or Buyer or its
Affiliates effectively to exercise full rights of ownership of the Shares,
including without limitation, the right to vote the Shares purchased by it
on all matters properly presented to the Company's stockholders;
(b) any action taken, or any statute, rule, regulation, judgment,
order or injunction promulgated, entered, enforced, enacted, issued or
applicable to the Offer, the Merger or the other Transactions by any
Governmental Entity shall be in effect that results in any of the
consequences referred to in clauses (1) through (4) of paragraph (a) above;
(c) the Merger Agreement shall have been terminated in accordance with
its terms;
(d) the commitment for the Financing shall be no longer in effect due
to (i) any general suspension of, or limitation on prices for, trading in
securities on any national securities exchange or the over-the-counter
market for a period in excess of 24 hours (excluding suspensions or
limitations resulting solely from physical damage or interference with such
exchanges not related to market conditions), (ii) a declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States (whether or not mandatory), (iii) a commencement of a war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, (iv) any limitation (whether or not
mandatory) by any United States Governmental Entity on the extension of
credit generally by banks or other financial
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<PAGE> 86
institutions, (v) a change in general financial, bank or capital market
conditions which materially and adversely affects the ability of financial
institutions in the United States to extend credit or syndicate loans, (vi)
a decline of at least 20% in either the Dow Jones Average of Industrial
Stocks or the Standard & Poor's 500 Index from the close of business on the
date of the Merger Agreement, or (vii) in the case of any of the foregoing
existing at the time of the execution of the Merger Agreement, a material
acceleration or worsening thereof;
(e) since the Balance Sheet Date there shall have occurred any
material adverse change or any event or development that has resulted in or
is reasonably likely to result in, a material adverse change in the
business, properties, assets, condition (financial), results of operations,
liabilities or operations of the Company and its Subsidiaries, taken as a
whole;
(f) the Company's Board of Directors (or any committee thereof) shall
have (i) withdrawn, or modified or changed in a manner adverse to Buyer or
Merger Subsidiary (including by amendment of the Schedule 13E-4) its
recommendation of the Offer, the Merger Agreement; the Merger or the other
Transactions; (ii) taken a position inconsistent with its recommendation of
the Offer, the Merger Agreement or the Merger, (iii) approved or
recommended any Takeover Proposal; (iv) taken any action referred to in
Section 6.04(b) of the Merger Agreement that is prohibited thereby, or (v)
shall have resolved or publicly disclosed an intention to do any of the
foregoing;
(g) Buyer and the Company shall have agreed that the Company shall
terminate the Offer or postpone the acceptance for payment of or payment
for Shares thereunder
which in the sole judgment of Buyer or Merger Subsidiary, in any such case, and
regardless of the circumstances giving rise to such condition, makes it
inadvisable to proceed with the Offer and/or with such acceptance for payment or
payments.
If any condition to the Financing shall also be a condition to the Offer in
this Annex I, Buyer shall use the failure to satisfy the condition set forth in
this Annex I as the basis for terminating the Merger Agreement instead of clause
(iii) of the first paragraph of this Annex I.
The parties acknowledge that the foregoing conditions are for the sole
benefit of the Buyer and Merger Subsidiary and that the Company shall not assert
failure of, or waive, any such condition without the prior written consent of
Buyer and that if Buyer elects to waive any such condition to the Offer, the
Company shall cooperate and comply with such election.
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<PAGE> 87
EXHIBIT A
CONFIDENTIALITY AGREEMENT
Bowles Hollowell Conner & Co.
First Union Capital Markets Group
101 South Tryon Street, 40th Floor
Charlotte, North Carolina 28280
Ladies and Gentlemen:
You have advised us that you are acting on behalf of Hilite Industries,
Inc., a certain publicly traded company ("Neon" or the "Company") in its
consideration of a possible sale of Neon, and you have agreed to discuss with us
the possible purchase of Neon. As a condition to such discussions, you have
required that we agree to keep strictly confidential all information conveyed to
us regarding this matter.
