<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:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
[ ] 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 oustanding 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 (i) 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,
1999 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.
<PAGE> 4
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 __, 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 ___, 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 __, 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY .........................................................................................................1
The Companies............................................................................................1
General..................................................................................................1
Action by Written Consent................................................................................2
Payment for Shares ......................................................................................2
Purpose of the Merger....................................................................................3
Conditions to the Merger.................................................................................3
Opinion of Bowles Hollowell..............................................................................3
The Background to the Transactions.......................................................................3
Regulatory Matters.......................................................................................3
Certain Federal Income Tax Consequences of the Merger....................................................3
Accounting Treatment.....................................................................................4
Appraisal Rights.........................................................................................4
SELECTED FINANCIAL INFORMATION OF THE COMPANY.....................................................................5
ACTION BY WRITTEN CONSENT.........................................................................................7
THE MERGER........................................................................................................7
Background of the Transactions...........................................................................7
Recommendation of the Disinterested Directors and the Board;
Fairness of the Transactions...................................................................12
Opinion of Bowles Hollowell.............................................................................14
Payment for Shares......................................................................................18
Appraisal Rights........................................................................................19
Certain U.S. Federal Income Tax Consequences............................................................22
Certain Legal Matters and Regulatory Approvals..........................................................23
Effect of the Merger on the Market for the Shares; Exchange Act
Registration...................................................................................25
PURPOSES AND REASONS FOR THE TRANSACTIONS........................................................................25
Purposes and Reasons of the Company for the Transactions................................................25
Purposes and Reasons of Buyer and the Continuing Stockholders
for the Transactions...........................................................................26
RECAPITALIZATION.................................................................................................26
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS..................................................................27
Bonuses.................................................................................................28
The Agreement Among Stockholders........................................................................28
PROJECTIONS AND CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.......................................28
</TABLE>
i
<PAGE> 6
<TABLE>
<S> <C>
THE MERGER AGREEMENT.............................................................................................31
The Offer...............................................................................................31
The Stock Purchase......................................................................................32
The Merger..............................................................................................32
Certificate of Incorporation and By-laws................................................................33
Agreements of the Company and Buyer.....................................................................33
No Solicitation; Acquisition Proposals..................................................................35
Indemnification; Directors' and Officers' Liability.....................................................36
Best Efforts............................................................................................38
Representations and Warranties..........................................................................38
Conditions to Effect the Merger.........................................................................38
Termination.............................................................................................39
Expenses and Termination Fee............................................................................40
Amendments; No Waivers..................................................................................42
STOCKHOLDERS AGREEMENT...........................................................................................42
THE STOCK SUBSCRIPTION AGREEMENTS................................................................................42
CERTAIN INFORMATION CONCERNING THE COMPANIES.....................................................................43
The Company.............................................................................................43
Buyer...................................................................................................43
Merger Subsidiary.......................................................................................44
RECENT DEVELOPMENTS..............................................................................................44
BENEFICIAL OWNERSHIP OF SHARES...................................................................................44
MARKET PRICES AND DIVIDENDS......................................................................................45
AVAILABLE INFORMATION............................................................................................46
</TABLE>
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
ii
<PAGE> 7
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.
<PAGE> 8
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.
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."
2
<PAGE> 9
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 __, 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."
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.
3
<PAGE> 10
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."
4
<PAGE> 11
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>
(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
5
<PAGE> 12
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 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>
6
<PAGE> 13
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
7
<PAGE> 14
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 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
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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 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
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<PAGE> 16
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 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
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<PAGE> 17
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
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<PAGE> 18
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.
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;
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<PAGE> 19
- 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.
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.
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<PAGE> 20
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,
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
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<PAGE> 21
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.
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<PAGE> 22
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./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
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<PAGE> 23
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 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.
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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.
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.
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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.
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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 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.
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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.
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
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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.
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
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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.
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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 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,
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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 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
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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 assets and similar
transactions. The Transactions have been structured so as to qualify for
recapitalization accounting treatment.
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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
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<PAGE> 34
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.
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:
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
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
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<PAGE> 35
"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 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.
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<PAGE> 36
- 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.
The Company provided potential bidders with the following projections
in connection with the bid solicitation process conducted by the Company and
Bowles Hollowell:
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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.
