<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1997
REGISTRATION NO. 333-40535
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
HAWK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 34-1608156 3499
- -------------------------------- -------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) NO.) CLASSIFICATION CODE NO.)
</TABLE>
200 PUBLIC SQUARE, SUITE 30-5000
CLEVELAND, OHIO 44114
(216) 861-3553
- --------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
NORMAN C. HARBERT
CHAIRMAN OF THE BOARD
200 PUBLIC SQUARE, SUITE 30-5000
CLEVELAND, OHIO 44114
(216) 861-3553
- --------------------------------------------------------------------------------
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
With copies to:
<TABLE>
<S> <C>
MARC C. KRANTZ, ESQ. GLENN E. MORRICAL, ESQ.
KOHRMAN JACKSON & KRANTZ P.L.L. ARTER & HADDEN LLP
ONE CLEVELAND CENTER, 20TH FLOOR 1100 HUNTINGTON BUILDING
1375 EAST NINTH STREET 925 EUCLID AVENUE
CLEVELAND, OHIO 44114 CLEVELAND, OHIO 44115
(216) 736-7204 (216) 696-1100
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] _________________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 30, 1997
SHARES
LOGO HAWK CORPORATION
CLASS A COMMON STOCK
($.01 PAR VALUE)
Of the shares of Class A Common Stock offered hereby (the
"Offering"), shares are being sold by Hawk Corporation ("Hawk" or the
"Company") and shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders except that certain
of the Selling Stockholders will use a portion of the proceeds to prepay in part
certain notes outstanding to the Company. See "Principal and Selling
Stockholders" and "Certain Transactions -- Transactions Concurrent with the
Offering."
Upon completion of the Offering, certain directors and executive officers
of the Company will beneficially own all of the outstanding shares of Series D
Preferred Stock, par value $.01 per share, of the Company (the "Series D
Preferred Stock"). For as long as certain conditions are met, the holders of the
Series D Preferred Stock will be entitled to elect a majority of the members of
the Board of Directors of the Company and to vote as a separate class on
fundamental corporate transactions. Accordingly, the holders of the Series D
Preferred Stock may thereby control and direct the policies of the Board of
Directors and, in general, determine the outcome of various matters submitted to
the stockholders for approval, including fundamental corporate transactions. See
"Risk Factors -- Effective Voting Control by Existing Stockholders" and
"Description of Capital Stock."
Prior to the Offering, there has been no public market for the Company's
Class A Common Stock. It is currently expected that the public offering price
will be between $ and $ per share. See "Underwriting" for information
relating to the method of determining the public offering price.
The Company has applied to have the Class A Common Stock listed on the New
York Stock Exchange under the symbol "HWK."
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) Certain of the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to an aggregate of additional shares
of Class A Common Stock on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If this option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that Class A Common Stock will be available for delivery on or
about , 1998 at the offices of Schroder & Co. Inc., New York, New
York.
SCHRODER & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
<PAGE> 3
LOGO
THE COMPANY DESIGNS, ENGINEERS, MANUFACTURES
AND MARKETS SPECIALIZED COMPONENTS, PRINCIPALLY
MADE FROM POWDER METALS, USED IN A WIDE VARIETY
OF AEROSPACE, INDUSTRIAL AND COMMERCIAL
APPLICATIONS.
[PHOTOGRAPH OF FRICTION PRODUCTS]
Friction products for
brakes, clutches and
transmissions.
[PHOTOGRAPH OF POWDER METAL COMPONENTS]
Powder metal
components for
a variety of industrial
applications.
[PHOTOGRAPH OF DIE-CAST ALUMINUM ROTORS]
Die-cast aluminum rotors
for small electric motors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK INCLUDING OVER-ALLOTMENTS, STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Hawk is a holding company, the principal
assets of which consist of the capital stock of its manufacturing subsidiaries,
Friction Products Co. ("FPC"), S.K. Wellman Corp. ("SKW"), Helsel, Inc.
("Helsel"), Logan Metal Stampings, Inc. ("Logan"), Hutchinson Products
Corporation ("Hutchinson") and Sinterloy Corporation ("Sinterloy"). Unless
otherwise indicated, the information in this Prospectus (1) reflects a
-for-one split of each share of Class A Common Stock, par value $.01 per
share (the "Class A Common Stock"), and Class B Non-Voting Common Stock, par
value $.01 per share (the "Class B Common Stock," and together with the Class A
Common Stock, the "Common Stock") prior to the Offering, (2) assumes the
Company's replacement of its existing senior revolving credit facility with a
new $50.0 million unsecured revolving credit facility (the "New Revolving Credit
Facility"), the Company's entry into a new $35.0 million five year unsecured
term loan facility (the "New Term Loan Facility") and the payment in full,
together with accrued interest thereon of the Company's $30.0 aggregate
principal amount of 12% senior subordinated notes (the "Senior Subordinated Note
Redemption") concurrently with the closing of the Offering, (3) assumes
completion of the Preferred Stock Redemption, as described in this Prospectus,
concurrently with the closing of the Offering, (4) assumes the Company's
redemption of $35.0 million of its 10 1/4% Senior Notes due 2003 (the "Senior
Note Redemption") as soon as practicable after the closing of the Offering, and
(5) assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
GENERAL
Hawk designs, engineers, manufactures and markets specialized components,
principally made from powder metals, used in a wide variety of aerospace,
industrial and commercial applications. The Company is a leading worldwide
supplier of friction products for brakes, clutches and transmissions used in
aerospace, industrial and specialty applications. Friction products represented
68.9% of Company sales in the first nine months of 1997. Hawk is also a leading
supplier of powder metal components for industrial applications, including pump,
motor and transmission elements, gears, pistons and anti-lock brake sensor
rings. In addition, the Company designs and manufactures die-cast aluminum
rotors for small electric motors used in appliances, business equipment and
exhaust fans. The Company focuses on manufacturing products requiring
sophisticated engineering and production techniques for applications in markets
in which it has achieved a significant market share.
Hawk is the largest independent supplier of original equipment and
replacement friction materials to the manufacturers of braking systems for the
Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the
Canadair CRJ aircraft. The Company is also the largest supplier of friction
materials to the general aviation (non-commercial, non-military) market,
supplying friction materials for aircraft manufacturers such as Cessna, Lear,
Gulfstream and Fokker. The Company believes that it is a leading supplier of
friction materials to manufacturers of construction and agricultural equipment
and truck clutches, including Caterpillar, John Deere, New Holland and Eaton. In
addition, the Company is a major supplier of friction products for use in
specialty applications, such as brakes for Harley-Davidson motorcycles, AM
General Humvees and Bombardier, Polaris and Arctco ("Arctic Cat") snowmobiles.
The Company's powder metal components are used primarily in industrial
applications, often as lower cost replacements for parts manufactured by
traditional forging, casting or stamping technologies. The Company targets three
areas of the powder metal component marketplace: high precision components that
are used in fluid power applications requiring tight tolerances; large
structural powder metal parts used in construction, agricultural and truck
applications; and smaller, high volume parts for which the Company can utilize
its efficient pressing and sintering capabilities. The Company is also the
largest independent U.S. manufacturer of die-cast aluminum rotors for use in
subfractional (less than 1/20 horsepower) electric motors.
3
<PAGE> 5
The Company believes that its diverse customer base and extensive sales to
the aerospace and industrial aftermarkets reduce its exposure to economic
fluctuations. The Company estimates that aftermarket sales of friction products
have comprised approximately 50% of the Company's net friction product sales in
recent years. The Company also believes that its principal tradenames are
well-known in the domestic and international marketplace and are associated with
quality and extensive customer support, including specialized product
engineering and strong aftermarket service.
Since its formation in 1989, Hawk has pursued a strategic growth plan by
making complementary acquisitions and broadening its customer base. From 1991
through the 12 month period ended September 30, 1997, the Company's net sales
and income from operations increased at a compound annual rate of 38.3% and
35.5%, respectively. The Company reported a loss before extraordinary item of
$1.9 million in 1996, and expects to incur a net loss, after extraordinary
charges, in the first quarter of 1998 as a result of the incurrence of
non-recurring extraordinary charges of $3.6 million in prepayment penalties
($2.2 million net after tax) and $1.9 million as a result of the write-off of
previously capitalized deferred financing costs ($1.1 million net after tax),
each arising from the Senior Note Redemption. For the first nine months of 1997,
the Company's net sales and income from operations (before non-recurring costs
in 1996 of $3.7 million for plant consolidation expenses) increased 24.2% and
55.8%, respectively, compared to the corresponding period in 1996. Since 1994,
sales growth has been primarily driven by the acquisitions of Helsel, SKW and
Hutchinson. These acquisitions tripled the net sales of the Company and, because
the acquisitions were financed primarily with indebtedness, have caused the
Company to become highly leveraged. As a result, the Company's interest expense
grew at a compound annual rate of 103.5% from $3.3 million in 1994 to $13.5
million in 1996 pro forma for all acquisitions. The Company's net sales, pro
forma for all acquisitions, during the period from 1991 through the 12 month
period ended September 30, 1997 grew internally at a compound annual rate of
9.7%.
BUSINESS STRATEGY
The Company's business strategy includes the following principal elements:
- Focus on High-Margin, Specialty Applications. The Company operates
primarily in aerospace, industrial and commercial markets that require
sophisticated engineering and production techniques. In developing new
applications, as well as in evaluating acquisitions, the Company seeks to
compete in markets requiring such engineering expertise and technical
capability, rather than in markets in which the primary competitive factor
is price. The Company believes margins for its products in these markets
are higher than in other manufacturing markets that use standardized
products. The Company's gross margins in 1996 and the first nine months of
1997 were 25.9% and 28.7%, respectively.
- New Product Introduction. A key part of the Company's strategy is
the introduction of new products which incorporate improved performance
characteristics or reduced costs in response to customer needs. Because
friction products are the consumable, or wear, component of brake, clutch
and transmission systems, the introduction of new friction products in
conjunction with a new system provides the Company with the opportunity to
supply the aftermarket for the life of the system. For example, the ability
to service the aftermarket for a particular aircraft braking system will
likely provide the Company with a stable market for its friction products
for the life of an aircraft, which can be 30 years or more. The Company
also seeks to grow by applying its existing products and technologies to
new specialized applications where its products have a performance or
technological advantage. For example, the Company recently developed a
powder metal pump element for a customer's power steering unit that
improved pumping efficiency and dependability while reducing noise and
cost.
- Pursuit of Strategic Acquisitions. Many of the markets in which the
Company competes are fragmented, providing the Company with attractive
acquisition opportunities. The Company will continue to seek to acquire
complementary businesses with leading market positions that will
4
<PAGE> 6
enable it to expand its product offerings, technical capabilities and
customer base. Historically, the Company has been able to achieve
significant cost reductions through the integration of its acquisitions.
For example, since the acquisition of SKW in 1995, the Company has
consolidated SKW's headquarters facility and one of SKW's two U.S.
manufacturing facilities into its existing facilities, resulting in $5.4
million of annualized cost savings.
- Expanding International Sales. To take advantage of worldwide
growth in its end user markets, the Company expanded its international
presence through the acquisition of SKW in 1995, which resulted in the
addition of manufacturing facilities in Italy and Canada and a worldwide
distribution network. The Company continues to expand its European
operations to meet strong demand in established markets throughout Europe.
The Company also believes that further opportunities to expand sales exist
in emerging economies. Sales from the Company's international facilities
have grown from $15.7 million in 1995 to $20.3 million for the 12 month
period ended September 30, 1997.
- Leveraging Customer Relationships. The Company's engineers work
closely with customers to develop and design new products and improve the
performance of existing products. The Company believes that its commitment
to quality, service and just-in-time delivery enables it to build and
maintain strong and stable customer relationships. The Company believes
that more than 80% of its sales are from products and materials for which
it is the sole source provider for specific customer applications. Each of
the Company's ten largest customers have been customers of the Company or
its predecessors for more than ten years. The Company believes that strong
relationships with its customers provide it with significant competitive
advantages in obtaining and securing new business opportunities.
------------------------
Unless the context otherwise requires, the terms "Company" and "Hawk" as
used in this Prospectus refer to Hawk Corporation, a Delaware corporation, its
consolidated subsidiaries and its predecessors by merger. The Company's
principal executive offices are located at 200 Public Square, Suite 30-5000,
Cleveland, Ohio 44114, and its telephone number is (216) 861-3553.
Hawk has applied for the registration of the Wellman Friction Products
trademark. Velvetouch(R), Fibertuff(R), Feramic(R),Velvetouch Feramic(R),
Velvetouch Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are
registered trademarks of the Company and Hawk Brake is a tradename of the
Company. Trademarks and tradenames of corporations other than the Company are
also referred to in this Prospectus.
5
<PAGE> 7
THE OFFERING
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<S> <C>
Class A Common Stock offered:
By the Company............................. shares(1)
By the Selling Stockholders................ shares(1)(2)
Total.............................. shares(1)
Class A Common Stock outstanding after the
Offering................................... shares(1)(2)(3)
Class B Common Stock outstanding after the
Offering................................... 0 shares
Total Common Stock outstanding after the
Offering................................... shares(1)(2)(3)
Use of proceeds.............................. To effect the Senior Subordinated Note
Redemption, to effect the Senior Note
Redemption, to effect the Preferred Stock
Redemption and for working capital and
general corporate purposes.(4)
Proposed NYSE symbol......................... HWK
</TABLE>
- ---------------
(1) Does not include shares that may be sold by certain of the Selling
Stockholders pursuant to the Underwriters' over-allotment option. See
"Principal and Selling Stockholders" and "Underwriting."
(2) The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Stockholders except that certain of the Selling
Stockholders will use a portion of the proceeds to prepay in part certain
notes outstanding to the Company. See "Use of Proceeds" and "Certain
Transactions -- Transactions Concurrent with the Offering."
(3) Does not include 700,000 shares of Class A Common Stock reserved for
issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares
will be reserved for options to be outstanding as of the closing of the
Offering), or shares of Class A Common Stock, based on an assumed
public offering price of $ per share, issuable upon conversion of
8.0% two-year notes that were issued by the Company in connection with the
acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal
balance of the notes is convertible at the option of the holders thereof
into shares of Class A Common Stock at the public offering price.
(4) Certain of the shares to be redeemed in the Preferred Stock Redemption are
owned by directors and executive officers of the Company. See "Use of
Proceeds" and "Certain Transactions -- Transactions Concurrent with the
Offering."
6
<PAGE> 8
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL
AND OPERATING DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
-------- -------- ------------------------- -------- -------------------------
<CAPTION>
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 41,395 $ 84,643 $123,997 $144,215 $ 93,672 $116,362 $124,985
Gross profit................... 14,624 23,479 32,113 39,133 24,649 33,422 37,374
Plant consolidation
expense(2)................... -- -- 4,028 4,028 3,749 50 50
Income from operations......... 7,376 9,980 9,811 14,257 6,880 16,556 19,617
Interest expense............... 3,267 7,323 10,648 13,527 7,321 10,639 11,039
Extraordinary item(3).......... -- -- (1,196) (1,196) -- -- --
Net income (loss).............. 2,287 762 (3,078) (2,207) (1,359) 3,261 4,894
Net income (loss) per share
applicable to common
stockholders................. $ $ $ $ $ $ $
Number of shares used to
compute per share data.......
AS ADJUSTED FOR THE OFFERING(4):
Interest expense............... $ $
Net income (loss)..............
Net income (loss) per share
applicable to common
stockholders.................
Number of shares used to
compute per share data.......
OTHER DATA:
Depreciation and
amortization................. $ 2,466 $ 5,527 $ 8,418 $ 9,967 $ 6,688 $ 7,166 $ 7,669
Capital expenditures (including
capital leases).............. 1,871 3,781 10,294 12,646 9,142 4,975 5,245
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
ACTUAL AS ADJUSTED(5)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 3,629 $
Working capital..................................................... 28,605
Total assets........................................................ 170,215
Total long-term debt................................................ 131,296
Detachable stock warrants, subject to put option(6)................. 9,300 --
Stockholders' equity (deficit)...................................... (1,448)
</TABLE>
- ---------------
(1) The pro forma income statement data and pro forma other data for the year
ended December 31, 1996 and the nine months ended September 30, 1997 include
the historical operations of the Company and give effect to the Hutchinson
and Sinterloy acquisitions as if they occurred as of January 1, 1996. This
data should be read in conjunction with the more detailed information
contained in the "Unaudited Pro Forma Consolidated Statements of Operations"
and notes thereto included elsewhere in this Prospectus.
(2) Reflects charges in 1996 and 1997 relating primarily to the relocation of
machinery and equipment.
(3) Reflects write-off of deferred financing costs, net of $798,000 in income
taxes.
(4) As adjusted income statement data for the year ended December 31, 1996 and
for the nine months ended September 30, 1997 assume the sale by the Company
of shares of Class A Common Stock in the Offering as of January 1,
1996 and the application of net proceeds thereof as set forth under "Use of
Proceeds."
(footnotes continued on the following page)
7
<PAGE> 9
(5) As adjusted balance sheet data assume the sale by the Company of
shares of Class A Common Stock in the Offering as of September 30, 1997 and
the application of net proceeds therefrom as set forth under "Use of
Proceeds," the exchange of the detachable warrants for shares of
Class B Common Stock, the redemption of all 1,375 outstanding shares of
Series A Preferred Stock, 351 of the outstanding shares of Series B
Preferred Stock and seven of the outstanding shares of Series C Preferred
Stock, together with accrued and unpaid dividends thereon, the Senior Note
Redemption and the Company's entry into the New Term Loan Facility.
(6) Effective June 30, 1995, the Company issued $30.0 million aggregate
principal amount of 12% senior subordinated notes with detachable warrants
that provide the holders the option to purchase shares of the
Company's Class B Common Stock at a nominal price. Beginning in the year
2001, the warrant holders have the right to put the warrants to the Company
for cash, at prices based on the fair market value of the Company at the
date of put, as determined by an independent third party. The warrant
holders' put option is terminated upon the closing of an initial public
offering. For financial reporting purposes, the carrying value of the
warrants, including the put option (classified as detachable stock warrants,
subject to put option, on the Company's balance sheet), was adjusted to $9.3
million as of September 30, 1997, based on revisions to the estimated
present value of the future fair market value of the Company.
8
<PAGE> 10
RISK FACTORS
This Prospectus contains forward-looking statements that involve certain
risks and uncertainties. Statements in this Prospectus regarding future
financial performance and other statements containing the words "expect,"
"believe," "anticipate," "project," "estimate," "predict," "intend" and similar
expressions are forward-looking statements. Actual results and events could
differ materially from those anticipated in such forward-looking statements as a
result of a variety of factors, including those set forth in the following risk
factors and elsewhere in this Prospectus. Prospective investors should consider
carefully the following factors, in addition to the other information contained
in this Prospectus, prior to making an investment in the Class A Common Stock.
ANTICIPATED LOSS IN FIRST QUARTER OF 1998; RECENT LOSS
The Company expects to incur non-recurring extraordinary charges of $3.6
million in prepayment penalties ($2.2 million net after tax) and $1.9 million as
a result of the write-off of previously capitalized deferred financing costs
($1.1 million net after tax), each arising from the Senior Note Redemption. As a
result of the penalties and charges, if the Senior Note Redemption occurs as
anticipated in the first quarter of 1998, the Company expects to incur a net
loss, after extraordinary charges, in that quarter.
In 1996, the Company incurred $4.0 million of non-recurring charges related
to plant consolidation expenses and $2.0 million ($1.2 million after tax) of
non-recurring extraordinary charges as a result of the write-off of previously
capitalized deferred financing costs arising from the termination of a then-
existing credit facility. In 1996, the Company reported a loss before
extraordinary item of $1.9 million and a loss applicable to holders of the
Company's common stock of $3.3 million. On a pro forma basis, after giving
effect to the Hutchinson and Sinterloy acquisitions as if they occurred as of
January 1, 1996, the Company's 1996 loss before extraordinary item would have
been $1.0 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
SUBSTANTIAL LEVERAGE; NEW TERM LOAN FACILITY; SENIOR NOTE REDEMPTION
The Company has, and following the Offering will continue to have,
substantial indebtedness under the indenture ("Senior Note Indenture") relating
to the Company's 10 1/4% Senior Notes due 2003 (the "Senior Notes"). In
addition, the Company anticipates entering into the New Term Loan Facility
concurrently with the closing of the Offering. Although the Company has entered
into a commitment letter with Bankers Trust Company with respect to the New Term
Loan Facility, there is no assurance that the Company and Bankers Trust Company
will enter into the New Term Loan Facility. The commitment letter is subject to
customary terms and conditions, including the closing of the Offering and the
use of the proceeds of the Offering to effect the Senior Note Redemption.
Failure to enter into the New Term Loan Facility and to effect the Senior Note
Redemption will prohibit the Company from benefitting from the lower interest
rate that the Company expects to be available initially on the New Term Loan
Facility compared to the Senior Notes. In the future, the Company may incur
additional indebtedness under the New Revolving Credit Facility to be entered
into concurrently with the Offering or under additional facilities for working
capital and to finance the acquisition of additional businesses. None of the
Senior Notes, New Term Loan Facility or New Revolving Credit Facility is or will
be secured by any assets, stock or other collateral of the Company, except that
all such indebtedness is or will be guaranteed by the Company's domestic
subsidiaries. The Company's debt service requirements may reduce funds available
for operations and future business opportunities and increase the Company's
vulnerability to adverse general economic and industry conditions and
competition.
As of September 30, 1997, the Company had total indebtedness, including
current maturities, of $131.3 million. On an as adjusted basis, after giving
effect to the Offering, the Company's total indebtedness as of September 30,
1997 would have been $104.4 million, and the Company's ratio of net debt to
total capitalization would have been 55.9%. The Company's ability to make
scheduled payments of the principal of or interest on, or to refinance, its
indebtedness and to make scheduled payments under its lease agreements depends
on its future performance, which is subject to economic,
9
<PAGE> 11
financial, competitive and other factors beyond its control. Any default under
the documents governing indebtedness of the Company could have a significant
adverse effect on the market value of the Class A Common Stock. Certain of the
Company's competitors currently operate on a less leveraged basis and may have
greater operating and financing flexibility than the Company. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ACQUISITION STRATEGY
The Company expects to continue a strategy of identifying and acquiring
complementary businesses. There is no assurance that the Company will continue
to identify suitable new acquisition candidates, obtain financing necessary to
complete such acquisitions, acquire businesses on satisfactory terms, enter into
any definitive acquisition agreements or, if entered into, that future
acquisitions will be successful or will achieve results comparable to the
Company's existing business. The Company could incur substantial additional
indebtedness in connection with its acquisition strategy. Any such additional
indebtedness may reduce funds available for operations and future business
opportunities and increase the Company's vulnerability to adverse general
economic and industry conditions and competition. See "Business -- Business
Strategy" and "Business -- Acquisitions."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's results of operations are subject to fluctuations from
quarter to quarter due to changes in demand for its products and other factors.
Demand for the Company's products in each of the geographic end markets it
serves can vary significantly from quarter to quarter due to changes in demand
for products that incorporate or utilize the Company's products and other
factors beyond the Company's control, such as the unusually high customer demand
at Sinterloy in the first six months of 1997, prior to its acquisition by the
Company, which high customer demand the Company does not expect to continue in
the comparable periods in 1998. In the third quarter, net sales of the Company's
products are typically lower than the first two quarters because of planned
production shut downs at the Company's Italian facility, and in the fourth
quarter, net sales of the Company's products are typically lower than the first
two quarters because of holiday-related manufacturing facility shut downs by the
Company and certain of its customers. Therefore, year-to-year comparisons of
quarterly results may not be meaningful, and quarterly results during the year
are not necessarily indicative of the results that may be expected for any
future period or for the entire year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Quarterly Results of
Operations."
COMPETITION
The principal industries in which the Company competes are competitive and
fragmented, with many small manufacturers and only a few manufacturers that
generate sales in excess of $50 million. The larger competitors may have
financial and other resources substantially greater than those of the Company.
The Company competes for new business principally at the beginning of the
development of new applications and at the redesign of existing applications by
its customers. For example, new model development for the Company's aircraft
braking system customers generally begins two to five years prior to full scale
production of new braking systems. Product redesign initiatives by customers
typically involve long lead times as well. Although the Company has been
successful in the past in obtaining this new business, there is no assurance
that the Company will continue to obtain such business in the future. The
Company also competes with manufacturers using different technologies, such as
carbon composite ("carbon-carbon") friction materials for aircraft braking
systems. There is no assurance that competition from these technologies or
others will not adversely affect the Company's business, financial condition and
results of operations. See "Business -- Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company has manufacturing facilities in Italy and Canada. As a
percentage of total Company net sales, net sales from the Company's
international facilities were 9.5% in 1995, 15.6% in 1996 and 13.8% in the 12
month period ended September 30, 1997. One of the elements of the Company's
10
<PAGE> 12
business strategy is its continued expansion into international markets. As a
result, the Company is subject to certain risks inherent in conducting business
internationally, including unexpected changes in regulatory requirements, export
restrictions, currency controls, tariffs and other trade barriers, difficulties
in staffing and managing foreign operations, political and economic instability,
fluctuations in currency exchange rates, difficulty in accounts receivable
collection and potentially adverse tax consequences. The Company is also subject
to risks associated with the imposition of protective legislation and
regulations, including those relating to import or export or otherwise resulting
from trade or foreign policy. In addition, because of the Company's foreign
operations, revenues and expenses are denominated in currencies other than U.S.
dollars, including Italian lira and, to a lesser extent, Canadian dollars.
Changes in exchange rates may have a significant effect on the Company's
business, financial condition and results of operations. The Company does not
currently participate in currency hedging transactions. However, as the
Company's international operations expand, the Company may participate in such
hedging transactions in the future. There is no assurance that one or more of
the foregoing international operation risks will not have a material adverse
effect on the Company's international operations, and, consequently, on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," "Business -- Business Strategy" and Note L to the
Company's Consolidated Financial Statements.
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company's sales to Aircraft Braking Systems represented approximately
10.4% of the Company's consolidated net sales in 1996 and approximately 8.7% of
the Company's consolidated net sales in the first nine months of 1997. In
addition, the Company's top five customers accounted for 40.1% of the Company's
consolidated net sales in 1996 and 34.2% of the Company's consolidated net sales
in the first nine months of 1997. Thus, a significant decrease or interruption
in business from any of the Company's larger customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Customers."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the performance
of its senior management team, including Norman C. Harbert, the Company's
Chairman of the Board, Chief Executive Officer and President, and Ronald E.
Weinberg, Vice-Chairman of the Board and Treasurer. Although the Company
believes that its senior management team has significant depth, the loss of
services of any of the Company's executive officers could have an adverse impact
on the Company. The future success of the Company will depend in large part on
its continued ability to attract and retain qualified engineers and other
professionals, either through direct hiring or acquisition of other businesses
employing such professionals. There is no assurance that the Company will be
able to attract and retain such personnel. See "Management."
COLLECTIVE BARGAINING AGREEMENTS
As of September 30, 1997, 43% of the Company's employees were represented
by unions, including approximately 75 employees at Hutchinson who are covered
under a collective bargaining agreement with the International Association of
Machinists and Aerospace Workers that expires in June 1998, and approximately
100 employees at SKW's Orzinuovi, Italy plant who are represented by a national
mechanics union under an agreement that expires in December 1998. Although the
Company believes its relations with its union employees are good, there is no
assurance that Hutchinson and SKW will be successful in negotiating new
agreements with the unions representing their employees on terms favorable to
the Company or can do so without experiencing work stoppages by some of their
employees. Because of the importance of Hutchinson and SKW's Orzinuovi, Italy
plant to the profitability of the Company, any work stoppage could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees."
11
<PAGE> 13
SUPPLY AND PRICE OF RAW MATERIALS
The principal raw materials used by the Company are copper, steel and iron
powder and custom-fabricated cellulose sheet. The Company has no long-term
supply agreements with any of its major suppliers. However, the Company has
generally been able to obtain sufficient supplies of raw materials for its
operations and changes in prices of such supplies over the past few years have
not had a significant effect on its operations. Although the Company believes
that such raw materials are readily available from alternate sources, an
interruption in the Company's supply of powder metal or cellulose sheet or a
substantial increase in the price of any of these raw materials could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Suppliers and Raw Materials."
EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS
Upon the closing of the Offering, the Company's directors and executive
officers will beneficially own an aggregate of approximately % of the
outstanding shares of Class A Common Stock (approximately % if the
Underwriters' over-allotment option is exercised in full) and 100% of the
outstanding shares of the Company's Series D Preferred Stock, par value $.01 per
share (the "Series D Preferred Stock"). Norman C. Harbert, Chairman of the
Board, Chief Executive Officer, President and a Director of the Company, Ronald
E. Weinberg, Vice-Chairman of the Board, Treasurer and a Director of the
Company, and Byron S. Krantz, Secretary and Director of the Company will
beneficially own approximately %, % and %, respectively, of the
outstanding shares of Class A Common Stock (approximately %, % and
%, respectively, if the Underwriters' over-allotment option is exercised in
full), and will beneficially own 45%, 45% and 10%, respectively, of the
outstanding shares of Series D Preferred Stock, after the Offering. The Series D
Preferred Stock is entitled to elect a majority of the members of the Board of
Directors of the Company and to vote as a separate class on fundamental
corporate transactions. Accordingly, if any two of these stockholders vote their
shares of Series D Preferred Stock in the same manner, they will have sufficient
voting power (without the consent of the Company's other holders of Class A
Common Stock) to elect a majority of the members of the Board of Directors, to
thereby control and direct the policies of the Board of Directors and, in
general, to determine the outcome of various matters submitted to the
stockholders for approval, including fundamental corporate transactions. In
addition, Messrs. Harbert, Weinberg and Krantz have entered into an agreement
regarding the election of the Company's Board of Directors. This agreement and
the voting rights of the Series D Preferred Stock may render more difficult or
tend to discourage mergers, acquisitions, tender offers or proxy contests, even
when stockholders other than Messrs. Harbert, Weinberg and Krantz consider such
a transaction to be in their best interests. See "Principal and Selling
Stockholders," "Certain Transactions -- Transactions Concurrent with the
Offering" and "Description of Capital Stock."
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 20.8% of the Company's consolidated net sales in 1996, and 18.6% of
the Company's consolidated net sales in the first nine months of 1997. Each
aircraft braking system, including the friction products supplied by the
Company, must meet stringent Federal Aviation Administration ("FAA") criteria
and testing requirements. The Company has been able to meet these requirements
in the past. However, there is no assurance that a review by the FAA of a
braking system including the Company's materials will not result in
determinations that could have a material adverse effect on the Company's
business, financial condition and results of operations, nor can there be any
assurance that the Company or its customers will be able to continue to meet FAA
requirements in the future. See "Business -- Government Regulation."
12
<PAGE> 14
ENVIRONMENTAL MATTERS
Manufacturers such as the Company are subject to stringent environmental
standards imposed by federal, state, local and foreign environmental and worker
health and safety laws, regulations and ordinances, including those related to
air emissions, wastewater discharges and chemical and hazardous waste management
and disposal. Certain of these environmental laws hold owners or operators of
land or businesses liable for their own and for previous owners' or operators'
releases of hazardous or toxic substances, materials or wastes, pollutants or
contaminants. Compliance with environmental laws also may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The nature of the
Company's operations, the long history of industrial uses at some of its current
or former facilities, and the operations of predecessor owners or operators of
certain of the businesses expose the Company to risk of liabilities or claims
with respect to environmental and worker health and safety matters. The Company
believes that it is in substantial compliance with all material environmental
and worker health and safety laws applicable to its operations. There can be no
assurance, however, that a review of the Company's past, present or future
environmental or worker health and safety compliance by courts or regulatory
authorities will not result in determinations that could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Environmental Matters."
PRODUCT LIABILITY
Manufacturers such as the Company are from time to time the subject of
product liability claims. Although the Company maintains liability insurance
coverage that it believes to be adequate, there can be no assurance that the
Company will be able to maintain such coverage or obtain alternate coverage in
the future at a reasonable cost, or that such coverage will be sufficient to
satisfy future product liability claims. If the Company's insurance coverage is
insufficient, such product liability claims, if successful, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY MATTERS
The Company relies on a combination of internal procedures, confidentiality
agreements, patents, trademarks and trade secrets law and common law, including
the law of unfair competition, to protect its intellectual property. There is no
assurance that the Company's intellectual property rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
In addition, the laws of certain foreign countries in which the Company's
products may be sold do not protect the Company's intellectual property rights
to the same extent as the laws of the United States. The failure or inability of
the Company to protect its proprietary information could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Intellectual Property Matters."
ANTI-TAKEOVER EFFECT OF THE COMPANY'S GOVERNING DOCUMENTS
Certain provisions of the Company's Second Amended and Restated Certificate
of Incorporation and Amended and Restated By-laws may be deemed to have
anti-takeover effects and may discourage, defer or prevent a change of control
of the Company. These provisions (1) enable the holders of the Series D
Preferred Stock to elect a majority of the Board of Directors, (2) provide that
only the Board of Directors, the Chairman or Vice-Chairman of the Board or
holders of at least 25% of the outstanding voting stock of the Company may call
special meetings of the stockholders, (3) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, (4) authorize
preferred stock, the terms of which (including voting rights, if any) may be
determined by the Board of Directors and which may be issued without stockholder
approval and (5) prohibit action by stockholders other than at a meeting. See
"Description of Capital Stock -- Anti-Takeover Effects of the Company's
Governing Documents" and "Description of Capital Stock -- Preferred Stock."
13
<PAGE> 15
In addition, on November 13, 1997, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (a "Right") for each
share of Common Stock outstanding at the close of business on January 16, 1998.
A Right will also be attached, until it is redeemed or exchanged or expires, to
each share of Common Stock subsequently issued (including the shares of Class A
Common Stock offered hereby). The Rights will have certain anti-takeover
effects. If triggered, the Rights would cause substantial dilution to a person
or group of persons (other than certain exempt persons, which include Norman C.
Harbert, Ronald E. Weinberg and any of their respective affiliates) that
acquires more than 15% of the Class A Common Stock on terms not approved by the
Board of Directors. The Rights could discourage or make more difficult a merger,
tender offer or similar transaction. See "Description of Capital Stock -- Rights
Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Class A Common Stock in the
public market following the Offering could adversely affect the market price for
the Class A Common Stock. Upon the closing of the Offering, the Company will
have shares of Class A Common Stock outstanding. The holders of the
shares of Common Stock outstanding prior to the Offering and all the
directors, executive officers and significant employees of the Company who held
Class A Common Stock prior to the Offering have agreed not to offer, sell or
otherwise dispose of such shares or any shares of Common Stock purchased by them
directly from the Company after the effective date of the Offering, until 180
days after the effective date, without the prior written consent of Schroder &
Co. Inc. After such date, all such shares may be sold subject to the limitations
of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
See "Shares Eligible for Future Sale."
LACK OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Company's
Common Stock. The Company has applied to have the Class A Common Stock listed on
the New York Stock Exchange. Regardless of whether the Class A Common Stock is
approved for listing on the New York Stock Exchange, there is no assurance as to
the development or liquidity of any trading market for the Class A Common Stock
or that the purchasers of the Class A Common Stock will be able to resell their
shares at prices equal to or greater than the public offering price. The public
offering price for the Class A Common Stock will be determined by negotiations
between the Company and Schroder & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and McDonald & Company Securities, Inc., as
representatives (the "Representatives") of the Underwriters. See "Underwriting"
for a discussion of the factors to be considered in determining the public
offering price of the shares of Class A Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
After completion of the Offering, the market price of the Class A Common
Stock could be subject to significant fluctuations due to variations in the
quarterly financial results of the Company and other factors, such as changes in
earnings estimates by analysts, conditions in the overall economy and the
financial markets, natural disasters and other developments affecting the
Company and its competitors. In addition, the securities markets have recently
experienced significant price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance, and these fluctuations may
adversely affect the market price of the Class A Common Stock.
DILUTION
Based on the September 30, 1997 financial statements of the Company,
purchasers of the Class A Common Stock will experience immediate dilution of
$ in the tangible net book value per share of the Class A Common Stock,
assuming a public offering price of $ per share. See "Dilution."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Class
A Common Stock offered hereby (based on an assumed public offering price of
$ per share) are estimated to be $ million ($ million if the
Underwriters' over-allotment option is exercised in full) after deduction of the
estimated underwriting discounts and commissions and expenses of the Offering.
The Company will not receive any proceeds from the sale of Class A Common Stock
by the Selling Stockholders except that certain of the Selling Stockholders will
use a portion of the proceeds to prepay in part certain notes outstanding to the
Company. See "Certain Transactions -- Transactions Concurrent With the
Offering."
As part of its strategy of identifying and acquiring complementary
businesses, the Company has from time to time engaged, and expects to engage in
the future, in discussions relating to such potential acquisitions. There is no
assurance that the Company will continue to identify suitable new acquisition
candidates, obtain financing necessary to complete such acquisitions, acquire
businesses on satisfactory terms or enter into any definitive acquisition
agreements or, if entered into, that future acquisitions will be successful or
will achieve results comparable to the Company's existing business. At this
time, the Company has no outstanding commitments or agreements regarding any
future acquisitions. See "Risk Factors -- Acquisition Strategy."
The following table sets forth the estimated sources and uses of the
proceeds to the Company from the sale of shares of Class A Common Stock in the
Offering and the New Term Loan Facility, and the completion of the Senior Note
Redemption, the Senior Subordinated Note Redemption and the Preferred Stock
Redemption.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
SOURCES
The Offering................................................ $
New Term Loan Facility(1)................................... 35,000
--------
Total Sources..................................... $
========
USES
Senior Note Redemption(2)................................... $ 35,000
Prepayment Premium for Senior Note Redemption(2)............ 3,588
Senior Subordinated Note Redemption(3)...................... 30,300
Preferred Stock Redemption(4):
Series A Preferred Stock.................................. 1,409
Series B Preferred Stock.................................. 354
Series C Preferred Stock.................................. 8
Working Capital and General Corporate Purposes(5)...........
--------
Total Uses........................................ $
========
</TABLE>
- ---------------
(1) See "Capitalization" for a description of the New Term Loan Facility.
(2) The Senior Notes bear interest at the rate of 10 1/4% per annum. The Company
anticipates that it will effect the Senior Note Redemption, in accordance
with the terms of the Senior Note Indenture, as soon as practicable after
the closing of the Offering. Under the Senior Note Redemption, $35.0 million
in principal amount of the Senior Notes will be redeemed. At the time of the
Senior Note Redemption, the Company expects to incur non-recurring
extraordinary charges of $3.6 million in prepayment penalties and $1.9
million as a result of the write-off of previously capitalized deferred
financing costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
(footnotes continued on the following page)
15
<PAGE> 17
(3) Represents payment in full of the Senior Subordinated Notes, together with
accrued and unpaid interest thereon (assuming a payment date of January 31,
1998). Principal payments on the Senior Subordinated Notes are due in equal
installments of $10.0 million on January 31, 2004 and June 30, 2004 and
2005. Interest on the Senior Subordinated Notes is payable quarterly at
12.0% per annum.
(4) Represents the redemption (the "Preferred Stock Redemption") of all 1,375
outstanding shares of the Company's Series A Preferred Stock, par value $.01
per share (the "Series A Preferred Stock"), of 351 of the outstanding shares
of the Company's Series B Preferred Stock, par value $.01 per share (the
"Series B Preferred Stock"), and of seven of the outstanding shares of the
Company's Series C Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock"), in each case at a redemption price equal to the price
paid per share together with accrued and unpaid dividends thereon (assuming
a redemption date of January 31, 1998). Certain of the shares of Series A,
Series B and Series C Preferred Stock to be redeemed in the Preferred Stock
Redemption are owned by directors and executive officers of the Company as
follows: (1) the Series A Preferred Stock owned by Clanco Partners I, of
which William J. O'Neill, Jr. is the managing partner, Clanco Family
Partners, L.P. ("Clanco FLP"), of which Mr. O'Neill is a director of its
general partner, and Dorothy K. O'Neill Revocable Trust, of which Mr.
O'Neill is a co-trustee, will be redeemed; (2) the Series B Preferred Stock
owned by Clanco FLP, Jeffrey H. Berlin, Douglas D. Wilson and Thomas A.
Gilbride will be redeemed; and (3) the Series C Preferred Stock owned by Mr.
Berlin and Dan T. Moore, III, and certain fractional shares of Series C
Preferred Stock owned by Norman C. Harbert, Ronald E. Weinberg, Byron S.
Krantz and their respective affiliates, will be redeemed. See "Certain
Transactions -- Transactions Concurrent with the Offering."
(5) Pending use of these remaining proceeds, the Company will invest them in
money market funds or other short-term interest bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Class A Common
Stock. The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Any future dividends will depend on the
earnings, capital requirements and financial condition of the Company, and on
such other factors as the Company's Board of Directors may consider relevant. In
addition, the New Revolving Credit Facility, New Term Loan Facility and the
Senior Note Indenture prohibit or will prohibit the payment of cash dividends on
the Class A Common Stock except upon compliance with certain conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1997, as adjusted to reflect (1) the sale of
shares of Class A Common Stock offered by the Company hereby (at an assumed
public offering price of $ per share) and the application of the net
proceeds therefrom as described under "Use of Proceeds," (2) the exercise of
warrants to purchase shares of Class B Common Stock (which will be
automatically converted on a one-for-one basis into shares of Class A Common
Stock upon the sale by certain of the Selling Stockholders in the Offering), (3)
the replacement of the Company's existing senior revolving credit facility (the
"Old Revolving Credit Facility") with the New Revolving Credit Facility, and (4)
the Company's entry into the New Term Loan Facility. This table should be read
in conjunction with the historical consolidated financial statements of the
Company and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Long-term debt (including current portion)
Old Revolving Credit Facility(1)................................... -- --
New Revolving Credit Facility(2)................................... -- --
Senior Notes(3).................................................... $100,000 $ 65,000
New Term Loan Facility(2).......................................... -- 35,000
Senior Subordinated Notes(4)....................................... 26,862 --
Hutchinson acquisition notes....................................... 1,500 1,500
Other obligations.................................................. 2,934 2,934
-------- --------
Total long-term debt............................................ $131,296 $ 104,434
======== ========
Detachable stock warrants, subject to put option(4).................. $ 9,300 $ --
-------- --------
Stockholders' equity
Series A Preferred Stock, $.01 par value: authorized: 2,625 shares;
issued and outstanding: 1,375 shares, $1,375,000 aggregate
liquidation value (actual); issued and outstanding: none (as
adjusted); Series B Preferred Stock, $.01 par value: authorized:
702 shares; issued and outstanding: 702 shares, $702,000
aggregate liquidation value (actual); issued and outstanding:
none (as adjusted); and Series C Preferred Stock, $.01 par
value: authorized: 1,189 shares; issued and outstanding: 1,189
shares, $1,189,000 aggregate liquidation value (actual); issued
and outstanding: none (as adjusted)............................. $ 1 --
Series D Preferred Stock, $.01 par value: authorized: 1,530 shares;
issued and outstanding: none (actual); issued and outstanding:
1,530 shares, $1,530,000 aggregate liquidation value (as
adjusted)....................................................... -- $ 1
Series E Preferred Stock, $.01 par value: authorized: 100,000
shares; issued and outstanding: none (actual and as adjusted)... -- --
Class A Common Stock, $.01 par value: authorized: 2,200,000 shares;
issued and outstanding: 1,443,978 shares (actual); authorized:
75,000,000 shares; issued and outstanding: shares (as
adjusted)(5).................................................... 14
Class B Common Stock, $.01 par value: authorized: 10,000,000
shares; issued and outstanding: none (actual and as adjusted)... -- --
Additional paid-in capital......................................... 1,964
Retained earnings (deficit)........................................ (2,653)
Other equity adjustments........................................... (774) (774)
-------- --------
Total stockholders' equity (deficit)............................ (1,448)
-------- --------
Total capitalization....................................... $139,148 $
======== ========
</TABLE>
(footnotes on the following page)
17
<PAGE> 19
- ---------------
(1) Borrowings of up to the lesser of (1) $25.0 million, or (2) the sum of 85.0%
of eligible accounts receivable and 60.0% of eligible inventory, under the
Company's existing bank credit facility (the "Old Revolving Credit
Facility") were available at LIBOR plus 2.25% per annum or, at the Company's
option, a variable rate based on the lending bank's prime rate plus 1.0% per
annum, for working capital and general corporate purposes. Amounts
outstanding under the Old Revolving Credit Facility are due November 27,
1999. The Old Revolving Credit Facility was secured by substantially all of
the accounts receivable, inventory and intangibles of the Company and its
domestic subsidiaries. The Old Revolving Credit Facility will be terminated
at the closing of the Offering.
(2) Concurrently with the closing of the Offering, the Company expects to enter
into the New Revolving Credit Facility and the New Term Loan Facility.
Amounts outstanding under each facility will be due five years from the
closing date, and will bear interest at a variable rate based on the
Eurodollar Rate plus 0.75% per annum or, at the Company's option, a variable
rate based on either the lending bank's prime rate or the federal funds rate
plus 0.5% per annum, with both rates subject to increase in the event the
Company does not meet certain debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") ratios. The New Revolving Credit
Facility and the New Term Loan Facility will be unsecured, will be
guaranteed by the Company's domestic subsidiaries and will be used for
working capital and general corporate purposes. The New Revolving Credit
Facility will not be subject to a borrowing base formula. The commitment fee
on the unused portion of the New Revolving Credit Facility is 0.25% per
annum of such unused portion, which fee is subject to increase in the event
the Company does not meet the debt to EBITDA ratios.
(3) The Company anticipates that it will effect the Senior Note Redemption, in
accordance with the terms of the Senior Note Indenture, as soon as
practicable after the closing of the Offering. Under the Senior Note
Redemption, $35.0 million in principal amount of the Senior Notes will be
redeemed. At the time of the Senior Note Redemption, the Company expects to
incur non-recurring extraordinary charges of $3.6 million in prepayment
penalties ($2.2 million net after tax) and $1.9 million as a result of the
write-off of previously capitalized deferred financing costs ($1.1 million
net after tax), which are reflected in adjusted retained earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(4) Effective June 30, 1995, the Company issued $30.0 million aggregate
principal amount of Senior Subordinated Notes with detachable warrants that
provide the holders the option to purchase shares of the Company's
Class B Common Stock at a nominal price. Beginning in the year 2001, the
warrant holders have the right to put the warrants back to the Company for
cash, at prices based on the fair market value of the Company at the date of
put, as determined by an independent third party. The warrant holders' put
option is terminated upon the closing of an initial public offering. For
financial reporting purposes, at June 30, 1995, the fair value of the
warrants, including the put option, was estimated to be $4.6 million and
classified as detachable stock warrants, subject to put option, on the
Company's balance sheet. The resulting discount is being amortized over the
life of the debt as non-cash, imputed interest. This discount is based on an
effective interest rate of 14.2%. The unamortized discount at September 30,
1997 was $3.1 million. Adjustments to the carrying value of the detachable
stock warrants are determined by management based on revisions to the
estimated present value of the future fair market value of the Company. The
carrying value of the warrants, including the put option, was adjusted to
$9.3 million as of September 30, 1997.
(5) Does not include 700,000 shares of Class A Common Stock reserved for
issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares
will be reserved for options to be outstanding as of the closing of the
Offering), or shares of Class A Common Stock, based on an assumed
public offering price of $ per share, issuable upon conversion of 8.0%
two-year notes that were issued by the Company in connection with the
acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal
balance is convertible at the option of the holders thereof into shares of
Class A Common Stock at the public offering price.
18
<PAGE> 20
DILUTION
At September 30, 1997, the Company's net tangible book value was $
million or $ per share of Class A Common Stock. Net tangible book value
per share represents the Company's tangible assets less total liabilities
divided by the number of shares of Class A Common Stock, assuming the exercise
of warrants to purchase shares of Class B Common Stock which will be
converted on a one-for-one basis into shares of Class A Common Stock upon the
sale by the Selling Stockholders in the Offering and the application of the net
proceeds of the Offering to effect the Preferred Stock Redemption. After giving
effect to the sale of the shares of Class A Common Stock offered
hereby (at an assumed public offering price of $ per share of Class A
Common Stock) and after deduction of underwriting discounts and commissions and
estimated offering expenses (estimated at $ million), the net tangible book
value of the Company at September 30, 1997 would have been $ , or
$ per share of Class A Common Stock. This represents an immediate
increase in net tangible book value of $ per share of Class A Common
Stock to existing stockholders and an immediate dilution of $ per share
of Class A Common Stock to new purchasers. The following table illustrates this
dilution per share of Class A Common Stock:
<TABLE>
<S> <C> <C>
Public offering price per share of Class A Common Stock...... $
Net tangible book value per share of Class A Common Stock
as of September 30, 1997(1)............................. $
Increase per share of Class A Common Stock attributable to
the sale of Class A Common Stock in the Offering........
Pro forma net tangible book value per share of Class A Common
Stock after giving effect to the Offering(1)...............
--------
Dilution per share of Class A Common Stock to new
purchasers(1).............................................. $
========
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the number of shares of Class A Common Stock
purchased from the Company, the aggregate consideration paid and the average
price per share of Class A Common Stock paid by existing stockholders and by new
purchasers who purchase Class A Common Stock in the Offering (based upon an
assumed public offering price of $ per share of Class A Common Stock),
without giving effect to estimated underwriting, discounts and commissions and
expenses of the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... % $1,426,500 % $
New purchasers............. % $ % $
Total(1)......... 100% $ 100% $
</TABLE>
- ---------------
(1) Does not include 700,000 shares of Class A Common Stock reserved for
issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares
will be reserved for options to be outstanding as of the closing of the
Offering). See "Management -- Stock Option Plan." Also does not include
shares of Class A Common Stock, based on an assumed public
offering price of $ per share, issuable upon conversion of 8.0% two-year
notes that were issued by the Company in connection with the acquisition of
Hutchinson. Up to $500,000 of the then-outstanding principal balance is
convertible at the option of the holders thereof into shares of Class A
Common Stock at the public offering price.
19
<PAGE> 21
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations of the
Company for the year ended December 31, 1996 and the nine months ended September
30, 1997, include the historical operations of the Company and give effect to
the Hutchinson acquisition in January 1997 and the Sinterloy acquisition in
August 1997 as if they occurred as of January 1, 1996. The unaudited pro forma
consolidated statements of operations have been prepared by the Company's
management. The information is not designed to represent and does not represent
what the Company's results of operations actually would have been had the
aforementioned transactions been completed as of January 1, 1996, or to project
the Company's results of operations for any future period. For example, because
of unusually high customer demand at Sinterloy in the first six months of 1997,
the Company expects that Sinterloy's results of operations in the nine months
ended September 30, 1998 will be lower than those achieved by Sinterloy in the
nine months ended September 30, 1997. The pro forma adjustments are based on
available information and certain assumptions that the Company currently
believes are reasonable under the circumstances. The unaudited pro forma
consolidated statements of operations should be read in conjunction with the
more detailed information contained in the historical consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
20
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
HAWK HUTCHINSON SINTERLOY FOR
CORPORATION ACQUISITION ACQUISITION ACQUISITIONS PRO FORMA
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 123,997 $8,621 $11,597 -- $144,215
Cost of sales.............................. 91,884 5,776 7,422 -- 105,082
--------- ------- ------- -------- ------
Gross profit............................... 32,113 2,845 4,175 -- 39,133
Expenses:
Selling, technical, and administrative
expenses............................... 15,468 794 1,053 $ 11(1) 17,326
Amortization of intangibles.............. 2,806 149 -- 567(2) 3,522
Plant consolidation expense.............. 4,028 -- -- -- 4,028
--------- ------- ------- -------- ------
Total expenses............................. 22,302 943 1,053 578 24,876
--------- ------- ------- -------- ------
Income from operations..................... 9,811 1,902 3,122 (578) 14,257
Interest expense........................... 10,648 23 9 2,847(3) 13,527
Other (income) expense, net................ 256 (20) (32) -- 204
--------- ------- ------- -------- ------
Income (loss) before income taxes and
extraordinary item....................... (1,093) 1,899 3,145 (3,425) 526
Income taxes............................... 789 791 34 (77)(4) 1,537
--------- ------- ------- -------- ------
Income (loss) before extraordinary item.... $ (1,882) $1,108 $ 3,111 $(3,348) $ (1,011)
========= ======= ======= ======== ======
Preferred stock dividend requirements...... $ (226) $ (226)
========= ======
Loss applicable to common stockholders,
excluding extraordinary item of $1,196... $ (2,108) $ (1,237)
========= ======
Loss per share applicable to common
stockholders............................. $ $
========= ======
Number of shares used to compute per share
data.....................................
========= ======
</TABLE>
- ---------------
<TABLE>
<C> <S> <C>
(1) Represents incremental depreciation expense due to the write up of plant, property and
equipment to fair market value under the purchase method of accounting in the acquisition
of Sinterloy............................................................................... $ 11
======
(2) Represents incremental amortization due to an increase in intangible assets from applying
the purchase method of accounting in the Sinterloy and Hutchinson acquisitions. Intangible
assets include goodwill that is amortized over 30 years.
Sinterloy.................................................................................. $ 317
Hutchinson................................................................................. 250
------
$ 567
======
(3) Represents incremental interest expense, assuming an interest rate of 10.25%, based on the
imputed funding required to effect the acquisitions of:
Sinterloy.................................................................................. 1,801
Hutchinson................................................................................. 1,046
------
$2,847
======
(4) Represents income taxes that would have been incurred had Hutchinson and Sinterloy been
included in the Company's consolidated group for tax reporting purposes.................... $ (77)
======
</TABLE>
21
<PAGE> 23
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
HISTORICAL
HAWK SINTERLOY ADJUSTMENTS
CORPORATION ACQUISITION FOR ACQUISITION PRO FORMA
----------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
Net sales...................................... $ 116,362 $ 8,623 -- $124,985
Cost of sales.................................. 82,940 4,671 -- 87,611
--------- ------ ------- --------
Gross profit................................... 33,422 3,952 -- 37,374
Expenses:
Selling, technical, and administrative
expenses................................... 14,241 643 $ 9(1) 14,893
Amortization of intangibles.................. 2,575 -- 239(2) 2,814
Plant consolidation expenses................. 50 -- 50
--------- ------ ------- --------
Total expenses............................... 16,866 643 248 17,757
--------- ------ ------- --------
Income from operations......................... 16,556 3,309 (248) 19,617
Interest expense............................... 10,639 -- 400(3) 11,039
Other (income) expense, net.................... 122 (61) -- 61
--------- ------ ------- --------
Income before income taxes..................... 5,795 3,370 (648) 8,517
Income taxes................................... 2,534 -- 1,089(4) 3,623
--------- ------ ------- --------
Net income..................................... $ 3,261 $ 3,370 $ (1,737) $ 4,894
========= ====== ======= ========
Preferred stock dividend requirements.......... $ (240) $ (240)
========= ========
Net income applicable to common stockholders... $ 3,021 $ 4,654
========= ========
Net income per share applicable to common
stockholders................................. $ $
========= ========
Number of shares used to compute per share
data.........................................
========= ========
</TABLE>
- ---------------
<TABLE>
<C> <S> <C>
(1) Represents incremental depreciation expense due to the write-up of plant, property and
equipment to fair market value under the purchase method of accounting in the acquisition
of Sinterloy............................................................................... $ 9
======
(2) Represents incremental amortization due to an increase in intangible assets from applying
the purchase method of accounting in the acquisition of Sinterloy. Intangible assets
include goodwill that is amortized over 30 years........................................... $ 239
======
(3) Represents the net adjustment to interest expense, assuming an interest rate of 10.25%,
based on the imputed funding required to effect the acquisition of Sinterloy............... $ 400
======
(4) Represents income taxes that would have been incurred had Sinterloy been included in the
Company's consolidated group for tax reporting purposes.................................... $1,089
======
</TABLE>
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The selected consolidated financial data presented below under the captions
"Income Statement Data," "Other Data" and "Balance Sheet Data" as of and for
each of the five years ended December 31, 1992, 1993, 1994, 1995 and 1996, have
been derived from the audited consolidated financial statements of the Company.
The selected consolidated financial data as of and for the nine months ended
September 30, 1996 and 1997 have been derived from the unaudited consolidated
financial statements of the Company, which have been prepared by management on
the same basis as the audited consolidated financial statements of the Company,
and, in the opinion of management of the Company, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of such data for such periods and as of such dates. Operating results for the
nine month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for any other interim period or the full year. The
acquisitions of Helsel, SKW, Hutchinson and Sinterloy occurred in June 1994,
June 1995, January 1997 and August 1997, respectively. This data should be read
in conjunction with the more detailed information contained in the consolidated
financial statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $ 24,931 $ 28,417 $ 41,395 $ 84,643 $123,997 $ 93,672 $116,362
Cost of sales........................... 14,929 16,834 26,771 61,164 91,884 69,023 82,940
-------- -------- -------- -------- -------- -------- --------
Gross profit.......................... 10,002 11,583 14,624 23,479 32,113 24,649 33,422
Selling, technical and administrative... 4,582 4,833 6,294 11,575 15,468 11,612 14,241
Amortization of intangibles............. 1,304 954 954 1,924 2,806 2,408 2,575
Plant consolidation expense(1).......... -- -- -- -- 4,028 3,749 50
-------- -------- -------- -------- -------- -------- --------
Income from operations................ 4,116 5,796 7,376 9,980 9,811 6,880 16,556
Interest expense........................ 2,903 2,654 3,267 7,323 10,648 7,321 10,639
Other expense (income), net............. -- -- (234) (130) 256 55 122
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
minority interest, extraordinary
item and cumulative effect of change
in accounting principle............. 1,213 3,142 4,343 2,787 (1,093) (496) 5,795
Income taxes............................ 494 1,716 1,845 1,593 789 863 2,534
Minority interest....................... -- -- 211 432 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. 719 1,426 2,287 762 (1,882) (1,359) 3,261
Extraordinary item(2)................... 233 -- -- -- (1,196) -- --
Cumulative effect of change in
accounting for income taxes........... -- 284 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 952 $ 1,142 $ 2,287 $ 762 $ (3,078) $ (1,359) $ 3,261
======== ======== ======== ======== ======== ======== ========
Preferred stock dividend requirements... $ (263) $ (263) $ (294) $ (326) $ (226) $ (170) $ (240)
Income (loss) before extraordinary
item applicable to common
stockholders........................ 456 879 1,993 436 (2,108) (1,529) 3,021
Net income (loss) applicable to common
stockholders........................ 689 879 1,993 436 (3,304) (1,529) 3,021
Income (loss) before extraordinary item
per share applicable to common
stockholders..........................
Net income (loss) per share applicable
to common stockholders................
Number of shares used to compute per
share data............................
OTHER DATA:
Depreciation and amortization........... $ 2,174 $ 1,920 $ 2,466 $ 5,527 $ 8,418 $ 6,688 $ 7,166
Capital expenditures (including capital
leases)............................... 446 586 1,871 3,781 10,294 9,142 4,975
</TABLE>
(footnotes on the following page)
23
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 68 $ 63 $ 730 $ 771 $ 25,774 $ 1,894 $ 3,629
Working capital (deficit)............... 1,053 (3,709) (4,076) 15,565 48,700 19,009 28,605
Property, plant and equipment, net...... 6,020 5,627 10,166 39,460 44,142 44,284 51,963
Total assets............................ 33,729 33,925 43,645 127,419 158,441 132,894 170,215
Total long-term debt.................... 26,457 24,050 26,726 94,906 129,183 102,146 131,296
Detachable stock warrants, subject to
put option(3)......................... -- -- -- 4,600 4,600 4,600 9,300
Stockholders' equity (deficit).......... 2,488 3,377 5,898 3,948 1,190 2,698 (1,448)
</TABLE>
- ---------------
(1) Reflects charges in 1996 and 1997 relating primarily to the relocation of
machinery and equipment.
(2) Reflects utilization of tax loss carryforward in 1992 and write-off in 1996
of deferred financing costs, net of $798,000 in income taxes.