This letter will confirm our agreement with you and Neon to retain in
strict confidence all information (whether oral or written) conveyed to us by
Neon, its agents, or you regarding the Company, unless such information is
publicly available, we can clearly establish was known to us, without any direct
or indirect obligation of confidentiality, prior to your disclosure, or is or
becomes available to us on a nonconfidential basis from a source other than you,
Neon, or its agents, provided that such other source is not bound by a
confidentiality agreement with you or Neon. We will use such information only in
connection with our consideration of whether to purchase Neon and will not
otherwise us it in our business or disclose it to others, except that we shall
have the right to communicate the information to such of our directors,
officers, advisors, and employees (if any) who are required by their duties to
have knowledge thereof, provided that each such person is informed that such
information is strictly confidential and subject to this agreement and agrees
not to disclose or use such information except as provided herein. We hereby
agree to be jointly and severally responsible for any breach of this agreement
by our officers, directors, advisors, and/or employees or any of our
representatives. In the event that we become legally compelled by deposition,
subpoena, or other court or governmental action to disclose any of the
confidential information covered by this agreement, we shall provide Neon with
prompt prior written notice to that effect, and we will cooperate with Neon if
it seeks to obtain a protective order concerning such confidential information.
We agree not to initiate contact, or engage in discussions, with any
employee, customer, or supplier of Neon without the express prior consent of you
or the Company. Unless we purchase Neon, we agree not to hire or solicit for
employment any employees of Neon, without the written consent of the Company,
for a period of two years from the date of this letter.
Until the expiration of two years from the date of this letter, we will not
and will insure that our officers, directors, advisors, and employees will not,
without the prior written approval of the Board of Directors of the Company, (i)
acquire or agree to acquire or make any proposal to acquire directly or
indirectly any securities or property of the Company, or (ii) otherwise act
alone, or in concert with others to seek to control or influence the management,
Board of Directors, or policies of the Company.
We acknowledge that neither Neon nor any of its directors, officers,
employees, stockholders, or agents make any representation as to the accuracy or
completeness of such information and that neither Neon nor any of its directors,
officers, employees, stockholders, or agents shall have any liability to us as a
result of our use of such information.
We also agree that without prior consent of Neon, we and our officers,
directors, advisors, and employees will not disclose to any other person that we
have received such information, that we are in discussions or negotiations with
you and Neon as to a possible purchase of Neon, or that the Board of Directors
of the Company is contemplating a possible sale of Neon.
We will advise all of our directors, officers, employees, and other
representatives who are informed of the matters which are the subject of this
letter that U.S. securities laws prohibit any person who has material, nonpublic
information concerning an issuer of publicly held securities from purchasing or
selling such securities.
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<PAGE> 88
CONFIDENTIALITY AGREEMENT
PAGE 2
We acknowledge that Neon reserves the right to reject any or all offers to
acquire the Company. We further acknowledge that the Company reserves the right
to discontinue discussions at any time and to conduct the process for the sale
of the Company as in its sole discretion it shall determine (including without
limitation, negotiating with any prospective purchasers, and entering into a
definitive agreement without prior notice to us or any other person or to change
any procedures relating to such sale without notice to us or any other person).
We shall have no claim against the Company or any of its directors, officers,
representatives, affiliates, or agents arising out of or relating to the sale of
the Company other than as against them as named parties to a definitive
agreement and only in accordance with the express terms and conditions thereof.
We further acknowledge that we acquire no intellectual property rights based on
any information provided to us hereunder and no right under any invention,
patent or patent application based on any information conveyed to us in
accordance with this agreement.
In the event that we do not purchase Neon, we agree to return to you all
financial and other written information provided to us relating to Neon,
including any memoranda, notes, or other writings prepared by us or our
representatives based on such information, together with all copies of such
information in our possession or under our control to which we have access. We
agree that neither Neon nor Bowles Hollowell Conner & Co. shall be obligated to
pay any fees on our behalf to any brokers, finders, or other parties claiming to
represent us in this transaction. Without limiting the generality of the
nondisclosure agreements contained herein above, it is further understood that
we are strictly prohibited by this agreement from acting as a broker or an agent
using any of the confidential information provided to us.
We acknowledge that unauthorized disclosure of such information would cause
substantial and irreparable damage to the business and competitive position of
the Company, and we agree that the Company shall be entitled to injunctive
relief in the event of any breach or threatened breach of the terms of this
letter agreement in addition to such other remedies as may be available at law
or equity. The parties hereto acknowledge that any action or proceeding arising
out of or relating to this letter agreement shall be determined by the United
States District Court for the Northern District of Texas and this agreement
shall be interpreted and construed in its entirety in accordance with the laws
of the State of Delaware.
<TABLE>
<S> <C> <C>
Name: Michael T. Kestner
--------------------------------
Title: Chief Financial Officer
--------------------------------
Company: Carreras, Kestner & Co., LLC
--------------------------------
Date: 1/22/99
--------------------------------
</TABLE>
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<PAGE> 89
SCHEDULE II
April 26, 1999
The Board of Directors
Hilite Industries, Inc.