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
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<PAGE> 38
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
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<PAGE> 39
- the Buyer Shares and the Shares retained by the Continuing
Stockholders will not be canceled as provided above, but will
remain outstanding.
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;
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<PAGE> 40
- 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):
- 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;
- 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;
- 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;
- 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);
- (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;
- 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;
- 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
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<PAGE> 41
provided to Buyer, or (iii) tooling costs that are reimbursable by
customer;
- change the accounting principles used by it unless required by
generally accepted accounting principles of the United States
consistently applied;
- 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;
- 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;
- 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
- 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 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
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<PAGE> 42
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,
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<PAGE> 43
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 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.
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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-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);
38
<PAGE> 45
- 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;
- 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
39
<PAGE> 46
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
- 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,
- approve or recommend, or propose publicly to approve
or recommend, any Takeover Proposals, or
- 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,
- 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
- 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.
40
<PAGE> 47
- 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 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:
- at the time of such termination the Minimum Condition
has not been satisfied,
- 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,
- 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
- 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:
- at the time of such termination the Minimum Condition
has not been satisfied,
- 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,
- prior to such termination a Takeover Proposal Event
has occurred, and
- 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,
41
<PAGE> 48
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:
- prior to such termination a Takeover Proposal Event
has occurred, and
- 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.
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.
42
<PAGE> 49
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.
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.
43
<PAGE> 50
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 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%
</TABLE>
44
<PAGE> 51
<TABLE>
<S> <C> <C>
Daniel W. Brady 7,018(3) *
Arthur D. Johnson 9,035(2) *
Donald M. Maher 9,035(2) *
All officers and directors 46,141 2.3%
as a group (4 individuals)
</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>
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
45
<PAGE> 52
$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.
46
<PAGE> 53
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> 54
<TABLE>
<CAPTION>
TABLE OF CONTENTS(1)
ARTICLE I
THE OFFER
<S> <C>
SECTION 1.01. The Offer.....................................................2
SECTION 1.02. Company Action................................................3
SECTION 1.03. Directors.....................................................4
ARTICLE II
STOCK PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of Shares...................................5
SECTION 2.02. Purchase Price................................................5
SECTION 2.03. Closing.......................................................5
SECTION 2.04. Closing Deliveries by the Company.............................5
SECTION 2.05. Closing Deliveries by Buyer...................................6
ARTICLE III
THE MERGER
SECTION 3.01. The Merger....................................................6
SECTION 3.02. Conversion of Shares..........................................7
SECTION 3.03. Surrender and Payment.........................................7
SECTION 3.04. Dissenting Shares.............................................9
SECTION 3.05. Stock Options.................................................9
SECTION 3.06. Merger Without Meeting of Stockholders.......................10
SECTION 3.07. Closing......................................................10
SECTION 3.08. Certificate of Incorporation.................................10
SECTION 3.09. By-Laws......................................................10
SECTION 3.10. Directors and Officers.......................................10
SECTION 3.11. Effects of the Merger........................................11
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
SECTION 4.01. Corporate Existence and Power................................11
SECTION 4.02. Corporate Authorization......................................11
SECTION 4.03. Governmental Authorization...................................12
SECTION 4.04. Non-Contravention............................................12
SECTION 4.05. Capitalization...............................................12
SECTION 4.06. Subsidiaries.................................................13
SECTION 4.07. Investments..................................................14
SECTION 4.08. SEC Filings..................................................14
SECTION 4.09. Financial Statements.........................................14
SECTION 4.10. Disclosure Documents.........................................15
SECTION 4.11. Absence of Certain Changes...................................15
SECTION 4.12. No Undisclosed Material Liabilities..........................17
SECTION 4.13. Litigation; Permits..........................................17
SECTION 4.14. Taxes........................................................18
SECTION 4.15. Employee Matters.............................................19
SECTION 4.16. Labor Matters................................................22
SECTION 4.17. Compliance with Laws.........................................22
SECTION 4.18. Finders' Fees................................................22
SECTION 4.19. Environmental Matters........................................23
SECTION 4.20. Property.....................................................24
SECTION 4.21. Insurance....................................................25
SECTION 4.22. Patents and Trademarks.......................................25
</TABLE>
- --------
(1) The Table of Contents is not a part of this Agreement.