(3) Effective June 30, 1995, the Company issued $30.0 million aggregate
principal amount of Senior Subordinated Notes with detachable warrants that
provide the holders the option to purchase shares of the Company's
Class B Common Stock at a nominal price. Beginning in the year 2001, the
warrant holders have the right to put the warrants to the Company for cash,
at prices based on the fair market value of the Company at the date of put,
as determined by an independent third party. The warrant holders' put option
is terminated upon the closing of an initial public offering. For financial
reporting purposes, the carrying value of the warrants, including the put
option (classified as detachable stock warrants, subject to put option, on
the Company's balance sheet), was adjusted to $9.3 million as of September
30, 1997, based on revisions to the estimated present value of the future
fair market value of the Company.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the Company's
consolidated financial statements and notes thereto and other financial
information, included elsewhere in this Prospectus.
OVERVIEW
Hawk is a manufacturing holding company that, through its operating
subsidiaries, designs, engineers, manufactures and markets specialized
components, principally made from powder metals, used in a wide variety of
aerospace, industrial and commercial applications. Since 1989, Hawk has pursued
a strategic growth plan by making complementary acquisitions and broadening its
customer base:
<TABLE>
<CAPTION>
EFFECTIVE DATE YEAR
ACQUISITION OF ACQUISITION BUSINESS FOUNDED
- ----------------- -------------- --------------------------------------------- -------
<S> <C> <C> <C>
FPC and Logan March 1989 Friction products for brakes, clutches and 1961
transmissions used in aerospace, industrial
and specialty applications
Helsel June 1994 High precision powder metal components used 1974
primarily in fluid power applications
SKW June 1995 Friction products for industrial applications 1924
Hutchinson January 1997 Die-cast aluminum rotors for small electric 1947
motors used in business equipment, appliances
and exhaust fans
Sinterloy August 1997 Powder metal components for business 1969
equipment
</TABLE>
The above acquisitions were accounted for under the purchase method of
accounting, with the purchase price allocated to the estimated fair market value
of the assets acquired and liabilities assumed. In the acquisitions, any excess
of the purchase price paid over the estimated fair value of the net assets
acquired was allocated to goodwill, which resulted in approximately $40.1
million of goodwill reflected on the September 30, 1997 balance sheet. The
annual amortization of goodwill will result in non-cash charges to future
operations of approximately $1.8 million per year (of which the majority of such
amortization is deductible for tax purposes) based on amortization periods
ranging from 15 to 40 years.
The acquisitions of Helsel, SKW, Hutchinson and Sinterloy caused a
significant change in the Company's product mix and resulted in a reduction in
the Company's gross profit margin. The Company's gross profit margin in 1993 was
40.8%. The acquisition of Helsel had the effect of reducing the Company's
overall gross profit margin to 35.3% in 1994. The acquisition of SKW had the
effect of further reducing the Company's overall gross profit margin to 27.7% in
1995 and 25.9% in 1996. The Company believes that the gross profit margins of
the industrial and specialty friction products and powder metal components
produced by SKW and Helsel, respectively, exceed gross profit margins realized
in other markets that use standardized products. However, these margins are
exceeded by those achieved by the Company's FPC business, as a result of FPC's
proprietary products and leading position in the aerospace friction products
market.
In 1995, the Company consolidated SKW's headquarters facility into the
Company's existing facilities, which resulted in an annualized cost savings of
$1.8 million due to the elimination of redundant expenses. During 1996, the
Company consolidated one of SKW's two U.S. manufacturing facilities into the
Company's existing facilities, which resulted in $3.6 million in annualized cost
savings from reduction of overhead expenses. The Company incurred $4.0 million
of costs relating primarily to the relocation of machinery and equipment in
1996. In addition, the manufacturing facility consolidation program had the
effect of decreasing the gross profit margins in 1996 primarily as a result of
the temporary production inefficiencies arising from the relocation of
manufacturing operations. Partly as a result of the elimination of these
temporary production inefficiencies, gross margins increased to 28.7% for the
nine months ended September 30, 1997 from 26.3% for the corresponding period in
1996.
25
<PAGE> 27
The Company expects to incur non-recurring extraordinary charges of $3.6
million in prepayment penalties ($2.2 million net after-tax) and $1.9 million as
a result of the write-off of previously capitalized deferred financing costs
($1.1 million net after tax), each arising from the Senior Note Redemption. As a
result of the penalties and charges, if the Senior Note Redemption occurs as
anticipated in the first quarter of 1998, the Company expects to incur a net
loss, after extraordinary charges, in that quarter.
In November 1996, the Company incurred $2.0 million ($1.2 million
after-tax) of non-recurring extraordinary charges as a result of the write-off
of previously capitalized deferred financing costs arising from the termination
of the Company's previous senior credit facility. Primarily because of the
non-recurring charges relating to the manufacturing facility consolidation
program and the deferred financing costs, the Company incurred a net loss of
$3.1 million in 1996.
The Company's foreign operations expose it to the risk of exchange rate
fluctuations. For example, because the Company's Italian operation typically
generates positive net cash flow, which is denominated in lire, a decline in the
value of the lira relative to the dollar would adversely affect the Company's
reported sales and earnings. In addition, the restatement of foreign currency
denominated assets and liabilities into U.S. dollars gives rise to foreign
exchange gains or losses which are recorded in stockholders' equity. The Company
does not currently participate in hedging transactions related to foreign
currency. See Note L to the Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, items in the
Company's income statements as a percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
DECEMBER 31, 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................. 35.3 27.8 25.9 26.3 28.7
Selling, technical and administrative
expenses*.................................... 15.2 13.7 12.5 12.4 12.2
Amortization of intangible assets.............. 2.3 2.3 2.2 2.6 2.2
Plant consolidation expense.................... -- -- 3.2 4.0 --
Income from operations....................... 17.8 11.8 7.9 7.3 14.2
Interest expense............................... 7.9 8.7 8.6 7.8 9.1
Other (income) expense, net.................... (0.6) (0.2) 0.2 -- 0.1
Income (loss) before income taxes............ 10.5 3.3 (0.9) (0.5) 5.0
Income taxes................................... 4.5 1.9 0.6 0.9 2.2
Minority interest.............................. 0.5 0.5 -- -- --
Income before extraordinary item............. 5.5 0.9 (1.5) (1.5) 2.8
Extraordinary item............................. -- -- (1.0) -- --
Net income (loss)............................ 5.5 0.9 (2.5) (1.5) 2.8
</TABLE>
- ---------------
* The Company's technical expenses consist primarily of research and product
development expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales increased by $22.7 million, or 24.2%, from $93.7
million during the first nine months of 1996 to $116.4 million during the first
nine months of 1997. The net sales increase was attributable to the acquisitions
of Hutchinson and, to a lesser extent, Sinterloy and strong customer demand in
all of the Company's product lines. Sales attributable to Hutchinson, which was
acquired in January 1997, and Sinterloy, which was acquired in August 1997, were
$8.7 million and $1.7 million, respectively, for the period ending September 30,
1997, or 45.8% of the net sales increase.
26
<PAGE> 28
Gross Profit. Gross profit increased $8.8 million to $33.4 million during
the first nine months of 1997, a 35.6% increase over gross profit of $24.6
million during the first nine months of 1996. The gross profit margin increased
to 28.7% during the first nine months of 1997 from 26.3% during the comparable
period in 1996. The increase was attributable to cost savings resulting from the
consolidation of one of the Company's manufacturing facilities during 1996 into
existing Company facilities, as well as favorable product mix.
Selling, Technical and Administrative Expenses. Selling, technical and
administrative ("ST&A") expenses increased $2.6 million, or 22.6%, from $11.6
million during the first nine months of 1996 to $14.2 million during the first
nine months of 1997. As a percentage of net sales, ST&A remained relatively
constant at 12.2% during the first nine months of 1997 compared to 12.4% during
the comparable period of 1996.
Income from Operations. Income from operations increased $9.7 million, or
140.6%, from $6.9 million in the first nine months of 1996 to $16.6 million in
the first nine months of 1997. Income from operations as a percentage of net
sales increased to 14.2% in the first nine months of 1997 from 7.3% in the
comparable nine month period of 1996, reflecting cost savings from the
consolidation of facilities, reduced plant consolidation expenses, increased
sales and a more favorable product mix.
Interest Expense. Interest expense increased $3.3 million, or 45.3%, to
$10.6 million in the first nine months of 1997 from $7.3 million in the
comparable nine month period in 1996. The increase is attributable to higher
debt levels, a result of the issuance of the Senior Notes in the fourth quarter
of 1996.
Income Taxes. The provision for income taxes increased $1.6 million to
$2.5 million in the first nine months of 1997 (43.7% of pre-tax income) from
$0.9 million in the comparable period of 1996, reflecting the increase in
pre-tax income.
Net Income (Loss). As a result of the factors noted above, net income was
$3.3 million in the first nine months of 1997 compared to a loss of $1.4 million
in the comparable nine month period of 1996.
1996 COMPARED TO 1995
Net Sales. Net sales increased $39.4 million, or 46.5%, from $84.6 million
in 1995 to $124.0 million in 1996. Net friction product sales increased $39.2
million, or 61.1%, from $64.2 million in 1995 to $103.4 million in 1996. The net
friction product sales increase was primarily attributable to the purchase of
SKW in June 1995. Sales attributable to the acquired company in 1996 were $68.9
million compared to $32.3 million of SKW sales that were included in the
Company's results for 1995, representing a net increase of $36.6 million, or
93.3%, of the friction product net sales increase. The remaining net friction
product sales increase of $2.6 million in 1996, or 6.7% of the increase, was
primarily attributable to increased aftermarket sales of friction products used
in construction and agricultural equipment and increased sales of specialty
friction products. These sales increases were partially offset by lower sales of
friction products for heavy truck clutches resulting from lower truck
production. Powder metal component net sales increased $212,000, or 1.0%, from
$20.4 million in 1995 to $20.6 million in 1996. The increase in powder metal
component sales was primarily attributable to higher sales of powder metal
components used in hydraulic mechanisms.
Gross Profit. Gross profit in 1996 was $32.1 million, an increase of $8.6
million, or 36.8%, from $23.5 million in 1995. As a percentage of net sales,
gross profit was 25.9% in 1996 and 27.8% in 1995. Gross profit as a percentage
of sales decreased primarily as a result of the change in product mix resulting
from the SKW acquisition and costs associated with the start-up of production
(other than moving expenses) in connection with the manufacturing facility
consolidation program. As a result of the SKW acquisition, sales of the
Company's higher margin aerospace friction products declined from 25.5% of net
sales in 1995 to 20.8% of net sales in 1996. Combined sales of the Company's
lower margin construction and agriculture friction products increased from 17.6%
of net sales in 1995 to 34.2% of net sales in 1996.
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<PAGE> 29
ST&A Expenses. ST&A expenses increased $3.9 million, or 33.6%, from $11.6
million in 1995 to $15.5 million in 1996. As a percentage of net sales, ST&A
expenses declined from 13.7% to 12.5% over such periods, primarily as a result
of the reductions in the overhead of SKW and the increase in net sales, as a
result of the SKW acquisition, partially offset by higher incentive compensation
at the Company's friction product facilities.
Income from Operations. Income from operations of $9.8 million in 1996
decreased $169,000, or 1.7%, from $10.0 million in 1995. As a percentage of net
sales, income from operations declined from 11.8% in 1995 to 7.9% in 1996. In
addition to the change in product mix resulting from the SKW acquisition and
production start-up costs and increased ST&A expenses referred to above, the
decrease reflects $4.0 million in non-recurring costs in 1996 in connection with
the SKW manufacturing facility consolidation program and $882,000 in increased
amortization of goodwill and deferred financing costs primarily resulting from
the acquisition of SKW.
Interest Expense. Interest expense increased $3.3 million, or 45.4%, from
$7.3 million in 1995 to $10.6 million in 1996. The increase is primarily related
to the higher average amount of outstanding indebtedness in 1996 resulting from
the acquisition of SKW.
Income Taxes. The provision for income taxes decreased $804,000 from $1.6
million in 1995 (57.2% of pre-tax income) to $789,000 of expense in 1996.
Extraordinary Item. In 1996, the Company incurred $2.0 million of
non-recurring extraordinary charges as a result of the write-off of previously
capitalized deferred financing costs arising from the termination of the Old
Credit Facility.
Net Income (Loss). The net loss for 1996 was $3.1 million, a change of
$3.8 million compared to net income of $762,000 in 1995, as a result of the
factors noted above.
1995 COMPARED TO 1994
Net Sales. Net sales increased $43.2 million, or 104.5%, from $41.4
million in 1994 to $84.6 million in 1995. Friction product net sales increased
$33.8 million, or 110.9%, from $30.4 million in 1994 to $64.2 million in 1995.
The net friction product sales increase was attributable to the purchase of SKW
in June 1995, and to a lesser extent, to increased sales of linings for aircraft
braking systems due to the sustained improvement of the U.S. commercial airline
industry. Sales attributable to SKW in 1995, including brake lining sales, were
$32.3 million, or 95.7%, of the friction product net sales increase. Sales for
the Company's other friction products businesses were unchanged as increased
aftermarket sales and sales of heavy truck clutches resulting from increased
truck production were offset by sales declines to original equipment
manufacturers of construction and agricultural equipment. Powder metal component
net sales increased $9.5 million, or 86.6%, from $10.9 million in 1994 to $20.4
million in 1995, primarily as a result of the full year inclusion of Helsel
which was acquired in June 1994. The full year inclusion of Helsel accounted for
$9.2 million, or 97.4%, of the net sales increase in 1995. The remaining powder
metal component sales increase was primarily due to increased sales of powder
metal components for fluid power applications and for anti-lock brake sensor
rings for use in heavy trucks.
Gross Profit. Gross profit in 1995 was $23.5 million, an increase of $8.9
million, or 60.6%, from $14.6 million in 1994. As a percentage of net sales,
gross profit was 35.3% in 1994 and 27.8% in 1995. This change was primarily a
result of a change in product mix resulting from the acquisitions of SKW and
Helsel and $2.4 million in additional cost of sales as a result of the write up
of inventory purchased in the SKW acquisition to fair value. Gross profit
margins in the existing friction products business grew slightly due to the
increased proportion of high margin aircraft brake lining sales.
ST&A Expenses. ST&A expenses increased $5.3 million, or 83.9%, from $6.3
million in 1994 to $11.6 million in 1995. As a percentage of net sales, ST&A
expenses declined from 15.2% to 13.7% over such periods, primarily as a result
of the reductions in the overhead of SKW and the increase in net sales, as a
result of the SKW acquisition.
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<PAGE> 30
Income from Operations. Income from operations increased $2.6 million, or
35.3%, from $7.4 million in 1994 to $10.0 million in 1995. As a percentage of
net sales, income from operations declined from 17.8% in 1994 to 11.8% in 1995,
primarily as a result of the change in product mix following the SKW and Helsel
acquisitions and, to a lesser extent, increased amortization of goodwill and
deferred financing costs of $910,000, primarily as a result of the acquisitions.
Interest Expense. Interest expense increased $4.1 million, or 124.2%, from
$3.3 million in 1994 to $7.3 million in 1995. The increase is primarily related
to the higher average amount of outstanding indebtedness in 1995 resulting from
the acquisition of SKW.
Income Taxes. The provision for income taxes decreased $252,000 from $1.8
million in 1994 (42.5% of pre-tax income) to $1.6 million in 1995 (57.2% of
pre-tax income). The increase in the effective tax rate in 1995 was primarily
the result of increased non-deductible amortization, earnings from foreign
operations and adjustments to the Company's worldwide tax liability.
Net Income. Net income decreased $1.5 million, or 66.7%, from $2.3 million
in 1994 to $762,000 in 1995, as a result of the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the recent acquisitions and the issuance of the Senior
Notes, the Company has, and will continue to have, substantial indebtedness. The
Company will therefore be required to use a substantial portion of its cash flow
from operations for the payment of interest expense on indebtedness. In the
first nine months of 1997, interest expense was equal to 104.4% of the Company's
cash flow from operations.
The Company's primary source of funds for conducting its business
activities and servicing its indebtedness has been cash generated from
operations and borrowings under its Old Revolving Credit Facility (subject to a
borrowing base of a portion of the eligible accounts receivable and inventory).
As of September 30, 1997, there were no amounts outstanding under the Old
Revolving Credit Facility.
Concurrently with closing of the Offering, the Company expects to enter
into the $50.0 million New Revolving Credit Facility and the $35.0 million New
Term Loan Facility and to terminate the Old Revolving Credit Facility. Bankers
Trust Company, the lender under the Old Revolving Credit Facility, will be the
lender under the New Revolving Credit Facility and the New Term Loan Facility.
The New Revolving Credit Facility and the New Term Loan Facility will be
unsecured, will be guaranteed by the Company's domestic subsidiaries and will be
used for working capital and general corporate purposes. The New Revolving
Credit Facility will not be subject to a borrowing base formula. Each facility
will contain financial and other covenants with respect to the Company and its
subsidiaries that, among other matters, will prohibit the payment of cash
dividends on the Class A Common Stock except upon compliance with certain
conditions, restrict the creation of liens, sales of assets, sale-leaseback
transactions and transactions with affiliates and require the maintenance of
certain minimum debt and interest coverage ratios, including a debt coverage
ratio (total debt to consolidated EBITDA) of less than or equal to 4.0 to 1.0
and an interest coverage ratio (consolidated EBITDA to net interest expense)
greater than or equal to 2.5 to 1.0. The Company expects to be in compliance
with all such covenants at closing. Amounts outstanding under each facility will
be due five years from the closing date, and bear interest at a variable rate
based on the Eurodollar Rate plus 0.75% per annum or, at the Company's option, a
variable rate based on either the lending bank's prime rate or the federal funds
rate plus 0.5% per annum, with both rates subject to increase in the event the
Company does not meet certain debt to EBITDA ratios. Replacement of the Old
Revolving Credit Facility with the New Revolving Credit Facility and entry into
the New Term Loan Facility are subject to the closing of the Offering and use of
the proceeds of the Offering to effect the Senior Note Redemption.
The Company has outstanding $100.0 million of Senior Notes, which are
unsecured senior obligations of the Company. The Senior Notes, which mature on
December 1, 2003, are guaranteed on a senior unsecured basis by each of the
present and future domestic subsidiaries of the Company.
29
<PAGE> 31
Principal payments on the Senior Notes are due semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1997, to holders of record
on the immediately preceding May 15 and November 15, respectively. Interest on
the Senior Notes accrues at the rate of 10 1/4% per annum. The Company is
subject to certain restrictive covenants contained in the Senior Note Indenture,
including, but not limited to, covenants imposing limitations on: the incurrence
of additional indebtedness; certain payments, including dividends and
investments; the creation of liens; sales of assets and preferred stock;
transactions with interested persons; payment and stock issuance restrictions
affecting subsidiaries; sale-leaseback transactions; and mergers and
consolidations. The Company anticipates that it will effect the Senior Note
Redemption, in accordance with the terms of the Senior Note Indenture, as soon
as practicable after the closing of the Offering. Under the Senior Note
Redemption, $35.0 million in principal amount of the Senior Notes will be
redeemed. See "Use of Proceeds."
As of September 30, 1997, the Company was in compliance with the terms of
its indebtedness.
Net cash provided by operating activities was $10.2 million for the nine
month period ended September 30, 1997 as compared to $2.8 million in the
comparable period of 1996. The increase in net income of $4.6 million and
non-cash charges in addition to an improved working capital position at
September 30, 1997 accounted for the increased operating cash flow.
Net cash used in investing activities was $30.7 million and $7.5 million
for the nine month periods ending September 30, 1997 and 1996, respectively. The
cash used in investing activities in the 1997 period consisted of $26.0 million
attributable to the acquisitions of Hutchinson and Sinterloy and $4.8 million
for the purchases of property, plant and equipment. In the comparable period of
1996, cash used in investing activities consisted primarily of expenditures for
property, plant and equipment.
Net cash used in financing activities was $1.6 million for the nine month
period ended September 30, 1997 and was used primarily for payment of capital
lease obligations. In the comparable nine month period of 1996, net cash
provided by financing activities of $5.8 million was primarily attributable to
an increase in borrowing under the Company's previous credit facilities.
The primary uses of capital by the Company are (1) to pay interest on, and
to repay principal of, indebtedness, (2) for capital expenditures for
maintenance, replacement and acquisitions of equipment, expansion of capacity,
productivity improvements and product development, and (3) for making additional
strategic acquisitions of complementary businesses. The Company's capital
expenditures were $9.1 million in the nine month period ended September 30, 1996
and $5.0 million for the comparable period of 1997. The Company anticipates that
1998 capital expenditures will be approximately $14.1 million, primarily for the
expansion of the Company's existing manufacturing facilities and the purchase of
additional equipment to expand the Company's manufacturing capacity.
The Company believes that cash flow from operating activities, funds
available from the sale of the Class A Common Stock in the Offering and
additional funds available under the New Revolving Credit Facility will be
sufficient to meet its currently anticipated operating and capital expenditure
requirements and service its indebtedness for the next 12 months. If the Company
cannot generate sufficient cash flow from operating activities or borrow under
the New Revolving Credit Facility to meet such obligations, then the Company may
be required to take certain actions, including refinancing all or a portion of
its existing debt, selling assets or obtaining additional financing. There is no
assurance that any such refinancing or asset sales would be possible or that any
additional financing could be obtained.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly statement of operations
data. This unaudited quarterly information has been prepared on the same basis
as the annual information presented elsewhere
30
<PAGE> 32
herein and, in management's opinion, includes all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the
information for each of the quarters presented.
<TABLE>
<CAPTION>
1996 1997
------------------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $31,422 $31,501 $30,749 $30,325 $36,884 $40,097 $39,381
Gross profit.................. 8,366 8,208 8,075 7,464 10,516 12,420 10,486
Selling, technical and
administrative expenses..... 3,669 3,986 3,957 3,856 4,554 4,893 4,794
Amortization of intangibles... 651 932 825 398 829 797 949
Plant consolidation
expenses.................... 600 1,539 1,610 279 -- -- 50
Income from operations........ 3,446 1,751 1,683 2,931 5,133 6,730 4,693
Interest expense.............. 2,513 2,461 2,347 3,327 3,679 3,380 3,580
Other expense (income), net... 5 5 45 201 (250) 280 92
Income (loss) before income
taxes and extraordinary
item........................ 928 (715) (709) (597) 1,704 3,070 1,021
Income (loss) before
extraordinary item.......... 512 (721) (1,150) (523) 898 1,887 476
Extraordinary item............ -- -- -- (1,196) -- -- --
Net income (loss)............. $ 512 $ (721) $(1,150) $(1,719) $ 898 $ 1,887 $ 476
</TABLE>
The Company's results of operations are subject to fluctuations from
quarter to quarter due to changes in demand for its products and other factors.
Demand for the Company's products in each of the geographic end markets it
serves can vary significantly from quarter to quarter due to changes in demand
for products that incorporate or utilize the Company's products and other
factors beyond the Company's control, such as the unusually high customer demand
at Sinterloy in the first six months of 1997, prior to its acquisition by the
Company, which high customer demand the Company does not expect to continue in
comparable periods in 1998. In the third quarter, net sales of the Company's
products are typically lower than the first two quarters because of planned
production shut downs at the Company's Italian facility, and in the fourth
quarter, net sales of the Company's products are typically lower than the first
two quarters because of holiday-related manufacturing facility shut downs by the
Company and certain of its customers. Therefore, year-to-year comparisons of
quarterly results may not be meaningful, and quarterly results during the year
are not necessarily indicative of the results for any future period or for the
entire year. See "Risk Factors -- Fluctuation in Quarterly Results."
INFLATION
Inflation generally affects the Company by increasing interest expense of
floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The Company believes that the relatively moderate rate of
inflation over the past few years has not had a significant effect on its
results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 specifies modifications to the calculation of earnings per share from
that currently used by the Company. Under SFAS No. 128, "basic earnings per
share" will be calculated based upon the weighted average number of shares
actually outstanding, and "diluted earnings per share" will be calculated based
upon the weighted average number of common shares outstanding and other
potential common shares if they are dilutive. SFAS No. 128 will be adopted by
the Company on December 31, 1997 and all prior periods will be
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<PAGE> 33
restated. The adoption of SFAS No. 128 is not expected to have a material impact
on the Company's earnings per share for any of the periods presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first quarter
of 1998, and does not anticipate a significant impact on the financial
statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required in 1998.
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<PAGE> 34
BUSINESS
OVERVIEW
Hawk designs, engineers, manufactures and markets specialized components,
principally made from powder metals, used in a wide variety of aerospace,
industrial and commercial applications. The Company is a leading worldwide
supplier of friction products for brakes, clutches and transmissions used in
aerospace, industrial and specialty applications. Friction products represented
68.9% of Company sales in the first nine months of 1997. Hawk is also a leading
supplier of powder metal components for industrial applications, including pump,
motor and transmission elements, gears, pistons and anti-lock brake sensor
rings. In addition, the Company designs and manufactures die-cast aluminum
rotors for small electric motors used in appliances, business equipment and
exhaust fans. The Company focuses on manufacturing products requiring
sophisticated engineering and production techniques for applications in markets
in which it has achieved a significant market share.
Hawk is the largest independent supplier of original equipment and
replacement friction materials to the manufacturers of braking systems for the
Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the
Canadair CRJ aircraft. The Company is also the largest supplier of friction
materials to the general aviation (non-commercial, non-military) market,
supplying friction materials for aircraft manufacturers such as Cessna, Lear,
Gulfstream and Fokker. The Company believes that it is a leading supplier of
friction materials to manufacturers of construction and agricultural equipment
and truck clutches, including Caterpillar, John Deere, New Holland and Eaton. In
addition, the Company is a major supplier of friction products for use in
specialty applications, such as brakes for Harley-Davidson motorcycles, AM
General Humvees and Bombardier, Polaris and Arctco ("Arctic Cat") snowmobiles.
The Company's powder metal components are used primarily in industrial
applications, often as lower cost replacements for parts manufactured by
traditional forging, casting or stamping technologies. The Company targets three
areas of the powder metal component marketplace: high precision components that
are used in fluid power applications requiring tight tolerances; large
structural powder metal parts used in construction, agricultural and truck
applications; and smaller, high volume parts for which the Company can utilize
its efficient pressing and sintering capabilities. The Company is also the
largest independent U.S. manufacturer of die-cast aluminum rotors for use in
subfractional electric motors.
The Company believes that its diverse customer base and extensive sales to
the aerospace and industrial aftermarkets reduce its exposure to economic
fluctuations. The Company estimates that aftermarket sales of friction products
have comprised approximately 50% of the Company's net friction product sales in
recent years. The Company also believes that its principal tradenames are
well-known in the domestic and international marketplace and are associated with
quality and extensive customer support, including specialized product
engineering and strong aftermarket service.
Since its formation in 1989, Hawk has pursued a strategic growth plan by
making complementary acquisitions and broadening its customer base. From 1991
through the 12 month period ended September 30, 1997, the Company's net sales
and income from operations increased at a compound annual rate of 38.3% and
35.5%, respectively. The Company reported a loss before extraordinary item of
$1.9 million in 1996, and expects to incur a net loss, after extraordinary
charges, in the first quarter of 1998 as a result of the incurrence of
non-recurring extraordinary charges of $3.6 million in prepayment penalties
($2.2 million net after tax) and $1.9 million as a result of the write-off of
previously capitalized deferred financing costs ($1.1 million net after tax),
each arising from the Senior Note Redemption. For the first nine months of 1997,
the Company's net sales and income from operations (before non-recurring costs
in 1996 of $3.7 million for plant consolidation expenses) increased 24.2% and
55.8%, respectively, compared to the corresponding period in 1996. Since 1994,
sales growth has been primarily driven by the acquisitions of Helsel, SKW and
Hutchinson. These acquisitions tripled the net sales of the Company and, because
the acquisitions were financed primarily with indebtedness, have caused the
Company to become highly leveraged. As a result, the Company's interest expense
grew at a compound annual rate of 103.5% from $3.3 million in 1994 to $13.5
million in 1996 pro forma for all
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<PAGE> 35
acquisitions. The Company's net sales, pro forma for all acquisitions, during
the period from 1991 through the 12 month period ended September 30, 1997 grew
internally at a compound annual rate of 9.7%.
BUSINESS STRATEGY
The Company's business strategy includes the following principal elements:
- Focus on High-Margin, Specialty Applications. The Company operates
primarily in aerospace, industrial and commercial markets that require
sophisticated engineering and production techniques. In developing new
applications, as well as in evaluating acquisitions, the Company seeks to
compete in markets requiring such engineering expertise and technical
capability, rather than in markets in which the primary competitive factor
is price. The Company believes margins for its products in these markets
are higher than in other manufacturing markets that use standardized
products. The Company's gross margins in 1996 and the first nine months of
1997 were 25.9% and 28.7%, respectively.
- New Product Introduction. A key part of the Company's strategy is
the introduction of new products which incorporate improved performance
characteristics or reduced costs in response to customer needs. Because
friction products are the consumable, or wear, component of brake, clutch
and transmission systems, the introduction of new friction products in
conjunction with a new system provides the Company with the opportunity to
supply the aftermarket for the life of the system. For example, the ability
to service the aftermarket for a particular aircraft braking system will
likely provide the Company with a stable market for its friction products
for the life of an aircraft, which can be 30 years or more. The Company
also seeks to grow by applying its existing products and technologies to
new specialized applications where its products have a performance or
technological advantage. For example, the Company recently developed a
powder metal pump element for a customer's power steering unit that
improved pumping efficiency and dependability while reducing noise and
cost.
- Pursuit of Strategic Acquisitions. Many of the markets in which the
Company competes are fragmented, providing the Company with attractive
acquisition opportunities. The Company will continue to seek to acquire
complementary businesses with leading market positions that will enable it
to expand its product offerings, technical capabilities and customer base.
Historically, the Company has been able to achieve significant cost
reductions through the integration of its acquisitions. For example, since
the acquisition of SKW in 1995, the Company has consolidated SKW's
headquarters facility and one of SKW's two U.S. manufacturing facilities
into its existing facilities, resulting in $5.4 million of annualized cost
savings.
- Expanding International Sales. To take advantage of worldwide
growth in its end user markets, the Company expanded its international
presence through the acquisition of SKW in 1995, which resulted in the
addition of manufacturing facilities in Italy and Canada and a worldwide
distribution network. The Company continues to expand its European
operations to meet strong demand in established markets throughout Europe.
The Company also believes that further opportunities to expand sales exist
in emerging economies. Sales from the Company's international facilities
have grown from $15.7 million in 1995 to $20.3 million for the 12 month
period ended September 30, 1997.
- Leveraging Customer Relationships. The Company's engineers work
closely with customers to develop and design new products and improve the
performance of existing products. The Company believes that its commitment
to quality, service and just-in-time delivery enables it to build and
maintain strong and stable customer relationships. The Company believes
that more than 80% of its sales are from products and materials for which
it is the sole source provider for specific customer applications. Each of
the Company's ten largest customers have been customers of the Company or
its predecessors for more than ten years. The Company believes that strong
relation-
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<PAGE> 36
ships with its customers provide it with significant competitive advantages
in obtaining and securing new business opportunities.
HISTORY
The Company believes that its management team has demonstrated the ability
to identify, complete and integrate strategic acquisitions. In 1989, an investor
group led by Norman C. Harbert, Chairman of the Board, President and Chief
Executive Officer and a stockholder of the Company, and Ronald E. Weinberg,
Vice-Chairman of the Board, Treasurer and a stockholder of the Company, formed
The Hawk Group of Companies, Inc., an Ohio corporation, to acquire the assets
and liabilities of FPC and Logan, each an Ohio corporation that is a
wholly-owned subsidiary of the Company. The assets of Helsel were acquired in
June 1994 by a group led by Mr. Harbert and Mr. Weinberg, and, in June 1995,
Helsel became a wholly-owned subsidiary of the Company upon its merger with a
subsidiary of the Company. The Company acquired the capital stock of SKW in June
1995, at which time the Company was reincorporated as a Delaware corporation by
means of a parent-subsidiary merger. In October 1996, the Company changed its
name to Hawk Corporation. In November 1996, Hawk Holding Corp., a Delaware
corporation that was a principal stockholder of the Company, merged with and
into the Company. In January 1997, the Company acquired the capital stock of
Hutchinson and, in August 1997, the Company purchased the assets of Sinterloy.
ACQUISITIONS
Building on the base of its original FPC and Logan subsidiaries, the
Company has successfully made the following acquisitions:
- Helsel. The June 1994 Helsel acquisition provided the Company with
the ability to manufacture medium sized, high precision powder metal
components used primarily in fluid power applications. Following the
acquisition, the Company made approximately $5 million in capital
improvements at Helsel, increasing its capacity by approximately 30%. By
focusing on its expertise in fluid power applications and by increasing
capacity, Helsel has increased its sales over 50% since its acquisition by
the Company.
- S.K. Wellman. The June 1995 SKW acquisition furthered the Company's
strategy of consolidating friction product manufacturers. Tracing its
history back to the manufacture of transmission friction discs for the
Model T in the 1920s, SKW brought an established, well-known original
equipment and aftermarket industrial product line to the Company to
complement FPC's core aerospace product line. In addition, the acquisition
provided the Company with strategic access to international markets through
SKW's manufacturing facilities in Italy and Canada and an established
distribution network throughout Europe and the Far East. Following the
acquisition, the Company consolidated one of SKW's two U.S. manufacturing
facilities and SKW's executive offices into other facilities of the
Company.
- Hutchinson. The January 1997 Hutchinson acquisition furthered the
Company's strategy of acquiring complementary businesses and expanded the
Company's product offerings, technical capabilities and customer base.
Hutchinson designs and manufactures die-cast aluminum rotors. The Company
believes that Hutchinson is one of the largest independent domestic
suppliers of these rotors, which are used in subfractional (less than 1/20
horsepower) electric motors for use in business equipment, appliances and
exhaust fans. The Company also believes Hutchinson has growth opportunities
arising from the trend by original equipment motor manufacturers to
outsource production of rotors. Additionally, Hutchinson manufactures
extruded aluminum fan spacers used in commercial diesel engines for heavy
trucks and off-road equipment and precision metal castings used in hand
power tools and gasoline pumping units.
- Sinterloy. The August 1997 acquisition of Sinterloy expanded the
Company's powder metal components business primarily into the business
equipment market. Sinterloy's ability to manufacture high volume small to
medium sized powder metal components complements the Company's
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<PAGE> 37
other powder metal businesses, which generally produce lower volume, higher
precision components.
Both the friction product and powder metal component industries are
fragmented and are undergoing consolidation due in part to the additional
resources needed (1) to perform the research and development necessary to
satisfy customers' increasingly stringent quality and performance criteria, and
(2) to meet just-in-time delivery requirements. As a result, the Company
believes that it can continue to make strategic acquisitions that may include
other friction product and powder metal component manufacturers. To effect its
acquisition strategy, the Company engages in discussions, from time to time,
with other manufacturers in friction products, powder metal component and other
complementary businesses. At this time, the Company has no outstanding
commitments or agreements regarding any future acquisitions. See "Risk
Factors -- Acquisition Strategy."
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<PAGE> 38
PRODUCTS AND MARKETS
The Company focuses on supplying components to the aerospace, industrial
and commercial markets that require sophisticated engineering and production
techniques for applications in markets in which it has achieved a significant
market share. Through acquisitions and product line expansions, the Company has
diversified its end markets, which diversification, the Company believes, has
reduced its economic exposure to the cyclicality of any particular industry. In
the first nine months of 1997, the Company's sales by principal products and
principal end markets were:
Principal Products
<TABLE>
<S> <C>
Friction Products 69
Powder Metal Components 18
Rotors 5
Other* 8
</TABLE>
Principal Markets
<TABLE>
<S> <C>
Aerospace 19
Truck 15
Construction 19
Agricultural 12
Other** 20
Pump & Motor 10
Lawn & Garden 5
</TABLE>
- ---------------
* Includes steel stampings, precision metal castings and extruded aluminum fan
spacers.
** Includes motorcycles and snowmobiles, performance racing automotive,
automotive (original equipment and aftermarket) and power hand tools.
Friction Products
The Company's friction products are made from proprietary formulations of
composite materials that primarily consist of metal powders and synthetic and
natural fibers. Friction products are the replacement elements used in brakes,
clutches and transmissions to absorb vehicular energy and dissipate it through
heat and normal mechanical wear. For example, the friction brake linings in
aircraft braking systems slow and stop airplanes when landing or taxiing.
Friction products manufactured by the Company also include friction linings for
use in automatic and power shift transmissions, clutch facings that serve as the
main contact point between an engine and a transmission, and brake linings for
use in other types of braking systems.
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<PAGE> 39
The Company's friction products are custom-designed to meet the performance
requirements of a specific application and must meet or exceed the customer's
performance specifications, including temperature, pressure, component life and
noise level criteria. The engineering required in designing a friction material
for a specific application dictates a balance between the component life cycle
and the performance application of the friction material in, for example,
stopping or starting movement. Friction products are consumed through customary
use in a brake, clutch or transmission system and require regular replacement.
Because the friction material is the consumable, or wear, component of such
systems, new friction product introduction in conjunction with a new system
provides the Company with the opportunity to supply the aftermarket with that
friction product for the life of the system.
The principal markets served by the Company's friction products business
include manufacturers of aircraft brakes, truck clutches, heavy-duty
construction and agricultural vehicle brakes, clutches and transmissions, as
well as manufacturers of motorcycle, snowmobile and performance racing brakes.
Based upon net sales, the Company believes that it is among the top three
worldwide manufacturers of friction products used in aerospace and industrial
applications. The Company estimates that aftermarket sales of friction products
have comprised approximately 50% of the Company's net friction product sales in
recent years. The Company believes that its stable aftermarket sales component
enables the Company to reduce its exposure to adverse economic cycles.
Aerospace. The Company is the largest independent supplier of friction
materials to the manufacturers of braking systems for the Boeing 727, 737 and
757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft.
The Company is also the largest supplier of friction materials to the general
aviation (non-commercial, non-military) market, supplying friction materials for
aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. Each
aircraft braking system, including the friction materials supplied by the
Company, must meet stringent FAA criteria and certification requirements. New
model development and FAA testing for the Company's aircraft braking system
customers generally begins two to five years prior to full scale production of
new braking systems. If the Company and its aircraft brake system manufacturing
partner are successful in obtaining the rights to supply a particular model of
aircraft, the Company will typically supply its friction products to that
model's aircraft braking system for as long as the model continues to fly
because it is generally too expensive to redesign a braking system and meet FAA
requirements. Moreover, FAA maintenance requirements mandate that brake linings
be changed after a specified number of take-offs and landings, which the Company
expects to result in a continued and steady market for its aerospace friction
products.
The Company's friction products for commercial aerospace applications are
primarily used on "single-aisle" aircraft that are flown on shorter routes,
resulting in more takeoffs and landings than larger aircraft. The Company
believes its friction products provide an attractive combination of performance
and cost effectiveness in these applications. According to Boeing's 1997 Current
Market Outlook, there were over 7,500 single-aisle commercial aircraft in the
world at the end of 1996, and this number is projected to increase to
approximately 11,000 by the end of 2006. The Boeing report also states that
world airline traffic is projected to increase 5.5% per year through 2006. The
Company expects that continued growth in world airline traffic, combined with
the increasing number of single-aisle aircraft, will cause demand for the
Company's aerospace friction products to remain strong. For example, Boeing is
utilizing BFGoodrich braking systems with the Company's friction material on
many of its new 737-600, -700 and -800 series aircraft.
Construction/Agricultural/Trucks. The Company supplies a variety of
friction products for use in brakes, clutches and transmissions on construction
and agricultural vehicles and equipment and trucks. These components are
designed to precise tolerances and permit brakes to stop or slow a moving
vehicle and the clutch or transmission systems to engage or disengage. The
Company believes it is a leading supplier to original equipment manufacturers
and to the aftermarket. The Company believes that its trademark, Velvetouch(R)
is well-known in the aftermarket for these components. As with the Company's
aerospace friction products, new friction product introduction in conjunction
with a new brake, clutch or transmission system provides the Company with the
opportunity to supply the aftermarket with
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<PAGE> 40
the friction product for the life of the system. The Company expects to grow
with its domestic customers in these applications as they continue to penetrate
worldwide markets. The Company also expects strong sales growth from its
facility in Italy as its primary customers, New Holland, Same Deutz and Clark
Hurth, continue to grow in European and emerging economic markets.
Construction Equipment. The Company supplies friction products such as
transmission discs, clutch facings and brake linings to manufacturers of
construction equipment, including Caterpillar. The Company believes it is the
second largest domestic supplier of these types of friction products.
Replacement components for construction equipment are sold through manufacturers
such as Caterpillar, as well as various aftermarket distributors.
Demand for Hawk's friction products in the construction sector is partially
driven by demand for new construction equipment and the overall level of
construction activity. According to an industry publication, unit sales of
construction equipment in North America have grown 10.1% per year from 1992 to
1996. This growth has been driven by economic expansion, a favorable interest
rate environment and the evolution of the rental market for construction
equipment. Additionally, there has been strong demand for construction equipment
overseas, driven principally by infrastructure development in emerging
economies. Currently, the Company is experiencing healthy demand in this market
sector as a result of these favorable trends.
Agricultural Equipment. The Company supplies friction products such as
clutch facings, transmission discs and brake linings for manufacturers of
agricultural equipment, including John Deere and New Holland. The Company
believes it is the second largest domestic supplier of such friction products.
Replacement components for agricultural equipment are sold through original
equipment manufacturers as well as various aftermarket distributors.
Demand for Hawk's friction products in the agricultural sector is partially
driven by a healthy domestic farm economy and the replacement of aging equipment
resulting from underinvestment during the 1980s. According to an industry
publication, since 1992, unit sales of U.S. two wheel drive tractors over 100
horsepower have grown at a compound annual rate of 8.0%. In addition, the
Company has been experiencing strong demand from the agricultural equipment
market in Europe.
Medium and Heavy Trucks. The Company supplies friction products for clutch
facings used in medium and heavy trucks to original equipment manufacturers,
such as Eaton. The Company believes it is the leading domestic supplier of
replacement friction products used in these applications. Replacement components
are sold through Eaton and various aftermarket distributors.
Demand for Hawk's friction products in the truck sector is driven by
utilization and original equipment manufacturing volume. Demand for Class 8
(heavy) trucks has been strong over the past several years. According to an
industry publication, sales of Class 8 diesel trucks in 1996 were an estimated
185,000 units, which represents a 46% increase over the 127,000 units sold in
1992. Class 8 truck sales volumes have continued to grow in 1997. As a result,
the Company is currently experiencing strong demand for friction products in the
truck sector.
Specialty. The Company supplies friction products for use in other
specialty applications, such as brake pads for Harley-Davidson motorcycles, AM
General Humvees and Bombardier, Polaris Industries and Arctic Cat snowmobiles.
The Company believes that these markets are experiencing significant growth and
the Company will continue to increase its market share with its combination of
superior quality and longer product life. Under the "Hawk Brake" tradename, the
Company also supplies high performance friction material for use in racing car
brakes. The Company's high performance brake pad for race cars can operate in
temperatures of over 1,100 degrees Fahrenheit. The Company believes that this
performance racing material may have additional applications such as braking
systems for passenger and school buses, police cars and commercial delivery
vehicles.
Other. In addition to providing metal stampings for its friction business,
the Company's Logan subsidiary also sells transmission plates and other
components to the automotive and trucking industries.
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<PAGE> 41
Powder Metal Components
The Company is a leading supplier of powder metal components consisting
primarily of pump, motor and transmission elements, gears, pistons and anti-lock
brake sensor rings for applications ranging from lawn and garden tractors to
industrial equipment. Since Hawk's founding in 1989, it has participated in the
growing powder metal parts and products industry with a focus on the North
American industrial market, which the Metal Powder Industries Federation
("MPIF"), an industry trade group, estimates had sales of over $1.0 billion in
1996. According to MPIF, the value of iron powder shipments in North America
increased by over 10% per year from 1991 to 1996, and North American powder
manufacturers are anticipating an average annual growth rate of almost 6% per
year for the next ten years.
Fluid Power and Industrial Applications. The Company manufactures a
variety of components made from powder metals for use in (1) fluid power
applications, such as pumps and other hydraulic mechanisms, and (2)
transmissions, other drive mechanisms and anti-lock braking systems used in
trucks and off-road equipment. The Company believes that the market for powder
metal components will continue to grow as the Company's core powder metal
technology benefits from advances that permit production of powder metal
components with increased design flexibility, greater densities and closer
tolerances that provide improved strength, hardness and durability for demanding
applications, and enable the Company's powder metal components to be substituted
for wrought steel or iron components produced with forging, casting or stamping
technologies. Powder metal components can often be produced at a lower cost per
unit than products manufactured with forging, casting or stamping technologies
due to the elimination of, or substantial reduction in, secondary machining,
lower material costs and the virtual elimination of raw material waste. The
Company believes that the current trend of substituting powder metal components
for forged, cast or stamped components in industrial applications will continue
for the foreseeable future, providing the Company with increased product and
market opportunities.
The Company produces powder metal components in three facilities, each
targeting an important aspect of the market place:
- High Precision. Helsel's pressing and finishing capabilities enable
it to specialize in tight tolerance fluid power components such as pump
elements and gears. In addition, the Company believes that Helsel's
machining capabilities provide it with a competitive advantage by giving it
the ability to supply a completed part to its customers, typically without
any subcontracted precision machining. The Company believes that Helsel's
growth will be driven by existing customers' new design requirements and
new product applications primarily for pumps, motors and transmissions.
- Large Size Capability. While Helsel and Sinterloy have small to
medium sized powder metal part capability, FPC has the capability to make
structural powder metal components that are among the largest used in North
America. The Company expects its sales of larger powder metal components to
continue to grow as the Company creates new designs for existing customers
and benefits from market growth, primarily in current construction,
agricultural and truck applications. For example, the Company believes that
sales of its powder metal components used in anti-lock braking systems will
benefit as domestic trucks comply with the U.S. Department of
Transportation's regulations requiring the installation of anti-lock
braking systems on new trucks.
- High Volume. Sinterloy targets smaller, high volume parts where it
can utilize its efficient pressing and sintering capabilities to their best
advantage. Sinterloy's primary market for growth is powder metal components
for the business equipment market. The Company believes that the addition
of Sinterloy's capabilities will provide the Company with cross-selling
opportunities from the Company's other powder metal facilities.
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<PAGE> 42
Die-Cast Aluminum Rotors
The Company believes that Hutchinson is the largest independent U.S.
manufacturer of die-cast aluminum rotors for use in subfractional electric
motors. These motors are used in a wide variety of applications such as business
equipment, small household appliances and exhaust fans.
The Company believes that more than 90 million subfractional motors are
manufactured in the United States annually. Hutchinson manufactured
approximately 30 million rotors for these motors in 1996. Increased office
automation, increased sales of small household appliances and increased sales of
exhaust fans for heating, ventilation and air conditioning systems in commercial
buildings and residential buildings are all factors that are expected to
increase the growth of subfractional motor sales.
The Company estimates that approximately 50% of all rotors in the
subfractional motor market are made internally by motor manufacturers such as
Emerson and General Electric. However, the Company believes Hutchinson has
growth opportunities arising from the trend by original equipment motor
manufacturers to outsource their production of rotors.
MANUFACTURING
The manufacturing processes for most of the Company's friction products and
powder metal components are essentially similar. In general, both use composite
metal alloys in powder form to make high quality powder metal components. The
basic manufacturing steps, consisting of blending/compounding,
molding/compacting, sintering (or bonding) and secondary machining/treatment,
are as follows:
- Blending/compounding: Composite metal alloys in powder form are
blended with lubricants and other additives according to scientific
formulas, many of which are proprietary to the Company. The formulas are
designed to produce precise performance characteristics necessary for a
customer's particular application, and the Company often works together
with its customers to develop new formulas that will produce materials with
greater energy absorption characteristics, durability and strength.
- Molding/compacting: At room temperature, a specific amount of a
powder alloy is compacted under pressure into a desired shape. The
Company's molding presses are capable of producing pressures of up to 3,000
tons. The Company believes that it has some of the largest presses in the
powder metal industry, enabling it to produce large, complex components.
- Sintering: After compacting, molded parts are heated in furnaces to
specific temperatures, enabling metal powders to metallurgically bond,
harden and strengthen the molded parts while retaining their desired shape.
For friction materials, the friction composite part is also bonded directly
to a steel plate or core, creating a strong continuous metallic part.
- Secondary machining/treatment: If required by customer
specifications, a molded part undergoes additional processing. These
processing operations are generally necessary to attain increased hardness
or strength, tighter dimensional tolerances or corrosion resistance. To
achieve these specifications, parts are heat treated, precision coined,
ground or drilled or treated with a corrosion resistant coating, such as
oil.
Certain of the Company's friction products, which are primarily used in
oil-cooled brakes and power shift transmissions, do not require all of the
foregoing steps. For example, molded composite friction materials are molded
under high temperatures and cured in electronically-controlled ovens and then
bonded to a steel plate or core with a resin-based polymer. Cellulose composite
friction materials are blended and formed into continuous sheets and then
stamped into precise shapes by computer-controlled die cutting machines. Like
molded composite friction materials, cellulose composite friction materials are
then bonded to a steel plate or core with a resin-based polymer.
The Company's die-cast aluminum rotors are produced in a three-step
process. Steel stamped disks forming the laminations of the rotors are first
skewed (stacked) and then loaded into dies into
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<PAGE> 43
which molten aluminum is injected to create the rotors. The rotor castings
created in the dies are then machined to produce finished rotors. These rotors
are manufactured in a variety of sizes and shapes to customers' design
specifications.
Quality Control. Throughout its design and manufacturing process, the
Company focuses on quality control. For product design, each Company
manufacturing facility uses state-of-the-art testing equipment to replicate
virtually any application required by the Company's customers. This equipment is
essential to the Company's ability to manufacture components that meet stringent
customer specifications. To ensure that tight tolerances have been met and that
the requisite quality is inherent in its finished products, the Company uses
statistical process controls, a variety of electronic measuring equipment and
computer-controlled testing machinery. The Company has also established programs
within each of its facilities to detect and prevent potential quality problems.
TECHNOLOGY
The Company believes that it is an industry leader in the development of
systems, processes and technologies which enable it to manufacture friction
products with numerous performance advantages, such as greater wear resistance,
increased stopping power, lower noise and smoother engagement. The Company's
expertise is evidenced by its aircraft brake linings, which are currently being
installed on the braking systems of the newly-designed Boeing 737-600, -700 and
- -800 series of aircraft.
The Company maintains an extensive library of proprietary friction product
formulas that serve as starting points for new product development. Each formula
has a specific set of ingredients and processes to generate repeatability in
production. Some formulas may have as many as 15 different components. A slight
change in a mixture can produce significantly different performance
characteristics. The Company uses a variety of technologies and materials in
developing and producing its products, such as graphitic and cellulose
composites. The Company believes its expertise in the development and production
of products using these different technologies and materials gives it a
competitive advantage over other friction product manufacturers, which typically
have expertise in only one or two types of friction material.
The Company also believes that its powder metal components business is able
to produce a wide range of products from small precise components to large
structural parts. The Company has presses that produce some of the largest
powder metal parts in the world, and its powder metal technology permits the
manufacture of complex components with specific performance characteristics and
close dimensional tolerances that would be impractical to produce using
conventional metalworking processes.
CUSTOMERS
The Company's engineers work closely with customers to develop and design
new products and improve the performance of existing products. The Company
believes that its working relationship with its customers on development and
design, and the Company's commitment to quality, service and just-in-time
delivery have enabled it to build and maintain strong and stable customer
relationships. Each of the Company's ten largest customers have been customers
of the Company or its predecessors for more than ten years, and the Company
believes that more than 80% of its sales are from products and materials for
which it is the sole source provider for specific customer applications.
The Company believes that its recent acquisitions have broadened product
lines, increased its technological capabilities and will further enhance its
customer relationships and expand its preferred supplier status. As a result of
its commitment to customer service and satisfaction, the Company has received
numerous preferred supplier awards from its leading customers, including
Aircraft Braking Systems, BFGoodrich Aerospace, Caterpillar, John Deere and New
Holland.
The Company's sales to Aircraft Braking Systems represented 10.4% of the
Company's consolidated net sales in 1996 and 8.7% of the Company's consolidated
net sales in the first nine months of
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1997. In addition, the Company's top five customers accounted for 40.1% of the
Company's consolidated net sales in 1996 and 34.2% of the Company's consolidated
net sales in the first nine months of 1997. See "Risk Factors -- Reliance on
Significant Customers."
MARKETING AND SALES
The Company markets its products globally through eleven product managers,
who operate from the Company's facilities in the United States, Italy and Canada
and a sales office in the United Kingdom. The Company's product managers and
sales force work directly with the Company's engineers who provide the technical
expertise necessary for the development and design of new products and for the
improvement of the performance of existing products.
The Company's friction products are sold both directly to original
equipment manufacturers and to the aftermarket through its original equipment
customers and a network of distributors and representatives throughout the
world.
The Company's marketing and sales of its powder metal components and
die-cast aluminum rotors are directed by six product managers. The Company sells
its powder metal components and rotors to original equipment manufacturers
through independent sales representatives.
SUPPLIERS AND RAW MATERIALS
The principal raw materials used by the Company are copper, steel and iron
powder and custom-formulated cellulose sheet. The Company believes that its
relationships with its suppliers are good. In an effort to ensure a continued
source of supply of the Company's raw materials at competitive prices, the
Company concentrates on developing relationships with its suppliers. In many
instances, the Company works in close consultation with its suppliers in the
development of new combinations of powder metal. Thus, although the Company has
no long-term supply agreements with any of its major suppliers, the Company has
generally been able to obtain sufficient supplies of these raw materials for its
operations. See "Risk Factors -- Supply and Price of Raw Materials."
COMPETITION
The principal industries in which the Company competes are competitive and
fragmented, with many small manufacturers and only a few manufacturers that
generate sales in excess of $50 million. Larger competitors may have financial
and other resources substantially greater than those of the Company. None of
these competitors compete with the Company in all of its product lines. The
Company believes that the principal competitive factors in the sale of its
friction products and powder metal components are quality, engineering expertise
and technical capability, new product innovation, timely delivery and service.
The Company believes that its strong and stable customer relationships evidence
that it competes favorably with respect to each of these factors.
The Company competes for new business principally at the beginning of the
development of new applications and at the redesign of existing applications by
its customers. For example, new model development for the Company's aircraft
braking system customers generally begins two to five years prior to full scale
production of new braking systems. Product redesign initiatives by customers
typically involve long lead times as well.
The Company also competes with manufacturers that use different
technologies. The metallic aircraft braking systems for which the Company
supplies friction materials compete with a "carbon-carbon" braking system.
Carbon-carbon braking systems are significantly lighter than the metallic
aircraft braking systems for which the Company supplies friction materials, but
are more expensive. The carbon-carbon brakes are typically used on wide-body
aircraft, such as the Boeing 747 and military aircraft, where the advantages in
reduced weight justify the additional expense. In addition, as the Company's
core powder metal technology improves, enabling its components to be substituted
for wrought steel or iron components, the Company also increasingly competes
with companies using
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<PAGE> 45
forging, casting or stamping technologies. Powder metal components can often be
produced at a lower cost per unit than products manufactured with forging,
casting or stamping technologies due to the elimination of, or substantial
reduction in, secondary machining, lower material costs and the virtual
elimination of raw material waste. As a result, powder metal components are
increasingly being substituted for metal parts manufactured using more
traditional technologies. There is no assurance that competition from these
technologies or others will not adversely affect the Company's business,
financial condition and results of operations. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 20.8% of the Company's consolidated net sales in 1996 and 18.6% of
the Company's consolidated net sales in the first nine months of 1997. Each
aircraft braking system, including the friction products supplied by the
Company, must meet stringent FAA criteria and testing requirements. The Company
has been able to meet these requirements in the past and continuously reviews
FAA compliance procedures to help ensure continued and future compliance. See
"Risk Factors -- Government Regulation."
ENVIRONMENTAL MATTERS
Manufacturers such as the Company are subject to stringent environmental
standards imposed by federal, state, local and foreign environmental laws and
regulations, including those related to air emissions, wastewater discharges and
chemical and hazardous waste management and disposal. Certain of these
environmental laws hold owners or operators of land or businesses liable for
their own and for previous owners' or operators' releases of hazardous or toxic
substances, materials or wastes, pollutants or contaminants. Compliance with
environmental laws also may require the acquisition of permits or other
authorizations for certain activities and compliance with various standards or
procedural requirements. The Company is also subject to the federal Occupational
Safety and Health Act and similar foreign and state laws. The nature of the
Company's operations, the long history of industrial uses at some of its current
or former facilities, and the operations of predecessor owners or operators of
certain of the businesses expose the Company to risk of liabilities or claims
with respect to environmental and worker health and safety matters. The Company
reviews its procedures and policies for compliance with environmental and health
and safety laws and regulations and believes that it is in substantial
compliance with all such material laws and regulations applicable to its
operations. The costs of compliance with environmental, health and safety
requirements have not been material to the Company. See "Risk
Factors -- Environmental Matters."
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<PAGE> 46
MANUFACTURING FACILITIES AND OTHER PROPERTIES
The Company's material operations are conducted through the following
facilities, all of which are owned, except as noted:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL FUNCTIONS
- --------------------------- -------------- -------------------------------------------------
<S> <C> <C>
Medina, Ohio............... 148,000 Manufacturing of friction products and powder
metal components, sales and marketing, research
and development, product engineering, customer
service and support, and administration
Brook Park, Ohio........... 111,000 Manufacturing of friction products, domestic and
international sales and marketing, product
engineering, customer service and support, and
administration
Orzinuovi, Italy........... 97,000 Manufacturing of friction products, international
sales and marketing, research and development,
and administration
Akron, Ohio................ 81,000 Manufacturing of metal stampings
Campbellsburg, Indiana..... 75,000 Manufacturing of powder metal components, sales
and marketing, product engineering, customer
service and support, and administration
Solon, Ohio(1)............. 58,000 Research and development
Solon Mills, Illinois(2)... 42,000 Manufacturing of powder metal components, sales
and marketing, customer service and support
Alton, Illinois............ 37,000 Manufacturing of die-cast aluminum rotors, sales
and marketing, customer service and support, and
administration
Concord, Ontario, 15,000 Manufacturing of friction products, distribution
Canada(2)................ and warehousing
Cleveland, Ohio(3)......... 6,200 Principal executive offices
</TABLE>
- ---------------
(1) Approximately 20,000 square feet of the Solon facility is leased to a third
party.
(2) Leased.
(3) Leased. The Company is party to an expense sharing arrangement under which
the Company shares the expenses of its corporate headquarters located in
Cleveland with a company owned by Mr. Weinberg. See "Certain
Transactions -- Other Transactions."
In June 1996, the Company closed its manufacturing facility in LaVergne,
Tennessee that it acquired in the SKW acquisition and consolidated its
operations with existing Company facilities. The Company has placed the LaVergne
facility on the market for sale and does not anticipate incurring any material
gain or loss as a result of the sale.
The Company's Italian facility is subject to certain security interests
granted to its lenders.
The Company believes that substantially all of its property and equipment
is in good condition. Several of the Company's facilities are operating at or
near capacity. With the planned expansion of these facilities, as described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources," the Company believes that it
will have sufficient capacity to accommodate its needs through 1999.
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<PAGE> 47
EMPLOYEES
As of September 30, 1997, the Company had 1,258 employees, consisting of
107 management, supervisory and administrative personnel, 114 engineering,
quality control and laboratory personnel, 36 sales and marketing personnel and
1,001 manufacturing personnel.
