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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-18433
PROSPECTUS
[Logo]
HAWK CORPORATION
AND
FRICTION PRODUCTS CO., HAWK BRAKE, INC., LOGAN METAL STAMPINGS, INC., S.K.
WELLMAN HOLDINGS, INC.,
S.K. WELLMAN CORP., WELLMAN FRICTION PRODUCTS U.K. CORP., HELSEL, INC.
AND HUTCHINSON PRODUCTS CORPORATION
OFFER TO EXCHANGE $100,000,000 OF ITS SERIES B 10 1/4% SENIOR NOTES DUE 2003
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR $100,000,000
OF ITS OUTSTANDING 10 1/4% SENIOR NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON APRIL 21, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
Hawk Corporation, a Delaware corporation ("Hawk" or the "Company"), and each
of its domestic subsidiaries listed above, hereby offer to exchange (the
"Exchange Offer") up to $100,000,000 in aggregate principal amount of Hawk's new
Series B 10 1/4% Senior Notes due 2003 (the "Exchange Notes") for $100,000,000
in aggregate principal amount of Hawk's outstanding 10 1/4% Senior Notes due
2003 (the "Notes"). The terms of the Exchange Notes are identical in all
material respects (including principal amount, interest rate and maturity) to
the terms of the Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes will be freely transferable by holders
thereof (other than as provided herein) and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Notes and be entitled to the benefits of the Indenture (as defined)
governing the Notes.
Interest on the Exchange Notes will be payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 1997. The Exchange Notes will mature
on December 1, 2003, unless previously redeemed. The Exchange Notes will be
redeemable in cash at the option of the Company, in whole or in part, on or
after December 1, 2000, at the redemption prices set forth herein, together with
accrued interest thereon to the date of redemption. In addition, the Company may
also redeem up to $35.0 million aggregate principal amount of Exchange Notes in
cash at its option at any time prior to December 1, 1999 at 110.25% of the
principal amount thereof, plus accrued interest to the date of redemption, with
the net proceeds of one or more Public Equity Offerings (as defined); provided,
however, that at least $65.0 million aggregate principal amount of Notes must
remain outstanding after any such redemption. Upon a Change of Control (as
defined), the Company will be required to offer to repurchase the Exchange Notes
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of repurchase.
The Exchange Notes will be senior unsecured obligations of the Company,
ranking senior in right of payment to all subordinated indebtedness of the
Company. The Exchange Notes will rank pari passu in right of payment with all
other existing and future unsecured senior indebtedness of the Company. THE
EXCHANGE NOTES WILL BE GUARANTEED ON A SENIOR UNSECURED BASIS BY EACH OF THE
DOMESTIC SUBSIDIARIES OF THE COMPANY AND ANY FUTURE RESTRICTED SUBSIDIARIES (AS
DEFINED) THAT ARE NOT FOREIGN SUBSIDIARIES (AS DEFINED) (COLLECTIVELY, THE
"GUARANTORS"). HOWEVER, THE EXCHANGE NOTES WILL BE EFFECTIVELY SUBORDINATED TO
ALL FUTURE AND EXISTING SECURED INDEBTEDNESS OF THE COMPANY AND THE GUARANTORS
AND TO ALL FUTURE AND EXISTING INDEBTEDNESS OF THE COMPANY'S SUBSIDIARIES THAT
ARE NOT GUARANTORS. As of December 31, 1996, the Company and the Guarantors had
approximately $1.6 million of secured indebtedness outstanding (exclusive of
unused commitments of $25.0 million under the New Revolving Credit Facility, as
defined) and no senior debt outstanding other than the Notes, and the
subsidiaries that are not Guarantors had approximately $1.2 million of
indebtedness outstanding. The Company has, and following the Exchange Offer will
continue to have, substantial indebtedness. As of December 31, 1996, the Company
had total indebtedness, including current maturities, of $129.2 million. See
"Risk Factors -- Substantial Leverage and Debt Service Requirements."
The Notes were sold by the Company in connection with the concurrent
consummation of certain of the Transactions (as defined). See "The
Transactions." All of the Notes were originally issued and sold to the Placement
Agents (as defined) on November 27, 1996 in transactions not registered under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
the exemption provided by Section 4(2) of the Securities Act. Accordingly, the
Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy certain of
the obligations of Hawk and the Guarantors under the registration rights
agreement relating to the Notes. See "The Exchange Offer -- Purpose of the
Exchange Offer."
Each holder who is a broker-dealer and who receives Exchange Notes for its
own account in exchange for Notes that were acquired by it as a result of
market-making activities or other trading activities will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such Exchange Notes. The Letter of Transmittal relating to the Exchange
Offer states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed to make available, for a period
of up to 120 days after consummation of the Exchange Offer, copies of this
Prospectus, as amended or supplemented, to any broker-dealer and any other
persons, if any, with similar prospectus delivery requirements, for use in
connection with any resale of Exchange Notes. In the absence of an exemption,
each broker-dealer that received the Notes from the Company in the Offering (as
defined) and not as a result of market-making or other trading activities must
comply with the registration requirements of the Securities Act. See
"Registration Rights" and "Plan of Distribution."
The Notes are designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market. The Exchange Notes
constitute securities for which there is no established trading market. The
Company and the Guarantors do not intend to list the Exchange Notes on any
national securities exchange or to seek admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. Any Notes
not tendered and accepted in the Exchange Offer will remain outstanding and will
continue to be subject to the restrictions on transfer set forth in the
Indenture. The Company and the Guarantors do not intend to register the Notes
under the Securities Act. To the extent that any Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Notes could be
adversely affected. No assurance can be given as to the liquidity of the trading
market for either the Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Notes being tendered for exchange. The date of acceptance and exchange
of the Notes (the "Exchange Date") will be the first business day following the
Expiration Date. Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Hawk and the Guarantors will pay all
expenses incident to the Exchange Offer. Neither Hawk nor any of the Guarantors
will receive any cash proceeds from the Exchange Offer.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE
OFFER.
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.
March 20, 1997
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AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission"), Washington, D.C., a Registration Statement on
Form S-4 (together with all amendments, exhibits, schedules and supplements
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Exchange Notes offered
hereby. 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 Exchange Notes offered hereby, reference is made to the
Registration Statement. Copies of the Registration Statement may be inspected
without charge 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 and the Guarantors.
The Company and the Guarantors are not currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company and the Guarantors intend to submit a
no-action letter asking the Commission to confirm that it will not object if the
Guarantors do not individually comply with the reporting and information
obligations of Sections 13 and 15(d) of the Exchange Act, provided that, in lieu
thereof, the Company's periodic reports under the Exchange Act contain, in
addition to consolidated financial statements of the Company and its
subsidiaries, a note with tabular consolidating condensed financial statements
of the Company, the Guarantors as a group and the non-guarantor subsidiaries of
the Company as a group, together with any other required disclosure contemplated
by applicable rules promulgated under the Exchange Act. Separate financial
statements and other disclosures concerning the Guarantors are not presented
herein because management has determined they are not material to investors.
Assuming that no-action relief is granted, upon completion of the Exchange
Offer, only the Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will file periodic reports and other
information with the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of any material so filed can be obtained from the Public Reference
Section of the Commission, upon payment of certain fees prescribed by the
Commission.
In addition, the Company and the Guarantors have agreed that, whether or
not required to do so by the rules and regulations of the Commission, for so
long as any of the Exchange Notes remain outstanding, they will furnish to the
holders of the Exchange Notes and file with the Commission (unless the
Commission will not accept such a filing) (1) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company and the Guarantors were
required to file such forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants, and (2) all reports that would be required to be filed with the
Commission on Form 8-K if the Company and the Guarantors were required to file
such reports and (3) any other information, documents and other reports that the
Company and the Guarantors would be required to file with the Commission if they
were subject to Section 13 or 15(d) of the Exchange Act.
UNTIL APRIL 14, 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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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") and Hutchinson Products
Corporation ("Hutchinson"). In addition, in March 1996, the Company purchased
certain friction products assets of GKN Bound Brook Limited ("GKN"). Unless
otherwise indicated, industry and market data used in this Prospectus were
obtained from internal Company data that have not been independently verified.
Unless otherwise indicated, the information in this Prospectus assumes
completion of all the Transactions, as described in this Prospectus. Holders of
Notes considering tendering their Notes in the Exchange Offer should read this
Prospectus in its entirety. This Prospectus contains forward-looking statements
that involve certain risks and uncertainties. Actual results and events may
differ significantly from those discussed in the forward-looking statements.
Factors that might cause a difference include, but are not limited to, those
discussed in "Risk Factors."
THE COMPANY
GENERAL
Hawk designs, engineers, manufactures and markets friction products (83.4%
of sales in 1996) and precision engineered components (16.6%). The Company is a
leading worldwide supplier of friction products for brakes, clutches and
transmissions used in aerospace, industrial and specialty applications. The
Company is also a leading supplier of precision engineered components primarily
made from powder metals, including pump elements, gears, transmission plates,
pistons and anti-lock brake sensor rings, used in industrial applications. The
Company focuses on manufacturing products requiring sophisticated engineering
and production techniques for applications in aerospace and specialty industrial
markets where it has achieved a major market position.