I-2
<PAGE> 55
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 4.23. Material Contracts...........................................26
SECTION 4.24. Shareholder Rights Agreement.................................26
SECTION 4.25. Voting Requirements..........................................26
SECTION 4.26. Opinion of Financial Advisor.................................26
SECTION 4.27. Year 2000 Issues.............................................27
SECTION 4.28. Transaction Fees.............................................27
SECTION 4.29. Insider Interests............................................27
SECTION 4.30. Full Disclosure..............................................27
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF BUYER AND MERGER SUBSIDIARY
SECTION 5.01. Corporate Existence and Power................................28
SECTION 5.02. Corporate Authorization......................................28
SECTION 5.03. Governmental Authorization...................................28
SECTION 5.04. Non-Contravention............................................28
SECTION 5.05. Disclosure Documents.........................................28
SECTION 5.06. Finders' Fees................................................29
SECTION 5.07. Financing....................................................29
SECTION 5.08. Share Ownership..............................................29
SECTION 5.09. Merger Subsidiary's Operations...............................29
SECTION 5.10. Due Diligence................................................29
ARTICLE VI
COVENANTS OF THE COMPANY
SECTION 6.01. Conduct of the Company.......................................30
SECTION 6.02. Stockholder Meeting; Proxy Material..........................30
SECTION 6.03. Access to Information........................................31
SECTION 6.04. Other Offers.................................................31
SECTION 6.05. Notices of Certain Events....................................33
ARTICLE VII
COVENANTS OF BUYER
SECTION 7.01. Obligations of Merger Subsidiary.............................34
SECTION 7.02. Voting of Shares.............................................34
SECTION 7.03. Director and Officer Liability...............................34
SECTION 7.04. Merger Subsidiary Subscription Agreements....................36
ARTICLE VIII
COVENANTS OF BUYER
AND THE COMPANY
SECTION 8.01. Best Efforts.................................................36
SECTION 8.02. Certain Filings..............................................37
SECTION 8.03. Public Announcements.........................................37
SECTION 8.04. Conveyance Taxes.............................................37
SECTION 8.05. Further Assurances...........................................37
SECTION 8.06. Employee Matters.............................................38
SECTION 8.07. Certain Litigation...........................................38
SECTION 8.08. Recapitalization.............................................39
SECTION 8.09. Stop Transfer Order..........................................39
ARTICLE IX
CONDITIONS TO THE STOCK PURCHASE AND THE MERGER
SECTION 9.01. Conditions to the Stock Purchase............................39
SECTION 9.02. Conditions to the Merger.....................................40
ARTICLE X
TERMINATION
SECTION 10.01. Termination.................................................41
</TABLE>
I-3
<PAGE> 56
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 10.02. Effect of Termination.......................................43
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Notices.....................................................43
SECTION 11.02. Survival of Representations and Warranties..................44
SECTION 11.03. Amendments; No Waivers......................................44
SECTION 11.04. Expenses....................................................45
SECTION 11.05. Successors and Assigns......................................47
SECTION 11.06. Governing Law...............................................48
SECTION 11.07. Severability................................................48
SECTION 11.08. Third Party Beneficiaries...................................48
SECTION 11.09. Entire Agreement............................................48
SECTION 11.10. Counterparts; Effectiveness.................................48
SECTION 11.11. Jurisdiction................................................48
SECTION 11.12. Knowledge...................................................49
</TABLE>
I-4
<PAGE> 57
TABLE OF CONTENTS
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
I-5
<PAGE> 58
DEFINITIONS
The following terms which may appear in more than one Section of this
Agreement are defined in the following Sections:
TERMS SECTION OR OTHER LOCATION
- ----- -------------------------
Advisor Section 1.02 (a)
Agreement Preamble
Balance Sheet Section 4.09
Balance Sheet Date Section 4.09
Benefit Arrangement Section 4.15 (A)
Business Day Section 1.01
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
Company Designees Section 1.03 (a)
Company Disclosure Documents Section 4.10 (a)
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 (B)
Employee Plan Section 4.15 (C)
Environmental Law Section 4.19 (b)
Environmental Permits Section 4.19 (b)
ERISA Section 4.15 (D)
ERISA Affiliate Section 4.15 (E)
Exchange Act Section 1.01
Expenses Section 11.04(b)(ii)
Expiration Date Section 1.01
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
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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 2.07
Merger Closing Date Section 2.07
Merger Consideration Section 3.02 (a)
Merger Subsidiary Preamble
Minimum Condition Section 1.01 (a)
Multiemployer Plan Section 4.15 (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 2.05 (a)
Option Consideration Section 2.05 (a)
Outside Termination Date Section 10.01 (ii)
PBGC Section 4.15 (d)
Person Section 2.03 (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)
SEC Section 1.01 (b)
Secretary Section 3.01 (b)
Share(s) Preamble
Stockholder 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
Surviving Corporation Section 3.01 (a)
Takeover Proposal Section 6.04
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
Title IV Plan Section 4.15 (G)
Transactions Section 1.01 (b)
Transaction Fees Section 4.28
Trigger Event Section 11.04 (b)
UST's Section 4.19 (a) (iii)
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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:
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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 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,
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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 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
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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 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").