1671 S. Broadway
Carrollton, Texas 75006
Members of the Board:
Hilite Industries, Inc., a Delaware corporation ("Hilite"), Hilite
Holdings, LLC, a Delaware limited liability company (the "Purchaser"), and
Hilite Mergeco, Inc. a Delaware corporation ("Merger Subsidiary"), have proposed
to enter into an Agreement and Plan of Merger (the "Agreement"). Pursuant to the
Agreement, the implementation of which is contingent on, among other things,
completion of debt financing, Hilite will commence a tender offer to purchase
all outstanding shares of the common stock, par value $0.01 per share, of Hilite
(the "Hilite Common Stock"), other than a portion of such shares held by certain
shareholders of Hilite who will retain an equity interest in Hilite (the
"Roll-over Shareholders"), at a purchase price of $14.25 per share, net to the
seller in cash (the "Tender Offer"). The Agreement also provides that, following
such Tender Offer, the Merger Subsidiary will be merged with and into Hilite
(the "Merger" and, together with the Tender Offer, the "Transaction") pursuant
to which each outstanding share of Hilite Common Stock not previously tendered
(other than those shares held by Roll-over stockholders and the Purchaser) will
be converted into the right to receive $14.25 in cash. We have assumed, with
your consent, that the Transaction will be treated as a recapitalization for
financial reporting purposes. You have requested our opinion as to whether the
cash consideration to be received in the Transaction by the holders of Hilite
Common Stock (other than Roll-over stockholders with respect to their retained
Shares) is fair, from a financial point of view, to such holders.
Bowles Hollowell Conner ("BHC"), a division of First Union Capital Markets
Corp. ("FUCMC"), as a part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, tender offers, divestitures, leveraged buyouts, and
private placements of debt and equity securities. We have acted as financial
advisor to the Board of Directors of Hilite in connection with the Transaction
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Transaction. In addition, Hilite has
agreed to indemnify us for certain liabilities that may arise out of such
services, including the rendering of this opinion. FUCMC and/or its affiliates
will be participating, with your consent, as documentation agent, administrative
agent, syndication agent, lender in the senior secured credit facility, and
lender holding subordinated notes with attached warrants, for the financing of
the Transaction , for which services FUCMC and/or such affiliates will receive
customary compensation. In the ordinary course of business, FUCMC and/or its
affiliates may actively trade the securities of Hilite for their own account and
the accounts of its customers and, accordingly, may at any time hold a long or
short position in securities of Hilite.
In arriving at our opinion, BHC reviewed and analyzed certain publicly
available financial information and other information concerning the Company and
certain internal analyses and other information furnished to BHC by the Company.
BHC also held discussions with members of senior management of the Company
regarding the business and prospects of the Company. In addition, BHC:
(i) reviewed the reported prices and trading activity for the Hilite
Common Stock;
(ii) compared certain financial and stock market information for
Hilite with similar information for certain other companies whose
securities are publicly traded;
(iii) reviewed the financial terms of certain recent business
combinations which BHC deemed comparable in whole or in part;
(iv) reviewed the terms of the Agreement as furnished to BHC in draft
form dated April 25, 1999; and
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<PAGE> 90
(v) performed such other studies and analyses and considered such
other factors as BHC deemed appropriate.
We have not independently verified any of the information described above
and for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to the information relating to the prospects of
Hilite, we have assumed that such information reflects the best currently
available judgments and estimates of the management of Hilite as to the likely
future financial performance of Hilite. We also have assumed, with your consent,
that the final terms of the Agreement reviewed by us in draft form dated April
25 will not vary materially from the draft reviewed by us. In addition, we have
not made an independent evaluation or appraisal of the assets or liabilities of
Hilite, nor have we been furnished with any such evaluations or appraisals. Our
opinion is based on market, economic, and other conditions as they exist and can
be evaluated as of the date of this letter.
In connection with our engagement to provide financial advisory services to
the Board of Directors concerning strategic alternatives, we were authorized to
solicit, and did solicit, interest from third parties with respect to the
acquisition of Hilite. In arriving at our opinion, we have considered the
nature, scope, and results of such solicitation. Our advisory services and the
opinion expressed herein were prepared for the use of the Board of Directors of
Hilite and do not constitute a recommendation to any shareholder as to whether
or not any such shareholder should tender shares of Hilite Common Stock in the
Tender Offer or how such shareholder should vote on the proposed Merger. We
hereby consent to the inclusion of this opinion in its entirety as an exhibit to
the tender offer or proxy statement of Hilite distributed in connection with the
Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the cash consideration to be received in the Transaction by
the holders of Hilite Common Stock (other than Roll-over stockholders with
respect to their retained Shares) is fair, from a financial point of view, to
such holders.
