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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 1, 1999
HILITE INDUSTRIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-22924 75-2147742
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(STATE OR OTHER JURISDICTION (COMMISSION FILE (IRS EMPLOYER
OF INCORPORATION) NUMBER) IDENTIFICATION NO.)
1671 S. BROADWAY
CARROLLTON, TEXAS 75006
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(972) 466-0475
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
THE EXHIBIT INDEX IS LOCATED AT PAGE 5.
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT
--------------------------------
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"),
dated as of April 26, 1999, by and among Hilite Industries, Inc., a Delaware
corporation (the "Company"), Hilite Holdings, LLC, a Delaware limited liability
company ("Holdings"), and Hilite Mergeco, Inc., a Delaware corporation ("Merger
Subsidiary"), on May 3, 1999, the Company made an offer (the "Offer") to
purchase all of its issued and outstanding shares of common stock, $0.01 par
value per share ("Shares"), for $14.25 per Share, net to the seller in cash,
upon the terms and subject to the conditions set forth in the Offer to Purchase
dated May 3, 1999. The Company's all cash tender offer for all of the Shares
expired at 9:00 a.m., New York City time on June 1, 1999. 4,730,791 Shares were
validly tendered and not withdrawn pursuant to the Offer and were accepted for
payment at a price of $14.25 per Share. Immediately prior to the consummation of
the Offer, the Company sold 1,681,414 newly issued Shares to Holdings at a price
of $14.25 per Share (the "Stock Purchase"). As a result of the Offer and the
Stock Purchase, Holdings owns approximately 89.6% of the issued and outstanding
Shares.
The source of the consideration used to fund the Offer and the
Stock Purchase is described in "THE TENDER OFFER -- Section 10. Financing of the
Transactions" of the Offer to Purchase attached as Exhibit (d)(1) to the
Statement on Schedule 13E-3, dated May 3, 1999, filed by Holdings, the Company,
Merger Subsidiary and certain stockholders of the Company (the "Continuing
Stockholders").
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) four directors of the Company resigned and
(iii) Holdings designated, and the remaining directors of the Company appointed,
five new directors to the Board of Directors of the Company.
In connection with the consummation of the Offer and the Stock
Purchase, Holdings, the Continuing Stockholders and First Fidelity Capital, Inc.
and Magnetite Asset Investors, L.L.C. 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, following the consummation of the merger
contemplated by the Merger Agreement, 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 Holdings. 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.
As a result of the Offer, only approximately 53,000 Shares
remain outstanding (excluding Shares owned by Holdings and the Continuing
Stockholders), which are held by approximately 90 holders of record (including
Holdings and the Continuing Stockholders as holders of record). Consequently, on
June 1, 1999, the Company terminated the inclusion of the
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Shares on The NASDAQ Stock Market, Inc. National Market and on June 4, 1999, the
Company filed a Form 15 with the Securities and Exchange Commission
deregistering the Shares.
ITEM 7. EXHIBITS
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The following exhibits are filed herewith:
Exhibit No. Description
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2.1 Agreement and Plan of Merger, dated as of April 26, 1999, by
and among Hilite Industries, Inc., Hilite Holdings, LLC and
Hilite Mergeco, Inc. (Incorporated herein by reference to
Exhibit (c)(1) of the Company's Statement on Schedule 13E-3,
filed on May 3, 1999).
10.1 Agreement Among Stockholders, dated as of June 1, 1999, by and
among Hilite Industries, Inc., Hilite Holdings, LLC and all of
the stockholders and warrantholders of the Company.
99.1 Press release, dated June 1, 1999.
99.2 Offer to Purchase, dated May 3, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILITE INDUSTRIES, INC.
By: /s/ Ronald G. Campbell
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Ronald G. Campbell
Treasurer and
Assistant Secretary
June 14, 1999
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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2.1 Agreement and Plan of Merger, dated as of April 26, 1999, by
and among Hilite Industries, Inc., Hilite Holdings, LLC and
Hilite Mergeco, Inc. (Incorporated herein by reference to
Exhibit (c)(1) of the Company's Statement on Schedule 13E-3,
filed on May 3, 1999).
10.1 Agreement Among Stockholders, dated as of June 1, 1999, by and
among Hilite Industries, Inc., Hilite Holdings, LLC and all of
the stockholders and warrantholders of the Company.
99.1 Press release, dated June 1, 1999.
99.2 Offer to Purchase, dated May 3, 1999.
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Exhibit 10.1
AGREEMENT AMONG STOCKHOLDERS
BY AND AMONG
HILITE INDUSTRIES, INC.
AND ITS STOCKHOLDERS
Dated June 1, 1999
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TABLE OF CONTENTS
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<TABLE>
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Page
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SECTION 1. DEFINITIONS.....................................................................................1
SECTION 2. RESTRICTIONS ON TRANSFER........................................................................5
2.1 Restriction on Transfer.........................................................................5
2.2 Permitted Transfers.............................................................................5
2.3 Securities Law Restrictions.....................................................................6
2.4 Restrictions on Transfer........................................................................6
SECTION 3. RIGHT OF FIRST REFUSAL..........................................................................6
3.1 Intention to Sell...............................................................................6
3.2 Acceptance Period...............................................................................7
3.3 Failure of the Company to Exercise Its Option to Purchase.......................................7
3.4 Notice of Election to Purchase..................................................................7
3.5 Selling Stockholder's Rights Upon Failure to Exercise Right to Purchase
All Offered Shares..............................................................................7
3.6 Payment for Selling Stockholder's Offered Shares................................................8
3.7 Closing Date....................................................................................8
SECTION 4. RIGHT TO PARTICIPATE IN CO-SALE.................................................................9
4.1 Intention to Sell...............................................................................9
4.2 Acceptance Period...............................................................................9
4.3 Co-Sale of Shares...............................................................................9
4.4 Liability.......................................................................................9
4.5 Share Certificates; Disposition Proceeds........................................................9
4.6 Limitation on Right of Co-Sale By Management Group.............................................10
SECTION 5. OBLIGATION TO PARTICIPATE......................................................................10
5.1 Obligation to Participate......................................................................10
5.2 Satisfaction of Conditions.....................................................................10
5.3 Costs of Sale..................................................................................10
5.4 Certain Definitions............................................................................11
SECTION 6. PREEMPTIVE RIGHTS..............................................................................11
6.1 Eligible Offering..............................................................................11
6.2 Notice of Eligible Offering....................................................................11
6.3 Sale to Third Parties..........................................................................12
6.4 Exceptions to Issues of Securities.............................................................12
SECTION 7. MANAGEMENT AND OPERATION OF THE COMPANY........................................................12
7.1 Board of Directors.............................................................................12
</TABLE>
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<TABLE>
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SECTION 8. REPURCHASE OF MANAGEMENT GROUP SHARES.........................................................13
8.1 The Company's Repurchase of Management Group Shares............................................13
8.2 Exercise of Rights.............................................................................14
8.3 Exercise of "Put" Option.......................................................................15
8.4 Repurchase and Purchase Rights Binding on Transferees..........................................15
SECTION 9. COMPANY'S INABILITY TO SATISFY OBLIGATIONS...........................................................15
SECTION 10. REGULATORY REQUIREMENTS; CESSATION OF DIRECT
INVESTMENT PROGRAM. ..............................................................................15
SECTION 11. LEGEND ON SHARE CERTIFICATES........................................................................16
SECTION 12. DURATION OF AGREEMENT...............................................................................17
SECTION 13. REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDERS......................................................................................17
SECTION 14. COVENANT OF HILITE HOLDINGS, LLC.....................................................................18
SECTION 15. REPORTS..............................................................................................18
SECTION 16. CONSENT TO JURISDICTION AND SERVICE OF PROCESS......................................................18
SECTION 17. INDIVIDUAL STOCKHOLDERS; COMMUNITY PROPERTY.........................................................19
SECTION 18. BENEFITS OF AGREEMENT...............................................................................19
SECTION 19. NOTICES.............................................................................................19
SECTION 20. GOVERNING LAW; CONSTRUCTION; VENUE..................................................................20
SECTION 21. MODIFICATION AND WAIVER.............................................................................20
SECTION 22. ENTIRE AGREEMENT....................................................................................20
SECTION 23. SEVERABILITY........................................................................................20
SECTION 24. REMEDIES............................................................................................20
SECTION 25. COUNTERPARTS........................................................................................21
</TABLE>
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AGREEMENT AMONG STOCKHOLDERS
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THIS AGREEMENT AMONG STOCKHOLDERS (this "Agreement"), dated as
of June 1, 1999, is entered into by and among HILITE INDUSTRIES, INC., a
Delaware corporation (the "Company"), First Fidelity Private Capital, Inc. (to
be renamed First Union Private Capital, Inc., "First Fidelity"), Magnetite Asset
Investors L.L.C. ("Magnetite") (First Fidelity and Magnetite collectively, the
"Warrant Holders"), and the stockholders listed on SCHEDULE I attached to this
Agreement and any other Person that becomes a stockholder of the Company after
the date of this Agreement (collectively with the Warrant Holders, the
"Stockholders").
RECITALS
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1. All of the issued and outstanding shares of Common Stock,
$.01 par value (the "Common Shares"), of the Company are held of record and
beneficially owned by the Stockholders as of the date of this Agreement as set
forth on SCHEDULE I attached to this Agreement.
2. Pursuant to an Investment Agreement, dated June 1, 1999, by
and between the Company and the Warrant Holders, the Company issued to the
Warrant Holders warrants (the "Warrants") to purchase Common Shares.
3. The Stockholders and the Company desire to provide for
stability of the ownership and operation of the Company and to promote
continuity in the Company's management and policies.
AGREEMENTS
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NOW, THEREFORE, in consideration of the premises and the
mutual covenants and provisions set forth in this Agreement, the parties hereto
hereby agree as follows:
SECTION 1. DEFINITIONS
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As used in this Agreement, the following terms have the
following respective meanings:
"AFFILIATE" means, with respect to any Person, any other
Person (other than the Company) that directly or indirectly controls, is
controlled by or is under common control with such Person.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company.
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"CHANGE IN CONTROL AGREEMENT" means the Change in Control
Retention Bonus and Employment Agreement entered into by each Employee and the
Company.
"CLOSING" means the date on which the sale and purchase of a
Selling Stockholder's Shares is to be completed.
"COMPANY ACCEPTANCE PERIOD" means the ten (10) business days
from and after the date of receipt by the Company of a Notice of Intention to
Sell in which the Company has to give its written notice to the Selling
Stockholder whether or not the Company wishes to exercise its option to purchase
all of the Selling Stockholders' Shares at the price and on the terms set forth
in the Notice of Intention to Sell.
"CO-SALE NOTICE" means the written notice a Transferring
Stockholder must deliver to the Company, setting forth the number of Shares
intended to be sold by the Transferring Stockholder, the proposed purchase price
per share, the proposed purchaser and the address of such Person, and the other
terms and conditions of sale.
"CO-SALE SHARES" means those Eligible Shares as to which an
Eligible Stockholder has exercised its co-sale rights pursuant to, and in
accordance with, the provisions of SECTION 4.
"DEBT" of any Person means: either (a) any liability of any
Person (i) for borrowed money (including the current portion thereof), or (ii)
under any reimbursement obligation relating to a letter of credit, bankers'
acceptance or note purchase facility, or (iii) evidenced by a bond, note,
debenture or similar instrument (including a purchase money obligation), or (iv)
for the payment of money relating to a lease that is required to be classified
as a capitalized lease obligation in accordance with United States generally
accepted accounting principles, or (v) for all or any part of the deferred
purchase price of property or services (other than trade payables), or (b) any
liability of others described in the preceding clause (a) that such Person has
guaranteed, that is recourse to such Person or any of its assets or that is
otherwise its legal liability or that is secured in whole or in part by the
assets of such Person.
"DISABILITY" means any Employee Stockholder that because of
accident, disability or physical or mental illness, is incapable of performing
his or her duties to the Company for (a) a continuous period of 180 days and
remains so incapable at the end of such 180-day period, or (b) periods amounting
in the aggregate to 180 days within any one period of 365 days and remains so
incapable at the end of such aggregate period of 180 days.
"EBITDA" means the Company's consolidated net income as
reflected in its consolidated financial statements for the relevant period,
excluding any extraordinary gains or losses, and increased by the amount
reflected in such financial statements as expenses incurred for interest, taxes,
depreciation, amortization of any intangible assets and financial or related
fees.
"ELIGIBLE STOCKHOLDER" means (a) any Stockholder other than a
Selling Stockholder, and (b) any Stockholder other than a Transferring
Stockholder.
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"ELIGIBLE STOCKHOLDER ACCEPTANCE PERIOD" means the ten (10)
business days from and after the date of receipt by an Eligible Stockholder from
the Company of the Notice of Intention to Sell in which such Eligible
Stockholder has to give written notice to the Company and the Selling
Stockholder whether or not such Eligible Stockholder wishes to exercise its
option to purchase any of the Offered Shares not purchased by the Company at the
price and on the terms set forth in the Notice of Intention to Sell.
"EMPLOYEE STOCKHOLDER" means a Stockholder who is a member of
the Management Group.
"EMPLOYEE STOCKHOLDER REPURCHASE EVENT" mean the death or
Disability of or the termination of employment of an Employee Stockholder.
"HILITE HOLDINGS" means Hilite Holdings, LLC, a Delaware
limited liability company.
"INITIAL PUBLIC OFFERING" means an initial underwritten
offering of the Shares pursuant to a registration statement filed under the
Securities Act of 1933, as amended.
"MANAGEMENT GROUP" means Stockholders identified on SCHEDULE I
as members of management of the Company and Stockholders who become members of
the management of the Company after the date of this Agreement other than Joseph
W. Carreras and Michael T.
Kestner.
"NOTICE OF INTENTION TO SELL" means the written notice a
Selling Stockholder must deliver to the Company under SECTION 3.1 setting forth
the number of Shares intended to be sold by the Selling Stockholder, the
proposed purchase price per Share, the proposed purchaser and the address of
such person, and the other terms and conditions of sale.
"PERSON" means any individual, corporation, partnership,
limited liability company, trust, unincorporated association or other entity.
"PROPORTIONATE PERCENTAGE" means with respect to any
transaction, the pro rata percentage of Shares that an Eligible Stockholder is
entitled to purchase pursuant to SECTION 3 or to sell pursuant to SECTION 4 or
the pro rata percentage of a transaction a Stockholder is entitled to
participate in pursuant to SECTION 14. Such pro rata percentage is the
percentage which expresses the ratio of the total number of Shares owned by an
Eligible Stockholder (assuming conversion of the Warrants) and the total number
of Shares owned by all Eligible Stockholders (assuming conversion of the
Warrants).
"SECURITIES ACT" means the Securities Act of 1933, as amended
form time to time.
"SELLING STOCKHOLDER" means any Stockholder who proposes to
Transfer all or any portion of his, her or its Shares, or any Stockholder who or
which has delivered a Notice of Intention to Sell with respect to all or any
portion of his, her or its Shares, pursuant to the provisions of SECTION 3.
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"SHARES" means (i) the Common Shares now outstanding or
outstanding after the date of this Agreement, (ii) any Common Shares issued or
issuable directly or indirectly upon exercise of the Warrants, (iii) any
securities into which any such shares may have been changed, converted or
exchanged, and any Common Shares issued or issuable with respect to the
securities referred to in clauses (i), (ii) and (iii) by way of stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization.
"STOCKHOLDER" includes each holder of Shares and Warrants
listed on SCHEDULE I attached to this Agreement (including the Warrant Holders),
and each other Person who becomes the record or beneficial owner of Shares or
Warrants.
"SUBORDINATED DEBT" means the Senior Subordinated Notes in the
aggregate principal amount of $15,000,000 issued to the Warrant Holders.
"TERMINATION FOR CAUSE" means the Company's termination of an
Employee Stockholder's employment with the Company for any of the following
reasons:
(i) an act of fraud, embezzlement or theft in connection
with the Employee Stockholder's duties or in the
course of his or her employment with the Company;
(ii) intentional wrongful damage to property of the
Company;
(iii) intentional wrongful disclosure of secret processes
or confidential information of the Company;
(iv) intentional breach of Section 7 of the Employee
Stockholder's Change in Control Agreement for so long
as such agreement is in effect; or
(v) a willful failure or refusal to follow the lawful and
proper directives of the Chief Executive Officer of
the Company (the "CEO") consistent with the Employee
Stockholder's position, after receipt by the Employee
Stockholder of written notice from the CEO specifying
in reasonable detail the alleged failure or refusal
and after a reasonable opportunity for the Employee
Stockholder to cure such alleged failure or refusal;
For purposes of this definition, no act or failure to act on the part of the
Employee Stockholder shall be deemed "intentional" if it was due primarily to an
error in judgment or negligence, but shall be deemed "intentional" only if done
or omitted to be done by the Employee Stockholder not in good faith and without
reasonable belief that his or her action or omission was in the best interest of
the Company. Notwithstanding the foregoing, the Employee Stockholder shall not
be deemed to have been terminated for "Cause" hereunder unless and until there
shall have been delivered to the Employee Stockholder a copy of a resolution
duly adopted by the affirmative vote of not less than three quarters of the
Board of Directors then in office at a meeting of the Board of Directors called
and held for such purpose, after reasonable notice to the Employee Stockholder
and an opportunity for the Employee Stockholder, together with his counsel (if
the Employee Stockholder chooses to have counsel present at such meeting), to be
heard before the Board of Directors, finding that, in the good faith opinion of
the Board of Directors, the
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Employee Stockholder had committed an act constituting "Cause" as herein defined
and specifying act constituting "Cause" as herein defined and specifying the
particulars thereof in detail. Nothing herein will limit the right of the
Employee Stockholder or his beneficiaries to contest the validity or propriety
of any such determination.
"TERMINATION WITHOUT CAUSE" means the Company's termination of
an Employee Stockholder's employment with the Company for any reason other than
by death or Disability or a Termination For Cause.
"TRANSFER" means sale, transfer, assignment, gift, pledge,
hypothecation, encumber, or other disposition, whether voluntary or involuntary
or by operation of law.
"TRANSFERRING STOCKHOLDER" means any Stockholder who has
delivered or is required to deliver a Co-Sale Notice with respect to all or any
portion of his, her or its Shares, pursuant to the provisions of SECTION 4.
"VOLUNTARY TERMINATION" means an Employee Stockholder's
termination of his or her employment with the Company.
"WARRANT HOLDERS" means the Warrant Holders, as defined in the
Preamble, and each other Person who becomes the record or beneficial owner of
the Warrants.
SECTION 2. RESTRICTIONS ON TRANSFER
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2.1 RESTRICTION ON TRANSFER. At no time during the term of
this Agreement may a Stockholder Transfer any Shares or Warrants or any interest
in Shares or Warrants except by a Transfer permitted in SECTIONS 3, 4, 5, or 8
or except as set forth in SECTION 2.2.
2.2 PERMITTED TRANSFERS. A Stockholder may Transfer Shares or
Warrants as follows:
(a) To an Affiliate or, in the case of a Stockholder
that is a partnership, to its partners or to the general
partners of such partners or, in the case of a Stockholder
that is a limited liability company, to its members or, in the
case of a Stockholder that is a trust, to its beneficiaries;
(b) In the case of a Stockholder who is an
individual, to the spouse or lineal descendants of such
Stockholder including, without limitation, Transfers by
bequest or device, or to a trust or trusts for the benefit of
any of the foregoing;
(c) In the case of a Transfer of Warrants by the
Warrant Holders, to the purchaser of at least 20% of the
Subordinated Debt; or
(d) To related trusts, other entities or family
members undertaken for estate planning purposes.
PROVIDED, HOWEVER, that any above-described transferee or distributee of Shares
or Warrants permitted under SECTION 2.1 or SECTION 2.2 must (i) have agreed in
writing with the parties to this
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Agreement prior to the consummation of such Transfer to be bound by and to
comply with all applicable provisions of this Agreement including, without
limitation, the provisions contained in SECTIONS 7 and 8, and (ii) be deemed to
be a Stockholder or Warrant Holders, as the case may be, for purposes of this
Agreement. Any Transfer of Shares or Warrants that is not made strictly in
accordance with the provisions of this Agreement will be null and void, and the
Company will not recognize any such Transfer or the purported transferee as a
holder of Shares or Warrants.
2.3 SECURITIES LAW RESTRICTIONS. Notwithstanding any other
provision in this Agreement, but subject to the express written waiver by the
Company in the exercise of its good faith and reasonable judgment, no
Stockholder may Transfer any Shares or Warrants without the registration of the
Transfer of such Shares or Warrants under the Securities Act or until the
Company has received such legal opinions or other evidence that such Transfer is
exempt from the registration requirements under the Securities Act and
applicable state securities laws as the Company reasonably deems appropriate in
light of the facts and circumstances relating to such proposed Transfer,
together with such representations, warranties and indemnifications from the
transferor and the transferee as the Company reasonably deems appropriate to
confirm the accuracy of the facts and circumstances that are the basis for any
such opinion or other assurances and to reasonably protect the Company and the
other Stockholders from any liability resulting from any such Transfer.
2.4 RESTRICTIONS ON TRANSFER. Notwithstanding the foregoing
provisions of this SECTION 2 and SECTION 3 to the contrary, no Stockholder has
the right to sell (a) any Offered Shares pursuant to a Notice of Intention to
Sell if such Stockholder did not at the time of giving such Notice of Intention
to Sell have a good faith belief that such purchaser would purchase all of the
Offered Shares, at the price and on the terms contained in the Notice of
Intention to Sell or (b) without the written consent of the Board of Directors,
any Shares or Warrants to any direct competitor or customer of the Company or
any shareholder, officer, director or other Affiliate of any direct competitor
or customer of the Company. Nothing in this SECTION 2.4 shall be interpreted to
prohibit a Stockholder from selling Shares to a shareholder of any direct
competitor or customer of the Company if such shareholder's only interest in the
direct competitor or customer is holding securities listed on a national
securities exchange or securities regularly quoted in an over-the-counter market
by one or more members of the National Association of Securities Dealers or
similar organization and provided further that such shareholder owns less than
one percent of the total outstanding voting securities of such entity.