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 Lockheed L-1011 aircraft and is
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 large trucks, including Dana,
Caterpillar and John Deere. 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 precision engineered components
made from powder metals are used in a wide variety of industrial applications,
often as a lower cost replacement for parts manufactured by a traditional
forging, casting or stamping technology.
The Company believes that its diverse customer base and broad aftermarket
product line lessens 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 plan of fostering
growth by making complementary acquisitions and broadening its customer base.
From 1991 to 1996, the Company's net sales and income from operations (before
non-recurring costs in 1996 of $4.0 million for plant consolidation expenses)
increased at a compound annual rate of 42.6% and 34.9%, respectively, and for
1996, the Company's net sales and income from operations (before such
non-recurring
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costs) increased 46.5% and 38.7%, respectively, compared to 1995. Since 1994,
the sales growth has been primarily driven by the acquisitions of Helsel and
SKW. The acquisitions tripled the net sales of the Company. In addition, the
Company's net sales during the period from 1991 to 1996 grew internally, without
giving effect to the acquisitions, at a compound annual rate of 12.9%.
BUSINESS STRATEGY
The Company seeks to grow by continuing to focus on a balanced product mix
targeted at high margin specialty applications. The principal elements of the
Company's business strategy include:
- Focus on High-Margin, Specialty Applications. The Company operates
in aerospace and specialty industrial markets that typically 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 markets that use standardized products. The
Company's gross margin in 1996 was 25.9%.
- Leveraging Customer Relationships. The Company's engineers work
closely with its 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 have enabled it to
build and maintain strong and stable customer relationships. The Company
also believes that it is the sole source for specific applications with
respect to more than 85% of its sales. Each of the Company's 10 largest
customers have been customers of the Company or its predecessors for more
than 10 years. As further testimony to its customer satisfaction record,
the Company has received numerous preferred supplier awards from many of
its leading customers, including Aircraft Braking Systems, BFGoodrich
Aerospace, Dana, Caterpillar, Allison Transmission and John Deere.
- New Product Introduction. The Company believes that the
introduction of new products in conjunction with a new brake, clutch or
transmission system is particularly important in the friction products
business. This importance arises because the friction material is the
consumable, or wear, component of such 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, on an aircraft braking system, this ability to service the
aftermarket will likely give the Company a stable market for its friction
products for the life of the 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 has
recently introduced high performance friction material for use in racing
car brakes, which the Company believes may have additional applications in
the industrial market.
- Expanding International Sales. In recent years, the Company has
significantly expanded its international presence. With the acquisition of
SKW in 1995 and the purchase of certain friction products assets of GKN in
1996, the Company has acquired manufacturing facilities in Italy and
Canada, a sales office in the United Kingdom and a worldwide distribution
network for its products. The Company's distributors are located in
established markets throughout Europe, Canada and the Far East, as well as
emerging markets in South and Central America and Southeast Asia. As a
result of these acquisitions, sales from the Company's international
facilities grew from 9.7% of total Company net sales in 1995 to 15.9% in
1996. The Company believes that its ability to actively support
multinational customers on a global basis will allow it to increase its
sales to new and existing customers.
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- Pursuit of Strategic Acquisitions. The fragmented friction product
and powder metal component industries are undergoing consolidation. The
Company will continue to seek to acquire complementary businesses with a
major market position that will enable it to expand its product offerings,
technical capabilities and customer base. In assimilating acquired
companies, the Company may rationalize operations to reduce costs and
improve profitability. 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 an estimated $5.4 million of annualized cost savings.
------------------------
Unless the context otherwise requires, the terms "Company" and "Hawk" as
used in this Prospectus refer to Hawk Corporation, a Delaware corporation, and
its consolidated subsidiaries. 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), Feramic(R) and Fibertuff(R) are registered trademarks
of the Company and Hawk Brake is a tradename of the Company. Trademarks of
corporations other than the Company are also referred to in this Prospectus.
THE TRANSACTIONS
The Company's outstanding 10 1/4% Senior Notes due 2003 (the "Notes") were
offered as a component of a series of transactions (the "Transactions") that the
Company implemented to finance the acquisition of Hutchinson Foundry Products
Company and to improve the Company's operating and financial flexibility. In
addition to the offering of the Notes (the "Offering"), the Transactions
included: (1) the Company's repayment and termination of its existing senior
bank credit facility (the "Old Credit Facility"); (2) the Company's and its
domestic subsidiaries' execution of a new revolving credit facility (the "New
Revolving Credit Facility"); (3) the amendment to the Company's 12% senior
subordinated notes (the "Senior Subordinated Notes"); (4) the merger (the "Hawk
Controlling Stockholder Merger"), in a tax-free reorganization, of Hawk Holding
Corp., a Delaware corporation and a principal stockholder of the Company ("Old
Hawk"), with and into the Company; and (5) the Hutchinson acquisition. The
Transactions described in clauses (1) through (4) above were completed
concurrently with the Offering. The Company acquired Hutchinson in January 1997.
See "The Transactions" and "Certain Transactions -- Transactions Concurrent with
the Offering."
HUTCHINSON ACQUISITION
As part of the Company's strategy of acquiring complementary businesses
with a major market position that will expand the Company's product offerings,
technical capabilities and customer base, the Company acquired all the
outstanding capital stock of Hutchinson in January 1997. Hutchinson designs and
manufactures precision engineered components consisting primarily of rotors for
small motors used in small appliances and office equipment. The Company acquired
Hutchinson for (1) $10.0 million in cash at the closing of the acquisition,
subject to adjustment for changes in Hutchinson's stockholders' equity and
actual 1996 Hutchinson earnings, (2) notes (the "Hutchinson Acquisition Notes")
consisting of 8.0% two-year notes in the aggregate principal amount of $1.5
million, $500,000 of which is convertible at the option of the holders thereof
into shares of the Company's Class A Common Stock, $0.01 par value per share
("Class A Common Stock"), and (3) contingent payments to be made by the Company
only if Hutchinson meets certain earnings targets. There is no assurance that
the Company will be able to successfully integrate Hutchinson into its
operations. See "The Transactions -- Hutchinson Acquisition" and
"Business -- Hutchinson Acquisition."
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THE EXCHANGE OFFER
The Exchange Offer......... The Company and the Guarantors are offering to
exchange, pursuant to the Exchange Offer,
$100,000,000 aggregate principal amount of the
Company's new Series B 10 1/4% Senior Notes due
2003 (the "Exchange Notes") for $100,000,000
aggregate principal amount of the Company's
outstanding 10 1/4% Senior Notes due 2003 (the
"Notes"). The Notes were originally issued and sold
on November 27, 1996 to Schroder Wertheim & Co.
Incorporated, BT Securities Corporation and
McDonald & Company Securities, Inc. (the "Placement
Agents") in transactions not registered under the
Securities Act in reliance upon the exemption
provided by Section 4(2) of the Securities Act. The
terms of the Exchange Notes are identical in all
material respects (including principal amount,
interest rate and maturity) to the terms of the
Notes for which they may be exchanged pursuant to
the Exchange Offer, except that the Exchange Notes
will be freely transferable by holders thereof
(other than as provided herein), and will not be
subject to any covenant regarding registration. See
"The Exchange Offer -- Terms of the Exchange" and
"The Exchange Offer -- Terms and Conditions of the
Letter of Transmittal" and "Description of the
Exchange Notes."
Interest Payments.......... Interest on the Exchange Notes shall accrue from
the last interest payment date (June 1 or December
1) on which interest was paid on the Notes so
surrendered or, if no interest has been paid on
such Notes, from November 27, 1996 (the "Issue
Date").
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Notes being
tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on April 21, 1997, unless extended
(the "Expiration Date"). Any Note not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination
of the Exchange Offer.
Conditions of the Exchange
Offer..................... The Company and the Guarantors' obligation to
consummate the Exchange Offer will be subject to
certain conditions. See "The Exchange
Offer -- Conditions to the Exchange Offer." The
Company and the Guarantors reserve the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition.
Withdrawal Rights.......... The tender of Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the
Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
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Procedures for Tendering
Notes..................... See "The Exchange Offer -- Tender Procedure."
Federal Income Tax
Consequences.............. The exchange of Notes for Exchange Notes should not
be a taxable exchange for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
Consequences of the
Exchange Offer............ Holders of the Notes who do not tender their Notes
in the Exchange Offer will continue to hold such
Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture
dated as of November 27, 1996, among the Company,
the Guarantors and Bank One Trust Company, NA, as
trustee, relating to the Notes and the Exchange
Notes (the "Indenture"), except for any such rights
under the Registration Rights Agreement (the
"Registration Rights Agreement") dated November 27,
1996 by and among the Company and the Placement
Agents, that by their terms terminate or cease to
have further effectiveness as a result of the
making of, and the acceptance for exchange of all
validly tendered Notes pursuant to, the Exchange
Offer. Holders of Notes who do not exchange their
Notes for Exchange Notes pursuant to the Exchange
Offer will continue to be subject to the
restrictions on transfer of such Notes as set forth
in the legend thereon as a consequence of the offer
or sale of the Notes pursuant to an exemption from,
or in a transaction not subject to, the
registration requirements of the Securities Act and
applicable state securities laws. In general, the
Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities
laws. The Company and the Guarantors do not intend
to register the Notes under the Securities Act. All
untendered Notes will continue to be subject to the
restrictions on transfer set forth in the
Indenture. To the extent that Notes are tendered
and accepted in the Exchange Offer, the trading
market for untendered Notes could be adversely
affected.