Approximately 300 employees at the Company's Brook Park, Ohio plant are
covered under a collective bargaining agreement with the United International
Paperworkers Union expiring in October 2000; approximately 80 employees at the
Company's Akron, Ohio facility are covered under a collective bargaining
agreement with the United Automobile Workers expiring in July 2000; and
approximately 100 employees at the Company's Orzinuovi, Italy plant are
represented by a national mechanics union under an agreement that expires in
December 1998 and by a local union under an agreement that expires in December
2000. Approximately 75 hourly employees of Hutchinson are covered under a
collective bargaining agreement with the International Association of Machinists
and Aerospace Workers expiring in June 1998. The Company has experienced no
strikes and believes its relations with its employees and their unions to be
good. See "Risk Factors -- Collective Bargaining Agreements" and "Risk
Factors -- Dependence on Key Personnel."
INTELLECTUAL PROPERTY MATTERS
Velvetouch(R), Fibertuff(R), Feramic(R), Velvetouch Feramic(R), Velvetouch
Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are among the
federally registered trademarks of the Company. Velvetouch(R) is the Company's
principal trademark for use in the friction products aftermarket and is
registered in 26 countries. In addition, the Company has a pending application
with the United States Patent and Trademark Office to register the trademark
"Wellman Friction Products."
Although the Company maintains patents related to its business, the Company
does not believe that its competitive position is dependent on patent protection
or that its operations are dependent on any individual patent.
To protect its intellectual property, the Company relies on a combination
of internal procedures, confidentiality agreements, patents, trademarks, trade
secrets law and common law, including the law of unfair competition. The Company
is not aware of any pending claims of infringement or other challenges to the
Company's right to use any of its intellectual property. See "Risk
Factors -- Intellectual Property Matters."
LEGAL PROCEEDINGS
The Company is involved in lawsuits that arise in the ordinary course of
its business. In the Company's opinion, the outcome of these matters will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The directors, executive officers and significant employees of the Company
and their respective ages and positions held with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Norman C. Harbert(1)................ 64 Chairman of the Board, Chief Executive Officer,
President and Director
Ronald E. Weinberg(1)............... 56 Vice-Chairman of the Board, Treasurer and
Director
Jeffrey H. Berlin................... 35 Executive Vice President
Douglas D. Wilson................... 54 Executive Vice President, President -- FPC and
President -- SKW
Thomas A. Gilbride.................. 44 Vice President-Finance
Jess F. Helsel...................... 73 President -- Helsel
Timothy J. Houghton................. 53 President -- Hutchinson
Paul R. Bishop(2)(3)................ 54 Director
Byron S. Krantz(3).................. 62 Secretary and Director
Dan T. Moore, III(1)................ 57 Director
William J. O'Neill, Jr.(2).......... 64 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Norman C. Harbert has served as the Chairman of the Board, President, Chief
Executive Officer and Director of the Company since March 1989. Mr. Harbert has
over 39 years of manufacturing experience. From 1987 to 1988, Mr. Harbert was
Chairman, President and CEO of Maverick Tube Corporation, an oil drilling
equipment manufacturer, and from 1981 to 1986, he served as President and CEO of
Ajax Magnethermic Corporation, an international manufacturer of induction
heating and melting equipment. Prior to that time, Mr. Harbert served at
Reliance Electric Company for 22 years where, in 1980, his last position was as
General Manager, Rotating Products Group, with primary responsibility for a
division with annual sales of $250 million. Mr. Harbert is a director of New
West Eyeworks, Inc., a retail eyewear chain that operates throughout the western
United States, Second Bancorp Inc., a bank holding company, and Caliber System,
Inc., a transportation company (formerly known as Roadway Services, Inc.).
Ronald E. Weinberg has served as Vice-Chairman of the Board, Treasurer and
Director of the Company since March 1989. Mr. Weinberg has over 28 years of
experience in the ownership and management of operating companies, including a
number of manufacturing companies. In 1988, Mr. Weinberg led an investor group
in the acquisition of New West Eyeworks, Inc., a retail eyewear chain that
operates throughout the western United States, and Mr. Weinberg has served as
Chairman of the Board of that company since that date. In 1986, Mr. Weinberg led
an investor group in the acquisition of SunMedia Corp., which publishes a chain
of weekly newspapers in the Cleveland market and operates a direct marketing
company, and Mr. Weinberg has served as Chairman of the Board of that company
since the acquisition date.
Jeffrey H. Berlin has served as an Executive Vice President of the Company
since May 1997. Between July 1994 and May 1997, Mr. Berlin served as the Vice
President -- Marketing and Corporate Development of the Company. From August
1991 to July 1994, Mr. Berlin served the Company as its Director of Corporate
Development. From 1984 to 1991, Mr. Berlin held various corporate finance
positions including Director of Corporate Development for American Consumer
Products, Inc., a manufacturer of consumer hardware products.
47
<PAGE> 49
Thomas A. Gilbride has served as Vice President -- Finance of the Company
since January 1993. Between March 1989 and January 1993, Mr. Gilbride was
employed by the Company in various financial and administrative capacities.
Douglas D. Wilson has served as an Executive Vice President of the Company
since September 1996, the President of FPC since January 1992 and the President
of SKW since June 1995. From November 1990 to December 1991, he was the
Executive Vice President of FPC. Mr. Wilson was President and Chief Executive
Officer of Cleveland Gear Company, a gear manufacturing business, from 1986 to
1990. Mr. Wilson has been the Chairman of the Industry Advisory Group of the
Center for Advanced Friction Studies at the University of Illinois at Carbondale
since its formation in April 1996.
Jess F. Helsel has served as President of Helco, Inc. (the predecessor to
Helsel) since 1974 and has continued in that capacity since the sale of Helsel's
assets to the Company in June 1994. Mr. Helsel has over 52 years of experience
in the powder metal industry.
Timothy J. Houghton has served as President of Hutchinson Foundry Products
Company (the predecessor to Hutchinson) since 1992 and has continued in that
capacity since the acquisition of Hutchinson by the Company in January 1997. Mr.
Houghton also served as Chief Executive Officer of Hutchinson Foundry Products
Company from 1992 until January 1997.
Paul R. Bishop has served as a Director since May 1993. Mr. Bishop has
served as the Chairman, President and Chief Executive Officer of H-P Products,
Inc., a manufacturer of central vacuum systems and fabricated tubing and
fittings, since 1977. Mr. Bishop was a director of Belden & Blake Corporation,
an oil and gas drilling company, from April 1994 to July 1997 and a director of
Key Bank National Association from July 1992 to June 1997.
Byron S. Krantz has been the Secretary and a Director since March 1989. Mr.
Krantz has been a partner in the law firm of Kohrman Jackson & Krantz P.L.L.
since its formation in 1984.
Dan T. Moore, III has served as a Director since March 1989. Mr. Moore has
been the founder, owner and President of Dan T. Moore Company, Inc. since 1969,
Soundwich, Inc. since 1988, Flow Polymers, Inc. since 1985 and Perfect
Impression, Inc. since July 1994, all of which are manufacturing companies. Mr.
Moore has also been Chairman of the Board of Advanced Ceramics Corporation since
March 1993. He has been a director of Invacare Corporation, a manufacturer of
health care equipment, since 1979.
William J. O'Neill, Jr. has served as a Director since March 1989. Mr.
O'Neill has been the President and Chief Executive Officer of Clanco Management
Corp., an O'Neill family management company, since 1983. He has also served as
the Managing Partner of Clanco Partners I, an Ohio general partnership, since
March 1989.
The Company's executive officers serve at the discretion of the Board of
Directors, although the Company or its subsidiaries have entered into employment
agreements with Messrs. Harbert, Weinberg, Helsel and Houghton. See "Employment
Agreements."
COMPOSITION OF BOARD OF DIRECTORS
The Board of Directors of the Company consists of six members elected by
the holders of the Class A Common Stock and Series D Preferred Stock. The
Company's Second Amended and Restated Certificate of Incorporation provides that
the holders of the Series D Preferred Stock have the right to elect a majority
of the directors and that the holders of the Class A Common Stock have the right
to elect the remainder. The directors are elected at the annual meeting of
stockholders of the Company and each director holds office until the next annual
meeting of the stockholders and until his successor has been duly elected and
qualified. See "Risk Factors -- Effective Voting Control by Existing
Stockholders" and "Description of Capital Stock -- Preferred Stock."
48
<PAGE> 50
Certain transactions among the Company and its directors or entities
affiliated with certain directors of the Company are described below in
"Principal and Selling Stockholders -- Stockholder Agreement" and "Certain
Transactions."
BOARD COMMITTEES
The Nominating Committee of the Board of Directors recommends qualified
candidates for election as directors of the Company. The Audit Committee of the
Board of Directors reviews the accounting and reporting principles, policies and
practices followed by the Company and the adequacy of the Company's internal,
financial and operating controls. The Compensation Committee of the Board of
Directors reviews and makes recommendations regarding the compensation of
executive officers of the Company and reviews general policy relating to the
compensation and benefits of employees of the Company. The Compensation
Committee also administers option grants under the Company's 1997 Stock Option
Plan (the "1997 Plan").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in September 1996, the
Board of Directors made all determinations with respect to executive officer
compensation. The Compensation Committee consists of Messrs. Bishop and Krantz.
Mr. Bishop was not at any time during 1996, or at any other time, an officer or
employee of the Company. Mr. Krantz is Secretary of the Company and a partner in
the law firm of Kohrman Jackson & Krantz P.L.L., which provides legal services
to the Company. See "Certain Transactions -- Other Transactions."
DIRECTOR COMPENSATION
The Company pays each director, other than Messrs. Harbert, Weinberg or
Krantz, an annual fee of $10,000 that is payable $5,000 in cash and $5,000 in
shares of Class A Common Stock at the then current market price, rounded to the
nearest 50 shares. In addition, the Company pays each such director $1,000 in
cash for each board meeting that such director attends and $500 in cash for each
telephonic board meeting that such director participates in. The Company also
reimburses all directors for all expenses incurred in connection with their
services as directors. No additional consideration is paid to the directors for
committee participation.
49
<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid by the
Company during 1995 and 1996 to its President and Chief Executive Officer and
the Company's four other most highly compensated officers and key employees
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION COMPENSATION
- ----------------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Norman C. Harbert........................ 1996 $377,000 $410,000 $ 14,500(2) $ 20,306(3)
Chairman of the Board, President and 1995 340,000 350,000 11,400(2) 12,500(3)
Chief Executive Officer
Ronald E. Weinberg....................... 1996 266,000 410,000 20,300(4) --
Vice-Chairman of the Board and 1995 231,000 350,000 13,400(4) --
Treasurer
Douglas D. Wilson........................ 1996 166,000 120,000 1,600(5) --
Executive Vice President; President -- 1995 159,000 100,000 -- --
FPC; and President -- SKW
Jess F. Helsel........................... 1996 150,000 912,000(6) 12,300(7) --
President -- Helsel 1995 150,000 910,000(6) 12,300(7) --
Jeffrey H. Berlin........................ 1996 137,000 100,000 10,700(8) --
Executive Vice President 1995 96,000 75,000 2,500(8) --
</TABLE>
- ---------------
(1) Bonuses earned in 1995 were paid in 1996 and bonuses earned in 1996 were
paid in 1997.
(2) Includes $9,200 and $9,500 contributed in 1995 and 1996, respectively, by
FPC to FPC's profit sharing plan on behalf of Mr. Harbert and $2,200 and
$5,000 in medical reimbursements made in 1995 and 1996, respectively.
(3) Represents the premiums paid by the Company for a term life insurance policy
of which Mr. Harbert is the insured and Mr. Harbert's wife is the
beneficiary.
(4) Includes $9,200 and $9,500 contributed in 1995 and 1996, respectively, by
FPC to FPC's profit sharing plan on behalf of Mr. Weinberg and $4,200 and
$10,800 in medical reimbursements made in 1995 and 1996, respectively.
(5) Consists entirely of medical reimbursements.
(6) Upon the Company's acquisition of Helsel, the Company entered into an
Employment Agreement with Mr. Helsel. Mr. Helsel's bonus is determined in
accordance with an earnings formula set forth in that Employment Agreement.
See "Employment Agreements."
(7) Includes $1,800 contributed by Helsel to Helsel's Employee's Savings and
Investment Plan, as matching contributions relating to before-tax
contributions made by Mr. Helsel under such plan, and $10,500 contributed by
Helsel to Helsel's profit sharing plan on behalf of Mr. Helsel.
(8) Includes $2,500 and $9,500 contributed in 1995 and 1996, respectively, by
FPC to FPC's profit sharing plan on behalf of Mr. Berlin and $1,200 in
medical reimbursements made in 1996.
None of the Named Executive Officers received any perquisites or other
personal benefits, securities or property that exceeded the lesser of $50,000 or
10% of the salary and bonus for each Named Executive Officer during 1995 or
1996.
STOCK OPTION PLAN
The 1997 Plan was adopted in November 1997, and provides for the grant of
options to purchase an aggregate of 700,000 shares of the Company's Class A
Common Stock. The 1997 Plan provides for the grant to employees of incentive
stock options within the meaning of sec.422 of the Internal Revenue
50
<PAGE> 52
Code of 1986, as amended (the "Code"), and for the grant of nonstatutory stock
options to eligible employees (including directors and officers) and
non-employee directors. Incentive stock options may be exercisable for up to ten
years at an option price of not less than the fair market value of the Common
Stock on the date that the option is granted, or for up to five years at an
option price of not less than 110% of the fair market value of the Common Stock
on the date the option is granted in the case of an officer or other key
employee who owns, at the time the option is granted, more than ten percent of
the Common Stock. Nonstatutory stock options may be exercisable for up to ten
years at such exercise price and upon such terms and conditions as the
Compensation Committee of the Board of Directors may determine.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors, which is charged with designating those persons to whom options are
to be granted and determining the terms of options granted, including the
exercise price, the number of shares subject to the option, and the time of the
exercise. In granting options the Compensation Committee will take into
consideration the past performance and anticipated future contribution of the
potential option recipient and such other considerations the Committee deems
relevant.
Options granted under the 1997 Plan are subject to the following
restrictions, among others: (1) the per share exercise price must be equal to or
greater than 100%, or equal to or greater than 110% in the case of an officer or
other key employee who owns, at the time an incentive stock option is granted,
more than ten percent of the Class A Common Stock, of the fair market value of a
share of Common Stock on the date of grant of the option, except in the case of
a nonstatutory stock option in which the committee has discretion to set a per
share exercise price of less than 100% of fair market value on the date of grant
of the option; and (2) no option may be exercisable after the expiration of ten
years from the date of its grant, and in the case of an incentive stock option
granted to an officer or other key employee who owns, at the time an incentive
stock option is granted, more than ten percent of the Class A Common Stock, no
option is exercisable after the expiration of five years from the date of grant.
If the option holder ceases to be employed by the Company because he or she is
terminated for Cause (as defined in the 1997 Plan), any options held by the
terminated employee will automatically expire. If an option holder's employment
by the Company is terminated by reason of a mental or physical disability or
death, then his or her options will expire one year after the date of
termination. If an option holder's employment is terminated for any other
reason, then his or her options will terminate three months from the date of
termination. The 1997 Plan provides that unless otherwise provided in an
individual grant, an option will become immediately fully exercisable upon the
occurrence of certain transactions, such as the merger or sale of the Company.
The 1997 Plan authorizes the Company to make loans to option holders to
enable them to exercise their options. Such loans must (1) provide for recourse
to the optionee, (2) bear interest at a rate no less than the prime rate of
interest of the Company's principal lender and (3) be secured by the shares of
Common Stock purchased. The Board of Directors has the authority to amend or
terminate the 1997 Plan, provided that no such action impairs the rights of the
holder of any outstanding option without the written consent of such holder, and
provided further that certain amendments of the 1997 Plan are subject to
stockholder approval. Unless terminated sooner, the 1997 Plan will terminate ten
years from its effective date.
At the closing of the Offering, options to purchase 310,000 shares of Class
A Common Stock will be outstanding under the 1997 Plan at an exercise price
equal to the public offering price and options to purchase 390,000 shares of
Class A Common Stock will remain available for grant.
BENEFIT PLANS
FPC Profit Sharing Plan. FPC maintains a tax-qualified profit sharing
plan, including features under section 401(k) of the Code, that covers
substantially all of its employees. The plan generally provides for voluntary
employee pre-tax contributions ranging from 1% to 10% and a discretionary FPC
contribution allocated to each employee based on compensation.
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<PAGE> 53
SKW Retirement Savings and Profit Sharing Plan. SKW also sponsors a
tax-qualified defined contribution plan, including features under section 401(k)
of the Code, that covers substantially all of its non-union U.S. employees. The
plan generally provides for voluntary employee pre-tax contributions ranging
from 1% to 15%, a matching SKW contribution in an amount equal to 10% of the
first 6% of the employee's contribution, and a discretionary SKW contribution
allocated to each employee based on compensation.
Helsel Employee's Savings and Investment Plan. Helsel maintains a
tax-qualified savings and investment plan, including features under section
401(k) of the Code, that covers substantially all of its employees. The plan
generally provides for voluntary employee pre-tax contributions ranging from 1%
to 23%, a 50% matching contribution by Helsel (up to a maximum of 2% of an
employee's compensation), and a discretionary Helsel contribution.
Helsel Employee's Retirement Plan. Helsel sponsors a tax-qualified defined
contribution plan that covers substantially all of its employees. The retirement
plan provides eligible employees with an annual Helsel contribution equal to 7%
of their compensation.
FPC Pension Plan. FPC sponsors a tax-qualified non-contributory, defined
benefit pension plan covering substantially all of its employees and Logan's
non-union employees. The plan provides participating employees with retirement
benefits at normal retirement age (as defined in the plan) based on specified
formulas. In no event will the amount of annual retirement income determined
under these formulas and payable at the participant's retirement date be greater
than $90,000. In addition, federal law defines the maximum amount of annual
compensation that may be taken into account in calculating the amount of the
pension benefit as follows: 1989 -- $200,000; 1990 -- $209,200;
1991 -- $222,220; 1992 -- $228,860; 1993 -- $235,840; 1994 through
1996 -- $150,000; 1997 -- $160,000 (indexed for inflation). The estimated annual
benefit payable at normal retirement age for each Named Executive Officer who is
eligible to participate in the FPC pension plan is as follows: Mr.
Harbert -- $59,200; Mr. Weinberg -- $88,100; Mr. Wilson -- $90,000; and Mr.
Berlin -- $90,000.
EMPLOYMENT AGREEMENTS
Pursuant to Employment Agreements, each dated as of November 1, 1996, Mr.
Harbert has agreed to serve as Chairman of the Board, President and Chief
Executive Officer of Hawk, and Mr. Weinberg has agreed to serve as Vice-Chairman
of the Board and Treasurer, through December 2004. Mr. Harbert will receive an
annual base salary of $403,625 in 1997. Mr. Weinberg will receive an annual base
salary of $303,625 in 1997. Each receives an annual bonus based on the incentive
compensation programs in effect for the Company's subsidiaries. The base salary
may be adjusted by the Compensation Committee of the Board. If either Mr.
Harbert or Mr. Weinberg becomes mentally or physically disabled during the term,
the Company will pay his annual base salary, at the same rate preceding the
disability, for the remainder of the term of the employment agreement. In the
event of the death or disability of either Mr. Harbert or Mr. Weinberg during
the term, the Company will also pay any of his bonus earned but not paid.
Neither Mr. Harbert nor Mr. Weinberg may engage in any competitive business
while he is employed by the Company and for a period of two years thereafter.
Mr. Harbert is required to devote substantially all of his business time
and effort to the Company but may serve on the boards of other companies and
charitable organizations. Under the terms of Mr. Weinberg's employment
agreement, he is not required to devote all of his time and effort to the
business of the Company, and in recent periods, he has devoted approximately 60%
of his time and effort to the business of the Company. Mr. Weinberg also serves
as Chairman of the Board of New West Eyeworks, Inc. and Chairman of the Board of
SunMedia Corp.
Prior to the Offering, the Company will enter into a split dollar life
insurance agreement with each of Mr. Harbert and Mr. Weinberg (the "Split Dollar
Agreements") pursuant to which the Company will purchase term life insurance
policies on the lives of Mr. Harbert and Mr. Weinberg in the face amounts of
$1.0 million and $3.8 million, respectively. Under the terms of the Split Dollar
Agreements, the Company will pay the annual premiums of the insurance policies
in the amount of $46,163 for Mr.
52
<PAGE> 54
Harbert's policy and $58,586 for Mr. Weinberg's policy, and the Company will be
reimbursed for such payments from the policy proceeds in an amount equal to the
greater of the cash value of the policies or the total amount of premiums paid
during the term of the policies. The remaining proceeds of each policy will be
paid to beneficiaries designated by the insured. The Split Dollar Agreements
will terminate upon the occurrence of any of the following events: (1) total
cessation of the Company's business; (2) the bankruptcy, receivership or
dissolution of the Company; or (3) the termination of the insured's employment
by the Company (other than for reason of his death or mental or physical
disability). Upon the termination of a Split Dollar Agreement, the insured will
have the right to purchase the policy covered thereby for an amount equal to the
greater of the cash value of the policy or the total amount of premiums paid
during the term of the policy.
An existing Wage Continuation Agreement between the Company and Mr. Harbert
will be amended and restated prior to the closing of the Offering in connection
with the Company's entry into a Split Dollar Agreement with Mr. Harbert. The
Wage Continuation Agreement, as amended and restated, will provide that if Mr.
Harbert dies during the term of his employment agreement or is no longer in the
active employ of the Company solely because of a mental or physical disability,
the Company will pay his spouse a monthly wage continuation payment until her
death in an amount equal to $12,500 per month (on an after-tax basis) less a
monthly annuity (on an after-tax basis) to be purchased for the spouse of Mr.
Harbert with Mr. Harbert's share of the proceeds of the split dollar insurance
policy on Mr. Harbert's life. An existing Wage Continuation Agreement between
the Company and Mr. Weinberg will be terminated prior to the Offering in
connection with the Company's entry into a Split Dollar Agreement with Mr.
Weinberg.
Upon the acquisition of Helsel by a group led by Mr. Harbert and Mr.
Weinberg, Jess F. Helsel entered into an Employment Agreement and a Consulting
Agreement, each effective July 1, 1994. Mr. Helsel agreed to serve as President
of Helsel through the expiration of the term of the employment agreement in June
1997. In June 1997, these agreements were amended to extend the term of the
employment agreement by an additional year ending in June 1998 and to delay the
commencement of the term of the consulting agreement until July 1998. Mr. Helsel
receives an annual base salary of $150,000 and an annual bonus determined in
accordance with specified formulas based on the amount by which Helsel's
earnings before interest, income taxes, depreciation, amortization, certain
corporate charges and payment of Mr. Helsel's bonus exceeds specified targets.
If Mr. Helsel becomes mentally or physically disabled during the term, the
Company will pay his annual base salary and bonus for the remainder of the term.
Under the amended consulting agreement, the Company will pay Mr. Helsel $150,000
for each of the first two years after the expiration of the extended term of the
employment agreement and $75,000 for each of the third and fourth years after
the expiration of such term. Mr. Helsel may not engage in any competitive
business while he is employed by the Company and for a period of five years
after the expiration of the extended term of his employment agreement.
Upon the acquisition of Hutchinson, the Company entered into an Employment
Agreement, dated January 2, 1997, with Timothy J. Houghton, President of
Hutchinson. Under the terms of the three year employment agreement, Mr. Houghton
will receive an annual base salary of $160,000 and a bonus determined in
accordance with a specified formula based on the growth in Hutchinson's earnings
before interest, income taxes, depreciation and amortization during 1997, 1998
and 1999. Mr. Houghton may not engage in any competitive business while he is
engaged by the Company and for a period of five years after the expiration of
his employment agreement.
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<PAGE> 55
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and
assuming exercise in full of the Underwriters' over-allotment option,
information regarding the beneficial ownership of the Company's Class A Common
Stock and Series D Preferred Stock (collectively, the "Voting Stock"), by (1)
each stockholder known by the Company to be the beneficial owner of more than
five percent of each class of the Company's outstanding shares of Voting Stock,
(2) each director or executive officer who beneficially owns any shares of
Voting Stock, and (3) all directors and executive officers of the Company as a
group. The information set forth in the table below does not include shares
of Class A Common Stock, based on an assumed public offering price of
$ per share, issuable upon conversion of 8.0% two-year notes in the
aggregate principal amount of $1.5 million (of which up to $500,000 of the
then-outstanding principal balance is convertible at the option of the holders
thereof into shares of Class A Common Stock) that were issued by the Company in
connection with the acquisition of Hutchinson, and assumes the exercise of
warrants to purchase shares of Class B Common Stock (which will be
automatically converted on a one-for-one basis into shares of Class A Common
Stock upon the sale by certain of the Selling Stockholders in the Offering). See
"Management -- Stock Option Plan" and "Certain Transactions -- Transactions
Concurrent with the Offering." In addition, the information set forth in the
table below does not include the following options to purchase shares of Class A
Common Stock which will be issued at the closing of the Offering under the 1997
Plan: Mr. Berlin -- 20,000; Mr. Wilson -- 20,000; Mr. Gilbride -- 15,000; Mr.
Harbert -- 10,000; Mr. Helsel -- 10,000; Mr. Weinberg -- 10,000; Mr.
Bishop -- 5,000; Mr. Krantz -- 5,000; Mr. Moore -- 5,000; and Mr. O'Neill --
5,000. Each of the foregoing options will have an exercise price equal to the
public offering price and will vest over a five-year period with 20% of each
such option becoming exercisable on each of the first five anniversaries of the
effective date of grant. See "Management -- Stock Option Plan." Unless otherwise
indicated, the Company believes that all persons named in the tables have sole
investment and voting power over the shares of Voting Stock owned. Unless
otherwise specified, the address of all the stockholders is the address of the
Company set forth in this Prospectus.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR
TO THE OFFERING OWNERSHIP AFTER THE OFFERING
------------------- SHARES OF -------------------------------------
CLASS A CLASS A CLASS A SERIES D
COMMON STOCK(1) COMMON COMMON STOCK(1) PREFERRED STOCK(1)
------------------- STOCK ---------------- ------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT SHARES PERCENT
- ----------------------------- --------- ------- ------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
William J. O'Neill, Jr.(2)... 26.3% % -- --
Norman C. Harbert(3)(4)...... 21.6% % 689 45%
Ronald E. Weinberg(3)(5)..... 21.1% % 689 45%
CIGNA Mezzanine Partners III,
L.P.(6).................... 12.0% -- -- -- --
Connecticut General Life
Insurance Company(7)....... 6.0% -- -- -- --
Byron S. Krantz(3)(8)........ 4.8% -- % 152 10%
Jeffrey H. Berlin............ 4.6% -- % -- --
Douglas D. Wilson............ * -- * -- --
Thomas A. Gilbride........... * -- * -- --
Dan T. Moore, III............ * -- * -- --
Jess F. Helsel............... * -- * -- --
Paul R. Bishop............... * -- * -- --
All directors and executive
officers as a group (11
individuals)............... 81.0% % 1,530 100%
</TABLE>
- ---------------
* Less than 1.0%.
(1) The Class A Common Stock and Series D Preferred Stock are the only voting
securities of the Company that will be outstanding after the Offering. See
"Description of Capital Stock."
(2) Includes shares held by Clanco Partners I, an Ohio general partnership,
prior to the Offering and shares after the Offering. Mr. O'Neill is the
managing partner of Clanco Partners I and as a result has voting and
dispositive power over the shares held by Clanco Partners I. Clanco Partners
I
54
<PAGE> 56
is an Ohio general partnership whose address is c/o William J. O'Neill, Jr.,
30195 Chagrin Boulevard, Suite 310, Pepper Pike, Ohio 44124.
(3) Each of these stockholders is a party to an agreement governing the voting
and disposition of all shares of Class A Common Stock of which such
stockholders are the legal or beneficial owners. Each such stockholder
disclaims beneficial ownership of the shares of Class A Common Stock owned
by the other such stockholders. See "Stockholder Agreement."
(4) Includes shares held by the Harbert Family Limited Partnership. The
Harbert Family Limited Partnership is an Ohio limited partnership. Mr.
Harbert is the managing general partner of the Harbert Family Limited
Partnership and as a result has voting and dispositive power over the shares
held by the Harbert Family Limited Partnership.
(5) Includes shares held by the Weinberg Family Limited Partnership. The
Weinberg Family Limited Partnership is an Ohio limited partnership. Mr.
Weinberg is the managing general partner of the Weinberg Family Limited
Partnership and as a result has voting and dispositive power over the shares
held by the Weinberg Family Limited Partnership.
(6) CIGNA Mezzanine Partners III, L.P. is a Delaware limited partnership whose
address is c/o CIGNA Investments, Inc., 900 Cottage Grove Road, Hartford,
Connecticut 06152-2206. Assumes the exercise of warrants to purchase
shares of Class B Common Stock which will be converted on a one-for-one
basis into shares of Class A Common Stock upon sale by CIGNA Mezzanine
Partners III, L.P. in the Offering.
(7) Connecticut General Life Insurance Company is a Connecticut corporation
whose address is c/o CIGNA Investments, Inc., 900 Cottage Grove Road,
Hartford, Connecticut 06152-2206. Assumes the exercise of warrants to
purchase shares of Class B Common Stock which will be converted on a
one-for-one basis into shares of Class A Common Stock upon sale by
Connecticut General Life Insurance Company in the Offering.
(8) Includes shares held by the Krantz Family Limited Partnership. The Krantz
Family Limited Partnership is an Ohio limited partnership whose address is
c/o Byron S. Krantz, One Cleveland Center, 20th Floor, Cleveland, Ohio
44114. Mr. Krantz is the managing general partner of the Krantz Family
Limited Partnership and as a result has voting and dispositive power over
the shares held by the Krantz Family Limited Partnership.
STOCKHOLDER AGREEMENT
Messrs. Harbert, Weinberg and Krantz are parties to a Stockholders' Voting
Agreement, effective as of November 27, 1996, that as amended provides that to
the extent that any of them is the legal or beneficial owner of any shares of
voting stock of the Company, including any shares of Class A Common Stock or
Series D Preferred Stock, they will vote those shares (1) in favor of electing
Messrs. Harbert, Weinberg and Krantz (so long as each desires to serve) or their
respective designees to the Board of Directors of the Company, (2) in favor of
electing such other directors to the Board of Directors as a majority of Messrs.
Harbert, Weinberg and Krantz or their respective designees shall direct and (3)
with respect to such matters as are submitted to a vote of the stockholders of
the Company as a majority of Messrs. Harbert, Weinberg and Krantz or their
respective designees shall direct. If any of Messrs. Harbert, Weinberg or Krantz
or their respective affiliates sells more than 50% of the Class A Common Stock
beneficially owned by such individual on the date of the Offering, the
obligation of the other parties to continue to vote their shares of Class A
Common Stock and Series D Preferred Stock for the selling stockholder or his
designee as a director will terminate. The agreement will terminate upon the
first to occur of the mutual written agreement of the parties to terminate the
agreement or the death of the last to die of Mr. Harbert, Mr. Weinberg or their
respective designees; provided that the provisions described in clauses (1) and
(2) above will terminate sooner in the event that none of Messrs. Harbert,
Weinberg and Krantz (or any designee thereof) remains on the Board of Directors.
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CERTAIN TRANSACTIONS
TRANSACTIONS CONCURRENT WITH THE OFFERING
Preferred Stock Redemption. Upon the closing of the Offering, the Company
will effect the Preferred Stock Redemption by (1) redeeming all of the
outstanding shares of Series A Preferred Stock, 351 of the 702 outstanding
shares of Series B Preferred Stock and seven of the 1,189 outstanding shares of
Series C Preferred Stock, at their liquidation value, plus accrued and unpaid
dividends, and (2) exchanging the remaining outstanding shares of Series B and
Series C Preferred Stock for an equal number of shares of Series D Preferred
Stock. Assuming such transactions are consummated as of January 31, 1998, the
Series A Preferred Stock will be redeemed for approximately $1.4 million, the
Series B Preferred Stock for approximately $354,000 and the Series C Preferred
Stock for approximately $8,000, including accrued and unpaid dividends. See "Use
of Proceeds."
The Series A Preferred Stock redemption proceeds will be distributed to the
holders of Series A Preferred Stock, including approximately: $1.0 million to
Clanco Partners I, of which William J. O'Neill, Jr. is the managing partner;
$297,000 to Clanco Family Partners, L.P., of which Mr. O'Neill is a director to
its general partner; and $103,000 to the Dorothy K. O'Neill Revocable Trust, of
which Mr. O'Neill is also a co-trustee. The Series B Preferred Stock redemption
proceeds will be distributed to certain holders of Series B Preferred Stock,
including approximately $317,000 to Clanco FLP.
Following the Preferred Stock Redemption, the Company will exchange all
shares of Series B and Series C Preferred Stock of which each of Messrs.
Harbert, Weinberg and Krantz is the legal and beneficial owner for an equal
number of shares of Series D Preferred Stock. Immediately prior to the Preferred
Stock Redemption, Mr. Weinberg will purchase certain shares of Series C
Preferred Stock from other stockholders so that, following the exchange
described in the preceding sentence, he will own the same amount of shares of
Series D Preferred Stock as Mr. Harbert. Upon the closing of the Offering,
Messrs. Harbert, Weinberg and Krantz will own all of the outstanding shares of
Series D Preferred Stock and there will be no shares of Series A, Series B or
Series C Preferred Stock outstanding. See "Principal and Selling Stockholders"
and "Description of Capital Stock -- Preferred Stock."
All shares of Series A, Series B and Series C Preferred Stock redeemed or
exchanged in the Preferred Stock Redemption will be cancelled and permanently
retired. For a description of the terms of the Series D Preferred Stock, see
"Description of Capital Stock -- Preferred Stock."
The Company will not implement the Preferred Stock Redemption or the
exchange of Series B and Series C Preferred Stock for Series D Preferred Stock
unless the Offering is consummated.
Partial June 1995 Note Repayment. On June 30, 1995, Mr. Harbert and Mr.
Weinberg, along with others, issued notes to the Company to repay certain
indebtedness incurred by them with respect to the acquisition of Helsel (the
"June 1995 Notes"). Each of Mr. Harbert's and Mr. Weinberg's note has
outstanding principal in the amount of $802,000. The June 1995 Notes are due and
payable on July 1, 2002 and bore interest at the prime rate plus 1.25% per annum
through September 30, 1996, and at the prime rate thereafter. The Company
expects that each of Mr. Harbert and Mr. Weinberg will use a portion of the
proceeds they receive as Selling Stockholders to repay $302,000 in principal on
the June 1995 Notes, reducing the outstanding principal balance on their
respective notes to $500,000. See "Stockholder Notes."
HAWK CONTROLLING STOCKHOLDER MERGER
In November 1996, concurrently with the closing of the offering of the
Senior Notes, the Company completed the merger of Hawk Holding Corp., a Delaware
corporation and a principal stockholder of the Company ("Hawk Holding"), with
and into the Company in a tax-free reorganization under Section 368(a)(1)(A) of
the Code (the "Hawk Controlling Stockholder Merger"). Hawk Holding had no
material assets other than the capital stock of the Company. Prior to the
merger, Hawk Holding owned 33.9% of
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the outstanding shares of Class A Common Stock of the Company and 1,250 shares
of the Series A Preferred Stock with a liquidation value of $1.25 million, plus
accrued and unpaid dividends. Hawk Holding's only liabilities were its debts to
the Company and Hawk Holding's stockholders in the aggregate amount of
approximately $870,000. As a result of the merger, the Series A Preferred Stock
owned by Hawk Holding was canceled, and the Company issued its Series C
Preferred Stock in the aggregate amount of approximately $1.19 million ($1.25
million less $61,000), which was equal to the liquidation value of the Series A
Preferred Stock owned by Hawk Holding less $61,000 of indebtedness of Hawk
Holding to the Company, which was cancelled in the merger. In the merger, the
Company also canceled the shares of Class A Common Stock of the Company owned by
Hawk Holding and then reissued the same amount of shares of Class A Common Stock
pro rata to the Hawk Holding stockholders. The common stockholders of Hawk
Holding included: Norman C. Harbert, Chairman of the Board, President, Chief
Executive Officer and a Director and stockholder of the Company who owned 44.2%
of Hawk Holding; Ronald E. Weinberg, Vice-Chairman of the Board, Treasurer and a
Director and stockholder of the Company who owned 42.1%; Byron S. Krantz,
Secretary and a Director and stockholder of the Company who owned 9.7%; Thomas
A. Gilbride, Vice President - Finance and a stockholder of the Company who owned
1.9%; and Dan T. Moore, III, a Director of the Company, Douglas D. Wilson,
Executive Vice President and a stockholder of the Company, and Clanco Partners
I, each of whom owned less than 1.0%. William J. O'Neill, Jr., a Director and a
stockholder of the Company, is the managing partner of Clanco Partners I.
Hawk Holding's liabilities included $61,000 of indebtedness to the Company
under a note that bore interest at the prime rate and was due on demand, and
approximately $809,000 of indebtedness to certain of its stockholders under a
note that bore interest at the prime rate plus 1.75% per annum and was due March
14, 1994. Upon the effectiveness of the Hawk Controlling Stockholder Merger, the
$61,000 indebtedness of Hawk Holding to the Company was canceled. Of the
$809,000 aggregate principal amount of indebtedness to stockholders,
approximately $364,000 was owed to Mr. Harbert for his portion of the note,
$347,000 was owed to Mr. Weinberg for his portion and $81,000 was owed to Mr.
Krantz for his portion. Upon the effectiveness of the Hawk Controlling
Stockholder Merger, the $809,000 aggregate principal amount of indebtedness was
converted into Series C Preferred Stock with a liquidation value of $809,000,
and the Company issued Series C Preferred Stock with a liquidation value of
$380,000 pro rata to the Hawk Holding stockholders.
THE 1995 HELSEL TRANSACTION
In June 1995, Helsel became a wholly-owned subsidiary of the Company.
Helsel was acquired in June 1994 by a control group of Company stockholders led
by Messrs. Harbert and Weinberg. Helsel was operated by the control group of
Company stockholders from the date of the 1994 acquisition until its merger in
June 1995 with a subsidiary of the Company. Pursuant to the terms of that
merger, each outstanding share of common stock of Helsel was converted into
shares of Class A Common Stock of the Company at an exchange ratio based on an
independent valuation. Each outstanding share of the preferred stock of Helsel
was surrendered in exchange for one fully paid share of Series B Preferred Stock
of the Company. The terms of the Series B Preferred Stock of the Company are
identical in all material respects to the terms of the Helsel preferred stock.
At the time of the merger, the following directors and executive officers of the
Company became the beneficial owners of the number of shares of Class A Common
Stock (as adjusted for the stock split) and Series B Preferred Stock set forth
opposite their names:
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<TABLE>
<CAPTION>
SHARES SHARES
OF CLASS A OF SERIES B
NAME OF STOCKHOLDER COMMON STOCK PREFERRED STOCK
- ----------------------------------------------- ------------ ---------------
<S> <C> <C>
William J. O'Neill, Jr.*....................... 315
Norman C. Harbert.............................. 158
Ronald E. Weinberg............................. 158
Jeffrey H. Berlin.............................. 13
Byron S. Krantz................................ 35
Douglas D. Wilson.............................. 3
Thomas A. Gilbride............................. 1
Paul R. Bishop................................. --
Jess F. Helsel................................. --
</TABLE>
- ---------------
* Includes shares of Class A Common Stock issued to a predecessor-in-interest of
Clanco Partners I and 315 shares of Series B Preferred Stock owned by Clanco
FLP, of which Mr. O'Neill is a director of its general partner.
In connection with its acquisition of Helsel's assets from Helco, Inc.
("Helco"), the Company issued a secured promissory note in the original
principal amount of $500,000 to Helco, which note is due August 1, 1999. Jess F.
Helsel, the President of Helsel, is a director, officer and stockholder of
Helco. The note bears interest at the rate of prime plus 1% per annum (currently
9.5%), is payable in four equal annual principal installments of $125,000 and
quarterly installments of interest accrued on the outstanding principal balance
(currently $250,000), and is secured by a security interest in Helsel's assets
and certain guaranties made by the Company, Mr. Harbert and Mr. Weinberg.
On July 1, 1994, the Company issued 9% subordinated notes to the investment
group formed to acquire Helsel, Inc. in the aggregate principal amount of
$200,000. One such note, in the original principal amount of $90,000, was issued
to the William J. O'Neill, Sr. Irrevocable Trust A, of which Mr. O'Neill is a
co-trustee. All of these notes were repaid in full in June 1995.
STOCKHOLDER NOTES
Certain stockholders of the Company issued June 1995 Notes as follows: by
Mr. Harbert in the original principal amount of approximately $802,000; by Mr.
Weinberg in the original principal amount of approximately $802,000; by Mr.
Wilson in the original principal amount of $162,500; and by Mr. Krantz in the
original principal amount of approximately $60,000. The June 1995 Notes remain
outstanding. The Company expects that Mr. Harbert and Mr. Weinberg will use a
portion of the proceeds they receive as Selling Stockholders to prepay in part
their June 1995 Notes. See "Transactions Concurrent with the Offering."
In addition, Clanco Partners I issued a note to the Company on June 30,
1995 with the same terms as the June 1995 Notes. The original principal amount
of Clanco Partners I's note was $162,500. Clanco Partners I repaid its note to
the Company in full in August 1996.
OTHER TRANSACTIONS
The Company is a party to an expense sharing arrangement under which the
Company shares certain expenses of its Cleveland, Ohio headquarters with
Weinberg Capital Corporation, of which Mr. Weinberg is President and sole
shareholder. Pursuant to a formula based on full-time equivalent personnel, the
Company pays approximately 54% of the overhead costs of the headquarters,
including, without limitation, rent, utilities and copying, telephone and other
expenses. The aggregate amount of the payments by the Company for the shared
headquarters were approximately $170,000 in the first nine months of 1997,
$128,000 in 1996, $130,000 in 1995 and $95,000 in 1994.
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The Company purchases raw materials from a corporation of which Dan T.
Moore, III is an officer and a principal shareholder. Mr. Moore is a Director of
the Company. The Company paid approximately $860,000 for such raw materials in
the first nine months of 1997 and $901,000 in 1996.
Byron S. Krantz, a Director and the Secretary of the Company, is a partner
of the law firm of Kohrman Jackson & Krantz P.L.L., which provides legal
services to the Company. The Company paid legal fees to Kohrman Jackson & Krantz
P.L.L. in 1996 of $469,000 for services in connection with a variety of matters,
including the registration, sale and exchange of the Senior Notes and the Hawk
Controlling Stockholder Merger.
The Company believes that the terms of the transactions and the agreements
described above are on terms at least as favorable as those which it could
otherwise have obtained from unrelated parties. On-going and future transactions
with related parties will be: (1) on terms at least as favorable as those that
the Company would be able to obtain from unrelated parties; (2) for bona fide
business purposes; and (3) approved by a majority of the disinterested and
non-employee directors.
DESCRIPTION OF CAPITAL STOCK
At the time of the Offering, the authorized capital stock of the Company
consists of (1) 75,000,000 authorized shares of Class A Common Stock, $.01 par
value per share, shares of which will be outstanding upon consummation
of the Offering, (2) 10,000,000 authorized shares of Class B Common Stock, none
of which will be outstanding upon consummation of the Offering, and (3) 500,000
authorized shares of Serial Preferred Stock, $.01 par value per share
("Preferred Stock"), of which no shares of Series A, Series B or Series C
Preferred Stock and 1,530 shares of Series D Preferred Stock will be outstanding
upon consummation of the Offering and of which 100,000 shares of Series E
Preferred Stock, par value $.01 per share (the "Series E Preferred Stock"), will
be reserved for issuance upon consummation of the Offering. The foregoing
description of the Company's capital stock assumes (1) the sale by the Selling
Stockholders of shares of Class A Common Stock in the Offering, (2)
the exercise of warrants to purchase shares of Class B Common Stock
(which will be automatically converted on a one-for-one basis into shares of
Class A Common Stock upon the sale by certain of the Selling Stockholders in the
Offering) and (3) the consummation of the Preferred Stock Redemption. See "Use
of Proceeds" and "Certain Transactions -- Transactions Concurrent with the
Offering." The following summary description of the capital stock of the Company
does not purport to be complete and is qualified in its entirety by reference to
the Second Amended and Restated Certificate of Incorporation of the Company (the
"Certificate") and to the Amended and Restated By-laws of the Company (the
"By-laws"), copies of which are available as described under "Available
Information."
COMMON STOCK
The powers, preferences and rights of the Class A Common Stock, and the
qualifications, limitations and restrictions thereof, are in all respects
identical to those of the Class B Common Stock, except for voting and conversion
rights. The Class B Common Stock was issued to comply with certain regulatory
requirements imposed upon stockholders that are affiliates of insurance
institutions.
Each holder of Class A Common Stock is entitled to one vote per share owned
of record on the applicable record date on all matters presented to a vote of
the stockholders, including the election of certain directors. See
"Management -- Composition of Board of Directors" and "Preferred Stock." Except
as may otherwise be required by the Delaware General Corporation Law and the
Certificate, the holders of Class B Common Stock are not entitled to vote on any
matters to be voted on by the stockholders of the Company.
The Class B Common Stock is convertible into Class A Common Stock on a
one-for-one basis (1) automatically upon the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act, and (2) at the request of a third party transferee under certain
circumstances. In case of any merger or consolidation of the Company with any
other entity as a result
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of which the holders of Class A Common Stock are entitled to receive cash,
property, stock or other securities with respect to or in exchange for their
Class A Common Stock, or in case of any sale or conveyance of all or
substantially all of the assets of the Company, the holders of each share of
Class B Common Stock have the right thereafter to convert such share of Class B
Common Stock into the kind and amount of cash, property, stock or other
securities receivable upon such consolidation, merger, sale or conveyance by a
holder of one share of Class A Common Stock.
Subject to the rights of the holders of any outstanding Preferred Stock,
each holder of Common Stock is entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. Upon
liquidation or dissolution of the Company, each holder of Common Stock will be
entitled to share pro rata in any distribution of the Company's assets after the
payment of all debts and other liabilities, subject to the rights of the holders
of any outstanding Preferred Stock.
The holders of the Class A and Class B Common Stock have no preemptive
rights to purchase or subscribe for any stock or other securities and there are
no conversion rights (other than as stated herein) or redemption or sinking fund
provisions with respect to such stock.
All outstanding shares of Common Stock are, and when issued the shares of
Class A Common Stock offered hereby will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority (without action by the
stockholders) to issue the authorized and unissued Preferred Stock in one or
more additional series, to designate the number of shares constituting any such
series, and to fix, by resolution, the preferences, rights, privileges,
restrictions and other rights thereof, including voting rights, liquidation
preferences, dividend rights and conversion and redemption rights of such
series. Under certain circumstances, the Company could issue this Preferred
Stock as a method of discouraging, delaying or preventing a change of control of
the Company. The Company does not currently intend to issue any additional
shares of Preferred Stock.
Concurrently with the closing of the Offering and pursuant to the Preferred
Stock Redemption, the Company will (1) redeem all of the outstanding shares of
Series A Preferred Stock, 351 of the 702 outstanding shares of Series B
Preferred Stock and seven of the 1,189 outstanding shares of Series C Preferred
Stock, and (2) exchange the remaining outstanding shares of Series B and Series
C Preferred Stock for an equal number of shares of Series D Preferred Stock. As
a result of the Preferred Stock Redemption, all redeemed or exchanged shares of
Series A, Series B and Series C Preferred Stock will be cancelled and
permanently retired. See "Certain Transactions -- Transactions Concurrent with
the Offering."
The following is a description of the terms of the Series D Preferred
Stock:
- Dividends on the Series D Preferred Stock are cumulative and accrue at
the rate of 9.8% per annum, payable quarterly.
- The holders of the Series D Preferred Stock have the right to elect a
majority of the members of the Board of Directors and to vote separately
as a class on any proposal to effect a fundamental corporate change (such
as a merger, consolidation, recapitalization or sale of all or
substantially all of the assets of the Company) that is submitted to the
stockholders of the Company for a vote. The voting rights of the shares
of Series D Preferred Stock will terminate: (1) as to any of the Harbert,
Weinberg or Krantz family groups owning such shares on the date of
consummation of the Offering (each, a "Family Group") in the event that
such Family Group sells or otherwise ceases to control more than 50% of
the total number of shares of Class A Common Stock owned by it on the
date of consummation of the Offering, as adjusted; (2) as to all of such
shares upon the earlier to occur of (a) the date of death of the last to
die of Mr. Harbert, his son (Carl J. Harbert, II), Mr. Weinberg or his
son (Ronald E. Weinberg, Jr.) or (b) the date that both the Harbert and
Weinberg Family Groups sell or cease to control more than 50% of the
total number of shares of Class A Common Stock owned by them on the date
of consummation of the
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Offering, as adjusted; and (3) as to any of the Family Groups in the
event of the breach by such Family Group of the restrictions on transfer
of the Series D Preferred Stock described below. See
"Management -- Composition of Board of Directors" and "Anti-Takeover
Effects of the Company's Governing Documents."
- Shares of Series D Preferred Stock may only be sold or transferred
between any of the Family Groups or any of the members of such Family
Groups. Any Family Group that sells or transfers shares in violation of
such transfer restrictions and any transferee receiving such shares will
not be entitled to vote its shares of Series D Preferred Stock.
- The Company may, either (1) with the consent of all holders of the Series
D Preferred Stock for as long as they have the voting rights described
above, or (2) without the consent of such holders following the
termination of such voting rights, redeem all of the outstanding shares
of Series D Preferred Stock, provided the Company is not in default in
the payment of any dividends on such series of Preferred Stock then
outstanding, for $1,000 per share plus all accrued and unpaid dividends
to the date of redemption.
- Each share of Series D Preferred Stock is entitled to a liquidation
preference equal to $1,000 per share plus any accrued and unpaid
dividends thereon after payment of all debts and other liabilities of the
Company and before any payment or distribution is made on the Common
Stock (or any other subordinate class or series of stock of the Company).
The holders of the Series D Preferred Stock have no preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or sinking fund provisions with respect to such stock.
The Series D Preferred Stock is not listed or quoted on any stock
exchange or market.
In addition, the Board of Directors has authorized the issuance of up to
100,000 shares of Series E Preferred Stock in connection with the Rights
Agreement. For a description of the Rights Agreement and the terms of the Series
E Preferred Stock, see "Rights Agreement."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law prohibits a
publicly-held Delaware corporation from engaging in a broad range of "business
combinations" with an "interested stockholder" (defined generally as a person
owning 15% of more of a corporation's outstanding voting stock) for three years
following the date such person became an interested stockholder unless: (1)
before the person becomes an interested stockholder, the board of directors of
the corporation approves either the transaction resulting in such person
becoming an interested stockholder or the business combination; (2) upon
consummation of the transaction that resulted in the person becoming an
interested stockholder, the interested stockholder owns 85% or more of the
outstanding voting stock of the corporation (excluding shares owned by directors
who are also officers of the corporation or shares held by employee stock 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 (3) following the date on which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of the stockholders,
and not by written consent, by the affirmative vote of at least two-thirds of
the corporation's outstanding voting stock, excluding shares owned by the
interested stockholder. In the Certificate, the Company has opted to be governed
by the foregoing provisions of Section 203.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S GOVERNING DOCUMENTS
Certain provisions of the Certificate and By-laws of the Company may be
deemed to have an anti-takeover effect and may delay, discourage or prevent a
change of control of the Company. In addition to the ability of the Board of
Directors to issue Preferred Stock, these provisions include the following:
Vacancies on Board of Directors. The Certificate provides that, subject to
the terms of the Preferred Stock, only the Board of Directors may fill vacant
directorships. As a result, a stockholder
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interested in gaining control of the Company will be precluded from removing
incumbent directors and simultaneously gaining control of the Board of Directors
by filling the vacancies created by such removal with its own nominees.
Special Meetings of Stockholders. The Certificate provides that special
meetings of stockholders of the Company may be called only by a majority of the
Board of Directors, the Chairman or Vice-Chairman of the Board or at least 25%
of the stockholders of the Company entitled to vote. This provision will make it
more difficult for stockholders to take actions opposed by the Board of
Directors.
Elimination of Actions by Written Consent. The Certificate provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and cannot be taken by written consent in lieu of a meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual or special meeting of stockholders, or to nominate candidates
for election as directors at an annual or special meeting of stockholders, must
give the Company not less than 60 days nor more than 90 days prior notice of
such intent; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, such stockholder must give the Company notice of its proposal or
nomination in compliance with the provisions of the By-laws no later than the
close of business on the tenth day following the notice of the meeting; and
provided further that in the event Rule 14a-8, as amended from time to time,
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires notice of a stockholders' proposal to be received by the Company more
than 90 days prior to the meeting, such longer notice period shall control.
These provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
None of the foregoing provisions may be amended or repealed except by an
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock of the Company.
RIGHTS AGREEMENT
Adoption of Rights Agreement. On November 13, 1997, the Board of Directors
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the stockholders
of record as of 5:00 P.M., Cleveland, Ohio time, on January 16, 1998 (the
"Effective Date"), and with respect to Common Stock issued thereafter until the
Distribution Date (as defined below) and, in certain circumstances, with respect
to Common Stock issued after the Distribution Date. Except as set forth below,
each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series E Preferred
Stock (the "Preferred Shares") at a price of $70.00 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement, dated as of January
16, 1998 (the "Rights Agreement"), between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent (the "Rights Agent").
The following summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement
(a copy of which is available as described under "Available Information"),
including the definitions therein of certain terms used in the foregoing
description.
Issue of Right Certificates. The Rights are attached to all certificates
representing outstanding Common Stock, and no separate Right Certificates (as
defined below) have been distributed. The Rights will separate from the Common
Stock on the earliest to occur of (1) the first date of public announcement that
any person or entity, alone or together with its affiliates and associates (a
"Person"), other than those that are Exempt Persons (as defined below), has
acquired beneficial ownership of 15% or more of the outstanding Class A Common
Stock (other than pursuant to certain permitted offers), or (2) the close of
business on the tenth business day (or such later date as the Board of Directors
of the
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Company may determine) following the commencement of, or first public
announcement of an intention to commence, a tender or exchange offer the
consummation of which would result in any Person becoming an Acquiring Person
(as defined below), including, in the case of both clauses (1) and (2) above,
any such date which is after the date of the Rights Agreement and prior to the
issuance of the Rights (the earliest of such dates being called the
"Distribution Date"). Any Person whose acquisition of Common Stock causes a
Distribution Date pursuant to clause (1) above is an "Acquiring Person." The
first date of public announcement that a Person has become an Acquiring Person
is the "Shares Acquisition Date." For purposes of the Rights Agreement, the
definition of Acquiring Person excludes certain Persons (the "Exempt Persons"),
including Mr. Harbert, Mr. Weinberg and their respective affiliates and
associates.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption, exchange, or expiration of the Rights), new Common
Stock certificates issued after the Effective Date upon transfer or new issuance
of Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption, exchange, or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock outstanding as of the Effective Date will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate. As promptly as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date (and to each initial record holder of certain Common Stock
issued after the Distribution Date), and such separate Right Certificates alone
will evidence the Rights.
Exercise and Expiration of Rights. The Rights are not exercisable until
the Distribution Date and will expire at 5:00 P.M., Cleveland, Ohio time, on
January 16, 2008, unless earlier redeemed or exchanged by the Company as
described below. Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
Flip-In Provision. In the event that any Person, other than those that are
Exempt Persons, becomes an Acquiring Person other than pursuant to certain
permitted offers, each holder of a Right will have (subject to the terms of the
Rights Agreement) the right to receive upon exercise the number of shares of
Common Stock, or, in the discretion of the Board of Directors, the number of one
one-thousandths of a Preferred Share (or, in certain circumstances, other
securities of the Company) determined in accordance with a formula based on the
then Purchase Price divided by 50% of the then current per share market price of
the Class A Common Stock (the "Flip-In Right"). Notwithstanding the foregoing,
all Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person or any affiliate or
associate thereof will be null and void.
Flip-Over Provision. In the event that, at any time following the Shares
Acquisition Date, (1) the Company is acquired in a merger or other business
combination transaction in which the holders of all of the outstanding Common
Stock immediately prior to the consummation of the transaction are not the
holders of all of the surviving corporation's voting power, or (2) more than 50%
of the Company's assets or earning power is sold or transferred, in either case
with or to an Acquiring Person or any affiliate or associate thereof, or any
other person in which such Acquiring Person, affiliate or associate has an
interest, or any Person acting on behalf of or in concert with such Acquiring
Person, affiliate or associate, or, if in such transaction all holders of Common
Stock are not treated alike, then each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
(the "Flip-Over Right") to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company or the Company, as the case may be, having a value
determined in accordance with a formula based on the then Purchase Price divided
by 50% of the then current per share market price of the common stock of such
acquiring company. The holder of a Right will continue to have the Flip-Over
Right whether or not such holder exercises or surrenders the Flip-In Right.
63
<PAGE> 65
Adjustment of Purchase Price. The Purchase Price payable, and the number
of one one-thousandths of a Preferred Share or other securities issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution (1) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Preferred Shares, (2) upon the grant to holders of
the Preferred Shares of certain rights or warrants to subscribe for or purchase
Preferred Shares at a price, or securities convertible into Preferred Shares
with a conversion price, less than the then current market price of the
Preferred Shares or (3) upon the distribution to holders of the Preferred Shares
of evidences of indebtedness or assets (excluding regular quarterly cash
dividends or a dividend payable in preferred shares) or of subscription rights
or warrants (other than "equivalent preferred shares," as defined in the Rights
Agreement). The Purchase Price is also subject to adjustment in the event of a
stock split of the Common Stock, or a stock dividend on the Common Stock payable
in Common Stock, or subdivisions, consolidations or combinations of the Common
Stock occurring, in any such case, prior to the Distribution Date.
Redemption of Rights. At any time prior to the earlier to occur of either
(1) a Person becoming an Acquiring Person or (2) the expiration of the Rights,
the Company may redeem the Rights in whole, but not in part, at a price of $.001
per Right (the "Redemption Price"), which redemption shall be effective upon the
action of the Board of Directors. The Company may at its option pay the
Redemption Price in cash or Common Stock. Additionally, the Company may redeem
the then outstanding Rights in whole, but not in part, at the Redemption Price
after a Shares Acquisition Date and before the expiration of any period during
which the Flip-Over Right may be exercised in connection with a merger or other
business combination transaction or series of transactions involving the Company
in which all holders of Common Stock are treated alike but not involving (other
than as a holder of Common Stock being treated like all other such holders) any
Person acting directly or indirectly on behalf of, or in concert with, any
Acquiring Person, or its affiliates or associates. The Board of Directors may
only redeem Rights if a majority of the Disinterested Directors (as defined in
the Rights Agreement) authorizes such redemption. Upon the effective date of the
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
Exchange of Rights. At any time after a Person becomes an Acquiring Person
but before such Acquiring Person, together with all affiliates and associates
thereof, becomes the "Beneficial Owner" (defined in the Rights Agreement) of 50%
or more of the Common Stock then outstanding, the Company may, at its option,
exchange all or part of the then outstanding and exercisable Rights (other than
those owned by the Acquiring Person, together with any affiliates and associates
of such Acquiring Person, which have become null and void) at an exchange ratio
of one share of Common Stock per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction involving either the Common
Stock or the Preferred Shares occurring after the date of the Rights Agreement
(the "Exchange Ratio"). The Board of Directors may only exchange Rights if a
majority of the Disinterested Directors authorizes such exchange. Immediately
upon the action of the Board of Directors ordering the exchange of any Rights
and without any further action and without any notice, the right to exercise
such rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of shares of Common Stock equal to the
number of such rights held by such holder multiplied by the Exchange Ratio.
Amendment of Rights Agreement. Prior to the Distribution Date, the Company
may supplement or amend any provision of the Rights Agreement without the
approval of the holders of Common Stock. From and after the Distribution Date,
the Company generally may supplement or amend the Rights Agreement without the
approval of the holders of Right Certificates in order (1) to cure any
ambiguity, (2) to correct or supplement any provision which may be defective or
inconsistent with any other provisions, (3) to shorten or lengthen any time
period or (4) to change or supplement the provisions in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Right Certificates (other than an Acquiring Person
or an affiliate or associate of an Acquiring Person). The Company may not
supplement or amend any provision of the
64
<PAGE> 66
Rights Agreement unless a majority of the Disinterested Directors authorizes
such supplement or amendment.