SECTION 3. RIGHT OF FIRST REFUSAL
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3.1 INTENTION TO SELL. If a Stockholder wishes to Transfer all
or any portion of the Shares owned by such Stockholder (such Shares, the
"Offered Shares") to a bona fide third party who is not an Affiliate of such
Stockholder (other than a Transfer pursuant to SECTIONS 2.2, 5 and 8), such
Selling Stockholder promptly shall deliver to the Company and other Stockholders
a Notice of Intention to Sell.
3.2 ACCEPTANCE PERIOD. Upon receipt of a Notice of Intention
to Sell and for the duration of the Company Acceptance Period, the Company will
have the right and option to elect to purchase all (but not less than all) of
such Offered Shares at the purchase price and on the terms stated in the Notice
of Intention to Sell. On or before the expiration of the Company
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Acceptance Period, the Company may give the Selling Stockholder written notice
of the Company's intention to exercise its rights to purchase such Offered
Shares.
3.3 FAILURE OF THE COMPANY TO EXERCISE ITS OPTION TO PURCHASE.
If the Company fails to elect to purchase all of the Offered Shares in
accordance with the provisions of SECTIONS 3.1 and 3.2, the Company shall
promptly, and in any event within three (3) business days after the end of the
Company Acceptance Period, deliver to each Eligible Stockholder a copy of the
Notice of Intention to Sell and a statement indicating the number of Offered
Shares available for purchase by the Eligible Stockholders, whereupon each
Eligible Stockholder will have the right and option to elect to purchase up to
its Proportionate Percentage of such Offered Shares, at the purchase price and
on the terms stated in the Notice of Intention to Sell, such election to be made
by giving written notice to the Company and the Selling Stockholder within the
Eligible Stockholder Acceptance Period.
3.4 NOTICE OF ELECTION TO PURCHASE. If any Eligible
Stockholder fails to elect to purchase on a timely basis, or elects in writing
not to purchase, all of such Proportionate Percentage of the remaining Offered
Shares pursuant to SECTION 3.3, then, within three (3) business days after the
earlier to occur of (a) the expiration of the Eligible Stockholder Acceptance
Period or (b) receipt by the Company of either written notices of election or
non- election from each Eligible Stockholder, the Company shall given written
notice to those Eligible Stockholders, if any, that have accepted such offer
with respect to all of their Proportionate Percentages of such remaining Offered
Shares, setting forth the number of Offered Shares remaining available for
purchase pursuant to the Notice of Intention to Sell, and each such Eligible
Stockholder will then have the right and option to, within five (5) business
days after receiving notice from the Company, elect to purchase (i) all of such
Offered Shares so remaining available (if there is only one electing Eligible
Stockholder) or (ii) up to its Proportionate Percentage of such Offered Shares
so remaining available (if there is more than one electing Eligible Stockholder)
(PROVIDED, HOWEVER, that in determining each such electing Eligible
Stockholder's Proportionate Percentage for this provision, the denominator of
the Proportionate Percentage ratio described in the definition of Proportionate
Percentage includes ONLY Shares held by Eligible Stockholders electing to
purchase their full Proportionate Percentage of the Offered Shares under SECTION
3.3), or (iii) such Offered Shares so remaining available in such other
proportions as such Eligible Stockholders may mutually agree, at the purchase
price and on the terms stated in the Notice of Intention to Sell. The Company
promptly shall notify the Selling Stockholder in writing of each notice of
election received from Eligible Stockholders.
3.5 SELLING STOCKHOLDER'S RIGHTS UPON FAILURE TO EXERCISE
RIGHT TO PURCHASE ALL OFFERED SHARES. If acceptances have not been received by
the Selling Stockholder with respect to all of the Offered Shares under SECTIONS
3.1, 3.2, 3.3 AND 3.4, then the Selling Stockholder may, subject to SECTION 4,
sell all (but not less than all) of the Offered Shares to the purchaser
specified in the Notice of Intention to Sell at the price and upon the terms set
forth in the Notice of Intention to Sell, at any time within thirty (30)
business days after the last date on which any Eligible Stockholder will be
entitled to make any election pursuant to the provisions of this SECTION 3. The
purchaser specified in the Notice of Intention to Sell must, prior to
consummating the purchase of the Offered Shares, agree in writing to become a
party to, and to be bound by the provisions of, this Agreement, and the Company
will not recognize any Transfer to such purchaser of Offered Shares until such
agreement has been executed and delivered to the Company. If the Offered Shares
are not sold by the Selling Stockholder during such thirty (30)
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business-day period, the right of the Selling Stockholder to sell such Offered
Shares will expire and such remaining Offered Shares again will be subject to
the restrictions contained in this Agreement and will not then be Transferred
except in compliance with this Agreement.
3.6 PAYMENT FOR SELLING STOCKHOLDER'S OFFERED SHARES. Payment
by the Company or the Eligible Stockholders for the Selling Stockholder's
Offered Shares will be made by wire transfer or certified check, payable to the
order of the Selling Stockholder (or the Selling Stockholder's legal
representative, as the case may be), against delivery to the party purchasing
such Offered Shares of (a) a certificate or instrument representing the Offered
Shares so sold, duly endorsed for transfer to the purchasing party or
accompanied by a stock transfer power duly endorsed for transfer, with all
requisite stock transfer taxes paid and stamps affixed and (b) written
representations and warranties of the transferor to the effect that: (i) such
Person is the record and beneficial owner of the Shares being purchased and
sold, has good and marketable title to such Shares and the absolute right to
transfer the same to the purchaser, and the same, upon transfer to the
purchaser, will be free and clear of all claims, liens, pledges, restrictions
(other than restrictions imposed by this Agreement and restrictions under
federal and state securities laws) or encumbrances of any nature whatsoever;
(ii) such Person has full power and capacity to perform the terms of this
Agreement relating to such purchase and sale; and (iii) any consent or approval
of any governmental authority, court or third person necessary to permit the
Transfer of the Shares has been obtained.
3.7 CLOSING DATE. The Closing of the sale and delivery of
Offered Shares being purchased and sold pursuant to this SECTION 3 to the
Company or the Eligible Stockholders, and payment for such Offered Shares, will
be held at the Company's office or other agreed upon location at a time
designated by the Company as follows:
(a) If the Company has elected to purchase all of the Offered
Shares, on the tenth (10th) business day after the date on which the
Selling Stockholder receives notification of the Company's intention to
so purchase; or
(b) In all other cases, on the tenth (10th) business day after
the last day upon which Eligible Stockholders can elect to purchase
Offered Shares pursuant to this SECTION 3.
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SECTION 4. RIGHT TO PARTICIPATE IN CO-SALE
-------------------------------
4.1 INTENTION TO SELL. If any Stockholder proposes to Transfer
all or any portion of the Shares owned by such Stockholder to a bona fide third
party who is not an Affiliate of such Stockholder (other than in a manner
contemplated by Sections 2.2, 5, or 8), then such Stockholder shall give a
Co-Sale Notice to the Company setting forth the terms and conditions of such
proposed transaction. The Co-Sale Notice will be provided concurrently with or
as part of the Notice of Intention to Sell as required under SECTION 3. Upon
receipt of the Co- Sale Notice, the Company shall promptly provide a copy of the
Co-Sale Notice to each Eligible Stockholder as of the date of the Company's
receipt of such Co-Sale Notice.
4.2 ACCEPTANCE PERIOD. Except as set forth in SECTION 4.6,
each Eligible Stockholder has the right, exercisable upon written notice to the
Company and the Transferring Stockholder within twenty (20) business days after
receipt by such Eligible Stockholder of the Co-Sale Notice, to participate in
the proposed disposition of Shares with respect to those Shares as to which
rights of the Company and the Eligible Stockholders pursuant to SECTION 3 of
this Agreement have not been exercised (the "Eligible Shares") on the terms and
conditions set forth in the Co-Sale Notice. Each Eligible Stockholder may
participate in such transaction in an amount equal to the product of (a) the
number of Shares then owned by such Eligible Stockholder and (b) a fraction, the
numerator of which is the number of Eligible Shares to be sold by the
Transferring Stockholder and the denominator of which is the number of Shares
then owned by the Transferring Stockholder.
4.3 CO-SALE OF SHARES. If the proposed purchaser does not
agree to purchase the Co-Sale Shares in accordance with this SECTION 4, then the
Transferring Stockholder and each Eligible Stockholder participating in such
sale will reduce the number of Shares it proposes to dispose of in the
transaction pro rata until the number of Shares to be disposed of equals the
number of Shares the proposed purchaser has agreed to purchase. The terms and
conditions of sale of each Co-Sale Share will be the same as the terms and
conditions of the sale to the proposed purchaser.
4.4 LIABILITY. The consummation of a disposition contemplated
by a Co-Sale Notice will be subject to the sole discretion of the Transferring
Stockholder, and such Transferring Stockholder will have no liability whatsoever
to any Eligible Stockholder participating in such disposition other than to
obtain for such Eligible Stockholder the same terms and conditions as those
obtained by such Stockholder or Stockholders, as set forth in the Co-Sale Notice
or any amendment thereof communicated in the manner provided for in this SECTION
4; PROVIDED that in no event shall the liability of any Stockholder for
indemnification or otherwise in connection with any such sale exceed the net
proceeds received by such Stockholder.
4.5 SHARE CERTIFICATES; DISPOSITION PROCEEDS. Each Eligible
Stockholder participating in the proposed disposition of Shares in accordance
with the provisions of this SECTION 4 shall deliver to the Company, as agent for
the Eligible Stockholder for delivery to the proposed purchaser, one or more
certificates, properly endorsed for transfer, with all stock transfer taxes paid
and stamps affixed, which represent the number of Shares that such Eligible
Stockholder elects to sell pursuant to this SECTION 4. The Company then shall
deliver such certificate or certificates to the purchaser on behalf of such
Eligible Stockholder in
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consummation of the disposition of Shares pursuant to the terms and provisions
specified in this SECTION 4 and, then, the Company promptly shall remit to such
Eligible Stockholder that portion of the proceeds of disposition to which such
Eligible Stockholder is entitled by reason of its or his participation.
4.6 LIMITATION ON RIGHT OF CO-SALE BY MANAGEMENT GROUP.
Notwithstanding the provisions of this SECTION 4 to the contrary, no Employee
Stockholder nor any successor or assignee of Shares held by that Employee
Stockholder has any of the rights and privileges set forth in SECTIONS 4.1
through 4.5 if there is a Termination For Cause.
SECTION 5. OBLIGATION TO PARTICIPATE
-------------------------
5.1 OBLIGATION TO PARTICIPATE. If a majority of the
disinterested members of the Board of Directors and the holders of a majority of
the Shares then outstanding approve a Sale of the Company (an "Approved Sale"),
the Stockholders will, subject to Section 5.2, (i) consent to, vote for and
raise no objections against the Approved Sale or the process pursuant to which
the Approved Sale was arranged, (ii) waive any dissenter's or appraisal rights
and similar rights with respect thereto, and (iii) if the Approved Sale is
structured as a sale of stock, agree to sell all of their Shares on the terms
and conditions approved by the Board of Directors or the holders of a majority
of the Shares then outstanding. The Stockholders will take all necessary and
desirable actions in connection with the consummation of any Approved Sale
including, if such Approved Sale is structured as a sale of assets, actions
necessary to cause the orderly liquidation of the Company following the
liquidation, the making of the same representations, warranties, covenants and
undertakings (to the extent applicable to any such Stockholder in his, her or
its capacity as a Stockholder of the Company) to the prospective transferee(s)
in such Approved Sale as the holders of a majority of the Shares then
outstanding.
5.2 SATISFACTION OF CONDITIONS. The obligations of the holders
of Shares with respect to an Approved Sale are subject to the satisfaction of
the following conditions: (i) upon the consummation of the Approved Sale, all of
the holders of Common Stock shall receive the same form and amount of
consideration per share of Common Stock, or if any holders of Common Stock are
given an option as to the form and amount of consideration to be received, all
holders shall be given the same option; and (ii) in connection with the Approved
Sale all holders of Shares representing then currently exercisable rights to
acquire shares of Common Stock shall only be permitted to either (A) exercise
such rights prior to the consummation of the Approved Sale and participate in
such sale as holders of Common Stock or (B) upon the consummation of the
Approved Sale, receive in exchange for such rights consideration equal to the
amount determined by multiplying (1) the same amount of consideration per share
of Common Stock received by the holders of Common Stock in connection with the
Approved Sale less the exercise price (if any) per share of Common Stock of such
rights to acquire Common Stock by (2) the number of shares of Common Stock
represented by such then currently exercisable rights.
5.3 COSTS OF SALE. The Stockholders will bear their pro rata
share (based upon the number of Shares sold) of the costs of any sale of Shares
pursuant to an Approved Sale to the extent such costs are incurred for the
benefit of all holders of the Shares and are not otherwise paid by the Company
or the acquiring party and shall be obligated to join on a pro rata basis (based
on the number of Shares (assuming conversion of the Warrants) held by such
holder) in any indemnification or other obligations that a majority of the
holders agree to provide in
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connection with such Approved Sale (other than any such obligations that relate
specifically to a holder of Shares such as indemnification with respect to
representations and warranties given by a holder regarding such holder's title
to and ownership of Shares); provided that all indemnity obligations of each
Stockholder will be capped at the amount of proceeds received by such
Stockholder in an Approved Sale. Costs incurred by the Stockholders on their own
behalf will not be considered costs of the Approved Sale.
5.4 CERTAIN DEFINITIONS. For purposes of this SECTION 5, the
terms set forth in this Agreement shall have the following meaning:
"INDEPENDENT THIRD PARTY" means any Person or Persons
who, immediately prior to the contemplated transaction, (i)
are not employees or Affiliates of the Company, (ii) do not
own, directly or indirectly, in excess of five percent (5%) of
the Shares, on a fully diluted basis, (iii) who are not
controlling, controlled by or under common control with any
such five percent (5%) owner of the Company's Shares and (iv)
who are not the spouse or descendant (by birth or adoption) of
any Person described in clauses (i), (ii) or (iii) above.
"SALE OF THE COMPANY" means the sale of the Company
pursuant to which any Independent Third Party or affiliated
group of Independent Third Parties acquires (a) all or
substantially all of the capital stock of the Company (whether
by merger, consolidation or sale or transfer of the Company's
capital stock) or (b) all or substantially all of the
Company's assets determined on a consolidated basis.
SECTION 6. PREEMPTIVE RIGHTS
-----------------
6.1 ELIGIBLE OFFERING. Except as otherwise provided in SECTION
6.4, the Company hereby grants to each of the Stockholders the right to purchase
a portion of any future offering (an "Eligible Offering") of any Shares or any
other equity securities of the Company or of any security convertible into or
exchangeable for or carrying rights, warrants or options to purchase any Shares
or any other equity securities of the Company or, to the extent such Stockholder
(or, in the case of any Stockholder that is not an individual, its Affiliates)
is eligible to purchase such securities pursuant to such offering under federal
and state securities laws, any "Units" comprised of (i) debt securities of the
Company and (ii) any security convertible into or exchangeable for or carrying
rights, warrants or options to purchase any Shares or any other equity
securities of the Company which bears the same ratio to the aggregate amount of
securities covered by such Eligible Offering as the number of Shares (assuming
the exercise of the Warrants) owned by such Stockholder bears to the total
number of Shares owned (assuming the exercise of the Warrants), on a fully
diluted basis, by all Stockholders at the time. In no event shall the Company be
required to change the type or terms of any offering in order for any
Stockholder to become eligible to participate in such offering pursuant to this
Section 6.1.
6.2 NOTICE OF ELIGIBLE OFFERING. Before issuing any securities
pursuant to an Eligible Offering, the Company shall give written notice thereof
to each Stockholder. Such
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notice must specify the security or securities the Company proposes to issue and
the consideration that the Company intends to receive for such security or
securities being issued. For a period of ten (10) business days following the
delivery of such notice, each Stockholder will be entitled, by written notice to
the Company, to elect to purchase up to the portion of the securities being sold
in the Eligible Offering calculated in accordance with SECTION 6.1; provided,
however, that if two (2) or more securities are proposed to be sold as a "unit"
in an Eligible Offering, any such election must relate to such unit of
securities. If any such offer is accepted by a Stockholder or Stockholders, the
Company shall sell to such Stockholder or Stockholders, and such Stockholder or
Stockholders shall purchase from the Company, for the consideration and on the
terms set forth in the Company's notice of such Eligible Offering, the number of
securities that such Stockholder or Stockholders have elected to purchase. The
Company then may sell the remainder of the securities to be sold in the Eligible
Offering, if any, pursuant to the provisions set forth in SECTION 6.3.
6.3 SALE TO THIRD PARTIES. If elections to exercise the rights
pursuant to SECTION 6.1 are not made with respect to any securities included in
an Eligible Offering within the ten (10) business day period described in
SECTION 6.2, or if there remain securities to be sold after the sale of
securities to the Stockholder or Stockholders as set forth in SECTION 6.2, then
the Company may issue such securities to third persons, but only for a
consideration of the type and not less than that set forth in the Company's
notice and only within a period of sixty (60) business days thereafter.
6.4 EXCEPTIONS TO ISSUES OF SECURITIES. Notwithstanding any
other provision in this Agreement to the contrary, no Stockholder has any
preemptive right to purchase any of the following securities issued by the
Company:
(a) Shares issued upon conversion of the Warrants;
(b) Securities issued to the acquiree or its shareholders or
members in connection with any merger, consolidation or acquisition by
the Company; PROVIDED that the Company is the survivor of such merger
or consolidation or is the acquiror and no Person who is a Stockholder
or an Affiliate of the Company becomes a beneficial owner of any
securities issued in such transaction;
(c) Securities issued in an Initial Public Offering; and
(d) Securities issued pursuant to an option plan of the
Company which is approved by the disinterested members of the Board of
Directors; provided that such option plan does not exceed 3% of the
fully diluted equity of the Company on the date of this Agreement
(appropriately adjusted to reflect any stock dividend, stock split,
combination of shares, recapitalization or other similar event
affecting the number of outstanding Shares).
SECTION 7. MANAGEMENT AND OPERATION OF THE COMPANY
---------------------------------------
7.1 BOARD OF DIRECTORS.
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(a) Each Stockholder shall vote or grant written consents with
respect to all of its respective Shares and any other voting securities
of the Company over which such Stockholder has voting control and shall
take all other reasonable or necessary actions within such
Stockholder's control (including, without limitation, calling special
meetings of the Board of Directors or Stockholders), so that:
(i) the Board of Directors will initially consist of five
(5) members;
(ii) the following persons will be elected and reelected
as members of the Board of Directors:
(A) Joseph W. Carreras and Michael T. Kestner;
(B) one (1) representative designated by
Citicorp Venture Capital or its Affiliate;
(C) one (1) representative designated by Key
Equity Capital or its Affiliate; and
(D) one (1) representative designated by Kelso &
Company, L.P. or its Affiliate.
(iii) In the event any representative designated pursuant
to clauses (ii)(B), (C) or (D) above for any reason
ceases to serve as the member of the Board of
Directors during his term, the resulting vacancy
shall be filled by a representative designated as
provided in clauses (ii)(B), (C) or (D) above, as
applicable. In the event Hilite Holdings is
dissolved, then either Mr. Carreras or Mr. Kestner
(but not both) may be replaced by a majority of the
members of the Board of Directors elected pursuant to
clauses (ii) (B), (C), and (D) above. In the event
either Mr. Carreras or Mr. Kestner cease to serve as
a member of the Board of Directors for any reason
other than the dissolution of Hilite Holdings, the
remaining member may select a member to fill the
resulting vacancy. In the event both Mr. Carreras and
Mr. Kestner cease to serve as members of the Board of
Directors and Hilite Holdings is not dissolved, then
Carreras, Kestner Investors, L.L.C. shall elect one
member and the four members shall, by a majority
vote, elect the fifth member.
(b) The Company will pay the reasonable out-of-pocket expenses
incurred by each director in connection with attending meetings of the
Board of Directors (and any committee of the Board of Directors).
SECTION 8. REPURCHASE OF MANAGEMENT GROUP SHARES
-------------------------------------
8.1 THE COMPANY'S REPURCHASE OF MANAGEMENT GROUP SHARES.
Shares held by an Employee Stockholder or any successor or transferee pursuant
to SECTION 2.2 (the "Employee Stockholder Shares") are subject to repurchase
upon the occurrence of an Employee Stockholder Repurchase Event as follows:
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(i) Upon the death or Disability of an Employee
Stockholder, the Employee Stockholder and his
successors and transferees pursuant to SECTION 2.2
shall have a "put" option to require the Company to
purchase all of the Employee Stockholder Shares at a
price per Employee Stockholder Share equal to the
amount determined by multiplying EBITDA for the four
full fiscal quarters immediately preceding the
delivery of the Employee Stockholder Repurchase
Notice times 5.8 and adding all cash and cash
equivalents and then subtracting all Debt (including
any accrued interest and, if applicable, any
prepayment penalties on such Debt) then outstanding,
with the result then being divided by the aggregate
number of Shares (assuming conversion of all
convertible securities) then outstanding (the
"Formula Price"). The Employee Stockholder's "put"
option under this SECTION 8.1(i) will expire within
twenty (20) calendar days from the date the Employee
Stockholder or his estate receives a written notice
from the Company with respect to its "put" option.