Sincerely,
/s/ JOSEPH F. KENNY
BOWLES HOLLOWELL CONNER
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<PAGE> 91
SCHEDULE III
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of such stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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<PAGE> 92
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for the approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock
of such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such stockholder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
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<PAGE> 93
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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<PAGE> 94
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 95
SCHEDULE IV
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hilite Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows 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
IV-1
<PAGE> 96
HILITE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
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 --
Deferred income taxes..................................... 1,817,012 1,774,082
Assets held for disposal.................................. 532,533 --
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.................................... -- 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...................................... -- 49,883
------------ ------------
Total current liabilities......................... 15,272,926 14,348,795
------------ ------------
Long-term debt.............................................. 12,956,896 16,486,252
Subordinated debt........................................... -- 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; 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 4,900,000 issued 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
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-2
<PAGE> 97
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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 administrative 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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-3
<PAGE> 98
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
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......................... -- 2,738,352 --
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......................... -- -- (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............... -- -- 15,397,000
Dividends paid.................................... (367,500) -- --
Repayment of subordinated debt.................... -- (75,000) --
Proceeds from long-term debt...................... -- 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........... -- -- (1,120,543)
Cash and cash equivalents at beginning of period.... -- -- 1,120,543
---------- ----------- ------------
Cash and cash equivalents at end of period.......... $ -- $ -- $ --
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-4
<PAGE> 99
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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.
IV-5
<PAGE> 100
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hilite Industries, Inc. ("Hilite" or the "Company") is engaged in the
manufacture of products used primarily in the automotive industry. The Company's
products are sold primarily to manufacturers of automobiles and their suppliers,
pursuant to credit terms customarily extended in the industry. The Company
operates separately under the names Pitts Industries ("Pitts"), Surfaces,
Machine Parts Company ("MAPCO") and North American Spring and Stamping Corp.
("NASS"). Pitts manufactures electromagnetic clutches for various applications.
Surfaces manufactures brake proportioning valves for automotive brake systems.
MAPCO manufactures mounting brackets, fan blades and pulleys. NASS manufactures
specialty springs, stamping products and assemblies.
On July 21, 1995, the Company acquired 100% of the outstanding common stock
of North American Spring and Stamping Corp. from its three stockholders
("Selling Shareholders"). In consideration for the transaction, the Company paid
$17,397,000. During fiscal 1998, as a result of a lawsuit settlement, the
Company was relieved of its obligation to pay approximately $2,000,000 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:
<TABLE>
<S> <C>
Buildings and improvements 20 years or remaining useful life
Machinery and equipment 5 to 10 years
Other assets 3 years
</TABLE>
Repair and maintenance expenditures are charged to operations as incurred
and expenditures for major renewals and betterments are capitalized. When units
of property are disposed of, the cost and related accumulated depreciation are
removed from the accounts, and the resulting gains or losses are included in the
results of operations.
Property, plant and equipment are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount of an asset or group of
assets may not be recoverable. The impairment review includes a comparison of
future cash flows expected to be generated by the asset or group of assets with
their associated carrying value. If the carrying value of the asset or group of
assets exceeds expected cash flows (undiscounted and without interest charges),
an impairment loss is recognized to the extent carrying amounts exceed fair
value.
The Company routinely makes expenditures for tooling fixtures and equipment
required for production of specific products for customers. These costs are
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.
IV-6
<PAGE> 101
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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 exercise 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
IV-7
<PAGE> 102
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Net income (loss) 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 1998, as a result of a lawsuit settlement, the Company was
relieved of its obligation to pay approximately $2,000,000 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.)
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>
<CAPTION>
1996
-----------
<S> <C>
Net sales................................................... $73,744,530
Net income.................................................. 3,597,833
Net income per share........................................ 0.73
</TABLE>
IV-8
<PAGE> 103
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
administrative costs). The charge is comprised of a reduction (approximately
$900,000) in the net book value of certain assets, primarily machinery,
equipment and tooling, to their estimated fair value, net of estimated selling
costs, accrual of certain costs which the Company expects to incur in
terminating contractual obligations, but for which no future economic benefit
will be received (approximately $1,600,000) and other costs (approximately
$200,000). 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 of NASS to settle the suit. Under the terms of the
Settlement Agreement, the Company is relieved of its obligation to pay
approximately $2,000,000 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>
<CAPTION>
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>
IV-9
<PAGE> 104
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
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.