Use of Proceeds............ There will be no cash proceeds to the Company or
any of the Guarantors from the exchange pursuant to
the Exchange Offer.
Exchange Agent............. Bank One Trust Company, NA is serving as Exchange
Agent in connection with the Exchange Offer.
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TERMS OF THE EXCHANGE NOTES
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Notes for which they may be exchanged pursuant to the Exchange Offer, except
that the Exchange Notes will be freely transferable by holders thereof (other
than as provided herein) and will not be subject to any covenant regarding
registration.
The Exchange Notes......... $100,000,000 aggregate principal amount of Series B
10 1/4% Senior Notes due 2003.
Maturity................... December 1, 2003.
Interest Payment Dates..... June 1 and December 1 of each year, commencing June
1, 1997.
Guarantees................. The Exchange Notes will be guaranteed (the
"Guarantees") on a senior unsecured basis by each
of the domestic subsidiaries of the Company and any
future Restricted Subsidiaries (as defined) that
are not Foreign Subsidiaries (as defined) (each, a
"Guarantor"). See "Description of the Exchange
Notes -- The Guarantees."
Ranking.................... The Exchange Notes will be senior unsecured
obligations of the Company, ranking senior in right
of payment to all subordinated indebtedness of the
Company. The Guarantees will be senior unsecured
obligations of the Guarantors, ranking senior in
right of payment to all subordinated indebtedness
of the Guarantors. The Exchange Notes will rank
pari passu in right of payment with all other
existing and future unsecured senior indebtedness
of the Company. However, the Exchange Notes will be
effectively subordinated to all future and existing
secured indebtedness of the Company and the
Guarantors and to all future and existing
indebtedness of the Company's subsidiaries that are
not Guarantors. As of December 31, 1996, the
Company and the Guarantors had approximately $1.6
million of secured indebtedness outstanding
(exclusive of unused commitments of $25.0 million
under the New Revolving Credit Facility) and no
senior debt outstanding other than the Notes, and
the subsidiaries that are not Guarantors had
approximately $1.2 million of indebtedness
outstanding. The Indenture will permit the Company
and its subsidiaries to incur additional
indebtedness, subject to certain limitations. See
"Risk Factors -- Ranking of the Exchange Notes" and
"Description of the Exchange Notes -- Ranking."
Optional Redemption........ The Exchange Notes will be redeemable in cash at
the option of the Company, in whole or in part, on
or after December 1, 2000, at the redemption prices
set forth herein, together with accrued and unpaid
interest thereon, if any, to the date of
redemption. In addition, the Company may also
redeem up to $35.0 million aggregate principal
amount of Exchange Notes in cash at its option at
any time prior to December 1, 1999 at 110.25% of
the principal amount thereof, plus accrued and
unpaid interest, if any,
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<PAGE> 9
to the date of redemption, with the net proceeds of
one or more Public Equity Offerings; provided,
however, that at least $65.0 million aggregate
principal amount of Exchange Notes must remain
outstanding after any such redemption. See
"Description of the Exchange Notes -- Optional
Redemption."
Change of Control.......... Upon a Change of Control, the Company will be
required to offer to repurchase the Exchange Notes
at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. See "Description
of the Exchange Notes -- Change of Control."
Certain Covenants.......... The Indenture contains certain covenants with
respect to the Company and its Restricted
Subsidiaries that restrict, among other things, (1)
the incurrence of additional indebtedness, (2) the
payment of dividends and other restricted payments,
(3) the creation of certain liens, (4) the sales of
certain assets, (5) sale and leaseback
transactions, (6) transactions with affiliates and
(7) issuance of capital stock by subsidiaries. The
Indenture also restricts the Company's ability to
consolidate or merge with or into, or to transfer
all or substantially all of its assets to, another
person. These restrictions and requirements are
subject to a number of important qualifications and
exceptions. See "Description of the Exchange Notes
-- Certain Covenants."
Risk Factors............... Noteholders should carefully consider the matters
set forth under the caption "Risk Factors" prior to
tendering their Notes in exchange for the Exchange
Notes offered hereby. See "Risk Factors."
9
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below under the captions
"Income Statement Data," "Other Data" and "Balance Sheet Data" as of and for
each of the three years ended December 31, 1994, 1995 and 1996, have been
derived from the audited consolidated financial statements of the Company. The
unaudited pro forma income statement data and other data for the year ended
December 31, 1996 includes the historical operations of the Company and gives
effect to the Hutchinson acquisition as if it occurred as of January 1, 1996.
The unaudited pro forma balance sheet data as of December 31, 1996 includes the
historical accounts of the Company and gives effect to the Hutchinson
acquisition as if it occurred as of December 31, 1996. This data should be read
in conjunction with the more detailed information contained in the consolidated
financial statements and notes thereto, the "Unaudited Pro Forma Consolidated
Financial Information" and notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
PRO FORMA
ACTUAL AS
----------------------------------- ADJUSTED
1994 1995(1) 1996 1996(2)
------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................ $41,395 $ 84,643 $ 123,997 $ 132,618
Gross profit......................................... 14,624 23,479 32,113 34,958
Plant consolidation expense(3)....................... -- -- 4,028 4,028
Income from operations............................... 7,376 9,980 9,811 11,463
Extraordinary item -- write-off of deferred financing
costs, net of $798,000 income taxes................ 1,196 1,196
Net income (loss).................................... 2,287 762 (3,078) (2,220)
Preferred stock dividend requirements................ (294) (326) (226) (226)
Net income (loss) applicable to common
shareholders....................................... 1,993 436 (3,304) (2,446)
Net income (loss) per share applicable to common
shareholders....................................... 1.76 .28 (1.88) (1.39)
Number of shares used to compute per share data...... 1,132,689 1,538,162 1,760,946 1,760,946
OTHER DATA:
EBITDA, as adjusted(4)............................... $ 9,842 $ 15,507 $ 22,257 $ 24,308
Depreciation and amortization........................ 2,466 5,527 8,418 8,817
Interest expense..................................... 3,267 7,323 10,648 10,671
Cash flows from:
Operating activities............................... 4,821 7,713 5,866 --
Investing activities............................... (6,498) (67,388) (8,113) --
Financing activities............................... 2,312 59,748 27,250 --
Ratio of EBITDA, as adjusted, to interest
expense(4)(5)...................................... 3.0x 2.1x 2.1x 2.3x
Ratio of net debt to EBITDA, as adjusted(4)(6)....... 2.6x 5.7x 4.6x 4.8x
Ratio of earnings to fixed charges(7)................ 2.0x 1.3x -- 1.0x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------
PRO FORMA
AS
ACTUAL ADJUSTED
-------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital, excluding current portion of long-term debt....................... $ 49,414 $ 40,603
Total assets....................................................................... 158,441 161,810
Long-term debt (including current portion)......................................... 129,183 131,433
Shareholders' equity............................................................... 1,190 1,190
</TABLE>
(footnotes on the following page)
10
<PAGE> 11
- ---------------
(1) Revised to reflect the acquisition of minority interest in Helsel. See Note
C of Notes to the Company's Consolidated Financial Statements.
(2) The unaudited pro forma income statement data and other data do not give
effect to $3.6 million of annualized projected cost savings the Company
expects to realize from the closing of a manufacturing facility, and $1.6
million of projected cost savings related to the termination of selling,
technical and administrative personnel at another facility.
(3) Reflects charges in 1996 relating primarily to the relocation of machinery
and equipment.
(4) As used herein, "EBITDA, as adjusted" is defined as income from operations
plus depreciation and amortization excluding plant consolidation expense.
The plant consolidation expense adjustment to EBITDA reflects charges in
1996, relating primarily to the relocation of machinery and equipment.
EBITDA, as adjusted, is presented because (i) it is a widely accepted
financial indicator of a company's ability to incur and service debt, (ii)
it reflects the non-cash effect on earnings of generally high levels of
amortization expense associated with the acquisitions, and (iii) it is the
basis on which compliance with the financial covenants contained in the
Indenture, the New Revolving Credit Agreement and the Senior Subordinated
Notes is principally determined. However, EBITDA, as adjusted, does not
purport to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flow, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. Also, the measure of EBITDA, as adjusted, may not be comparable
to similar measures reported by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) The pro forma ratio of EBITDA, as adjusted, to interest expense gives effect
to the Hutchinson acquisition. This data should be read in conjunction with
the more detailed information contained in the "Unaudited Pro Forma
Consolidated Financial Information" and notes thereto. The ratios for the
periods presented reflect that the Company has substantial leverage. See
"Risk Factors -- Substantial Leverage and Debt Service Requirements."