(ii) Upon an Employee Stockholder's Termination For Cause,
the Company will have the right, exercisable at any
time, to purchase all of the Employee Stockholder
Shares at a price per Employee Stockholder Share
equal to the Formula Price.
(iii) Upon an Employee Stockholder's Termination Without
Cause, the Employee Stockholder will have a "put"
option to require the Company to purchase all of the
Employee Stockholder Shares at a price per Employee
Stockholder Share equal to the Formula Price. The
Employee Stockholder's "put" option under this
SECTION 8.1(a)(iii) will expire within twenty (20)
calendar days from the date the Employee Stockholder
receives a written notice from the Company with
respect to its "put" option.
(iv) Upon an Employee Stockholder's Voluntary Termination,
the Company will have the right, exercisable at any
time, to purchase all of the Employee Stockholder
Shares at a price per Employee Stockholder Share
equal to the Formula Price.
8.2 EXERCISE OF RIGHTS. The rights to purchase or sell the
Employee Stockholder Shares under the provisions of this SECTION 8 may be
exercised by giving written notice of such exercise (the "Employee Stockholder
Repurchase Notice") to the respective Employee Stockholder (if exercised by the
Company) or to the Company (if exercised by an Employee Stockholder), in each
case within the time period set forth in the applicable paragraph of SECTION
8.1, which notice must specify a closing date not later than fifty (50) business
days after the date of such notice, upon which date the Company will make
payment against delivery by the Employee Stockholder or his or her successors
and transferees pursuant to SECTION 2.2 of certificates representing the
Employee Stockholder Shares to be sold. Subject to SECTION 9, the Company shall
pay to an Employee Stockholder or his or her successors and transferees pursuant
to SECTION 2.2 the purchase price for such Shares as determined pursuant to this
SECTION 8 in cash at Closing.
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8.3 EXERCISE OF "PUT" OPTION. An Employee Stockholder may
exercise his "put" option under SECTION 8.1 by giving written notice to the
Company within the period described in the applicable paragraph. Subject to
SECTION 9, the Company shall endeavor to pay cash for the Shares as purchased.
8.4 REPURCHASE AND PURCHASE RIGHTS BINDING ON TRANSFEREES. The
rights to purchase set forth in this SECTION 8 will be binding upon each
Employee Stockholder and his or her successor(s) and assignee(s) pursuant to
SECTION 2.2, and any such successor(s) and assignee(s) must agree in writing, in
form reasonably satisfactory to the Company to comply with the provisions of
this SECTION 8 in particular, and with the provisions of this Agreement in
general.
SECTION 9. COMPANY'S INABILITY TO SATISFY OBLIGATIONS
------------------------------------------
If the Company is not able to perform any of its obligations
to repurchase Shares under this Agreement because, in the judgment of the Board
of Directors based on the advice of counsel, such performance would cause the
Company to violate any financing agreement with its lenders or would violate the
provisions of applicable laws, statutes, rules or regulations, the Company's
Certificate of Incorporation, the Company's Bylaws, any agreement to which the
Company is a party, including, without limitation, any provisions of any
agreement, instrument or other document evidencing, securing or otherwise
relating to any Debt ("Debt Instrument"), then the Company shall use its
reasonable efforts to accomplish such purchase and sale as soon as practicable
without violating the terms of any Debt Instrument or any applicable law
PROVIDED, HOWEVER, that the Company will not amend its Certificate of
Incorporation or its Bylaws or enter into any agreement with the intent of
avoiding its obligations under this Agreement. If the provisions of SECTION 9
limit the Company's repurchase of the Shares of more than one Stockholder, then,
with respect to any Shares that the Company becomes obligated to purchase
simultaneously, the Company shall purchase such Shares on a pro rata basis from
each such Stockholder. Notwithstanding the limitations set forth in this SECTION
9, if the Company becomes obligated to purchase any Shares under SECTION 8, at a
minimum the Company shall promptly purchase as many such Shares as it is
permitted to purchase under applicable law and any Debt Instrument.
SECTION 10. REGULATORY REQUIREMENTS; CESSATION OF DIRECT INVESTMENT PROGRAM.
----------------------------------------------------------------
(a) Notwithstanding anything else set forth herein to the
contrary, in the event of any reasonable determination in good faith by the
Warrant Holders that, by reason of any existing or future Federal or state rule,
regulation, guideline, order, request or directive (whether or not having the
force of law and whether or not failure to comply therewith would be unlawful)
(collectively, a "REGULATORY REQUIREMENT"), the Warrant Holders is effectively
restricted or prohibited from holding any of the Shares then held by the Warrant
Holders, the Company and the Stockholders shall use reasonable good faith
efforts to take such action as they may determine is reasonably necessary and
appropriate to permit the Warrant Holders to transfer the Shares to comply with
such Regulatory Requirement. All such actions shall be taken at the expense of
the Warrant Holders. The Warrant Holders shall give written notice to the
Company and the other Stockholders of any reasonable determination by it
hereunder and the transfer it
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believes may be necessary or appropriate to permit it to comply with such
Regulatory Requirement.
(b) Notwithstanding anything else set forth herein to the
contrary, in the event the Warrant Holders or any successor or other group of
First Union Corporation or BlackRock Inc., as applicable, or their directly or
indirectly wholly-owned subsidiaries engaging in substantially the same business
cease making direct and mezzanine debt and/or equity investments and make a
determination to liquidate all their private equity positions that can be
liquidated as set forth in a representation letter to the Company, then the
Company and the Stockholders shall permit the Warrant Holders, as applicable, to
transfer its Shares. All such actions shall be taken at the expense of the
Warrant Holders, as applicable. The Warrant Holders, as applicable, shall give
written notice to the Company and the other Stockholders of any determination by
it hereunder.
(c) Notwithstanding any provision of (a) above, if the Warrant
Holders gives a notice under paragraph (a) hereof setting forth the Transfer it
believes may be necessary or appropriate to permit it to comply with such
Regulatory Requirement, or, under paragraph (b) hereof setting forth the
representations set forth in such paragraph, in lieu of the Warrant Holders and
the Company taking such action as may be set forth in paragraph (a) or (b), the
Company shall have the option, at the determination of a majority of the members
of its Board of Directors, to repurchase all the Shares held by the Warrant
Holders. At any time within 15 days after the date of their receipt of the
notice given pursuant to paragraph (a) or (b) above, the Company may indicate
its interest in purchasing all the Shares held by the Warrant Holders by giving
written notice to the Warrant Holders (with copies to the Stockholders). If the
Company has indicated its interest in purchasing all the Shares held by the
Warrant Holders, then the Company shall have the right to purchase such capital
stock for a period of 90 days (or such longer period as may be required to
obtain necessary regulatory approvals for closing the repurchase) (the
"REPURCHASE PERIOD"). During the Repurchase Period, the Company shall endeavor
to obtain financing in amounts sufficient to provide for the purchase of the
Shares held by the Warrant Holders. If, at the end of the Repurchase Period, the
Company has not been able to obtain financing in amounts sufficient to provide
for the purchase of the Shares held by the Warrant Holders, then the Warrant
Holders shall have the right to sell such capital stock. Any such repurchase
shall be based on the fair market value of such shares, as determined by an
appraisal thereof by three independent qualified appraisers, one being selected
by the Company, one being selected by the Warrant Holders, and the third
appraiser being chosen by the two appraisers thus chosen, which determination
shall be final and binding on all parties. The cost of any such appraisal shall
be borne one-half by the Company and one-half by the Warrant Holders.
SECTION 11. LEGEND ON SHARE CERTIFICATES
----------------------------
All certificates representing Shares and Warrants now or
hereafter held by a Stockholder will be endorsed with a legend reading as
follows until such time as the Shares or Warrants represented by such
certificates no longer are subject to the provisions of this Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR
UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
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SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS EITHER (A) THEY ARE
REGISTERED UNDER THE ACT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR (B) THE COMPANY HAS RECEIVED EVIDENCE SATISFACTORY TO IT
(WHICH MAY INCLUDE AN OPINION OF COUNSEL) THAT SUCH PROPOSED
DISPOSITION IS EXEMPT FROM SUCH REGISTRATION.
"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF AN AGREEMENT AMONG STOCKHOLDERS DATED AS OF JUNE 1, 1999
TO WHICH THE COMPANY IS A PARTY. A COPY OF SUCH AGREEMENT MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE CORPORATE SECRETARY OF THE COMPANY."
Upon execution of this Agreement, any certificates for Shares presently held by
the Stockholders shall be surrendered to the Company, and such certificates
shall be endorsed with such legend and returned to the appropriate Stockholder.
SECTION 12. DURATION OF AGREEMENT
---------------------
This Agreement will terminate and be of no further force and
effect upon the earliest to occur of the following: (i) the consummation of an
Initial Public Offering, (ii) the liquidation of the Company, and (iii) the
consent of all Stockholders.
SECTION 13. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
--------------------------------------------------
Each Stockholder severally represents and warrants to the
Company and to each other as follows:
(a) If a corporation, the Stockholder is a corporation duly
organized, validly existing, and in good standing under the laws of the
state of its incorporation and has requisite corporate power and
authority to enter into this Agreement and to undertake the
transactions contemplated in this Agreement;
(b) If a limited liability company, the Stockholder is a
limited liability company duly organized, validly existing and in good
standing under the laws of the state of its formation and has requisite
limited liability company power and authority to undertake the
transactions contemplated by this Agreement;
(c) If a partnership, the Stockholder is a partnership duly
organized, validly existing, and in good standing under the laws of the
state of its formation and has requisite partnership power and
authority to enter into this Agreement and to undertake the
transactions contemplated in this Agreement;
(d) If a trust, the Stockholder is a trust duly organized,
validly existing and in good standing under the laws of the state of
its formation and has requisite power and authority to enter into this
Agreement and to undertake the transactions contemplated in this
Agreement;
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(e) If an individual, the Stockholder is legally competent to
enter into this Agreement and to undertake the transactions
contemplated in this Agreement;
(f) The execution, delivery and performance of this Agreement
will not violate any provision of law, any order of any court, or other
agency of government, or any provision of any indenture, agreement, or
other instrument to which the Stockholder or any of the Stockholder's
properties or assets is bound, or conflict with, result in a breach of,
or constitute (with due notice or lapse of time or both) a default
under any such indenture, agreement, or other instrument, or result in
the creation or imposition of any lien, charge, or encumbrance of any
nature whatsoever upon any of the properties or assets of the
Stockholder, except as contemplated by this Agreement; and
(g) This Agreement has been duly and validly authorized,
executed, and delivered by the Stockholder and constitutes the legal,
valid, and binding obligation of the Stockholder, enforceable in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, fraudulent
conveyance, and other similar laws and principles of equity affecting
creditors' rights and remedies generally.
SECTION 14. COVENANT OF AND RELATED TO HILITE HOLDINGS, LLC
-----------------------------------------------
(a) In the event Hilite Holdings acquires any other Person,
each Stockholder shall have the right to participate up to its
Proportionate Percentage in the transaction on the same terms and
conditions as Hilite Holdings.
(b) In the event that Hilite Holdings determines to pursue an
initial public offering ("Hilite Holdings Offering") of its equity
securities, each Stockholder shall have the right ("Exchange Right") to
exchange on a pro rata basis its or his shares of the Company into
equity securities of Hilite Holdings . Hilite Holdings shall provide
the Stockholders prior notice of its determination to pursue a Hilite
Holdings Offering (a "Holdings Offering Notice"). The Stockholders may
exercise its or his Exchange Right for a period of 30 days following
receipt of the Holdings Offering Notice. A Stockholder's obligation to
effect an exchange of its or his shares of common stock of the Company
for equity securities of Hilite Holding pursuant to the Exchange Right
shall be conditioned upon the consummation of the Hilite Holdings
Offering.
SECTION 15. REPORTS
-------
The Company shall provide to each Stockholder quarterly and
annual financial reports (without exhibits), as soon as practicable after the
completion of such reports, and in the event that the Company files quarterly
and annual reports with the Securities and Exchange Commission, the Company
shall provide copies of such reports (without exhibits) to the Stockholders as
soon as practicable after the date of such filing. In addition, all Stockholders
will be invited to an annual meeting of Stockholders to be held at least once
each year in accordance with the Company's By-laws.
SECTION 16. CONSENT TO JURISDICTION AND SERVICE OF PROCESS
----------------------------------------------
Each Stockholder irrevocably consents to the non-exclusive
jurisdiction of the state and federal courts located in Cleveland, Ohio, agrees
that any action, suit or proceeding by
18
<PAGE> 22
or among the Stockholders (or any of them) or the Company and any Stockholder
may be brought in any court in Cleveland, Ohio, and waives any objection that
the Stockholder may now or hereafter have to the choice of forum whether
personal jurisdiction, venue, FORUM NON CONVENIENS or on any other ground. Each
Stockholder further agrees that final judgment against it or him in any such
action or proceeding will be conclusive and may be enforced in any other
jurisdiction within or outside the State of Ohio by suit on the judgment, a
certified or exemplified copy of which will be conclusive evidence of the fact
and the amount of such judgment.
SECTION 17. INDIVIDUAL STOCKHOLDERS; COMMUNITY PROPERTY
-------------------------------------------
Each individual Stockholder or transferee required to become a
party to this Agreement whose Shares are or become "community property" shall,
at the later of the date of this Agreement or the time when his or her spouse
first has a "community property" interest in any of such Shares, cause such
spouse to execute a counterpart of this Agreement and any amendment hereto
executed by such Stockholder, or another writing in form and substance
satisfactory to the Company, subjecting such spouse and the spouse's "community
property" interest in such Shares to the applicable provisions of this Agreement
or any such writing solely by reason of his or her "community property" interest
in Shares.
SECTION 18. BENEFITS OF AGREEMENT
---------------------
This Agreement will be binding upon and inure to the benefit
of the parties and their respective successors, permitted assigns, heirs,
executors, administrators and legal representatives.
SECTION 19. NOTICES
-------
All notices, requests, consents, and other communications must
be in writing, delivered in person or duly sent by a nationally recognized
overnight courier service or by first-class registered or certified mail,
postage prepaid, addressed as follows:
(a) If to the Company: Hilite Industries, Inc.
Terminal Tower
50 Public Square, 32nd Floor
Cleveland, Ohio 44113
Attn: Michael T. Kestner
with copies to: Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Attn: John M. Saada, Jr., Esq.
(b) If to the Stockholders, at the addresses shown below their
names on SCHEDULE I attached to this Agreement, or to such other address that
has been designated by notice in writing by such party to the others in
accordance with the provisions of this SECTION 19.
19
<PAGE> 23
Each party will at all times have an address to which any communications may be
sent. All such notices, requests, consents and other communications will be
deemed to have been received (i) in the case of personal delivery or facsimile,
on the date of such delivery, (ii) in the case of delivery by recognized
overnight courier service on the first business day following delivery of such
notice to the overnight courier, and (iii) in the case of mailing, on the third
(3rd) business day following such mailing.
SECTION 20. GOVERNING LAW; CONSTRUCTION; VENUE
----------------------------------
This Agreement is governed by and construed in accordance with
the laws of the State of Delaware, without regard to its conflicts of law rules.
The headings or titles to Sections in this Agreement are intended solely for
convenience and no provision of this Agreement is to be construed by reference
to the heading or title of any Section. Unless otherwise specifically stated,
references in this Agreement to Sections or Schedules refer to Sections and
Schedules of this Agreement.
SECTION 21. MODIFICATION AND WAIVER
-----------------------
Except as otherwise provided in this Agreement, neither this
Agreement nor any provision of this Agreement may be modified, changed, waived,
discharged or terminated except by an instrument in writing signed by the
holders of at least 75% of the outstanding Shares, and such modification,
amendment or waiver shall be binding on all holders of Shares who are parties to
this Agreement; provided that in no event shall an obligation of any holder of
Shares or Warrants be increased or a right of any holder of Shares or Warrants
be decreased, except upon the written consent of such holder.
SECTION 22. ENTIRE AGREEMENT
----------------
This Agreement and the Schedules attached to this Agreement
constitute the entire agreement among the parties with respect to matters or
understandings involving the subject matter contained herein and supersedes in
its entirety any and all prior agreements or understandings, oral or written,
among any or all of the undersigned relating to such ownership, control or
disposition, except that this Agreement shall not supersede the Change in
Control Agreement with each Employee Stockholder.
SECTION 23. SEVERABILITY
------------
If any provision of this Agreement, or the application thereof
to any Person or circumstance, is adjudged or ruled to be invalid or
unenforceable, the remaining provisions of this Agreement and the application
thereof to other Persons or circumstances will not be affected by such ruling.
SECTION 24. REMEDIES
--------
The parties recognize and agree that if the Company or any of
the Stockholders breaches its, his or her obligations under this Agreement, the
other parties hereto may not have an adequate remedy at law. Such breach will
cause such other parties irreparable harm for which there may be no adequate
remedy at law. If any party institutes an action or proceeding to
20
<PAGE> 24
enforce the provisions of this Agreement, such party will be entitled to the
remedies of specific performance and injunctive relief, and any such Person
against whom such action or proceeding is brought hereby waives any claim or
defense that there is an adequate remedy at law. The right to obtain an
injunction under this Agreement will not be considered a waiver of any right on
the part of the non-breaching parties to recover damages and to assert any other
claims for remedies which such parties may have at law or in equity. The
breaching party shall bear any expenses incurred by an injured party, including
reasonable attorneys' fees, in enforcing its rights under this Agreement.
SECTION 25. COUNTERPARTS
------------
This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original, but all of which taken together
will constitute one and the same instrument.
[Signatures on Following Page]
21
<PAGE> 25
IN WITNESS WHEREOF, the parties have executed or caused this
Agreement to be executed as of the day and year first above written.
"THE COMPANY"
HILITE INDUSTRIES, INC.
By: /s/ MICHAEL T. KESTNER
-------------------------------------
Name: Michael T. Kestner
Title: Vice President, Chief Financial
Officer and Secretary
"THE STOCKHOLDERS"
HILITE HOLDINGS, LLC
By: /s/ MICHAEL T. KESTNER
-------------------------------------
Name: Michael T. Kestner
Title: Vice President, Chief Financial
Officer and Secretary
JAMES E. LINEBERGER, JR. TRUST
By: /s/ JAMES E. LINEBERGER, JR.
-------------------------------------
Name: James E. Lineberger, Jr.
Title: Trustee
GEOFFRY S. LINEBERGER TRUST
By: /s/ JAMES E. LINEBERGER, JR.
-------------------------------------
Name: James E. Lineberger, Jr.
Title: Trustee
CHRISTOPHER LINEBERGER TRUST
By: /s/ JAMES E. LINEBERGER, JR.
-------------------------------------
Name: James E. Lineberger, Jr.
Title: Trustee
22
<PAGE> 26
THE BRADY FAMILY LIMITED PARTNERSHIP
By: /s/ DANIEL W. BRADY
-------------------------------------
Name: Daniel W. Brady
Title: General Partner
FIRST FIDELITY PRIVATE CAPITAL, INC.
By: /s/ EDWARD H. ROSS
-------------------------------------
Name: Edward H. Ross
Title: Senior Vice President
/s/ SAMUEL M. BERRY
-------------------------------------
Samuel M. Berry
/s/ CHRIS A. CURTO
-------------------------------------
Chris A. Curto
/s/ ARTHUR D. JOHNSON
-------------------------------------
Arthur D. Johnson
/s/ DONALD M. MAHER
-------------------------------------
Donald M. Maher
/s/ WILLIE VERCHER
-------------------------------------
Willie Vercher
/s/ DR. KRISHNAMURTHY SUNDARARAJAN
-------------------------------------
Dr. Krishnamurthy Sundararajan
/s/ RONALD E. REINKE
-------------------------------------
Ronald E. Reinke
23
<PAGE> 27
MAGNETITE ASSET INVESTORS L.L.C.
By: BLACKROCK FINANCIAL MANAGEMENT, INC.,
as Managing Member
By: /s/ DENNIS M. SCHANEY
----------------------------------
Name: Dennis M. Schaney
Title: Managing Director
24
<PAGE> 28
SCHEDULE I
----------
Name & Addresses Of Stockholders & Respective Stockholdings
-----------------------------------------------------------
Name & Address Stockholdings
- -------------- -------------
Hilite Holdings, LLC 1,726,397**
Terminal Tower
50 Public Square, 32nd Floor
Cleveland, Ohio 44113
James E. Lineberger, Jr. Trust 29,239
1120 Boston Post Road
Darien, CT 06820
Geoffry S. Lineberger Trust 29,240
1120 Boston Post Road
Darien, CT 06820
Christopher Lineberger Trust 29,240
1120 Boston Post Road
Darien, CT 06820
The Brady Family Limited Partnership 7,018
2845 Parkwood Lane
Aurora, IL 60504
*Samuel M. Berry 21,053
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
*Chris A. Curto 3,500**
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
*Arthur D. Johnson 13,900**
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
25
<PAGE> 29
Names & Address Stockholdings
- --------------- -------------
*Ronald E. Reinke 9,800**
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
*Donald M. Maher 9,035
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
*Willie Vercher 5,250**
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
*Dr. Krishnamurthy Sundararajan 5,250**
c/o Hilite Industries, Inc.
1671 S. Broadway
Carrollton, TX 75006
First Fidelity Private Capital, Inc. 66,278 Warrants
One First Union Center, 5th Floor
301 South College Street
Charlotte, NC 28288
Attn: Mr. Edward H. Ross
Magnetite Asset Investors L.L.C. 33,139 Warrants
c/o BlackRock Financial Management, Inc.