Anti-Takeover Effects of Rights. The Rights have certain anti-takeover
effects. If triggered, the Rights would cause substantial dilution to an
Acquiring Person that acquires more than 15% of the Class A Common Stock on
terms not approved by a majority of the Disinterested Directors. The Rights
could discourage or make more difficult a merger, tender offer or similar
transaction. However, the Rights should not interfere with any merger or other
business combination approved by a majority of the Disinterested Directors prior
to the time an Acquiring Person becomes such, because until such time the Rights
may be redeemed by the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate provides that directors and officers shall be indemnified
against liabilities arising from their service as directors or officers to the
fullest extent permitted by law, including payment in advance of a final
disposition of a director's or officer's expenses and attorneys' fees incurred
in defending any action, suit or proceeding. Except in the case of an action,
suit or proceeding brought by or in the right of the Company against an officer
or director, a court must approve such indemnification if the officer or
director is adjudged liable. Presently, the Delaware General Corporation Law
provides that to be entitled to indemnification an individual must have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
Company's best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Delaware law permits a corporation to purchase and maintain insurance or
furnish similar protection on behalf of any officer or director against any
liability asserted against him and incurred by him in his capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him against such liability under the Delaware
General Corporation Law. The Company maintains a directors' and officers'
liability insurance policy.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any director or officer.
LIMITATION ON DIRECTOR LIABILITY
The Certificate also provides that, to the fullest extent permitted by the
Delaware General Corporation Law, a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. This provision presently limits a director's liability
except where a director (1) breaches his or her duty of loyalty to the Company
or its stockholders, (2) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (3) authorizes payment of an unlawful
dividend or stock repurchase or redemption or (4) obtains an improper personal
benefit.
This provision is consistent with Section 102(b)(7) of the Delaware General
Corporation Law, which is designed, among other things, to encourage qualified
individuals to serve as directors of Delaware corporations. The Company believes
this provision will assist it in maintaining and securing the services of
qualified directors who are not employees of the Company. This provision has no
effect on the availability of non-monetary equitable remedies, such as
injunction or rescission. If equitable remedies are found not to be available to
stockholders for any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is
Continental Stock Transfer & Trust Company, New York, New York.
65
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Class A Common Stock (excluding shares that may be sold by the Company upon
exercise of the Underwriters' over-allotment option) and no shares of Class B
Common Stock outstanding. Of these shares, shares of Class A Common
Stock sold in the Offering will be freely tradeable without restriction (except
as to affiliates of the Company) or registration under the Securities Act. The
remaining outstanding shares of Class A Common Stock held by existing
stockholders of the Company will be "restricted securities" within the meaning
of Rule 144 under the Securities Act ("Rule 144"). Of those shares,
shares held by non-affiliates of the Company are available for
immediate sale in the public market subject to the limitations of Rule 144. All
of the Company's directors and executive officers have agreed that for a period
of 180 days after the date of the Offering they will not, without the prior
written consent of Schroder & Co. Inc., offer, sell or otherwise dispose of any
shares of Class A Common Stock held by them as of the effective date of the
Offering or purchased by them directly from the Company thereafter. Given these
contractual restrictions, beginning 180 days after the date of the Offering,
of such shares would be available for immediate sale in the public
market subject to the limitations of Rule 144. In addition, a substantial number
of shares of Class A Common Stock issuable upon exercise of options granted
pursuant to the 1997 Plan will become eligible for future sale in the public
market at prescribed times.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder is entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Company's Class A Common Stock (approximately
shares immediately after the Offering) or the average weekly trading
volume of the Class A Common Stock on the New York Stock Exchange during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission, Washington, D.C. (the "Commission").
Sales under Rule 144 are also subject to certain manner of sales provisions,
notice requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of acquisition of
restricted shares from the Company or from any affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale, such person would
be entitled to sell such shares in the public market under Rule 144 without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register an aggregate of 700,000 shares of Class A Common
Stock reserved for issuance under the 1997 Plan. The registration statement is
expected to be filed and to become effective within 180 days following the date
of this Prospectus. Shares of Common Stock issued upon exercise of options
granted under the 1997 Plan after the effective date of such registration
statement will be eligible for sale in the public market subject to the
contractual restrictions described above and, in the case of options exercised
by affiliates, the Rule 144 volume limitations applicable to affiliates.
Since there has been no public market for shares of Class A Common Stock of
the Company, the Company is unable to predict the effect, if any, that sales
made under Rule 144, pursuant to future registration statements, or otherwise,
may have on any then prevailing market price of the Class A Common Stock.
Nevertheless, sales of a substantial amount of the Class A Common Stock in the
public market could adversely affect market prices, as well as the Company's
ability to raise additional capital through an offering of securities.
66
<PAGE> 68
UNDERWRITING
The Underwriters named below have severally agreed, subject to certain
conditions, to purchase from the Company and the Selling Stockholders the
aggregate number of shares of Class A Common Stock set forth opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
Schroder & Co. Inc. ...........................................
Donaldson, Lufkin & Jenrette Securities Corporation............
McDonald & Company Securities, Inc. ...........................
------------
Total................................................
============
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Class A Common Stock offered hereby, if
any are purchased. The Representatives have advised the Company and the Selling
Stockholders that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters propose initially to offer a concession not in
excess of $ per share to certain dealers, including the Underwriters;
that the Underwriters and such dealers may initially allow a discount not in
excess of $ per share to other dealers; and that the public offering
price and the concession and discount to dealers may be changed by the
Representatives after the commencement of the Offering.
Certain of the Selling Stockholders have granted to the Underwriters
options expiring at the close of business on the 30th day after the date of the
Underwriting Agreement, to purchase up to an aggregate of additional
shares of Class A Common Stock, at the public offering price less underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. The Underwriters may exercise the options only to cover
over-allotments, if any. To the extent that the Underwriters exercise these
options, each Underwriter will be committed, subject to certain conditions, to
purchase a number of the additional shares proportionate to such Underwriter's
initial commitment.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against liabilities, including liabilities under the
Securities Act.
The Company and all its directors, executive officers, significant
employees and existing stockholders have agreed not to offer to sell, grant any
option to purchase or otherwise dispose of any shares of Class A Common Stock
held by them for a period of 180 days after the date of this Prospectus, without
the prior written consent of Schroder & Co. Inc. See "Shares Eligible for Future
Sale."
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
Application has been made to have the Class A Common Stock approved for
quotation on the New York Stock Exchange under the symbol HWK. The Underwriters
have advised the New York Stock Exchange that the minimum distribution, issuance
and aggregate market value requirements for listing on the New York Stock
Exchange will be achieved in the Offering.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including over-allotments, stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the Class A Common Stock at a
level above that which might otherwise prevail in the open market. An
"over-allotment" refers to the Underwriters' sale of more shares of Class A
Common Stock than they are required to purchase from the
67
<PAGE> 69
Company and the Selling Stockholders in the Offering, thereby creating a short
position in the Class A Common Stock for the account of the Underwriters. A
"stabilizing bid" is a bid for or the purchase of Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the market price of the
Class A Common Stock. A "syndicate covering transaction" is a bid for or the
purchase of Class A Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the Offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the shares of Class A Common Stock originally
sold by such Underwriter or syndicate member are purchased by the
Representatives in a syndicate covering transaction and therefore have not been
effectively placed by such Underwriter or syndicate member. The Representatives
have advised the Company that such transactions may be effected on the New York
Stock Exchange or otherwise and, if commenced, may be discontinued at any time.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
public offering price, in addition to prevailing market conditions, will be the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related business.
Schroder & Co. Inc. and McDonald & Co. Securities, Inc. acted as placement
agents for the Senior Notes and received customary compensation.
LEGAL MATTERS
Certain legal matters with respect to the Class A Common Stock will be
passed upon for the Company by Kohrman Jackson & Krantz P.L.L., Cleveland, Ohio.
Byron S. Krantz, a partner in Kohrman Jackson & Krantz P.L.L., owns
shares of Class A Common Stock and 152 shares of Series D Preferred Stock, has
been granted an option to purchase shares of Class A Common Stock
pursuant to the 1997 Plan and is the Secretary and a Director of the Company.
Marc C. Krantz, a son of Byron S. Krantz and a partner in Kohrman Jackson &
Krantz P.L.L., is the Assistant Secretary of the Company. The Company paid legal
fees to Kohrman Jackson & Krantz P.L.L. in 1996 of $469,000 for services in
connection with a variety of matters, including the registration, sale and
exchange of the Senior Notes and the Hawk Controlling Stockholder Merger.
Certain legal matters will be passed upon for the Underwriters by Arter & Hadden
LLP, Cleveland, Ohio.
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
as of September 30, 1997, December 31, 1996 and 1995 and for the nine months
ended September 30, 1997 and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Helco, Inc. as of June 30, 1994, and the
related statements of income, stockholder's equity and cash flows for the year
then ended included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of SKW and subsidiaries as of
December 31, 1994 and 1993, and for each of the two years in the period ended
December 31, 1994, and for the statements of operations and cash flows for the
six month period ended June 30, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth
68
<PAGE> 70
in their report appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The balance sheets of Houghton Acquisition Corporation d/b/a Hutchinson
Foundry Products Company as of December 31, 1996 and 1995 and the related
statements of income, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1996, 1995 and 1994 included in this Prospectus have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The financial statements of Sinterloy Inc. as of December 31, 1996 and
1995, and the related statements of income, stockholder's equity and cash flows
for the years then ended included in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is currently subject to certain of the informational
requirements of the Exchange Act, and in accordance therewith and the terms of
the Senior Note Indenture, files reports, statements, and other information with
the Commission. Such reports, statements and other information filed by the
Company may be inspected and copied at the Commission's principal office at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of fees prescribed by the Commission. In addition, the
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Offering. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. For further information with
respect to the Company and the Offering, reference is made to the Registration
Statement, which may be inspected at the office of the Commission without charge
and copies of which may be obtained from and upon request of the Commission and
payment of the prescribed fee.
REPORTS TO HOLDERS OF CLASS A COMMON STOCK
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
69
<PAGE> 71
HAWK CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HAWK CORPORATION
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997.. F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1996 (unaudited) and 1997......... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1997............................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1996 (unaudited) and 1997......... F-7
Notes to Consolidated Financial Statements........................................... F-9
HELCO, INC.
Report of Independent Auditors....................................................... F-29
Balance Sheet as of June 30, 1994.................................................... F-30
Statement of Income for the year ended June 30, 1994................................. F-31
Statement of Shareholder's Equity for the year ended June 30, 1994................... F-32
Statement of Cash Flows for the year ended June 30, 1994............................. F-33
Notes to Financial Statements........................................................ F-34
S.K. WELLMAN LIMITED, INC.
Report of Independent Auditors....................................................... F-37
Consolidated Balance Sheets as of December 31, 1993 and 1994......................... F-38
Consolidated Statements of Operations for the years ended December 31, 1993 and 1994
and the six months ended June 30, 1995............................................. F-39
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993
and 1994........................................................................... F-40
Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994,
and the six months ended June 30, 1995............................................. F-41
Notes to Consolidated Financial Statements........................................... F-42
HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY
Report of Independent Accountants.................................................... F-49
Balance Sheets as of December 31, 1995 and 1996...................................... F-50
Statements of Income for the years ended December 31, 1994, 1995 and 1996............ F-51
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994,
1995 and 1996...................................................................... F-52
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996........ F-53
Notes to Financial Statements........................................................ F-54
SINTERLOY, INC.
Report of Independent Auditors....................................................... F-62
Balance Sheets as of December 31, 1995, 1996 and June 30, 1997 (unaudited)........... F-63
Statements of Income for the years ended December 31, 1995 and 1996 and six months
ended June 30, 1997 (unaudited).................................................... F-64
Statements of Shareholder's Equity for the years ended December 31, 1995 and 1996 and
six months ended June 30, 1997 (unaudited)......................................... F-65
Statements of Cash Flows for the years ended December 31, 1995 and 1996 and six
months ended June 30, 1997 (unaudited)............................................. F-66
Notes to Financial Statements........................................................ F-67
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk
Corporation and subsidiaries as of September 30, 1997 and December 31, 1996 and
1995 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the nine months ended September 30, 1997 and for each
of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hawk
Corporation and subsidiaries at September 30, 1997 and December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
the nine months ended September 30, 1997 and for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Cleveland, Ohio
December 19, 1997
F-2
<PAGE> 73
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 771 $ 25,774 $ 3,629
Accounts receivable, less allowance of $276 in 1995, $182
in 1996 and $216 in 1997.............................. 17,307 16,783 24,962
Inventories:
Raw materials and work-in-process..................... 14,575 16,707 18,102
Finished products..................................... 5,530 4,157 4,465
-------- -------- ---------
20,105 20,864 22,567
Deferred income taxes.................................... 1,042 2,432 1,283
Other current assets..................................... 1,189 935 1,703
-------- -------- ---------
Total current assets................................ 40,414 66,788 54,144
PROPERTY, PLANT AND EQUIPMENT:
Land..................................................... 1,080 1,080 1,218
Buildings and improvements............................... 6,619 7,615 10,283
Machinery and equipment.................................. 38,990 45,766 57,012
Furniture and fixtures................................... 1,118 1,611 1,988
Construction in progress................................. 653 2,825 808
-------- -------- ---------
48,460 58,897 71,309
Less accumulated depreciation............................ 9,000 14,755 19,346
-------- -------- ---------
Total property, plant and equipment................. 39,460 44,142 51,963
OTHER ASSETS:
Intangible assets........................................ 39,821 39,939 56,569
Net assets held for sale................................. 3,604 3,604 3,604
Shareholder notes........................................ 2,000 1,838 1,675
Other.................................................... 2,120 2,130 2,260
-------- -------- ---------
Total other assets.................................. 47,545 47,511 64,108
-------- -------- ---------
TOTAL ASSETS............................................... $127,419 $158,441 $ 170,215
======== ======== =========
</TABLE>
F-3
<PAGE> 74
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DETACHABLE STOCK
DECEMBER 31, WARRANTS AND
-------------------- SEPTEMBER 30, PRO FORMA
1995 1996 1997 SHAREHOLDERS' EQUITY(1)
-------- -------- ------------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................... $ 8,488 $ 8,194 $ 11,878
Accrued compensation...................... 7,364 6,775 7,206
Other accrued expenses.................... 3,537 2,405 4,860
Current portion of long-term debt......... 5,460 714 1,595
-------- -------- ---------
Total current liabilities.......... 24,849 18,088 25,539
LONG-TERM LIABILITIES:
Long-term debt............................ 89,446 128,469 129,701
Deferred income taxes..................... 2,348 4,090 5,065
Other..................................... 2,228 2,004 2,058
-------- -------- ---------
Total long-term liabilities........ 94,022 134,563 136,824
DETACHABLE STOCK WARRANTS, SUBJECT TO PUT
OPTION.................................... 4,600 4,600 9,300 $ --
SHAREHOLDERS' EQUITY (DEFICIT):
Series A preferred stock, $.01 par value
and an aggregate liquidation value of
$2,625, plus any accrued and unpaid
dividends, with 10% cumulative dividend
(2,625 shares authorized, 1,375 shares
issued and outstanding); Series B
preferred stock, $.01 par value and an
aggregate liquidation value of $702,
plus any accrued and unpaid dividends,
with 9% cumulative dividend (702 shares
authorized, issued and outstanding);
Series C preferred stock, $.01 par value
and an aggregate liquidation value of
$1,190, plus any accrued and unpaid
dividends with 10% cumulative dividend
(1,190 shares authorized, issued and
outstanding)............................ 1 1 1 1
Class A common stock, $.01 par value;
2,200,000 shares authorized, 1,443,978
issued and outstanding.................. 14 14 14 14
Class B common stock, $.01 par value,
375,000 shares authorized, none issued
or outstanding.......................... 3
Additional paid-in capital................ 1,724 1,964 1,964 1,964
Retained earnings (deficit)............... 2,330 (974) (2,653) 4,891
Other equity adjustments.................. (121) 185 (774) (774)
-------- -------- --------- ---------
Total shareholders' equity
(deficit)........................ 3,948 1,190 (1,448) $ 6,099
-------- -------- --------- =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)................................. $127,419 $158,441 $ 170,215
======== ======== =========
</TABLE>
(1) The Unaudited Pro Forma Detachable Stock Warrants and Shareholders' Equity
above gives effect to the exchange of the detachable stock warrants, subject
to put option, for shares of Class B Common Stock, and the redemption
of all 1,375 outstanding shares of Series A Preferred Stock, 351 of the
outstanding shares of Series B Preferred Stock and seven of the outstanding
shares of Series C Preferred Stock, together with accrued and unpaid
dividends thereon.
See notes to consolidated financial statements.
F-4
<PAGE> 75
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 41,395 $ 84,643 $ 123,997 $ 93,672 $ 116,362
Cost of sales...................... 26,771 61,164 91,884 69,023 82,940
--------- --------- --------- --------- ---------
Gross profit....................... 14,624 23,479 32,113 24,649 33,422
Expenses:
Selling, technical and
administrative expenses....... 6,294 11,575 15,468 11,612 14,241
Amortization of intangibles...... 954 1,924 2,806 2,408 2,575
Plant consolidation expense...... 4,028 3,749 50
--------- --------- --------- --------- ---------
Total expenses..................... 7,248 13,499 22,302 17,769 16,866
--------- --------- --------- --------- ---------
Income from operations............. 7,376 9,980 9,811 6,880 16,556
Interest expense................... 3,267 7,323 10,648 7,321 10,639
Other (income) expense, net........ (234) (130) 256 55 122
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
minority interest and
extraordinary item............... 4,343 2,787 (1,093) (496) 5,795
Income taxes....................... 1,845 1,593 789 863 2,534
Minority interest.................. 211 432
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item............................. 2,287 762 (1,882) (1,359) 3,261
Extraordinary item--write-off of
deferred financing costs, net of
$798 income taxes................ (1,196)
--------- --------- --------- --------- ---------
Net income (loss).................. $ 2,287 $ 762 $ (3,078) $ (1,359) $ 3,261
========= ========= ========= ========= =========
Preferred stock dividend
requirements..................... $ (294) $ (326) $ (226) $ (170) $ (240)
========= ========= ========= ========= =========
Income (loss) before extraordinary
item applicable to common
shareholders..................... $ 1,993 $ 436 $ (2,108) $ (1,529) $ 3,021
========= ========= ========= ========= =========
Net income (loss) applicable to
common shareholders.............. $ 1,993 $ 436 $ (3,304) $ (1,529) $ 3,021
========= ========= ========= ========= =========
Income (loss) before extraordinary
item per share applicable to
common shareholders.............. $ 1.76 $ .28 $ (1.20) $ (.87) $ 1.72
========= ========= ========= ========= =========
Net income (loss) per share
applicable to common
shareholders..................... $ 1.76 $ .28 $ (1.88) $ (.87) $ 1.72
========= ========= ========= ========= =========
Number of shares used to compute
per share data................... 1,132,689 1,538,162 1,760,946 1,760,946 1,760,946
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 76
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
PREFERRED COMMON COMMON STOCK
PREFERRED PREFERRED STOCK STOCK STOCK $.01 ADDITIONAL
STOCK STOCK $.01 PAR NO PAR $3 PAR PAR PAID-IN
10% 9% VALUE VALUE VALUE VALUE CAPITAL
--------- --------- --------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994............................. $ 2,625 $ 377
Issuance of stock............................ $ 370 $ 158
Net income...................................
Preferred stock dividend.....................
------- ----- ----- ----- ----- ---- -------
Balance at
December 31, 1994........................... 2,625 370 377 158
Merger of Helsel and Hawk.................... (2,625) (370) $ 1 (377) (158) $ 14 $ 8,724
Net income...................................
Preferred stock dividend.....................
Purchase of warrants......................... (7,000)
Foreign currency translation adjustment......
Additional minimum pension liability.........
------- ----- ----- ----- ----- ---- -------
Balance at
December 31, 1995........................... 1 14 1,724
Merger of Hawk Holding Corp. and Hawk........ 240
Net loss.....................................
Preferred stock dividend.....................
Foreign currency translation adjustment......
Additional minimum pension liability.........
------- ----- ----- ----- ----- ---- -------
Balance at
December 31, 1996........................... 1 14 1,964
Adjustment to carrying value of detachable
warrants....................................
Net income...................................
Preferred stock dividend.....................
Foreign currency translation adjustment......
Minimum pension liability ...................
------- ----- ----- ----- ----- ---- -------
Balance at September 30, 1997................ $ $ $ 1 $ $ $ 14 $ 1,964
======= ===== ===== ===== ===== ==== =======
<CAPTION>
RETAINED OTHER
EARNINGS EQUITY
(DEFICIT) ADJUSTMENTS TOTAL
-------- ----------- -------
<S> <<C> <C> <C>
Balance at
January 1, 1994............................. $ 375 $ 3,377
Issuance of stock............................ 528
Net income................................... 2,287 2,287
Preferred stock dividend..................... (294) (294)
------- ------- -------
Balance at
December 31, 1994........................... 2,368 5,898
Merger of Helsel and Hawk.................... (474) 4,735
Net income................................... 762 762
Preferred stock dividend..................... (326) (326)
Purchase of warrants......................... (7,000)
Foreign currency translation adjustment...... $ 207 207
Additional minimum pension liability......... (328) (328)
------- ------- -------
Balance at
December 31, 1995........................... 2,330 (121) 3,948
Merger of Hawk Holding Corp. and Hawk........ 240
Net loss..................................... (3,078) (3,078)
Preferred stock dividend..................... (226) (226)
Foreign currency translation adjustment...... 315 315
Additional minimum pension liability......... (9) (9)
------- ------- -------
Balance at
December 31, 1996........................... (974) 185 1,190
Adjustment to carrying value of detachable
warrants.................................... (4,700) (4,700)
Net income................................... 3,261 3,261
Preferred stock dividend..................... (240) (240)
Foreign currency translation adjustment...... (1,296) (1,296)
Minimum pension liability ................... 337 337
------- ------- -------
Balance at September 30, 1997................ $(2,653) $ (774) $(1,448)
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 77
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------------------
1994 1995 1996 1997
----------- ----------- ----------- 1996 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 2,287 $ 762 $ (3,078) $(1,359) $ 3,261
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 2,466 5,527 8,418 6,688 7,166
Accretion of discount on debt.... 325 650 488 487
Deferred income taxes............ 302 377 352 1,568
Minority interest................ 211 432
Extraordinary item, net of tax... 1,196
Changes in operating assets and
liabilities, net of acquired
assets:
Accounts receivable.............. (451) (53) 524 (1,208) (5,319)
Inventories...................... (380) (1,398) (759) (241) (865)
Other assets..................... 4 1,115 4 (1,126) (925)
Accounts payable................. 235 196 (294) 350 2,800
Other liabilities................ 147 430 (1,147) (805) 2,023
------- -------- --------- ------- --------
Net cash provided by operating
activities....................... 4,821 7,713 5,866 2,787 10,196
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Helco, Inc............. (4,627)
Purchase of S.K. Wellman Limited,
Inc., net of cash acquired....... (61,607)
Purchase of Hutchinson Foundry
Products Company................. (10,639)
Purchase of Sinterloy, Inc......... (15,449)
Purchases of property, plant and
equipment........................ (1,871) (3,781) (8,275) (7,669) (4,798)
Loans to shareholders.............. (2,000)
Payments received on shareholder
notes............................ 162 162 163
------- -------- --------- ------- --------
Net cash used in investing
activities....................... (6,498) (67,388) (8,113) (7,507) (30,723)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-
term debt........................ 3,880 102,000 181,373 5,317
Payments on long-term debt......... (3,555) (30,726) (149,765) (783)
Net borrowings (payments) under
revolving credit lines........... 1,280 (1,280)
Purchase of warrants............... (7,000)
Proceeds from sale of preferred
stock, including minority
interest......................... 702
Proceeds from sale of common stock,
including minority interest...... 300
Deferred financing costs........... (2,799) (4,678) 417 (565)
Payments of preferred stock
dividends........................ (295) (326) (226) (170) (240)
Other.............................. (121) 546 279 (30)
------- -------- --------- ------- --------
Net cash provided by (used in)
financing activities............. 2,312 59,748 27,250 5,843 (1,618)
------- -------- --------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 635 73 25,003 1,123 (22,145)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 63 698 771 771 25,774
------- -------- --------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 698 $ 771 $ 25,774 $ 1,894 $ 3,629
======= ======== ========= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 78
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------- -------------
<S> <C> <C> <C> <C>
Cash payments for interest.................... $2,743 $6,260 $11,024 $ 8,137
====== ====== =======
Cash payments for income taxes................ $1,852 $1,929 $ 1,153 $ 1,490
====== ====== =======
Noncash investing and financing activities:
Equipment purchased with capital leases..... $ 2,019 $ 177
=======
Acquisition of Helsel minority interest
through issuance of stock................ $4,735
======
</TABLE>
Reconciliation of assets acquired and liabilities assumed
<TABLE>
<CAPTION>
HELCO -- 1994
-----------------
<S> <C>
Fair value of assets acquired............................................. $ 8,615
Liabilities assumed....................................................... (3,488)
Subordinated note payable issued.......................................... (500)
--------
Cash paid for acquisition................................................. $ 4,627
========
</TABLE>
<TABLE>
<CAPTION>
SK
WELLMAN -- 1995
-----------------
<S> <C>
Fair value of assets acquired, net of cash acquired....................... $ 76,666
Liabilities assumed....................................................... (15,059)
---------
Cash paid for acquisition, net of cash received........................... $ 61,607
=========
</TABLE>
<TABLE>
<CAPTION>
HUTCHINSON -- 1997
-----------------
<S> <C>
Fair value of assets acquired............................................. $ 13,747
Liabilities assumed....................................................... (1,608)
Note payable issued....................................................... (1,500)
--------
Cash paid for acquisition................................................. $ 10,639
========
</TABLE>
<TABLE>
<CAPTION>
SINTERLOY -- 1997
-----------------
<S> <C>
Fair value of assets acquired............................................. $ 16,043
Liabilities assumed....................................................... (594)
--------
Cash paid for acquisition................................................. $ 15,449
========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 79
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1997
A. BASIS OF PRESENTATION
The consolidated financial statements of Hawk Corporation and its
wholly-owned subsidiaries, also include, effective July 1, 1994, the accounts of
Helsel, Inc. (Helsel), effective July 1, 1995, the accounts of S.K. Wellman
Corp. (Wellman), effective January 2, 1997, the accounts of Hutchinson Products
Corporation (Hutchinson) and, effective August 1, 1997, the accounts of
Sinterloy Corporation (Sinterloy) (collectively, the Company). See Note C. All
significant intercompany accounts and transactions have been eliminated in the
accompanying financial statements. Certain amounts have been reclassified in
1994, 1995 and 1996 to conform with the 1997 presentation. All references to
1997 in the Notes to Consolidated Financial Statements refer to the nine months
ended September 30, 1997.
The Company designs, engineers, manufactures and markets specialized
components, principally made from powder metals, used in a wide variety of
aerospace, industrial and commercial applications.
The accompanying unaudited consolidated financial statements at September
30, 1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
B. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include expenditures
for additions and major improvements. Expenditures for repairs and maintenance
are charged to operations as incurred. The Company principally uses either the
straight-line or the unit method of depreciation for financial reporting
purposes based on annual rates sufficient to amortize the cost of the assets
over their estimated useful lives (5 to 40 years). Accelerated methods of
depreciation are used for federal income tax purposes.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over periods
ranging from 3 to 40 years. The ongoing value and remaining useful life of
intangible assets are subject to periodic evaluation and the Company currently
expects the carrying amounts to be fully recoverable. If events and
circumstances indicate that intangible assets might be impaired, an undiscounted
cash flow methodology would be used to determine whether an impairment loss
should be recognized. See Note D.
F-9
<PAGE> 80
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates. Revenues and expenses
are translated at weighted average exchange rates. Gains and losses resulting
from translation are included in other equity adjustments in the consolidated
balance sheets.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer. Costs and related expenses to manufacture the products are
recorded as cost of sales when the related revenue is recognized.
SIGNIFICANT CONCENTRATIONS
The Company provides credit, in the normal course of its business, to
original equipment and after-market manufacturers. The Company's customers are
not concentrated in any specific geographic region. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses which, when realized, have been within the range of management's
expectations.
The percentage of consolidated net sales to major customers are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 22.6% 13.8% 10.4%
Customer B................................................. 11.0 9.8 8.9
</TABLE>
Accounts receivable balances from these customers represent approximately
18% and 13% of the Company's consolidated accounts receivable at December 31,
1995 and 1996, respectively.
PRODUCT RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company's
expenditures for product development and engineering were (in thousands)
approximately $1,158 in 1994, $2,000 in 1995, $2,639 in 1996 and $2,333 in 1997.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses amounted
to (in thousands) approximately $106, $385, $197 and $191 in 1994, 1995, 1996
and 1997, respectively.
INCOME TAXES
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995 and 1996 and September 30, 1997, the carrying value of
the Company's financial instruments, which include cash, cash equivalents and
long-term debt, approximate their fair value.
F-10
<PAGE> 81
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and common share equivalents (warrants) outstanding during the
respective periods. Earnings available to common shareholders reflects an
adjustment for preferred stock dividends paid during the respective periods.
SUPPLEMENTAL NET INCOME (LOSS) PER SHARE
Supplemental pro forma income (loss) before taxes and extraordinary item
and net income (loss), considering only the repayment of the Senior Subordinated
Notes and a portion of the Senior Notes (see Note E) with a portion of the
proceeds of a contemplated public offering of shares of common stock and the
proceeds from a $35.0 million five year unsecured term loan facility, would have
been $ and $ , respectively, for the year ended December 31,
1996, and $ and $ , respectively, for the nine months ended
September 30, 1997. Supplemental pro forma net income (loss) per share would
have been $ for the year ended December 31, 1996 and $ for the
nine months ended September 30, 1997, based on the weighted average number of
shares of common stock outstanding during the period plus the estimated number
of shares necessary to be issued in such public offering, and considering the
proceeds from a $35.0 million five year unsecured term loan facility, in order
to obtain sufficient proceeds to repay the Senior Subordinated Notes and a
portion of the Senior Notes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the asset's carrying amount. The Company adopted SFAS No.
121 effective January 1, 1996. The adoption of SFAS No. 121 did not have a
material effect on the Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies modifications to the
calculation of earnings per share from that currently used by the Company. Under
SFAS No. 128, "basic earnings per share" will be calculated based upon the
weighted average number of shares actually outstanding, and "diluted earnings
per share" will be calculated based upon the weighted average number of common
shares outstanding and other potential common shares if they are dilutive. SFAS
No. 128 will be adopted by the Company on December 31,1997 and all prior periods
will be restated. The adoption of SFAS No. 128 is not expected to have a
material impact on the Company's earnings per share for any of the periods
presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first quarter
of 1998, and does not anticipate a significant impact to the financial
statements.
F-11
<PAGE> 82
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required in 1998.
C. BUSINESS ACQUISITIONS
Effective June 30, 1994, Helsel, a corporation owned 53% by a control group
of Company shareholders (Hawk Control Group) and 47% by other investors,
commenced operations and acquired substantially all of the net assets of Helco,
Inc. (Helco) for approximately $8.6 million. The acquisition was accounted for
as a purchase. Accordingly, the purchase price was allocated to assets and
liabilities based on their estimated fair values as of the date of the
acquisition. The excess of fair market value of identifiable assets less
liabilities over the purchase price resulted in negative goodwill, which was
applied to reduce property, plant and equipment. The acquisition was financed
through long-term debt and the sale of $702,000 of preferred stock and $300,000
of common stock. Effective June 30, 1995, Helsel became a wholly-owned
subsidiary of the Company whereby each outstanding share of common stock of
Helsel was exchanged, based on an independent valuation, for .0693955 shares of
common stock of the Company. Additionally, the Company issued one share of 9%
preferred stock for each share of Helsel preferred stock. In total, 6,940 Class
A common shares and 702 Series B preferred shares were issued to the Helsel
shareholders. Because the Hawk Control Group owned a controlling interest in
Helsel, the 1995 transaction has been accounted for as a merger of entities
under common control and the Company's 1994 financial statements have been
restated to include Helsel since June 30, 1994. In addition, the acquisition of
the other investors' 47% interest in Helsel, effective June 30, 1995, has been
accounted for as the purchase of a minority interest. Accordingly, the excess of
the purchase price over the estimated fair value of the minority interest ($3.6
million) was recorded as goodwill and is being amortized over 30 years.
A summary of the combination and financial results for Helsel and the
Company, as of December 31, 1994 and for the period July 1, 1994 through
December 31, 1994, follows:
<TABLE>
<CAPTION>
LESS: CONSOLIDATED
MINORITY HAWK
HELSEL HAWK INTEREST CORPORATION
------ ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total assets.................... $8,804 $34,841 $ 43,645
Shareholders' equity............ 1,417 5,166 $ (685) 5,898
Net sales....................... 8,555 32,840 41,395
Income before income taxes...... 787 3,556 4,343
Net income...................... 446 2,052 (211) 2,287
</TABLE>
In connection with the acquisition, the Company entered into an employment
agreement through June 1997 with the previous shareholder of Helco, who
continues to serve as President of Helsel. Terms of the employment agreement
include an annual salary of $150,000 and a bonus based on earnings. Amounts
earned under this contract are charged to current operations.
Effective June 30, 1995, Wellman acquired for cash substantially all of the
net assets of S.K. Wellman Limited, Inc. for approximately $62 million. The
acquisition was accounted for as a purchase. The excess of the purchase price
over the estimated fair value of the net assets acquired in the amount of $15.8
million is being amortized over 15 years and is included in intangible assets.
The operating results of Wellman are included in the Company's consolidated
statements of operations since the date
F-12
<PAGE> 83
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of acquisition. As a result of this acquisition, the Company consolidated
certain operating facilities. Accordingly, the net carrying value of the
facilities the Company closed and is planning to sell are reflected as net
assets held for sale on the accompanying balance sheets at December 31, 1995 and
1996 and September 30, 1997. The net assets held for sale are stated at the
lower of the carrying amount or fair value less costs to sell and consist
primarily of land and buildings. In addition, for the year ended December 31,
1996, the Company incurred and expended approximately $4.0 million of costs
relating primarily to the relocation of machinery and equipment.
Effective January 2, 1997, Hutchinson acquired all of the outstanding
capital stock of Hutchinson Foundry Products Company for (1) $10.6 million in
cash; (2) $1.5 million in 8.0% two-year convertible notes; and (3) contingent
payments to be made by the Company if certain earnings targets are met. The
acquisition has been accounted for as a purchase. The excess of the purchase
price over the estimated fair value of the capital stock acquired in the amount
of $7.7 million is being amortized over 30 years and is included in intangible
assets. The results of operations of Hutchinson are included in the Company's
consolidated statements of income since the date of acquisition.
Effective August 1, 1997, Sinterloy acquired substantially all of the
assets (except cash) and assumed certain liabilities of Sinterloy, Inc., for
$15.4 million in cash, subject to an adjustment based on the adjusted net equity
position of Sinterloy, Inc. at closing. As of September 30, 1997, a closing
adjustment had not been determined. The acquisition was accounted for as a
purchase. The excess of the purchase price over the estimated fair value of the
assets less the assumed liabilities in the amount of $10.4 million is being
amortized over 30 years and is included in intangible assets. The results of
operations of Sinterloy are included in the Company's consolidated statements of
operations since the date of acquisition.
The following unaudited pro forma consolidated results of operations give
effect to the Hutchinson and Sinterloy acquisitions as though they had occurred
on January 1, 1996 and include certain adjustments, such as additional
amortization expense as a result of goodwill and increased interest expense
related to debt incurred for the acquisitions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales....................................... $108,834 $124,985
======== ========
Net (loss) income............................... $ (506) $ 4,894
======== ========
</TABLE>
Pro forma net sales and net income are not necessarily indicative of the
net sales and net income that would have occurred had the acquisitions been made
at the beginning of the respective years or the results which may occur in the
future.
In November 1996, the Company merged with Hawk Holding Corp. (Old Hawk), a
corporation that owned approximately 34% of the outstanding common stock of the
Company, in a tax-free reorganization. At the time of the merger, Old Hawk was
96% owned by the Hawk Control Group and 4% owned by other investors. In the
merger, the Company acquired and canceled the shares of Class A common stock of
the Company owned by Old Hawk and reissued the same amount of shares of Class A
common stock pro rata to the Old Hawk stockholders. In addition, the Company
acquired and canceled the Class A preferred stock of the Company owned by Old
Hawk, and issued 1,190 shares of Class C preferred stock, which has a
liquidation value substantially equal to the aggregate liquidation value of the
Class A preferred stock previously owned by Old Hawk. Since the Company and Old
Hawk were under common control, the Company has recorded the acquisition of the
Hawk Control Group's interest in Old Hawk at historical cost and the acquisition
of the other investors' ownership interest as a purchase of minority interest.
Accordingly, the excess of the purchase price over the estimated fair value
F-13
<PAGE> 84
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of the minority interest acquired in the amount of $240,000 was recorded as
goodwill and is being amortized over 30 years.
D. INTANGIBLE ASSETS
The components of intangible assets and related amortization periods are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Product certifications (19 to 40
years)................................. $20,820 $20,820 $20,820
Goodwill (15 to 40 years)................ 21,772 22,012 40,103
Deferred financing costs (3 to 7
years)................................. 2,779 4,678 5,611
Proprietary formulations and patents (10
years)................................. 1,806 1,806 1,806
Other.................................... 779 779 960
------- ------- -------
47,956 50,095 69,300
Accumulated amortization................. (8,135) (10,156) (12,731)
------- ------- -------
$39,821 $39,939 $56,569
======= ======= =======
</TABLE>
Product certifications were acquired and valued based on the Company's
position as a certified supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
E. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Term Loans.............................. $57,090
Revolving Credit Line................... 10,400
Senior Subordinated Notes............... 25,725 $ 26,375 $ 26,862
Senior Notes............................ 100,000 100,000
Other................................... 1,691 2,808 4,434
------- -------- --------
94,906 129,183 131,296
Less current portion.................... 5,460 714 1,595
------- -------- --------
$89,446 $128,469 $ 129,701
======= ======== ========
</TABLE>
As a result of the acquisition of Wellman in June 1995, the Company entered
into a Secured Credit Agreement Facility (Credit Agreement) with several
participating banks, and repaid all previous credit facilities. In November
1996, in connection with the issuance of new Senior Notes (discussed below), the
Credit Agreement was cancelled, all outstanding borrowings were repaid, and the
Company incurred an extraordinary charge of $1,994,000 relating to the write-off
of previously capitalized deferred financing costs. Prior to its cancellation in
November 1996, the Credit Agreement consisted of (1) two term loans requiring
quarterly interest payments, based on certain published rates, and quarterly
principal payments in accordance with payment schedules from September 1995
through June 2002; and (2) a $22,000,000 revolving credit line with a commitment
fee of one half percent per annum on the unused portion and interest payable
quarterly based on certain published rates.
In addition, effective June 30, 1995, the Company issued $30,000,000 in
Senior Subordinated Notes with $10,000,000 maturing on January 31, 2004, and
June 30, 2004 and 2005. Interest is payable quarterly at a fixed rate of 12%. In
connection with the senior subordinated notes, the Company issued detachable
warrants to the lender that provide the lender the option to purchase 316,970
shares of the
F-14
<PAGE> 85
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's Class B common stock at a per share price of $.01. The warrants are
exercisable through the year 2005. Beginning in the year 2001, the Company has
the option to repurchase the warrants and the warrant holders have the right to
put the warrants to the Company for cash, at prices based on the fair market
value of the Company at the date of put as determined by an independent third
party. The warrant holders' put option is terminated upon the occurrence of
certain events, including the closing of an initial public offering.
For financial reporting purposes, at June 30, 1995, the fair value of the
warrants, including the put option, was estimated to be $4,600,000 and
classified as detachable stock warrants, subject to put option on the
accompanying balance sheet. The resulting discount is being amortized over the
life of the debt as non-cash, imputed interest. The discount is based on an
effective interest rate of 14.2%. The unamortized discount at December 31, 1995,
December 31, 1996, and September 30, 1997 totaled $4,275,000, $3,625,000, and
$3,138,000, respectively. Adjustments to the carrying value of the detachable
stock warrants are based on revisions to the estimated present value of the
future fair market value of the Company, with a corresponding charge or credit
to retained earnings. The carrying value of the warrants, including the put
option, was adjusted to $9.3 million as of September 30, 1997.
In November 1996, the Company issued $100,000,000 in Senior Notes due on
December 1, 2003, unless previously redeemed, at the Company's option, in
accordance with the terms of the Notes. Interest is payable semi-annually on
June 1 and December 1 of each year commencing June 1, 1997, at a fixed rate of
10.25%. The Senior Notes and the notes for which certain of the Senior Notes
have been exchanged (Exchange Notes and, together with the Senior Notes, the
Senior Notes) are fully and unconditionally guaranteed on a joint and several
basis by each of the direct or indirect wholly-owned domestic subsidiaries of
the Company (Guarantor Subsidiaries). (See Note M).
Also, in November 1996, the Company executed a new $25,000,000 Revolving
Credit Facility (Credit Facility) which matures in November 1999. The Company
pays a commitment fee of 0.5% per annum on the unused portion. Interest is
payable monthly at LIBOR plus 2.25% per annum, or at the Company's option, a
variable rate based on the prime rate plus 1.0% per annum, payable at various
interest periods per the Credit Facility. The Credit Facility contains covenants
with respect to the Company and its subsidiaries that, among other things,
prohibit the payment of any dividends to the Company by the subsidiaries of the
Company (including the Guarantor Subsidiaries) in the event of a default under
the terms of the Credit Facility. There were no outstanding borrowings under the
Credit Facility at December 31, 1996 or September 30, 1997.
Aggregate principal payments due on long-term debt as of September 30, 1997
are as follows (in thousands): three months ending December 31, 1997 -- $172;
1998 -- $1,581; 1999 -- $1,502; 2000 -- $450; 2001 -- $535; 2002 -- $228;
thereafter -- $126,828.
F. SHAREHOLDERS' EQUITY
In accordance with a Merger Agreement and Plan of Reorganization dated June
30, 1995, the Company, formerly an Ohio corporation, was merged with and into a
Delaware corporation under the same name. Concurrently, each issued and
outstanding share of common stock, without par value, of the previous
corporation was converted into one fully paid share of Class A common stock, par
value $.01 per share, of the merged corporation. Additionally, each issued and
outstanding share of preferred stock, $1,000 par value per share, of the
previous corporation was converted into one fully paid share of Series A
preferred stock, par value $.01 per share, of the merged corporation.
The Company's authorized preferred stock includes 2,625 shares of Class A
preferred stock, 702 shares of Class B preferred stock and 1,190 shares of Class
C preferred stock. Dividends are cumulative at the rate of 10% of $1,000 per
share for Class A and Class C preferred stock and 9% of $1,000
F-15
<PAGE> 86
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
per share for Class B preferred stock. Each share of preferred stock is: (1)
entitled to a liquidation preference equal to $1,000 per share plus any accrued
and unpaid dividends, (2) not entitled to vote, except in certain circumstances,
(3) redeemable in whole, at the option of the Company, for $1,000 per share plus
all accrued dividends to the date of redemption.
The Company's authorized common shares of 2,575,000 includes 2,200,000
shares of Class A voting and 375,000 shares of Class B non-voting. Each share of
the Class B common stock is convertible into one share of Class A common stock
upon the occurrence of certain events. All of the outstanding shares are Class
A.
In June 1995, the Company repurchased detachable warrants covering 2,000
shares of Class B common stock for a negotiated price of $7,000,000. The
warrants were originally issued in connection with a subordinated note that was
paid in full when the Company entered into the Credit Agreement as described in
Note E.
G. EMPLOYEE BENEFITS
The Company has several defined benefit pension plans which cover certain
employees. Benefits payable are based primarily on compensation and years of
service or a fixed annual benefit for each year of service. Certain hourly
employees are also covered under collective bargaining agreements. The Company
funds the plans in amounts sufficient to satisfy the minimum amounts required
under ERISA.
A summary of the components of net periodic pension cost (income) for the
plans is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost.................. $ 246 $ 382 $ 400 $ 339
Interest cost................. 421 665 727 617
Actual return on plan
assets...................... (165) (1,732) (1,435) (2,165)
Net amortization and
deferral.................... (293) 673 576 1,335
------- ------- ------- -------
$ 209 $ (12) $ 268 $ 126
======= ======= ======= =======
</TABLE>
F-16
<PAGE> 87
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the actuarially determined benefit obligations and trustees
net assets for Company administered defined benefit pension plans is presented
below, along with a reconciliation of the plans' funded status to amounts
recognized in the Company's balance sheets. The plans' assets are primarily
invested in fixed income and equity securities.
<TABLE>
<CAPTION>
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
--------------------------------- ---------------------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligations:
Vested.................. $(5,960) $(6,186) $(7,461) $(2,559) $(2,594) $(2,209)
Non-vested.............. (60) (57) (124) (214) (198) (164)
------- ------- ------- ------- ------- -------
$(6,020) $(6,243) $(7,585) $(2,773) $(2,792) $(2,373)
======= ======= ======= ======= ======= =======
Projected benefit
obligations............. $(6,634) $(6,943) $(8,218) $(2,773) $(2,909) $(2,373)
Plan assets at fair
value................... 7,524 8,677 12,054 1,693 2,261 2,153
------- ------- ------- ------- ------- -------
Projected benefit
obligations less than
(in excess of) plan
assets.................. 890 1,733 3,836 (1,080) (648) (220)
Unrecognized net loss..... 371 (263) (1,995) 328 (65) (197)
Prior service cost not yet
recognized in net
periodic pension cost... 134 134 188 361 347 266
Unrecognized net (asset)
obligation.............. (231) (208) (129) 151 125 52
Adjustment required to
recognize minimum
liability............... (840)
------- ------- ------- ------- ------- -------
PREPAID (ACCRUED) PENSION
COST.................... $ 1,164 $ 1,396 $ 1,900 $(1,080) $ (241) $ (99)
======= ======= ======= ======= ======= =======
</TABLE>
The following assumptions were used in accounting for the defined benefit
plans:
<TABLE>
<CAPTION>
1994 1995 1996 1997
----- ----- ---- ----
<S> <C> <C> <C> <C>
Used to compute the projected benefit obligation:
Discount rate............................................ 8.0% 8.0% 7.5% 7.5%
Annual salary increase................................... 3.0 3.0 3.0 3.0
Expected long-term rate of return on plan assets........... 10.0 10.0 9.5 9.0
</TABLE>
The Company also sponsors several defined contribution plans which provide
voluntary employee contributions and, in certain plans, matching and
discretionary employer contributions. Expenses associated with these plans were
(in thousands) approximately $290 in 1994, $920 in 1995, $690 in 1996, and $590
in 1997.
H. LEASE OBLIGATIONS
The Company has capital lease commitments for buildings and equipment.
Future minimum annual rentals, including interest expense, are (in thousands):
three months ending December 31, 1997 --
F-17
<PAGE> 88
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$219, 1998 -- $875, 1999 -- $737, 2000 -- $491, 2001 -- $580, 2002 -- $238.
Amount representing interest is $538. Total capital lease obligations are
included in other long-term debt. Amortization of assets recorded under capital
leases is included with depreciation expense.
The Company leases certain office and warehouse facilities and equipment
under operating leases. Rental expense (in thousands) was approximately $77 in
1994, $270 in 1995, $609 in 1996 and $677 in 1997. Future minimum lease
commitments under these agreements which have an original or existing term in
excess of one year as of September 30, 1997 are as follows (in thousands): three
months ending December 31, 1997 -- $220; 1998 -- $874; 1999 -- $545;
2000 -- $528; 2001 -- $504; 2002 -- $435 and thereafter -- $318.
I. INCOME TAXES
The provision (credit) for income taxes, except for the effect of the
extraordinary item, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS
---------------------------- ENDED
1994 1995 1996 SEPTEMBER 30, 1997
------ ------ ------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal........................... $1,369 $ 907 $ (624) $ 802
State and local................... 174 235 129 80
Foreign........................... 74 932 84
------ ------ ----- ------
1,543 1,216 437 966
Deferred:
Federal........................... 237 365 299 1,510
State and local................... 65 12 53 58
------ ------ ----- ------
302 377 352 1,568
------ ------ ----- ------
TOTAL INCOME TAXES.................. $1,845 $1,593 $ 789 $2,534
====== ====== ===== ======
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. At December 31, 1996 the Company had net operating loss
carryforwards of approximately $1,600,000 which expire in 2011.
F-18
<PAGE> 89
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company also had $622,000 of Alternative Minimum Tax (AMT) credit
carryforwards that do not expire. Significant components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------- SEPTEMBER 30
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward................. $ 545
Reserve for severance costs..................... $ 237
Accrued vacation................................ 259 318 $ 500
Accrued pension costs........................... 466
AMT credit carryforward......................... 622
Other accruals.................................. 509 595 535
Other........................................... 302 352 248
------ ------ ------
Total deferred tax assets......................... 1,773 2,432 1,283
Deferred tax liabilities:
Tax over book depreciation and amortization..... 2,659 4,090 4,797
Other........................................... 420 268
------ ------ ------
Total deferred tax liabilities.................... 3,079 4,090 5,065
------ ------ ------
NET DEFERRED TAX LIABILITIES...................... $1,306 $1,658 $ 3,782
====== ====== ======
</TABLE>
The provision for income taxes, including the tax effect of the
extraordinary item, differs from the amounts computed by applying the federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
--------------------------- ENDED
1994 1995 1996 SEPTEMBER 30, 1997
---- ----- ------ ------------------
<S> <C> <C> <C> <C>
Income tax (credit) at federal
statutory rate..................... 34.0% 34.0% (34.0)% 34.0%
State and local tax, net of federal
tax benefit........................ 3.0 5.7 3.9 4.0
Nondeductible goodwill
amortization....................... 2.2 7.2 3.7 3.1
Adjustment for worldwide tax rates
and other, net..................... 3.1 9.0 26.4 2.6
---- ---- ---- ----
Provision for income taxes........... 42.3% 55.9% 0.0% 43.7%
==== ==== ==== ====
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided. Upon distribution of these earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes, which may be offset by foreign tax credits, and withholding taxes
payable to various foreign countries.
J. CONTINGENCIES
The Company has wage continuation agreements with two of its
officers/shareholders. In the event the officer/shareholder dies or becomes
permanently disabled while employed by the Company, each agreement provides for
payments to be made annually to the officer/shareholder's spouse based on a
compensation formula, until the spouse's death.
F-19
<PAGE> 90
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
K. RELATED PARTIES
In June 1995, certain shareholders of the Company issued interest-bearing
notes to the Company in the amount of $2 million, in order to enable them to
repay certain indebtedness incurred by them with respect to the acquisition of
Helsel. The notes are due and payable on July 1, 2002 and bear interest at the
prime rate plus 1.25% through September 30, 1996 and at the prime rate
thereafter.
L. GEOGRAPHIC INFORMATION
Geographic information for the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------- -------------------------------- --------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 76,570 $ 8,073 $ 84,643 $104,622 $ 19,375 $123,997 $101,113 $ 15,249 $116,362
Income from
operations.......... 9,242 738 9,980 7,326 2,485 9,811 15,865 691 16,556
Net income (loss)..... 481 281 762 (3,788) 710 (3,078) 2,976 285 3,261
Total assets.......... 113,293 14,126 127,419 141,139 17,302 158,441 151,831 18,384 170,215
</TABLE>
The Company has foreign operations in Canada and Italy. The Company had no
foreign operations in 1994.
M. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note E, each of the Guarantor Subsidiaries of the Senior
Notes has fully and unconditionally guaranteed on a joint and several basis the
obligation to pay principal, premium, if any, and interest with respect to the
Senior Notes. The Guarantor Subsidiaries are direct or indirect wholly-owned
subsidiaries of the Company.
The following supplemental consolidating condensed financial statements
present (in thousands):
1. Consolidating condensed balance sheets as of December 31, 1995,
December 31, 1996, and September 30, 1997, consolidating condensed
statements of income for the years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1996 (unaudited) and
1997 and consolidating condensed statements of cash flows for the
years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and 1997.
2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
subsidiaries in Canada and Italy acquired in 1995) with their
investments in subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries of the Senior Notes are material to investors. Therefore,
separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented. The Credit Facility contains covenants with
respect to the Company and its subsidiaries that, among other things, would
prohibit the payment of any dividends to the Company by the subsidiaries of the
Company (including the Guarantor Subsidiaries) in the event of a default under
the terms of the Credit Facility.