(6) For purposes of the computation, net debt is equal to total long-term debt,
less cash and cash equivalents. The pro forma ratio of net debt to EBITDA,
as adjusted, gives effect to the SKW acquisition. This data should be read
in conjunction with the more detailed information contained in the
"Unaudited Pro Forma Consolidated Financial Information" and notes thereto.
The ratios for the periods presented reflect that the Company has
substantial leverage. See "Risk Factors -- Substantial Leverage and Debt
Service Requirements."
(7) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary items, interest expense, amortization of
deferred financing costs, taxes and a portion of rent expense representative
of interest, by the sum of interest expense, amortization of deferred
financing costs, a portion of rent expense representative of interest and
preferred stock dividend requirements. The ratio of earnings to fixed
charges is not meaningful for periods that result in a deficit. For 1996,
the deficit of earnings to fixed charges was $1.5 million.
11
<PAGE> 12
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully by Noteholders prior to
tendering their Notes in exchange for the Exchange Notes offered hereby.
CONSEQUENCES OF THE EXCHANGE OFFER; TERMS OF THE EXCHANGE
Holders of Notes who do not exchange their Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Notes as set forth in the legend thereon as a consequence of
the offer or sale of the Notes pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Notes may not be offered
or sold, unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company and the Guarantors do not intend
to register the Notes under the Securities Act. Based on interpretations by the
staff of the Commission set forth in a series of no-action letters issued to
third parties, the Company and the Guarantors believe that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any such holder
that is an "affiliate" of the Company and the Guarantors within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business,
such holders have no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any such
other person is engaging in or intends to engage in a distribution of such
Exchange Notes. However, the Company and the Guarantors have not sought, and do
not intend to seek, their own no-action letter, and there can be no assurance
that the staff of the Commission would make a similar determination with respect
to the Exchange Offer. Any holder who is an affiliate of Hawk and the Guarantors
or who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes cannot rely on such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. Each holder who is a broker-dealer and who receives Exchange Notes for
its own account in exchange for Notes that were acquired by it as a result of
market-making activities or other trading activities will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. In the absence of an exemption, each broker-dealer that
received Notes from the Company in the Offering and not as a result of
market-making or other trading activities must comply with the registration
requirements of the Securities Act. See "Plan of Distribution." Holders of Notes
do not have any appraisal or dissenters' rights under the Delaware General
Corporation Law in connection with the Exchange Offer.
NECESSITY TO COMPLY WITH EXCHANGE PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Notes, holders of Notes must transmit a properly completed
Letter of Transmittal (as defined), including all other documents required by
such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth in the Letter of Transmittal on or prior to the Expiration Date. In
addition, either (1) certificates for the Notes must be received by the Exchange
Agent along with the Letter of Transmittal or (2) a timely confirmation of a
book-entry transfer of such Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedure for book-entry transfer described herein, must be received by the
Exchange Agent prior to the Expiration Date, or (3) the holder must timely
comply with the guaranteed delivery procedures described herein. See "The
Exchange Offer."
12
<PAGE> 13
BLUE SKY RESTRICTIONS ON RESALE OF EXCHANGE NOTES
In order to comply with the securities laws of certain jurisdictions, the
Exchange Notes may not be offered or resold by any holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company and the Guarantors have agreed,
pursuant to the Registration Rights Agreement and subject to certain specified
limitations therein, to register or qualify the Exchange Notes for offer or sale
under the securities or blue sky laws of such jurisdictions as any holder of
Notes reasonably requests. However, an exemption is generally available for
sales to registered broker-dealers and certain institutional buyers. Other
exemptions under applicable state securities laws may also be available.
LOSS IN 1996
In 1996, the Company incurred $4.0 million of non-recurring charges
relating 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
the Old 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 acquisition as if it occurred as of December 31, 1996,
the Company's 1996 loss before extraordinary item would have been $1.0 million.
See "Management's Discussion and Analysis of Pro Forma Results of Operations and
Financial Condition -- Pro Forma 1996 Compared to 1995" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- 1996
Compared to 1995."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS
The Company has, and following the Exchange Offer will continue to have,
substantial indebtedness. As of December 31, 1996, the Company had total
indebtedness, including current maturities, of $129.2 million. The Company's
ability to make scheduled payments of the principal of or interest on, or to
refinance, its indebtedness (including the Exchange Notes) and to make scheduled
payments under its lease agreements depends on its future performance, which is
subject to economic, financial, competitive and other factors beyond its
control.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following: (1)
the Company will have significant cash requirements to service debt, reducing
funds available for operations and future business opportunities and increasing
the Company's vulnerability to adverse general economic and industry conditions
and competition; (2) the Company's leveraged position will increase its
vulnerability to competitive pressures; (3) the financial covenants and other
restrictions contained in the New Revolving Credit Facility, the Indenture, the
Senior Subordinated Notes and other agreements relating to the Company's
indebtedness require the Company to meet certain financial tests and will
restrict its ability to borrow additional funds, to dispose of assets or to pay
cash dividends on, or repurchase, preferred or common stock; and (4) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited. Any default under the documents governing
indebtedness of the Company could have a significant adverse effect on the
market value of the Exchange Notes. Certain of the Company's competitors
currently operate on a less leveraged basis and may have greater operating and
financing flexibility than the Company.
The Company's primary source of liquidity is cash flow from operations.
Based upon the current level of operations, the Company believes that its cash
flow from operations, together with borrowings under the New Revolving Credit
Facility and its other sources of liquidity, will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
13
<PAGE> 14
There can be no assurance, however, that the Company's business will continue to
generate cash flow at or above current levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its debt
and make necessary capital or other expenditures, or if its future cash flows
are insufficient to amortize all required principal payments out of internally
generated funds, 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 can be no assurance that any such refinancing or
asset sales would be possible or that any additional financing could be
obtained.
RESTRICTIVE COVENANTS
The New Revolving Credit Facility, the Indenture and the Senior
Subordinated Notes contain a number of significant financial covenants and other
restrictions that, among other things, will restrict the ability of the Company
to dispose of assets, incur additional indebtedness, repay other indebtedness or
amend other debt instruments, pay dividends, create liens on assets, enter into
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures or engage in certain transactions with subsidiaries and affiliates,
and will otherwise restrict certain corporate activities. See "Description of
Certain Indebtedness" and "Description of the Exchange Notes -- Certain
Covenants."
The Company's ability to comply with the covenants contained in the New
Revolving Credit Facility, the Indenture and the Senior Subordinated Notes may
be affected by events beyond its control, including prevailing economic,
financial and industry conditions. The breach of any of such covenants or
restrictions could result in a default under the New Revolving Credit Facility,
the Indenture or the Senior Subordinated Notes, which would permit the senior
lenders or the holders of the Exchange Notes or the Senior Subordinated Notes,
as the case may be, to declare all amounts borrowed thereunder to be due and
payable, together with accrued and unpaid interest, and the commitments of the
senior lenders to make further extensions of credit under the New Revolving
Credit Facility could be terminated. If the Company were unable to repay its
indebtedness to its senior lenders, such lenders could proceed against the
collateral securing such indebtedness, which collateral consists of accounts
receivable and inventory of the Company and its domestic subsidiaries.
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 13.8%
of the Company's consolidated net sales in 1995. In addition, the Company's top
five customers accounted for approximately 40.1% of the Company's consolidated
net sales in 1996 and approximately 40.9% of the Company's consolidated net
sales in 1995. Thus, a significant decrease or interruption in business from
Aircraft Braking Systems, or a loss of any of the Company's other significant
customers, could have a material adverse effect on the Company's financial
condition, liquidity and results of operations. Although the Company does have
long-term contracts with several of its significant customers, these contracts
do not include minimum purchase requirements and may be terminated by the
customers at any time. See "Business -- Customers."
RANKING OF THE EXCHANGE NOTES; HOLDING COMPANY STRUCTURE
The Company is a holding company, the principal assets of which consist of
the stock of its manufacturing subsidiaries. To meet its debt obligations, the
Company is dependent solely on payments from these subsidiaries. The Exchange
Notes will be senior unsecured obligations of the Company, ranking senior in
right of payment to all subordinated indebtedness of the Company. The Guarantees
are senior unsecured obligations of the Guarantors, ranking senior in right of
payment to all subordinated indebtedness of the Company. The Exchange Notes will
rank pari passu in right of payment with all other existing and future unsecured
senior indebtedness of the Company.
14
<PAGE> 15
However, the Exchange Notes will be effectively subordinated to all future and
existing secured indebtedness of the Company and the Guarantors and to all
future and existing indebtedness of the Company's subsidiaries that are not
Guarantors. As of December 31, 1996, the Company and the Guarantors had
approximately $1.6 million of secured indebtedness outstanding (exclusive of
unused commitments of $25.0 million under the New Revolving Credit Facility) and
no senior debt outstanding other than the Notes, and the subsidiaries that are
not Guarantors had approximately $1.2 million of indebtedness outstanding. The
Indenture governing the Exchange Notes will permit the Company and its
subsidiaries to incur additional indebtedness, subject to certain limitations.