345 Park Avenue
29th Floor
New York, New York 10154
Attn: Mr. Dennis M. Schaney
*Management Shareholders
**Includes Shares issued subsequent to June 1, 1999
26
<PAGE> 1
Exhibit 99.1
FOR IMMEDIATE RELEASE
June 1, 1999
CONTACT: Michael T. Kestner, Chief Financial Officer
Telephone Number: (216) 771-6700
HILITE INDUSTRIES COMPLETES TENDER OFFER
AND SALE OF SHARES TO CLEVELAND-BASED HILITE HOLDINGS, LLC.
CARROLLTON, TEXAS, June 1, 1999 -- Hilite Industries, Inc. (NASDAQ:HILI) today
announced that it has successfully completed the previously announced all-cash
tender offer by Hilite for all of its outstanding shares of common stock, at a
price of $14.25 per share. The Offer expired at 9:00 a.m. (New York City time)
today. Approximately 4,730,941 shares, including 22,550 shares tendered pursuant
to guaranteed delivery procedures, were validly tendered and not withdrawn
representing approximately 96% shares of all outstanding common shares of
Hilite. All of the tendered shares were accepted for payment.
Immediately prior to the acceptance of the tendered shares,
Hilite also completed the previously announced sale of an aggregate of 1,681,414
shares to Hilite Holdings, LLC. Hilite Holdings, LLC, based in Cleveland, Ohio,
is a Delaware limited liability company newly formed by Carreras, Kestner & Co.,
L.L.C. a Cleveland-based investment group, to acquire Hilite.
Hilite Industries, Inc. designs, manufactures and sells a
diversified line of highly engineered components and assemblies for the
automotive industry including brake proportioning valves, electromagnetic
clutches, machined components such as mounting brackets and pulleys, and
specialty components and assemblies such as stampings, specialty springs and
automated assemblies. The Company's customers include all three domestic
automotive companies: Ford Motor Company, General Motors Corporation and Daimler
Chrysler Corporation as well as other original equipment manufacturers such as
Navistar International Transportation Corporation and non-automotive companies
such as Motorola, Inc. The Company also sells products to first-tier suppliers
of the automotive industry including Borg-Warner Corporation, Bosch Braking
Systems Corporation, Denso of Los Angeles, Inc. and ITT Automotive of North
America, Inc.
For further information call Michael T. Kestner at (216)
771-6700 or access Hilite Industries, Inc.'s website at www.hilite-ind.com.
<PAGE> 1
EXHIBIT 99.2
OFFER TO PURCHASE FOR CASH BY
HILITE INDUSTRIES, INC.
ALL OUTSTANDING SHARES OF ITS COMMON STOCK
AT
$14.25 NET PER SHARE
------------------------
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK
CITY TIME, ON FRIDAY, MAY 28, 1999, UNLESS THE OFFER IS EXTENDED.
------------------------
Hilite Industries, Inc., a Delaware corporation (the "Company"), is
offering to purchase all outstanding shares of its common stock, $.01 par value
per share ("Shares"), for $14.25 per Share, net to seller in cash (such amount,
or any greater amount per Share paid pursuant to the offer, being referred to
herein as the "Offer Price"), upon the terms and subject to the conditions set
forth in this offer to purchase and in the related letter of transmittal (which
together constitute the "Offer").
The Offer is conditioned upon, among other things, there being validly
tendered and not withdrawn prior to the expiration of the Offer at least
2,510,101 Shares (the "Minimum Condition"), which constitutes a majority of the
outstanding Shares on a fully diluted basis, and the Company obtaining the Debt
Financing (as defined herein) arranged for its benefit by Buyer (as defined
herein). Pursuant to the Stockholders Agreement (as defined herein), the
Continuing Stockholders (as defined herein) have agreed to tender and not
withdraw in the aggregate approximately 73% of the outstanding Shares on a fully
diluted basis. See "The Merger Agreement and the Stockholders Agreement".
The Board of Directors of the Company (the "Board") and the Disinterested
Directors (as defined herein) have each unanimously determined, after giving
careful consideration to a number of factors, that the Offer and the Merger (as
defined herein) are fair to, and in the best interests of, the stockholders of
the Company, and have each unanimously approved the Merger Agreement and the
transactions contemplated thereby including the Offer at the Offer Price, the
Stock Purchase (as defined herein) and the Merger. The Board and the
Disinterested Directors each recommends that the stockholders of the Company
accept the Offer and tender their Shares pursuant to the Offer.
Bowles Hollowell Conner, a division of First Union Capital Market Corp.,
has delivered to the Board its 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 and the Merger Consideration (as
defined herein) 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.
IMPORTANT
ANY STOCKHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH STOCKHOLDER'S
SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL IN
ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND MAIL OR
DELIVER IT TOGETHER WITH THE CERTIFICATE(S) EVIDENCING TENDERED SHARES, AND ANY
OTHER REQUIRED DOCUMENTS, TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY (THE
"DEPOSITARY") (AT THE DEPOSITARY'S ADDRESS SET FORTH ON THE BACK COVER OF THIS
OFFER TO PURCHASE) OR TENDER SUCH SHARES PURSUANT TO THE PROCEDURE FOR
BOOK-ENTRY TRANSFER SET FORTH IN "THE TENDER OFFER -- SECTION 3. PROCEDURES FOR
ACCEPTING THE OFFER AND TENDERING SHARES" OR (2) REQUEST SUCH STOCKHOLDER'S
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE
TRANSACTION FOR SUCH STOCKHOLDER.
The Shares are listed and traded on the Nasdaq National Market. On April
26, 1999, the last full day of trading prior to the announcement of the Offer,
the closing sale price of the Shares on Nasdaq was $10 7/8 per Share. On April
30, 1999, the last full trading day prior to the commencement of the Offer, the
closing sale price of the Shares on Nasdaq was $ 13 11/16 per Share.
Stockholders are urged to obtain a current market quotation for the Shares.
Any stockholder who desires to tender Shares and whose certificates
evidencing such Shares are not immediately available, or who cannot comply with
the procedure for book-entry transfer on a timely basis, may tender such Shares
by following the procedure for guaranteed delivery set forth in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Shares".
Questions or requests for assistance may be directed to Morrow & Co., Inc.,
the Information Agent, or First Union Capital Markets Corp., the Dealer Manager,
at their respective addresses and telephone numbers set forth on the back cover
of this Offer to Purchase. Additional copies of this Offer to Purchase, the
Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from
the Information Agent or from brokers, dealers, commercial banks or trust
companies.
THE TRANSACTIONS (AS DEFINED HEREIN) HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
------------------------
The Dealer Manager for the Offer is:
FIRST UNION CAPITAL MARKETS CORP.
May 3, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................ 1
SPECIAL FACTORS............................................. 3
Background of the Transactions............................ 3
Recommendation of the Disinterested Directors and the
Board; Fairness of the Transactions.................... 7
Opinion of Bowles Hollowell............................... 8
Purposes and Reasons of the Company for the
Transactions........................................... 11
Purposes and Reasons of Buyer and the Continuing
Stockholders for the Transactions...................... 11
Position of Buyer and the Continuing Stockholders
Regarding Fairness of the Transactions................. 11
Recapitalization.......................................... 12
Interests of Certain Persons in the Transactions.......... 12
The Stock Subscription Agreements......................... 13
Cautionary Statement Concerning Forward-Looking Statements
and Company Financial Projections...................... 13
Plans for the Company after the Transactions; Certain
Effects of the Transactions............................ 14
Rights of the Stockholders in the Transactions............ 15
The Merger Agreement and the Stockholders Agreement....... 16
Related Party Transactions................................ 25
Beneficial Ownership of Common Stock...................... 25
Transactions and Arrangements Concerning the Shares....... 27
THE TENDER OFFER............................................ 28
1. Terms of the Offer; Expiration Date................... 28
2. Acceptance for Payment and Payment for Shares......... 29
3. Procedures for Accepting the Offer and Tendering
Shares................................................. 30
4. Withdrawal Rights..................................... 32
5. Certain U.S. Federal Income Tax Consequences.......... 32
6. Price Range of Shares; Dividends...................... 33
7. Certain Information Concerning the Company............ 33
8. Recent Developments................................... 34
9. Summary Historical Financial Information.............. 34
10. Financing of the Transactions......................... 35
11. Effect of the Transactions on the Market for the
Shares; Exchange Act Registration...................... 38
12. Certain Conditions to the Offer....................... 39
13. Certain Legal Matters and Regulatory Approvals........ 40
14. Fees and Expenses..................................... 42
15. Certain Information Concerning Buyer and Merger
Subsidiary............................................. 43
16. Recapitalization Accounting........................... 44
17. Miscellaneous......................................... 44
</TABLE>
<TABLE>
<S> <C>
SCHEDULE I. Directors and Executive Officers of the Company
SCHEDULE II. Opinion of Bowles Hollowell
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
</TABLE>
i
<PAGE> 3
To the Holders of Common Stock of
Hilite Industries, Inc.:
INTRODUCTION
Hilite Industries, Inc., a Delaware corporation (the "Company"), hereby
offers to purchase all outstanding shares of its common stock, $.01 par value
per share ("Shares"), at a price of $14.25 per Share, net to seller in cash
(such amount, or any greater amount per Share paid pursuant to the Offer, being
referred to herein as the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer. Tendering stockholders will not be obligated
to pay brokerage fees or commissions or, except as otherwise provided in
Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to
the purchase of Shares by the Company pursuant to the Offer. The Company will
pay all charges and expenses of Bowles Hollowell Conner, a division of First
Union Capital Markets Corp., which is acting as financial advisor to the
Company, First Union Capital Markets Corp., which is acting as the dealer
manager for the Offer (the "Dealer Manager"), Continental Stock Transfer & Trust
Company, which is acting as the depositary for the Offer (the "Depositary") and
Morrow & Co., Inc., which is acting as information agent for the Offer (the
"Information Agent") incurred in connection with the Offer. See "THE TENDER
OFFER -- Section 14. Fees and Expenses". If the Transactions are not
consummated, certain of the fees related to the Transactions will be paid by the
Buyer.
The Shares are currently listed and traded on the Nasdaq National Market
under the symbol "HILI". On April 26, 1999, the last full day of trading prior
to the announcement of the Offer, the closing sale price of the Shares on Nasdaq
was $10 7/8 per Share. On April 30, 1999, the last full trading day prior to the
commencement of the Offer, the closing sale price of the Shares on Nasdaq was
$13 11/16 per Share. Stockholders are urged to obtain a current market quotation
for the Shares. The consummation of the Transactions (as defined herein) would
result in: (i) the delisting of the Shares from Nasdaq, (ii) the Shares becoming
eligible for termination of registration pursuant to Section 12(g)(4) of the
Exchange Act (as defined herein), (iii) a change in the composition of the
present board of directors and executive officers of the Company and (iv) a
change in the capitalization of the Company.
The purpose of the Transactions is (i) to enable Hilite Holdings, LLC, a
Delaware limited liability company ("Buyer"), to obtain, in the aggregate,
majority ownership in the Company and (ii) 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 premium over recent market prices more quickly than through
alternative transaction structures that had been considered. See "THE TENDER
OFFER -- Section 6. Price Range of Shares; Dividends and Distributions" and
"SPECIAL FACTORS -- Recommendation of the Disinterested Directors and Board;
Fairness of the Transactions".
The Company, Buyer and Hilite Mergeco, Inc., a Delaware corporation and
wholly-owned subsidiary of Buyer ("Merger Subsidiary"), entered into an
Agreement and Plan of Merger, dated as of April 26, 1999 (the "Merger
Agreement"). Pursuant to the Merger Agreement, Buyer agreed to purchase after
the expiration of the Offer but immediately prior to the consummation of the
Offer 1,681,414 newly-issued Shares (the "Stock Purchase") at a per Share price
equal to the Offer Price. The Stock Purchase will provide the Company with a
portion of the funds needed to consummate the Offer and the Merger (as defined
herein) and it is anticipated that the remainder of the funds needed to
consummate the Offer and the Merger and to pay all related fees and expenses
will be obtained by the Company through financing arranged for its benefit by
Buyer, consisting of (i) borrowings under a $65 million senior secured credit
facility and (ii) the proceeds from the sale of $15.0 million of 12.5% senior
unsecured subordinated notes (collectively, the "Debt Financing"). See "SPECIAL
FACTORS -- The Merger Agreement and Stockholder Agreement" and "TENDER OFFER --
Section 8. Financing of the Offer and the Merger".
The Offer is being made pursuant to the Merger Agreement which provides
that, among other things, as soon as practicable after the purchase of Shares
pursuant to the Offer and the satisfaction of the other conditions set forth in
the Merger Agreement, in accordance with the requirements of the General
Corporation Law of the State of Delaware, Merger Subsidiary will be merged with
and into the Company (the "Merger" and, together with the Offer and the Stock
Purchase, the "Transactions"), with the Company as the surviving corporation of
the Merger (the "Surviving Corporation"). At the effective time of the Merger,
each Share issued and outstanding
1
<PAGE> 4
immediately prior to the effective time of the Merger, other than certain Shares
owned by the James E. Lineberger, Jr. Trust, the Geoffry S. Lineberger Trust,
the Christopher Lineberger Trust, the Brady Family Limited Partnership and
certain members of the Company's management (collectively, "Continuing
Stockholders") and Buyer (see "SPECIAL FACTORS -- The Merger Agreement and
Stockholders Agreement"), will be canceled and converted automatically into the
right to receive $14.25 in cash, or any higher price that may be paid per Share
pursuant to the Offer, without interest (the "Merger Consideration"), subject to
dissenters' rights. Shares owned by any wholly-owned subsidiary of the Company
and Shares owned by Merger Subsidiary will be canceled. Each share of Merger
Subsidiary will be converted into one share of Surviving Corporation. The Merger
Agreement is more fully described in "SPECIAL FACTORS -- The Merger Agreement
and Stockholders Agreement". NO DISSENTERS' RIGHTS ARE AVAILABLE IN CONNECTION
WITH THE OFFER. See "SPECIAL FACTORS -- Rights of the Stockholders in the
Transactions". Stockholders who fully comply with the statutory dissenters'
procedures under Delaware law, the relevant portions of which are attached to
this Offer to Purchase as SCHEDULE III, will be entitled to receive, in
connection with the Merger, cash for the fair value of their Shares as
determined pursuant to the procedures prescribed by Delaware law.
THE BOARD AND THE COMPANY'S THREE OUTSIDE DIRECTORS (THE "DISINTERESTED
DIRECTORS") HAVE EACH UNANIMOUSLY DETERMINED, AFTER GIVING CAREFUL CONSIDERATION
TO A NUMBER OF FACTORS, THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE
BEST INTERESTS OF, THE STOCKHOLDERS OF THE COMPANY, AND HAVE EACH UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
INCLUDING THE OFFER AT THE OFFER PRICE, THE STOCK PURCHASE AND THE MERGER. THE
BOARD AND THE DISINTERESTED DIRECTORS EACH RECOMMENDS THAT THE STOCKHOLDERS OF
THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER.
Bowles Hollowell has delivered to the Board its 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 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. See "SPECIAL
FACTORS -- Opinion of Bowles Hollowell" for further information concerning the
opinion of Bowles Hollowell, a copy of which is attached to this Offer to
Purchase as Schedule II.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST
2,510,101 SHARES (THE "MINIMUM CONDITION"), WHICH CONSTITUTES A MAJORITY OF THE
OUTSTANDING SHARES ON A FULLY DILUTED BASIS, AND UPON THE COMPANY OBTAINING THE
DEBT FINANCING ARRANGED FOR ITS BENEFIT BY BUYER. SEE "THE TENDER
OFFER -- SECTION 12. CERTAIN CONDITIONS TO THE OFFER". PURSUANT TO THE
STOCKHOLDERS AGREEMENT, THE CONTINUING STOCKHOLDERS HAVE AGREED TO TENDER AND
NOT WITHDRAW IN THE AGGREGATE APPROXIMATELY 73% OF THE OUTSTANDING SHARES ON A
FULLY DILUTED BASIS.
Buyer and Merger Subsidiary have entered into a Stockholders Agreement with
the Continuing Stockholders dated as of the date of the Merger Agreement (the
"Stockholders Agreement"), providing, subject to certain conditions, for (i) the
tender by the Continuing Stockholders of certain Shares owned or controlled by
them, (ii) the retention by the Continuing Stockholders of certain Shares owned
or controlled by them and (iii) the grant of an irrevocable proxy to Buyer by
the Continuing Stockholders to vote all Shares owned or controlled by them at
the time of the Stockholders' Meeting (as defined herein) in favor of the
Merger. See "SPECIAL FACTORS -- The Merger Agreement and the Stockholders
Agreement."
As of March 31, 1999, there were 4,900,000 Shares issued and outstanding
and no Shares held in the treasury of the Company. Employee and director stock
options ("Employee Options") exercisable for 120,200 Shares were outstanding
pursuant to the Company's stock option plans and direct grants as of March 31,
1999, of which all options were vested as of such date. As of March 31, 1999,
there were approximately 40 holders of record of the issued and outstanding
Shares. As of March 31, 1999, the Company's directors and executive officers as
a group beneficially owned 3,842,800 Shares, or 76.5% of the Shares outstanding
as of such date on a fully diluted basis. The Company has been informed by its
directors and executive officers (other than those who are Continuing
Stockholders) that they intend either to tender all Shares beneficially owned by
them to the Company pursuant to the Offer or to vote such Shares in favor of the
Merger Agreement and the Merger. The
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Continuing Stockholders have agreed to tender all their Shares except for their
retained Shares and to vote all of their Shares in favor of the Merger Agreement
and the Merger.
The receipt of cash for Shares pursuant to the Offer or in the Merger 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. See "THE TENDER
OFFER -- Section 5. Certain U.S. Federal Income Tax Consequences".
The consummation of the Merger is subject to the satisfaction or waiver of
certain conditions including the approval and adoption of the Merger Agreement
by the requisite vote of the stockholders of the Company. See "SPECIAL
FACTORS -- The Merger Agreement and the Stockholders Agreement". Under the
Company's certificate of incorporation (the "Certificate of Incorporation") and
Delaware law, the affirmative vote of the holders of a majority of the
outstanding Shares is required to approve the Merger Agreement and the Merger.
If the Offer is consummated, Buyer will be able to effect the Merger without the
affirmative vote of any other stockholder.
Following the consummation of the Transactions, Buyer and the Continuing
Stockholders will own Shares representing approximately 92.2% and 7.8%,
respectively, of the Shares outstanding following such consummation.
This Offer to Purchase and the accompanying documents contain information
required to be disclosed by the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder (the "Exchange Act"), including
financial information regarding the Company, a description of the terms,
conditions and background of the Offer, and the procedures for tendering Shares.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION
IS MADE WITH RESPECT TO THE OFFER.
SPECIAL FACTORS
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 Hilite. Mr. Brady indicated that since Hilite went public in
January 1994 at $9.00 per share, the earnings of the Company had almost doubled,
but that the current market price of the stock was at only $8.00 per share,
$1.00 per share less than the Company's initial public offering price.
Thereafter, the Board discussed the issues raised by Mr. Brady and concluded
that the Company's stock price was undervalued in the public markets and did not
reflect the Company's operating results. The Board determined that such
undervaluation was in part attributable to generally low multiples for small-cap
companies and, specifically, for automotive components suppliers, as well as the
limited public float for the Shares. Acknowledging its primary goal of
maximizing stockholder value over the long term, the Board encouraged Messrs.
Brady, Berry and James E. Lineberger to explore the Company's strategic options,
including the option of selling the Company.
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During May and June 1998, Messrs. Brady, Berry and Lineberger interviewed
and requested proposals from several investment banking firms, some of which
they had met with earlier to discuss strategic alternatives for the Company.
Three firms made proposals with respect to the Company. These proposals
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
proposals 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 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.
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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
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., LLC
("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 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
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<PAGE> 8
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 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, the Disinterested Directors held a telephonic meeting
with Bowles Hollowell and with legal counsel, at which the Disinterested
Directors were given a separate opportunity to evaluate the proposed
transaction, its structure and its fairness. In connection with this evaluation,
the Disinterested Directors reviewed the interests of the Continuing
Stockholders in the Transactions and determined that the retained ownership of
Shares by the Continuing Stockholders at the agreed upon level (7.8% of the
recapitalized Company or 2.9% of the outstanding Shares prior to the
recapitalization) did not affect their assessment that the Transactions were
fair to the Company's stockholders. In reaching this determination, the
Disinterested Directors acknowledged that the Transactions would eliminate the
opportunity for the stockholders, other than the Continuing Stockholders, to
participate in the future growth of the Company, but also recognized that the
Transactions would limit the stockholders' exposure to the risks of any future
decrease in the value of the Company. In addition, the Disinterested Directors
focused on the fact that the Offer Price was determined prior to any discussions
regarding the Continuing Stockholders' retention of certain Shares to facilitate
recapitalization accounting treatment. Bowles Hollowell, after performing
additional analyses and taking into consideration the Company's third quarter
results, advised the Disinterested Directors that such analyses and
considerations did not effect its original determination as to the fairness of
the Offer Price and the Transactions. After consideration of Bowles Hollowell's
updated analysis, the Disinterested Directors reaffirmed that the Offer Price
was determined before the negotiations that resulted in the Continuing
Stockholders maintaining their interests in the Company, agreed that the Offer
and Merger were fair to, and in the best interests of, the stockholders, and
unanimously recommended that the Board approve the Transactions. Following the
Disinterested Directors meeting, the full Board met with Bowles Hollowell and
legal counsel. Bowles Hollowell reviewed with the Board the updated analysis
presented to the Disinterested Directors and rendered to the Board an oral
opinion (which opinion was subsequently confirmed by delivery of a written
opinion dated April 26, 1999) to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the Offer Price
was fair from a financial point of view to the holders of the Shares (other than
the Continuing Stockholders with respect to their retained Shares). Thereafter,
the directors unanimously determined, after giving careful consideration to a
number of factors including the recommendation of the Disinterested Directors,
that the Transactions, taken together, were fair to, and in the best interests
of, the Company and its stockholders, and unanimously approved the Transactions.