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>
<CAPTION>
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>
IV-10
<PAGE> 105
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. LONG-TERM DEBT
Long-term debt at June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
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>
Effective August 30, 1997, the bank increased the revolving line of credit
to $12,000,000 and on September 18, 1997 the bank increased the availability
under the equipment acquisition facility to $3,000,000 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).
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,
IV-11
<PAGE> 106
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Current:
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>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Pre-tax book income at 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>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred assets:
Book accruals and reserves in excess 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.
IV-12
<PAGE> 107
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
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.
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>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending June 30, 1999................................... $380,610
2000.............................................. 194,007
2001.............................................. 105,009
2002.............................................. 25,517
2003.............................................. 8,100
Thereafter........................................ --
--------
Total minimum lease payments............ $713,243
========
</TABLE>
IV-13
<PAGE> 108
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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.
IV-14
<PAGE> 109
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at Beginning of
year.................................. 120,200 $7.38 69,800 $9.00 69,800 $9.00
Options granted......................... -- -- 50,400 5.13 -- --
Options exercised....................... -- -- -- -- -- --
Options canceled........................ -- -- -- -- -- --
------- ----- ------- ----- ------ -----
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>
<CAPTION>
AVERAGE AVERAGE AVERAGE
LIFE EXERCISE EXERCISE
SHARES (IN YEARS) PRICE SHARES PRICE
------ ----------- -------- ------- --------
<S> <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>
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>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Net income (loss) available 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.
IV-15
<PAGE> 110
SCHEDULE V
HILITE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable, less allowance for doubtful accounts
of $250,620 and $193,015 at March 31 and June 30,
respectively........................................... 16,347,027 11,289,779
Tooling receivable........................................ 591,700 716,700
Inventories............................................... 10,025,765 9,927,849
Income tax receivable..................................... -- 542,188
Deferred income taxes..................................... 1,817,012 1,817,012
Assets held for disposal.................................. -- 532,533
Prepaid expenses and other current assets................. 474,956 1,015,764
------------ ------------
Total current assets.............................. 29,256,460 25,841,825
------------ ------------
Property, plant and equipment............................... 46,398,659 43,538,367
Less accumulated depreciation and amortization.............. (18,556,512) (15,921,909)
------------ ------------
Property, plant and equipment, net.......................... 27,842,147 27,616,458
Goodwill, net of accumulated amortization................... 3,727,068 3,898,209
------------ ------------
TOTAL ASSETS...................................... $ 60,825,675 $ 57,356,492
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 10,672,772 $ 12,849,981
Long-term debt -- current portion......................... 2,542,945 2,422,945
Income taxes payable...................................... 1,380,531 --
------------ ------------
Total current liabilities......................... 14,596,248 15,272,926
------------ ------------
Long-term debt.............................................. 13,170,014 12,956,896
Deferred income taxes....................................... 2,978,761 2,978,761
------------ ------------
Total non-current liabilities..................... 16,148,775 15,935,657
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 4,900,000 issued and outstanding at March
31, 1999 and June 30, 1998............................. 49,000 49,000
Additional paid-in capital................................ 9,105,674 9,105,674
Retained earnings......................................... 20,925,978 16,993,235
------------ ------------
Total stockholders' equity........................ 30,080,652 26,147,909
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 60,825,675 $ 57,356,492
============ ============
</TABLE>
V-1
<PAGE> 111
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................. $25,630,565 $22,106,855 $68,213,758 $63,763,644
Cost of sales............................. 19,935,407 17,592,124 53,594,629 50,962,220
----------- ----------- ----------- -----------
Gross profit.............................. 5,695,158 4,514,731 14,619,129 12,801,424
Selling, general and administrative
expenses................................ 2,325,166 2,067,652 6,774,452 6,778,701
----------- ----------- ----------- -----------
Operating income.......................... 3,369,992 2,447,079 7,844,677 6,022,723
Interest expense.......................... 280,461 186,759 970,272 986,777
----------- ----------- ----------- -----------
Income before income taxes................ 3,089,531 2,260,320 6,874,405 5,035,946