See "Description of the Exchange Notes -- Ranking."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Exchange Notes will be obligations of the Company and will be
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
by the Guarantors. If a court in a lawsuit for the benefit of any unpaid
creditor of the Company or any of the Guarantors, or a representative of the
Company's or such Guarantor's creditors were to find that, at the time the
Company issued the Notes or exchanged the Exchange Notes or the Guarantor issued
its Guarantee, the Company or such Guarantor, as the case may be: (1) intended
to hinder, delay or defraud any existing or future creditor, or (2) did not
receive reasonably equivalent value for issuing the Notes, exchanging the
Exchange Notes or issuing the Guarantee, as the case may be, and (a) was
insolvent, (b) became insolvent as a result of the issuance of the Notes,
exchange of the Exchange Notes or issuance of such Guarantee, (c) was engaged or
about to engage in a business or a transaction for which its remaining assets
were unreasonably small in relation to the business or transaction, or (d)
intended to incur, or believed or reasonably should have believed that it would
incur, debts beyond its ability to pay as they became due, then such court could
void the Exchange Notes and the Guarantees and void such transactions.
Alternatively, in such event, such court could subordinate the claims of the
holders of Exchange Notes and the Guarantees to claims of other creditors of the
Company or such Guarantor, as the case may be, or take other action detrimental
to holders of the Exchange Notes and the Guarantees. Each of the Company and the
Guarantors may be viewed as insolvent if, at the time of or as a result of the
Offering, the Exchange Offer or the other components of the Transactions, the
sum of its debts is greater than the sum of all of its assets at a fair
valuation or if it generally is not paying its debts as they become due. The
Guarantees contain a savings clause that limits the amount of the Guarantees to
the maximum amount that can be guaranteed by the Guarantors under applicable
federal and state laws relating to the insolvency of debtors. The savings clause
does not contain any fixed dollar limit; rather, it limits the otherwise
unconditional obligation of the respective Guarantors to the extent necessary to
prevent the Guarantees from constituting a fraudulent conveyance.
Based upon financial and other information available to them, the Company
and the Guarantors believe that the Notes were incurred, and the Exchange Notes
will be exchanged, for proper purposes and in good faith and not for the purpose
of hindering, delaying or defrauding any existing or future creditor. In
addition, the Company and the Guarantors believe that they received equivalent
value for issuing the Notes, exchanging the Exchange Notes or issuing the
Guarantees, as the case may be, and that they (1) are not and will not become
insolvent, (2) are not and will not be engaged in a business or transaction for
which their respective remaining assets constitute unreasonably small capital in
relation to the business or transaction, and (3) do not intend and will not
intend to incur, or believe that they have incurred or will incur, debts beyond
their ability to repay as they become due. However, since each of the foregoing
components of the question of whether a fraudulent conveyance has occurred is
inherently fact-based and fact-specific, there can be no assurance that a court
would concur with such beliefs and positions.
In rendering their opinions in connection with the Offering and the
Exchange Offer, counsel for the Company and the Guarantors and counsel for the
Placement Agents have not, and will not, express any opinion as to the
applicability of federal or state fraudulent conveyance laws.
15
<PAGE> 16
COMPETITION
The industries in which the Company competes are highly competitive and
fragmented, with many small manufacturers and only a few manufacturers
generating sales in excess of $50 million. The larger competitors 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 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 can be 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 technologies using carbon
composite ("carbon-carbon") friction materials for aircraft braking systems.
There can be no assurance that competition from these technologies or others
will not adversely affect the Company's operations in the future. See
"Business -- Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Sales from the Company's international facilities grew from 9.7% of total
Company net sales in 1995 to 15.9% in 1996. One of the elements of the Company's
strategy is its continued expansion into international markets. There are
certain risks inherent in doing 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 instability, fluctuations in currency exchange rates and
potentially adverse tax consequences. The Company does not currently participate
in currency hedging transactions because foreign currency risks have not been
material to the Company in the past. However, as the Company's international
operations expand, the Company may participate in such hedging transactions in
the future. There can be 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
liquidity, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Business Strategy."
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 Company maintains key man life insurance in the amount of
$1.0 million each on the lives of Mr. Harbert and Mr. Weinberg. The future
success of the Company will depend in large part on its continued ability to
attract and retain qualified personnel. See "Management."
ACQUISITION PLANS
The Company acquired Hutchinson in January 1997. There is no assurance that
the Company will be able to successfully integrate Hutchinson into its
operations. In addition, the Company will continue to seek to acquire
complementary businesses with a major market position that will expand the
Company's product offerings, technical capabilities and customer base. There is
no assurance that any definitive acquisition agreements will be reached or, if
entered into, that any future acquisition will be successful or will achieve
results comparable to the Company's existing business. See "Business -- Business
Strategy."
16
<PAGE> 17
SUPPLY AND PRICE OF RAW MATERIALS
The principal raw materials used by the Company are copper powder,
cellulose, steel and iron powder. 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 copper, steel or powder metal or a substantial increase in the price
of any of these raw materials could have a material adverse effect on the
Company's financial condition, liquidity and results of operations. See
"Business -- Suppliers and Raw Materials."
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented approximately 20.8% of the Company's consolidated net sales in 1996,
and approximately 26.1% of the Company's consolidated net sales in 1995. 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 can be 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
financial condition or 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.
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 financial condition or results of operations. See
"Business -- Government Regulation."
PURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control (as defined in "Description of the Exchange
Notes -- Certain Definitions"), the Company will be required to offer to
repurchase all outstanding Exchange Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The source of funds for any such repurchase will be the Company's available cash
or cash generated from operating or other sources, including borrowings, sales
of assets, sales of equity or funds provided by a new controlling person. A
Change of Control will trigger an event of default under the New Revolving
Credit Facility that would permit the lenders thereto to accelerate the debt
under the New Revolving Credit Facility. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to make
any required repurchases of Notes tendered and to repay indebtedness under the
New Revolving Credit Facility. See "Descrip-
17
<PAGE> 18
tion of Certain Indebtedness -- New Revolving Credit Facility" and "Description
of the Exchange Notes -- Change of Control."
ABSENCE OF A PUBLIC MARKET
The Notes are designated for trading in the PORTAL market. Prior to the
Exchange Offer, there has been no market for the Exchange Notes. The Company and
the Guarantors do not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Placement
Agents, all of which are broker-dealers, have advised the Company that they
currently intend to make a market in the Exchange Notes, but they are not
obligated to do so and, if commenced, may discontinue such market making at any
time at the sole discretion of any of the Placement Agents. Accordingly, no
assurance can be made as to the development or liquidity of any market for the
Exchange Notes. In addition, such market-making activity will be subject to
limitations imposed by the Securities Act and the Exchange Act and may further
be limited during the Exchange Offer. If an active public market does not
develop, the market, price and liquidity of the Exchange Notes may be adversely
affected. If any of the Exchange Notes are traded after the Exchange Offer, they
may trade at a discount from the price at which an Exchange Noteholder purchased
Exchange Notes, depending on prevailing interest rates, the market for similar
securities and other factors, including general economic conditions and the
financial condition and performance of the Company. Noteholders considering
tendering their Notes in the Exchange Offer should be aware that they may be
required to bear the financial risks of the Exchange Notes for an indefinite
period of time. See "Description of the Exchange Notes."
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THE TRANSACTIONS
The Notes were offered as a component of the Transactions that the Company
implemented to finance the acquisition of Hutchinson and to improve its
operating and financial flexibility. In addition to the Offering, the
Transactions included: (1) the Company's repayment and termination of the Old
Credit Facility; (2) the Company's and its domestic subsidiaries' execution of
the New Revolving Credit Facility; (3) the amendment to the Senior Subordinated
Notes; (4) the Hawk Controlling Stockholder Merger; and (5) the Hutchinson
acquisition. The Transactions described in clauses (1) through (4) above were
completed concurrently with the Offering. The Company acquired Hutchinson in
January 1997.
OLD CREDIT FACILITY
The Old Credit Facility, which was entered into in June 1995 to finance the
Company's acquisition of SKW and refinance the Company's then-existing
indebtedness, was repaid in its entirety with the proceeds of the Offering and
all commitments thereunder were terminated. The Company did not incur any
prepayment penalties in connection with the termination of the Old Credit
Facility. See "Use of Proceeds."
NEW REVOLVING CREDIT FACILITY
The New Revolving Credit Facility consists of a revolving credit loan that
equals the lesser of (1) $25.0 million, or (2) the sum of 85% of eligible
accounts receivable and 60% of eligible inventory. The New Revolving Credit
Facility is secured by substantially all of the accounts receivable, inventory
and intangibles of the Company and its domestic subsidiaries. In addition, the
New Revolving Credit Facility contains financial and other covenants with
respect to the Company and its subsidiaries that, among other matters, would
prohibit the payment of any dividends to the Company by subsidiaries of the
Company in the event of a default under the terms of the New Revolving Credit
Facility, restrict the creation of certain liens, restrict capital expenditures
and require the maintenance of certain minimum interest coverage. Amounts
outstanding under the New Revolving Credit Facility are due November 27, 1999
and bear interest at a variable rate based on the London Interbank Offered Rate
("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. Interest payment
dates will vary depending on the interest rate option selected by the Company,
but generally, interest will be payable monthly. The commitment fee on the
unused portion of the New Revolving Credit Facility is 0.5% per annum of such
unused portion. Currently, there are no amounts outstanding under the New
Revolving Credit Facility. See "Description of Certain Indebtedness -- New
Revolving Credit Facility."
SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes were entered into in June 1995, along with
the Old Credit Facility, to finance the Company's acquisition of SKW and
refinance the Company's then-existing indebtedness. 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. The Senior Subordinated Notes are
guaranteed by certain domestic subsidiaries of the Company. Concurrently with
the closing of the Offering, the Company and the holders of the Senior
Subordinated Notes entered into an amendment that, among other matters, (1)
changed the initial principal payment date from June 30, 2003 to January 31,
2004, (2) subordinated the Senior Subordinated Notes to the Exchange Notes and
the New Revolving Credit Facility, and (3) subordinated the Senior Subordinated
Notes guarantees to the Guarantees. In addition, the holders of the Senior
Subordinated Notes granted a waiver to permit the Hawk Controlling Stockholder
Merger. See "Description of Certain Indebtedness -- Senior Subordinated Notes."
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HAWK CONTROLLING STOCKHOLDER MERGER
Concurrently with the closing of the Offering, Old Hawk was merged with and
into the Company in a tax-free reorganization. Old Hawk had no material assets
other than the capital stock of the Company. Prior to the merger, Old Hawk owned
33.9% of the outstanding shares of Class A Common Stock of the Company and 1,250
shares of the redeemable 10% cumulative preferred stock, par value $0.01 per
share, Series A (the "Series A Preferred Stock") with a liquidation value of
$1.25 million, plus accrued and unpaid dividends. Old Hawk's only liabilities
were its debts to the Company and Old Hawk's stockholders in the aggregate
amount of approximately $870,000. As a result of the merger, the Series A
Preferred Stock owned by Old Hawk was canceled, and the Company issued new
redeemable 10% cumulative preferred stock, par value $0.01 per share, Series C
(the "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 Old Hawk less $61,000 of indebtedness
of Old Hawk to the Company, which was canceled in the merger. In the merger, the
Company also canceled the shares of Class A Common Stock of the Company owned by
Old Hawk and then reissued the same amount of shares of Class A Common Stock pro
rata to the Old Hawk stockholders. See "Certain Transactions -- Transactions
Concurrent with the Offering."
HUTCHINSON ACQUISITION
As part of the Company's strategy of acquiring complementary businesses
with a major market position that will expand the Company's product offerings,
technical capabilities and customer base, the Company acquired all the
outstanding capital stock of Hutchinson, a privately-owned company, in January
1997. The Company acquired Hutchinson for (1) $10.0 million in cash at the
closing of the acquisition, subject to adjustment for changes in Hutchinson's
stockholders' equity and actual 1996 Hutchinson EBITDA, (2) the Hutchinson
Acquisition Notes, which are 8.0% two-year notes in the aggregate original
principal amount of $1.5 million, and (3) contingent payments to be made by the
Company in amounts equal to (a) 30.0% of the amount by which Hutchinson's EBITDA
exceeds $2.6 million in 1997, 1998 and 1999, and (b) a maximum aggregate amount
of $500,000, plus interest at 8.0% per annum, payable in installments no greater
than $167,000 on April 30, 1998, 1999 and 2000, provided that the amount payable
will be determined pursuant to a formula based on Hutchinson's forecasted EBITDA
versus actual EBITDA for the fiscal year immediately preceding the payment date
(the "$500,000 Contingent Payment Obligation"). If the Company issues its Class
A Common Stock in an initial public offering prior to the maturity of the
Hutchinson Acquisition Notes, the holders of the Hutchinson Acquisition Notes
may at their option convert up to $500,000 of the original principal amount of
the Hutchinson Acquisition Notes into Class A Common Stock at the public
offering price. Interest on the Hutchinson Acquisition Notes is payable
quarterly and principal is payable in installments aggregating $1.0 million on
the first anniversary date thereof and $500,000 on the second anniversary date
thereof; provided that the holders of the Hutchinson Acquisition Notes may
extend the final maturity date by up to nine months to preserve their option to
convert the Hutchinson Acquisition Notes into Class A Common Stock. The Company
will only be required to make payments on the $500,000 Contingent Payment
Obligation if certain EBITDA thresholds are met in any of 1997, 1998 and 1999.
Interest on the $500,000 Contingent Payment Obligation will be paid with the
annual payments, if any, and will be calculated as if such payment amount had
been outstanding for one year. The Company did not acquire any bank indebtedness
owed by Hutchinson. The subsidiary of the Company that acquired Hutchinson is a
Guarantor.
There is no assurance that the Company will be able to successfully
integrate Hutchinson into its operations. See "Business -- Hutchinson
Acquisition."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Notes were originally issued and sold to the Placement Agents on the
Issue Date in transactions not registered under the Securities Act in reliance
upon the exemption provided by Section 4(2) of the Securities Act. In connection
with the sale of the Notes, Hawk and the Guarantors entered into the
Registration Rights Agreement with the Placement Agents pursuant to which the
Company and the Guarantors agreed to file a registration statement (the
"Exchange Offer Registration Statement") with respect to an offer to exchange
the Notes for a new issue of debt securities of the Company registered under the
Securities Act with terms (other than restrictions on transfer) substantially
identical to those of the Notes and to use its best efforts to cause the
Exchange Offer Registration Statement to become effective by the 120th day
following the Issue Date and, upon becoming effective, to commence the Exchange
Offer and cause the same to remain open for acceptance for not less than 20
business days after the date of commencement. If the Exchange Offer is not
consummated within 150 days after the Issue Date or, under certain
circumstances, if the Placement Agents so request, the Company and the
Guarantors agreed to file and use their best efforts to cause to be declared
effective a shelf registration statement (the "Shelf Registration Statement")
with respect to resales of the Notes from time to time and will use its best
efforts to keep the Shelf Registration Statement effective until three years
after the effective date thereof. See "Registration Rights."
The purpose of the Exchange Offer is to fulfill certain of Hawk's and the
Guarantors' obligations under the Registration Rights Agreement. This Prospectus
may not be used by any holder of the Notes or any holder of the Exchange Notes
to satisfy the registration and prospectus delivery requirements under the
Securities Act that may apply in connection with any resale of such Notes or
Exchange Notes. See "Terms of the Exchange" below.
Each holder who is a broker-dealer and who receives Exchange Notes for its
own account in exchange for Notes that were acquired by it as a result of
market-making activities or other trading activities will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal relating to the Exchange Offer
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Notes where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. See "Plan of Distribution."
TERMS OF THE EXCHANGE
Hawk and the Guarantors hereby offer to exchange, subject to the conditions
set forth herein and in the Letter of Transmittal accompanying this Prospectus
(the "Letter of Transmittal"), $1,000 in principal amount of Exchange Notes for
each $1,000 in principal amount of the Notes. The terms of the Exchange Notes
are identical in all material respects (including principal amount, interest
rate and maturity) to the terms of the Notes for which they may be exchanged
pursuant to this Exchange Offer, except that the Exchange Notes will generally
be freely transferable by holders thereof (other than as provided below) and
will not be subject to any covenant regarding registration. The Exchange Notes
will evidence the same indebtedness as the Notes and will be entitled to the
benefits of the Indenture. See "Description of the Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Notes being tendered for exchange.
Hawk and the Guarantors are making the Exchange Offer in reliance upon an
interpretation by the staff of the Commission set forth in a series of no-action
letters issued to third parties. Based on
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such interpretation, Hawk and the Guarantors believe that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is an "affiliate" of Hawk and the Guarantors within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business,
such holders have no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any such
other person is engaging in or intends to engage in a distribution of such
Exchange Notes. However, Hawk and the Guarantors have not sought, and do not
intend to seek, their own no-action letter, and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Any holder who is an affiliate of Hawk and the Guarantors or
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes cannot rely on such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. Each holder who is a broker-dealer and who receives Exchange Notes for
its own account in exchange for Notes that were acquired by it as a result of
market-making activities or other trading activities will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such Exchange Notes. The Letter of Transmittal relating to the Exchange
Offer states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed to make available, for a period
of up to 120 days after consummation of the Exchange Offer, copies of this
Prospectus, as amended or supplemented, to any broker-dealer and any other
persons, if any, with similar prospectus delivery requirements, for use in
connection with any resale of Exchange Notes. In the absence of an exemption,
each broker-dealer that received the Notes from the Company in the Offering and
not as a result of market-making or other trading activities must comply with
the registration requirements of the Securities Act. See "Registration Rights"
and "Plan of Distribution."
Interest on the Exchange Notes shall accrue from the last interest payment
date on which interest was paid on the Notes so surrendered or, if no interest
has been paid on such Notes, from the Issue Date.
Tendering holders of the Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Notes pursuant
to the Exchange Offer.