On April 26, 1999, the Company entered into the Merger Agreement with Buyer
and Merger Subsidiary and the Continuing Stockholders entered into the
Stockholders Agreement with Buyer and Merger Subsidiary. The
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Company publicly announced the proposed Transactions prior to the commencement
of trading of the Company's stock on April 27, 1999.
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, (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:
(i) 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;
(ii) 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;
(iii) 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;
(iv) 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;
(v) 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;
(vi) 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;
(vii) 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;
(viii) 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;
(ix) the opinion of Bowles Hollowell dated April 26, 1999 to the
effect that based upon their 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;
(x) 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;
(xi) 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
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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
(xii) the fact that the Continuing Stockholders agreed to tender
approximately 97% of their Shares (excluding Employee Options) in the
Offer.
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 hereto 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
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
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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. These multiples compare with implied multiples for the Company
based on the Per Share Amount 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.
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. These multiples compare with 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. 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 Transactions, 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%.
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
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<PAGE> 12
could generate over the fiscal years 2000 through 2004, based on internal
estimates of the management of the Company. Bowles Hollowell did not discount or
otherwise risk-adjust management's growth and EBITDA estimates. The stand-alone
discounted cash flow analysis of the Company was determined by (i) adding (x)
the present value at June 30, 1999 of projected free cash flows over the
five-year period 2000 through 2004, and (y) the present value at June 30, 1999
of the estimated perpetual value of the Company in year 2004 and (ii)
subtracting the projected net debt of the Company at June 30, 1999. The range of
estimated perpetual values for the Company at the end of the five-year period
was calculated by applying perpetual growth rates ranging from 2.0% to 4.0%. The
cash flows and perpetual values of the Company were discounted to present value
using discount rates ranging from 12.9% to 14.9%. This analysis yielded an
equity reference range for the Company of approximately $12.03 to $18.40 per
Share as compared to the Offer Price.
Certain Other Factors. In connection with its opinion, Bowles Hollowell
also reviewed and considered, among other things, (i) the indications of
interest and bids of third parties other than CK & Co., (ii) the historical and
pro forma financial profile of the Company, (iii) the historical trading volumes
and market prices for the Shares, and movements in the Shares relative to the
S&P 500 Index, the Nasdaq Composite, and the common stock of the Selected
Companies, and (iv) the ownership profile of the Company.
The summary set forth above does not purport to be a complete description
of the opinion of Bowles Hollowell to the Board or the financial analyses
performed and factors considered by Bowles Hollowell in connection with its
opinion. A copy of Bowles Hollowell's written presentation to the Board with
respect to its opinion has been filed as an exhibit to the Schedule 13E-3 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.
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 also
will be participating, 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 "THE TENDER OFFER -- Section 10. 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
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<PAGE> 13
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 has
agreed to pay Bowles Hollowell upon consummation of the Transactions an
aggregate financial advisory fee of approximately $1,641,850 (less $75,000
already paid as a retainer to Bowles Hollowell) 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.
PURPOSES AND REASONS OF THE COMPANY FOR THE TRANSACTIONS
The purposes of the Offer is to provide the Company's shareholders 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 believes that the limited supply of Shares traded in the
public market limits the liquidity of the Shares and negatively impacts the
market price of the Shares. Following the consummation of the Transactions, the
Shares would no longer be traded on Nasdaq and registration of the Shares would
be terminated under the Exchange Act.
The acquisition of the Shares has been 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 (ii) provide
stockholders with cash for all of their Shares more quickly than through
alternative transaction structures that had been considered by the Board.
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 is 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 Transactions, Buyer and the Continuing
Stockholders will own approximately 92.2% and 7.8%, respectively, of the
outstanding Shares.
POSITION OF BUYER AND THE CONTINUING STOCKHOLDERS REGARDING FAIRNESS OF THE
TRANSACTIONS
Buyer has considered the analysis of and the factors examined by the Board
(described in detail in "SPECIAL FACTORS -- Recommendation of the Disinterested
Directors and the Board; Fairness of the Transactions") and believe that these
analyses and factors, in particular factors (i) through (xii) of that section,
provide a reasonable basis for it to believe, as it does, that the Transactions
are fair to the stockholders of the Company. The views of Buyer were based on
the totality of factors and analyses considered, with no single factor or
analyses being dispositive of, Buyer's fairness determination and should not be
construed as a recommendation by Buyer to the Company's stockholders to tender
their Shares. Certain of the Continuing Stockholders are members of the Board
and their position regarding the fairness of the Transactions is set forth in
"SPECIAL FACTORS -- Recommendation of the Disinterested Directors and the Board;
Fairness of the Transaction." The Continuing Stockholders who are not Board
members, who own in the aggregate approximately 1.6% of the outstanding Shares
and will own approximately 1.5% of the outstanding Shares of the
post-recapitalized Company, have expressed no opinion regarding the fairness of
the Transactions. The Buyer did not review a copy of Bowles Hollowell's fairness
opinion prior to entering into the Merger Agreement.
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<PAGE> 14
RECAPITALIZATION
The Offer is being made 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.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Stockholders should be aware in considering their decision to participate
in the Offer that each of the directors of the Company has, to some degree,
interests which may present such directors with an actual or potential conflict
of interests in connection with the Offer. The directors and executive officers
of the Company or their affiliates will receive, as a result of the Transactions
an aggregate of approximately $51,850,000 in cash for the Shares beneficially
owned by them and their options to purchase Shares and those directors and
executive officers who are Continuing Stockholders will also retain a portion of
their Shares. As of April 30, 1999, the directors and executive officers of the
Company as a group beneficially owned 3,842,800 Shares, or 76.5% of the Shares,
including 102,800 Shares issuable upon the exercise of options granted pursuant
to the Company's 1993 Stock Option Plan.
The Company has been informed by its directors and executive officers
(other than those who are Continuing Stockholders) that they intend to tender
all of the Shares beneficially owned by them to the Company pursuant to the
Offer. The Continuing Stockholders have agreed to tender all of their Shares
except their retained Shares and to vote all of their Shares in favor of the
Merger Agreement and the Merger.
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
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<PAGE> 15
senior executive's employment of equivalent health, dental, life insurance and
other death benefit programs as in effect at the time of termination. Each
Change in Control Agreement provides that if any portion of the benefits under
the agreement would constitute an excess parachute payment for purposes of the
Code, benefits will be reduced so that the executive will be entitled to receive
an amount equal to the maximum amount which he could receive without becoming
subject to the excise tax imposed by the Code on such certain excess parachute
payments. The Transactions constitute a change of control pursuant to the Change
in Control Agreements.
The aggregate cash consideration that would be received by officers and
directors of the Company under their respective Change in Control Agreements as
a result of the Transactions would be as follows:
<TABLE>
<S> <C>
Daniel W. Brady............................................. $879,081
Samuel M. Berry............................................. 976,458
Roy Wiegmann................................................ 118,004
Donald M. Maher............................................. 178,465
Arthur D. Johnson........................................... 152,771
Ronald E. Reinke............................................ 124,574
Lineberger & Co., LLC(1).................................... 924,999
</TABLE>
- ---------------
(1) The Company has agreed to pay Lineberger & Co., LLC its change of
control payment of $924,999 over the next three years.
Bonuses. In connection with the consummation of the Transactions, each of James
D. Gerson, Ronald G. Assaf and John F. Creamer, the Company's outside directors,
will receive the following amounts as termination bonuses, respectively:
$46,250, $46,250 and $34,688.
THE STOCK SUBSCRIPTION AGREEMENTS
Merger Subsidiary, Buyer and the Company have entered into separate Stock
Subscription Agreements with the members of Buyer. Under these Stock
Subscription Agreements, the members have agreed, upon the occurrence of a final
and non-appealable judgment against Merger Subsidiary or Buyer in favor of the
Company relating to the Merger Agreement or the transactions contemplated
thereunder, to purchase shares of common stock of Merger Subsidiary for an
aggregate purchase price of $2.0 million in cash. Merger Subsidiary and Buyer
are jointly and severally liable for any such judgments.
The Stock Subscription Agreements may not be amended without the prior
written consent of the Company. The Company is a third-party beneficiary of the
Stock Subscription Agreements and will be entitled to enforce them on behalf of
Merger Subsidiary.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND COMPANY FINANCIAL
PROJECTIONS
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
below (collectively, the "Projections"). Such information has been included in
this Offer to Purchase 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 and the Debt Financing. 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
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<PAGE> 16
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. Neither the Company nor any other party assumes any responsibility
for the accuracy or validity of the Projections. 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 Company provided potential bidders with the following projections in
connection with the bid solicitation process conducted by the Company and Bowles
Hollowell:
SUMMARY PROJECTED FINANCIAL RESULTS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDING JUNE 30,
-------------------------------------------------------
1999P 2000P 2001P 2002P 2003P
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales:
Brake valves....................... $34,173 $36,495 $ 42,768 $ 48,168 $ 59,918
Power transmission components...... 28,015 33,254 36,694 38,965 40,737
Specialty components and
assemblies....................... 23,869 21,720 22,320 22,920 23,820
------- ------- -------- -------- --------
Net sales.......................... $86,057 $91,469 $101,782 $110,053 $124,475
Gross profit....................... $17,958 $19,846 $ 22,860 $ 26,341 $ 30,642
Gross profit margin................ 20.9% 21.7% 22.5% 23.9% 24.6%
EBIT(1)............................ $10,058 $11,184 $ 13,536 $ 16,863 $ 20,598
EBIT margin........................ 11.7% 12.2% 13.3% 15.3% 16.5%
EBITDA(1).......................... $13,688 $15,160 $ 17,832 $ 21,579 $ 26,004
EBITDA margin...................... 15.9% 16.6% 17.5% 19.6% 20.9%
Depreciation and amortization...... $ 3,630 $ 3,976 $ 4,296 $ 4,716 $ 5,406
Capital expenditures............... 3,162 3,073 3,096 6,400 4,400
Basic earnings per share
(EPS)(2)......................... $ 1.13 $ 1.33 $ 1.68 $ 2.15 $ 2.64
</TABLE>
- ---------------
(1) Excludes expenses related to CEO salary and management fees, and corporate
costs resulting from the public ownership of the Company's stock.
(2) Assumes average weighted number of shares outstanding of 4,900,000 and
annual effective tax rates of 37%.
In addition to the above, the March 11, 1999 letter requesting final bids
sent by Bowles Hollowell to all bidders, indicated that Net Sales and adjusted
EBITDA of the Company for the twelve months ended February 28, 1999 were
approximately $90.2 million and $14.2 million, respectively. Additionally, the
letter indicated the Company's belief that adjusted EBITDA for the fiscal year
ending June 30, 1999 was expected to exceed $14 million.
PLANS FOR THE COMPANY AFTER THE TRANSACTIONS; CERTAIN EFFECTS OF THE
TRANSACTIONS
Pursuant to the Merger Agreement, upon completion of the Offer and the
Stock Purchase, the Company, Buyer and Merger Subsidiary intend to effect the
Merger in accordance with the Merger Agreement. See "SPECIAL FACTORS -- The
Merger Agreement and the Stockholders Agreement."
Except as described in this section or elsewhere in this Offer to Purchase,
neither the Company nor Buyer has current plans or proposals that relate to or
would result in: (a) other than the transactions set forth herein, an
extraordinary corporate transaction, such as a merger, reorganization or
liquidation involving the Company; (b) a
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<PAGE> 17
sale or transfer of a material amount of assets of the Company; (c) any change
in the management of the Company or any change in any material term of the
employment contract of any continuing executive officer; (d) any material change
in the present dividend rate or policy or indebtedness or capitalization of the
Company; or (e) any other material change in the Company's corporate structure
or business upon consummation of the Transactions, Buyer and the Company intend
to terminate the registration of the Shares pursuant to Section 12(g) (4) of the
Exchange Act.
After the consummation of the Transactions, it is expected that James E.
Lineberger, Chairman of the Board, and Daniel W. Brady, Vice Chairman of the
Board and Chief Executive Officer will resign and their involvement in the
Company will be solely as a Continuing Stockholder. Also, the Company's current
dividend policy will be terminated. In addition, Buyer may initiate a review of
the Company and its assets, corporate structure, capitalization, operations,
properties, policies, management and personnel to determine what changes, if
any, would be desirable following the Merger in order best to organize the
activities of the Company. Buyer expressly reserves the right to make any
changes that it deems necessary or appropriate in light of its review or in
light of future developments.
Successful consummation of the Transactions will enable Buyer to obtain
ownership of approximately 92.2% of the Shares, thereby becoming entitled to all
benefits that result from such ownership. Such benefits include management and
investment direction with regard to the future conduct of the business of the
Company, the benefits of the profits generated by operations and any increase in
the Company's value. Similarly, Buyer will also bear the risk of any losses
generated by the operations of the Company and any decrease in the value of the
Company.
Upon consummation of the Transactions, the Company will become a privately
held corporation. Accordingly, stockholders (other than the Continuing
Stockholders with respect to their retained Shares) will not have the
opportunity to participate in the earnings and growth of the Company after the
consummation of the Transactions and will not have any right to vote on
corporate matters. Similarly, stockholders (other than the Continuing
Stockholders with respect to the retained Shares) will not face the risk of
losses generated by the Company's operations or any decrease in the value of the
Company after the consummation of the Transactions.
FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS, THE SHARES WILL NO LONGER
BE QUOTED ON NASDAQ. In addition, the registration of the Shares under the
Exchange Act will be terminated. Accordingly, following the consummation of the
Transactions, there will be no publicly-traded Shares outstanding. See "THE
TENDER OFFER -- Section 11. Effect of the Transactions on the Market for the
Shares; Exchange Act Registration". It is expected that, if Shares are not
accepted for payment by the Company pursuant to the Offer and the Transactions
are not consummated, the Company's current management, under the general
direction of the Board, will continue to manage the Company as an ongoing
business.
RIGHTS OF THE STOCKHOLDERS IN THE TRANSACTIONS
Approval. Under Delaware law, the approval of the Board of Directors of the
Company and the affirmative vote of the holders of a majority of the outstanding
Shares are required to adopt and approve the Merger Agreement and the Merger.
The execution and delivery of the Merger Agreement by the Company and the
consummation by the Company of the Transactions have been duly authorized by all
necessary corporate action on the part of the Company, subject to the approval
of the Merger by the Company's stockholders in accordance with Delaware law. In
addition, the affirmative vote of the holders of a majority of the outstanding
Shares is the only vote of the holders of any class or series of the Company's
capital stock necessary to approve the Merger Agreement and the transactions
contemplated thereby, including the Merger. Therefore, after the consummation of
the Offer and the Stock Purchase, the only remaining required corporate action
of the Company, other than the filing of a Certificate of Merger with the
Secretary of State of the State of Delaware, will be the approval of the Merger
Agreement and the Merger by the affirmative vote of the holders of a majority of
the Shares. As a result of the Stock Purchase, Merger Subsidiary will acquire in
the aggregate at least a majority of the Shares. Each outstanding Share will be
entitled to one vote in any such vote of the stockholders of the Company.
Accordingly, upon consummation of the Offer and the Stock Purchase, the
affirmative vote of no other stockholder of the Company will be required to
approve the Merger Agreement and the Merger.
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<PAGE> 18
Appraisal Rights. Holders of the Shares do not have appraisal rights as a
result of the Offer. However, if the Merger is consummated, holders of the
Shares at the effective time of the Merger will have certain rights pursuant to
the provisions of Section 262 of the DGCL in lieu of receiving the consideration
proposed under the Merger Agreement. Dissenting stockholders of the Company who
comply with the applicable statutory procedures will be entitled to receive a
judicial determination of the fair value of their Shares (exclusive of any
element of value arising from the accomplishment or expectation of the Merger)
and to receive payment of such fair value in cash, together with a fair rate of
interest thereon, if any. Any such judicial determination of the fair value of
the Shares could be based upon factors other than, or in addition to, the price
per share of common stock of the Company, as the case may be, to be paid in the
Merger or the market value of the Shares. The value so determined could be more
or less than the price per Share to be paid in the Merger and payment of the
value would take place subsequent to payment pursuant to the Offer or the
Merger. The value is determined as of the day immediately preceding the Company
Stockholders Meeting at which the Merger is approved.
THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING STOCKHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY
STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE APPRAISAL RIGHTS. THE
PRESERVATION AND EXERCISE OF APPRAISAL RIGHTS REQUIRE STRICT ADHERENCE TO
SECTION 262 OF THE DGCL.
THE MERGER AGREEMENT AND THE STOCKHOLDERS AGREEMENT
The following are summaries of certain provisions of the Merger Agreement
and the Stockholders Agreement. These summaries are not a complete description
of the terms and conditions of the Merger Agreement and the Stockholders
Agreement and are qualified in their entirety by reference to the complete text
of the Merger Agreement and the Stockholders Agreement, which are filed with the
Commission as Exhibits (c)(1) and (c)(2), respectively, to the Schedule 13E-3
and are incorporated herein by reference.
The Merger Agreement
The Offer. The Merger Agreement provides for the commencement of the Offer
as promptly as practicable, but in no event later than five business days after
the initial public announcement of the terms of the Merger Agreement. The
obligation of the Company to commence the Offer, to consummate the Offer and to
accept for payment and to pay for any Shares validly tendered and not withdrawn
is subject only to the Minimum Condition, and the satisfaction or waiver of
certain other conditions set forth in "THE TENDER OFFER -- Section 12. Certain
Conditions to the Offer."
The Offer will remain open (unless the Company, at the written request of
Buyer, terminates the Offer upon the occurrence of an event listed in "THE
TENDER OFFER -- Section 12. Certain Conditions to the Offer") for a period of
twenty Business Days from the commencement of the Offer in accordance with
applicable laws (the "Expiration Date"). The Company, at the request of Buyer,
shall extend the Offer at any time up to June 30, 1999 (the "Outside Termination
Date") 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 of the
Offer, the condition to the Offer requiring the expiration or termination of any
applicable waiting periods under the HSR Act is not satisfied. 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.
The Company is not required to accept the Shares for payment and pay the
Offer Price for the Shares tendered unless it has received the proceeds from the
sale of the Buyer Shares and the Debt Financing or other funds arranged for by
Buyer in an amount that equals to or is greater than the Offer Price multiplied
by the number of Shares tendered.
The Stock Purchase. At a closing to be held the day after the Offer
expires, the Company agrees to sell to Buyer 1,681,414 newly-issued Shares (the
"Buyer Shares") for a purchase price equal to the number of Buyer Shares
multiplied by the Offer Price or such increased price per share payable in the
Offer in accordance with the Merger Agreement (the "Purchase Price").
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As a condition to the Company's obligation to consummate the Stock
Purchase, Buyer will arrange for the Company to receive financing which,
together with the Purchase Price, equals or is greater than the Offer Price
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 Delaware law,
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 "Effective
Time"), 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, by virtue of the
Merger and without any action on the part of any stockholder:
(a) each Share issued and outstanding immediately prior to the
Effective Time will, except Shares to which properly exercised dissenters'
rights are available under Delaware law and exercised and except as
otherwise provided in the following paragraphs (b) and (d), be canceled and
converted into the right to receive the Merger Consideration upon surrender
and exchange of the certificates representing such Shares;
(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 will be canceled, and no payment
will be made with respect thereto;
(c) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time will be converted and exchanged for
one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation; and
(d) the Buyer Shares and the shares retained by the Continuing
Stockholders will not be canceled as provided above, but will remain
outstanding.
Directors. The Merger Agreement provides that promptly upon the
consummation of the Stock Purchase and the acceptance for payment by the Company
of any Shares, Buyer will be entitled to designate the number of directors,
rounded up to the next whole number, on the Company's Board of Directors that
equals the product of (i) the total number of directors on the Company's Board
of Directors (giving effect to the election of any additional directors to
satisfy the requirement) 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 agrees to 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 the Merger Agreement), (y) each Board of each subsidiary of the Company
and (z) each committee of each such Board. Until the Effective Time, the Company
agrees to retain as members of its Board of Directors at least two directors who
are directors of the Company on the date of the Merger Agreement.
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, the Certificate of Incorporation and By-laws of the Surviving
Corporation.
Treatment of Stock Option Plans. The Merger Agreement provides for the
following:
(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 are to be
canceled, and each holder of any such Option, whether or not then vested or
exercisable, will 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 over the applicable exercise price of such Option,
by (ii) the number of Shares subject to such Option.
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(b) Except as otherwise agreed to in writing by the parties to the
Merger Agreement, (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
the capital stock of the Company or any Subsidiary are to be canceled as of
the Effective Time, and (ii) the Company agrees to 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 to acquire equity securities of the Company, the Surviving
Corporation or any subsidiary of either one of them.
Agreements of the Company and Buyer. Pursuant to the Merger Agreement, the
Company agrees 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. In connection with such meeting, the Company
agrees to (i) promptly, after the consummation of the Stock Purchase and the
Offer, prepare and file with the Commission, use its best efforts to have
cleared by the Commission and thereafter mail to its stockholders as promptly as
practicable the proxy or information statement and all other proxy materials for
such meeting, (ii) use its best efforts to obtain the necessary approvals by its
stockholders of the Merger Agreement and the Merger and (iii) otherwise comply
with all legal requirements applicable to such meeting.