Income tax provision...................... 1,147,684 797,393 2,576,407 1,842,315
----------- ----------- ----------- -----------
Net income................................ $ 1,941,847 $ 1,462,927 $ 4,297,998 $ 3,193,631
=========== =========== =========== ===========
PER SHARE DATA:
Basic earnings per share................ $ .40 $ .30 $ .88 $ .65
=========== =========== =========== ===========
Diluted earnings per share.............. $ .39 $ .30 $ .87 $ .65
=========== =========== =========== ===========
SHARES USED IN COMPUTING EARNINGS PER
SHARE:
Basic................................... 4,900,000 4,900,000 4,900,000 4,900,000
=========== =========== =========== ===========
Diluted................................. 4,929,807 4,913,198 4,921,251 4,909,295
=========== =========== =========== ===========
</TABLE>
V-2
<PAGE> 112
HILITE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income................................................ $4,297,998 $3,193,631
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation...................................... 2,692,283 2,530,898
Amortization...................................... 171,140 227,972
---------- ----------
Cash provided from operations before changes in
operating assets and liabilities...................... 7,161,421 5,952,501
Changes in operating assets and liabilities:
Increase in accounts receivable................... (5,057,248) (2,554,150)
(Increase) decrease in tooling and other
receivable...................................... 125,000 (613,131)
Increase in inventories........................... (97,916) (838,951)
(Increase) decrease in prepaid expenses and other
current assets.................................. 540,808 (76,966)
Increase (decrease) in accounts payable and
accrued expenses................................ (2,352,933) 654,568
Increase in income taxes payable.................. 1,922,719 376,049
---------- ----------
Total changes in operating assets and
liabilities..................................... (4,919,570) (3,052,581)
---------- ----------
Net cash provided by operations............................. 2,241,851 2,899,920
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (2,532,469) (2,190,852)
Proceeds from sale of assets.............................. 325,000 --
---------- ----------
Net cash used in investing activities....................... (2,207,469) (2,190,852)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividend.................................. (367,500) (245,000)
Proceeds from long-term debt.............................. 600,000 --
Repayment of long-term debt............................... (1,857,209) (1,817,204)
Net increase in note payable.............................. 1,590,327 1,353,136
---------- ----------
Net cash used in financing activities....................... (34,382) (709,068)
---------- ----------
Net change in cash and cash equivalents..................... -- --
Cash and cash equivalents at beginning of period............ -- --
---------- ----------
Cash and cash equivalents at end of period.................. $ -- $ --
========== ==========
</TABLE>
- ---------------
1. The interim consolidated financial statements of the Company at March 31,
1999 and for the three and nine-month period ended March 31, 1999, are
unaudited, but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes, and are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1999.
V-3
<PAGE> 113
SCHEDULE VI
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.
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>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales:
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 benefitted 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
VI-1
<PAGE> 114
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 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.
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
VI-2
<PAGE> 115
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.
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net sales for the quarter ended March 31, 1999 were $25,631,000 compared to
$22,107,000 for the quarter ended March 31, 1998, representing an increase of
$3,524,000 (15.9%). Brake valve net sales increased 21.5% to $8,869,000 in the
third fiscal quarter of 1999 from $7,298,000 in the same quarter of the prior
year. The increase resulted primarily from net sales of brake valves for use on
new GM and Chrysler models which commenced production since the third quarter of
the prior fiscal year and due to higher customer production volumes on most car
models which the Company provides brake valves. Power transmission component net
sales increased 64.6% to $9,814,000 for the quarter ended March 31, 1999 from
$5,961,000 in the same period of fiscal 1998. Approximately $1,600,000 of the
increase is due to a new transfer case component application which commenced
production in the third quarter of fiscal 1998. The remaining increase is
primarily due to a significant volume increase of heavy truck air conditioning
clutches. The volume increase is due to higher production volumes from a certain
customer and to increases in service clutches to the related after-market. Third
quarter 1999 net sales were $6,948,000 for the specialty components and
assemblies division, a decrease of 21.5% from last year's third quarter net
sales of $8,848,000. This decrease in net sales is primarily related to the
elimination of numerous unprofitable parts in conjunction with the restructuring
of the division in the prior year and to a one-time sales opportunity of certain
assemblies to Motorola, Inc. which occurred in fiscal 1998. Additionally, the
specialty components and assemblies division benefitted from approximately
$600,000 of price increases in fiscal 1998 on the products eliminated as part of
the restructuring. The impact of price changes in the current quarter, other
than those mentioned for the specialty components and assemblies division, was
not significant.