Holders of Notes do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law in connection with the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer shall expire on the Expiration Date. The term
"Expiration Date" means 5:00 p.m., New York City time, on April 21, 1997, unless
Hawk and the Guarantors in their sole discretion extend the period during which
the Exchange Offer is open, in which event the term "Expiration Date" shall mean
the latest time and date on which the Exchange Offer, as so extended by Hawk and
the Guarantors, shall expire. Hawk and the Guarantors reserve the right to
extend the Exchange Offer at any time and from time to time by giving oral or
written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
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Exchange Offer, all Notes previously tendered and not withdrawn pursuant to the
Exchange Offer will remain subject to the Exchange Offer.
The term "Exchange Date" means the first business day following the
Expiration Date. Hawk and the Guarantors expressly reserve the right to (1)
terminate the Exchange Offer and not accept for exchange any Notes if any of the
events set forth below under "Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by Hawk and the Guarantors and (2) amend
the terms of the Exchange Offer in any manner that, in their good faith
judgment, is advantageous to the holders of the Notes, whether before or after
any tender of the Notes. Unless Hawk and the Guarantors terminate the Exchange
Offer prior to 5:00 p.m., New York City time, on the Expiration Date, Hawk and
the Guarantors will exchange the Exchange Notes for the Notes on the Exchange
Date.
TENDER PROCEDURE
The tender to Hawk and the Guarantors of Notes by a holder thereof pursuant
to one of the procedures set forth below and the acceptance thereof by Hawk and
the Guarantors will constitute a binding agreement between such holder and Hawk
and the Guarantors in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal. This Prospectus, together
with the Letter of Transmittal, will first be sent out on or about March 20,
1997, to all holders of Notes known to Hawk and the Guarantors and the Exchange
Agent.
A holder of Notes may tender the same by (1) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Notes being tendered and any required signature guarantees and
any other documents required by the Letter of Transmittal, to the Exchange Agent
at its address set forth on the Letter of Transmittal on or prior to the
Expiration Date (or complying with the procedure for book-entry transfer
described below) or (2) complying with the guaranteed delivery procedures
described below.
If tendered Notes are registered in the name of the signer of the Letter of
Transmittal and the Exchange Notes to be issued in exchange therefor are to be
issued (and any untendered Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to Hawk and the Guarantors and duly
executed by the registered holder, and the signature on the endorsement or
instrument of transfer must be guaranteed by a commercial bank or trust company
located or having an office, branch, agency or correspondent in the United
States, or by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. (any of the foregoing
hereinafter referred to as an "Eligible Institution"). If the Exchange Notes
and/or Notes not exchanged are to be delivered to an address other than that of
the registered holder appearing on the note register for the Notes, the
signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
THE METHOD OF DELIVERY OF NOTES AND ALL OTHER DOCUMENTS IS AT THE ELECTION
AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE OBTAINED, AND THE MAILING BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR
NOTES SHOULD BE SENT TO HAWK AND THE GUARANTORS.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
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participant in the book-entry transfer facility's system may make book-entry
delivery of Notes by causing such book-entry transfer facility to transfer such
Notes into the Exchange Agent's account with respect to the Notes in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of Notes may be effected through book-entry transfer into the Exchange
Agent's accounts at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Notes to reach the Exchange Agent before the Expiration
Date or the procedure for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if the Exchange Agent has received at its office
listed on the Letter of Transmittal on or prior to the Expiration Date a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Notes are registered and, if possible, the certificate numbers of the Notes
to be tendered, and stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange trading days after the
date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Notes, in proper form for transfer (or a confirmation
of book-entry transfer of such Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), Hawk and the Guarantors may,
at their option, reject the tender. Copies of a Notice of Guaranteed Delivery
that may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (1) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Notes (or a confirmation of book-entry transfer of such Notes
into the Exchange Agent's account at the book-entry transfer facility) is
received by the Exchange Agent, or (2) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) by an Eligible Institution will be made only against deposit of
the Letter of Transmittal (and any other required documents) and the tendered
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Notes will be determined
by Hawk and the Guarantors, whose determination will be final and binding. Hawk
and the Guarantors reserve the absolute right to reject any Notes not properly
tendered or the acceptance for exchange of which may, in the opinion of Hawk's
and the Guarantors' counsel, be unlawful. Hawk and the Guarantors also reserve
the absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any Notes. Unless waived, any defects or
irregularities in connection with tenders of Notes for exchange must be cured
within such reasonable period of time as Hawk and the Guarantors shall
determine. Neither Hawk, the Guarantors, the Exchange Agent nor any other person
will be under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
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TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Notes to Hawk and the Guarantors and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Notes to be assigned, transferred and exchanged.
The Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, Hawk and the Guarantors will acquire good and
unencumbered title to the tendered Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or Hawk and the Guarantors to
be necessary or desirable to complete the exchange, assignment and transfer of
tendered Notes or transfer ownership of such Notes on the account books
maintained by a book-entry transfer facility. The Transferor agrees that
acceptance of any tendered Notes by Hawk and the Guarantors and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by Hawk
and the Guarantors of certain of their obligations under the Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of Hawk and the
Guarantors within the meaning of Rule 405 under the Securities Act and that it
is acquiring the Exchange Notes offered hereby in the ordinary course of such
Transferor's business and that such Transferor has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. Each Transferor that is a broker-dealer receiving Exchange Notes
for its own account must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed to
make available, for a period of up to 120 days after consummation of the
Exchange Offer, copies of this Prospectus, as amended or supplemented, to any
broker-dealer and any other persons, if any, with similar prospectus delivery
requirements, for use in connection with any resale of Exchange Notes. See "Plan
of Distribution."
WITHDRAWAL RIGHTS
Tenders of Notes pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the Letter of Transmittal, and with respect to a facsimile
transmission, must be confirmed by telephone and an original delivered by
guaranteed overnight delivery. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered Notes to be
withdrawn, the certificate numbers of Notes to be withdrawn, the principal
amount of Notes to be withdrawn, a statement that such holder is withdrawing his
election to have such Notes exchanged, and the name of the registered holder of
such Notes, and must be signed by the holder in the same manner as the original
signature on the
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Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to Hawk and the Guarantors that the person
withdrawing the tender has succeeded to the beneficial ownership of the Notes
being withdrawn. The Exchange Agent will return the properly withdrawn Notes
promptly following receipt of notice of withdrawal. If Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn Notes or otherwise comply with the book-entry
transfer facility procedure. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by Hawk and the
Guarantors, and such determination will be final and binding on all parties.
Any Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Notes that have been tendered
for exchange but that are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Notes tendered by
book-entry transfer into the Exchange Agent's account at the book-entry transfer
facility pursuant to the book-entry transfer procedures described above, such
Notes will be credited to an account with such book-entry transfer facility
specified by the holder) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Notes may be
retendered by following one of the procedures described under "Tender Procedure"
above at any time on or prior to the Expiration Date.
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
For each Note accepted for exchange, the holder of such Note will receive
an Exchange Note having a principal amount equal to that of the surrendered
Note. For the purposes of the Exchange Offer, Hawk and the Guarantors shall be
deemed to have accepted for exchange validly tendered Notes when, as and if Hawk
and the Guarantors have given oral or written notice thereof to the Exchange
Agent.
The Exchange Agent will act as agent for the tendering holders of Notes for
the purposes of receiving Exchange Notes from Hawk and causing the Notes to be
assigned, transferred and exchanged. Upon the terms and subject to the
conditions of the Exchange Offer, delivery of Exchange Notes to be issued in
exchange for accepted Notes will be made by the Exchange Agent promptly after
acceptance of the tendered Notes. Tendered Notes not accepted for exchange by
Hawk and the Guarantors will be returned without expense to the tendering
holders (or, in the case of Notes tendered by book-entry transfer into the
Exchange Agent's account at the book-entry transfer facility pursuant to the
book-entry transfer procedures described above and in the Letter of Transmittal,
such non-exchanged Notes will be credited to an account maintained with such
book-entry transfer facility) promptly following the Expiration Date or, if Hawk
and the Guarantors terminate the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, Hawk and the Guarantors will not be required to issue
Exchange Notes in respect of any properly tendered Notes not previously accepted
and may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service), or, at their option, modify or otherwise amend the Exchange Offer, if
any of the following events occur:
(1) the Exchange Offer would, in the reasonable judgment of the
Company and the Guarantors, violate applicable law or any applicable
interpretation of the staff of the Commission;
26
<PAGE> 27
(2) an action or proceeding shall have been instituted or threatened
in any court or by any governmental agency that might materially impair the
ability of the Company and the Guarantors to proceed with the Exchange
Offer;
(3) a material adverse development shall have occurred in any existing
action or proceeding with respect to the Company; or
(4) a governmental approval shall not have been obtained, which
approval the Company deems necessary for the consummation of the Exchange
Offer;
that, in the reasonable judgment of Hawk and the Guarantors in any case, and
regardless of the circumstances (including any action by Hawk and the
Guarantors) giving rise to any such condition, makes it inadvisable to proceed
with the Exchange Offer.
Hawk and the Guarantors expressly reserve the right to terminate the
Exchange Offer and not accept for exchange any Notes upon the occurrence of any
of the foregoing conditions (which represent all of the material conditions to
the acceptance by Hawk and the Guarantors of properly tendered Notes). In
addition, Hawk and the Guarantors may amend the Exchange Offer at any time prior
to the Expiration Date if any of the conditions set forth above occur. Moreover,
regardless of whether any of such conditions has occurred, Hawk and the
Guarantors may amend the Exchange Offer in any manner that, in their good faith
judgment, is advantageous to holders of the Notes.