F-20
<PAGE> 91
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 408 $ 78 $ 285 $ 771
Accounts receivable, net........... 11,978 5,329 17,307
Inventories, net................... 16,435 3,670 20,105
Deferred income taxes.............. 1,042 1,042
Other current assets............... 654 535 1,189
-------- -------- ------- ---------- --------
Total current assets........ 408 30,187 9,819 40,414
OTHER ASSETS:
Investment in subsidiaries......... 1,165 4,108 $ (5,273)
Inter-company advances, net........ 94,978 5,353 (100,331)
Property, plant and equipment...... 35,534 3,926 39,460
Intangible assets.................. 2,846 36,616 359 39,821
Other.............................. 2,061 5,641 22 7,724
-------- -------- ------- ---------- --------
Total other assets.......... 101,050 87,252 4,307 (105,604) 87,005
-------- -------- ------- ---------- --------
Total assets......................... $101,458 $117,439 $14,126 $ (105,604) $127,419
======== ======== ======= ========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 5,693 $ 2,795 $ 8,488
Accrued compensation............... $ 33 6,572 759 7,364
Other accrued expenses............. 2,793 744 3,537
Current portion of long-term
debt............................. 4,923 125 412 5,460
-------- -------- ------- ---------- --------
Total current liabilities... 4,956 15,183 4,710 24,849
-------- -------- ------- ---------- --------
LONG-TERM LIABILITIES:
Long-term debt..................... 87,954 457 1,035 89,446
Deferred income taxes.............. 2,348 2,348
Other.............................. 1,578 650 2,228
Inter-company advances, net........ 98,256 2,075 $ (100,331)
-------- -------- ------- ---------- --------
Total long-term
liabilities............... 87,954 102,639 3,760 (100,331) 94,022
-------- -------- ------- ---------- --------
Total liabilities........... 92,910 117,822 8,470 (100,331) 118,871
-------- -------- ------- ---------- --------
Detachable stock warrants, subject to
put option......................... 4,600 4,600
Shareholders' equity (deficit)....... 3,948 (383) 5,656 (5,273) 3,948
-------- -------- ------- ---------- --------
Total liabilities and shareholders'
equity............................. $101,458 $117,439 $14,126 $ (105,604) $127,419
======== ======== ======= ========== ========
</TABLE>
F-21
<PAGE> 92
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 25,187 $ 5 $ 582 $ 25,774
Accounts receivable, net........... 189 10,884 5,710 16,783
Inventories, net................... 16,120 4,744 20,864
Deferred income taxes.............. 1,390 1,042 2,432
Other current assets............... 67 373 495 935
-------- -------- ------- ---------- --------
Total current assets........ 26,833 28,424 11,531 66,788
OTHER ASSETS:
Investment in subsidiaries......... 775 6,457 $ (7,232)
Inter-company advances, net........ 108,607 19,543 (128,150)
Property, plant and equipment...... 38,394 5,748 44,142
Intangible assets.................. 504 39,435 39,939
Other.............................. 1,838 5,318 416 7,572
-------- -------- ------- ---------- --------
Total other assets.......... 111,724 109,147 6,164 (135,382) 91,653
-------- -------- ------- ---------- --------
Total assets......................... $138,557 $137,571 $17,695 $ (135,382) $158,441
======== ======== ======= ========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ (157) $ 5,167 $ 3,184 $ 8,194
Accrued compensation............... 100 5,856 819 6,775
Other accrued expenses............. (719) 2,728 396 2,405
Current portion of long-term
debt............................. 289 425 714
-------- -------- ------- ---------- --------
Total current liabilities... (776) 14,040 4,824 18,088
LONG-TERM LIABILITIES:
Long-term debt..................... 126,375 1,290 804 128,469
Deferred income taxes.............. 2,729 1,057 304 4,090
Other.............................. 1,272 732 2,004
Inter-company advances, net........ 3,532 120,819 4,574 $ (128,925)
-------- -------- ------- ---------- --------
Total long-term
liabilities............... 132,636 124,438 6,414 (128,925) 134,563
-------- -------- ------- ---------- --------
Total liabilities........... 131,860 138,478 11,238 (128,925) 152,651
Detachable stock warrants, subject to
put option......................... 4,600 4,600
Shareholders' equity (deficit)....... 2,097 (907) 6,457 (6,457) 1,190
-------- -------- ------- ---------- --------
Total liabilities and shareholders'
equity............................. $138,557 $137,571 $17,695 $ (135,382) $158,441
======== ======== ======= ========== ========
</TABLE>
F-22
<PAGE> 93
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 3,540 $ 40 $ 49 $ 3,629
Accounts receivable, net........... 67 18,703 6,576 $ (384) 24,962
Inventories, net................... 17,801 4,766 22,567
Deferred income taxes.............. 190 1,093 1,283
Other current assets............... 142 614 947 1,703
-------- -------- ------- ---------- --------
Total current assets........ 3,939 38,251 12,338 (384) 54,144
OTHER ASSETS:
Investment in subsidiaries......... 790 5,765 (6,555)
Inter-company advances, net........ 132,535 1,463 9 (134,007)
Property, plant and equipment...... 46,385 5,578 51,963
Intangible assets.................. 233 56,336 56,569
Other.............................. 1,675 7,180 459 (1,775) 7,539
-------- -------- ------- ---------- --------
Total other assets.......... 135,233 117,129 6,046 (142,337) 116,071
-------- -------- ------- ---------- --------
Total assets......................... $139,172 $155,380 $18,384 $ (142,721) $170,215
======== ======== ======= ========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................... $ 7,982 $ 3,896 $ 11,878
Accrued compensation............... $ 64 6,278 864 7,206
Other accrued expenses............. (2,068) 7,242 70 $ (384) 4,860
Current portion of long-term
debt............................. 1,175 420 1,595
-------- -------- ------- ---------- --------
Total current liabilities... (2,004) 22,677 5,250 (384) 25,539
LONG-TERM LIABILITIES:
Long-term debt..................... 126,862 2,839 129,701
Deferred income taxes.............. 4,378 350 337 5,065
Other.............................. 484 1,574 2,058
Inter-company advances, net........ 2,986 127,338 5,458 (135,782)
-------- -------- ------- ---------- --------
Total long-term
liabilities............... 134,226 131,011 7,369 (135,782) 136,824
-------- -------- ------- ---------- --------
Total liabilities........... 132,222 153,688 12,619 (136,166) 162,363
-------- -------- ------- ---------- --------
Detachable stock warrants, subject to
put option......................... 9,300 9,300
Shareholders' equity (deficit)....... (2,350) 1,692 5,765 (6,555) (1,448)
-------- -------- ------- ---------- --------
Total liabilities and shareholders'
equity............................. $139,172 $155,380 $18,384 $ (142,721) $170,215
======== ======== ======= ========== ========
</TABLE>
F-23
<PAGE> 94
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................. $ 76,570 $ 8,073 $ 84,643
Cost of sales......................... 54,391 6,773 61,164
------- -------- ------- -------- --------
Gross profit.......................... 22,179 1,300 23,479
Expenses:
Selling, technical and
administrative expenses........... 11,013 562 11,575
Amortization of intangible assets... 1,924 1,924
------- -------- ------- -------- --------
Total expenses........................ 12,937 562 13,499
------- -------- ------- -------- --------
Income from operations................ 9,242 738 9,980
Interest (income) expense, net........ $ (95) 7,032 119 $ 267 7,323
Income from equity investees.......... 1,099 281 (1,380)
Other (income) expense, net........... (127) 264 (267) (130)
------- -------- ------- -------- --------
Income before income taxes and
minority interest................... 1,194 2,618 355 (1,380) 2,787
Income taxes.......................... 1,519 74 1,593
Minority interest..................... 432 432
------- -------- ------- -------- --------
Net income............................ $ 762 $ 1,099 $ 281 $ (1,380) $ 762
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $104,262 $19,735 $123,997
Cost of sales........................ 76,232 15,652 91,884
------- -------- ------- -------- --------
Gross profit......................... 28,030 4,083 32,113
Expenses:
Selling, technical and
administrative expenses.......... 13,932 1,536 15,468
Amortization of intangible
assets........................... 2,744 62 2,806
Plant consolidation expense........ 4,028 4,028
------- -------- ------- -------- --------
Total expenses....................... 20,704 1,598 22,302
------- -------- ------- -------- --------
Income from operations............... 7,326 2,485 9,811
Interest (income) expense, net....... $ (540) 10,447 369 $ 372 10,648
Income (loss) from equity
investees.......................... (2,422) 710 1,712
Other expense, net................... 155 473 (372) 256
------- -------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item................. (1,882) (2,566) 1,643 1,712 (1,093)
Income taxes (credit)................ (144) 933 789
------- -------- ------- -------- --------
Income (loss) before extraordinary
item............................... (1,882) (2,422) 710 1,712 (1,882)
Extraordinary item -- write-off of
deferred financing costs, net of
income taxes....................... (1,196) (1,196)
------- -------- ------- -------- --------
Net income (loss).................... $ (3,078) $ (2,422) $ 710 $ 1,712 $ (3,078)
======= ======== ======= ======== ========
</TABLE>
F-24
<PAGE> 95
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 79,001 $14,671 $ 93,672
Cost of sales.......................... 57,902 11,121 69,023
------- -------- ------- -------- --------
Gross profit........................... 21,099 3,550 24,649
Expenses:
Selling, technical and administrative
expenses........................... 10,498 1,114 11,612
Amortization of intangible assets.... 2,408 2,408
Plant consolidation expense.......... 3,749 3,749
------- -------- ------- -------- --------
Total expenses......................... 16,655 1,114 17,769
Income from operations................. 4,444 2,436 6,880
Interest expense, net.................. $ 198 6,588 256 $ 279 7,321
Income (loss) from equity investees.... (1,161) 633 528
Other (income) expense, net............ (148) 482 (279) 55
------- -------- ------- -------- --------
Income (loss) before income taxes...... (1,359) (1,363) 1,698 528 (496)
Income taxes (credit).................. (202) 1,065 863
------- -------- ------- -------- --------
Net income (loss)...................... $(1,359) $ (1,161) $ 633 $ 528 $ (1,359)
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $101,113 $15,249 $116,362
Cost of sales........................ 70,609 12,331 82,940
------- -------- ------- -------- --------
Gross profit......................... 30,504 2,918 33,422
Expenses:
Selling, technical and
administrative expenses.......... 12,053 2,188 14,241
Amortization of intangible
assets........................... $ 8 2,528 39 2,575
Plant consolidation expense........ 50 50
------- -------- ------- -------- --------
Total expenses....................... 8 14,631 2,227 16,866
Income (loss) from operations........ (8) 15,873 691 16,556
Interest expense, net................ 487 9,830 322 10,639
Income from equity investees......... 3,173 285 $ (3,458)
Other (income) expense, net.......... (635) 757 122
------- -------- ------- -------- --------
Income before income taxes........... 3,313 5,571 369 (3,458) 5,795
------- -------- ------- -------- --------
Income taxes......................... 52 2,398 84 2,534
------- -------- ------- -------- --------
Net income........................... $ 3,261 $ 3,173 $ 285 $ (3,458) $ 3,261
======= ======== ======= ======== ========
</TABLE>
F-25
<PAGE> 96
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash and cash equivalents
provided by operating activities... $ 3,934 $ 2,738 $ 1,041 $ 7,713
Cash flows from investing activities:
Purchase of net assets of Wellman,
net of cash acquired............. (61,607) (61,607)
Purchase of property, plant and
equipment........................ (3,145) (636) (3,781)
Loans to shareholders.............. (2,000) (2,000)
-------- -------- ------- -------- --------
Net cash and cash equivalents used in
investing activities............... (63,607) (3,145) (636) (67,388)
Cash flows from financing activities:
Proceeds from borrowings of long-
term debt........................ 102,000 102,000
Payments on long-term debt......... (30,606) (120) (30,726)
Net borrowings under revolving
credit lines..................... (1,280) (1,280)
Purchase of warrants............... (7,000) (7,000)
Deferred financing costs........... (2,799) (2,799)
Payment of preferred stock
dividend......................... (326) (326)
Other.............................. (121) (121)
-------- -------- ------- -------- --------
Net cash and cash equivalents
provided by financing activities... 59,989 (121) (120) 59,748
Net increase (decrease) in cash and
cash equivalents................. 316 (528) 285 73
Cash and cash equivalents, at
beginning of period................ 92 606 698
-------- -------- ------- -------- --------
Cash and cash equivalents, at end of
period............................. $ 408 $ 78 $ 285 $ 771
======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash and cash equivalents and
cash equivalents provided by (used
in) operating activities........... $ (408) $ 4,168 $ 2,106 $ 5,866
Cash flows from investing activities:
Purchase of property, plant and
equipment........................ (6,247) (2,028) (8,275)
Other.............................. 162 162
-------- -------- ------- -------- --------
Net cash and cash equivalents used in
investing activities............... (6,085) (2,028) (8,113)
Cash flows from financing activities:
Proceeds from borrowings of long-
term debt........................ 178,901 1,966 506 181,373
Payments on long-term debt......... (149,314) (164) (287) (149,765)
Deferred financing costs........... (4,678) (4,678)
Payment of preferred stock
dividend......................... (226) (226)
Other.............................. 546 546
-------- -------- ------- -------- --------
Net cash and cash equivalents
provided by financing activities... 24,683 2,348 219 27,250
Net increase (decrease) in cash.... 24,275 431 297 25,003
Cash and cash equivalents, at
beginning of period................ 408 78 285 771
-------- -------- ------- -------- --------
Cash and cash equivalents, at end of
period............................. $ 24,683 $ 509 $ 582 $ 25,774
======== ======== ======= ======== ========
</TABLE>
F-26
<PAGE> 97
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities............... $ (4,920) $ 4,640 $ 3,067 $ 2,787
Cash flows from investing activities:
Purchase of property, plant and
equipment........................ (6,053) (1,616) (7,669)
Payments received on shareholder
notes............................ 162 162
-------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities............... 162 (6,053) (1,616) (7,507)
Cash flows from financing activities:
Proceeds (payments) from borrowings
of long-term debt................ 5,935 274 (892) 5,317
Payment of preferred stock
dividend......................... (170) (170)
Deferred financing costs........... 55 362 417
Other.............................. 279 279
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities............... 5,820 915 (892) 5,843
-------- -------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents................... 1,062 (498) 559 1,123
Cash and cash equivalents at
beginning of period................ 408 46 317 771
-------- -------- ------- -------- --------
Cash and cash equivalents at end of
period............................. $ 1,470 $ (452) $ 876 $ 1,894
======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash and cash equivalents
provided by operating activities... $ 6,299 $ 3,640 $ 257 $ 10,196
Cash flows from investing activities:
Purchase of Hutchinson Foundry
Products Company................. (10,639) (10,639)
Purchase of Sinterloy, Inc......... (15,449) (15,449)
Purchase of property, plant and
equipment........................ (4,603) (195) (4,798)
Payments received on shareholder
loans............................ 163 163
-------- -------- ------- -------- --------
Net cash used in investing
activities......................... (25,925) (4,603) (195) (30,723)
Cash flows from financing activities:
(Payments) proceeds on long-term
debt............................. (1,751) 1,591 (623) (783)
Deferred financing costs........... (565) (565)
Payment of preferred stock
dividend......................... (240) (240)
Other.............................. (30) (28) 28 (30)
-------- -------- ------- -------- --------
Net cash (used in) provided by
financing activities............... (2,021) 998 (595) (1,618)
-------- -------- ------- -------- --------
Net (decrease) increase in cash and
cash equivalents................... (21,647) 35 (533) (22,145)
Cash and cash equivalents at
beginning of period................ 25,187 5 582 25,774
-------- -------- ------- -------- --------
Cash and cash equivalents at end of
period............................. $ 3,540 $ 40 $ 49 $ 3,629
======== ======== ======= ======== ========
</TABLE>
F-27
<PAGE> 98
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
N. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On November 13, 1997, the Company's board of directors authorized the
filing of a registration statement with the Securities and Exchange Commission
permitting the Company to sell up to an aggregate of shares of its Class A
Common Stock (not including the underwriters' over-allotment option) to the
public. Under the terms of the public offering (the Offering) currently
contemplated, the Senior Subordinated Notes, together with accrued and unpaid
interest thereon, will be repaid in full $35.0 million of the Senior Notes,
together with accrued and unpaid interest thereon, will be repaid and certain
shares of the Company's Series A, Series B and Series C Preferred Stock will be
redeemed, together with accrued and unpaid dividends thereon.
RIGHTS AGREEMENT
On November 13, 1997, the board of directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock. The dividend is payable to the stockholders of record as of January 16,
1998, and with respect to Common Stock issued thereafter until the Distribution
Date, as defined in the Rights Agreement, and in certain circumstances, with
respect to Common Stock issued after the Distribution Date. Except as set forth
in the Rights Agreement, each Right, when it becomes exercisable, entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series E Preferred Stock (the "Series E Preferred Shares") at a price of $70 per
one one-thousandth of a Series E Preferred Share, subject to adjustment.
UNSECURED TERM LOAN AND REVOLVING CREDIT FACILITIES
Concurrently with the public offering, the Company intends to enter into a
$35.0 million five year unsecured term loan facility and replace its existing
Credit Facility with a new unsecured revolving credit facility.
REDEMPTION OF CERTAIN SENIOR NOTES
The Company anticipates that it will redeem $35.0 million of its Senior
Notes ("Senior Note Redemption"), in accordance with the terms of the Senior
Note Indenture, as soon as practicable after the closing of the Offering. At the
time of the Senior Note Redemption, the Company expects to incur non-recurring
extraordinary charges of $3.6 million in prepayment penalties and $1.9 million
as a result of the write-off of previously capitalized deferred financing costs,
each arising from the Senior Note Redemption.
STOCK OPTION PLAN
The 1997 Stock Option Plan was adopted in November 1997, and provides for
the grant of options to purchase an aggregate of 700,000 shares of the Company's
Class A Common Stock. The 1997 Plan provides for the grant to employees of
incentive stock options within the meaning of the Internal Revenue Code and for
the grant of nonstatutory options to eligible employees and non-employee
directors. Incentive stock options may be exercisable for up to ten years at an
option price of not less than the fair market value of the Common Stock on the
date that the option is granted, or for up to five years at an option price of
not less than 110% of the fair market value of the Class A Common Stock on the
date the option is granted in the case of an officer or other key employee who
owns, at the time the option is granted, more than ten percent of the Class A
Common Stock. Nonstatutory stock options may be exercisable for up to ten years
at such exercise price and upon such terms and conditions as a committee of the
board of directors may determine.
The 1997 Plan provides that unless otherwise provided in an individual
grant, an option will become immediately fully exercisable upon the occurrence
of certain transactions, such as the merger or sale of the Company.
At the closing of the Offering, options to purchase 310,000 shares of Class
A Common Stock will be outstanding under the 1997 Plan at an exercise price
equal to the public offering price and options to purchase 390,000 shares of
Class A Common Stock will remain available for grant.
F-28
<PAGE> 99
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Helco, Inc.
We have audited the accompanying balance sheet of Helco, Inc. as of June
30, 1994, and the related statements of income, shareholder's equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Helco, Inc. at June 30,
1994, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
July 26, 1994
F-29
<PAGE> 100
HELCO, INC.
BALANCE SHEET
JUNE 30, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 563,854
Accounts receivable.......................................................... 2,240,231
Inventories:
Raw materials............................................................. 246,179
Work-in-process........................................................... 579,186
Finished products......................................................... 513,975
----------
1,339,340
Prepaid expenses............................................................. 63,935
----------
Total current assets........................................................... 4,207,360
Property, plant and equipment:
Land......................................................................... 236,996
Building..................................................................... 2,052,734
Manufacturing equipment...................................................... 6,161,719
Office equipment............................................................. 217,709
----------
8,669,158
Less accumulated depreciation................................................ 5,039,901
----------
3,629,257
Other assets................................................................... 119,601
----------
TOTAL ASSETS................................................................... $ 7,956,218
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 747,893
Accrued payroll and payroll taxes............................................ 259,402
Accrued pension expense...................................................... 214,986
Income taxes payable......................................................... 526,118
Current portion of long-term debt............................................ 432,360
----------
Total current liabilities...................................................... 2,180,759
Long-term debt, less current portion........................................... 1,418,339
Deferred income taxes.......................................................... 299,539
Shareholder's equity:
Common stock, no par value; 1,000 shares authorized, 80 shares issued and
outstanding............................................................... 40,000
Retained earnings............................................................ 4,017,581
----------
Total shareholder's equity..................................................... 4,057,581
----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY..................................... $ 7,956,218
==========
</TABLE>
See notes to financial statements.
F-30
<PAGE> 101
HELCO, INC.
STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1994
<TABLE>
<S> <C>
Net sales..................................................................... $ 13,529,367
Cost of products sold......................................................... 9,865,987
Gross margin.................................................................. 3,663,380
Selling, general and administrative expenses.................................. 1,247,383
Research and development...................................................... 221,270
-----------
2,194,727
Other income (expense):
Interest expense............................................................ (138,705)
Interest income............................................................. 11,485
Miscellaneous income........................................................ 64,358
-----------
(62,862)
-----------
Income before income taxes.................................................... 2,131,865
Provision for income taxes:
Current..................................................................... 838,963
Deferred.................................................................... 26,852
-----------
865,815
-----------
NET INCOME.................................................................... $ 1,266,050
===========
</TABLE>
See notes to financial statements.
F-31
<PAGE> 102
HELCO, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------- ---------- ----------
<S> <C> <C> <C>
Balance at July 1, 1993.............................. $40,000 $2,751,531 $2,791,531
Net income........................................... 1,266,050 1,266,050
------- ---------- ----------
Balance at June 30, 1994............................. $40,000 $4,017,581 $4,057,581
======= ========== ==========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 103
HELCO, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................... $1,266,050
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 542,251
Deferred income taxes..................................................... 26,852
Changes in operating assets and liabilities:
Accounts receivable..................................................... (942,556)
Inventories and prepaid expenses........................................ (249,734)
Accounts payable and accrued expenses................................... 752,895
----------
Net cash provided by operating activities.................................... 1,395,758
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment................................. (445,645)
----------
Net cash used in investing activities.......................................... (445,645)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt................................................. (200,000)
Proceeds from long-term debt................................................. 17,445
Repayments of long-term debt................................................. (411,292)
----------
Net cash used in financing activities.......................................... (593,847)
----------
NET INCREASE IN CASH........................................................... 356,266
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................. 207,588
----------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................................... $ 563,854
==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash payments for interest................................................... $ 141,381
==========
Cash payments for income taxes............................................... $ 400,149
==========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 104
HELCO, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Helco, Inc. (the Company), previously doing business as Helsel, Inc.,
manufactures, markets and distributes powdered metal parts for its customers
located primarily throughout the midwestern United States.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided
over the estimated service lives of the respective classes of property, plant
and equipment assets using accelerated methods. Gains and losses upon disposal
or retirement are recorded in current operations.
PRODUCT RESEARCH AND DEVELOPMENT
Costs incurred in research, product development and engineering ($221,270)
are charged to operations as incurred.
INCOME TAXES
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to accruals recorded for book
purposes that are not deductible for tax purposes until paid and the use of
accelerated depreciation methods for property, plant and equipment for income
tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1994, the carrying value of the Company's financial
instruments, which include cash, cash equivalents and long-term debt,
approximate their fair value. All of the Company's long-term debt bears interest
at variable rates. See Note B.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
F-34
<PAGE> 105
HELCO, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
B. LONG-TERM DEBT
Long-term debt at June 30, 1994 was as follows:
<TABLE>
<S> <C>
Variable rate (currently 8.25%) equipment purchase obligation due
in monthly installments of $14,000, including interest........... $ 509,068
Variable rate (currently 7.25%) equipment purchase obligation, due
in monthly installments of $16,000, including interest........... 182,194
Variable rate (currently 8.0%) equipment purchase obligation, due
in monthly installments of 43,550, including interest............ 95,862
Variable rate (currently 6.5%) mortgage note payable in monthly
installments of $9,300, including interest....................... 902,019
Variable rate (currently 8.0%) equipment purchase obligation, due
in monthly installments of $3,000 including interest............. 145,292
Other.............................................................. 16,264
----------
1,850,699
Less payments due within one year.................................. 432,360
----------
TOTAL LONG-TERM DEBT............................................... $1,418,339
==========
</TABLE>
The above debt is secured by the Company's inventories, accounts receivable
and equipment.
The following is a schedule by years of maturity requirements on long-term
debt as of June 30, 1994:
<TABLE>
<S> <C>
1995............................................................... $ 432,360
1996............................................................... 270,324
1997............................................................... 269,987
1998............................................................... 184,000
1999............................................................... 105,521
Later years........................................................ 588,507
----------
TOTAL DEBT......................................................... $1,850,699
==========
</TABLE>
C. EMPLOYEE BENEFITS
The Company has a qualified defined contribution pension plan covering
substantially all of its employees. Contributions are based on a percent of the
individual employee's earnings. Expenses associated with the plan totaled
$214,986 during the year ended June 30, 1994.
The Company also sponsors an employees' savings and retirement plan in
which certain of its employees are eligible to participate. Participants may
elect to contribute a portion of their compensation to the plan. The Company is
required to contribute 50% of the participant's contribution, not to exceed 2%
of the participant's earnings. Expenses associated with the plan totaled $29,967
during the year ended June 30, 1994.
F-35
<PAGE> 106
HELCO, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
D. INCOME TAXES
Income taxes set forth in the statement of income are as follows:
<TABLE>
<S> <C>
Current:
Federal............................................................ $670,212
State.............................................................. 168,751
--------
838,963
Deferred............................................................. 26,852
--------
$865,815
========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The provision for income taxes differ from the amounts computed by applying
the federal statutory rate as follows:
<TABLE>
<S> <C>
Income tax at federal statutory rate..................................... 34.0%
State and local tax, net................................................. 5.2
Other, net............................................................... 1.4
----
40.6%
====
</TABLE>
E. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISKS
During the year ended June 30, 1994, the Company had sales approximating
$9,068,879 to four customers. At June 30, 1994 amounts due from these customers
included in accounts receivable was $1,458,672.
F. SUBSEQUENT EVENT
Effective July 1, 1994, substantially all of the net assets of the Company
were sold to a group of outside investors.
F-36
<PAGE> 107
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
S.K. Wellman Limited, Inc.
We have audited the consolidated balance sheets of S.K. Wellman Limited,
Inc. and subsidiaries (a wholly-owned subsidiary of MLX Corp.) as of December
31, 1993 and 1994, and the related consolidated statements of operations,
shareholder's equity, and cash flows for the years then ended. We have also
audited the statements of operations and cash flows of S.K. Wellman Limited,
Inc. and subsidiaries for the six months ended June 30, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of S.K. Wellman
Limited, Inc. and subsidiaries at December 31, 1993 and 1994, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1993 and 1994 and the six months ended June 30, 1995 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
September 26, 1996
F-37
<PAGE> 108
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 290 $ 446
Accounts receivable................................................. 8,357 9,638
Inventories:
Raw materials and work-in-process................................ 6,151 7,328
Finished products................................................ 2,298 2,353
------- -------
8,449 9,681
Prepaid expenses and other current assets........................... 585 957
Deferred income taxes............................................... 825 618
------- -------
Total current assets.................................................. 18,506 21,340
Property, plant and equipment:
Land and improvements............................................... 1,179 1,239
Buildings and improvements.......................................... 6,908 7,376
Machinery and equipment............................................. 15,686 17,581
Construction in progress............................................ 533 1,178
------- -------
24,306 27,374
Less accumulated depreciation and amortization...................... 12,250 14,012
------- -------
12,056 13,362
Other assets:
Receivable from MLX Corp............................................ 1,467 2,151
Intangible assets, less accumulated amortization of $3,060 in 1993
and $3,558 in 1994............................................... 2,370 1,925
Other............................................................... 536 510
------- -------
TOTAL ASSETS.......................................................... $34,935 $39,288
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................... $ 3,356 $ 4,615
Accrued compensation and benefits................................... 2,214 2,764
Accrued taxes....................................................... 403 769
Other accrued liabilities and expenses.............................. 1,481 1,552
Current portion of long-term debt................................... 53 61
------- -------
Total current liabilities............................................. 7,507 9,761
Long-term liabilities:
Debt................................................................ 12,390 10,997
Deferred income taxes............................................... 224 181
Other............................................................... 2,261 2,893
------- -------
Total long-term liabilities........................................... 14,875 14,071
Shareholder's equity:
Preferred stock, $100 par value -- authorized 20,000 shares; none
outstanding
Common stock, $1 par value -- authorized and outstanding 250,000
shares........................................................... 250 250
Retained earnings................................................... 14,044 16,838
Other equity adjustments............................................ (1,536) (1,427)
Cost of 3,750 shares of common stock held for retirement............ (205) (205)
------- -------
Total shareholder's equity............................................ 12,553 15,456
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................ $34,935 $39,288
======= =======
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE> 109
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1993 1994 1995
------- ------- ----------
<S> <C> <C> <C>
Net sales................................................ $57,036 $60,858 $ 34,916
Costs and expenses:
Cost of products sold.................................. 43,174 46,365 26,617
Selling, general and administrative expenses........... 6,196 6,772 3,085
MLX Corp. management fee............................... 950 1,200 600
Amortization of intangibles............................ 175 175 87
------- ------- --------
50,495 54,512 30,389
------- ------- --------
Operating earnings....................................... 6,541 6,346 4,527
Interest expense......................................... (1,746) (1,369) (660)
Intercompany interest income............................. 151 185 109
Other (expense) income................................... (122) 115 (6)
------- ------- --------
Earnings before income taxes............................. 4,824 5,277 3,970
Provision for income taxes:
Federal income taxes................................... 1,422 1,489 1,016
Foreign, state and local income taxes.................. 533 994 680
------- ------- --------
1,955 2,483 1,696
------- ------- --------
NET EARNINGS............................................. $ 2,869 $ 2,794 $ 2,274
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE> 110
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK TOTAL
COMMON RETAINED OTHER EQUITY HELD FOR SHAREHOLDER'S
STOCK EARNINGS ADJUSTMENTS RETIREMENT EQUITY
------ -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1993........ $250 $14,552 $ (1,026) $ (205) $13,571
Net earnings....................... 2,869 2,869
Dividend to MLX Corp............... (3,377) (3,377)
Foreign currency translation
adjustment....................... (445) (445)
Pension adjustment................. (65) (65)
---- ------- -------- ------ -------
Balances at December 31, 1993...... 250 14,044 (1,536) (205) 12,553
Net earnings....................... 2,794 2,794
Foreign currency translation
adjustment....................... 109 109
---- ------- -------- ------ -------
Balances at December 31, 1994...... $250 $16,838 $ (1,427) $ (205) $15,456
==== ======= ======== ====== =======
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE> 111
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS
31, ENDED
-------------------- JUNE 30,
1993 1994 1995
------- ------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.............................................. $ 2,869 $ 2,794 $ 2,274
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 2,501 2,269 1,099
Changes in operating assets and liabilities:
Accounts receivable.................................. (84) (1,281) (907)
Inventories and prepaid expenses..................... (507) (1,604) (891)
Accounts payable and accrued expenses................ 1,486 2,116 143
Deferred income taxes................................ (449) 191
Other................................................ (1,152) 124 301
------- ------- --------
Net cash provided by operating activities................. 4,664 4,609 2,019
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment................ (1,820) (2,983) (1,334)
Collection of intercompany advances and interest.......... 1,731 1,140 372
Advances to MLX Corp...................................... (1,247) (1,824)
------- ------- --------
Net cash used in investing activities..................... (1,336) (3,667) (962)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of long-term debt.............................. 10,740 365
Repayments of long-term debt.............................. (8,132) (1,750) (1,759)
Changes in capital lease obligations...................... 599 256
Dividends paid to MLX Corp................................ (5,900)
------- ------- --------
Net cash used in financing activities..................... (3,292) (786) (1,503)
------- ------- --------
Net increase (decrease) in cash........................... 36 156 (446)
Cash at beginning of period............................... 254 290 446
------- ------- --------
CASH AT END OF PERIOD..................................... $ 290 $ 446 $ 0
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE> 112
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
S.K. Wellman Limited, Inc. (S.K. Wellman or the Company), is a wholly-owned
subsidiary of MLX Corp. (MLX). The Company designs and manufactures proprietary
high-energy friction material and related products for original equipment and
aftermarket applications in the aircraft industry and for heavy equipment
brakes, transmissions and clutches. The Company serves many large manufacturing
companies around the world through subsidiary manufacturing and sales offices
located in Brook Park, Ohio; LaVergne, Tennessee; Solon, Ohio; Concord, Ontario;
Orzinuovi, Italy; and an affiliation with Tokai Carbon Co., Limited in Tokyo,
Japan.
On June 30, 1995, substantially all of the net assets of the Company were
acquired, for cash, by Hawk Corporation for a purchase price of approximately
$62 million. The acquisition was accounted for as a purchase. The operating
results of the Company have been included in Hawk Corporation's consolidated
financial statements since the date of acquisition.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of S.K. Wellman and its
wholly-owned subsidiaries. Upon consolidation, all significant intercompany
accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include expenditures
for additions and major improvements. Expenditures for repairs and maintenance
are charged to operations as incurred. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
respective assets.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over the
weighted average lives indicated in the following table. The components of
intangible assets are as follows:
<TABLE>
<CAPTION>
1993 1994 LIFE
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Excess of cost of acquired businesses over
the fair value of the net assets
acquired.................................. $ 1,699 $ 1,699 10 years
Deferred financing costs.................... 907 953 11 years
Proprietary formulations and patents........ 1,806 1,806 10 years
Pension costs............................... 1,018 1,025 15 years
------- --------
5,430 5,483
Accumulated amortization.................... (3,060) (3,558)
------- --------
$ 2,370 $ 1,925
======= ========
</TABLE>
F-42
<PAGE> 113
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PRODUCT RESEARCH AND DEVELOPMENT
Costs incurred in research, product development and engineering ($3.4
million in 1993 and 1994 and $1.9 million for the six months ended June 30,
1995) are charged to operations as incurred. The Company recorded the research
and product development portion of this expense ($1.7 million in 1993, $1.4
million in 1994 and $.7 million for the six months ended June 30, 1995) as
selling, general and administrative expense in the Consolidated Statements of
Operations.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at current exchange rates with the resulting cumulative translation
adjustment reflected as an Other Equity Adjustment in shareholder's equity.
Exchange adjustments resulting from certain transactions, included in other
(expense) income in the accompanying Consolidated Statements of Operations were
a $255,000 loss in 1993, $95,000 income in 1994 and $10,000 income for the six
months ended June 30, 1995.
INCOME TAXES
In accordance with a tax sharing agreement between MLX and the Company, MLX
charges the Company for federal income taxes computed as if the Company was not
part of the consolidated federal income tax return. In addition, the Company
records provisions for foreign, state and local income taxes.
Deferred income taxes arise from temporary differences between income tax
and financial reporting and principally relate to accruals recorded for book
purposes that are not deductible for tax purposes until paid and the use of
accelerated depreciation methods for property, plant and equipment for income
tax purposes.
RECLASSIFICATION
Certain reclassifications have been made in the 1993 financial statements
to conform with the 1994 and 1995 presentation.
B. RELATIONSHIP WITH MLX CORP.
The Company has a Management Services Agreement with MLX under which MLX
provides certain senior management and financial services to the Company for a
fee.
The Company advanced $4 million in cash to MLX in 1990 and made additional
advances totaling $1.2 million in 1993 and $1.8 million in 1994. The Company
charges MLX interest on these advances at a rate which is equal to the rate
which the Company pays on its senior credit facility. The intercompany balance
is adjusted quarterly for charges by MLX for federal income taxes on the
Company's taxable income.
F-43
<PAGE> 114
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
C. LONG-TERM DEBT
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior credit facility:
Revolving credit facility............................. $ 2,345 $ 1,981
Real estate term facility............................. 6,450 8,399
Mezzanine component................................... 1,350 550
Equipment term note................................... 420
Subordinated note....................................... 1,703
Note payable to bank.................................... 175 128
12,443 11,058
Less current portion.................................... 53 61
------- -------
$12,390 $10,997
======= =======
</TABLE>
The Company has available a $19.7 million credit facility (the senior
credit facility). During 1994, the loan and security agreement was amended to
extend the expiration of the facility through January 1998 and to consolidate
the real estate term facility, the original equipment term note and the proceeds
used to repay the seller note into the consolidated term loan.
The senior credit facility provides for four borrowing components with
varying rates and repayment obligations. Included in the senior credit facility
is a secured revolving credit component with a maximum borrowing limit of $7.2
million which expires in January 1998. This revolving loan bears interest at
prime rate plus 1.25% (9.75%) at December 31, 1994 compared to prime rate plus
2.0% (8%) at December 31, 1993. The amount which may be borrowed is subject to
certain availability formulas regarding accounts receivable and inventory.
The senior credit facility also includes a secured consolidated term loan
component with an initial balance of $8.5 million. This loan requires monthly
amortization of $101,000 with any remaining unpaid balance payable in January
1998. The loan bears an initial interest rate of prime plus 2% dropping to prime
plus 1.75% after certain conditions are met.
These components of the senior credit facility are secured by a lien on
substantially all the North American assets of the Company and a pledge of the
common stock of its Italian subsidiary. The agreements require the Company to,
among other things, maintain specified levels of working capital, net worth and
profitability. This agreement also limits cash dividends and loans to MLX. Under
the most restrictive covenants, retained earnings in the amount of approximately
$1.3 million were free from limitations on the payment of dividends to MLX at
December 31, 1994.
An additional component of the senior credit facility is a $2 million,
unsecured, 30-month mezzanine term facility expiring in July 1995 with monthly
amortization requirements of $67,000 and an interest rate of prime plus 3.5%.
This facility may be prepaid, under certain circumstances, with no penalty.
The senior credit facility also has available a line of credit intended to
fund capital expenditures up to a maximum of $2 million. This note bears
interest at prime rate plus 1.75% and requires equal monthly amortization
payments based on a five year term with any remaining unpaid balance payable in
January 1997. Advances are made at the Company's request and may occur at any
time until January 1997. At December 31, 1994 no amounts were outstanding under
the arrangement.
F-44
<PAGE> 115
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The note payable to bank was used to fund certain capital expenditures in
Italy. The note bears interest at 9%, is unsecured, and is due in varying
quarterly installments through December 1996.
The Company intends to finance current maturities of long-term borrowings,
except the Italian note payable to bank, through availability under the
revolving credit facility.
Aggregate maturities and other reductions of debt are: 1995 -- $61,000;
1996 -- $1.3 million; 1997 -- $1.2 million and 1998 -- $8.5 million.
Interest paid was $1.4 million in 1993, $1.2 million in 1994 and $.6
million for the six months ended June 30, 1995.
D. EMPLOYEE BENEFITS
The Company sponsors a defined contribution pension plan which covers a
majority of its U.S. employees. The plan provides for voluntary employee
contributions, a matching Company contribution and a discretionary Company
contribution. Expenses related to this plan were $470,000, $516,000 and $285,000
in 1993, 1994 and for the six months ended June 30, 1995, respectively.
The Company and certain of its subsidiaries sponsor two non-contributory
defined benefit pension plans covering certain of their U.S. and Canadian
employees. Benefits under one plan is based on compensation during the years
immediately preceding retirement. Under the other plan, the benefits are based
on a fixed annual benefit for each year of credited service. It is the Company's
policy to make contributions to these plans sufficient to meet minimum funding
requirements of the applicable laws and regulations, plus such additional
amounts, if any, as the Company's actuarial consultants advise to be
appropriate. Plan assets consist principally of equity securities and fixed
income instruments.
A summary of the components of net periodic pension costs for the plans is
as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN THOUSANDS)
<S> <C> <C>
Service cost.................................................. $ 105 $ 125
Interest cost................................................. 259 160
Actual return on plan assets.................................. (281) 71
Net amortization and deferral................................. 88 (227)
------ ------
$ 171 $ 129
====== ======
Assumptions used were:
Weighted average discount rate.............................. 7.44% 8.38%
Rate of increase in compensation levels..................... 6.00% 5.00%
Weighted average expected long-term rate of return on
assets................................................... 8.63% 8.63%
</TABLE>
F-45
<PAGE> 116
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table presents the funded status and amounts recognized in
the consolidated financial statements at December 31, 1993 and 1994, related to
the defined benefit plans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994
---------------------------- ----------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT
OBLIGATIONS
Vested benefit obligations........ $ (423) $(1,407) $(372) $(1,558)
======= ======= ===== =======
Accumulated benefit obligations... $ (434) $(1,613) $(381) $(1,772)
======= ======= ===== =======
Projected benefit obligations..... $ (537) $(1,613) $(495) $(1,772)
Plan assets at fair value......... 1,012 984 891 1,038
------- ------- ----- -------
Projected benefit obligations less
than (in excess of) plan
assets.......................... 475 (629) 396 (734)
Unrecognized net loss............. 93 86 149
Prior service cost not yet
recognized in net periodic
pension cost.................... 200 170 349
Unrecognized net obligation
(asset) at January 1............ (284) 214 (246) 76
Adjustment required to recognize
minimum liability............... (500) (574)
------- ------- ----- -------
PREPAID (ACCRUED) PENSION COST AT
DECEMBER 31..................... $ 284 $ (629) $ 320 $ (734)
======= ======= ===== =======
</TABLE>
The Company provides a fixed noncontributory benefit toward postretirement
health care for certain of its U.S. retired union employees. Projected future
costs of providing postretirement health care benefits are recognized as expense
as employees render service. In 1993, the Company recognized a transition
obligation amounting to approximately $540,000, for prior service costs as of
January 1, 1993. This transition obligation is being amortized into general and
administrative expenses over 20 years. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 7%.
Postretirement benefit costs amounted to $62,000, $50,000 and $13,500 in 1993,
1994 and the six months ended June 30, 1995, respectively.
E. LEASES
The Company has lease commitments for buildings and equipment. Future
minimum annual rentals are: 1995 -- $211,000, 1996 -- $188,000, 1997 -- $158,000
1998 -- $115,000, 1999 -- $47,000, thereafter -- $135,000. Amount representing
interest is $211,000.
The Company leases certain office and warehouse facilities and equipment
under operating leases. Rental expense was $312,000, $367,000 and $162,000, in
1993, 1994 and the six months ended June 30, 1995, respectively. Future minimum
lease commitments under these agreements which have an original or existing term
in excess of one year as of December 31, 1994 are as follows: 1995 -- $259,000;
1996 -- $128,000; 1997 -- $76,000; 1998 -- $11,000 and 1999 -- $9,000.
F-46
<PAGE> 117
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INCOME TAXES
The results of the Company's operations are included in the consolidated
federal income tax returns of MLX Corp. Income taxes set forth in the
Consolidated Statements of Operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
------------------ JUNE 30,
1993 1994 1995
------ ------ ----------
<S> <C> <C> <C>
Federal:
Current.................................... $1,810 $1,298 $1,016
Deferred................................... (388) 191 0
------ ------ ------
1,422 1,489 1,016
219 699 424
Foreign,
State and local:
Current.................................... 375 295 256
Deferred................................... (61)
------ ------ ------
314 295 256
------ ------ ------
$1,955 $2,483 $1,696
====== ====== ======
</TABLE>
The provision for income taxes differ from the amounts computed by applying
the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------- JUNE 30,
1993 1994 1995
---- ---- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate.............. 34.0% 34.0% 34.0%
State and local tax, net.......................... 4.3 3.7 4.3
Nondeductible goodwill amortization and other..... 0.6 0.9 0.7
Foreign tax rate differential..................... 3.5 6.1 3.8
Other, net........................................ (1.9) 2.4 0.0
---- ---- ----
40.5% 47.1% 42.8%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-47
<PAGE> 118
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
purposes. Significant components of the Company's net deferred tax assets as of
December 31, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
----- -----
<S> <C> <C>
Deferred tax assets:
Accrued vacation.......................................... $ 321 $ 181
Inventory obsolescence.................................... 193 93
Accrued pension........................................... 138 8
Other reserves............................................ 173 336
----- -----
Total deferred tax assets................................... 825 618
Deferred tax liabilities:
Tax over book depreciation................................ (193) (201)
Other..................................................... (31) 20
----- -----
Total deferred tax liabilities.............................. (224) (181)
----- -----
Net deferred tax assets..................................... $ 601 $ 437
===== =====
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries were not
significant at December 31, 1994. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided. Upon distribution of these earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes and withholding taxes payable to various foreign countries.
The Company paid foreign, state and local income taxes amounting to
$504,000 and $628,000 in 1993 and 1994, respectively.
G. OTHER MATTERS
Sales of foreign operations were $10.1 million, $11.8 million and $7.6
million in 1993, 1994 and for the six months ended June 30, 1995, respectively,
with operating earnings of $.9 million, $1.6 million and $1.2 million in 1993,
1994 and six months ended June 30, 1995, respectively, and net loss of $16,000,
net income of $514,000 and net income of $385,000 in 1993, 1994 and for the six
months ended June 30, 1995, respectively. Identifiable assets of foreign
operations were $9.4 million and $10.8 million at December 31, 1993 and 1994,
respectively.
The percentage of net sales to major customers was as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------- JUNE 30,
1993 1994 1995
---- ---- ----------
<S> <C> <C> <C>
Customer A.......................................... 16% 15% 17%
Customer B.......................................... 9% 9% 13%
Customer C.......................................... 14% 16% 12%
</TABLE>
The Company provides credit, in the normal course of its business, to
original equipment and after-market companies in the aircraft and heavy
equipment industries. The Company's customers are not concentrated in any
specific geographic region. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations.
F-48
<PAGE> 119
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Houghton Acquisition Corporation d/b/a
Hutchinson Foundry Products Company:
We have audited the accompanying balance sheets of Houghton Acquisition
Corporation d/b/a Hutchinson Foundry Products Company (the "Company") as of
December 31, 1996 and 1995 and the related statements of income, stockholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1995 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
St. Louis, Missouri
February 5, 1997
F-49
<PAGE> 120
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 289,620 $ 21,945
Accounts receivable, net of estimated allowance for doubtful
accounts of $-0- and $90,500 in 1996 and 1995,
respectively................................................ 1,378,577 1,007,205
Inventories.................................................... 444,751 226,150
Prepaid expenses and other assets.............................. 142,650 35,608
Refundable income taxes........................................ 141,259
Deferred income taxes.......................................... 51,000 124,000
---------- ----------
Total current assets...................................... 2,447,857 1,414,908
---------- ----------
Property, plant and equipment.................................... 3,957,584 3,248,921
Less accumulated depreciation.................................... 1,140,904 827,744
---------- ----------
2,816,680 2,421,177
---------- ----------
Other assets:
Prepaid pension cost........................................... 175,789 177,373
Debt financing costs, net of accumulated amortization of
$196,238 in 1995............................................ 10,586
Noncompete agreement, net of accumulated amortization of
$400,000 and $300,000 in 1996 and 1995, respectively........ 100,000 200,000
Goodwill, net of accumulated amortization of $104,933 and
$78,699 in 1996 and 1995, respectively...................... 789,314 815,548
Other intangible assets, net of accumulated amortization of
$57,512 and $45,484 in 1996 and 1995, respectively.......... 16,727 28,755
---------- ----------
Total other assets........................................ 1,081,830 1,232,262
---------- ----------
Total assets.............................................. $6,346,367 $5,068,347
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings on revolving line of credit......................... $ 131,950
Current portion of long-term debt.............................. $ 100,000 100,000
Current portion of capital lease obligations................... 79,584
Accounts payable............................................... 518,940 223,227
Accrued expenses............................................... 249,915 345,771
Income taxes payable........................................... 52,000
Preferred stock dividends payable.............................. 38,389
---------- ----------
Total current liabilities................................. 948,439 891,337
Long-term debt, net of current portion........................... 25,000 375,000
Capital lease obligations, net of current portion................ 545,157
Deferred income taxes............................................ 350,000 308,000
Cumulative redeemable preferred stock............................ 1,434,000 1,360,000
Common stock purchase warrants subject to put option............. 3,283,524 2,269,470
Stockholders' equity (deficit)................................... (239,753) (135,460)
---------- ----------
Total liabilities and stockholders' equity (deficit)...... $6,346,367 $5,068,347
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE> 121
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................................ $8,621,385 $8,133,452 $8,687,853
Cost of goods sold................................... 5,776,692 5,417,039 5,860,256
----------- ----------- -----------
Gross profit....................................... 2,844,693 2,716,413 2,827,597
Selling, general and administrative expenses......... 793,944 868,470 876,046
Amortization expense................................. 148,848 493,160 689,260
----------- ----------- -----------
Income from operations............................. 1,901,901 1,354,783 1,262,291
----------- ----------- -----------
Other income (expense):
Interest expense................................... (23,530) (145,061) (254,775)
Other, net......................................... 20,390 7,150 8,975
----------- ----------- -----------
(3,140) (137,911) (245,800)
----------- ----------- -----------
Income before provision for income taxes........... 1,898,761 1,216,872 1,016,491
Provision for income taxes........................... 791,000 486,000 419,400
----------- ----------- -----------
Net income........................................... $1,107,761 $ 730,872 $ 597,091
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE> 122
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1994...................... $5,000 $ 495,000 $ 42,044 $ 542,044
Net income.................................... 597,091 597,091
Dividends on preferred stock.................. (123,997) (123,997)
Accretion on preferred stock and stock
warrants.................................... (954,412) (954,412)
------- --------- ------------ -----------
Balance, December 31, 1994.................... 5,000 495,000 (439,274) 60,726
Net income.................................... 730,872 730,872
Dividends on preferred stock.................. (124,000) (124,000)
Accretion on preferred stock and stock
warrants.................................... (803,058) (803,058)
------- --------- ------------ -----------
Balance, December 31, 1995.................... 5,000 495,000 (635,460) (135,460)
Net income.................................... 1,107,761 1,107,761
Dividends on preferred stock.................. (124,000) (124,000)
Accretion on preferred stock and stock
warrants.................................... (1,088,054) (1,088,054)
------- --------- ------------ -----------
Balance, December 31, 1996.................... $5,000 $ 495,000 $ (739,753) $ (239,753)
======= ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE> 123
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 1,107,761 $ 730,872 $ 597,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 313,160 289,064 282,642
Amortization..................................... 148,848 493,160 689,260
Deferred income taxes............................ 115,000 14,000 107,000
Loss on disposals of equipment................... 10,918
Changes in Assets and Liabilities:
Accounts receivable.............................. (371,372) 53,736 91,486
Inventories...................................... (218,601) 80,534 (27,470)
Prepaid expenses and other assets................ (107,042) (9,313) (15,511)
Prepaid pension cost............................. 1,584 (28,714) (17,061)
Accounts payable................................. 295,713 (76,871) 24,219
Accrued expenses................................. (95,856) (51,105) 43,954
Income taxes refundable/payable.................. (193,259) 30,825 14,175
---------- ------------ -----------
Net cash provided by operating activities........... 995,936 1,537,106 1,789,785
---------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (58,035) (57,119) (93,278)
Proceeds from disposals of equipment................ 32,000 42,500
---------- ------------ -----------
Net cash used in investing activities............... (58,035) (25,119) (50,778)
---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt........................ (350,000) (2,134,150) (1,350,044)
Repayments of capital lease obligations............. (25,887)
Borrowings under revolving line of credit........... 1,328,895 461,644 327,843
Repayments under revolving line of credit........... (1,460,845) (329,694) (327,843)
Dividends paid on preferred stock................... (162,389) (124,000) (123,318)
---------- ------------ -----------
Net cash used in financing activities............... (670,226) (2,126,200) (1,473,362)
---------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents...................................... 267,675 (614,213) 265,645
Cash and cash equivalents, beginning of year.......... 21,945 636,158 370,513
---------- ------------ -----------
Cash and cash equivalents, end of year................ $ 289,620 $ 21,945 $ 636,158
========== ============ ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid................................... $ 869,000 $ 451,000 $ 298,000
========== ============ ===========
Interest paid....................................... $ 24,000 $ 170,000 $ 236,000
========== ============ ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease agreements..... $ 650,628
==========
Dividends declared but not paid as of December 31..... $ 38,389 $ 38,389
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE> 124
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. DESCRIPTION OF BUSINESS:
Effective December 31, 1992, Houghton Acquisition Corporation (the
"Company") purchased substantially all of the assets of Hutchinson Foundry
Products Company. The Company's principal business is the production and sale of
rotors for use in subfractional horsepower motors and, to a lesser extent, the
machining and sale of aluminum extrusions and castings, principally fan spacers
used by engine manufacturers and gas nozzles used in gasoline pumping units. The
Company sells its products primarily in the Midwest region of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, bank
deposits and highly liquid investments purchased with original
maturities of three months or less.
B. INVENTORIES: Inventories are stated at the lower of cost or market.
Cost is determined principally using the first-in, first-out method.
C. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment acquired
in conjunction with the Acquisition (see Note 1) were recorded at their
estimated fair value at the acquisition date based on independent
appraisals obtained near the acquisition date. Property, plant and
equipment purchased subsequent to the acquisition are recorded at cost.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Land improvements............................................ 15 years
Buildings.................................................... 20 years
Machinery and equipment...................................... 10 years
Vehicles and computers....................................... 3-5 years
</TABLE>
Upon retirement or replacement, the cost and related accumulated
depreciation are removed from the respective accounts and any resulting
gain or loss is included in earnings. Expenditures for maintenance and
repairs are charged to operations as incurred, while renewals and
betterments which extend the useful lives of the assets are capitalized.
D. DEBT FINANCING COSTS: Costs incurred in connection with obtaining and
securing the bank loan agreement have been capitalized and are being
amortized over the period of the related borrowings. Amortization
expense for 1996, 1995 and 1994 was $10,586, $68,948 and $68,957,
respectively.
E. NONCOMPETE AGREEMENT: In connection with the acquisition (see Note 1),
the Company entered into a noncompete agreement with the seller valued
at $500,000. Under this noncompete agreement, the seller has agreed not
to compete with the Company through December 31, 1997.
The value of the noncompete agreement is being amortized over the term
of the agreement using the straight-line method. Amortization expense
was $100,000 for 1996, 1995 and 1994.
F. GOODWILL: The excess of the purchase price of the Company over the fair
value of the tangible and identifiable intangible net assets acquired
(see Note 1) has been allocated to goodwill. Goodwill is being amortized
on a straight-line basis over a period of forty years. Amortization
expense was $26,234 for 1996, 1995 and 1994.
F-54
<PAGE> 125
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
At each balance sheet date, management assesses whether there has been a
permanent impairment of the value of goodwill. The factors considered by
management in performing this assessment include current operating
results, trends and prospects as well as the effects of obsolescence,
demand, competition and other economic factors. Management has concluded
that no impairment of the value of goodwill has occurred as of any of
the balance sheet dates presented.
G. OTHER INTANGIBLE ASSETS: Other intangible assets at December 31, 1996
consist of organization costs which are being amortized over five years.
Amortization expense related to these costs amounted to $12,028 for
1996.
Prior to 1996, other intangible assets also included a sales agreement
and a union employment agreement, the values of which were based on
independent appraisals at the date of acquisition (see Note 1). These
intangible assets were amortized on a straight-line basis over the terms
of the respective agreements and became fully amortized during 1995.
Amortization expense related to other intangible assets amounted to
$297,978 and $494,069 in 1995 and 1994, respectively.
H. INCOME TAXES: Deferred tax liabilities and assets are recognized for
the expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax liabilities and
assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax
rates as of the balance sheet date which are expected to be applied to
taxable income in the periods in which the deferred tax liability or
asset is expected to be settled or realized. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
I. PREFERRED STOCK AND STOCK WARRANTS: The proceeds received related to
the preferred stock and stock warrants have been allocated to the
respective instruments based upon their estimated fair values as of
March 10, 1993, the effective date of the related Securities Purchase
Agreement. The preferred stock is being accreted to its redemption value
as of March 10, 1998 using the interest method. The stock warrants are
being accreted on a straight-line basis to their estimated value as of
their earliest put date, March 10, 1998, using a formula based on a
multiple of earnings adjusted for certain items as defined in the
Securities Purchase Agreement. Accretion is effected via corresponding
decreases to the Company's retained earnings and constitutes noncash
transactions for purposes of the accompanying statements of cash flows.
J. ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
The Company has entered into an agreement with one of its largest customers
which entitles the Company to be this customer's exclusive supplier of die cast
rotors, under certain terms and conditions. The current agreement extends
through August 31, 1998.
F-55
<PAGE> 126
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following is a summary of sales and uncollateralized accounts
receivable by year and as of December 31, respectively, to individual customers
in amounts that exceeded ten percent of total Company net sales and accounts
receivable, respectively:
<TABLE>
<CAPTION>
NUMBER OF
CUSTOMERS COMBINED PERCENT OF
WITH SALES TO TOTAL
SIGNIFICANT SIGNIFICANT COMPANY
YEAR ENDED DECEMBER 31, SALES CUSTOMERS NET SALES
------------------------------------------- ----------- -------------- ----------
<S> <C> <C> <C>
1996....................................... 2 $3.9 million 45%
1995....................................... 2 $3.9 million 48%
1994....................................... 3 $5.0 million 58%
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CUSTOMERS COMBINED PERCENT OF
WITH ACCOUNTS TOTAL
SIGNIFICANT RECEIVABLE COMPANY
ACCOUNTS OF SIGNIFICANT ACCOUNTS
AS OF DECEMBER 31, RECEIVABLE CUSTOMERS RECEIVABLE
-------------------------------------------- ----------- -------------- ----------
<S> <C> <C> <C>
1996........................................ 3 $860,000 62%
1995........................................ 2 $577,000 57%
</TABLE>
Management expects that sales to the Company's major customers will
continue to be a significant portion of its annual sales. The Company performs
ongoing credit evaluations of its customers and has historically experienced
insignificant credit losses.
Substantially all of the Company's balances of cash and cash equivalents
are maintained in accounts at one financial institution.
4. INVENTORIES:
Inventories consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials........................................... $260,216 $102,455
Work-in-process......................................... 107,145 30,579
Finished goods.......................................... 77,390 93,116
--------- ---------
$444,751 $226,150
========= =========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land and improvements................................ $ 179,450 $ 179,450
Buildings............................................ 694,841 677,664
Machinery and equipment.............................. 3,013,590 2,329,588
Vehicles and computers............................... 69,703 62,219
----------- -----------
$3,957,584 $3,248,921
=========== ===========
</TABLE>
As of December 31, 1996, machinery and equipment includes $650,628 of
assets acquired pursuant to capital lease agreements and accumulated
depreciation and depreciation expense include $21,688 related to those assets as
of December 31, 1996 and for the year then ended.
F-56
<PAGE> 127
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Depreciation expense amounted to $313,160, $289,064 and $282,642 for the
years ended December 31, 1996, 1995 and 1994, respectively.
6. DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Obligation under noncompete agreement -- Payable in
quarterly installments through January 1, 1998....... $ 125,000 $ 225,000
Subordinated debt -- Note payable to former owner,
interest payable quarterly at floating rate tied to a
bank's prime rate (10.5% at December 31, 1995),
repaid during 1996................................... 250,000
---------- ----------
125,000 475,000
Less current portion................................... (100,000) (100,000)
---------- ----------
$ 25,000 $ 375,000
========== ==========
</TABLE>
Management estimates that the fair value of its outstanding long-term debt
approximates its carrying value.
The Company also has a senior revolving line of credit agreement with a
bank which provides for borrowings up to the lesser of $1 million or an amount
based on specified percentages of the Company's eligible accounts receivable and
inventory, as defined in the agreement. Interest is payable monthly at a
floating rate tied to the bank's prime rate (8.25% at December 31, 1996), plus
.25% on the unused portion of the amount available. The Company had no
outstanding balance under the revolving line of credit agreement as of December
31, 1996.
7. CAPITAL LEASE OBLIGATIONS:
During 1996, the Company entered into various capital lease agreements for
certain machinery and equipment used in its operations.
The following is a schedule, by years, of future minimum lease payments
required under capital lease agreements, together with the present value of the
net minimum lease payments as of December 31, 1996:
<TABLE>
<S> <C>
1997.............................................................. $ 131,603
1998.............................................................. 131,603
1999.............................................................. 131,603
2000.............................................................. 131,603
2001.............................................................. 254,926
----------
Total minimum lease payments.................................... 781,338
Less amount representing interest................................. (156,597)
----------
Present value of minimum lease payments......................... 624,741
Less current portion.............................................. (79,584)
----------
Long-term portion............................................... $ 545,157
==========
</TABLE>
F-57
<PAGE> 128
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. COMMON STOCK, PREFERRED STOCK AND STOCK WARRANTS:
Common stock consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Common stock; voting; $1 par value; 30,000 shares
authorized; 5,000 shares issued and outstanding;
3,696 shares reserved for issuance upon exercise of
Common Stock Purchase Warrants..................... $ 5,000 $ 5,000
========== ==========
</TABLE>
Preferred stock consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Class A Cumulative Redeemable Preferred Stock;
voting; $100 par value; 15,500 shares issued and
outstanding; mandatory dividend rate of 8% per
annum payable quarterly; redeemable by the Company
at any time, however, redemption is mandatory by
March 10, 1998; holders have the option to redeem
upon an event of default as defined in the related
Securities Purchase Agreement, registration of
securities or if the Company's president ceases to
hold a majority of voting securities; redemption
price of $100 per share............................ $1,434,000 $1,360,000
========== ==========
</TABLE>
Stock warrants consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Common Stock Purchase Warrants; issued to holders of
Class A Cumulative Redeemable Preferred Stock;
rights to purchase an aggregate of 3,479 shares of
Company's common stock, exercisable at any time for
$1 per share; on or after March 10, 1998, warrant
holders have the option to require the Company to
purchase such warrants, or any common stock
obtained as result of prior exercise of warrants,
at a price based on a multiple of the Company's
adjusted earnings, as defined in the related
Securities Purchase Agreement; holders of stock
issued upon exercise of warrants have the right to
cause the Company to register such shares under the
Securities Act of 1933; if not exercised, warrants
terminate on the sixth anniversary of the date all
preferred stock has been redeemed.................. $3,283,524 $2,269,470
========== ==========
</TABLE>
The Company has also issued other common stock purchase warrants to two
individuals to purchase an aggregate of 217 shares of the Company's common stock
on or before March 15, 1998 at an exercise price of approximately $446 per
share.
Pursuant to the terms of the Securities Purchase Agreement, preferred
stockholders and warrant holders are protected against dilution or other
impairment of their respective interests.
F-58
<PAGE> 129
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Amounts recorded for accretion of the Cumulative Redeemable Preferred Stock
and Common Stock Purchase Warrants were as follows for the years ended December
31:
<TABLE>
<CAPTION>
CUMULATIVE
REDEEMABLE COMMON STOCK
PREFERRED PURCHASE
STOCK WARRANTS
---------- ------------
<S> <C> <C>
1996............................................. $ 74,000 $1,014,054
1995............................................. $ 64,000 $ 739,058
1994............................................. $ 55,000 $ 899,412
</TABLE>
9. INCOME TAXES:
The Company's provision for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current................................ $550,000 $381,000 $254,000
Deferred............................... 100,000 12,000 93,000
-------- -------- --------
650,000 393,000 347,000
-------- -------- --------
State:
Current................................ 126,000 91,000 58,400
Deferred............................... 15,000 2,000 14,000
-------- -------- --------
141,000 93,000 72,400
-------- -------- --------
$791,000 $486,000 $419,400
======== ======== ========
</TABLE>
The provision for income taxes for the years ended December 31 differs from
the "expected" tax expense computed by applying the U.S. federal corporate tax
rate of 34% to income before provision for income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" income tax
provision.............................. $646,000 $414,000 $346,000
State income tax provision, net of
federal income tax benefit............. 82,000 59,000 51,000
Goodwill................................. 10,000 10,000 10,000
Other, net............................... 53,000 3,000 12,400
-------- -------- --------
$791,000 $486,000 $419,400
======== ======== ========
</TABLE>
F-59
<PAGE> 130
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The significant components of the Company's deferred tax assets and
liabilities recognized in the accompanying balance sheets as of December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued vacation.................................... $ 47,000 $ 47,000
Accrued compensation................................ 41,000
Allowance for doubtful accounts..................... 35,000
Other............................................... 4,000 1,000
-------- --------
Total deferred tax assets................... 51,000 124,000
Deferred tax liabilities -- Property, plant and
equipment basis differences......................... 350,000 308,000
-------- --------
Net deferred tax liabilities................ $299,000 $184,000
======== ========
</TABLE>
10. EMPLOYEE BENEFIT PLANS:
The Company has a defined benefit retirement plan, Hutchinson Foundry
Retirement Plan for Employees (the "Plan"), which covers substantially all
employees of the Company. The Plan provides benefits in accordance with a
formula equal to $16 per month multiplied by the participants' years of service
as of their retirement date. Benefit payments to retired participants commence
at age 65 (or at some earlier date at a discounted amount as defined by the
Plan, if so elected, for early retirees) and continue for the life of the
participant. Participants also have the option of electing a lump sum
distribution at retirement. The Plan is funded in accordance with ERISA.
Required contributions were $-0-, $18,000 and $-0- for 1996, 1995 and 1994,
respectively.
Net periodic pension (cost) income consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Actual return (loss) on plan assets...... $149,499 $ 160,672 $(83,820)
Service cost............................. (21,168) (17,134) (15,865)
Interest cost............................ (34,719) (31,426) (32,584)
Net amortization and deferral............ (95,196) (112,440) 149,330
Settlement gain.......................... 10,468
-------- --------- ---------
Net periodic pension (cost)
income....................... $ (1,584) $ 10,140 $ 17,061
======== ========= =========
</TABLE>
F-60
<PAGE> 131
HOUGHTON ACQUISITION CORPORATION D/B/A
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table presents the funded status of the Plan determined as of
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation:
Vested............................................. $ 492,089 $392,196
Nonvested.......................................... 20,381 15,261
--------- --------
Accumulated benefit obligation............. $ 512,470 $407,457
========= ========
Actuarial present value of projected benefit
obligation......................................... $ 512,470 $407,457
Plan assets at fair value............................ 781,655 646,550
--------- --------
Plan assets in excess of projected benefit
obligation............................... 269,185 239,093
Unrecognized prior service cost...................... 38,005
Unrecognized net gain................................ (131,401) (61,720)
========= ========
Prepaid pension cost....................... $ 175,789 $177,373
========= ========
</TABLE>
Plan assets consist of corporate stocks and bonds, mutual funds and money
market accounts. The applicable portion of the unrecognized net gain is being
amortized over the average future working lifetime of the participants. The
assumptions used in developing the present value of the benefit obligations and
pension cost were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate.......................... 7.5 % 7.5 % 8.0 %
Long-term rate of return on plan assets................. 9.0 % 9.0 % 9.0 %
</TABLE>
The Company also has a 401(k) defined contribution plan for substantially
all of its employees. Participants may contribute up to 15% of their
compensation each year. The Company, at its discretion, may elect to match a
percentage of employees' contributions each year, as determined by its Board of
Directors, not to exceed the maximum amount deductible for federal income tax
purposes. The Company contributed $5,000, $5,000 and $10,000 to the 401(k) plan
in 1996, 1995 and 1994, respectively.