The Company's gross profit was $5,695,000 (22.2% of net sales) for the
third quarter of the 1999 fiscal year compared to gross profit of $4,515,000
(20.4% of net sales) for the third quarter of the 1998 fiscal year. Increased
sales volume in the brake valve and power transmission components division were
the primary contributors to the increased gross profit as these divisions have
higher average gross margins than the specialty components and assemblies
division. In addition, the gross margin increase is due to fixed costs, such as
building expenses, equipment depreciation and supervisory salaries, not
increasing at the same rate as the increase in sales.
VI-3
<PAGE> 116
Selling, general and administrative expenses were $2,325,000 (9.1% of net
sales) in the third quarter of the 1999 fiscal year as compared to $2,068,000
(9.4% of net sales) in the third quarter of the 1998 fiscal year. The increase
of $257,000 in selling, general and administrative expenses is primarily due to
a $144,000 favorable adjustment to legal costs associated with the settlement of
the lawsuit against the former owners of NASS in the third quarter of the prior
year.
Interest expense was $280,000 for the three months ended March 31, 1999
compared to $187,000 for the three months ended March 31, 1998. The increase is
primarily due to the settlement of the lawsuit against the former owners of
NASS, which occurred in the third quarter of the prior year in which a note and
interest was canceled resulting in a favorable adjustment of $190,000. The
impact of changes in interest rates was not significant. Net income was
$1,942,000 (7.6% of net sales) for the third quarter of the 1999 fiscal year
compared to net income of $1,463,000 (6.6% of net sales) for the same period of
the prior fiscal year, representing an increase of $479,000.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Net sales for the nine months ended March 31, 1999 were $68,214,000
compared to $63,764,000 for the nine months ended March 31, 1998, representing a
increase of $4,450,000 (7.0%). Brake valve net sales increased 27.5% to
$25,310,000 for the first nine months of fiscal 1999 from $19,857,000 for the
same period of the prior year. The increase resulted primarily from net sales of
brake valves sold to Chrysler and GM for new models which commenced production
since the prior fiscal year and to increased customer production on most car
models. Power transmission component net sales increased 39.5% to $23,099,000
for the nine months ended March 31, 1999 from $16,559,000 for the same period of
fiscal 1998. Approximately $4,600,000 of the increase is due to a new transfer
case component application which commenced production in the third quarter of
fiscal 1998. The remaining increase is primarily due to a significant volume
increase of heavy truck air conditioning clutches. The volume increase is due to
a higher production volumes from a certain customer and to increases in service
clutches to the related after-market. Net sales for the first nine months of
fiscal 1999 were $19,805,000 for the specialty components and assemblies
division, a decrease of 27.6% from net sales of $27,346,000 in the first nine
months of fiscal 1998. This decrease in net sales is primarily related to a
one-time sales opportunity of certain assemblies to Motorola, Inc. and due to
the elimination of numerous unprofitable parts in conjunction with the
restructuring of the division, both of which occurred in fiscal 1998.
Additionally, the specialty components and assemblies division benefitted from
approximately $1,900,000 of price increases in fiscal 1998 on the products
eliminated as part of the restructuring. The impact of price changes during the
period, other than those mentioned for the specialty components and assemblies
division, was not significant.
The Company's gross profit was $14,619,000 (21.4% of net sales) for the
first nine months of fiscal 1999 compared to gross profit of $12,801,000 (20.1%
of net sales) for the first nine months of fiscal 1998. Increased sales volume
in the brake valve and power transmission components division were the primary
contributors to the increased gross profit as these divisions have higher
average gross margins than the specialty components and assemblies division. In
addition, the gross margin increase is due to fixed costs, such as building
expenses, equipment depreciation and supervisory salaries, not increasing at the
same rate as the increase in sales. The margin increases were partially offset
by significant start-up costs in the specialty components and assemblies
division on a new automotive assembly for Visteon. Selling, general and
administrative expenses were $6,774,000 (9.9% of net sales) in the first nine
months of fiscal 1999 as compared to $6,779,000 (10.6% of net sales) in the
first nine months of fiscal 1998. The decrease in commission expense related to
the decrease in sales at the specialty components and assemblies division were
offset by higher R & D expenses and consulting costs.
Interest expense was $970,000 for the nine months ended March 31, 1999
compared to $987,000 for the nine months ended March 31, 1998. The decrease is
due to lower average debt balances over the prior year. The impact of changes in
interest rates was not significant.