Except as provided for in the Merger Agreement, from the date of the Merger
until the Effective Time, the Company and its subsidiaries agree 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 provides further that from the date of the
Merger Agreement until the Effective Time:
- the Company will not adopt or propose any change in its Certificate of
Incorporation or By-laws;
- except for the Merger, the Company will not, and will 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 will not, and will 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 will not, and will 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, or (ii) omit, or agree or commit to omit, to take any
action necessary to prevent any such representation or warranty from
being inaccurate in any material respect at any such time;
- the Company will not, and will not permit any of its subsidiaries to,
agree or commit to do any of the foregoing; and
- the Company will not, and will 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;
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- 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 herein);
- (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
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 will not, nor will it permit any of its subsidiaries
to, nor will it authorize (and will 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 (i)
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,
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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 subsidiaries other than the transactions contemplated by
the Merger Agreement (each, a "Takeover Proposal"), or (ii) participate in any
discussions or negotiations regarding any Takeover Proposal; provided, however,
that 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, (A) furnish information with respect to the Company and
its subsidiaries to any person making a Superior Proposal pursuant to a
customary confidentiality agreement, and (B) 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 through the sixth anniversary of the date on which the Effective Time
occurs, Buyer will 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 (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, to the fullest
extent permitted under the Certificate of Incorporation or By-Laws of the
Company or indemnification agreements in effect on the date of the Merger
Agreement, including provisions relating to advancement of expenses incurred in
the defense of any claim, action, suit, proceeding or investigation. If any
claim, action, suit, proceeding or investigation is brought against an
Indemnified Party (whether arising before or after the Effective Time), 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, Buyer agrees to cause the Surviving Corporation to pre-pay,
at
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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 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 noncancelable. 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 in the event 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, the indemnity
provisions will continue in effect until the final disposition of such claim,
action, suit, proceeding or investigation. The Surviving Corporation and Buyer
agree that if either of them (i) consolidates with or merges into any other
person or entity and is not the continuing or the Surviving Corporation or
entity of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person or entity, proper
provision will be made so that their successors and assigns succeed to the
indemnity obligations prior to the consummation of such transaction.
Best Efforts. Pursuant to the terms of the Merger Agreement and subject to
the conditions thereof, the Company, Buyer and Merger Subsidiary agree to, and
the Company agrees 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.
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Conditions to Effect the Stock Purchase.
The Merger Agreement provides that the obligations of the Company and Buyer
to effect the Stock Purchase are subject to the satisfaction or waiver on or
prior to the closing of the Stock Purchase of the following conditions: the
conditions to the offer described in "THE TENDER OFFER -- Section 12. Certain
Conditions to the Offer" will have been satisfied and the Company will
simultaneously with the closing of the Stock Purchase, purchase all Shares
validly tendered and not withdrawn pursuant to the Offer, and no provision of
any applicable law or regulation and no judgment, injunction, order or decree
shall prohibit the consummation of the Merger (each party agrees to use its best
efforts to have any such order reversed or injunction lifted).
The obligations of Buyer to effect the Stock Purchase are also subject to
the satisfaction (or waiver) at or prior to the closing of the Stock Purchase of
each of the following additional conditions: the representations and warranties
of the Company set forth in the Merger Agreement being true and correct as of
the Expiration Date as though made on or as of such date, except (A) those
representations and warranties that address matters only as of a particular date
which are true and correct as of such date (unless they shall not be true and
correct as of the specified date) or (B) where the failure of the
representations and warranties (other than those representations and warranties
set forth in the first sentence of the representation and warranty with respect
to corporate existence and power, and in the representations and warranties with
respect to corporate authorization, capitalization and disclosure documents,
being true and correct (without giving effect to the materiality or material
adverse effect limitations contained therein), individually or in the aggregate,
do not have, and could not reasonably be expected to have, a Material Adverse
Effect; the Company performing or complying in all material respects with all
obligations and agreements, and complying in all materials respects with
covenants, contained in the Merger Agreement to be performed or complied with by
the Company prior to or on the closing of the Stock Purchase; the Company
delivering a certificate of the Company, dated as of the closing of the Stock
Purchase, signed by an executive officer of the Company to evidence satisfaction
of the conditions set forth above; and all Directors of the Company tendering
their resignations effective as of the closing of the Stock Purchase and being
replaced by nominees acceptable to Buyer.
The obligations of the Company to effect the Stock Purchase are also
subject to the satisfaction (or waiver) at or prior to the closing of the Stock
Purchase of each of the following additional conditions: the representations and
warranties of Buyer set forth in the Merger Agreement being true and correct in
all material respects on the closing of the Stock Purchase, with the same force
and effect as though such representations and warranties had been made on and as
of the closing of the Stock Purchase, 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; Buyer performing in
all material respects all obligations and agreements, and complying in all
material respects with covenants, contained in the Merger Agreement to be
performed or complied with by Buyer prior to or on the closing of the Stock
Purchase; and the Company receiving certificates of Buyer, dated as of the
closing of the Stock Purchase, signed by an executive officer of Buyer to
evidence satisfaction of the conditions set forth above.
Conditions to Effect the Merger
The Merger Agreement provides that the obligations of the Company, Buyer
and Merger Subsidiary to effect the Merger are subject to the satisfaction or
waiver on or prior to the closing of the Merger of the following conditions: if
required by the DGCL and the Certificate of Incorporation, the Merger Agreement
and the Transactions being duly adopted by the stockholders of the Company; any
applicable waiting period under the HSR Act relating to the Merger expiring; no
provision of any applicable law or regulation and no judgment, injunction, order
or decree prohibiting the consummation of the Merger (each party agreeing to use
its best efforts to have any such order reversed or injunction lifted); the
Company accepting for payment Shares tendered pursuant to the Offer; Buyer
having received or being reasonably satisfied that it will receive all material
consents and approvals in connection with the consummation of the Merger or to
enable the Surviving Corporation to continue to carry on the business of the
Company and its subsidiaries as presently conducted in all material respects;
and Buyer having purchased the Buyer Shares.
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Termination. The Merger Agreement may be terminated and the Transactions
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of the Merger Agreement by the stockholders of the Company):
(a) 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;
(b) by either the Company or Buyer, if the Offer Completion Date has
not occurred by the Outside Termination Date; 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;
(c) 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;
(d) 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 "TENDER OFFER -- Section 12. Certain
Conditions to the Offer." to be satisfied or waived prior to the Expiration
Date or any extension thereof;
(e) 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
(f) by Buyer at any time prior to the Offer Completion Date, if the
Company materially breaches or fails in any material respect to perform or
comply with any of its covenants and agreements contained in the Merger
Agreement or breaches its representations and warranties in any material
respect, which breach or failure to perform cannot be or has not been cured
within ten days of the receipt of written notice of such breach by the
Company from Buyer;
(g) 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 (A) 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, (B) approve or recommend,
or propose publicly to approve or recommend, any Takeover Proposal or (C)
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 Date of the Offer; or
(h) by Buyer or Merger Subsidiary at any time prior to the Offer
Completion Date if, (A) 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 (B) 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
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<PAGE> 26
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:
(a) The Merger Agreement is terminated pursuant to the provisions of
paragraphs (g) and (h) in the section entitled "Termination" above.
(b) The Merger Agreement is terminated by either Buyer or the Company
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, and each of the following
items occurs:
(i) at the time of such termination the Minimum Condition has not
been satisfied,
(ii) at the time of such termination the Company shall not have the
right to terminate the Merger Agreement pursuant to paragraph (e) in the
section entitled "Termination" above,
(iii) 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, and
(iv) 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.
(c) The Merger Agreement is terminated by either Buyer or the Company
pursuant to the provisions of paragraph (d) in the section entitled
"Termination" above, and each of the following items occurs:
(i) at the time of such termination the Minimum Condition has not
been satisfied,
(ii) at the time of such termination the Company shall not have the
right to terminate the Merger Agreement pursuant to paragraph (e) in the
section entitled "Termination" above,
(iii) prior to such termination a Takeover Proposal Event has
occurred, and
(iv) 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.
(d) The Merger Agreement is terminated by Buyer at any time prior to
the Offer Completion Date, if the Company materially breaches or fails in
any material respect to perform or comply with any of its covenants and
agreements contained in the Merger Agreement or breaches its
representations and warranties in any material respect, which breach or
failure to perform cannot be or has not been cured within ten days of the
receipt of written notice of such breach by the Company from Buyer, and
each of the following items occurs:
(i) prior to such termination a Takeover Proposal Event has
occurred, and
(ii) 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,
24
<PAGE> 27
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 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, providing, subject to certain conditions, for (i)
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, (ii)
the agreement by the Continuing Stockholders not to tender certain of the Shares
owned or controlled by them and (iii) the grant of an irrevocable proxy to Buyer
by the Continuing Stockholders to vote all Shares owned or controlled by them at
the time of the Stockholders' Meeting in favor of the Merger. See "SPECIAL
FACTORS -- The Merger Agreement and the Stockholders Agreement".
RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 1998 and 1997, the Company paid
management fees of $283,750 and $235,000, respectively, to Lineberger & Co.,
LLC. During the nine-month period ended March 31, 1999 the Company paid
management fees of $250,000 to Lineberger & Co., LLC. Effective October 1, 1997
the Company and Lineberger & Co., LLC entered into a one-year management
agreement with an additional three year renewal option upon mutual consent,
which provides for annual management fees of $300,000. On October 1, 1998 the
Company and Lineberger & Co., LLC mutually agreed to increase the annual
management fees payable by the Company to $350,000. The renewal agreement allows
for the management fee to be increased upon mutual agreement of the Company and
Lineberger & Co., LLC. Under the agreement, Lineberger & Co., LLC is to perform
various management and consulting services for the Company, including without
limitation, preparation of an annual business plan and projections, recruitment
of senior management, establishment and maintenance of various auditing,
inventory and production controls, assisting with the Company's financial
relationships and acquisitions and rendering general business and administrative
advice. See "SPECIAL FACTORS -- Interests of Certain Persons in the
Transactions".
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of March 31, 1999, the ownership of the
Company's common stock by (i) each person who is known by the Company to be the
beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act)
of more than five percent (5%) of the Company's Common Stock, (ii) each of the
Company's named executive officers and directors, and (iii) each of the
Continuing Stockholders who are not covered by paragraphs (i) and (ii) above.
Except as otherwise indicated, the shareholders listed in the table have
25
<PAGE> 28
sole voting and investment powers with respect to the shares indicated and their
addresses are the address of the Company.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
OWNED
------------
<S> <C>
James E. Lineberger......................................... 3,169,287(1)
James E. Lineberger, Jr. Trust.............................. 1,056,429
1120 Boston Post Road
Darien, Connecticut 06820
Geoffry S. Lineberger Trust................................. 1,056,429
1120 Boston Post Road
Darien, Connecticut 06820
Christopher Lineberger Trust................................ 1,056,429
1120 Boston Post Road
Darien, Connecticut 06820
The Brady Family Limited Partnership........................ 357,143
Daniel. W. Brady............................................ 358,143(2)
Samuel M. Berry............................................. 197,370(3)
James D. Gerson............................................. 26,000(4)
Ronald G. Assaf............................................. 6,000
Arthur D. Johnson........................................... 26,200(5)
Donald M. Maher............................................. 26,200(5)
Roy W. Wiegmann............................................. 14,600(5)
John F. Creamer............................................. 2,000
Ronald E. Reinke............................................ 17,000(5)
Willie Vercher.............................................. 1,750(5)
Dr. Krishnamurthy Sundararajan.............................. 1,200(5)
Chris A. Curto.............................................. 5,500(6)
</TABLE>
- ---------------
(1) Includes 1,056,429 shares of common stock of the Company owned by each of
the James E. Lineberger, Jr. Trust, the Geoffry S. Lineberger Trust and the
Christopher Lineberger Trust. Harrietjo Lineberger, Mr. Lineberger's wife,
and James E. Lineberger, Jr., Mr. Lineberger's son, are trustees of the
James E. Lineberger, Jr. Trust and the Christopher Lineberger Trust and
James E. Lineberger, Jr. and Christopher Lineberger, Mr. Lineberger's sons,
are trustees of the Geoffry S. Lineberger Trust and, therefore shares owned
by the trusts may be deemed to be beneficially owned by Mr. Lineberger. Mr.
Lineberger disclaims beneficial ownership of these shares.
(2) Includes 357,143 shares of common stock of the Company held by The Brady
Family Limited Partnership, of which Mr. Brady is the sole general partner,
and 1,000 shares of common stock of the Company owned by the Jacqueline L.
Brady 1993 Living Trust U/A DTD 9/23/93.
(3) Includes 18,800 shares of common stock of the Company issuable upon the
exercise of options granted pursuant to the 1993 Stock Option Plan.
(4) Includes 5,000 shares of common stock of the Company owned by Mr. Gerson's
wife, as custodian for their children, which may therefore be deemed to be
beneficially owned by Mr. Gerson. Mr. Gerson disclaims beneficial ownership
of these shares.
(5) Issuable upon the exercise of options granted pursuant to the 1993 Stock
Option Plan.
(6) Includes 5,000 shares of Common Stock issuable upon the exercise of options
granted pursuant to the 1993 Stock Option Plan.
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<PAGE> 29
In addition, Buyer and Merger Subsidiary may be deemed to be beneficial
owners of all of outstanding Shares owned by the Continuing Stockholders
pursuant to the Stockholders Agreement. Buyer and Merger Subsidiary disclaim
such beneficial ownership.
TRANSACTIONS AND ARRANGEMENTS CONCERNING THE SHARES
To the Company's knowledge, the only transactions in the Shares effected
during the past 60 days by the Company or its executive officers, directors,
affiliates or subsidiaries is as follows: on February 22, 1999, Ronald Assaf, a
director of the Company, transferred 45,000 Shares to a trust for the benefit of
a family member.
To the Company's knowledge, all of the Company's executive officers,
directors, affiliates and subsidiaries (other than the Continuing Stockholders
with respect to the retained Shares) currently intend to tender all Shares which
are held of record or beneficially owned by such persons pursuant to the Offer,
other than shares, if any, held by such persons which, if tendered would cause
such persons to incur liability under the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended. Pursuant to the terms of the
Stockholders Agreement, the Continuing Stockholders have agreed to tender into
the Offer Shares beneficially owned by them approximating 73% of the Shares
outstanding and have agreed not to tender Shares beneficially owned by them
approximating 2.9% of the Shares outstanding.
Except as set forth in this Offer to Purchase, neither the Company nor, to
the Company's knowledge, any of its affiliates, directors or executive officers
or any person controlling the Company, is a party to any contract, arrangement,
understanding or relationship with any other person relating, directly or
indirectly, to, or in connection with, the Offer with respect to any securities
of the Company (including, but not limited to, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any such
securities, joint ventures, loan or option arrangements, puts or calls,
guarantees of loans, guarantees against loss or the giving or withholding of
proxies, consents or authorizations). Except as described in this Offer to
Purchase, since the commencement of the Company's second full fiscal year
preceding the date of this Offer to Purchase, no contracts or negotiations
concerning a merger, consolidation, or acquisition, a tender offer for or other
acquisition of any securities of the Company, an election of directors of the
Company, or a sale or other transfer of a material amount of assets of the
Company, has been entered into or has occurred between any affiliates of the
Company or between the Company or any of its affiliates and any unaffiliated
person.
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<PAGE> 30
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will accept for payment, and will pay for all
outstanding Shares validly tendered prior to the Expiration Date (as hereinafter
defined) and not withdrawn as specified in "THE TENDER OFFER -- Section 4.
Withdrawal Rights". The term "Expiration Date" is 12:00 midnight, New York City
time, on Friday, May 28, 1999, unless and until the Company, at the direction of
Buyer (but subject to the terms and conditions of the Merger Agreement), has
extended the period during which the Offer is open, in which event Expiration
Date will be the latest time and date at which the Offer, as so extended by the
Company, expires.
The Company shall, at the direction of Buyer, extend the Offer for a period
not to exceed 10 business days in the aggregate if on the initial Expiration
Date, more than 85% but less than 90% of the outstanding Shares have been
tendered. During any such extension, all Shares previously tendered and not
withdrawn will remain subject to the Offer, subject to the rights of a tendering
stockholder to withdraw such stockholder's Shares. See "THE TENDER
OFFER -- Section 4. Withdrawal Rights". At Buyer's request, the Company also
shall increase the Offer Price and make such other changes to the Offer as Buyer
may request, provided, however, that the Company is not required to make any
changes that decrease the Offer Price, that change the form of consideration to
be paid in the Offer, or that reduce the maximum number of Shares to be
purchased in the Offer, that impose conditions to the Offer in addition to those
set forth in TENDER OFFER-Annex I hereto or that broaden the scope of such
conditions. The Company agreed not to make any 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 is conditioned upon, among other things, the satisfaction of the
Minimum Condition and the Company obtaining the Debt Financing arranged for its
benefit by the Buyer. Pursuant to the Stockholders Agreement, the Continuing
Stockholders have agreed to tender and not withdraw approximately 73% of the
outstanding Shares on a fully diluted basis. See "THE TENDER OFFER -- Section
12. Certain Conditions to the Offer".
Subject to the applicable regulations of the Commission, the Company also
expressly reserves the right, at Buyer's request (but subject to the terms and
conditions of the Merger Agreement), at any time and from time to time, (i) to
delay acceptance for payment of, or, regardless of whether such Shares were
accepted for payment, payment for, any Shares, pending receipt of any regulatory
approval specified in "THE TENDER OFFER -- Section 13. Certain Legal Matters and
Regulatory Approval", (ii) to terminate the Offer and not accept for payment any
Shares upon the occurrence of any of the conditions specified in "THE TENDER
OFFER -- Section 12. Certain Conditions to the Offer" and (iii) to waive any
condition, other than the Minimum Condition, or otherwise amend the Offer in any
respect, by giving oral or written notice of such delay, termination, waiver or
amendment to the Depositary and by making a public announcement thereof. The
Company acknowledges that (i) Rule 14e-1(c) under the Exchange Act requires the
Company to pay the consideration offered or return the Shares tendered promptly
after the termination or withdrawal of the Offer and (ii) the Company may not
delay acceptance for payment of, or payment for (except as provided in clause
(i) of the first sentence of this paragraph), any Shares upon the occurrence of
any of the conditions specified in "THE TENDER OFFER -- Section 12. Certain
Conditions to the Offer" without extending the period of time during which the
Offer is open.
Any such extension, delay, termination, waiver or amendment will be
followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be made no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Subject to applicable law (including Rules 13e-4(e) and 14e-1
under the Exchange Act, which require that material changes be promptly
disseminated to stockholders in a manner reasonably calculated to inform them of
such changes) and without limiting the manner in which the Company may choose to
make any public announcement, the Company has no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a press release to the Dow Jones News Service.
28
<PAGE> 31
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-4(e) and 13e-3(e) under the Exchange Act.
Subject to the terms of the Merger Agreement, if, prior to the Expiration
Date, the Company should decide to decrease the number of Shares being sought or
to increase or decrease the consideration being offered in the Offer, such
decrease in the number of Shares being sought or such increase or decrease in
the consideration being offered will be applicable to all stockholders whose
Shares are accepted for payment pursuant to the Offer and, if at the time notice
of any such decrease in the number of Shares being sought or such increase or
decrease in the consideration being offered is first published, sent or given to
holders of such Shares, the Offer is scheduled to expire at any time earlier
than the period ending on the tenth business day from and including the date
that such notice is first so published, sent or given, the Offer will be
extended at least until the expiration of such ten business day period. For
purposes of the Offer, a "business day" means any day other than a Saturday,
Sunday or a federal holiday and consists of the time period from 12:01 a.m.
through 12:00 midnight, New York City Time.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares whose names appear on the Company's stockholder list
and will be furnished, for subsequent transmittal to beneficial owners of
Shares, to brokers, dealers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the stockholder
list or, if applicable, who are listed as participants in a clearing agency's
security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Company will accept for payment, and will pay for, all
outstanding Shares validly tendered prior to the Expiration Date and not
properly withdrawn, promptly after the latest to occur of (i) the Expiration
Date and (ii) the satisfaction or waiver of the conditions to the Offer
specified in "THE TENDER OFFER -- Section 12. Certain Conditions to the Offer".
Subject to applicable rules of the Commission, the Company expressly reserves
the right to delay acceptance for payment of, or payment for, Shares pending
receipt of any regulatory approvals specified in "THE TENDER OFFER -- Section
13. Certain Legal Matters and Regulatory Approvals" or in order to comply in
whole or in part with any other applicable law.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (A) the
certificates evidencing such Shares (the "Share Certificates") or timely
confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such
Shares into the Depositary's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures specified in "THE
TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering
Shares", (B) the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees or, in the
case of a book-entry transfer, an Agent's Message (as defined below) in lieu of
the Letter of Transmittal and (C) any other documents required under the Letter
of Transmittal.
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to the
Depositary of the Company's acceptance for payment of such Shares pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Shares accepted for payment pursuant to the Offer will be made by deposit of
the Offer Price with the Depositary, which will act as agent for tendering
stockholders for the purpose of receiving payments from the Company and
transmitting such payments to tendering stockholders whose Shares have been
accepted for payment. Under no circumstances will the Company pay interest on
the Offer Price, regardless of any delay in making such payment.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense to the tendering
stockholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at the Book-Entry Transfer Facility pursuant to the
procedure specified in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and
29
<PAGE> 32
Tendering Shares", such Shares will be credited to an account maintained at the
Book-Entry Transfer Facility), as promptly as practicable following the
expiration or termination of the Offer.