11. SUBSEQUENT EVENT:
In January 1997, all of the Company's common stock, preferred stock and
related common stock purchase warrants were sold to Hawk Corporation ("Hawk"), a
Delaware Corporation headquartered in Cleveland, Ohio. Hawk is a manufacturer of
various products requiring sophisticated engineering and production techniques
in numerous industrial markets. No adjustments have been reflected in the
accompanying financial statements as a result of this transaction.
F-61
<PAGE> 132
REPORT OF INDEPENDENT AUDITORS
Shareholder
Sinterloy, Inc.
We have audited the accompanying balance sheets of Sinterloy, Inc. as of
December 31, 1996 and 1995, and the related statements of income, shareholder's
equity, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sinterloy, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
August 22, 1997
F-62
<PAGE> 133
SINTERLOY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 545,412 $1,552,611 $ 2,301,628
Accounts receivable.............................. 965,982 1,294,066 1,666,361
Inventories...................................... 316,640 506,835 407,256
Prepaid expenses................................. 64,750 10,642 18,353
---------- ---------- ----------
Total current assets..................... 1,892,784 3,364,154 4,393,598
Property and equipment:
Machinery and equipment.......................... 1,706,700 3,410,892 3,662,128
Office furniture and fixtures.................... 91,642 65,314 72,324
---------- ---------- ----------
1,798,342 3,476,206 3,734,452
Less accumulated depreciation.................... 869,347 1,350,392 1,569,425
---------- ---------- ----------
928,995 2,125,814 2,165,027
---------- ---------- ----------
TOTAL ASSETS....................................... $2,821,779 $5,489,968 $ 6,558,625
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable................................. $ 232,075 $ 755,503 $ 298,043
Accrued expenses................................. 135,758 222,513 187,902
Accrued income taxes............................. 16,000 30,000 --
Current portion of note payable.................. 22,174 23,687 24,482
---------- ---------- ----------
Total current liabilities................ 406,007 1,031,703 510,427
Note payable....................................... 109,896 86,209 73,766
Shareholder's equity:
Common stock, no par value, 100,000 shares
authorized, issued and outstanding............ 10,000 10,000 10,000
Retained earnings................................ 2,295,876 4,362,056 5,964,432
---------- ---------- ----------
Total shareholder's equity............... 2,305,876 4,372,056 5,974,432
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY......... $2,821,779 $5,489,968 $ 6,558,625
========== ========== ==========
</TABLE>
See notes to financial statements.
F-63
<PAGE> 134
SINTERLOY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- JUNE 30,
1995 1996 1997
----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................... $ 7,586,030 $11,596,950 $7,734,875
Cost of sales............................... 5,215,868 7,422,194 4,091,492
----------- ---------- ----------
Gross profit................................ 2,370,162 4,174,756 3,643,383
General and administrative expenses......... 868,970 1,053,213 515,804
----------- ---------- ----------
Operating income............................ 1,501,192 3,121,543 3,127,579
Other income (expense):
Miscellaneous income...................... 5,720 783 7,638
Loss on sale of equipment................. -- (1,628) --
Interest income........................... 12,604 32,485 42,860
Interest expense.......................... (18,733) (8,668) (3,575)
----------- ---------- ----------
Other income (expense) -- net............... (409) 22,972 46,923
----------- ---------- ----------
Income before income taxes.................. 1,500,783 3,144,515 3,174,502
Income taxes................................ 36,077 33,767 --
----------- ---------- ----------
NET INCOME.................................. $ 1,464,706 $ 3,110,748 $3,174,502
=========== ========== ==========
</TABLE>
See notes to financial statements.
F-64
<PAGE> 135
SINTERLOY, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1, 1995.......................... $10,000 $ 1,223,233 $ 1,233,233
Net income.......................................... 1,464,706 1,464,706
Cash distribution to shareholder.................... (392,063) (392,063)
------- ----------- -----------
Balance at December 31, 1995........................ 10,000 2,295,876 2,305,876
Net income.......................................... 3,110,748 3,110,748
Cash distributions to shareholder................... (1,044,568) (1,044,568)
------- ----------- -----------
Balance at December 31, 1996........................ 10,000 4,362,056 4,372,056
======= =========== ===========
Net income (unaudited).............................. 3,174,502 3,174,502
Cash distributions to shareholder (unaudited)....... (1,572,126) (1,572,126)
------- ----------- -----------
Balance at September 30, 1997 (unaudited)........... $10,000 $ 5,964,432 $ 5,974,432
======= =========== ===========
</TABLE>
See notes to financial statements.
F-65
<PAGE> 136
SINTERLOY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SIX MONTHS ENDED
--------------------------- JUNE 30,
1995 1996 1997
----------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 1,464,706 $3,110,748 $3,174,502
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 267,539 509,276 219,033
Loss on sale of equipment................ -- 1,628 --
Change in operating assets and
liabilities:
Accounts receivable.................... (262,316) (328,084) (372,295)
Inventories............................ (65,321) (190,195) 99,579
Prepaid expenses....................... (53,983) (10,642) (7,711)
Accounts payable....................... 83,207 523,428 (457,460)
Accrued expenses and other............. 112,943 86,755 (64,611)
Accrued income taxes................... 11,500 14,000
----------- ---------- ----------
Net cash provided by operating activities... 1,558,275 3,716,914 2,591,037
INVESTING ACTIVITIES
Purchases of property and equipment......... (536,543) (1,642,973) (258,246)
FINANCING ACTIVITIES
Payments on line of credit.................. (200,000) -- --
Payments on note payable.................... (20,758) (22,174) (11,648)
Shareholder distributions................... (392,063) (1,044,568) (1,572,126)
----------- ---------- ----------
Net cash used in financing activities....... (612,821) (1,066,742) (1,583,774)
----------- ---------- ----------
Net increase in cash........................ 408,911 1,007,199 749,017
Cash and cash equivalents at beginning of
year..................................... 136,501 545,412 1,552,611
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 545,412 $1,552,611 $2,301,628
=========== ========== ==========
</TABLE>
See notes to financial statements.
F-66
<PAGE> 137
SINTERLOY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
SIX MONTHS ENDED JUNE 30, 1997
A. BASIS OF PRESENTATION
Sinterloy, Inc. (the Company) is primarily engaged in the production of
structural sintered metal parts. The plant facility is located in Solon Mills,
Illinois. The Company was incorporated in Illinois on March 23, 1988.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements at June 30, 1997 and for
the six months ended June 30, 1997 have been prepared in accordance with
generally accepted accounting principles for the interim financial information
and with Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six-month period
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw material and supplies.............................. $ 92,799 $242,791 $ 297,042
Work in process........................................ 126,135 148,789 68,787
Finished goods......................................... 97,706 115,255 41,427
-------- -------- --------
$316,640 $506,835 $ 407,256
======== ======== ========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment has been recorded at cost.
Depreciation is provided by using an accelerated method over the useful
lives of the assets. Estimated useful lives range from 3 to 7 years.
INCOME TAXES
Effective October 1, 1994, the Company elected S Corporation status. Under
those provisions, the shareholder is liable for individual income taxes on the
Company's taxable income. The Company is responsible for paying Illinois
Replacement Tax of 1.5% of taxable income.
States taxes paid in 1996 and 1995 were $19,767 and $24,577, respectively.
F-67
<PAGE> 138
SINTERLOY, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ form those estimates.
C. NOTE PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payable to a former shareholder, in monthly
installments of $2,621 principal and interest,
bearing interest at 6.62%, due February, 2001,
unsecured............................................ $132,070 $109,896 $ 98,248
Less current portion................................... 22,174 23,687 24,482
-------- -------- --------
LONG-TERM NOTE PAYABLE................................. $109,896 $ 86,209 $ 73,766
======== ======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997.......................................... $ 23,687
1998.......................................... 25,304
1999.......................................... 27,081
2000.......................................... 28,875
2001.......................................... 4,949
---------
$ 109,896
=========
</TABLE>
During 1995, 1996 and 1997, the Company had a revolving line of credit with
a maximum of $500,000 bearing interest at prime. There were no borrowings on the
line of credit at December 31, 1996 and 1995 and June 30, 1997.
Interest paid in 1996 and 1995 was $8,668 and $18,733, respectively.
D. LEASE COMMITMENT
In 1995, the Company leased its facilities from a third party with monthly
rental payments of $5,429. In February 1996 the facilities were purchased by the
Company's sole shareholder who leases the facilities to the Company under a five
year operating lease through January 31, 2001. Beginning March 1996, monthly
rental payments were increased to $13,150 due to a significant addition to the
facility in 1996. The Company also has operating leases for two vehicles and
other miscellaneous equipment. Rent expense was $148,650 and $56,288 for the
years ended December 31, 1996 and 1995, respectively.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997.......................................... $ 166,206
1998.......................................... 157,800
1999.......................................... 157,800
2000.......................................... 157,800
2001.......................................... 13,150
---------
$ 652,756
=========
</TABLE>
F-68
<PAGE> 139
SINTERLOY, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
E. PROFIT SHARING PLAN
On September 1, 1993, the Company established a 401(k) profit sharing plan.
Eligible employees may elect to defer up to 10% of their total compensation or
as prescribed by the Internal Revenue Service regulations. The Company
contributes a matching fifty percent (50%) of each employee's elective deferral.
Additionally, the plan allows for the Company to make discretionary
contributions. Company contributions for the years ended December 31, 1996 and
1995 were $59,203 and $53,375, respectively.
The discretionary portion of the contributions was $20,000 for the years
ended December 31, 1996 and 1995.
F. MAJOR CUSTOMERS
For the years ended December 31, 1996 and 1995, the Company generated
approximately 72% and 60%, respectively, of its revenue from three major
customers. Accounts receivable from the three customers was $887,525 and
$684,687, as of December 31, 1996 and 1995, respectively.
G. SUBSEQUENT EVENT
Effective August 1, 1997, the Company sold substantially all of its assets
except cash, and certain liabilities for $15,000,000 (the purchase price). The
purchase price will be adjusted dollar for dollar based on the adjusted net
equity position of the Company at closing compared to the net equity position of
the Company at December 31, 1996.
F-69
<PAGE> 140
Hawk Logo
THE COMPANY'S PRINCIPAL MARKETS
[PHOTOGRAPH OF HARVESTING MACHINE]
Agriculture
[PHOTOGRAPH OF BULLDOZER]
Construction
[PHOTOGRAPH OF AIRPLANE]
Aerospace
[PHOTOGRAPH OF TRUCK]
Truck
<PAGE> 141
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK, NOR DOES IT CONSTITUTE
AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION, OR AN OFFER OR SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................... 3
Risk Factors............................... 9
Use of Proceeds............................ 15
Dividend Policy............................ 16
Capitalization............................. 17
Dilution................................... 19
Unaudited Pro Forma Consolidated Statements
of Operations............................ 20
Selected Consolidated Financial Data....... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 25
Business................................... 33
Management................................. 47
Principal and Selling Stockholders......... 54
Certain Transactions....................... 56
Description of Capital Stock............... 59
Shares Eligible for Future Sale............ 66
Underwriting............................... 67
Legal Matters.............................. 68
Experts.................................... 68
Available Information...................... 69
Reports to Holders of Class A
Common Stock............................. 69
Index to Financial Statements.............. F-1
</TABLE>
======================================================
======================================================
SHARES
LOGO
HAWK CORPORATION
CLASS A COMMON STOCK
($.01 PAR VALUE)
------------------------
SCHRODER & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
======================================================
<PAGE> 142
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the Offering (other than underwriting discounts and commissions)
will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...................... $ 31,819
NASD filing fee.......................................................... 11,000
NYSE listing fee......................................................... 88,100
Registrar and transfer agent's fees and expenses......................... *
Printing expenses........................................................ *
Accounting fees and expenses............................................. *
Legal fees and expenses.................................................. *
Miscellaneous............................................................ *
--------
Total.......................................................... $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
All amounts except the Securities and Exchange Commission registration fee, the
NASD filing fee and the NYSE listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law, which enables a corporation in its original certificate or an amendment
thereto to eliminate or limit the personal liability of a director for
violations of the director's fiduciary duty, except (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) pursuant to Section 174 of the Delaware General
Corporation Law (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (4) for any transaction
from which a director derived an improper personal benefit. The Certificate, a
copy of which is filed as Exhibit 3.1 to this Registration Statement, contains
provisions permitted by Section 102(b)(7) of the Delaware General Corporation
Law.
Reference also is made to Section 145 of the Delaware General Corporation
Law, which grants a corporation power to indemnify any persons, including
officers and directors, who are, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer, director, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses (including attorneys' fees)
which such officer or director actually and reasonably incurred. Any
indemnification made under Section 145, unless ordered by a court, shall be
authorized upon a determination that indemnification of the director, officer,
employee or
II-1
<PAGE> 143
agent is proper because the person has met the applicable standard of conduct
required by this section. Such determination shall be made with respect to a
person who is a director or officer at the time of such determination by a
majority vote of the directors who are not parties to such action, suit, or
proceeding, even though less than a quorum, or by a committee of such directors
designated by a majority vote of such directors, even though less than a quorum,
or if there are no such directors, or if such directors so direct, by
independent legal counsel, or by the stockholders. The Certificate provides for
the indemnification of directors and officers of the Registrant to the fullest
extent permitted by the Delaware General Corporation Law.
The Registrant maintains an insurance policy that provides protection,
within the maximum liability limits of the policy and subject to a deductible
amount for each claim, to the Registrant under its indemnification obligations
and to the directors and officers of the Registrant with respect to certain
matters that are not covered by the Registrant's indemnification obligations.
At present, there is no pending litigation or proceeding involving any
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any director or officer.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act.
In addition, the Selling Stockholders have agreed to indemnify the
Registrant, each Underwriter, their respective directors and officers and each
person who controls the Registrant or any such Underwriter (within the meaning
of the Securities Act) against any losses, claims, damages, liabilities (or
proceedings in respect thereof) and expenses resulting from any untrue statement
or alleged untrue statement of a material fact or any omission or alleged
omission of a material fact required to be stated in this Registration Statement
or any prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or necessary to make the statements therein (in the case of
any prospectus, in light of the circumstances under which they were made) not
misleading, but only to the extent that such untrue statement is contained in,
or such omission is from, information so concerning a Selling Stockholder
furnished in writing by such Selling Stockholder expressly for use therein;
provided that the indemnification obligation of a Selling Stockholder is limited
to an amount equal to the proceeds received by such Selling Stockholder pursuant
to this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The 1995 Parent-Subsidiary Merger. In June 1995, in connection with the
merger of Helsel into a subsidiary of the Registrant and the acquisition of SKW,
the Registrant, which until that time had been an Ohio corporation ("Old Hawk"),
reincorporated as a Delaware corporation in a parent-subsidiary merger. Pursuant
to the terms of the merger, each outstanding share of common stock of Old Hawk
was converted into one fully-paid share of Class A Common Stock of the
Registrant. In addition, each outstanding share of preferred stock of Old Hawk
was, by virtue of the merger, converted into one fully-paid share of Series A
Preferred Stock of the Registrant. The terms of the Series A Preferred Stock of
the Registrant are identical in all material respects to the terms of the Old
Hawk preferred stock.
The 1995 Helsel Merger. In June 1995, Helsel became a wholly-owned
subsidiary of the Registrant by merging with a subsidiary of the Registrant.
Pursuant to the terms of that merger, each outstanding share of common stock of
Helsel was converted into shares of the Class A Common Stock of the Registrant
at an exchange ratio based on an independent valuation. Each outstanding share
of the preferred stock of Helsel was surrendered in exchange for one fully paid
share of Series B Preferred Stock of the Registrant. The terms of the Series B
Preferred Stock of the Registrant are identical in all material respects to the
terms of the Helsel preferred stock.
II-2
<PAGE> 144
The 1995 Refinancing. During the refinancing of the Registrant on June 30,
1995, the Registrant issued warrants to purchase up to shares (subject
to adjustment) of Class B Common Stock to its subordinated lenders in connection
with their purchase of a total of $30,000,000 of Senior Subordinated Notes.
The Hutchinson Acquisition. In connection with its acquisition of
Hutchinson, the Registrant issued certain 8.0% two-year notes in the aggregate
principal amount of $1.5 million, of which up to $500,000 of the principal
balance thereof outstanding on the effective date of the Offering is convertible
at the option of the holders thereof into shares of Class A Common Stock at the
public offering price of the Class A Common Stock.
Exemptions from Registration. The sales of Preferred Stock, Class A Common
Stock and warrants described above were each made pursuant to an exemption from
registration under Section 4(2) of the Securities Act. The certificates
representing the shares of Preferred Stock, Common Stock and the warrants are
restricted as to transfer and legended to describe such restrictions. No
underwriters were involved in such transactions.
Issuances Concurrent with the Offering. Concurrently with the effective
date of the Offering, the Registrant will issue shares of Class B
Common Stock (which will be automatically converted on a one-for-one basis into
shares of Class A Common Stock at the time of the Offering) upon the exercise of
certain warrants held by the Selling Stockholders pursuant to an exemption from
registration under Section 4(2) of the Securities Act. As of the closing of the
Offering, pursuant to the Section 4(2) exemption, the Registrant will (1)
exchange the shares of Series B and Series C Preferred Stock owned beneficially
and of record by Norman C. Harbert, Ronald E. Weinberg and Byron S. Krantz for
an equal number of shares of Series D Preferred Stock, and (2) grant to various
directors and employees of the Registrant options to purchase an aggregate of
310,000 shares of Class A Common Stock pursuant to the Registrant's 1997 Plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits: See the Exhibit Index following the signature page to this
Registration Statement.
(b) Financial Statement Schedules: All schedules for which provision is
made in the applicable accounting regulations of the Commission are not required
under the related instructions or are not applicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 145
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on December 30, 1997.
HAWK CORPORATION
By: /s/ THOMAS A. GILBRIDE
------------------------------------
Thomas A. Gilbride,
Vice President-Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<C> <S> <C>
NORMAN C. HARBERT* Chairman of the Board, Chief December 30, 1997
- ---------------------------------------- Executive Officer,
Norman C. Harbert President and Director
(principal executive
officer)
RONALD E. WEINBERG* Vice-Chairman of the Board, December 30, 1997
- ---------------------------------------- Treasurer and Director
Ronald E. Weinberg (principal financial
officer)
/s/ THOMAS A. GILBRIDE Vice President - Finance December 30, 1997
- ---------------------------------------- (principal accounting
Thomas A. Gilbride officer)
/s/ BYRON S. KRANTZ Secretary and Director December 30, 1997
- ----------------------------------------
Byron S. Krantz
PAUL R. BISHOP* Director December 30, 1997
- ----------------------------------------
Paul R. Bishop
DAN T. MOORE, III* Director December 30, 1997
- ----------------------------------------
Dan T. Moore, III
WILLIAM J. O'NEILL, JR.* Director December 30, 1997
- ----------------------------------------
William J. O'Neill, Jr.
</TABLE>
*By: /s/ BYRON S. KRANTZ
-----------------------------------------------
Byron S. Krantz
Attorney-in-Fact
II-5
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
2.1*** Stock Purchase Agreement, dated November 7, 1996, among the Registrant, Timothy
Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community
Investment Partners II, L.P. and St. Louis Community Foundation setting forth the
terms of the Hutchinson acquisition (omitting certain exhibits and schedules
setting forth the forms of opinions of counsel, relating to the purchase price
adjustment mechanism and relating to the business of Houghton Acquisition
Corporation d.b.a. Hutchinson Foundry Products Company, which the Registrant
undertakes to furnish supplementally to the Commission upon request)
2.2**** Asset Purchase Agreement, dated as of July 10, 1997, by and among the Registrant,
Sinterloy, Inc. and Robert G. Sierks setting forth the terms of the Sinterloy
acquisition (omitting the exhibits and schedules setting forth the form of
various ancillary documents and relating to the business of Sinterloy, which the
Registrant undertakes to furnish supplementally to the Commission upon request)
3.1 Form of the Registrant's Second Amended and Restated Certificate of Incorporation
3.2 Form of the Registrant's Amended and Restated By-laws
4.1* Specimen Common Stock certificate
4.2 Form of Rights Agreement between the Registrant and Continental Stock Transfer &
Trust Company, as Rights Agent
4.3*** Indenture, dated as of November 27, 1996, by and among the Registrant, Friction
Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K.
Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp.,
Hutchinson Products Corporation, and Bank One Trust Company, NA, as Trustee
4.4*** Form of 10 1/4% Senior Note due 2003
4.5*** Form of Series B 10 1/4% Senior Note due 2003
4.6*** Stockholders' Voting Agreement, effective as of November 27, 1996, by and among
the Registrant, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald
E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the
Krantz Family Limited Partnership
5.1* Opinion of Kohrman Jackson & Krantz P.L.L. as to the validity of the Class A
Common Stock being registered
10.1 The Registrant's 1997 Stock Option Plan
10.2** Form of Incentive Stock Option Agreement
10.3** Form of Non-Statutory Stock Option Agreement
10.4*** Employment Agreement, dated as of November 1, 1996, between the Registrant and
Norman C. Harbert
10.5*** Wage Continuation Agreement, effective as of June 30, 1995, between the
Registrant and Norman C. Harbert
10.6*** Letter agreement, dated November 1, 1996, amending the Wage Continuation
Agreement, effective as of June 30, 1995, between the Registrant and Norman C.
Harbert
10.7*** Employment Agreement, dated as of November 1, 1996, between the Registrant and
Ronald E. Weinberg
10.8*** Wage Continuation Agreement, effective as of June 30, 1995, between the
Registrant and Ronald E. Weinberg
10.9*** Letter agreement, dated November 1, 1996, amending the Wage Continuation
Agreement, effective as of June 30, 1995, between the Registrant and Ronald E.
Weinberg
10.10*** Employment Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel
10.11*** Consulting Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
10.12** Letter agreement, dated as of June 1997, amending the Employment Agreement and
the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess
F. Helsel
10.13** Employment Agreement, dated January 2, 1997, between the Registrant and Timothy
J. Houghton
10.14*** Promissory Note, dated July 1, 1994, in the principal amount of $500,000, issued
by the Registrant to Helco, Inc.
10.15*** Form of the Promissory Notes, each dated June 30, 1995, issued by each of Norman
C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the
Registrant
10.16*** Letter agreement, dated October 1, 1996, amending the Promissory Notes, each
dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg,
Byron S. Krantz and Douglas D. Wilson to the Registrant
10.17** Form of Convertible Promissory Note, dated January 2, 1997, in the aggregate
principal amount of $1.5 million, issued by the Registrant to each of Timothy
Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community
Investment Partners II, L.P. and St. Louis Community Foundation
10.18*** Credit Agreement, dated as of November 27, 1996, among Friction Products Co.,
Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman
Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp. and
Hutchinson Products Corporation, as Borrowers, and the Registrant, as Funds
Administrator, and BT Commercial Corporation, as Lender and Agent (omitting
certain exhibits and schedules setting forth the form of various ancillary
documents and relating to the business of the Registrant, which omitted exhibits
and schedules the Registrant undertakes to furnish supplementally to the
Commission upon request)
10.19*** General Security Agreement, dated as of November 27, 1996, made by Friction
Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K.
Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp.
and Hutchinson Products Corporation in favor of BT Commercial Corporation, as
Agent
10.20*** Trademark Security Agreement, dated as of November 27, 1996, made by S.K. Wellman
Corp. in favor of BT Commercial Corporation, as Agent
10.21*** Trademark Security Agreement, dated as of November 27, 1996, made by Friction
Products Co. in favor of BT Commercial Corporation, as Agent
10.22*** Patent Security Agreement, dated as of November 27, 1996, made by S.K. Wellman
Corp. in favor of BT Commercial Corporation, as Agent
10.23*** Patent Security Agreement, dated as of November 27, 1996, made by Friction
Products Co. in favor of BT Commercial Corporation, as Agent
10.24*** Agency and Contribution Agreement, dated as of November 27, 1996, among the
Registrant, as Funds Administrator, and Friction Products Co., Hawk Brake, Inc.,
Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K.
Wellman Corp., Wellman Friction Products U.K. Corp. and Hutchinson Products
Corporation, as Borrowers
10.25***** Assumption and Joinder Agreement, dated as of August 1, 1997, between Sinterloy
Corporation and BT Commercial Corporation, as Agent
10.26***** Substituted and Restated Revolving Note, dated as of August 1, 1997, in the
principal amount of up to $25,000,000, made by Friction Products Co., Hawk Brake,
Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc.,
S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Hutchinson Products
Corporation and Sinterloy Corporation in favor of BT Commercial Corporation, as
Agent
21.1** Subsidiaries of the Registrant
23.1* Consent of Kohrman Jackson & Krantz P.L.L. (included in its opinion filed as
Exhibit 5.1 hereto)
23.2 Consents of Ernst & Young LLP
23.3 Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
24.1** Reference is made to the Signatures section of this Registration Statement for
the Power of Attorney contained therein
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-18433), as filed with the Commission on December 20,
1996.
**** Incorporated by reference to the Registrant's Form 8-K (Reg. No.
333-18433), as filed with the Commission on July 16, 1997.
***** Incorporated by reference to the Registrant's Form 10-Q for the quarterly
period ended June 30, 1997 (Reg. No. 333-18433), as filed with the
Commission on August 14, 1997.
<PAGE> 1
Exhibit 3.1
FORM
OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HAWK CORPORATION
ARTICLE I
NAME
The name of the corporation is Hawk Corporation (the "Corporation").
ARTICLE II
REGISTERED OFFICE IN DELAWARE
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
PURPOSE
The Corporation is formed for the purpose of engaging in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as it presently exists or may be
amended in the future (the "Delaware General Corporation Law").
ARTICLE IV
CAPITAL STRUCTURE
4.1 Authorized Capital Stock. The aggregate number of shares of all
classes of stock that the Corporation is authorized to issue is 85,500,000
shares, consisting of:
(a) 75,000,000 shares of Class A Common Stock, par value $0.01
per share (the "Class A Common Stock");
(b) 10,000,000 shares of Class B Non-Voting Common Stock, par
value $0.01 per share (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"); and
(c) 500,000 shares of Serial Preferred Stock, par value $0.01
per share (the "Preferred Stock").
<PAGE> 2
4.2 Class A Common Stock and Class B Common Stock.
(a) Powers, Preferences and Rights. Except as may otherwise be
provided by this Second Amended and Restated Certificate of Incorporation, as
may be amended from time to time by resolutions of the Board of Directors
designating a class or series of Preferred Stock pursuant to Section 4.4 hereof
(this "Certificate of Incorporation"), or by the Delaware General Corporation
Law, the powers, preferences and rights of the Class A Common Stock and the
Class B Common Stock, and the qualifications, limitations or restrictions
thereof, shall be in all respects identical.
(b) Voting Rights. Except as may otherwise be provided by this
Certificate of Incorporation or by the Delaware General Corporation Law, (i) all
rights to vote and all voting power shall be vested exclusively in the holders
of the Class A Common Stock and (ii) each holder of Class A Common Stock shall
be entitled to one vote for each share held of record on the applicable record
date on all matters presented for a vote of the stockholders of the Corporation,
including, without limitation, the election of directors. Except as otherwise
required by the Delaware General Corporation Law, the holders of Class B Common
Stock shall not be entitled to vote on any matters to be voted on by the
stockholders of the Corporation.
(c) Dividends; Recapitalizations. Except as may otherwise be
provided by this Certificate of Incorporation or by the Delaware General
Corporation Law, if, as and when dividends on the Class A Common Stock and the
Class B Common Stock are declared payable from time to time by the Board of
Directors as provided in this Section 4.2(c), whether payable in cash, property,
stock or other securities, the holders of Class A Common Stock and the holders
of Class B Common Stock shall be entitled to share equally, on a per share
basis, in such dividends; provided, however, that (i) if dividends are declared
that are payable in shares of Class A Common Stock, or in shares of Class B
Common Stock, dividends shall be declared that are payable at the same rate on
both classes of stock and the dividends payable in shares of Class A Common
Stock shall be payable only to holders of Class A Common Stock and dividends
payable in shares of Class B Common Stock shall be payable only to holders of
Class B Common Stock, and (ii) if the dividends consist of other voting
securities of the Corporation, the Corporation shall make available to each
holder of Class B Common Stock, at such holder's written request, dividends
consisting of non-voting securities (except as otherwise required by the
Delaware General Corporation Law) of the Corporation which non-voting securities
are otherwise identical to such voting securities and are convertible into such
voting securities on the same terms as the Class B Common Stock is convertible
into the Class A Common Stock. If the Corporation shall in any manner split,
subdivide, combine or reclassify the outstanding shares of Class A Common Stock
or Class B Common Stock, the outstanding shares of the other such class of
common stock shall be proportionally split, subdivided, combined or reclassified
in the same manner and on the same basis as the outstanding shares of Class A
Common Stock or Class B Common Stock, as the case may be, have been subdivided
or combined or reclassified.
(d) Mergers and Consolidations. In case of any merger or
consolidation of the Corporation with any other entity as a result of which the
holders of Class A Common Stock shall
-2-
<PAGE> 3
be entitled to receive cash, property, stock or other securities with respect to
or in exchange for Class A Common Stock, or in case of any sale or conveyance of
all or substantially all of the assets of the Corporation, a holder of one share
of Class B Common Stock shall have the right thereafter, so long as the
conversion rights set forth in Section 4.2(e) hereof shall exist, to convert
such share of Class B Common Stock into the kind and amount of cash, property,
stock or other securities receivable upon such consolidation, merger, sale or
conveyance by a holder of one share of Class A Common Stock, and shall have no
other conversion rights with regard to such share of Class B Common Stock. The
provisions of this Section 4.2(d) shall similarly apply to successive mergers,
consolidations, sales or conveyances.
(e) Conversion of Class B Common Stock.
(i) Conversion at Qualified Public Offering. Each
share of Class B Common Stock sold in an underwritten public offering
pursuant to an effective registration statement under the Securities
Act of 1933, as amended (a "Public Offering"), shall automatically be
converted into an equal number of shares of Class A Common Stock
immediately upon the closing of such sale.
(ii) Conversion Upon Certain Transfers. Each share of
Class B Common Stock shall be converted into an equal number of shares
of Class A Common Stock upon the written request (the "Conversion
Request") of any third party transferee ("Transferee") acquiring such
shares of Class B Common Stock from any holder of Class B Common Stock
so long as such Transferee (A) is not an affiliate of the transferor of
such Class B Common Stock and (B) makes such Conversion Request within
fifteen days of the date such Class B Common Stock is transferred by
such transferor to such Transferee.
Other than as set forth in Section 4.2(d) and in this
Section 4.2(e), a holder of Class B Common Stock shall have no conversion rights
with respect to such Class B Common Stock.
(f) Conversion Procedures. Any holder of shares of Class B
Common Stock desiring to convert such shares, or any such holder whose shares
shall have been automatically converted, into shares of Class A Common Stock
shall surrender the certificate or certificates representing the Class B Common
Stock being converted, or so converted, duly assigned or endorsed for transfer
to the Corporation (or accompanied by duly executed stock powers relating
thereto), at the principal executive office of the Corporation, or at such
office of a transfer agent for the Class B Common Stock or office in the
continental United States of an agent for conversion as may from time to time be
designated by notice to the holders of the Class B Common Stock by the
Corporation, accompanied by written notice of conversion. Such notice of
conversion shall specify (i) the number of shares of Class B Common Stock that
are the subject of such conversion, (ii) the name or names in which such holder
wishes the certificate or certificates for Class A Common Stock and for any
Class B Common Stock not to be so converted to be issued, (iii) the address to
which such holder wishes delivery to be made of such new certificates to be
issued upon such conversion, (iv) the date upon which the person giving such
notice acquired the Class B Common Stock that is
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<PAGE> 4
the subject of such notice of conversion and (v) that the conversion of such
Class B Common Stock is required pursuant to Section 4.2(e)(i) above or
permitted pursuant to Section 4.2(e)(ii) above. Upon surrender of a certificate
representing Class B Common Stock for conversion, the Corporation shall issue
and send by hand delivery, by courier or by overnight or first class mail
(postage prepaid) to the holder thereof or to such holder's designee, at the
address designated by such holder, a certificate or certificates for the number
of shares of Class A Common Stock to which such holder shall be entitled upon
conversion. In the event that there shall have been surrendered a certificate or
certificates representing Class B Common Stock, only part of which are to be
converted, the Corporation shall issue and send to such holder or such holder's
designee, in the manner set forth in the preceding sentence, a new certificate
or certificates representing the number of Class B Common Stock that shall not
have been converted. The issuance of certificates representing shares of Class A
Common Stock issuable upon the conversion of shares of Class B Common Stock by
the registered holder thereof pursuant to the provisions of this Certificate of
Incorporation shall be made without charge to the converting holder for any tax
imposed on the Corporation in respect of the issue thereof; provided that the
Corporation shall not be required to pay any tax that may be payable with
respect to any transfer involved in the issue and delivery of any certificate in
a name other than that of the registered holder of the shares of Class B Common
Stock being converted, and the Corporation shall not be required to issue or
deliver any such certificate unless and until the person requesting the issue
thereof shall have paid the amount of such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. Shares of the Class
B Common Stock converted into Class A Common Stock as provided in this Section
4.2(f) shall resume the status of authorized but unissued shares of Class B
Common Stock.
(g) Effective Date of Conversion. The issuance by the
Corporation of shares of Class A Common Stock upon a conversion of Class B
Common Stock into Class A Common Stock pursuant to Section 4.2(e)(i) above shall
be deemed to be effective upon the consummation or closing of the sale pursuant
to the Public Offering covering such Class B Common Stock. The issuance by the
Corporation of shares of Class A Common Stock upon conversion of Class B Common
Stock into Class A Common Stock pursuant to Section 4.2(e)(ii) above shall not
be deemed to be effective until receipt of a timely and complete Conversion
Request from the Transferee, reasonably satisfactory in form and substance to
the Corporation. The person or persons entitled to receive the Class A Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Class A Common Stock as of the
effective date of conversion.
(h) Liquidating Distributions. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
or upon any sale or conveyance of all or substantially all of the assets of the
Corporation, after payment or provision for payment of all the liabilities of
the Corporation and the expenses of liquidation, and after the holders of the
Preferred Stock shall have been paid in full the amounts, if any, to which they
are entitled or a sum sufficient for such payment in full shall have been set
aside, the remaining assets of the Corporation available for distribution shall
be distributed ratably to the holders of the Class A Common Stock and Class B
Common Stock in accordance with their respective rights and interests. For the
purpose of this Section 4.2(h), a merger, consolidation, sale or conveyance
shall not be deemed to be a liquidation
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<PAGE> 5
or winding up of the Corporation unless the transaction provides for the
cessation of the business of the Corporation.
(i) Reservation of Class A Common Stock. The Corporation shall
at all times reserve and keep available out of its authorized and unissued Class
A Common Stock, solely for issuance upon the conversion of Class B Common Stock
as herein provided, free from any preemptive rights or other obligations, such
number of shares of Class A Common Stock as shall from time to time be issuable
upon the conversion of all the Class B Common stock then outstanding; provided
that, except as provided in this Certificate of Incorporation, the shares of
Class A Common Stock so reserved shall not be reduced or affected in any manner
whatsoever so long as any shares of Class B Common Stock are outstanding.
4.3 Amendment and Waiver. No amendment, modification or waiver of
any provisions of Sections 4.1 or 4.2 hereof or of this Section 4.3 that
adversely affects the rights, preferences or privileges of the Class A Common
Stock or Class B Common Stock shall be effective without the affirmative vote of
the holders of at least 51% of the outstanding shares of such class of Common
Stock entitled to vote at a meeting of the holders of such class of Common Stock
duly called for such purpose.
4.4 Preferred Stock.
(a) Designations by Board of Directors. The Preferred Stock
may be issued from time to time in one or more classes or series with such
voting rights, full or limited, or without voting rights, and with such
designations, preferences and relative, participating, optional or special
rights, and qualifications, limitations or restrictions as are stated herein and
as shall be stated and expressed in the resolution or resolutions providing for
the issue of such stock adopted by the Board of Directors as hereinafter
prescribed.
(b) Terms of the Preferred Stock. Subject to the rights of the
holders of the Class A Common Stock and Class B Common Stock, authority is
hereby expressly granted to and vested in the Board of Directors or any
designated committee thereof to authorize the issuance of the Preferred Stock
from time to time in one or more classes or series, to determine and take
necessary proceedings to fully effectuate the issuance and redemption of any
such Preferred Stock and, with respect to each class or series of Preferred
Stock, to fix and state from time to time, by resolution or resolutions
providing for the issuance thereof, the following:
(i) the number of shares to constitute the class or
series and the designations thereof;
(ii) whether the class or series is to have voting
rights, full or limited, or to be without voting rights;
(iii) the preferences and relative, participating,
optional or special rights, if any, and qualifications, limitations or
restrictions thereof, if any, of the class or series;
-5-
<PAGE> 6
(iv) whether the shares of the class or series will
be redeemable and, if redeemable, the redemption price or prices and
the time or times at which, and the terms and conditions upon which,
such shares will be redeemable and the manner of redemption;
(v) whether the shares of the class or series will be
subject to the operation of retirement or sinking funds to be applied
to the purchase or redemption of such shares for retirement and, if
such retirement or sinking funds are to be established, the annual
amount thereof and the terms and conditions relative to the operation
thereof;
(vi) the dividend rate, whether dividends are payable
in cash, stock or otherwise, the conditions upon which and the times
when such dividends are payable, the preference or relation to the
payment of dividends on any other class or series of stock, whether or
not such dividends will be cumulative or noncumulative and, if
cumulative, the date or dates from which such dividends will
accumulate;
(vii) the preferences, if any, and the amounts
thereof that the holders of the class or series will be entitled to
receive upon the voluntary or involuntary dissolution, liquidation or
winding up of, or upon any distribution of the assets of, the
Corporation;
(viii) whether the shares of the class or series will
be convertible into, or exchangeable for, the shares of any other class
or classes, or of any other series of the same or any other class or
classes, of stock of the Corporation and the conversion price or
prices, or ratio or ratios, or rate or rates, at which such conversion
or exchange may be made, with such adjustments, if any, as shall be
expressed or provided for in such resolution or resolutions; and
(ix) such other special rights and protective
provisions with respect to the class or series as the Board of
Directors or any designated committee thereof may deem advisable.
The shares of each class or series of Preferred Stock
may vary from the shares of any other class or series thereof in any or all of
the foregoing respects. The Board of Directors or any designated committee
thereof may from time to time increase the number of shares of Preferred Stock
designated for any existing class or series by a resolution adding to such class
or series authorized but unissued shares of Preferred Stock not designated for
any other class or series thereof. The Board of Directors or any designated
committee thereof may from time to time decrease the number of shares of
Preferred Stock designated for any existing class or series by a resolution
subtracting from such class or series any unissued shares of Preferred Stock
designated for such class or series, and the shares so subtracted shall become
authorized, unissued and undesignated shares of Preferred Stock.
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<PAGE> 7
ARTICLE V
BOARD OF DIRECTORS
5.1 Number and Term of Directors. The Board of Directors shall consist
of not less than three nor more than fifteen members, with the exact number to
be fixed from time to time by resolution of the Board of Directors. No decrease
in the number of directors shall have the effect of shortening the term of any
incumbent director. The directors shall serve until their respective successors
are duly elected and qualified or until their earlier resignation, death or
removal from office. Except as may otherwise be provided by this Certificate of
Incorporation, the stockholders may remove a director from office prior to the
expiration of his or her term by an affirmative vote of two-thirds of the
outstanding shares of all capital stock entitled to vote at a stockholders'
meeting duly called for such purpose.
5.2 Director Vacancies. Except as may otherwise be provided by this
Certificate of Incorporation, (i) whenever any vacancy on the Board of Directors
occurs because of death, resignation, retirement, disqualification, removal,
increase in the number of directors or otherwise, a majority of the directors
then in office, although less than a majority of the entire Board of Directors,
may fill the vacancy or vacancies for the balance of the unexpired term or
terms, at which time a successor or successors shall be duly elected by the
stockholders and qualified, and (ii) only the remaining directors of the
Corporation shall have the authority, in accordance with the foregoing
procedure, to fill any vacancy that exists on the Board of Directors.
5.3 Elimination of Ballot for the Election of Directors. The directors
of the Corporation need not be elected by written ballot.
5.4 Amendment of Bylaws. In furtherance and not in limitation of the
power conferred upon the Board of Directors by the Delaware General Corporation
Law, the Board of Directors shall have the power to make, adopt, alter, amend
and repeal from time to time the Bylaws of the Corporation without any action on
the part of the stockholders except as otherwise specifically provided in the
By-laws of the Corporation.
5.5 Amendment. This Article V shall not be altered, amended or repealed
except by an affirmative vote of at least two-thirds of the outstanding shares
of all capital stock entitled to vote at a stockholders' meeting duly called for
such purpose.
ARTICLE VI
INDEMNIFICATION RIGHTS AND LIMITATION OF DIRECTOR LIABILITY
6.1 Indemnification Rights.
(a) To the maximum extent permitted under the Delaware General
Corporation Law, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason
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<PAGE> 8
of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
(b) To the maximum extent permitted under the Delaware General
Corporation Law, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit.
6.2 Advancement of Expenses.
(a) To the maximum extent permitted under the Delaware General
Corporation Law, the Corporation shall pay all expenses (including attorneys'
fees) actually and reasonably incurred by any person by reason of the fact that
such person is or was a director of the Corporation in defending any civil,
criminal, administrative or investigative action, suit or proceeding in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that he is not entitled to be indemnified by the
Corporation as authorized by the Delaware General Corporation Law.
(b) To the maximum extent permitted under the Delaware General
Corporation Law, the Corporation shall pay all expenses (including attorneys'
fees) actually and reasonably incurred by any person by reason of the fact that
such person is or was an officer of the Corporation in defending any civil,
criminal, administrative or investigative action, suit or proceeding (other than
an action by the Corporation on its own behalf, it being understood that such an
action does not include any derivative suit instituted by a stockholder of the
Corporation) in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it is ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized by the Delaware General Corporation
Law.
6.3 Limitation on Liability of Directors. To the maximum extent
permitted under the Delaware General Corporation Law, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for the breach of his or her fiduciary duty as a director.
6.4 Nonexclusivity and Benefit. The indemnification rights granted
pursuant to this Article VI shall not be exclusive of other indemnification
rights, if any, granted to such person and shall inure to the benefit of the
heirs and legal representatives of such person.
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<PAGE> 9
6.5 Effect of Repeal, Amendment or Termination. To the maximum
extent permitted under the Delaware General Corporation Law, no repeal of or
restrictive amendment of this Article VI and no repeal, restrictive amendment or
termination of effectiveness of any law authorizing this Article VI shall apply
to or affect adversely any right or protection of any director, officer,
employee or agent of the Corporation, for or with respect to any acts or
omissions of such person occurring prior to such repeal, amendment or
termination of effectiveness.
6.6 Retroactive Effect. To the maximum extent permitted under the
Delaware General Corporation Law, the indemnification and advancement of
expenses provided by this Article VI shall apply with respect to acts or
omissions occurring prior to the adoption of this Article VI.
ARTICLE VII
STOCKHOLDERS
7.1 Elimination of Right of Stockholders to Act by Consent. No
action required to be taken or that may be taken at any annual or special
meeting of holders of the Common Stock may be taken without a vote at a meeting
duly called and held for such purpose, and the right of such holders to consent
in writing, without a meeting, to the taking of any action is specifically
denied.
7.2 Special Meetings. Except as otherwise required by the Delaware
General Corporation Law, special meetings of holders of the Common Stock may be
called only by (i) the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors, (ii) the Chairman of the Board, (iii)
the Vice-Chairman of the Board or (iv) the holders of at least 25% of the
outstanding shares of Common Stock entitled to vote at the special meeting. The
business transacted at any special meeting shall be limited to the purposes
stated in the notice of such meeting.
7.3 Amendment. This Article VII shall not be altered, amended or
repealed except by an affirmative vote of at least two-thirds of the outstanding
shares of all capital stock entitled to vote at a stockholders' meeting duly
called for such purpose.
ARTICLE VIII
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The Corporation hereby elects to be governed by Section 203 of the
Delaware General Corporation Law; provided that this Article VIII shall not
apply to restrict a "business combination," as such term is defined in Section
203 of the Delaware General Corporation Law, between the Corporation and an
"interested stockholder," as such term is defined in Section 203 of the Delaware
General Corporation Law, if the interested stockholder became such prior to the
effective date of this Certificate of Incorporation.
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<PAGE> 10
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Second Amended and Restated Certificate of Incorporation, and hereby affirm the
foregoing as true under the penalties of perjury, as of this _____ day of
January, 1998.
---------------------------------
Name: Norman C. Harbert
Title: Chairman of the Board
Attest:
- ------------------------------------
Name: Byron S. Krantz
Title: Secretary
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<PAGE> 11
FORM
OF
CERTIFICATE OF DESIGNATION
OF
THE SERIES D PREFERRED STOCK
OF
HAWK CORPORATION
PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW
Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board
and Secretary, respectively, of Hawk Corporation, a Delaware corporation (the
"Corporation"), hereby certify that:
Pursuant to authority conferred upon the Board of Directors of
the Corporation by the Certificate of Incorporation of the Corporation,
and pursuant to the provisions of Section 151 of the Delaware General
Corporation Law, the Board of Directors, at a telephonic meeting held on
November 13, 1997, duly adopted a resolution creating a new series of
Serial Preferred Stock, par value $0.01 per share, of the Corporation,
as follows:
RESOLVED, that pursuant to the authority expressly
vested in the Board of Directors of the Corporation in
accordance with the provisions of its Certificate of
Incorporation, a new series of Serial Preferred Stock of the
Corporation is hereby created, of which the powers,
designations, preferences and relative, participating, optional
or other rights, and qualifications and restrictions, shall be
as follows:
Section 1. Effective Date. The provisions of this Certificate of
Designation shall become effective only upon the effective date of the initial
public offering of shares of Common Stock described in the Corporation's
Registration Statement on Form 5-1 (Reg. No.333-40535), as originally filed with
the Securities and Exchange Commission on November 19, 1997, as amended from
time to time (the "Effective Date").
Section 2. Designation and Amount. There shall be a series of the
Serial Preferred Stock of the Corporation that shall be designated as the
"Series D Preferred Stock," par value $0.01 per share, and the number of shares
constituting such series shall be 1,530. Subject to Section 5 hereof, such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided that no decrease shall reduce the number of shares of Series
D Preferred Stock to a number less than that of the shares of Series D Preferred
Stock then outstanding. Any capitalized terms used herein without definition
shall have the meanings assigned to them in the Certificate of Incorporation of
the Corporation.
<PAGE> 12
Section 3. Dividends and Distributions.
(a) The holders of Series D Preferred Stock shall be entitled
to receive, out of funds legally available for that purpose, cash dividends at
the rate of nine and four-fifths percent (9.8%) of the Series D Liquidation
Preference (as defined in Section 4 hereof) per annum. Such dividends shall be
cumulative from the Effective Date and shall be payable quarterly in arrears,
when and as declared by the Board of Directors, on the last business day in
March, June, September and December of each year that such Series D Preferred
Stock is outstanding to holders of record on such date, commencing on the
Effective Date and prorated from the Effective Date through March 31, 1998.
Dividends on account of arrearages for any past due dividends may be declared
and paid on any date to holders of record on such payment date. Arrearages must
be paid prior to the payment of current dividends and shall be deemed to be paid
first on account of the longest outstanding arrearage.
(b) If full cash dividends have been declared and are not paid
or made available to the holders of all outstanding shares of Series D Preferred
Stock and funds legally available are insufficient to permit payment in full in
cash to all such holders of the preferential amounts to which they are then
entitled, then the entire amount legally available for payment of cash dividends
shall be distributed among the holders of the Series D Preferred Stock ratably
in proportion to the full amount to which they would otherwise be respectively
entitled, and any remainder not paid in cash to the holders of the Series D
Preferred Stock shall cumulate as provided in Section 3(c) hereof.
(c) If on any dividend payment date, the holders of the Series
D Preferred Stock have not received the full dividends provided for in Section
3(a) hereof then such dividends shall cumulate, whether or not declared, with
additional dividends thereon for each succeeding full dividend period during
which such dividends shall remain unpaid. Unpaid dividends for any period less
than a full dividend period shall cumulate on a day-to-day basis and shall be
computed on the basis of a 365-day year.
(d) So long as any shares of Series D Preferred Stock are
outstanding, the Corporation shall not declare or pay on any Common Stock any
dividend whatsoever, whether in cash, stock, property or otherwise, nor shall
the Corporation make any distribution on any Common Stock, nor shall any Common
Stock be purchased or redeemed by the Corporation, nor shall any monies be paid
or made available for a sinking fund for the purchase or redemption of any
Common Stock, unless all dividends to which the holders of the Series D
Preferred Stock are entitled to for all previous dividend periods have been paid
or declared and a sum of money sufficient for the payment thereof set apart.
Section 4. Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, before any payment or distribution shall be made to the holders of
Common Stock, the holders of each share of Series D Preferred Stock shall be
entitled to receive an amount of cash equal to $1,000 per share (the "Series D
Liquidation Preference") plus any accrued or unpaid dividends thereon to such
date. After the payment or the setting apart for payment of amounts so payable
to the holders of the Series D Preferred Stock, the
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<PAGE> 13
remaining assets of the Corporation shall be available for distribution among
the holders of Common Stock according to their respective rights and priorities.
If the assets or surplus funds to be distributed to the holders of the Series D
Preferred Stock are insufficient to permit the payment to such holders of the
full preferential amounts to which they are entitled, then the assets and
surplus fluids legally available for distribution shall be distributed ratably
among the holders of the Series D Preferred Stock ratably in proportion to the
full preferential amount each such holder is otherwise entitled to receive.
Section 5. Voting Rights.
(a) Subject to Sections 5(b), 5(c) and 5(d) hereof, and
notwithstanding any provisions of the Certificate of Incorporation to the
contrary, the holders of the shares of Series D Preferred Stock issued and
outstanding from time to time shall have the right, acting as a separate class,
to:
(i) Elect a majority of the directors to the Board of
Directors (the directors elected by the holders of the Series D
Preferred Stock being hereinafter referred to as the "Series D
Preferred Directors").
(ii) Fill any vacancy or vacancies on the Board of
Directors caused by the death, resignation, retirement,
disqualification or removal of any of the Series D Preferred Directors.
(iii) Remove a Series D Preferred Director from the Board
of Directors prior to the expiration of his or her term, with or
without cause, by an affirmative vote of at least a majority of the
outstanding shares of Series D Preferred Stock entitled to vote. Only
the holders of shares of Series D Preferred Stock may remove a Series D
Preferred Director from the Board of Directors.
(iv) Vote on any proposal submitted to the stockholders of
the Corporation for approval that would: (A) amend, alter or repeal any
of the provisions of the Certificate of Incorporation so as to
adversely affect any right, preference, privilege or voting power of
the Series D Preferred Stock or the holders thereof including, without
limitation, any proposal to change the method of electing the members
of the Board of Directors; (B) provide for the consolidation or merger
of the Corporation with one or more other corporations or entities or
the sale, lease, exchange, transfer or other disposition of all or
substantially all of the Corporation's assets, provided, however, that
the purchase for cash, stock or otherwise by the Corporation of all or
any part of the assets, stock or other securities of another
corporation or entity shall not be deemed to be such a consolidation or
merger; or (C) create or authorize, or increase the authorized or
issued amount of any class or series of capital stock ranking senior to
the Series D Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up,
or reclassify any authorized capital stock of the Corporation into any
such shares, or create, authorize or issue any obligation or security
convertible into or evidencing the right to
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<PAGE> 14
purchase any such shares. No such proposal shall be adopted or effected
absent the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of Series D Preferred Stock
entitled to vote.
(b) The holders of all shares of Series D Preferred Stock
shall permanently cease to have any of the voting rights specified in Section
5(a) hereof from and after the earlier to occur of:
(i) the date that the last of each of the Harbert Family
Group (as defined in Section 5(e) hereof) and the Weinberg Family Group
(as defined in Section 5(e) hereof) shall Transfer (as defined in
Section 5(e) hereof) a portion of its Class A Common Stock so as to
reduce its Aggregate Equity Interest (as defined in Section 5(e)
hereof) in the Corporation to less than fifty percent (50%) of its
Initial Aggregate Equity Interest (as defined in Section 5(e) hereof)
in the Corporation; and
(ii) the death of the last to die of Norman C. Harbert,
Carl J. Harbert II, Ronald E. Weinberg, Sr. or Ronald E. Weinberg, Jr.
(c) A Family Group (as defined in Section 5(e) hereof) shall
permanently cease to have any of the voting rights specified in Section 5(a)
hereof with respect to all of its shares of Series D Preferred Stock from and
after the earlier to occur of:
(i) the date that such Family Group shall Transfer a
portion of its Class A Common Stock so as to reduce its Aggregate
Equity Interest in the Corporation to less than fifty percent (50%) of
its Initial Aggregate Equity Interest in the Corporation; and
(ii) the date that any member of such Family Group shall
Transfer any shares of Series D Preferred Stock, or shall grant or
assign (or agree to grant or assign) any right to vote or proxy with
respect to any such shares, in contravention of the restrictions set
forth in Section 6 hereof.
(d) No Person to whom any shares of Series D Preferred Stock
are Transferred, or to whom any right to vote or proxy with respect any shares
of Series D Preferred Stock is granted or assigned, in contravention of the
restrictions set forth in Section 6 hereof shall have any of the voting rights
specified in Section 5(a) hereof. In the event that any Person that is not an
individual and that is a member of a Family Group ceases to be controlled by or
maintained principally for the benefit of a member of any Family Group, such
Person shall cease to have any of the voting rights specified in Section 5(a)
hereof.
(e) For purposes hereof the following capitalized terms have
the meanings specified below:
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<PAGE> 15
(i) "Aggregate Equity Interest" shall mean the aggregate
equity interest in the Corporation of a particular Family Group
represented by the total number of shares of Class A Common Stock held
thereby.
(ii) "Family Group" shall mean any of the Harbert Family
Group, the Weinberg Family Group or the Krantz Family Group.
(iii) "Harbert Family Group" shall mean Norman C. Harbert,
members of the immediate family of the foregoing, any other lineal
descendants of the foregoing, any estate of any of the foregoing, any
trusts established principally for the benefit of any of the foregoing,
and any other entity controlled by any of the foregoing (including,
without limitation, the Harbert Family Limited Partnership), but shall
not include any entity that ceases to be controlled by or maintained
principally for the benefit of a member of the Harbert Family Group.
(iv) "Initial Aggregate Equity Interest" shall mean the
Aggregate Equity Interest of a Family Group on the Effective Date, as
appropriately adjusted to reflect any subsequent subdivision or
combination of the outstanding shares of Class A Common Stock into a
greater or lesser number of shares of Class A Common Stock, whether as
a result of a merger, consolidation, stock split, stock dividend,
reclassification or otherwise.
(v) "Krantz Family Group" shall mean Byron S. Krantz,
members of the immediate family of the foregoing, any other lineal
descendants of the foregoing, any estate of any of the foregoing, any
trusts established principally for the benefit of any of the foregoing,
and any other entity controlled by any of the foregoing (including,
without limitation, the Krantz Family Limited Partnership), but shall
not include any entity that ceases to be controlled by or maintained
principally for the benefit of a member of the Krantz Family Group.
(vi) "Person" shall mean any individual, corporation,
partnership, limited liability company, estate, trust, association,
private foundation, joint stock company or other entity, and shall also
mean a "group" as the term is used for purposes of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
(vii) "Transfer" shall mean any sale, transfer, gift,
hypothecation, pledge, assignment, devise or other disposition of
shares of Class A Common Stock or Series D Preferred Stock (including
the granting of any option to purchase, or the execution and delivery
of any agreement for the sale, transfer or other disposition of such
shares), whether voluntary, involuntary or by operation of law, and
whether of record, constructively, beneficially or otherwise. The terms
"Transfers" and "Transferred" shall have correlative meanings.
(viii) "Weinberg Family Group" shall mean Ronald E.
Weinberg, Sr., members of the immediate family of the foregoing, any
other lineal descendants of the
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<PAGE> 16
foregoing, any estate of any of the foregoing, any trusts established
principally for the benefit of any of the foregoing, and any other
entity controlled by any of the foregoing (including, without
limitation, the Weinberg Family Limited Partnership), but shall not
include any entity that ceases to be controlled by or maintained
principally for the benefit of a member of the Weinberg Family Group.
Section 6. Restrictions on Transfer.
(a) Until the Restrictions Termination Date (as defined in
Section 6(d) hereof) or until the holders of all outstanding shares of Series D
Preferred Stock agree otherwise in writing:
(i) Shares of Series D Preferred Stock may be Transferred
only among the Family Groups and among the members of such Family
Groups. Any Transfer of shares of Series D Preferred Stock in
contravention of such restriction shall have the consequences set forth
in Sections 5(c)(ii) and 5(d) hereof. In the event that any Person that
is not an individual and that is a member of a Family Group ceases to
be controlled by or maintained principally for the benefit of a member
of any Family Group, such event shall constitute a constructive
Transfer in contravention of this Section 6(a).
(ii) A holder of Series D Preferred Stock having the
voting rights set forth in Section 5(a) hereof may only grant or assign
such voting rights, revocably or irrevocably, to one or more Family
Groups or members of a Family Group.
(iii) Each certificate for shares of Series D Preferred
Stock issued by the Corporation shall bear the following legend:
The shares of Series D Preferred Stock represented by this
certificate are subject to certain restrictions set forth in
the Certificate of Designation of the Series D Preferred
Stock, which is incorporated by operation of law in the
Certificate of Incorporation of the Corporation. Any transfer
of the shares of Series D Preferred Stock represented by this
certificate in contravention of such restrictions shall result
in the loss of all voting rights applicable to such shares,
except as otherwise required by the Delaware General
Corporation Law. The Corporation will mail without charge to
any requesting stockholder a copy of the Certificate of
Incorporation, including the express terms of each class and
series of the authorized capital Stock of the Corporation,
within five days after receipt of a written request therefor.
(b) For purposes hereof the term "Restrictions Termination
Date" shall mean the date that all holders of Series D Preferred Stock
permanently cease to have any of the voting rights specified in Section 5(a)
hereof in accordance with the provisions of Section 5(b) or 5(c) hereof.
Section 7. Special Meetings. The Secretary of the Corporation may, and
upon the written request of the holders of at least ten percent (10%) of the
number of shares of the Series D
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<PAGE> 17
Preferred Stock then outstanding addressed to the Secretary at the principal
office of the Corporation shall, call a special meeting of the holders of the
Series D Preferred Stock for the purpose of exercising any of the voting rights
described in Section 5(a) hereof to be held in the case of such written request
within thirty days after delivery of such request, and in either case to be held
at a place and upon the notice provided by the Delaware General Corporation Law
and in the By-laws of the Corporation.
Section 8. Redemption.
(a) The Corporation may, at any time and from time to time as
may be determined by the Board of Directors, redeem all but not less than all,
of the Series D Preferred Stock for an amount equal to the Series D Liquidation
Preference plus all accrued dividends to the date of redemption, provided that
(i) the Corporation is not in default in the payment of any dividends on the
Series D Preferred Stock then outstanding, and (ii) the Corporation has obtained
the consent of any and all holders of Series D Preferred Stock that then have
any of the voting rights set forth in Section 5(a) hereof.
(b) The Corporation shall provide notice of any redemption
pursuant to this Section 8 specifying the time and place of redemption, by first
class or certified mail, postage prepaid, to each holder of shares of Series D
Preferred Stock at the address for such holder last shown on the records of the
Corporation or its transfer agent, not more than sixty nor less than thirty days
before the applicable redemption date. Upon mailing of any such notice of
redemption, the Corporation shall become obligated to redeem Series D Preferred
Stock specified in such notice.
(c) No redeemed shares of Series D Preferred Stock shall be
entitled to any dividends declared after the redemption date, and on such date
all rights of the holder of such shares as a stockholder of the Corporation by
reason of the ownership of such shares shall cease, except the right to receive
the price of such shares without interest, upon presentation and surrender of
the certificate representing such shares, and such shares will not after such
redemption date be deemed to be outstanding.