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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.
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
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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 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
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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.
SECTION 3.05. STOCK OPTIONS.
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(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."
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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.
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
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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. 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
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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 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
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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
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
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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;
(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
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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;
(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
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"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 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.
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"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
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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
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
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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.
(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
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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.
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
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(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.
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.
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(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.
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
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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.
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
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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, 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
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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").
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
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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.
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
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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 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
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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 by paragraph (b) of this Section 6.04 in connection with a Superior
Proposal, neither the Company nor its Board of Directors
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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
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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 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.
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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.
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.
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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 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
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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.
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:
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(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).
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,
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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
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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;
(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
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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
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.
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(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 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
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(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 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,
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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
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<PAGE> 99
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 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.
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<PAGE> 100
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> 101
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
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<PAGE> 102
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 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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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.
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<PAGE> 104
CONFIDENTIALITY AGREEMENT
Page 2
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.
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.
Name: Michael T. Kestner
----------------------------
Title: Chief Financial Officer
----------------------------
Company: Carreras, Kestner & Co., LLC
----------------------------
Date: 1/22/99
----------------------------
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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.
II-1
<PAGE> 106
The Board of Directors
Hilite Industries, Inc.
April 26, 1999
Page 2
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
(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
II-2
<PAGE> 107
The Board of Directors
Hilite Industries, Inc.
April 26, 1999
Page 3
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
II-3
<PAGE> 108
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:
III-1
<PAGE> 109
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.
(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
III-2
<PAGE> 110
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
III-3
<PAGE> 111
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.
(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
III-4
<PAGE> 112
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.
(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
III-5
<PAGE> 113
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.
III-6
<PAGE> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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.
IV-11
<PAGE> 125
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Principal payments on long-term debt, excluding the revolving line of
credit, due in each of the next five fiscal years and thereafter are $2,422,945,
$2,422,945, $2,348,063, $2,123,437, $385,724, and $282,665, respectively.
Interest payments during the years ended June 30, 1998, 1997 and 1996 were
$1,425,865, $1,662,215, and $1,659,373, respectively.
9. INCOME TAXES
The provision for federal income taxes for the years ended June 30, 1998,
1997, and 1996 consisted of the following:
<TABLE>
<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> 126
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.
IV-13
<PAGE> 127
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
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.
IV-14
<PAGE> 128
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. STOCK-BASED COMPENSATION
During November 1993, the stockholders of the Company approved a stock
option plan and 100,000 shares (increased to 125,000 upon shareholder approval
in November 1997) of Common Stock were reserved for issuance upon exercise of
the options to be granted to employees, officers and directors of the Company
under the plan.
A summary of stock option activity is as follows:
<TABLE>
<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>
OUTSTANDING EXERCISABLE
- ------------------------------- -------------------
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>
IV-15
<PAGE> 129
HILITE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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-16
<PAGE> 130
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> 131
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> 132
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> 133
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:
1998 1997 1996
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%
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,
VI-1
<PAGE> 134
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 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
VI-2
<PAGE> 135
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 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.
VI-3
<PAGE> 136
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
VI-4
<PAGE> 137
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.
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
VI-5
<PAGE> 138
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.
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
VI-6
<PAGE> 139
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
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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.
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
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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.
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,
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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
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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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