Net income was $4,298,000 (6.3% of net sales) for the first nine months of
fiscal 1999 compared to net income of $3,194,000 (5.0% of net sales) for the
same period of the prior fiscal year, representing an increase of $1,104,000.
VI-4
<PAGE> 117
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 benefitted 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.
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.
During the nine-month period ended March 31, 1999, the Company's net cash
provided from operations before changes in operating assets and liabilities was
$7,161,000 compared to $5,953,000 in the same period of the prior year,
primarily due to the increase in net income over the prior year. At March 31,
1999 the Company's working capital was $14,660,000 compared to working capital
of $10,569,000 at June 30, 1998. The current ratio was 2.0 to 1 at March 31,
1999 and 1.7 to 1.0 at June 30, 1998. The book value per share increased to
$6.14 at March 31, 1999 from $5.34 per share at June 30, 1998.
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Cash from operations was used for changes in operating assets and
liabilities of $4,920,000 through the first nine months of the current year
compared to $3,053,000 during the same period of the prior year. The increase is
primarily due to a $5,057,000 increase in accounts receivable that is due to
higher sales volume and due to an increase in the average number of days sales
outstanding for receivables to 55 days at March 31, 1999 from 44 days at June
30, 1998. The increase in the average number of days sales outstanding is
primarily due to the expiration on June 30, 1998 of a one-year temporary
acceleration in payment by a significant customer. As of March 31, 1999, no
significant amounts were considered uncollectible.
Also, contributing to the increase in operating assets and liabilities was
a $2,353,000 decrease in accounts payable and accrued expenses. The decrease is
primarily due to timing of payments of accounts payable balances as well as
payments of year-end accrued bonuses, employer 401(k) contributions, payments to
satisfy the asset distribution of a terminated defined benefit plan at NASS and
payments on terminated contractual obligations associated with the NASS
restructuring reserve.
The Company's capital expenditures were $2,532,000 for the nine months
ended March 31, 1999. The Company presently estimates capital expenditures for
the year ending June 30, 1999 will be approximately $3,000,000, unless new
business opportunities require additional capital commitments. As of March 31,
1999, commitments, net of progress payments, were $565,000 for capital
expenditures and $2,553,000 for tooling which is expected to be reimbursed by
customers.
As of March 31, 1999, $6,984,000 was outstanding and $5,016,000 was
available under the general credit facility and $3,000,000 was available under
the equipment acquisition facility.
The Company distributed $367,500 in cash dividends during the first nine
months of fiscal 1999 as part of a previously announced quarterly cash dividend
program. On April 27, 1999, the Company announced a third quarter, 2 1/2 cent
dividend that will be distributed in May 1999 for stockholders of record on May
11, 1999.
On January 28, 1998, the Company announced that it had been notified by
Visteon, a subsidiary of Ford Motor Company, that a part manufactured by the
Company's specialty components and assemblies division may be involved in an
Owner Notification Program regarding a fuel gauge accuracy problem with certain
1997 model year vehicles. In December 1998, a favorable resolution was reached
on this matter with Visteon. The Company was released of any legal
responsibility and the matter was mutually resolved in a manner not materially
adverse to the Company.
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.
SEASONALITY
Net sales and operating results do not follow a predictable seasonal
pattern from quarter to quarter because the development and initial production
of new products may occur at different times of the year. Generally, in these
periods certain inefficiencies are experienced which result in higher costs to
the Company. In addition, the Company usually experiences somewhat lower sales
in the quarters ended December 31 and September 30 as automobile manufacturers
traditionally close their plants for vacations or model changeovers during these
periods resulting in lower demand for the Company's products.
INFLATION
The Company believes that the relatively moderate rate of inflation in
recent years has not had a significant impact on the Company's revenues or
profitability.
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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. For the nine months ended March 31,
1999, approximately $80,000 has been spent on this project with the remainder to
be spent either in the fourth quarter or in early fiscal year 2000.
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.
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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, certain statements in
this Management's Discussion and Analysis of results of operation and financial
condition and other sections of this document contain 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-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 automotive and non-automotive
build rates, customer sourcing decisions, manufacturing process efficiencies,
cost and timing of start-up of new products and risks related to technological
changes in components which affect the life of the product. Further, there can
be no assurance that the Company will regain its Q1 status at the Ford Visteon
division. These and other risks are described in the Company's Form 10-K for the
year ended June 30, 1998 filed with the Securities and Exchange Commission
("SEC") and Forms 10-Q filed quarterly with the SEC, copies of which are
available from the SEC or may be obtained upon request from the Company.
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