(d) On or before the redemption date, the Corporation shall
deposit an amount equal to the Series D Liquidation Preference, plus all accrued
dividends to the redemption date, for all outstanding shares of Series D
Preferred Stock with a bank or trust company in a trust fund for the benefit of
the respective holders of the shares designated for redemption together with
instructions and authority to the bank or trust company to pay such price for
such shares to the respective holders, after the redemption date upon receipt of
notification from the Corporation that such holder has surrendered all of the
certificates representing such holder's shares of Series D Preferred Stock to
the Corporation. The Corporation shall have the right to request the return of
the balance of any monies deposited by the Corporation remaining unclaimed at
the expiration of sixty days following the redemption date.
Section 9. Reacquired Shares. Any shares of Series D Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled
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<PAGE> 18
promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Serial Preferred Stock and
may be reissued as part of a new series of Serial Preferred Stock to be created
by resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
Section 10. Ranking. Subject to Section 5(a)(iv)(C) hereof the Series D
Preferred Stock shall rank on a parity with all other series of the Serial
Preferred Stock as to the payment of dividends and the distribution of assets.
Section 11. Severability. In the event any term, provision, sentence or
paragraph of this Certificate of Designation is declared by a court of competent
jurisdiction to be invalid or unenforceable, such term, provision, sentence or
paragraph shall be deemed severed from the remainder of this Certificate of
Designation, and the balance of this Certificate of Designation shall remain in
effect and be enforced to the fullest extent permitted by law and shall be
construed to preserve the intent and purposes of this Certificate of
Designation. Any such invalidity or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such term, provision, sentence or
paragraph of this Certificate of Designation in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Certificate of Designation, and hereby affirm the foregoing as true under the
penalties of perjury, as of this _____ day of January, 1998.
------------------------------
Name: Norman C. Harbert
Title: Chairman of the Board
Attest:
- -----------------------------------
Name: Byron S. Krantz
Title: Secretary
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<PAGE> 19
FORM
OF
CERTIFICATE OF DESIGNATION
OF
THE SERIES E PREFERRED STOCK
OF
HAWK CORPORATION
PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW
Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board
and Secretary, respectively, of Hawk Corporation, a Delaware corporation (the
"Corporation"), hereby certify that:
Pursuant to authority conferred upon the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation, and
pursuant to the provisions of Section 151 of the Delaware General
Corporation Law, the Board of Directors, at a telephonic meeting held
on November 13, 1997, duly adopted a resolution creating a new series
of Serial Preferred Stock, par value $0.01 per share, of the
Corporation, as follows:
RESOLVED, that pursuant to the authority expressly
vested in the Board of Directors of the Corporation in
accordance with the provisions of its Certificate of
Incorporation, a new series of Serial Preferred Stock of the
Corporation is hereby created (the "Series E Preferred
Stock"), of which the powers, designations, preferences and
relative, participating, optional or other rights, and
qualifications and restrictions, shall be as follows:
Section 1. Designation and Amount. There shall be a series of the
Serial Preferred Stock of the Corporation that shall be designated as the
"Series E Preferred Stock," par value $0.01 per share, and the number of shares
constituting such series shall be 100,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided that no
decrease shall reduce the number of shares of Series E Preferred Stock to a
number less than that of the shares then outstanding plus the number of shares
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.
Section 2. Dividends and Distributions. The holders of shares of Series
E Preferred Stock shall be entitled to receive, out of any funds legally
available and when and as declared by the Board of Directors, dividends and
other distributions of the same kind but at the rate of 1,000 times the
aggregate amount per share of the dividends or other distributions received by
the holders of shares of Common Stock, par value $0.01 per share, of the
Corporation (the "Common Stock"). Dividends and other distributions shall be
declared and paid to the holders of shares of Series E
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<PAGE> 20
Preferred Stock of record, on such dates respectively preceding the payment
thereof as may be fixed by the Board of Directors in declaring any such
dividends, at the same time that dividends or other distributions are declared
and paid to holders of shares of Common Stock. Such dividends shall not accrue
or be cumulative. In the event the Corporation shall, at any time after the
January 16, 1998 (the "Effective Date"), (i) declare any dividend on the Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares
of Common Stock or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the number of votes per share
to which holders of shares of Series E Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of shares of Common Stock that were outstanding immediately prior to such
event.
Section 3. Voting Rights. The holders of shares of Series E Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each share of Series E Preferred Stock shall entitle the holder thereof
to 1,000 votes on all matters submitted to a vote of the holders of shares of
Class A Common Stock of the Corporation (the "Class A Common Stock"). In the
event the Corporation shall, at any time after the Effective Date, (i) declare
any dividend on shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of shares of Series E
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders
of shares of Series E Preferred Stock and the holders of shares of Class A
Common Stock shall vote together as one class on all matters submitted to a vote
of the holders of the Class A Common Stock.
(c) Except as set forth herein, holders of shares of Series E
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
shares of Class A Common Stock as set forth herein) for taking any corporate
action.
Section 4. Reacquired Shares. Any shares of Series E Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Serial Preferred Stock and may be reissued as part of a new series of Serial
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
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Section 5. Liquidation, Dissolution or Winding Up. The holders of shares
of Series E Preferred Stock shall, in case of liquidation, dissolution, or
winding up of the affairs of the Corporation, be entitled to receive in full,
out of the assets of the Corporation, including its capital, an amount equal to
1,000 times the aggregate amount to be distributed per share to holders of
Common Stock, subject to the provision for adjustment hereinafter set forth. In
the event the Corporation shall at any time (i) declare any dividend on shares
of Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the
aggregate amount to which holders of shares of Series E Preferred Stock were
entitled immediately prior to such event under the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. Except as set forth above, the
holders of shares of Series E Preferred Stock shall have the same rights and
shall be treated in the same manner with respect to any liquidation, dissolution
or winding up as holders of shares of Common Stock.
Section 6. Consolidation, Merger, Etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the holders of
shares of Series E Preferred Stock shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Effective Date (i)
declare any dividend on the Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of shares
of Series E Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
Section 8. Redemption. The Series E Preferred Stock shall not be
redeemable.
Section 9. Ranking. The Series E Preferred Stock shall rank junior to
all other series of the Serial Preferred Stock as to the payment of dividends
and the distribution of assets, unless the terms of any such series shall
specifically provide otherwise.
Section 10. Amendment. The Second Amended and Restated Certificate of
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the shares of Series E Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least two-thirds (66 2/3%) of the
outstanding shares of Series E Preferred Stock, voting separately as a class.
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Section 11. Fractional Shares. Shares of Series E Preferred Stock may be
issued in fractions of a share that are one one-thousandths or integral
multiples of one one-thousandths of a share, which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of the holders of Series E Preferred Stock.
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Certificate of Designation, and hereby affirm the foregoing as true under the
penalties of perjury, as of this _____ day of January, 1998.
-------------------------------------
Name: Norman C. Harbert
Title: Chairman of the Board
Attest:
- -------------------------------------------
Name: Byron S. Krantz
Title: Secretary
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Exhibit 3.2
FORM OF
AMENDED AND RESTATED BY-LAWS
OF
HAWK CORPORATION
ARTICLE I
STOCKHOLDERS
1.1. Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as may be designated by resolution of the
Board of Directors of the Corporation (the "Board"). Any other proper business
may be transacted at the annual meeting.
1.2. Special Meetings. Except as otherwise required by the General
Corporation Law of the State of Delaware as it presently exists or may be
amended in the future (the "Delaware General Corporation Law"), special meetings
of the holders of the Class A Common Stock, par value $0.01 per share, or Class
B Non-Voting Common Stock, par value $0.01 per share, of the Corporation
(together, the "Common Stock") may be called only as set forth in the
certificate of incorporation of the Corporation, as amended and/or restated
from time to time (the "Certificate of Incorporation").
1.3. Notice of Meetings. Written notice of every meeting of
stockholders shall be given not less than ten nor more than sixty days before
the date of the meeting by or at the direction of the President, the Secretary
or such other person as the Board may appoint, to each stockholder entitled to
vote at such meeting. The notice shall include the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. If mailed, notice shall be deemed to be given when
deposited in the mail, postage prepaid, directed to the stockholder at his
address as it appears on the records of the Corporation.
1.4. Waiver of Notice of Meetings of Stockholders. Any written
waiver of notice, signed by a stockholder entitled to notice, shall be deemed
equivalent to notice. Attendance of a stockholder at a meeting constitutes a
waiver of notice of such meeting, except when the stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, need be specified in any written
waiver of notice.
1.5. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such reconvened meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the reconvened meeting, the Corporation may transact any business
which could have been transacted at the original meeting. If the adjournment is
for more than thirty days,
<PAGE> 2
or if after the adjournment a new record date is fixed for the reconvened
meeting, a notice of the reconvened meeting shall be given to each
stockholder of record entitled to vote at the meeting.
1.6. Quorum. Except as otherwise provided by the Delaware
General Corporation Law, the Certificate of Incorporation or these By-laws, at
each meeting of stockholders the presence in person or by proxy of the holders
of shares of stock having a majority of the votes which could be cast by the
holders of all outstanding shares of stock entitled to vote at the meeting shall
be necessary and sufficient to constitute a quorum. Shares of stock of the
Corporation belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held, directly or indirectly, by the Corporation, will
neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing does not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
In the absence of a quorum, the stockholders so present
may, by majority vote, adjourn the meeting from time to time in the manner
provided in Section 1.5 of these Amended and Restated By-laws (the "By-laws")
until a quorum is in attendance.
1.7. Organization of Meetings. Meetings of stockholders shall
be presided over by the Chairman of the Board or, if the Chairman of the Board
is not present, by the Vice-Chairman of the Board or, in the absence of the
foregoing persons, by a chairman chosen by the stockholders at the meeting. The
Secretary shall act as secretary of the meeting, but in his absence the chairman
of the meeting may appoint any person to act as secretary of the meeting.
1.8. Action by Vote. Except as otherwise provided by the
Certificate of Incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him which has voting power upon the matter in question.
Except as otherwise provided by the Certificate of
Incorporation, at all meetings of stockholders for the election of directors, a
plurality of the votes cast shall be sufficient to elect directors. Unless
otherwise provided by the Delaware General Corporation Law, the Certificate of
Incorporation or these By-laws, all other elections, proposals and questions
shall be determined by the vote of the holders of shares of stock having a
majority of the votes which could be cast by the holders of all shares of stock
entitled to vote thereon which are present in person or represented by proxy at
the meeting.
Voting at stockholder meetings need not be by written
ballot.
1.9. Representation by Proxy. Each stockholder entitled to
vote at a meeting of stockholders may authorize another person or persons to
act for him by proxy. A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting
in person or by filing an
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<PAGE> 3
instrument in writing revoking the proxy or another duly executed
proxy bearing a later date wi th the Secretary prior to the taking of a vote.
1.10. Inspectors of Election. The Board in advance of any meeting
of stockholders shall appoint one or more inspectors of election ("Inspectors of
Election") to act at the meeting or any adjournment of the meeting. Each
Inspector of Election, before entering upon the discharge of his duties, must
take and sign an oath faithfully to execute the duties of Inspector of Election
at such meeting with strict impartiality and according to the best of his
ability. Inspectors of Election shall take charge of the polls and, when the
vote is completed, shall make a certificate of the result of the vote taken and
of such other facts as may be required by the Delaware General Corporation Law.
The Inspectors of Election may appoint or retain other persons or entities to
assist them in the performance of their duties as inspectors.
1.11. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board and
which record date:
(a) in the case of determination of stockholders entitled
to notice of or to vote at any meeting of
stockholders or adjournment thereof, shall, unless
otherwise required by the Delaware General
Corporation Law, not be more than sixty nor less than
ten days before the date of such meeting; and
(b) in the case of any other action, shall not be more
than sixty days prior to such other action.
If no record date is fixed:
(a) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next
preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day
next preceding the day on which the meeting is held;
and
(b) the record date for determining stockholders for any
other purpose shall be at the close of business on
the day on which the Board adopts the resolution
relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record date for the
reconvened meeting.
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1.12. List of Stockholders Entitled to Vote. The officer or agent
responsible for maintaining the stock ledger of the Corporation shall prepare,
at least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof and may be inspected
by any stockholder who is present. The stock ledger shall be the only evidence
as to who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of stockholders.
1.13. Advance Notice of Stockholder Proposed Business. At a meeting
of the holders of the Common Stock, only such business may be conducted as is
properly brought before the meeting. To be properly brought before a meeting,
business must be either (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board, (ii) otherwise
properly brought before the meeting by or at the direction of the Board, or
(iii) otherwise properly brought before the meeting by a holder of Common Stock.
In addition to any other applicable requirements, for business to be properly
brought before a meeting of the holders of the Common Stock, the stockholder
must have given timely notice thereof in writing to the Secretary. To be timely,
a stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty days nor more
than ninety days prior to the meeting; provided, however, that in the event that
less than seventy days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever occurs first; and provided further
that in the event Rule 14a-8, as amended from time to time, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), requires that notice of a
stockholder's proposal be received by the Corporation more than ninety days
prior to the meeting, such longer notice period shall control. A stockholder's
notice to the Secretary must set forth as to each matter the stockholder
proposes to bring before the meeting (i) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class and number of shares of Common Stock
that are beneficially owned by the stockholder, and (iv) any material interest
of the stockholder in such business.
Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at a meeting of the holders of the Common Stock
except in accordance with the procedures set forth in this Section 1.13;
provided, however, that nothing in this Section 1.13 shall be deemed to preclude
discussion by any stockholder of any business properly brought before such a
meeting in accordance with said procedure.
The chairman at a meeting of the holders of the Common
Stock shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 1.13, and if he should so determine, he
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<PAGE> 5
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted.
Notwithstanding anything contained in these By-laws to the
contrary, this Section 1.13 shall not be altered, amended or repealed except by
the Board pursuant to the Certificate of Incorporation or an affirmative vote of
at least two-thirds of the outstanding shares of all capital stock entitled to
vote at a stockholders' meeting duly called for such purpose.
1.14. Elimination of Action By Written Consent of Stockholders. No
action required to be taken or which may be taken at any annual or special
meeting of holders of the Common Stock may be taken without a vote at a meeting
duly called and held for such purpose, and the right of such holders to consent
in writing, without a meeting, to the taking of any action is specifically
denied.
Notwithstanding anything contained in these By-laws to the
contrary, this Section 1.14 shall not be altered, amended or repealed except by
the Board pursuant to the Certificate of Incorporation or an affirmative vote of
at least two-thirds of the outstanding shares of all capital stock entitled to
vote at a stockholders' meeting duly called for such purpose.
ARTICLE II
BOARD OF DIRECTORS
2.1. Powers. Subject to applicable provisions of the Delaware
General Corporation Law and any limitations in the Certificate of Incorporation
or these By-laws, the Board shall manage the business and affairs of the
Corporation and exercise all corporate powers.
2.2. Number and Term. The number of directors of the Corporation
and the terms of office of such directors shall be as set forth in the
Certificate of Incorporation.
2.3. Election; Removal; Vacancies; Resignation. The election and
removal of directors and the filling of vacancies on the Board shall be as set
forth in the Certificate of Incorporation. Any director may resign at any time
upon written notice to the Corporation. Such resignation shall take effect on
the date of receipt of such notice or at any later time set forth in such notice
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
2.4. Regular Meetings. The Board shall hold a regular meeting
immediately after each annual meeting of stockholders. Other regular meetings of
the Board may be held at such places within or without the State of Delaware and
at such times as the Board may determine. Notice of a regular meeting need not
be given.
2.5. Special Meetings. Special meetings of the Board may be held
at any time or place within or without the State of Delaware whenever called
by the Chairman of the Board or the Vice-Chairman of the Board. Notice of a
special meeting of the Board shall be given by the officer calling the meeting
at least twenty-four hours before the special meeting.
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2.6. Waiver of Notice of Meetings of Directors. Any written waiver
of notice, signed by a director entitled to notice, shall be deemed equivalent
to notice. Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except when the director attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the directors, need be specified in any written
waiver of notice.
2.7. Quorum; Vote Required for Action. At all meetings of the
Board a majority of the whole Board shall constitute a quorum for the
transaction of business. In the absence of a quorum, the directors present at
the meeting may adjourn the meeting until a majority attends. Except in cases in
which the Certificate of Incorporation or these By-laws otherwise provide, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board.
2.8. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of the Corporation's directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of the Corporation's
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the
director or officer is present at or participates in the meeting of the Board or
committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if:
(a) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed
or are known to the Board or the committee, and the
Board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though
the disinterested directors are less than a quorum;
or
(b) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote
thereon, and the contract or transaction is
specifically approved in good faith by vote of the
stockholders; or
(c) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved
or ratified, by the Board, a committee thereof, or
the stockholders.
Interested directors may be counted in determining the
presence of a quorum at a meeting of the Board or of a committee which
authorizes the contract or transaction.
2.9. Organization of Meetings. Meetings of the Board shall be
presided over by the Chairman of the Board or, if the Chairman of the Board is
not present, by the Vice-Chairman of the Board or, in their absence, by a
chairman chosen by the directors at the meeting. The Secretary shall
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<PAGE> 7
act as secretary of the meeting, but in his absence the chairman of the meeting
may appoint any person to act as secretary of the meeting.
2.10. Telephonic Meetings Permitted. Members of the Board, or any
committee designated by the Board, may participate in meetings by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meetings can hear each other, and participation in
meetings pursuant to this Section shall constitute presence in person at such
meetings.
2.11. Action by Written Consent of Directors. Unless otherwise
restricted by the Certificate of Incorporation or these By-laws, any action
required or permitted to be taken at any meeting of the Board, or of any
committee thereof, may be taken without a meeting if all members of the Board or
such committee, as the case may be, consent in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or such
committee.
2.12. Compensation of Directors. In the discretion of the Board, the
Corporation may pay each director such fees for his services as director and
reimburse him for his reasonable expenses incurred in the performance of his
duties as director, as determined by the Board. Nothing contained in this
Section may be construed to preclude any director from serving the Corporation
in any other capacity and receiving reasonable compensation for such service.
Members of any special or standing committees may be allowed like compensation
for attending committee meetings.
2.13. Committees. The Board may, by resolution, designate, change
the membership of or terminate the existence of any committee or committees.
Each committee shall consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member
of the committee, the member or members of the committee present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by the Delaware General Corporation Law and to the
extent provided in the resolution of the Board, shall have and may exercise all
the powers and authority of the Board in the management of the business and
affairs of the Corporation.
2.14. Committee Rules. Unless the Board otherwise provides, each
committee designated by the Board may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board conducts its business
pursuant to Article II of these By-laws.
2.15. Stockholder Nominations for Director Candidates. Except as may
otherwise be provided in the Certificate of Incorporation, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the Board may be
made at a meeting of stockholders only (i) by or at the direction of the Board,
(ii) by any nominating committee or person appointed by the Board or (iii) by
any stockholder of
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the Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 2.15. Such
nominations, other than those made by or at the direction of the Board, must be
made pursuant to timely notice in writing to the Secretary. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty days nor more
than ninety days prior to the meeting; provided, however, that in the event that
less than seventy days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the date on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever occurs first. Such stockholder's
notice to the Secretary must set forth: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (a)
the name, age, business address and residence address of the person, (b) the
principal occupation or employment of the person, (c) the class and number of
shares of capital stock of the Corporation that are beneficially owned by the
person, and (d) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
Rule 14a, as amended from time to time, under the Exchange Act; and (ii) as to
the stockholder giving the notice, (a) the name and record address of the
stockholder, and (b) the class and number of shares of capital stock of the
Corporation that are beneficially owned by the stockholder. The Corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the Corporation to determine the eligibility of such proposed
nominee to serve as a director of the Corporation. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure and, if he should so determine and
declare, the defective nomination shall be disregarded.
Notwithstanding anything contained in these By-laws to the
contrary, this Section 2.15 shall not be altered, amended or repealed except by
the Board pursuant to the Certificate of Incorporation or by an affirmative
vote of at least two-thirds of the outstanding shares of all capital stock
entitled to vote at a stockholders' meeting duly called for such purpose.
ARTICLE III
OFFICERS
3.1. Enumeration; Appointment. The Board shall appoint a President,
Secretary and Treasurer, and it may, if it so determines, elect a Chairman of
the Board and/or Vice-Chairman of the Board from among its members. The Board
may also appoint, or empower the Chairman or Vice-Chairman of the Board, or the
President, to appoint, such other officers and agents as the business of the
Corporation may require. Any number of offices may be held by the same person.
The Board may require any officer, agent or employee to give security for the
faithful performance of his duties.
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3.2. Term of Office; Resignation; Removal; Vacancies. Each officer
shall hold office until his successor is appointed and qualified or until his
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Corporation. The Board may, when in its judgment the best
interests of the Corporation will be served, remove any officer with or without
cause at any time, but such removal shall be without prejudice to the
contractual rights of such officer, if any, with the Corporation. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board.
3.3. Powers and Duties. The officers of the Corporation shall have
such powers and duties in the management of the Corporation as may be prescribed
in these By-laws and by the Board and, to the extent not so provided, as
generally pertain to their respective offices, subject to the control of
the Board.
3.4. Compensation of Officers. The Board shall determine the
officers' salaries, and no officer shall be prevented from receiving such
compensation by reason of the fact that he is also a director of the
Corporation.
ARTICLE IV
CAPITAL STOCK
4.1. Stock Certificates. Every stockholder, upon written request,
shall be entitled to a certificate signed by or in the name of the Corporation
by two officers of the Corporation, certifying the number of shares owned by him
in the Corporation. Any or all of the signatures on the certificate may be by
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
4.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. Upon written request by a stockholder, the Corporation may issue a
new certificate of stock in the place of any certificate previously issued by
the Corporation, alleged to have been lost, stolen or destroyed. The Corporation
may require the owner of the lost, stolen or destroyed certificate, or his
legal representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
4.3. Transfer on Books. Subject to the restrictions, if any,
stated or noted on the stock certificate, shares of stock may be transferred on
the books of the Corporation by the surrender to the Corporation or its transfer
agent of the stock certificate properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with any necessary transfer
stamps affixed and with such proof of the authenticity of signature as the
Board or the transfer agent of the Corporation may reasonably require.
-9-
<PAGE> 10
4.4. Registered Stockholders. Except as may be otherwise required
by the Delaware General Corporation Law, by the Certificate of Incorporation or
by these By-laws, the Corporation shall be entitled to treat the record holder
of stock as shown on its books as the owner of such stock for all purposes,
including the payment of dividends and the right to receive notice and to vote
or to give any consent with respect to such stock and to be held liable for
such calls and assessments, if any, as may lawfully be made on such stock,
regardless of any transfer, pledge or other disposition of such stock until the
shares have been properly transferred on the books of the Corporation. It shall
be the duty of each stockholder to notify the Corporation of his current
mailing address.
ARTICLE V
MISCELLANEOUS
5.1. Certificate of Incorporation. These By-laws are subject to the
Certificate of Incorporation and, in the case of any conflict with the
Certificate of Incorporation, the Certificate of Incorporation shall control.
5.2. Amendment of By-laws. These By-laws may be amended or
repealed, and new by-laws may be made, by the Board.
5.3. Location of Records. The books and records of the Corporation
may be kept outside of the State of Delaware at such location or locations as
may be designated from time to time by the Board.
5.4. Fiscal Year. The fiscal year of the Corporation shall be the
calendar year, unless otherwise fixed by resolution of the Board.
5.5. Corporate Seal. The Corporation shall not have a corporate
seal.
*
- 10 -
<PAGE> 1
Exhibit 4.2
================================================================================
FORM OF
RIGHTS AGREEMENT
DATED AS OF JANUARY 16, 1998
BETWEEN
HAWK CORPORATION
AND
CONTINENTAL STOCK
TRANSFER & TRUST COMPANY,
AS RIGHTS AGENT
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Defined Term Cross Reference Sheet.........................................................................iv
Section 1. Certain Definitions.............................................................................1
Section 2. Appointment of Rights Agent.....................................................................6
Section 3. Issue of Rights Certificates....................................................................6
Section 4. Form of Rights Certificate......................................................................8
Section 5. Countersignature and Registration...............................................................9
Section 6. Transfer, Split-Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost
or Stolen Rights Certificates...................................................................9
Section 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights.................................................................................10
Section 8. Cancellation and Destruction of Rights
Certificates...................................................................................12
Section 9. Reservation and Availability of Preferred Stock................................................13
Section 10. Preferred Shares Record Date...................................................................14
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights.....................................................................14
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares...............................................................................21
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power........................................................................21
Section 14. Fractional Rights and Fractional Shares........................................................23
Section 15. Rights of Action...............................................................................25
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 16. Agreement of Rights Holders....................................................................25
Section 17. Rights Certificate Holder Not Deemed a
Stockholder....................................................................................26
Section 18. Concerning the Rights Agent....................................................................26
Section 19. Merger or Consolidation or Change of Name of
Rights Agent...................................................................................27
Section 20. Duties of Rights Agent.........................................................................27
Section 21. Change of Rights Agent.........................................................................29
Section 22. Issuance of New Rights Certificates............................................................30
Section 23. Redemption and Termination.....................................................................30
Section 24. Exchange.......................................................................................32
Section 25. Notice of Certain Events.......................................................................33
Section 26. Notices........................................................................................34
Section 27. Supplements and Amendments.....................................................................34
Section 28. Determination and Actions by the Board of
Directors, etc.................................................................................35
Section 29. Successors.....................................................................................35
Section 30. Benefits of this Agreement.....................................................................35
Section 31. Severability...................................................................................36
Section 32. Governing Law..................................................................................36
Section 33. Counterparts...................................................................................36
Section 34. Descriptive Headings...........................................................................36
</TABLE>
iii
<PAGE> 4
DEFINED TERM CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C>
Acquiring Person..................................................................................Section 1(a)
Act...............................................................................................Section 1(b)
Adjustment Shares............................................................................Section 11(a)(ii)
Adjusted Number of Shares...................................................................Section 11(a)(iii)
Adjusted Purchase Price.....................................................................Section 11(a)(iii)
Affiliate.........................................................................................Section 1(c)
Agreement.............................................................................................Preface
Associate........................................................................................Section 1 (c)
Beneficial Owner..................................................................................Section 1(d)
beneficially own..................................................................................Section 1(d)
Business Day......................................................................................Section 1(e)
capital stock equivalent....................................................................Section 11(a)(iii)
close of business.................................................................................Section 1(f)
Class A Common Shares.............................................................................Section 1(g)
Class B Common Shares.............................................................................Section 1(h)
Common Shares.....................................................................................Section 1(i)
Company...............................................................................................Preface
current per share market price...............................................................Section 11(d)(ii)
Disinterested Director............................................................................Section 1(j)
Distribution Date.................................................................................Section 1(k)
Effective Date........................................................................................Preface
equivalent preferred shares......................................................................Section 11(b)
Exchange Act......................................................................................Section 1(l)
Exchange Ratio...................................................................................Section 24(a)
Exempt Event......................................................................................Section 1(m)
Exempt Person.....................................................................................Section 1(n)
Final Expiration Date.............................................................................Section 1(o)
Interested Stockholder............................................................................Section 1(p)
NASDAQ............................................................................................Section 1(q)
Permitted Offer...................................................................................Section 1(r)
Person............................................................................................Section 1(s)
Preferred Shares..................................................................................Section 1(t)
Principal Party..................................................................................Section 13(b)
</TABLE>
iv
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
Proration Factor............................................................................Section 11(a)(iii)
Purchase Price....................................................................................Section 1(u)
Redemption Date...................................................................................Section 1(v)
Redemption Price..............................................................................Section 23(a)(i)
Right.................................................................................................Preface
Rights Certificate................................................................................Section 3(a)
Rights Agent..........................................................................................Preface
Rights Agreement..................................................................................Section 3(c)
Section 11(a)(ii) Event...........................................................................Section 1(w)
Section 13 Event..................................................................................Section 1(x)
Security......................................................................................Section 11(d)(i)
Shares Acquisition Date...........................................................................Section 1(y)
Subsidiary........................................................................................Section 1(z)
Summary of Rights.................................................................................Section 3(b)
then outstanding.............................................................................Section 1(d)(iii)
Trading Day...................................................................................Section 11(d)(i)
Triggering Event.................................................................................Section 1(aa)
voting securities................................................................................Section 13(a)
</TABLE>
v
<PAGE> 6
FORM OF
RIGHTS AGREEMENT
THIS RIGHTS AGREEMENT, dated as of January 16, 1998 (the "Agreement"), is
made and entered into between HAWK CORPORATION, a Delaware corporation (the
"Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Rights Agent (the
"Rights Agent").
On November 13, 1997, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
Common Share (as hereinafter defined) of the Company outstanding at the close of
business on January 16, 1998 (the "Effective Date"), each Right representing the
right to purchase one one-thousandth of a share of Series E Preferred Stock, par
value $0.01 par value, of the Company, having the rights, powers and preferences
set forth in the form of Certificate of Designation attached hereto as Exhibit
A, upon the terms and subject to the conditions hereinafter set forth, and has
further authorized and directed the issuance of one Right with respect to each
Common Share that shall become outstanding between the Effective Date and the
Distribution Date (as such terms are hereinafter defined), provided, however,
that Rights may be issued with respect to Common Shares that shall become
outstanding after the Distribution Date and prior to the earlier of the
Redemption Date and the Final Expiration Date in accordance with the provisions
of Section 22 of this Agreement.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the then outstanding Class A Common Shares (other than as a
result of a Permitted Offer (as hereinafter defined)) or was such a Beneficial
Owner at any time after the date hereof, whether or not such Person continues to
be the Beneficial Owner of 15% or more of the then outstanding Class A Common
Shares, but shall not include the Company, any Subsidiary of the Company, any
employee benefit plan or employee stock ownership plan of the Company or of any
Subsidiary of the Company or any person organized, appointed or established by
the Company or any Subsidiary of the Company for or pursuant to the terms of any
such plan. In any case, an Exempt Person (as such term is hereinafter defined),
so long as such Person remains an Exempt Person, is not an Acquiring Person and
an acquisition of Class A Common Shares by an Exempt Person is not a Triggering
Event, so long as such acquisition is an Exempt Event.
Notwithstanding the foregoing, no Person shall become an "Acquiring
Person:" (i) as the result of an acquisition of Class A Common Shares by the
Company that, by reducing the number
1
<PAGE> 7
of shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 15% or more of the Class A Common Shares then
outstanding; (ii) as the result of such Person becoming the Beneficial Owner of
15% or more of the Class A Common Shares then outstanding as determined above
solely as a result of an Exempt Event; provided, however, that if a Person
becomes the Beneficial Owner of 15% or more of the Class A Common Shares then
outstanding by reason of such a share acquisition by the Company or the
occurrence of such an Exempt Event and such Person shall, after becoming the
Beneficial Owner of any such Class A Common Shares, become the Beneficial Owner
of any additional Class A Common Shares by any means whatsoever (other than as a
result of the subsequent occurrence of an Exempt Event, a share acquisition by
the Company, a stock dividend or a subdivision of the Class A Common Shares into
a larger number of shares or a similar transaction), then such Person shall be
deemed to be an "Acquiring Person;" or (iii) if (A) within five Business Days
after such Person would otherwise have become an Acquiring Person (but for the
operation of this subclause (iii)), such Person notifies the Board of Directors
that such Person did so inadvertently, and (B) within two Business Days after
such notification (or such greater period of time as may be determined by action
of the Board of Directors, but in no event greater than five Business Days),
such Person divests itself of a sufficient number of Class A Common Shares so
that such Person is the Beneficial Owner of less than 15% of the outstanding
Class A Common Shares.
(b) "Act" shall mean the Securities Act of 1933, as amended and as in
effect on the date of this Agreement.
(c) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act; provided, however, that, for purposes of this Agreement, the terms
"Affiliate" and "Associate" shall not include any Person that is an Exempt
Person.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own," any securities:
(i) that such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) that such Person or any of such Person's Affiliates or Associates
has (A) the right or obligation to acquire (whether such right or obligation is
exercisable or effective immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding (whether or not in writing), or
upon the exercise of conversion rights, exchange rights, rights (other than the
Rights), warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own, securities
tendered pursuant to a tender or exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange; or (B) the right to vote
pursuant to any agreement, arrangement or understanding; provided, however, that
a Person shall not be deemed the Beneficial Owner of, or to beneficially own,
any security if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or
2
<PAGE> 8
consent given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations promulgated under the Exchange Act and (2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); and provided further, that prior to the occurrence of a
Triggering Event, a Person shall not be deemed to be the "Beneficial Owner" of
or to "beneficially own" securities issuable upon exercise of the Rights; or
(iii) that are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person (or any of
such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing) (other than customary agreements with
and between underwriters and selling group members with respect to a bona fide
public offering of securities) relating to the acquisition, holding, voting
(except to the extent contemplated by the proviso to Section l(d)(ii)(B)) or
disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, (x) the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder, and (y) no Person is to be deemed
a "Beneficial Owner" of, or to "beneficially own," any securities owned by any
other Person that is an Exempt Person.
(e) "Business Day" shall mean any day other than a Saturday, Sunday,
federal holiday or a day on which banking institutions in the State of Ohio are
authorized or obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00 P.M., Cleveland,
Ohio time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Cleveland, Ohio time, on the next succeeding
Business Day.
(g) "Class A Common Shares" when used with reference to the Company shall
mean shares of the Class A Common Stock, par value $0.01 per share, of the
Company.
(h) "Class B Common Shares" when used with reference to the Company shall
mean shares of the Class B Non-Voting Common Stock, par value $0.01 per share,
of the Company.
(i) "Common Shares" when used with reference to the Company shall mean the
shares of Class A Common Stock and Class B Common Stock. "Common Shares" when
used with reference to any Person other than the Company shall mean the capital
stock (or equity interest) with the greatest voting power of such other Person
or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
3
<PAGE> 9
(j) "Disinterested Director" means any director of the Board of Directors
of the Company who is not (i) a Person proposing or attempting to effect a
business combination or similar transaction with the Company (including, without
limitation, a merger, tender offer or exchange offer, sale of substantially all
of the Company's assets, or liquidation of the Company's assets) or any
Affiliate or Associate of such Person or Person acting directly or indirectly on
behalf of, or as a representative of, or in concert with, any such Person,
Affiliate or Associate, (ii) an Acquiring Person, an Affiliate or Associate of
an Acquiring Person, or a Person acting directly or indirectly on behalf of, or
as a representative of, or in concert with, an Acquiring Person or an Affiliate
or Associate of an Acquiring Person, or (iii) any Person who was directly or
indirectly proposed or nominated as a director of the Company by an Acquiring
Person.
(k) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect on the date of this Agreement.
(m) "Exempt Event" shall mean (i) the acquisition of additional Common
Shares by an Exempt Person, so long as such Person does not cease to be an
Exempt Person under Section 1(n), or (ii) with respect to any Person, the
acquisition by such Person of Beneficial Ownership of Class A Common Shares
solely as a result of the occurrence of a Triggering Event and the effect of
such Triggering Event on the last proviso of Section 1(d)(ii), other than a
Triggering Event in which such Person becomes an Acquiring Person.
(n) "Exempt Person" shall mean: (i) the Company; (ii) any Subsidiary; (iii)
any employee benefit plan of the Company or of any Subsidiary; (iv) any Person
holding Common Shares for any such employee benefit plan or for employees of the
Company or of any Subsidiary pursuant to the terms of such employee benefit
plan; (v) Norman C. Harbert, his spouse or issue, any trust of which Mr. Harbert
and/or his spouse is the grantor of or of which Mr. Harbert, his spouse, his
issue or any charity is a beneficiary, the Harbert Family Limited Partnership,
an Ohio limited partnership, and any Person controlled, directly or indirectly,
by Mr. Harbert; (vi) Ronald E. Weinberg, his spouse or issue, any trust of which
Mr. Weinberg and/or his spouse is the grantor of or of which Mr. Weinberg, his
spouse, his issue or any charity is a beneficiary, the Weinberg Family Limited
Partnership, an Ohio limited partnership, and any Person controlled, directly or
indirectly, by Mr. Weinberg; and (vii) William J. O'Neill, Jr., his spouse or
issue, any trust of which Mr. O'Neill and/or his spouse is the grantor of or of
which Mr. O'Neill, his spouse, his issue or any charity is a beneficiary, and
any Person controlled, directly or indirectly, by Mr. O'Neill; provided,
however, that an Exempt Person shall cease to be an Exempt Person at the time
that all or any part of such Exempt Person's interest in the Common Shares
becomes reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report) as part of a "group" (as that term is used in Rule 13d- 5(b)
of the General Rules and Regulations under the Exchange Act, or any successor
provision) that beneficially owns 15% or more of the then outstanding Class A
Common Shares and includes one or more Persons (including any Affiliate or
Associate thereof) who are not Exempt Persons and who individually or in the
aggregate beneficially own in excess of 1% of the then outstanding Class A
Common Shares (other than any group that may arise solely because of the (A)
Shareholders'
4
<PAGE> 10
Agreement, dated June 30, 1995, by and among Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited
Partnership, Byron S. Krantz, the Krantz Family Limited Partnership, Jeffrey H.
Berlin, Barry J. Feld, Thomas A. Gilbride, Jess F. Helsel, Fredric M. Roberts,
Gary Siciliano, Douglas D. Wilson and the Company, (B) Stockholders' Voting
Agreement, dated November 22, 1996, by and among Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited
Partnership, Byron S. Krantz, the Krantz Family Limited Partnership and the
Company and/or (C) Stockholders' Agreement, dated as of June 6, 1991, by and
among Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Dan T. Moore,
each as may be amended from time to time); and provided further that each of the
Persons named in Section 1(n)(vii) shall cease to be an Exempt Person at the
closing of the Company's initial public offering.
(o) "Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
(p) "Interested Stockholder" shall mean any Acquiring Person or any
Affiliate or Associate of an Acquiring Person or any other Person in which any
such Acquiring Person, Affiliate or Associate has an interest which represents
in excess of 5% of the total combined economic or voting power of such Person,
or any other Person acting directly or indirectly on behalf of, or in concert
with, any such Acquiring Person, Affiliate or Associate.
(q) "NASDAQ" shall mean the National Association of Securities Dealers,
Inc. Automated Quotation System.
(r) "Permitted Offer" shall mean a tender or exchange offer for all
outstanding Common Shares at a price and on terms determined, prior to the
purchase of shares under such tender or exchange offer, by at least a majority
of the Disinterested Directors to be adequate (taking into account all factors
that such directors deem relevant) and otherwise in the best interests of the
Company and its stockholders (other than the Person or any Affiliate or
Associate thereof on whose behalf the offer is being made) taking into account
all factors that such directors may deem relevant.
(s) "Person" shall mean any individual, firm, partnership, corporation,
limited liability company, trust, association, joint venture or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(t) "Preferred Shares" shall mean the Series E Preferred Stock, $0.01 par
value per share, of the Company, having the rights, powers and preferences set
forth in the form of Certificate of Designation attached hereto as Exhibit A.
(u) "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof, subject to adjustment as set forth in Section 7(b) hereof.
(v) "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
(w) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii) hereof.
5
<PAGE> 11
(x) "Section 13 Event" shall mean any event described in clause (x), (y) or
(z) of Section 13(a) hereof.
(y) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to the Exchange Act) by the Company or an
Acquiring Person that an Acquiring Person has become such; provided, that if
such Person is determined not to have become an Acquiring Person pursuant to
Section 1(a) hereof, then no Shares Acquisition Date shall be deemed to have
occurred.
(z) "Subsidiary" of any Person shall mean any corporation or other Person
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person, or which is
otherwise controlled by such Person.
(aa) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable. In the event the Company appoints one or more Co-Rights Agents, the
respective duties of the Rights Agents and any Co-Rights Agents shall be as the
Company shall determine.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the Shares Acquisition Date or (ii) the close
of business on the tenth day (or such later date as may be determined by action
of the Company's Board of Directors) after the date of the commencement by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan or employee stock ownership plan of the Company or of any
Subsidiary of the Company or any Person organized, appointed or established by
the Company or of any Subsidiary of the Company for or pursuant to the terms of
any such plan) of, or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan or employee stock ownership plan of the Company or of any
Subsidiary of the Company or any Person or entity organized, appointed or
established by the Company or of any Subsidiary of the Company for or pursuant
to the terms of any such plan) to commence (which intention to commence remains
in effect for five Business Days after such announcement), a tender or exchange
offer the consummation of which would result in any Person becoming an Acquiring
Person (including, in the case of both (i) and (ii), any such date which is
after the date of this Agreement and prior to the issuance of the Rights), the
earlier of such dates being herein referred to as the "Distribution Date," (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Rights Certificates) and
not by separate Rights Certificates, and (y) the right to receive Rights
Certificates will be transferable only
6
<PAGE> 12
in connection with the transfer of the underlying Common Shares (including a
transfer to the Company); provided, however, that if a tender offer is
terminated prior to the occurrence of a Distribution Date, then no Distribution
Date shall occur as a result of such tender offer. As soon as practicable after
the Distribution Date, the Company will prepare and execute, the Rights Agent
will countersign, and the Company will send or cause to be sent by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the close of
business on the Distribution Date, at the address of such holder shown on the
records of the Company, a Rights Certificate, in substantially the form of
Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each Common
Share so held. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) As promptly as practicable following the Effective Date, the Company
will send a copy of a Summary of Rights to Purchase Series E Preferred Shares,
in substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Effective Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Effective Date, until the Distribution Date, the Rights
will be evidenced by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights attached thereto. Until
the Distribution Date (or the earlier of the Redemption Date or the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Effective Date, with or without a copy of the Summary
of Rights attached thereto, shall also constitute the transfer of the Rights
associated with such Common Shares. As a result of the execution of this
Agreement on January 16, 1998, each Common Share outstanding as of the Close of
Business on January 16, 1998 shall, subject to the terms and conditions of this
Agreement, also represent one Right and shall, subject to the terms and
conditions of this Agreement, represent the right to purchase one one-thousandth
of a share of Preferred Stock.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Effective Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall be
deemed also to be certificates for Rights and shall bear the following legend:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Rights Agreement between
Hawk Corporation and Continental Stock Transfer & Trust
Company, as Rights Agent, dated as of January 16, 1998 (the
"Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal executive offices of Hawk Corporation.
Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this
certificate. Hawk Corporation will mail to the holder of this
certificate a summary of the Rights Agreement (as in effect on
he date of mailing) without charge
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<PAGE> 13
promptly after receipt of a written request therefor. Under
certain circumstances, Rights that are or were beneficially
owned by Acquiring Persons or their Affiliates or Associates
(as such terms are defined in the Rights Agreement) and any
subsequent holder of such Rights may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Effective Date but prior to the Distribution Date, any Rights associated with
such Common Shares shall be deemed cancelled and retired so that the Company
shall not be entitled to exercise any Rights associated with the Common Shares
which are no longer outstanding.
Section 4. Form of Rights Certificate.
(a) The Rights Certificates (and the forms of election to purchase shares
and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Effective Date, and on their face shall entitle the holders
thereof to purchase such number of one one-thousandths of a Preferred Share as
shall be set forth therein at the price per one one-thousandth of a Preferred
Share set forth therein (the "Purchase Price"), but the amount and type of
securities purchasable upon the exercise of each Right and the Purchase Price
thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights which are null and void pursuant to Section 7(e)
of this Agreement, any Rights Certificate issued pursuant to Section 6 or
Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, and any Rights
Certificate transferred pursuant to a plan, arrangement or understanding that a
majority of the Disinterested Directors has determined is part of or has, as a
primary purpose or effect, the avoidance of Section 7(e) shall contain (to the
extent feasible) the following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). Accordingly,
this Right Certificate and the Rights represented hereby may
become null and
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<PAGE> 14
void in the circumstances specified in Section 7(e) of the Rights
Agreement.
The provisions of Section 7(e) of this Rights Agreement shall be operative
whether or not the foregoing legend is contained on any such Rights Certificate.
Section 5. Countersignature and Registration. The Rights Certificates shall
be executed on behalf of the Company by its Chairman of the Board, its
Vice-Chairman of the Board, its Chief Executive Officer, its President, any of
its Vice Presidents, or its Treasurer, either manually or by facsimile
signature, shall have affixed thereto the Company's seal or a facsimile thereof,
and shall be attested by the Secretary or an Assistant Secretary of the Company,
either manually or by facsimile signature. The Rights Certificates shall be
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificates may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its office designated as the appropriate place for surrender of such
Rights Certificate for transfer, books for registration and transfer of the
Rights Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates and the
certificate number and the date of each of the Rights Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject
to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any
time after the close of business on the Distribution Date, and at or prior to
the close of business on the earlier of the Redemption Date or the Final
Expiration Date, any Rights Certificate or Rights Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of one one-thousandths of a Preferred Share (or, following a Triggering Event,
other securities, as the case may be) as the Rights Certificate or Rights
Certificates surrendered then entitled such holder (or former holder in the case
of a transfer) to purchase. Any registered holder desiring to transfer, split
up, combine or exchange any Rights Certificate or Rights Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Rights Certificates to be transferred, split up, combined
or exchanged at the principal office or offices of the Rights Agent designated
for such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the
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<PAGE> 15
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split-up, combination or
exchange of Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will execute and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Rights Certificate, with the appropriate form of election
to purchase and the certificate on the reverse side thereof duly executed, to
the Rights Agent at the principal office or offices of the Rights Agent
designated for such purpose, together with payment of the aggregate Purchase
Price for the total number of one one-thousandths of a Preferred Share (or other
securities, as the case may be) as to which such surrendered Rights are
exercised, at or prior to the earliest of (i) the close of business on January
16, 2008 (the "Final Expiration Date"), (ii) the time at which the Rights are
redeemed as provided in Section 23 hereof (the "Redemption Date"), (iii) the
time at which the Rights are exchanged as provided in Section 24 hereof, or (iv)
the consummation of a transaction contemplated by Section 13(d) hereof.
(b) The Purchase Price for each one one-thousandth of a Preferred Share
pursuant to the exercise of a Right shall initially be $70.00, shall be subject
to adjustment from time to time as provided in the next sentence and in Sections
11 and 13(a) hereof and shall be payable in accordance with paragraph (c) below.
Anything in this Agreement to the contrary notwithstanding, in the event that,
at any time after the date of this Agreement and prior to the Distribution Date,
the Company shall (i) declare or pay any dividend on the Common Shares payable
in Common Shares or (ii) effect a subdivision, combination or consolidation of
the Common Shares (by reclassification or otherwise than by payment of dividends
in Common Shares) into a greater or lesser number of Common Shares, then in any
such case, each Common Share outstanding following such subdivision, combination
or consolidation shall continue to have a Right associated therewith and the
Purchase Price following any such event shall be proportionately adjusted to
equal the result obtained by multiplying the Purchase Price immediately prior to
such event by a fraction the numerator of which
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<PAGE> 16
shall be the total number of Common Shares outstanding immediately prior to the
occurrence of the event and the denominator of which shall be the total number
of Common Shares outstanding immediately following the occurrence of such event.
The adjustment provided for in the preceding sentence shall be made successively
whenever such a dividend is declared or paid or such a subdivision, combination
or consolidation is effected.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the appropriate form of election to purchase and the certificate duly
executed, accompanied by payment of the Purchase Price for the Preferred Shares
(or other securities, as the case may be) to be purchased and an amount equal to
any applicable transfer tax required to be paid by the holder of such Rights
Certificate in accordance with Section 6 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent
shall, subject to Section 20(k), thereupon promptly (i) (A) requisition from any
transfer agent of the Preferred Shares (or make available, if the Rights Agent
is the transfer agent) certificates for the number of Preferred Shares to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company, in its sole discretion,
shall have elected to deposit the Preferred Shares issuable upon exercise of the
Rights hereunder into a depositary, requisition from the depositary agent
depositary receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company will direct the depositary
agent to comply with such requests, (ii) when appropriate, requisition from the
Company the amount of cash, if any, to be paid in lieu of issuance of fractional
shares in accordance with Section 14 hereof, (iii) after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder, and (iv) when
appropriate, after receipt thereof, deliver such cash to or upon the order of
the registered holder of such Rights Certificate. In the event that the Company
is obligated to issue other securities (including Common Shares) of the Company
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such other securities are available for distribution by the
Rights Agent, if and when appropriate.
In addition, in the case of an exercise of the Rights by a holder pursuant
to Section 11(a)(ii), the Rights Agent shall return such Rights Certificate to
the registered holder thereof after imprinting, stamping or otherwise indicating
thereon that the rights represented by such Rights Certificate no longer include
the rights provided by Section 11(a)(ii) of the Rights Agreement and if less
than all the Rights represented by such Rights Certificate were so exercised,
the Rights Agent shall indicate on the Rights Certificate the number of Rights
represented thereby which continue to include the rights provided by Section
11(a)(ii).
(d) In case the registered holder of any Rights Certificate shall exercise
(except pursuant to Section 11(a)(ii)) less than all the Rights evidenced
thereby, a new Rights Certificate evidencing Rights equivalent to the Rights
remaining unexercised shall be issued by the Rights Agent and delivered to the
registered holder of such Rights Certificate or to his duly authorized assigns,
subject
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<PAGE> 17
to the provisions of Section 14 hereof, or the Rights Agent shall place an
appropriate notation on the Rights Certificate with respect to those Rights
exercised.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Affiliate or Associate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any Affiliate or
Associate thereof) who becomes a transferee after the Acquiring Person becomes
such, or (iii) a transferee of an Acquiring Person (or of any Affiliate or
Associate thereof) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has a continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer that a majority of the
Disinterested Directors has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to insure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but shall have no liability to
any holder of Rights Certificates or other Person as a result of its failure to
make any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the appropriate form of
election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights
Certificates surrendered for the purpose of exercise (other than a partial
exercise), transfer, split up, combination or exchange shall, if surrendered to
the Company or any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if surrendered to the Rights Agent, shall
be canceled by it, and no Rights Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Rights Agreement.
The Company shall deliver to the Rights Agent for cancellation and retirement,
and the Rights Agent shall so cancel and retire, any other Rights Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all canceled Rights Certificates to the Company,
or shall, at the written request of the Company, destroy such canceled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Preferred Shares. The Company
covenants and agrees that at all times prior to the occurrence of a Section
11(a)(ii) Event it will cause to be
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<PAGE> 18
reserved and kept available out of its authorized and unissued Preferred Shares,
or any authorized and issued Preferred Shares held in its treasury, the number
of Preferred Shares that will be sufficient to permit the exercise in full of
all outstanding Rights and, after the occurrence of a Section 11(a)(ii) Event,
shall, to the extent reasonably practicable, so reserve and keep available a
sufficient number of Common Shares (and/or other securities) which may be
required to permit the exercise in full of the Rights pursuant to this
Agreement.
So long as the Preferred Shares (and, after the occurrence of a Section
11(a)(ii) Event, Common Shares or any other securities) issuable upon the
exercise of the Rights may be listed on any national securities exchange, the
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares (or other securities) reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
The Company covenants and agrees that it will take all such action as may
be necessary to ensure that all Preferred Shares (or Common Shares and/or other
securities, as the case may be) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares or other securities
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and non-assessable shares or securities.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax which may be payable in respect of any transfer or delivery
of Rights Certificates to a person other than, or the issuance or delivery of
certificates or depositary receipts for the Preferred Shares (or Common Shares
and/or other securities, as the case may be) in a name other than that of, the
registered holder of the Rights Certificates evidencing Rights surrendered for
exercise, or to issue or deliver any certificates for Preferred Shares or
depositary receipts for Preferred Shares (or other securities, as the case may
be) upon the exercise of any Rights, until any such tax shall have been paid
(any such tax being payable by the holder of such Rights Certificate at the time
of surrender) or until it has been established to the Company's reasonable
satisfaction that no such tax is due.
The Company shall use its best efforts to (i) file, as soon as practicable
following the Shares Acquisition Date (or, if required by law, at such earlier
time following the Distribution Date as so required), a registration statement
under the Act, with respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act and the rules and regulations thereunder)
until the date of the expiration of the rights provided by Section 11(a)(ii).
The Company will also take such action as may be appropriate under the blue sky
laws of the various states.
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<PAGE> 19
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares (or Common Shares and/or other securities, as
the case may be) is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the Preferred Shares (or Common
Shares and/or other securities, as the case may be) represented thereby on, and
such certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made; provided, however, that, if the
date of such surrender and payment is a date upon which the Preferred Shares (or
Common Shares and/or other securities, as the case may be) transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares on, and such certificate shall be dated, the next succeeding
Business Day on which the Preferred Shares (or Common Shares and/or other
securities, as the case may be) transfer books of the Company are open.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares or (C) combine the
outstanding Preferred Shares into a smaller number of Preferred Shares or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Shares transfer books of the Company were
open, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
If an event occurs which would require an adjustment under both Section 11(a)(i)
and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) In the event that any Person, alone or together with its Affiliates
and Associates, shall become an Acquiring Person, then proper provision shall be
made so that each holder of a Right (except as provided below and in Section
7(e) hereof) shall, for a period of 60 days after the later of the occurrence of
any such event or the effective date of an appropriate registration statement
under the Act pursuant to Section 9 hereof, have a right to receive, upon
exercise thereof at a price equal to the then current Purchase Price, in
accordance with the terms of this Agreement, such number of Class A or Class B
Common Shares, as the case may be (or, in the discretion of the
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<PAGE> 20
Board of Directors, one one-thousandths of a Preferred Share), as shall equal
the result obtained by (x) multiplying the then current Purchase Price by the
then number of one one-thousandths of a Preferred Share for which a Right was
exercisable immediately prior to the first occurrence of a Section 11(a)(ii)
Event, and (y) dividing that product by 50% of the then current per share market
price of the Company's Class A Common Shares (determined pursuant to Section
11(d) hereof) on the date of such first occurrence (such number of shares being
referred to as the "Adjustment Shares"); provided, however, that if the
transaction that would otherwise give rise to the foregoing adjustment is also
subject to the provisions of Section 13 hereof, then only the provisions of
Section 13 hereof shall apply and no adjustment shall be made pursuant to this
Section 11(a)(ii). Holders of Class B Common Shares that exercise Rights
associated with such Class B Common Shares in accordance with this Section
11(a)(ii) shall only be entitled to receive Class B Common Shares upon such
exercise.
(iii) In the event that there shall not be sufficient treasury shares or
authorized but unissued (and unreserved) Common Shares to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii) and the
Rights become so exercisable (and the Board of Directors has determined to make
the Rights exercisable into fractions of a Preferred Share), notwithstanding any
other provision of this Agreement, to the extent necessary and permitted by
applicable law, each Right shall thereafter represent the right to receive, upon
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, (x) a number of (or fractions of) Common Shares (up to the
maximum number of Common Shares which may permissibly be issued) and (y) one
one-thousandth of a Preferred Share or a number of (or fractions of) other
equity securities of the Company (or, in the discretion of the Board of
Directors, debt) which the Board of Directors has determined to have the same
aggregate current market value (determined pursuant to Sections 11(d)(i) and
(ii) hereof, to the extent applicable) as one Common Share (such number of, or
fractions of, Preferred Shares (or other equity securities or debt of the
Company) being referred to as a "capital stock equivalent"), equal in the
aggregate to the number of Adjustment Shares; provided, however, if sufficient
Common Shares and/or capital stock equivalents are unavailable, then the Company
shall, to the extent permitted by applicable law, take all such action as may be
necessary to authorize additional Common Shares or capital stock equivalents for
issuance upon exercise of the Rights, including the calling of a meeting of
stockholders; and provided, further, that if the Company is unable to cause
sufficient Common Shares and/or capital stock equivalents to be available for
issuance upon exercise in full of the Rights, then each Right shall thereafter
represent the right to receive the Adjusted Number of Shares upon exercise at
the Adjusted Purchase Price (as such terms are hereinafter defined). As used
herein, the term "Adjusted Number of Shares" shall be equal to that number of
(or fractions of) Common Shares (and/or capital stock equivalents) equal to the
product of (x) the number of Adjustment Shares and (y) a fraction, the numerator
of which is the number of Common Shares (and/or capital stock equivalents)
available for issuance upon exercise of the Rights and the denominator of which
is the aggregate number of Adjustment Shares otherwise issuable upon exercise in
full of all Rights (assuming there were a sufficient number of Common Shares
available) (such fraction being referred to as the "Proration Factor"). The
"Adjusted Purchase Price" shall mean the product of the Purchase Price and the
Proration Factor. The Board of Directors may, but shall not be required to,
establish
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<PAGE> 21
procedures to allocate the right to receive Common Shares and capital stock
equivalents upon exercise of the Rights among holders of Rights.
(b) In case the Company shall fix a record date for the issuance of rights
(other than the Rights), options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the same
rights and privileges as the Preferred Shares ("equivalent preferred shares"))
or securities convertible into Preferred Shares or equivalent preferred shares
at a price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred Shares or
equivalent preferred shares) less than the then current per share market price
of the Preferred Shares (as determined pursuant to Section 11(d) hereof) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current per share market price, and the denominator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of additional Preferred Shares and/or equivalent preferred shares to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible); provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon the exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be determined in good faith by a majority of the
Disinterested Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the Rights
Agent. Preferred Shares owned by or held for the account of the Company shall
not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights, options or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price (as determined pursuant to
Section 11(d) hereof) of the Preferred Shares on such record date, less the fair
market value (as determined in good faith by a majority of the Disinterested
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent) of the
portion of the assets or evidences of indebtedness so to be distributed or of
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<PAGE> 22
such subscription rights or warrants applicable to one Preferred Share and the
denominator of which shall be such current per share market price of the
Preferred Shares; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ, such other
exchange or market system then in use, or, if on any such date the Security is
not quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Security selected by the Disinterested Directors if the Disinterested Directors
constitute a majority of the Board of Directors or, if the Disinterested
Directors do not constitute a majority of the Board of Directors, by an
independent investment banking firm selected by the Board of Directors. If on
any such date no such market maker is making a market in the Security, the fair
value of the Security on such date as determined in good faith by the
Disinterested Directors if the Disinterested Directors constitute a majority of
the Board of Directors or, if the Disinterested Directors do not constitute a
majority of the Board of Directors, by an independent investment banking firm
selected by the Board of Directors shall be used. The term "Trading Day" shall
mean a day on which the principal national securities exchange on which the
Security is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day. Subject to Section 11(d)(ii)
hereof, if any Security is not publicly held or so listed or traded, the
"current per share market price" of such Security shall mean the fair market
value per share as determined in good faith by the Disinterested Directors if
the Disinterested Directors constitute a
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<PAGE> 23
majority of the Board of Directors or, if the Disinterested Directors do not
constitute a majority of the Board of Directors, by an independent investment
banking firm selected by the Board of Directors whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares (or one one-thousandth of a
Preferred Share) shall be determined in accordance with the method set forth in
Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current
per share market price" of the Preferred Shares shall be conclusively deemed to
be the current per share market price of the Class A Common Shares as determined
pursuant to Section 11(d)(i) (appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof),
multiplied by one thousand. If neither the Class A Common Shares nor the
Preferred Shares are publicly held or so listed or traded, "current per share
market price" shall mean the fair value per share as determined in good faith by
the the Disinterested Directors if the Disinterested Directors constitute a
majority of the Board of Directors or, if the Disinterested Directors do not
constitute a majority of the Board of Directors, by an independent investment
banking firm selected by the Board of Directors, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent.
(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-thousandth of a Preferred Share, or one
ten-thousandth of any other share or security, as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which mandates such adjustment or (ii)
the Final Expiration Date.
(f) If, as a result of an adjustment made pursuant to Section 11(a)(ii) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to
the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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<PAGE> 24
(h) Unless the Company shall have exercised its election as provided in
Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and 11(c) hereof, each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of one
one-thousandths of a Preferred Share (calculated to the nearest one
ten-thousandth of a Preferred Share) obtained by (i) multiplying (x) the number
of Preferred Shares covered by a Right immediately prior to this adjustment of
the Purchase Price by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one one-thousandths of a Preferred Share purchasable upon the exercise
of a Right. Each of the Rights outstanding after such adjustment of the number
of Rights shall be exercisable for the number of one one-thousandths of a
Preferred Share for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest one
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of Preferred Shares issuable upon the exercise of the Rights, the Rights
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per share and the number of shares which were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then par value, if any, of the number of one
one-thousandths of a Preferred Share, Common Shares or other securities issuable
upon exercise of the Rights, the Company shall take any
19
<PAGE> 25
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue such number of fully paid and
non-assessable one one-thousandths of a Preferred Share, Common Shares or other
securities at such adjusted Purchase Price.