If, prior to the Expiration Date, the Company increases the consideration
offered to any holders of Shares pursuant to the Offer, such increased
consideration will be paid to all holders of Shares that are purchased pursuant
to the Offer, whether or not such Shares were tendered prior to such increase in
consideration.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES
In order for a holder of Shares to validly tender Shares pursuant to the
Offer, the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message in lieu of the Letter of
Transmittal) and any other documents required by the Letter of Transmittal, must
be received by the Depositary at one of its addresses set forth on the back
cover of this Offer to Purchase and either (i) the Share Certificates evidencing
tendered Shares must be received by the Depositary at such address or such
Shares must be tendered pursuant to the procedure for book-entry transfer
described below and a Book-Entry Confirmation must be received by the Depositary
(including an Agent's Message if the tendering stockholder has not delivered a
Letter of Transmittal), in each case prior to the Expiration Date, or (ii) the
tendering stockholder must comply with the guaranteed delivery procedures
described below. The term "Agent's Message" means a message, transmitted by a
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Shares that are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Book-Entry Transfer. The Depositary will establish an account with respect
to the Shares at the Book-Entry Transfer Facility for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any financial
institution that is a participant in the system of the Book-Entry Transfer
Facility may make a book-entry delivery of Shares by causing the Book-Entry
Transfer Facility to transfer such Shares into the Depositary's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for such transfer. However, although delivery of Shares
may be effected through book-entry transfer at the Book-Entry Transfer Facility,
either the Letter of Transmittal, properly completed and duly executed, together
with any required signature guarantees, or an Agent's Message in lieu of the
Letter of Transmittal, and any other required documents, must, in any case, be
received by the Depositary at one of its addresses set forth on the back cover
of this Offer to Purchase prior to the Expiration Date, or the tendering
stockholder must comply with the guaranteed delivery procedure described below.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE
DELIVERY TO THE DEPOSITARY.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm that is a member of the Medallion Signature Guarantee
Program, or by any other "eligible guarantor institution", as such term is
defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing, an
"Eligible Institution"), except in cases where Shares are tendered (i) by a
registered holder of Shares who has not completed either the box entitled
"Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If a Share Certificate is registered in the name of a
person other than the signer of the Letter of Transmittal, or if payment is to
be made, or a Share Certificate not accepted for payment or not tendered is to
be returned, to a person other than the registered holder(s), then the Share
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appear(s)
on the Share Certificate, with the signature(s) on such Share
30
<PAGE> 33
Certificate or stock powers guaranteed by an Eligible Institution. See
Instructions 1 and 5 of the Letter of Transmittal.
Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such stockholder's Shares are
not immediately available or such stockholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such stockholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered, provided that all the following conditions are satisfied:
- such tender is made by or through an Eligible Institution;
- a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, is received
prior to the Expiration Date by the Depositary as provided below; and
- the Share Certificates (or a Book-Entry Confirmation) evidencing all
tendered Shares, in proper form for transfer, in each case together with
the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees, and any other
documents required by the Letter of Transmittal are received by the
Depositary within three Nasdaq trading days after the date of execution
of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or mail to the
Depositary and must include a guarantee by an Eligible Institution in the form
set forth in the form of Notice of Guaranteed Delivery made available by the
Company.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of the
Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal, properly completed and
duly executed, with any required signature guarantees, and any other documents
required by the Letter of Transmittal.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company in its sole discretion, which
determination will be final and binding on all parties. The Company reserves the
absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. The Company also reserves the absolute right to waive any
condition of the Offer or any defect or irregularity in the tender of any Shares
of any particular stockholder, whether or not similar defects or irregularities
are waived in the case of other stockholders. No tender of Shares will be deemed
to have been validly made until all defects and irregularities have been cured
or waived. None of the Company, the Dealer Manager, the Depositary, the
Information Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification. The Company's interpretation of the
terms and conditions of the Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding.
Cancellation. Promptly following the purchase of the Shares pursuant to the
Offer, the Company intends to cancel any such Shares purchased in the Offer.
The acceptance for payment by the Company of Shares pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering stockholder and the Company upon the terms and subject to the
conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
CERTAIN STOCKHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH SUCH STOCKHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH STOCKHOLDER'S
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH STOCKHOLDER IS NOT
SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE
FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH
RESPECT TO A STOCKHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY
PAYMENTS MADE TO SUCH STOCKHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF
TRANSMITTAL.
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<PAGE> 34
4. WITHDRAWAL RIGHTS
Tenders of Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for payment by the Company pursuant to the Offer,
may also be withdrawn at any time after June 28, 1999. If the Company extends
the Offer, is delayed in its acceptance for payment of Shares or is unable to
accept Shares for payment pursuant to the Offer for any reason, then, without
prejudice to the Company's rights under the Offer, the Depositary may,
nevertheless, on behalf of the Company, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering stockholders are
entitled to withdrawal rights as described in this Section 4.
For a withdrawal to be effective, a written notice of withdrawal must be
timely received by the Depositary at one of its addresses set forth on the back
cover page of this Offer to Purchase. Any such notice of withdrawal must specify
the name of the person who tendered the Shares to be withdrawn, the number of
Shares to be withdrawn and the name of the registered holder of such Shares, if
different from that of the person who tendered such Shares. If Share
Certificates evidencing Shares to be withdrawn have been delivered or otherwise
identified to the Depositary, then, prior to the physical release of such Share
Certificates, the serial numbers shown on the Share Certificates must be
submitted to the Depositary and the signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution, unless such Shares have been
tendered for the account of an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer as set forth in "THE
TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering
Shares", any notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. None of the Company,
the Dealer Manager, the Depositary, the Information Agent or any other person
will be under any duty to give notification of any defects or irregularities in
any notice of withdrawal or incur any liability for failure to give any such
notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and Tendering Shares".
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for Shares pursuant to the Offer or in the Merger will
be a taxable transaction for U.S. federal income tax purposes under the Code and
may also be a taxable transaction under applicable state, local or foreign tax
laws. In general, a stockholder will recognize gain or loss for U.S. federal
income tax purposes equal to the difference between the amount of cash received
in exchange for the Shares sold and such stockholder's adjusted tax basis in
such Shares. Assuming the Shares constitute capital assets in the hands of the
stockholder, such gain or loss will be capital gain or loss. In the case of an
individual stockholder, such capital gain generally will be subject to a maximum
federal income tax rate of 20% if the individual has held the Shares for more
than one year. Gain or loss will be calculated separately for each block of
Shares tendered pursuant to the Offer or 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 in the Offer or 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.
32
<PAGE> 35
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.
6. PRICE RANGE OF SHARES; DIVIDENDS
The Shares are traded on the Nasdaq National Market System 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 7/8 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>
Dividends of $0.025 per share on 4,900,000 shares were paid on each of
November 17, 1997, February 23, 1998, and May 18, 1998, August 19, 1998,
November 19, 1998, February 19, 1999 and on April 26, 1999, a dividend of $0.025
per share on 4,900,000 shares was awarded and will be paid on or about May 25,
1999 to holders of record on May 11, 1999.
7. CERTAIN INFORMATION CONCERNING 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
33
<PAGE> 36
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.
Available Information
The Company is subject to the reporting requirements of the Exchange Act
and, in accordance therewith, is required to file reports and other information
with the Commission relating to its business, financial condition and other
matters. Information as of particular dates concerning the Company's directors
and officers, their remuneration, options granted to them, the principal holders
of the Company's securities and any material interests of such persons in
transactions with the Company is required to be disclosed in proxy statements
distributed to the Company's stockholders and filed with the Commission. 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.
8. 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.
9. SUMMARY HISTORICAL FINANCIAL INFORMATION
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 the audited
34
<PAGE> 37
financial statements (including the related notes thereto) included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
<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.
10. FINANCING OF THE TRANSACTIONS
The total amount of funds required to consummate the Transactions and to
pay all related fees and expenses will approximate $92.5 million, which will be
provided through a combination of (i) $23,960,149 in proceeds from the Stock
Purchase, (ii) borrowings under a $65 million senior secured credit facility to
be provided to the Company (the "Senior Bank Facilities") and (iii) proceeds
from the sale of $15.0 million of 12.5% senior unsecured subordinated notes (the
"Subordinated Notes") (collectively, the "Financing"). The description set forth
below does not purport to be complete and is qualified in its entirety by
reference to certain agreements setting forth the principal terms of the
Company's debt, which are available upon request from the Company.
Equity Financing. Buyer will purchase the Shares in the Stock Purchase for
$23,960,149. The funds to be used by Buyer in the Stock Purchase will be
provided by Carreras, Kestner & Co., L.L.C. and members of the Buyer: Carreras,
Kestner Investors, L.L.C., Key Equity Capital Corporation, Key Equity Partners
99, Citicorp
35
<PAGE> 38
Venture Capital Corporation and Kelso & Company pursuant to the operating
agreement of the Buyer. It is currently contemplated that the respective
contributions to the equity financing will be as follows:
<TABLE>
<CAPTION>
MEMBER CONTRIBUTION
------ ------------
<S> <C>
Carreras, Kestner & Co., L.L.C.............................. $ 1,425
Carreras, Kestner Investors, L.L.C.......................... $3,449,581
Key Equity Capital Corporation/Key Equity Partners 99....... $6,836,381
Citicorp Venture Capital Corporation........................ $6,836,381
Kelso & Company............................................. $6,836,381
</TABLE>
Senior Credit Facilities.
First Union National Bank ("First Union") has committed to provide the
Company with the Senior Bank Facilities in an aggregate principal amount not to
exceed $65 million. The Senior Bank Facilities will consist of (a) a Tranche A
Senior Secured Term Loan Facility providing for term loans to the Company in a
principal amount not to exceed $17.5 million (the "Tranche A Term Facility");
(b) a Tranche B Senior Secured Term Loan Facility providing for term loans to
the Company in a principal amount not to exceed $27.5 million (the "Tranche B
Term Facility" and collectively with the Tranche A Term Facility, the "Term
Facilities"); and (c) a Senior Secured Revolving Credit Facility providing for
revolving loans to the Company and the issuance of U.S. dollar-denominated
letters of credit for the account of the Company in an aggregate principal and
stated amount at any time not to exceed $20 million (of which (i) up to $3
million may be represented by letters of credit and (ii) not more than $5
million may be represented by swingline loans to be made available by First
Union) (the "Revolving Facility").
Except as set forth below, (i) the Tranche A Term Facility may be drawn in
not more than two draws to fund the Offer and the Merger, to repay existing debt
and to pay related fees, costs and expenses, (ii) the full amount of the Tranche
B Term Facility must be drawn in a single drawing at the Closing to fund the
Tender Offer and the Merger, to repay existing debt and to pay related fees,
costs and expenses. Loans and, subject to certain limitations, letters of credit
under the Revolving Facility will be available at any time after the Closing and
prior to the fifth anniversary thereof.
Loans made under the Tranche A Term Facility will amortize quarterly over
five years with annual increases in the quarterly installment payments. Loans
made under the Tranche B Term Facility will amortize over six and one-half years
in equal nominal quarterly installments during the first five years of such
Facility and substantially greater equal quarterly installments for the final
six installments thereof. Mandatory prepayments of the Term Facilities will be
allocated pro rata between the Tranche A Term Facility and the Tranche B Term
Facility and, within each such Term Facility, among the remaining amortization
payments, and then to the Revolving Facility with a corresponding reduction in
the commitments under the Revolving Facility. Voluntary prepayments of the Term
Facilities will be allocated pro rata between the Tranche A Term Facility and
the Tranche B Term Facility and, within each such Term Facility, among the
remaining amortization payments. Amounts repaid or prepaid under any Term
Facility may not be reborrowed.
The Company will be required to make mandatory prepayments of loans,
subject to certain exceptions (a) in a principal amount equal to 75% of annual
excess cash flow of the Company and its subsidiaries (beginning with the fiscal
year ending June 30, 2000), provided that such excess cash flow percentage will
be reduced to 50% during any period when the leverage ratio consolidated funded
debt to consolidated EBITDA for two consecutive quarters is 3.5 or below, (b) in
a principal amount equal to 100% of the net cash proceeds of certain
dispositions of assets or of the incurrence of certain indebtedness by the
Company and its subsidiaries, and (c) in a principal amount equal to 50% of the
net cash proceeds of certain issuances of equity securities (excluding equity
issued in connection with the acquisition of the Company) by the Company and its
subsidiaries. At the Company's option, loans may be prepaid, and revolving
credit commitments or letters of credit may be permanently reduced, in whole or
in part at any time in minimum amounts to be agreed. Any prepayment of fixed
rate loans other than at the end of an interest period will be subject to
reimbursement of redeployment and other similar costs.
36
<PAGE> 39
The obligations of the Company under the Senior Bank Facilities will be
unconditionally and irrevocably guaranteed by Buyer and each of the direct or
indirect subsidiaries of the Company (collectively, the "Guarantors"), provided
that, if any such guarantee by a foreign subsidiary of the Company would have an
adverse tax impact upon the Company, then no such guarantee shall be required.
In addition, the Senior Bank Facilities will be secured by a first priority
perfected lien on and security interest in (i) 100% of the capital stock of each
Guarantor, whether existing at closing or thereafter organized or acquired (65%
of the capital stock of foreign Guarantors to the extent that a higher
percentage would have an adverse tax impact upon the Company), and (ii) all of
the assets (including, without limitation, accounts receivable, inventory,
equipment, intellectual property and other general intangibles, and real
property) of the Company and the domestic Guarantors other than Buyer.
At the Company's option, the interest rates per annum applicable to the
Senior Bank Facilities will be either (i) adjusted LIBOR plus a margin ranging
from 1.75% to 2.75%, in respect of the Revolving Facility and the Tranche A Term
Facility, and from 3.00% to 3.25%, in respect of the Tranche B Term Facility or
(ii) the Alternate Base Rate plus a margin ranging from .50% to 1.50% , in
respect of the Revolving Facility and the Tranche A Term Facility, and from
1.75% to 2.00%, in respect of the Tranche B Term Facility. The Alternate Base
Rate is the higher of First Union's Prime Rate or the Federal Funds Effective
Rate plus 0.5% per annum.
The Company will pay a per annum fee equal to the applicable LIBOR margin
ranging from 1.75% to 2.75% of the aggregate face amount of outstanding letters
of credit under the Revolving Facility and a per annum fee ranging from 0.375%
to 0.50% on the undrawn portion of the commitments in respect of the Revolving
Facility. In addition, the Company will pay a facing fee with respect to each
letter of credit in an amount equal to 0.25% of the average daily stated amount
thereof, payable quarterly in arrears to First Union for its own account as
issuer of letters of credit.
The Senior Bank Facilities will contain a number of significant covenants
that, among other things, will restrict the ability of the Company to dispose of
assets, incur additional indebtedness, repay other indebtedness or amend other
debt instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, or engage in certain transactions with subsidiaries and affiliates
and otherwise restrict corporate activities. In addition, under the Senior Bank
Facilities the Company will be required to comply with specified financial
ratios and tests, including minimum interest coverage, minimum working capital
coverage and maximum leverage ratios and a minimum consolidated EBITDA test.
Senior Subordinated Notes
First Union has committed to provide the Company with Subordinated Notes to
finance a portion of the Offer and the Merger, including fees, costs and
expenses related thereto, to refinance existing debt and for working capital and
general corporate purposes. The Subordinated Notes will be subordinated to the
Senior Bank Facilities. The Subordinated Notes will mature on the eight-year
anniversary of the date of issuance thereof (the "Maturity"). Interest on the
Subordinated Notes will be payable quarterly in arrears.
The Company will redeem the full principal amount of the Subordinated
Notes, plus any accrued interest, upon the earlier to occur of any of the
following: the Maturity, an initial public offering, a change of control, a sale
of a material portion of the Issuer's assets (subject to certain limitations) or
other similar fundamental corporate change. Mandatory prepayments will be
subject to the redemption price percentage set forth in the optional redemption
section below and to the terms of the subordination provisions.
The Subordinated Notes may be redeemed at the option of the Company, in
whole or in part, upon not less than 20 nor more than 60 days notice, at a
redemption price as set forth on the redemption price schedule set forth
37
<PAGE> 40
below, as such price may be reduced by First Union based upon the paragraph
below, in each case plus accrued interest on the principal redeemed:
<TABLE>
<CAPTION>
YEARS FROM CLOSING REDEMPTION PRICE PERCENTAGE
- ------------------ ---------------------------
<S> <C> <C>
1................................................... 103%
2................................................... 102%
3................................................... 101%
Thereafter.......................................... 100%
</TABLE>
The obligations of the Company under the Subordinated Notes will be
unconditionally and irrevocably guaranteed by the Guarantors, on a basis
subordinate in right and interest to the guaranties of the Senior Bank
Facilities in a manner consistent with the subordination of the Notes, provided
that, if any such guarantee by a foreign subsidiary of the Company would have an
adverse tax impact upon the Company, then no such guarantee shall be required.
The Notes will be issued pursuant to an Investment Agreement entered into
by and between the Company and the purchasers of the Subordinated Notes. The
Investment Agreement will contain a number of significant covenants that, among
other things, will restrict the ability of the Company to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations or engage in
certain transactions with subsidiaries and affiliates and otherwise restrict
corporate activities. In addition, under the Investment Agreement the Company
will be required to comply with specified financial ratios and tests, including
minimum interest coverage, maximum leverage ratios and a minimum consolidated
EBITDA test.
The Subordinated Notes will have detachable warrants to purchase up to 5%
of the fully diluted common equity of the Company. The warrants will contain
customary terms and conditions. The warrant holder is also expected to become a
party to a stockholders agreement among the stockholders of the
post-recapitalized Company.
Sources and Uses of Funds. The following table sets forth the anticipated
sources and uses of funds in connection with the Transactions:
<TABLE>
<S> <C>
SOURCES
Senior Bank Facilities.................................... $53,500,000
Subordinated Notes........................................ 15,000,000
Proceeds from the sale of Buyer Shares.................... 23,960,000
-----------
$92,460,000
===========
USES
Offer Price and Merger Consideration...................... 68,993,000
Retirement of Existing Debt............................... 15,100,000
Fees and Expenses......................................... 8,367,000
-----------
$92,460,000
===========
</TABLE>
11. EFFECT OF THE TRANSACTIONS ON THE MARKET FOR THE SHARES; EXCHANGE ACT
REGISTRATION
Upon consummation of the Transactions, Buyer and the Company intend to
discontinue listing the Shares on Nasdaq and to terminate the registration of
the Shares under the Exchange Act. If the Shares are delisted, the ability to
buy and sell the Shares will be adversely affected. In addition, the termination
of the registration of the Shares under the Exchange Act would substantially
reduce 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
38
<PAGE> 41
the Company and persons holding "restricted securities" of the Company may be
deprived of the ability to dispose of such securities pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended.
12. CERTAIN CONDITIONS TO THE OFFER
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 is not required to accept for payment or, subject to any applicable
rules and regulations of the SEC, including Rule 14e-1(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 closing of the Stock Purchase has not occurred other than
due to any breach of the Merger Agreement by Buyer or Merger
Subsidiary;
(iv) the Company has not received the proceeds of the debt portion of
the Financing or otherwise obtained funds sufficient to finance
the Transactions unless such proceeds were not received due to
(x) the failure of the lenders in the Debt Financing and Buyer or
Merger Subsidiary to agree on definitive documentation for such
financing or (y) the failure of Buyer and/or Merger Subsidiary to
receive the equity portion of its Financing; or
as a result of the existence of any of the following conditions which
conditions will not have been satisfied or waived at any time on or after the
date of the Merger Agreement and on or before the Expiration Date or any
extension thereof:
(v) there is instituted and pending by any governmental entity (or the
staff of any HSR Authority recommends the commencement of) any
action or proceeding which (A) 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
of Buyer or its subsidiaries, (B) seeks to impose limitations on
the ability of the Company, or renders the Company unable, to
accept for payment, pay 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, (C) 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 any
of the Transactions, or (D) 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
limitations, the right to vote the Shares purchased by it on all
matters properly presented to the Company's stockholders;
(vi) any action taken or any statute or rule entered, enforced,
issued against or applicable to the Offer, the Merger or the other
Transactions by any governmental entity is in effect that results in any
of the consequences referred to in clauses (A) through (D) of paragraph
(v) above;
(vii) the Merger Agreement has been terminated in accordance with
its terms;
(viii) the commitment for the Debt Financing is no longer in effect
due to (A) 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), (B)
a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States (whether or not mandatory), (C) a
commencement of a war, armed hostilities
39
<PAGE> 42
or other international or national calamity directly or indirectly
involving the United States, (D) any limitation (whether or not
mandatory) by any United States governmental entity on the extension of
credit generally by banks or other financial institutions, (E) 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, (F) 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 (G) a material acceleration or worsening of any
of the foregoing;
(ix) since the Balance Sheet Date there has 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;
(x) the Company's Board of Directors (or any committee thereof) has
(A) withdrawn, or modified or proposed publicly to withdraw or modify or
changed in a manner adverse to Buyer or Merger Subsidiary its
recommendation of the Offer, the Merger Agreement, the Merger or the
other Transactions, (B) taken a position inconsistent with its
recommendation of the Offer, the Merger Agreement or the Merger, (C)
approved or recommended or proposed publicly to approve or recommend any
Takeover Proposal, (D) taken any action in connection with Takeover
Proposals prohibited by the Merger Agreement, (E) caused or authorized
the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any Takeover
Proposal, or (F) resolved or publicly disclosed an intention to do any
of the foregoing; or
(xi) Buyer and the Company agree that the Company 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 the conditions set forth
in (i) through (xi) above, makes it inadvisable to proceed with the Offer
and/or with such acceptance for payment or payments.
The parties acknowledge that the foregoing conditions are for the sole
benefit of the Buyer and Merger Subsidiary and that the Company will 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 will cooperate and comply with such election.
13. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
General. Except as set forth in this Offer to Purchase, 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 its acquisition of Shares as
contemplated in the Offer 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 Company's acquisition of Shares pursuant
to the Offer. Should any such approval or other action be required, the Company
currently contemplates that it will seek such approval or other action. The
Company cannot predict whether it may determine that it is required to delay the
acceptance for payment of Shares tendered pursuant to the Offer pending the
outcome of any such matter. 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. The
Company's obligation under the Offer to accept Shares for payment is subject to
certain conditions. See "THE TENDER OFFER -- Section 11. Certain Conditions to
the Offer".
Antitrust. Neither the Offer nor the Merger are 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.
40
<PAGE> 43
State Takeover Laws
Delaware Business Combination Statute. Section 203 of Delaware General
Corporation Law (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, 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.
41
<PAGE> 44
The provisions of Section 203 are not applicable to any of the Transactions
as a result of the approval by the Company's Board of the Merger Agreement and
each of the transactions contemplated thereby prior to the execution of the
Merger Agreement.
Other State Takeover Laws. A number of states have adopted laws and
regulations applicable to attempts to acquire securities of corporations which
are incorporated, or have substantial assets, shareholders, principal executive
offices or principal places of business, or whose business operations otherwise
have substantial economic effects, in such states. In Edgar v. MITE Corp., the
Supreme Court of the United States invalidated on constitutional grounds the
Illinois Business Takeover Statute, which, as a matter of state securities law,
made takeovers of corporations meeting certain requirements more difficult.
However, in 1987 in CTS Corp. v. Dynamics Corp. of America, the Supreme Court
held that the State of Indiana may, as a matter of corporate law and, in
particular, with respect to those aspects of corporate law concerning corporate
governance, constitutionally disqualify a potential acquiror from voting on the
affairs of a target corporation without the prior approval of the remaining
shareholders. The state law before the Supreme Court was by its terms applicable
only to corporations that had a substantial number of shareholders in the state
and were incorporated there.
The Company conducts business in a number of other states throughout the
United States, some of which have enacted takeover laws and regulations. The
Company does not know whether any or all of these takeover laws and regulations
will by their terms apply to the Offer, and, except as set forth above with
respect to Section 203 of the DGCL, the Company has not currently complied with
any other state takeover statute or regulation. The Company reserves the right
to challenge the applicability or validity of any state law purportedly
applicable to the Offer and nothing in this Offer to Purchase or any action
taken in connection with the Offer is intended as a waiver of such right. If it
is asserted that any state takeover statute is applicable to the Offer and an
appropriate court does not determine that it is inapplicable or invalid as
applied to the Offer, the Company might be required to file certain information
with, or to receive approvals from, the relevant state authorities, and the
Company might be unable to accept for payment or pay for Shares tendered
pursuant to the Offer, or may be delayed in consummating the Offer. In such
case, the Company may not be obligated to accept for payment or pay for any
Shares tendered pursuant to the Offer. See "-- Section 2. Acceptance for Payment
and Payment."
14. FEES AND EXPENSES
The Company has retained Bowles Hollowell as its financial advisor in
connection with the Offer and the Merger. Pursuant to the terms of the Bowles
Hollowell engagement letter, the Company has agreed to pay to Bowles Hollowell
an aggregate financial advisory fee of $1,566,839 payable in the Offer and the
Merger 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.
The Company has retained Morrow & Co., Inc. as Information Agent, First
Union Capital Markets Corp. as Dealer Manager and Continental Stock Transfer &
Trust Company as Depositary in connection with the Offer. The Information Agent
and the Depositary will each receive reasonable and customary compensation for
customary services in connection with the Offer and will be reimbursed for
customary and reasonable out-of-pocket expenses. None of the Information Agent,
the Dealer Manager and the Depositary has been retained to, or is authorized to,
make solicitations or recommendations in connection with the Offer.
The Company will not pay any fees or commissions to any broker, dealer,
commercial bank, trust company or other person for soliciting Shares pursuant to
the Offer. The Company will, however, on request, reimburse such persons for
customary handling and mailing expenses incurred in forwarding materials in
respect of the Offer to the beneficial owners for which they act as nominees. No
broker, dealer, commercial bank or trust company has been authorized to act as
an agent for the Company for the purpose of the Offer. The Company will not pay
(or cause to be paid) any stock transfer taxes on its purchase of Shares
pursuant to the Offer, except as otherwise provided in Instruction 6 of the
Letter of Transmittal.
42
<PAGE> 45
Estimated costs and fees in connection with the Transactions, all of which
are the obligation of the Company if the Transactions is consummated, are as
follows:
<TABLE>
<S> <C>
Financing and commitment costs.............................. $1,600,000
Legal, accounting and other professional fees............... 950,000
Financial advisory fees..................................... 1,567,000
Printing and distribution costs............................. 100,000
Severance, incentive payments and related expenses.......... 3,850,000
Miscellaneous............................................... 300,000
----------
TOTAL....................................................... $8,367,000
==========
</TABLE>
If the Transactions are not consummated, certain of the fees related to the
Transactions will be paid by the Buyer.
See "SPECIAL FACTORS--The Merger Agreement the Stockholders' Agreement" for
a description of certain provisions for the reimbursement by the Company of
certain fees and expenses incurred by Buyer.
15. CERTAIN INFORMATION CONCERNING BUYER AND MERGER SUBSIDIARY
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. It is not anticipated that Buyer
will have any significant assets or liabilities or will 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.
Joseph W. Carreras, Michael B. Goldberg, Michael T. Kestner, John F. Kirby
and Mary Lynn Putney are the directors of Buyer and Messrs. Carreras, Kestner,
Ronald G. Campbell and Ian B. Hessel are executive officers of Buyer. Each is a
citizen of the United States.
Except as set forth in this Offer to Purchase, there have never been any
contacts, negotiations or transactions between Buyer, any of its affiliates or
any of the persons listed on Schedule I and the Company or its affiliates
concerning a merger, consolidation or acquisition, tender offer or other
acquisitions of securities, election of directors or a sale or other transfer of
a material amount of assets.
Merger Subsidiary. Merger Subsidiary is a Delaware corporation, newly
formed by Buyer for the purpose of effecting the Merger. It is not anticipated
that Buyer will have any significant assets or liabilities or will 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.
Messrs. Carreras, Kestner, Goldberg, Kirby and Putney are the directors of
Merger Subsidiary and Messrs. Carreras, Kestner, Campbell and Hessel are
executive officers of Merger Subsidiary. Each is a citizen of the United States.
For certain information concerning the Directors and Executive Officers of
Buyer and Merger Subsidiary see Schedule I to this Offer to Purchase. Except as
set forth in this Offer to Purchase: (i) neither Buyer or Merger Subsidiary nor,
to the knowledge of any of the foregoing, any of the persons listed in Schedule
I to this Offer to Purchase or any associate or majority-owned subsidiary of any
of the foregoing, beneficially owns or has a right to own any Shares or any
other equity securities of the Company; (ii) neither Buyer or Merger Subsidiary
nor, to the best knowledge of any of the foregoing, any of the persons or
entities referred to in clause (i) above or any of their executive officers,
directors or subsidiaries has effected any transaction in the Shares or other
equity securities of the Company during the past sixty days; (iii) neither Buyer
or Merger Subsidiary nor, to the best knowledge of any of the foregoing, any of
the persons listed in Schedule I to this Offer to Purchase has any contract,
arrangement, understanding or relationship with any other person with respect to
any securities of the Company, including, but not limited to, contracts,
arrangements, understandings and relationships concerning the transfer or voting
thereof, joint ventures, loan or option arrangements, puts, calls, guarantees of
loans, guarantees
43
<PAGE> 46
against loss or the giving or withholding of proxies, consents, or abstentions;
(iv) since July 1, 1998, there have been no transactions or business
relationships that would be required to be disclosed under the rules and
regulations of the Commission between any of Buyer or Merger Subsidiary or any
of their respective subsidiaries or to the best knowledge of any of Buyer or
Merger Subsidiary, any of the persons listed in Schedule I to this Offer to
Purchase, on the one hand, and the Company or any of its executive officers,
directors or affiliates, on the other hand; and (v) since July 1, 1998, there
have been no contracts, negotiations or transactions between any of Buyer or
Merger Subsidiary or any of their respective subsidiaries or, to the best
knowledge of any of Buyer or Merger Subsidiary, any of the persons listed in
Schedule I of this Offer to Purchase, on the one hand, and the Company or its
subsidiaries or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of securities,
and election of directors or a sale or other transfer of a material amount of
assets of the Company or any of its subsidiaries.
Neither Buyer nor Merger Subsidiary had any relationship with the Company
prior to the commencement of the discussions that led to the execution of the
Merger Agreement. Each of Buyer and Merger Subsidiary disclaims that it is an
"affiliate" of the Company within the meaning of Rule 13e-3 under the Exchange
Act.
16. RECAPITALIZATION ACCOUNTING
The Transactions have been structured to qualify for recapitalization
accounting treatment, consisting of the purchase by the Company (and the
cancelation) of certain Shares (i) in the Offer for the Offer Price and (ii) in
the Merger in exchange for the Merger Consideration, both of which are funded by
the Debt Financing and an equity investment by Buyer of $23,960,149.
17. MISCELLANEOUS
The Company is not aware of any jurisdiction in which the making of the
Offer is prohibited by any administrative or judicial action pursuant to any
valid state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of Shares pursuant
thereto, the Company will make a good faith effort to comply with any such state
statute. If, after such good faith effort, the Company cannot comply with any
such state statute, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of Shares in such state. In any jurisdiction
where the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer shall be deemed to be made on behalf of the
Company by the Dealer Manager or by one or more registered brokers or dealers
licensed under the laws of such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE
OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Pursuant to Section 13(e)(1) of the Exchange Act, the Company has filed
with the Commission the Schedule 13E-4 together with exhibits, furnishing
additional information with respect to the Offer. The Company has filed a
statement on Schedule 13E-3 with respect to the Offer and may file amendments to
the Schedule 13E-3. Such statements, including exhibits and any amendments
thereto, which furnish certain additional information with respect to the Offer
may be inspected at, and copies may be obtained from, the same places and in the
same manner as set forth in "THE TENDER OFFER -- Section 7. Certain Information
Concerning the Company".
HILITE INDUSTRIES, INC.
May 3, 1999
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<PAGE> 47
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information about each current executive
officer and director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
James E. Lineberger............................. 62 Chairman of the Board of Directors
Daniel W. Brady................................. 59 Vice Chairman of the Board of Directors and
Chief Executive Officer
Samuel M. Berry................................. 61 President, Chief Operating Officer and
Director
Ronald G. Assaf................................. 63 Director
James D. Gerson................................. 55 Director
John F. Creamer................................. 68 Director
Arthur D. Johnson............................... 58 Vice President-Operations
Donald M. Maher................................. 52 Vice-President-Sales and Marketing
Ronald E. Reinke................................ 55 Vice President-Engineering
Roy W. Wiegmann................................. 37 Vice President and Chief Financial Officer
</TABLE>
Mr. Lineberger has been Chairman of the Board of Directors of the Company
since it was formed in 1986. He has been a partner of Lineberger & Co., LLC and
its predecessors, private investment firms, since 1969. He has served as a
director of Sensormatic Electronics Corporation since 1968, Chairman of its
Executive Committee since 1974 and as Co-Chief Executive Officer from January to
July 1988.
Mr. Brady has been an officer and/or director of the Company since it was
formed in 1986. He became Chief Executive Officer in 1992 and currently devotes
more than 50% of his time to the Company. In addition, Mr. Brady has been
affiliated with Lineberger & Co., LLC since 1986 and acts as a consultant to and
director of several privately-held companies in which affiliates of Lineberger &
Co., LLC are controlling shareholders. During the last twenty years Mr. Brady
has been continuously associated with the automotive parts industry. From 1986
to 1991 he served first as Chief Financial Officer and then President of B&M
Industries, Inc., an affiliate of Lineberger & Co., LLC. Prior thereto, he was
Chief Financial Officer of D.A.B. Industries from 1978 to 1985 when it was
merged with J.P. Industries, Inc. He then became Treasurer of J.P. Industries,
Inc. from 1985 to 1986.
Mr. Berry has been with the Company and its predecessor operations since
1974. He has served as director, President and Chief Operating Officer of the
Company since December 1986. He has served as President since 1981 and
previously as Vice President-Manufacturing of the Company's predecessor
operations. From 1959 through 1964, he worked part-time for Pitts Industries,
currently a division of the Company.
Mr. Assaf has been a director of the Company since November 1993. He is a
founder of Sensormatic Electronics Corporation, has been its Chairman of the
Board of Directors since October 1971 and served as its President and Chief
Executive Officer since 1974 until his retirement in August 1996. In August
1994, Mr. Assaf was appointed to the Board of Directors of Computer Integration
Corporation. On March 25, 1998, Mr. Assaf, without admitting or denying any
wrongdoing, consented to the entry of a civil order enjoining him from future
violations of certain record-keeping and periodic reporting provisions of the
federal securities laws and pursuant to which he paid a civil money penalty of
$50,000. In its complaint in this civil action, the United States Securities and
Exchange Commission alleged that Mr. Assaf knew of certain improper revenue
recognition practices by Sensormatic Electronics Corporation and knew or
generally was aware that quarterly earnings statements contained in certain
Sensormatic periodic reports and registration statements filed with the SEC
during the period from at least July 1, 1993 through July 10, 1995 were false
and misleading.
Mr. Gerson has been a director of the Company since February 1994. Mr.
Gerson is currently the portfolio manager for Hudson Capital Appreciation Fund,
an affiliate of Fahnestock & Co. Inc. Mr. Gerson also serves as a director of
the following public companies: Ag Services of America, Inc., a distributor of
farm inputs; American Power Conversion Corp., a manufacturer of uninterruptable
power supplies; Arguss Holdings Inc., a fiber and cable construction firm; and
Energy Research Corp., a developer of advanced power generation systems.
I-1
<PAGE> 48
Mr. Creamer has been a director of the Company since January 1998. Mr.
Creamer was a director and vice chairman of the Board of Directors of Echlin,
Inc., an aftermarket and OEM supplier in the automotive industry from 1986 to
1998. Mr. Creamer also serves as a director to R&B, Inc., a supplier of
fasteners for the automotive industry, since 1993 and Bonded Motors, a
remanufacturer of car and light truck engines, since 1996. He currently is the
President and owner of Distribution Marketing Services, Inc., a consulting firm
to the automotive aftermarket and President of the Automotive Warehouse
Distributors Association, a trade association for the automotive aftermarket.
Mr. Johnson has been with the Company and its predecessor operations since
June 1968. He has been Vice President-Operations since January 1983. Previously,
he served as an industrial engineer and then Plant Manager of Pitts Industries,
currently a division of the Company.
Mr. Maher has been with the Company and its predecessor operations since
June 1985. He has served as Vice President-Sales and Marketing since July 1987.
Between 1985 and 1987 he served in various manufacturing capacities including
Vice President-Operations.
Mr. Reinke has been employed by the Company since August 1988 in the
capacity of Vice President-Engineering. From October 1972 through July 1988 he
was employed by the Control Systems Division of Borg-Warner in Decatur, Illinois
where he served in various staff positions including Engineering Manager.
Mr. Wiegmann has been employed by the Company since November 1992 as Vice
President and Chief Financial Officer. From August 1982 through May 1988 he was
a public accountant with the Dallas office of the accounting firm of Deloitte
Haskins and Sells (now known as Deloitte and Touche). He served as Vice
President and Chief Accounting Officer of TM Communications, Inc. from June 1988
to January 1990. From February 1990 through November 1992, he worked with
Professional Service Industries, a national engineering inspection and testing
company, where he served as Assistant Corporate Controller.
DIRECTOR NOMINEES OF BUYER
The following table sets forth information about each director nominee of
the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Joseph W. Carreras.............................. 45 Director Nominee
Michael B. Goldberg............................. 52 Director Nominee
Michael T. Kestner.............................. 44 Director Nominee
John F. Kirby................................... 38 Director Nominee
Mary Lynn Putney................................ 51 Director Nominee
</TABLE>
Mr. Carreras has been the President of Carreras, Kestner & Co., L.L.C.
since February 1998. Prior to February 1998, Mr. Carreras served as Chief
Executive Officer of Sinter Metals, Inc. since January 1994, was its Chairman of
the Board since June 1993 and served as a Director since Sinter Metals, Inc.'s
formation in December 1991.
Mr. Goldberg has been the Managing Director of Kelso & Company, L.P. since
1991. Mr. Goldberg is currently an officer and/or director of a number of
companies.
Mr. Kestner has been the Chief Financial Officer of Carreras, Kestner &
Co., L.L.C. since February 1998. He served as Chief Financial Officer of Sinter
Metals, Inc. from January 1995 until January 1998. Prior to joining Sinter
Metals, Inc. and since 1992, Mr. Kestner was a Vice President of Banc One
Capital Partners.
Mr. Kirby has been the Vice President of Key Bank National Association, Key
Equity Capital Corporation and Key Capital Corporation since 1991. He has also
been the General Partner of Key Equity Partners I, III and IV, Key Equity
Partners 97, 98 and 99, Key Equity Fund Partners I and II and Key Equity Fund
Partners 98 and 99 since their inception. Mr. Kirby has been an officer and/or
director of a number of privately held portfolio companies in connection with
his duties as an officer of Key Equity Capital Corporation.
Ms. Putney has been the Managing Director of Citigroup since 1990. Ms.
Putney has been employed by Citibank, which is the parent corporation of
Citicorp Venture Capital, for 27 years. She served as a Director of Sinter
Metals, Inc. from 1994 until its sale to GKN plc in May, 1997.
I-2
<PAGE> 49
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 Shareholders 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 Shareholders 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 administrative agent, syndication
agent, lender in the senior secured credit facility, and lender holding
subordinated notes with attached warrants, for the financing of the Transaction,
for which services FUCMC and/or such affiliates will receive customary
compensation. In the ordinary course of business, FUCMC and/or its affiliates
may actively trade the securities of Hilite for their own account and the
accounts of its customers and, accordingly, may at any time hold a long or short
position in securities of Hilite.
In arriving at our opinion, BHC reviewed and analyzed certain publicly
available financial information and other information concerning the Company and
certain internal analyses and other information furnished to BHC by the Company.
BHC also held discussions with members of senior management of the Company
regarding the business and prospects of the Company. In addition, BHC:
(i) reviewed the reported prices and trading activity for the Hilite
Common Stock;
(ii) compared certain financial and stock market information for
Hilite with similar information for certain other companies whose
securities are publicly traded;
(iii) reviewed the financial terms of certain recent business
combinations which BHC deemed comparable in whole or in part;
(iv) reviewed the terms of the Agreement as furnished to BHC in draft
form dated April 25, 1999; and
II-1
<PAGE> 50
The Board of Directors
Hilite Industries, Inc.
April 26, 1999
Page 2
(v) performed such other studies and analyses and considered such
other factors as BHC deemed appropriate.
We have not independently verified any of the information described above
and for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to the information relating to the prospects of
Hilite, we have assumed that such information reflects the best currently
available judgments and estimates of the management of Hilite as to the likely
future financial performance of Hilite. We also have assumed, with your consent,
that the final terms of the Agreement reviewed by us in draft form dated April
25 will not vary materially from the draft reviewed by us. In addition, we have
not made an independent evaluation or appraisal of the assets or liabilities of
Hilite, nor have we been furnished with any such evaluations or appraisals. Our
opinion is based on market, economic, and other conditions as they exist and can
be evaluated as of the date of this letter.
In connection with our engagement to provide financial advisory services to
the Board of Directors concerning strategic alternatives, we were authorized to
solicit, and did solicit, interest from third parties with respect to the
acquisition of Hilite. In arriving at our opinion, we have considered the
nature, scope, and results of such solicitation. Our advisory services and the
opinion expressed herein were prepared for the use of the Board of Directors of
Hilite and do not constitute a recommendation to any shareholder as to whether
or not any such shareholder should tender shares of Hilite Common Stock in the
Tender Offer or how such shareholder should vote on the proposed Merger. We
hereby consent to the inclusion of this opinion in its entirety as an exhibit to
the tender offer or proxy statement of Hilite distributed in connection with the
Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the cash consideration to be received in the Transaction by
the holders of Hilite Common Stock (other than Roll-over Shareholders 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-2
<PAGE> 51
SCHEDULE III
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Section 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of such stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
III-1
<PAGE> 52
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for the approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such stockholder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
III-2
<PAGE> 53
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
III-3
<PAGE> 54
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
III-4
<PAGE> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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>
V-3
<PAGE> 74
The letter of transmittal and certificates evidencing Shares and any other
required documents should be sent or delivered by each stockholder or his
broker, dealer, commercial bank, trust company or other nominee to the
Depositary at one of its addresses set forth below.
The Depositary for the Offer is:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight Courier:
2 Broadway 2 Broadway 2 Broadway
19th Floor 19th Floor 19th Floor
New York, NY 10004 New York, NY 10004 New York, NY 10004
</TABLE>
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
listed below. Additional copies of this offer to purchase, the letter of
transmittal and the notice of guaranteed delivery may be obtained from the
Information Agent. A stockholder may also contact brokers, dealers, commercial
banks or trust companies for assistance concerning the Offer.
The Information Agent for the Offer is:
MORROW & CO., INC.
445 Park Avenue, 5th Floor
New York, NY 10022
Banks and Brokerage Firms Call:
(800) 662-5200
Stockholders Please Call:
(800) 566-9061
The Dealer Manager for the Offer is:
FIRST UNION CAPITAL MARKETS CORP.
One First Union Center, Fifth Floor
301 South College Street, DC-5
Charlotte, NC 28288-0608
(800) 532-2916