(1) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the number
of one one-thousandths of a Preferred Share, Common Shares or other securities
of the Company, if any, issuable upon such exercise over and above the number of
one one-thousandths of a Preferred Share, Common Shares or other securities of
the Company, if any, issuable upon exercise on the basis of the Purchase Price
in effect prior to such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(m) Anything to the contrary in this Section 11 notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that (i) any consolidation or subdivision of the Preferred Shares, (ii)
issuance wholly for cash of Preferred Shares at less than the current market
price, (iii) issuance wholly for cash of Preferred Shares or securities which by
their terms are convertible into or exchangeable for Preferred Shares, (iv)
stock dividends, or (v) issuance of rights, options or warrants referred to in
this Section 11, hereafter made by the Company to holders of its Preferred
Shares shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which does not violate Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which does not violate Section 11(o) hereof), or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
does not violate Section 11(o) hereof), if (x) at the time of or immediately
after such consolidation, merger, sale or transfer there are any charter or
bylaw provisions or any rights, warrants or other instruments or securities
outstanding or agreements in effect or other actions taken, which would
materially diminish or otherwise eliminate the benefits intended to be afforded
by the Rights or (y) prior to, simultaneously with or immediately after such
consolidation, merger or sale, the stockholders of the Person who constitutes,
or would constitute, the "Principal Party" for purposes of Section 13 hereof
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates and Associates. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such other Person shall have executed and delivered to the Rights Agent a
supplemental agreement evidencing compliance with this Section 11(n).
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<PAGE> 26
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 27 hereof, take (or
permit any Subsidiary to take) any action the purpose of which is to, or if at
the time such action is taken it is reasonably foreseeable that the effect of
such action is to, materially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights.
(p) The exercise of rights under Section 11(a)(ii) shall only result in the
loss of rights under Section 11(a)(ii) to the extent so exercised and shall not
otherwise affect the rights represented by the Rights under this Rights
Agreement, including the rights represented by Section 13.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares and the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Rights Certificate in accordance with Section 26 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) In the event that, on or following the Shares Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any Interested Stockholder, or if in such merger or consolidation all
holders of Common Shares are not treated alike, (y) the Company shall
consolidate with, or merge with, any Interested Stockholder or, if in such
merger or consolidation all holders of Common Shares are not treated alike, and
the Company shall be the continuing or surviving corporation of such
consolidation or merger (other than, in a case of any transaction described in
(x) or (y), a merger or consolidation which would result in all of the
securities generally entitled to vote in the election of directors ("voting
securities") of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into securities
of the surviving entity) all of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation and
the holders of such securities not having changed as a result of such merger or
consolidation), or (z) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one transaction
or a series of related transactions, assets or earning power aggregating more
than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any Interested Stockholder or Persons or, if in such
transaction all holders of Common Shares are not treated alike (other than the
Company or any Subsidiary of the Company in one or more transactions each of
which does not violate Section 11(o) hereof), then, and in each such case
(except as provided in Section 13(d) hereof), proper provision shall be made so
that (i) each holder of a Right, except as provided in Section 7(e) hereof,
shall thereafter have the right to receive, upon the exercise thereof at a price
equal to the then current Purchase Price, in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of freely tradable Common
Shares of the Principal Party (as hereinafter defined), not subject to any
liens, encumbrances, rights of first refusal or other adverse claims, as shall
equal the result obtained by (A) multiplying the then current
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<PAGE> 27
Purchase Price by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable (without taking into account any adjustment
previously made pursuant to Section 11(a)(ii)) hereof and dividing that product
by (B) 50% of the then current per share market price of the Common Shares of
such Principal Party (determined pursuant to Section 11(d) hereof) on the date
of consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; and (iv) such Principal Party shall take such steps (including, but
not limited to, the reservation of a sufficient number of its Common Shares) in
connection with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to the Common Shares thereafter deliverable upon
the exercise of the Rights.
(b) "Principal Party" shall mean (i) in the case of any transaction
described in clause (x) or (y) of the first sentence of Section 13(a), the
Person that is the issuer of any securities into which Common Shares of the
Company are converted in such merger or consolidation, and if no securities are
so issued, the Person that is the other party to such merger or consolidation
(including, if applicable, the Company if it is the surviving corporation); and
(ii) in the case of any transaction described in clause (z) of the first
sentence of Section 13(a), the Person that is the party receiving the greatest
portion of the assets or earning power transferred pursuant to such transaction
or transactions; provided, however, that in any of the foregoing cases: (A) if
the Common Shares of such Person are not at such time and have not been
continuously over the preceding twelve month period registered under Section 12
of the Exchange Act, and such Person is a direct or indirect Subsidiary of
another Person the Common Shares of which are and have been so registered,
"Principal Party" shall refer to such other Person; (B) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Shares
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value; and (C) in case such Person is owned, directly
or indirectly, by a joint venture formed by two or more Persons that are not
owned, directly or indirectly, by the same Person, the rules set forth in (A)
and (B) above shall apply to each of the chains of ownership having an interest
in such joint venture as if such party were a "Subsidiary" of both or all of
such joint venturers and the Principal Parties in each such chain shall bear the
obligations set forth in this Section 13 in the same ratio as their direct or
indirect interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have a sufficient number of its
authorized Common Shares which have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable
22
<PAGE> 28
after the date of any consolidation, merger, sale or transfer mentioned in
paragraph (a) of this Section 13, the Principal Party at its own expense shall:
(i) prepare and file a registration statement under the Act with
respect to the Rights and the securities purchasable upon exercise of the Rights
on an appropriate form, and use its best efforts to cause such registration
statement to (A) become effective as soon as practicable after such filing and
(B) remain effective (with a prospectus at all times meeting the requirements of
the Act) until the Final Expiration Date; and
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the blue sky laws of
such jurisdictions as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all material
respects with the requirements for registration on Form 10 under the Exchange
Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. The rights under this
Section 13 shall be in addition to the rights to exercise Rights and adjustments
under Section 11(a)(ii) and shall survive any exercise thereunder.
(d) Notwithstanding anything in this Agreement to the contrary, the
provisions of this Section 13 shall not be applicable to a transaction described
in clauses (x) and (y) of Section 13(a) if: (i) such transaction is consummated
with a Person or Persons who acquired Common Shares pursuant to a Permitted
Offer (or a wholly owned Subsidiary of any such Person or Persons); (ii) the
price per Common Share offered in such transaction is not less than the price
per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such Permitted Offer; and (iii) the form of consideration
offered in such transaction is the same as the form of consideration paid
pursuant to such Permitted Offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or to
distribute Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price of the Rights for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on
23
<PAGE> 29
the New York Stock Exchange or, if the Rights are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Disinterested Directors if the Disinterested
Directors constitute a majority of the Board of Directors or, if the
Disinterested Directors do not constitute a majority of the Board of Directors,
by an independent investment banking firm selected by the Board of Directors. If
on any such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the
Disinterested Directors if the Disinterested Directors constitute a majority of
the Board of Directors or, if the Disinterested Directors do not constitute a
majority of the Board of Directors, by an independent investment banking firm
selected by the Board of Directors shall be used and shall be binding on the
Rights Agent.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are one one-thousandths or integral multiples
of one one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-thousandths of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it, provided that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not one one-thousandths or integral
multiples of one one-thousandth of a Preferred Share, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one Preferred Share. For purposes of this Section 14(b), the
current market value of a Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to Section 11(d)(ii) hereof) for the
Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of one of the transactions or events specified
in Section 11 giving rise to the right to receive Common Shares, capital stock
equivalents (other than Preferred Shares) or other securities upon the exercise
of a Right, the Company shall not be required to issue fractions of shares or
units of such Common Shares, capital stock equivalents or other securities upon
exercise of the Rights or to distribute certificates which evidence fractions of
such Common Shares, capital stock equivalents or other securities. In lieu of
fractional shares or units of such Common Shares, capital stock equivalents or
other securities, the Company may pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of a share or
unit of such Common Shares, capital stock equivalents or other securities. For
purposes of this Section 14(c), the current
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<PAGE> 30
market value shall be determined in the manner set forth in Section 11(d) hereof
for the Trading Day immediately prior to the date of such exercise and, if such
capital stock equivalent is not traded, each such capital stock equivalent shall
have the value of one one-thousandth of a Preferred Share.
(d) The holder of a Right by the acceptance of the Right expressly waives
the right to receive any fractional Rights or any fractional share upon exercise
of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and shall be entitled to specific performance
of the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purpose, duly endorsed
or accompanied by a proper instrument of transfer and with the appropriate form
fully executed;
(c) subject to Section 6 and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights Certificate
or the associated Common Shares certificate made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be required to be affected by any notice to the contrary; and
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<PAGE> 31
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or a beneficial interest in a Right or other Person as a result of its inability
to perform any of its obligations under this Agreement by reason of any
preliminary or permanent injunction or other order, decree or ruling issued by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority,
prohibiting or otherwise restraining performance of such obligation.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights
Certificate, as such any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or other distributions or to exercise any preemptive or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability arising therefrom, directly or
indirectly.
The Rights Agent shall be protected and shall incur no liability for, or in
respect of any action taken, suffered or omitted by it in connection with, its
administration of this Agreement in reliance upon any Rights Certificate or
certificate for Common Shares or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
all or substantially all of the corporate trust business of the Rights Agent or
any successor Rights Agent, shall be the successor to the Rights Agent under
this
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<PAGE> 32
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Rights Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Rights Certificates so countersigned; and in case at that time any
of the Rights Certificates shall not have been countersigned, the Rights Agent
may countersign such Rights Certificates either in its prior name or in its
changed name; and in all such cases such Rights Certificates shall have the full
force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of an Acquiring Person and the
determination of the current per share market price of any Security) be proved
or established by the Company prior to taking or suffering any action hereunder,
such fact or matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deemed to be conclusively proved and established
by a certificate signed by any one of the Chairman of the Board, the
Vice-Chairman of the Board, the Chief Executive Officer, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action taken
or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own negligence,
bad faith or willful misconduct.
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<PAGE> 33
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature on such Rights Certificates) or be
required to verify the same, but all such statements and recitals are and shall
be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required
under the provisions of Section 11 or Section 13 hereof or responsible for the
manner, method or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment (except with respect
to the exercise of Rights evidenced by Rights Certificates after receipt of the
certificate described in Section 12 hereof); nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any Preferred Shares, Common Shares or other securities to be
issued pursuant to this Agreement or any Rights Certificate or as to whether any
Preferred Shares, Common Shares or other securities will, when issued, be
validly authorized and issued, fully paid and non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder and
certificates delivered pursuant to any provision hereof from any one of the
Chairman of the Board, the Vice-Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Secretary, any Assistant
Secretary, the Treasurer or any Assistant Treasurer of the Company, and is
authorized to apply to such officers for advice or instructions in connection
with its duties, and shall not be liable for any action taken or suffered by it
in good faith or lack of action in accordance with instructions of any such
officer.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, omission, default, neglect or
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<PAGE> 34
misconduct of any such attorneys or agents or for any loss to the Company
resulting from any such act, omission, default, neglect or misconduct, provided
reasonable care was exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights
hereunder if there shall be reasonable grounds for believing that repayment of
such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause (1), (2) and/or
(3) thereof, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then the registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be (i)
a corporation organized and doing business under the laws of the United States
or of any other state of the United States, so long as such corporation complies
with the applicable rules and requirements of the New York Stock Exchange, as
such rules and requirements may be amended or modified from time to time, is
authorized to exercise stock transfer or corporate trust powers and is subject
to supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50,000,000 (or such lower number as approved by the Board of Directors),
or (ii) an affiliate of a corporation described in clause (i) of this sentence.
After appointment, the successor Rights Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
as Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor
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<PAGE> 35
Rights Agent and each transfer agent of the Common Shares or Preferred Shares
and mail a notice thereof in writing to the registered holders of the Rights
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Rights Certificates made in accordance with
the provisions of this Agreement.
In addition, in connection with the issuance or sale of Common Shares
following the Distribution Date and prior to the earliest of the Redemption
Date, the Final Expiration Date and the consummation of a transaction
contemplated by Section 13(d) hereof, the Company (i) shall with respect to
Common Shares so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, or upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Company, and (ii) may,
in any other case, if deemed necessary or appropriate by the Board of Directors,
issue Rights Certificates representing the appropriate number of Rights in
connection with such issuance or sale; provided, however, that no Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) (i) Subject to Section 23(a)(iii), the Board of Directors may, at its
option, redeem all, but not less than all, the then outstanding Rights at a
redemption price of $0.001 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price"), at any time prior to the earlier of (A)
a Section 11(a)(ii) Event, or (B) the Final Expiration Date. The Company may, at
its option, pay the Redemption Price either in Common Shares (based on the
"current per share market price," as defined in Section 11(d)(i) hereof, of the
Common Shares at the time of redemption) or cash; provided that if the Company
elects to pay the Redemption Price in Common Shares, the Company shall not be
required to issue any fractional Common Shares and the number of Common Shares
issuable to each holder of Rights shall be rounded down to the next whole share.
(ii) In addition, subject to Section 23(a)(iii), the Board of Directors
may, at its option, at any time following a Shares Acquisition Date but prior to
any Section 13 Event, redeem all, but not less than all, of the then outstanding
Rights at the Redemption Price in connection with any merger, consolidation,
sale or other transfer (in one transaction or in a series of related
transactions) of assets or earning power aggregating 50% or more of the earning
power of the Company and its Subsidiaries (taken as a whole) in which all
holders of Common Shares are treated
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<PAGE> 36
alike and not involving (other than as a holder of Common Shares being treated
like all other such holders) an Interested Stockholder.
(iii) The Board of Directors may only redeem Rights pursuant to Section
23(a)(i) or Section 23(a)(ii) hereof if a majority of the Disinterested
Directors authorizes such redemption.
(b) In the case of a redemption permitted under Section 23(a)(i),
immediately upon the date for redemption set forth (or determined in the manner
specified in) in a resolution of the Board of Directors ordering the redemption
of the Rights, evidence of which shall have been filed with the Rights Agent,
and without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. In the case of
a redemption permitted only under Section 23(a)(ii), evidence of which shall
have been filed with the Rights Agent, the right to exercise the Rights will
terminate and represent only the right to receive the Redemption Price upon the
later of ten Business Days following the giving of such notice or the expiration
of any period during which the rights under Section 11(a)(ii) may be exercised.
The Company shall promptly give public notice of any such redemption; provided,
however, that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Within ten days after such date for
redemption set forth in a resolution of the Board of Directors ordering the
redemption of the Rights, the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
(c) The Company may, at its option, discharge all of its obligations with
respect to the Rights by (i) issuing a press release announcing the manner of
redemption of the Rights in accordance with this Agreement and (ii) mailing
payment of the Redemption Price to the registered holders of the Rights at their
last addresses as they appear on the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent of
the Common Shares, and upon such action, all outstanding Rights and Rights
Certificates shall be null and void without any further action by the Company.
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Section 24. Exchange.
(a) Subject to Section 24(e), the Board of Directors may, at its option, at
any time after any Person becomes an Acquiring Person, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights that
have become void pursuant to the provisions of Section 7(e) and Section
11(a)(ii) hereof) for Common Shares of the Company at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction involving either the Common Shares or the
Preferred Shares occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any such Subsidiary, any entity
holding Common Shares for or pursuant to the terms of any such plan or any
trustee, administrator or fiduciary of such a plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to Section 24(a) hereof and without any further
action and without any notice, the right to exercise such rights shall terminate
and the only right thereafter of a holder of such Rights shall be to receive
that number of Common Shares equal to the number of such rights held by such
holder multiplied by the Exchange Ratio. The Company shall promptly give public
notice of any such exchange; provided, however, that the failure to give, or any
defect in, such notice shall not affect the validity of such exchange. The
Company promptly shall mail a notice of any such exchange to all of the holders
of such Rights at their last addresses as they appear upon the registry books of
the Rights Agent. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 7(e) and Section 11(a)(ii) hereof) held by each
holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares (or equivalent preferred shares, as such
term is defined in Section 11(b) hereof) for some or all of the Common Shares
exchangeable for Rights, at the initial rate of one one-thousandth of a
Preferred Share (or equivalent preferred share) for each Common Share, as
appropriately adjusted to reflect adjustments in the voting rights of the
Preferred Shares pursuant to the terms thereof, so that the fraction of a
Preferred Share delivered in lieu of each Common Share shall have the same
voting rights as one Common Share.
(d) The Board of Directors shall not authorize any exchange transaction
referred to in Section 24(a) hereof unless at the time such exchange is
authorized there shall be sufficient Common Shares or Preferred Shares issued
but not outstanding, or authorized but unissued, to permit the exchange of
Rights as contemplated in accordance with this Section 24.
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(e) The Board of Directors may only exchange Rights pursuant to Section
24(a) hereof if a majority of the Disinterested Directors authorizes such
exchange.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable in
stock of any class to the holders of its Preferred Shares or to make any other
distribution to the holders of Preferred Shares (other than a regular quarterly
cash dividend), (ii) to offer to the holders of its Preferred Shares rights or
warrants to subscribe for or to purchase any additional Preferred Shares or
shares of stock of any class or any other securities, rights or options, (iii)
to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with any other
Person (other than a Subsidiary of the Company in a transaction which does not
violate Section 11(o) hereof), or to effect any sale or other transfer (or to
permit one or more of its Subsidiaries to effect any sale or other transfer) in
one or more transactions, of 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which does not violate Section 11(o) hereof), or (v) to
effect the liquidation, dissolution or winding up of the Company, then, in each
such case, the Company shall give to each holder of a Rights Certificate, in
accordance with Section 26 hereof, a notice of such proposed action to the
extent feasible and file a certificate with the Rights Agent to that effect,
which shall specify the record date for the purposes of such stock dividend, or
distribution of rights or warrants, or the date on which such reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution, or winding up
is to take place and the date of participation therein by the holders of the
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 20
days prior to the record date for determining holders of the Preferred Shares
for purposes of such action, and in the case of any such other action, at least
20 days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Preferred Shares, whichever shall be
the earlier.
(b) In case of a Section 11(a)(ii) Event, then (i) the Company shall as
soon as practicable thereafter give to each holder of a Rights Certificate, in
accordance with Section 26 hereof, a notice of the occurrence of such event,
which notice shall describe such event and the consequences of such event to
holders of Rights under Section 11(a)(ii) hereof and (ii) all references in the
preceding Section 25(a) to Preferred Shares shall be deemed thereafter to refer
also, if appropriate, to Common Shares and/or, if appropriate, other securities
of the Company.
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Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Hawk Corporation
200 Public Square
Suite 30-5000
Cleveland, Ohio 44114
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Attention: Compliance Department
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate or, if prior
to the Distribution Date, to the holder of certificates representing Common
Shares shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. Supplements and Amendments.
(a) Prior to the Distribution Date, subject to Section 27(b) hereof, the
Company and the Rights Agent shall, if the Company so directs, supplement or
amend any provision of this Agreement without the approval of any holders of
certificates representing Common Shares. From and after the Distribution Date,
subject to Section 27(b) hereof, the Company and the Rights Agent shall, if the
Company so directs, supplement or amend this Agreement without the approval of
any holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, (iii) to shorten or lengthen any
time period hereunder or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, however, that this Agreement may not be supplemented or amended to
lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating
to when the Rights may be redeemed at such time as the Rights are not then
redeemable, or (B) any other time period unless such lengthening is for the
purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery
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<PAGE> 40
of a certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment,
provided that such supplement or amendment does not adversely affect the rights
or obligations of the Rights Agent under Section 18 or Section 20 of this
Agreement. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares.
(b) The Company shall not supplement or amend any provision of this
Agreement unless a majority of the Disinterested Directors authorizes such
supplement or amendment.
Section 28. Determination and Actions by the Board of Directors, etc. The
Board of Directors (and where expressly provided for herein, the Disinterested
Directors) shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board of Directors (or the Disinterested Directors, as the case may be), or the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Agreement, and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including,
without limitation, a determination to redeem or not redeem the Rights or to
amend the Agreement and whether any proposed amendment adversely affects the
interests of the holders of Rights Certificates). For all purposes of this
Agreement, any calculation of the number of Common Shares or other securities
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding Common Shares or any other securities
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act as in effect on the date of this Agreement. All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board of Directors (or the Disinterested Directors) in
good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights Certificates and all other parties, and
(y) not subject the Board of Directors (or the Disinterested Directors) to any
liability to the holders of the Rights Certificates.
Section 29. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Rights Agent, the Exempt Persons and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the Common Shares) any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Rights Agent,
the Exempt Persons and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, the Common Shares).
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Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and a majority of the
Disinterested Directors determine in their good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Disinterested
Directors.
Section 32. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 33. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 34. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the date and year first above written.
Attest: HAWK CORPORATION
By: By:
-------------------------------- ----------------------------------
Byron S. Krantz Norman C. Harbert
Secretary Chairman of the Board
Attest: CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By: By:
-------------------------------- ----------------------------------
Name: Name:
------------------------------ ---------------------------------
Title: Title:
------------------------------ --------------------------------
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EXHIBIT A
[FORM OF CERTIFICATE OF DESIGNATION
OF THE SERIES E PREFERRED STOCK]
CERTIFICATE OF DESIGNATION
OF THE SERIES E PREFERRED STOCK OF
HAWK CORPORATION
PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW
Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board and
Secretary, respectively, of Hawk Corporation, a Delaware corporation (the
"Corporation"), hereby certify that:
Pursuant to authority conferred upon the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation, and
pursuant to the provisions of Section 151 of the Delaware General
Corporation Law, the Board of Directors, at a telephonic meeting held on
November 13, 1997, duly adopted a resolution creating a new series of
Serial Preferred Stock, par value $0.01 per share, of the Corporation, as
follows:
RESOLVED, that pursuant to the authority expressly vested in the Board
of Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, a new series of Serial Preferred Stock of the
Corporation is hereby created (the "Series E Preferred Stock"), of which
the powers, designations, preferences and relative, participating, optional
or other rights, and qualifications and restrictions, shall be as follows:
Section 1. Designation and Amount. There shall be a series of the Serial
Preferred Stock of the Corporation that shall be designated as the "Series E
Preferred Stock," par value $0.01 per share, and the number of shares
constituting such series shall be 100,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided that no
decrease shall reduce the number of shares of Series E Preferred Stock to a
number less than that of the shares then outstanding plus the number of shares
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.
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Section 2. Dividends and Distributions. The holders of shares of Series E
Preferred Stock shall be entitled to receive, out of any funds legally
available and when and as declared by the Board of Directors, dividends and
other distributions of the same kind but at the rate of 1,000 times the
aggregate amount per share of the dividends or other distributions received by
the holders of shares of Common Stock, par value $0.01 per share, of the
Corporation (the "Common Stock"). Dividends and other distributions shall be
declared and paid to the holders of shares of Series E Preferred Stock of
record, on such dates respectively preceding the payment thereof as may be
fixed by the Board of Directors in declaring any such dividends, at the same
time that dividends or other distributions are declared and paid to holders of
shares of Common Stock. Such dividends shall not accrue or be cumulative. In
the event the Corporation shall, at any time after January 16, 1998 (the
"Effective Date"), (i) declare any dividend on the Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock
or (iii) combine the outstanding shares of Common Stock into a smaller number
of shares, then in each such case the number of votes per share to which
holders of shares of Series E Preferred Stock were entitled immediately prior
to such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of shares of Common Stock that were outstanding immediately prior to
such event.
Section 3. Voting Rights. The holders of shares of Series E Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
share of Series E Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the holders of shares of Class A
Common Stock of the Corporation (the "Class A Common Stock"). In the event the
Corporation shall, at any time after the Effective Date, (i) declare any
dividend on shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of shares of Series E
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of shares of
Series E Preferred Stock and the holders of shares of Class A Common Stock shall
vote together as one class on all matters submitted to a vote of the holders of
the Class A Common Stock.
(c) Except as set forth herein, holders of shares of Series E Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of shares
of Class A Common Stock as set forth herein) for taking any corporate action.
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Section 4. Reacquired Shares. Any shares of Series E Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Serial Preferred Stock and may be reissued as part of a new series of Serial
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 5. Liquidation, Dissolution or Winding Up. The holders of shares of
Series E Preferred Stock shall, in case of liquidation, dissolution, or winding
up of the affairs of the Corporation, be entitled to receive in full, out of the
assets of the Corporation, including its capital, an amount equal to 1,000 times
the aggregate amount to be distributed per share to holders of Common Stock,
subject to the provision for adjustment hereinafter set forth. In the event the
Corporation shall at any time (i) declare any dividend on shares of Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding shares of
Common Stock or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the aggregate amount to which
holders of shares of Series E Preferred Stock were entitled immediately prior to
such event under the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event. Except as set forth above, the holders of shares of Series E
Preferred Stock shall have the same rights and shall be treated in the same
manner with respect to any liquidation, dissolution or winding up as holders of
shares of Common Stock.
Section 6. Consolidation, Merger, Etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the holders of
shares of Series E Preferred Stock shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Effective Date (i)
declare any dividend on the Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of shares
of Series E Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
Section 8. Redemption. The Series E Preferred Stock shall not be
redeemable.
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Section 9. Ranking. The Series E Preferred Stock shall rank junior to all
other series of the Serial Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any such series shall
specifically provide otherwise.
Section 10. Amendment. The Second Amended and Restated Certificate of
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the shares of Series E Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least two-thirds (66 2/3%) of the
outstanding shares of Series E Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. Shares of Series E Preferred Stock may be
issued in fractions of a share that are one one-thousandths or integral
multiples of one one-thousandths of a share, which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of the holders of Series E Preferred Stock.
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Certificate of Designation, and hereby affirm the foregoing as true under the
penalties of perjury, as of this _____ day of __________, 199___.
-------------------------------------
Name: Norman C. Harbert
Title: Chairman of the Board
Attest:
- ------------------------------------
Name: Byron S. Krantz
Title: Secretary
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EXHIBIT B
[FORM OF RIGHTS CERTIFICATE]
Certificate No. R- Rights
----- ------------
NOT EXERCISABLE AFTER JANUARY 16, 2008, OR EARLIER IF NOTICE OF
REDEMPTION OR EXCHANGE IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION,
AT THE OPTION OF THE COMPANY, AT $0.001 PER RIGHT ON THE TERMS SET
FORTH IN THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO EXCHANGE, AT
THE OPTION OF THE COMPANY, AT ONE COMMON SHARE PER RIGHT ON THE TERMS
SET FORTH IN THE RIGHTS AGREEMENT. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS
OR BECAME AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY
MAY BECOME VOID TO THE EXTENT PROVIDED IN AND UNDER THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(E) OF THE RIGHTS AGREEMENT.]*
RIGHTS CERTIFICATE
This certifies that _________________________, or _______ registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement dated as of January 16, 1998 (the "Rights
Agreement") between HAWK CORPORATION, a Delaware corporation (the "Company"),
and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights
Agent"), to purchase from the Company at any time after the Distribution Date
(as such term is defined in the Rights Agreement) and prior to 5:00 P.M.
(Cleveland, Ohio time) on January 16, 2008 at the office of the Rights Agent in
New York, New York, one one-thousandth of a fully-paid, nonassessable share of
Series E Preferred Stock (the "Preferred Stock") of the Company, at a purchase
price of $70.00 per one one-thousandth of a share (the "Purchase Price"), upon
presentation and surrender of this Rights Certificate with the appropriate Form
of Election to Purchase duly executed. The number of Rights evidenced by this
Rights Certificate (and the number of shares which may be purchased upon
exercise thereof) set forth above, and the Purchase Price set forth above, are
the number and Purchase Price as of January 16, 1998, based on the Preferred
Stock as constituted at such date. As provided in the Rights Agreement, the
Purchase Price and the number of shares of Preferred Stock or other securities
which may be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
- --------------------
* The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentences.
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This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal office of the Company and are
also available upon written request to the Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office of the Rights Agent, may be exercised for
another Rights Certificate or Rights Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
shares of Preferred Stock as the Rights evidenced by the Rights Certificate or
Rights Certificates surrendered shall have entitled such holder to purchase. If
this Rights Certificate shall be exercised (other than pursuant to Section
11(a)(ii) of the Rights Agreement) in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised. If this Rights Certificate shall
be exercised in whole or in part pursuant to Section 11(a)(ii) of the Rights
Agreement, the holder shall be entitled to receive this Rights Certificate duly
marked to indicate that such exercise has occurred as set forth in the Rights
Agreement.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Rights Certificate may be redeemed by the Company at its option at a
redemption price of $0.001 per Right, and the redemption price may be satisfied
by issuing Common Shares (pursuant to Section 23(a)(i) of the Rights Agreement).
In addition, the Rights evidenced by this Rights Certificate may be exchanged by
the Company at its option at an exchange ratio of one Common Share per Right.
No fractional shares of Preferred Stock will be issued upon the exercise of
any Rights or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depository receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder, as such, of this or any other Rights Certificate shall be
entitled to vote, receive dividends or be deemed for any purpose the holder of
the Preferred Shares or any other securities of the Company that may at any time
be issuable on the exercise of the Rights represented hereby or thereby, nor
shall anything contained herein or in any other Rights Certificate be construed
to confer upon the holder of any Rights Certificate, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in Section
25 of the Rights Agreement), or to receive dividends or other distributions, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised.
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This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company.
Dated: January 16, 1998
Attested by: HAWK CORPORATION
By: By:
-------------------------------- ----------------------------------
Byron S. Krantz Norman C. Harbert
Secretary Chairman of the Board
Countersigned:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By:
--------------------------------
Authorized Officer
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[FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate)
FOR VALUE RECEIVED, _______________________ hereby sells, assigns and
transfers unto____________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated:
-------------------------
- -------------------------------
Signature
Signature Guaranteed:
- -------------------------------
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<PAGE> 51
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated:
-------------------------
- -------------------------------
Signature
Signature Guaranteed:
- -------------------------------
NOTICE
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
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FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Rights Certificate)
To: HAWK CORPORATION
The undersigned hereby irrevocably elects to exercise ____________________
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock or other securities, cash or assets issuable upon the exercise
of the Rights and requests that certificates for such shares be issued in the
name of and deliverable to:
- -------------------------------------------------------------------------------
(Please insert social security or other identifying number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
- -------------------------------------------------------------------------------
(Please insert social security or other identifying number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
Dated: Signature Guaranteed:
--------------------------
- -------------------------------- ------------------------------
Signature
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<PAGE> 53
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) the Rights evidenced by this Rights Certificate are [ ] are not [ ]
being sold, assigned or transferred by or on behalf of a Person who is, was or
became an Acquiring Person or an Affiliate or Associate of an Acquiring Person;
(3) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated:
----------------------
- ----------------------------
Signature
Signature Guaranteed:
- -----------------------------
NOTICE
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-7
<PAGE> 54
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
SERIES E PREFERRED SHARES
On November 13, 1997, the Board of Directors of Hawk Corporation, a
Delaware corporation (the "Company"), declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Class A Common
Stock, par value $0.01 per share (the "Class A Common Shares" and Class B
Common Stock, par value $0.01 per share (the "Class B Common Shares and
together with the Class A Common Shares, the "Common Shares"), of the Company.
The dividend is payable to the stockholders of record as of 5:00 P.M.,
Cleveland, Ohio time, on January 16, 1998 (the "Effective Date"), and with
respect to Common Shares issued thereafter until the Distribution Date (as
hereinafter defined) and, in certain circumstances, with respect to Common
Shares issued after the Distribution Date. Except as set forth below, each
Right, when it becomes exercisable, entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series E Preferred Stock, par
value $0.01 per share (the "Preferred Shares"), at a price of $70.00 per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement, dated as of January 16, 1998 (the "Rights Agreement"), between the
Company and Continental Stock Transfer & Trust Company, as Rights Agent (the
"Rights Agent").
A. Issue of Right Certificates
The Rights are attached to all certificates representing outstanding Common
Shares, and no separate Right Certificates (as hereinafter defined) have been
distributed. The Rights will separate from the Common Shares on the earliest to
occur of (i) the first date of public announcement that a Person (defined in the
Rights Agreement), alone or together with its Affiliates and Associates (defined
in the Rights Agreement), other than those that are exempt persons, has acquired
beneficial ownership (as defined in the Rights Agreement) of 15% or more of the
outstanding Class A Common Shares (except pursuant to a Permitted Offer); or
(ii) the close of business on the tenth (10th) business day (or such later date
as the Board of Directors may determine) following the commencement of, or first
public announcement of an intention to commence, a tender or exchange offer the
consummation of which would result in any Person becoming an Acquiring Person
(as hereinafter defined), including, in the case of both (i) and (ii), any such
date which is after the date of this Rights Agreement and prior to the issuance
of the Rights (the earliest of such dates being called the "Distribution Date").
A Person, alone or together with its Affiliates and Associates, whose
acquisition of Common Shares causes a Distribution Date pursuant to clause (i)
above is an "Acquiring Person." The first date of public announcement that a
Person, alone or together with its Affiliates and Associates, has become an
Acquiring Person is the "Shares Acquisition Date."
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The Rights Agreement provides that until the Distribution Date the Rights
will be transferred with and only with the Common Shares. Until the Distribution
Date (or earlier redemption, exchange, or expiration of the Rights), new Common
Share certificates issued after the Effective Date upon transfer or new issuance
of Common Shares will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption, exchange, or
expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Effective Date, even without such notation
or a copy of the Summary of Rights to Purchase Series E Preferred Shares being
attached thereto, will also constitute the transfer of the Rights associated
with the Common Shares represented by such certificate. As promptly as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date (and to each
initial record holder of certain Common Shares issued after the Distribution
Date), and such separate Right Certificates alone will evidence the Rights.
B. Exercise of Rights; Final Expiration Date of Rights
The Rights are not exercisable until the Distribution Date and will expire
at 5:00 P.M., Cleveland, Ohio time, on January 16, 2008, unless earlier redeemed
or exchanged by the Company as described below. Until a Right is exercised, the
holder thereof, as such, will have no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends.
C. Flip-In Provision
In the event that any Person other than certain exempt persons becomes an
Acquiring Person (except pursuant to a Permitted Offer), each holder of a Right
will have (subject to the terms of the Rights Agreement) the right to receive
upon exercise the number of Common Shares, or, in the discretion of the Board of
Directors, the number of one one-thousandths of a Preferred Share (or, in
certain circumstances, other securities of the Company) having a value
(immediately prior to such "Triggering Event," as defined the Rights Agreement)
determined in accordance with a formula based on the then Purchase Price divided
by 50% of the then current per share market price of the Class A Common Shares
(the "Flip-In Right"). Notwithstanding the foregoing, following the occurrence
of the event described above, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person or any Affiliate or Associate thereof will be null and void. A
"Permitted Offer" shall mean a tender or exchange offer for all outstanding
Common Shares at a price and on terms determined, prior to the purchase of
shares under such tender or exchange offer, by at least a majority of the
Disinterested Directors to be adequate (taking into account all factors that
such directors deem relevant) and otherwise in the best interests of the Company
and its stockholders (other than the Person or any Affiliate or Associate
thereof on whose behalf the offer is being made) taking into account all factors
that such directors may deem relevant. "Disinterested Director" means any
director of the Board of Directors of the Company who is not (i) a Person
proposing or attempting to effect a business combination or similar transaction
with the Company (including, without limitation, a merger, tender offer or
exchange offer, sale of substantially all of the Company's assets, or
liquidation of the Company's assets) or any Affiliate or Associate of such
Person or Person acting directly or indirectly on behalf
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<PAGE> 56
of, or as a representative of, or in concert with, any such Person, Affiliate or
Associate, (ii) an Acquiring Person, an Affiliate or Associate of an Acquiring
Person, or a Person acting directly or indirectly on behalf of, or as a
representative of, or in concert with, an Acquiring Person or an Affiliate or
Associate of an Acquiring Person, or (iii) any Person who was directly or
indirectly proposed or nominated as a director of the Company by an Acquiring
Person.
D. Flip-Over Provision
In the event that, at any time following the Shares Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the holders of all of the outstanding Common Shares immediately prior to
the consummation of the transaction are not the holders of all of the surviving
corporation's voting power, or (ii) more than 50% of the Company's assets or
earning power is sold or transferred, in either case with or to an Acquiring
Person or any Affiliate or Associate thereof, or any other person in which such
Acquiring Person, Affiliate or Associate has an interest, or any person acting
on behalf of or in concert with such Acquiring Person, Affiliate or Associate,
or, if in such transaction all holders of Common Shares are not treated alike,
then each holder of a Right (except Rights which previously have been voided as
set forth above) shall thereafter have the right (the "Flip-Over Right") to
receive, upon exercise, common shares of the acquiring company having a value
determined in accordance with a formula based on the then Purchase Price divided
by 50% of the then current per share market price of the common stock of such
acquiring company. The holder of a Right will continue to have the Flip-Over
Right whether or not such holder exercises or surrenders the Flip-In Right.
E. Adjustment of Purchase Price
The Purchase Price payable, and the number of one one-thousandths of a
Preferred Share or other securities issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of indebtedness
or assets (excluding regular quarterly cash dividends or a dividend payable in
preferred shares) or of subscription rights or warrants (other than "equivalent
preferred shares," as defined in the Rights Agreement).
The Purchase Price is also subject to adjustment in the event of a stock
split of the Common Shares, or a stock dividend on the Common Shares payable in
Common Shares, or subdivisions, consolidations or combinations of the Common
Shares occurring, in any such case, prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional one-thousandths of a Preferred Share will be
issued, and in lieu thereof, an adjustment in cash will
C-3
<PAGE> 57
be made based on the market price of the Preferred Shares on the last trading
day prior to the date of exercise.
F. Redemption of Rights
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem
the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of the
Board of Directors. The Company may at its option pay the Redemption Price in
cash or Common Shares. Additionally, the Company may redeem the then outstanding
Rights in whole, but not in part, at the Redemption Price after a Shares
Acquisition Date and before the expiration of any period during which the
Flip-Over Right may be exercised in connection with a merger or other business
combination transaction or series of transactions involving the Company in which
all holders of Common Shares are treated alike but not involving (other than as
a holder of Common Shares being treated like all other such holders) any Person
acting directly or indirectly on behalf of, or in concert with, any Acquiring
Person, or its Affiliates or Associates. The Board of Directors may only redeem
Rights if a majority of the Disinterested Directors (as defined in the Rights
Agreement) authorizes such redemption. Upon the effective date of the redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
G. Exchange of Rights
At any time after a Person becomes an Acquiring Person but before such
Acquiring Person, together with all Affiliates and Associates of such Person,
becomes the "Beneficial Owner" (defined in the Rights Agreement) of 50% or more
of the Common Shares then outstanding, the Company may, at its option, exchange
all or part of the then outstanding and exercisable Rights (other than those
owned by the Acquiring Person, together with any Affiliates and Associates of
such Acquiring Person, which have become null and void) at an exchange ratio of
one Common Share per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction involving either the Common Shares or the
Preferred Shares occurring after the date of the Rights Agreement (the "Exchange
Ratio"). The Board of Directors may only exchange Rights if a majority of the
Disinterested Directors authorizes such exchange. Immediately upon the action of
the Board of Directors ordering the exchange of any Rights and without any
further action and without any notice, the right to exercise such rights shall
terminate and the only right thereafter of a holder of such Rights shall be to
receive that number of Common Shares equal to the number of such rights held by
such holder multiplied by the Exchange Ratio.
H. Possible Tax Consequences
While the distribution of the Rights will not be taxable to stockholders of
the Company, stockholders may, depending upon the circumstances, recognize
taxable income should the Rights become exercisable or upon the occurrence of
certain events thereafter.
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I. Amendment of Rights Agreement
Prior to the Distribution Date, the Company may supplement or amend any
provision of the Rights Agreement without the approval of the holders of Common
Stock. From and after the Distribution Date, the Company generally may
supplement or amend the Rights Agreement without the approval of the holders of
Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or
supplement any provision which may be defective or inconsistent with any other
provisions, (iii) to shorten or lengthen any time period or (iv) to change or
supplement the provisions in any manner which the Company may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person). The Company may not supplement or amend any provision
of the Rights Agreement unless a majority of the Disinterested Directors
authorizes such supplement or amendment.
J. Copy Available
A copy of the Rights Agreement was filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration Statement on Form S-1. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is hereby
incorporated herein by reference.
C-5
<PAGE> 1
Exhibit 10.1
[HAWK LOGO]
1997 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to advance the
interests of HAWK CORPORATION, a Delaware corporation (the "Company"),
and its Subsidiaries by providing additional incentive to attract and retain
qualified and competent persons who are key to the Company or its Subsidiaries,
including key employees, Officers and Directors, and upon whose efforts and
judgment the success of the Company and its Subsidiaries is largely dependent,
by encouraging such persons to own stock in the Company.
2. DEFINITIONS. As used herein, the following terms shall have
the meaning indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change of Control" shall mean the occurrence of any of
the following:
(i) any transaction (which shall include a series of
transactions occurring within sixty days or occurring pursuant to a plan), that
has the result that stockholders of the Company immediately before such
transaction cease to own at least 51% of the voting stock of the Company or of
any entity that results from the participation of the Company in a
reorganization, consolidation, merger, liquidation or any other form of
corporate transaction;
(ii) the stockholders of the Company approve a plan
of merger, consolidation, reorganization, liquidation or dissolution in which
the Company does not survive (unless the approved merger, consolidation,
reorganization, liquidation or dissolution is subsequently abandoned); or
(iii) the stockholders of the Company approve a plan
for the sale, lease, exchange, transfer, assignment or other disposition of all
or substantially all the property and assets of the Company (unless such plan is
subsequently abandoned).
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Committee" shall mean the compensation committee
appointed by the Board pursuant to Section 13 hereof or, if not appointed, the
full Board.
(e) "Common Stock" shall mean the Company's Class A Common
Stock, par value $0.01 per share.
(f) "Controlled Entity" shall mean any trust, partnership,
limited liability company or other entity in which such person that receives
Options under this Plan acts as trustee, managing partner, managing member or
otherwise controls; provided that, to the extent any such Option received under
this Plan is awarded to a spouse pursuant to any divorce proceeding, such
<PAGE> 2
interest shall be deemed to be terminated and forfeited notwithstanding any
vesting provisions or other terms herein or in the agreement evidencing such
Option.
(g) "Director" shall mean a member of the Board.
(h) "Effective Date" shall mean the closing date of the
initial public offering by the Company contemplated by the Registration
Statement filed on Form S-1 (File No. 333-40535).
(i) "Fair Market Value" of a Share on any date of reference
shall be the "Closing Price" (as defined below) of the Common Stock on the
business day immediately preceding such date, unless the Committee in its sole
discretion shall determine otherwise in a fair and consistent manner. For the
purpose of determining Fair Market Value, the "Closing Price" of the Common
Stock on any business day shall be (i) if the Common Stock is listed or admitted
for trading on any United States national securities exchange, or if actual
transactions are otherwise reported on a consolidated transaction reporting
system, the last reported sale price of Common Stock on such exchange or
reporting system, as reported in any newspaper of general circulation, (ii) if
the Common Stock is quoted on the National Association of Securities Dealers
Automated Quotations System ("NASDAQ"), or any similar system of automated
dissemination of quotations of securities prices in common use, the mean between
the closing high bid and low asked quotations for such day of Common Stock on
such system, or (iii) if neither clause (i) or (ii) is applicable, the mean
between the high bid and low asked quotations for the Common Stock as reported
by the National Quotation Bureau, Incorporated if at least two securities
dealers have inserted both bid and asked quotations for Common Stock on at least
five of the ten preceding days.
(j) "Incentive Stock Option" shall mean an incentive stock
option as defined in Section 422 of the Code.
(k) "Non-Employee Director" shall mean a Director who: (i) is
not an Officer or employee of the Company or any Subsidiary; (ii) does not (A)
receive compensation, directly or indirectly, from the Company or any Subsidiary
for services rendered as a consultant or in any other capacity other than as a
Director, except for an amount that does not exceed the dollar amount for which
disclosure would be required under Item 404(a) of Regulation S-K, 17 C.F.R.
Section 229.404(a), or (B) possess an interest in any transaction for which
disclosure would be required under Item 404(a) of Regulation S-K, 17 C.F.R.
Section 229.404(a); and (iii) is not engaged in a business relationship for
which disclosure would be required under Item 404(b) of Regulation S-K,
17 C.F.R. Section 229.404(b).
(l) "Non-Statutory Stock Option" shall mean an Option which is
not an Incentive Stock Option.
(m) "Officer" shall mean the Company's Chairman,
Vice-Chairman, president, principal financial officer, principal accounting
officer (or, if there is no such accounting officer, the controller), any vice
president of the Company in charge of a principal business unit, division or
function (such as sales, administration or finance), any other officer who
performs a policy-making function, or any other person who performs similar
policy-making functions for the Company.
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<PAGE> 3
Officers of Subsidiaries shall be deemed Officers of the Company if they perform
such policy-making functions for the Company. As used in this paragraph, the
phrase "policy-making function" does not include policy-making functions that
are not significant.
(n) "Option" (when capitalized) shall mean any option granted
under this Plan.
(o) "Optionee" shall mean a person to whom a stock option is
granted under this Plan or any person who succeeds to the rights of such person
under this Plan by reason of the death of such person.
(p) "Plan" shall mean this 1997 Stock Option Plan of the
Company.
(q) "Securities Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(r) "Share(s)" shall mean a share or shares of the Common
Stock.
(s) "Subsidiary" shall mean a "subsidiary corporation" as
defined in Section 424(f) of the Code.
3. SHARES AND OPTIONS. The Company may grant to Optionees from
time to time Options to purchase an aggregate of up to 700,000 Shares from
Shares held in the Company's treasury or from authorized and unissued Shares. If
any Option granted under this Plan shall terminate, expire, or be canceled or
surrendered as to any Shares, new Options may thereafter be granted covering
such Shares. Subject to the provisions of Section 14 hereof, an Option granted
hereunder shall be either an Incentive Stock Option or a Non-Statutory Stock
Option as determined by the Committee at the time of grant of such Option and
shall clearly state whether it is an Incentive Stock Option or Non-Statutory
Stock Option. Subject to Section 17 hereof, all Incentive Stock Options shall be
granted within ten years from the date this Plan is adopted by the Board or the
date this Plan is approved by the stockholders of the Company, whichever is
earlier.
4. DOLLAR LIMITATION. Options otherwise qualifying as Incentive
Stock Options hereunder will not be treated as Incentive Stock Options to the
extent that the aggregate Fair Market Value (determined at the time the Option
is granted) of the Shares, with respect to which Options meeting the
requirements of Code Section 422(b) are exercisable for the first time by any
individual during any calendar year (under all plans of the Company and any
Subsidiary), exceeds $100,000.
5. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by a written agreement that
may contain any term deemed necessary or desirable by the Committee, provided
such terms are not inconsistent with this Plan or any applicable law. Optionees
shall be those persons selected by the Committee from the class of all
Directors, Officers and regular employees of the Company or its Subsidiaries.
Any person who files with the Committee, in a form satisfactory to the
Committee, a written waiver of
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<PAGE> 4
eligibility to receive any Option under this Plan shall not be eligible to
receive any Option under this Plan for the duration of such waiver.
(b) In granting Options to Directors, Officers and employees
of the Company or its Subsidiaries, the Committee shall take into consideration
the contribution the person has made to the success of the Company or its
Subsidiaries and such other factors as the Committee shall determine. The
Committee shall also have the authority to consult with and receive
recommendations from officers and other personnel of the Company and its
Subsidiaries with regard to these matters. The Committee may from time to time
in granting Options to Directors, Officers and employees of the Company or its
Subsidiaries under this Plan prescribe such other terms and conditions
concerning such Options as it deems appropriate, including, without limitation,
(i) prescribing the date or dates on which the Option becomes exercisable, (ii)
providing that the Option rights accrue or become exercisable in installments
over a period of years, or upon the attainment of stated goals or both, or (iii)
relating an Option to the continued employment of the Optionee for a specified
period of time, provided that such terms and conditions are not more favorable
to an Optionee than those expressly permitted herein.
(c) The Options granted to employees under this Plan shall be
in addition to regular salaries, pension, life insurance or other benefits
related to their employment with the Company or its Subsidiaries. Neither this
Plan nor any Option granted under this Plan shall confer upon any person any
right to employment or continuance of employment by the Company or its
Subsidiaries.
6. OPTION PRICE. The option price per Share of any Option shall
be any price determined by the Committee but shall not be less than the par
value per Share; provided, however, that in no event shall the option price per
Share of any Incentive Stock Option be less than the Fair Market Value of the
Shares underlying such Option on the date such Option is granted.
7. EXERCISE OF OPTIONS. An Option shall be deemed exercised when
(i) the Company has received written notice of such exercise in accordance with
the terms of the Option, (ii) full payment of the aggregate option price of the
Shares as to which the Option is exercised has been made, and (iii) arrangements
that are satisfactory to the Committee in its sole discretion have been made for
the Optionee's payment to the Company of an amount that is sufficient to satisfy
all applicable federal or state tax withholding requirements relating to
exercise of the Option, if any. Unless further limited by the Committee in any
Option, the option price of any Shares purchased shall be paid in cash, by
certified or official bank check, by money order, with Shares or by a
combination of the above; provided further, however, that the Committee in its
sole discretion may accept a personal check in full or partial payment of any
Shares. If the exercise price is paid in whole or in part with Shares, the value
of the Shares surrendered shall be their Fair Market Value on the date the
Option is exercised. The Company in its sole discretion may, on an individual
basis or pursuant to a general program established in connection with this Plan,
lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist
an Optionee to obtain the cash necessary to exercise all or a portion of an
Option granted hereunder or to pay any tax liability of the Optionee
attributable to such exercise. If the exercise price is paid in whole or in part
with Optionee's promissory note, such note shall (i) provide for full recourse
to the maker, (ii) be
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<PAGE> 5
collateralized by the pledge of the Shares that the Optionee purchases upon
exercise of such Option, (iii) bear interest at a rate no less than the base
lending rate of the Company's principal lender or if there is no such lender at
a rate no less than the prime rate as published from time to time in THE WALL
STREET JOURNAL, and (iv) contain such other terms as the Committee in its sole
discretion shall reasonably require. No Optionee shall be deemed to be a holder
of any Shares subject to an Option unless and until a stock certificate or
certificates for such Shares are issued to such person(s) under the terms of
this Plan. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as expressly provided in Section 10 hereof.
8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable
in such amounts, at such intervals and upon such terms as the Committee shall
provide in such Option, except as otherwise provided in this Section 8.
(a) The expiration date of an Option shall be determined by
the Committee at the time of grant, but in no event shall an Option be
exercisable after the expiration of ten years from the date of grant of the
Option.
(b) Unless otherwise provided in any Option, each outstanding
Option shall become immediately fully exercisable upon any Change in Control.
(c) The Committee may in its sole discretion accelerate the
date on which any Option may be exercised and may accelerate the vesting of any
Shares subject to any Option or previously acquired by the exercise of any
Option.
9. TERMINATION OF OPTION PERIOD.
(a) The unexercised portion of any Option shall automatically
and without notice terminate and become null and void at the time of the
earliest to occur of the following:
(i) three months after the date on which the
Optionee's employment is terminated for any reason other than by reason of (A)
Cause, which, solely for purposes of this Plan, shall mean the termination of
the Optionee's employment by reason of the Optionee's willful misconduct or
gross negligence, (B) a mental or physical disability (within the meaning of
Section 22(e)(3) of the Code) as determined by a medical doctor satisfactory
to the Committee, or (C) death;
(ii) immediately upon the termination of the
Optionee's employment for Cause;
(iii) one year after the date on which the Optionee's
employment is terminated by reason of a mental or physical disability (within
the meaning of Section 22(e)(3) of the Code) as determined by a medical doctor
satisfactory to the Committee; or
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<PAGE> 6
(iv) (A) one year after the date of termination of
the Optionee's employment by reason of death of the Optionee, or (B) three
months after the date on which the Optionee dies if the Optionee dies during the
one year period specified in Section 9(a)(iii) hereof.
(b) The Committee in its sole discretion may, by giving written
notice (a "cancellation notice"), cancel, effective upon the date of the
consummation of any corporate transaction described in Sections 2(b)(ii) or
(iii) hereof, any Option that remains unexercised on such date. Such
cancellation notice shall be given a reasonable period of time prior to the
proposed date of such cancellation and may be given either before or after
approval of such corporate transaction.
10. ADJUSTMENT OF SHARES.
(a) If at any time while this Plan is in effect or unexercised
Options are outstanding, there shall be any increase or decrease in the number
of issued and outstanding Shares through the declaration of a stock dividend or
through any recapitalization resulting in a stock split-up, combination or
exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the
maximum number of Shares available for grant under this Plan, so that the same
percentage of the Company's issued and outstanding Shares shall continue to be
subject to being so optioned; and
(ii) appropriate adjustment shall be made in the
number of Shares and the exercise price per Share thereof then subject to any
outstanding Option, so that the same percentage of the Company's issued and
outstanding Shares shall remain subject to purchase at the same aggregate
exercise price.
(b) Subject to the specific terms of any Option, the Committee
may change the terms of Options outstanding under this Plan, with respect to the
option price or the number of Shares subject to the Options, or both, when, in
the Committee's sole discretion, such adjustments become appropriate by reason
of any corporate transaction described in Sections 2(b)(ii) or (iii) hereof.
(c) Except as otherwise expressly provided herein, the issuance
by the Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection with
direct sale or upon the exercise of rights or warrants to subscribe therefor, or
upon conversion of shares or obligations of the Company convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to the number of or exercise price of Shares
then subject to outstanding Options granted under this Plan.
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under this Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate (i)
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issue by the Company of debt securities,
or preferred or preference stock that
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<PAGE> 7
would rank above the Shares subject to outstanding Options; (iv) the dissolution
or liquidation of the Company; (v) any sale, lease, exchange, transfer,
assignment or other disposition of all or any part of the assets or business of
the Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise.
11. TRANSFERABILITY OF OPTIONS.
(a) No Incentive Stock Option shall be transferable by the
Optionee other than by will, the laws of descent and distribution, and each
Incentive Stock Option shall be exercisable during the Optionee's lifetime only
by the Optionee.
(b) A person that receives Non-Statutory Stock Options under
this Plan or such person's beneficiary shall have the power or right to sell,
exchange, pledge, transfer, assign or otherwise encumber or dispose of such
person's or beneficiary's Non-Statutory Stock Options received under this Plan
only as follows: (i) to the spouse or any children or grandchildren of such
person that receives Non-Statutory Stock Options under this Plan; (ii) as a
charitable contribution or gift to or for the use of any person or entity
described in Section 170(c) of the Code; (iii) to any Controlled Entity; or
(iv) by will or the laws of intestate succession.
12. ISSUANCE OF SHARES. As a condition of any sale or issuance of
Shares upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such federal or state securities or other law or regulation
including, but not limited to, the following:
(i) a representation and warranty by the Optionee to
the Company, at the time any Option is exercised, that he is acquiring the
Shares to be issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(ii) a representation, warranty and/or agreement to
be bound by any legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities law deemed by the
Committee to be applicable to the issuance of the Shares and are endorsed upon
the Share certificates.
13. ADMINISTRATION OF THE PLAN.
(a) This Plan shall be administered by the Committee, which
shall consist of not less than two Directors. The Committee shall have all of
the powers of the Board with respect to this Plan; provided that if any member
of the Committee is not a Non-Employee Director, then the Board shall approve
any Option that the Committee proposes to grant hereunder. The Board may change
the membership of the Committee at any time and fill any vacancy occurring in
the membership of the Committee by appointment.
(b) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of this Plan. The Committee's
determinations and its interpretation and construction of any provision of this
Plan shall be final and conclusive.
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<PAGE> 8
(c) Any and all decisions or determinations of the Committee
shall be made either (i) by a majority vote of the members of the Committee at a
meeting or (ii) without a meeting by the unanimous written consent of the
members of the Committee.
14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any
other provisions of this Plan to the contrary, an Incentive Stock Option shall
not be granted to any person owning directly or indirectly (through attribution
under Section 424(d) of the Code) at the date of grant, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company (or of its subsidiary as defined in Section 424 of the Code at the date
of grant) unless the option price of such Option is at least 110% of the Fair
Market Value of the Shares subject to such Option on the date the Option is
granted, and such Option by its terms is not exercisable after the expiration of
five years from the date such Option is granted.
15. INTERPRETATION.
(a) The Plan shall be administered and interpreted so that all
Incentive Stock Options granted under this Plan will qualify as Incentive Stock
Options under Section 422 of the Code. If any provision of this Plan should be
held invalid for the granting of Incentive Stock Options or illegal for any
reason, such determination shall not affect the remaining provisions hereof,
but instead this Plan shall be construed and enforced as if such provision had
never been included in this Plan.
(b) This Plan shall be governed by the laws of the State of
Ohio.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.
16. AMENDMENT AND DISCONTINUATION OF THE PLAN.
(a) Either the Board or the Committee may from time to time
amend or discontinue this Plan or any Option; provided, however, that, except to
the extent provided in Section 10, no such amendment may, without approval by
the stockholders of the Company, (i) materially increase the benefits accruing
to participants under this Plan, (ii) materially increase the number of
securities which may be issued under this Plan, or (iii) materially modify the
requirements as to eligibility for participation in this Plan; and provided
further, that, except to the extent provided in Section 9, no amendment or
suspension of this Plan or any Option issued hereunder shall substantially
impair any Option previously granted to any Optionee without the consent of such
Optionee.
(b) Notwithstanding anything herein to the contrary, the
provisions of this Plan which govern the exercise price per Share under each
such Option, when and under what circumstances such Option will be granted and
the period within which each such Option may be exercised, shall not be amended
more than once every six months (even with stockholder approval)
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<PAGE> 9
other than to conform to changes to (i) the Code, or the rules promulgated
thereunder, (ii) the Employee Retirement Income Security Act of 1974, as
amended, or the rules promulgated thereunder, or (iii) rules promulgated by the
Securities and Exchange Commission.
17. EFFECTIVE DATE AND TERMINATION DATE. The Plan shall be
effective upon the Effective Date and shall terminate on the tenth anniversary
of the Effective Date.
*
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<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the consolidated financial statements of Hawk Corporation
dated December 19, 1997, in Amendment No. 2 to the Registration Statement (Form
S-1 No. 333-40535) and related Prospectus of Hawk Corporation for the
registration of ________ shares of its common stock.
/s/ Ernst & Young LLP
Cleveland, Ohio
December 29, 1997
<PAGE> 2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the financial statements of Helco, Inc. dated July 26,
1994, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-40535)
and related Prospectus of Hawk Corporation for the registration of _____ shares
of its common stock.
/s/ Ernst & Young LLP
Cleveland, Ohio
December 29, 1997
<PAGE> 3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the financial statements of Sinterloy, Inc. dated August
22, 1997, in Amendment No. 2 to the Registration Statement (Form S-1 No.
333-40535) and related Prospectus of Hawk Corporation for the registration of
_______ shares of its common stock.
/s/ Ernst & Young LLP
Cleveland, Ohio
December 29, 1997
<PAGE> 4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the consolidated financial statements of S.K. Wellman
Limited Inc. and Subsidiaries dated September 26, 1996, in Amendment No. 2 to
the Registration Statement (Form S-1 No. 333-40535) and related Prospectus of
Hawk Corporation for the registration of ________ shares of its common stock.
/s/ Ernst & Young LLP
Cleveland, Ohio
December 29, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-40535) to be filed on or about December 30, 1997, of our report dated
February 5, 1997, on our audit of the financial statements of Houghton
Acquisition Corporation d/b/a Hutchinson Foundry Products Company. We also
consent to the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
St. Louis, Missouri
December 30, 1997