The foregoing conditions are for the sole benefit of Hawk and the
Guarantors and may be waived by Hawk and the Guarantors, in whole or in part, in
the reasonable judgment of Hawk and the Guarantors. Any determination made by
Hawk and the Guarantors concerning an event, development or circumstance
described or referred to above will be final and binding on all parties.
Hawk and the Guarantors are not aware of the existence of any of the
foregoing events.
EXCHANGE AGENT
Bank One Trust Company, NA has been appointed as the Exchange Agent for the
Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent
at its address set forth on the Letter of Transmittal. Bank One Trust Company,
NA also acts as Trustee under the Indenture.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
EXPENSES; SOLICITATION OF TENDERS
Hawk and the Guarantors have not retained any dealer-manager or similar
agent in connection with the Exchange Offer and will not make any payments to
brokers, dealers or others for soliciting acceptances of the Exchange Offer.
Hawk and the Guarantors will, however, pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for reasonable out-of-
pocket expenses in connection therewith. Hawk and the Guarantors will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this and related
documents to the beneficial owners of the Notes and in handling or forwarding
tenders for their customers.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation in connection with the Exchange Offer
other than those contained in this Prospectus in connection with the Exchange
Offer made hereby and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the dates as of which information is furnished or
the date hereof. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Notes in any
27
<PAGE> 28
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. The Company and
the Guarantors have agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of Notes reasonably requests.
TRANSFER TAXES
Holders who tender their Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
Hawk and the Guarantors to register Exchange Notes in the name of, or request
that Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF THE EXCHANGE OFFER
Holders of Notes who do not tender their Notes in the Exchange Offer will
continue to hold such Notes and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for any such rights
under the Registration Rights Agreement that by their terms terminate or cease
to have further effectiveness as a result of the making of this Exchange Offer.
See "Description of the Exchange Notes." Holders of Notes who do not exchange
their Notes for Exchange Notes pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Notes as set forth in the
legend thereon as a consequence of the offer or sale of the Notes pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. Hawk and
the Guarantors do not intend to register the Notes under the Securities Act. All
untendered Notes will continue to be subject to the restrictions on transfer set
forth in the Indenture. To the extent that Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered Notes could be adversely
affected. No assurance can be given as to the liquidity of the trading market
for either the Notes or the Exchange Notes.
OTHER
Participation in the Exchange Offer is voluntary, and holders of Notes
should carefully consider whether to participate. Holders of the Notes are urged
to consult their financial and tax advisors in making their own decisions on
what action to take. See "Certain U.S. Federal Income Tax Consequences."
Hawk and the Guarantors may in the future seek to acquire untendered Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. Hawk and the Guarantors have no present plan to acquire any
Notes that are not tendered in the Exchange Offer.
28
<PAGE> 29
USE OF PROCEEDS
There will be no cash proceeds to the Company or any of the Guarantors as a
result of the Exchange Offer.
The following table sets forth the estimated sources and uses of the
proceeds to the Company from the sale of the Notes in the Offering, and the
completion of the other components of the Transactions and the Exchange Offer:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
SOURCES
The Notes............................................................. $100,000
Hutchinson Acquisition Notes(1)....................................... 1,500
--------
Total Sources............................................... $101,500
========
USES
Repayment of Old Credit Facility(2)................................... $ 72,500
Acquisition of Hutchinson(1).......................................... 11,500
Working Capital and General Corporate Purposes(3)..................... 11,900
Fees and Expenses(4).................................................. 5,600
--------
Total Uses.................................................. $101,500
========
</TABLE>
- ---------------
(1) The Company acquired all the outstanding capital stock of Hutchinson in
January 1997 for (a) $10.0 million in cash at closing, subject to adjustment
for changes in stockholders' equity and actual 1996 Hutchinson earnings, (b)
the Hutchinson Acquisition Notes, which are 8.0% two-year notes in the
aggregate original principal amount of $1.5 million, and (c) contingent
payments to be made by the Company only if Hutchinson meets certain EBITDA
targets. There is no assurance that the Company will be able to successfully
integrate Hutchinson into its operations. See "Risk Factors -- Acquisition
Plans" and "Business -- Hutchinson Acquisition."
(2) Represents payment in full of the Old Credit Facility, together with accrued
and unpaid interest of approximately $345,000, which repayment occurred
concurrently with the closing of the sale of the Notes in the Offering. The
Old Credit Facility consisted of two term loans ("Old Term Loan A" and "Old
Term Loan B"), and a revolving credit facility ("Old Revolving Loan"). Old
Term Loan A was due in quarterly installments of principal ranging from $1.4
million to $2.7 million through June 30, 2000; Old Term Loan B was due in
quarterly installments of principal ranging from $55,000 to $2.6 million
through June 30, 2002; and the Old Revolving Loan was scheduled to mature on
June 30, 2000. Each Loan bore interest at a base rate determined in
accordance with certain published rates. Each Loan may have, at the
Company's option, borne interest at a variable rate based on LIBOR, plus
2.5% per annum in the case of Old Term Loan A and the Old Revolving Loan,
and plus 3.25% per annum in the case of Old Term Loan B. As of September 30,
1996, the applicable interest rate on Old Term Loan A was 8.00% per annum,
the applicable interest rate on the Old Revolving Loan was 8.25% per annum,
and the applicable interest rate on Old Term Loan B was 8.75%.
(3) Pending use, the Company will invest these proceeds in money market funds or
other short-term interest bearing securities.
(4) Includes estimated fees and expenses of the Exchange Offer, the Offering and
the Transactions, including the New Revolving Credit Facility and the
Hutchinson acquisition.
29
<PAGE> 30
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1996, as adjusted to give effect to the acquisition of
Hutchinson. This table should be read in conjunction with the historical
consolidated financial statements of the Company and the unaudited pro forma
financial information and the respective notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations (including current portion)
New Revolving Credit Facility(1)............................... $ -- $ --
10 1/4% Senior Notes due 2003.................................. 100,000 100,000
Other Obligations.............................................. 2,808 3,558
Hutchinson Acquisition Notes................................... -- 1,500
Senior Subordinated Notes(2)................................... 26,375 26,375
-------- --------
Total long-term obligations.................................... $129,183 $ 131,433
======== ========
Detachable stock warrants, subject to put option (2)............. $ 4,600 $ 4,600
-------- --------
Total shareholders' equity....................................... 1,190 1,190
-------- --------
Total capitalization................................... $134,973 $ 137,223
======== ========
</TABLE>
- ---------------
(1) Borrowings of up to the lesser of (1) $25.0 million, or (2) the sum of 85%
of eligible accounts receivable and 60% of eligible inventory, under the New
Revolving Credit Facility are 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.
Currently, there are no amounts outstanding under the New Revolving Credit
Facility. See "Description of Certain Indebtedness -- New Revolving Credit
Facility."
(2) The Company issued $30.0 million aggregate principal amount of Senior
Subordinated Notes with detachable warrants to purchase Class B Common Stock
on June 30, 1995. The holders of the warrants have the right to put the
warrants to the Company. See "Description of Certain Indebtedness -- Senior
Subordinated Notes." The portion of the proceeds representing the current
value of the warrants, $4.6 million, was allocated to the detachable stock
warrants, subject to put option, and 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, 1996 was $3.6 million.
30
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations of the Company
for the year ended December 31, 1996 includes the historical operations of the
Company and gives effect to the Hutchinson acquisition as if it occurred as of
January 1, 1996. The unaudited pro forma consolidated balance sheet as of
December 31, 1996 includes the historical accounts of the Company and gives
effect to the acquisition of Hutchinson as if it occurred as of December 31,
1996. The unaudited pro forma consolidated financial information has 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 transaction been completed as of
the beginning of the period indicated, or to project the Company's results of
operations for any future period. The pro forma adjustments are based on
available information and certain assumptions that the Company concurrently
believes are reasonable in the circumstances. The unaudited pro forma
consolidated financial information 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," and the historical financial
information included elsewhere in this Prospectus.
The unaudited pro forma consolidated statements of operations of the
Company do not give effect to $3.6 million of annualized projected cost savings
the Company expects to realize from the closing of a manufacturing facility, and
$1.6 million of projected cost savings related to the termination of selling,
technical and administrative personnel at another facility.
31
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
------------------------------- FOR
HAWK HUTCHINSON HUTCHINSON PRO FORMA
CORPORATION ACQUISITION(1) ACQUISITION AS ADJUSTED
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $ 123,997 $8,621 -- $ 132,618
Cost of sales........................ 91,884 5,776 -- 97,660
------- ------- ------- -------
Gross profit.................... 32,113 2,845 -- 34,958
Expenses:
Selling, technical, and
administrative expenses......... 15,468 794 -- 16,262
Amortization of intangible
assets.......................... 2,806 149 $ 250(2) 3,205
Plant consolidation expense........ 4,028 -- -- 4,028
------- ------- ------- -------
Total expenses.................. 22,302 943 250 23,495
------- ------- ------- -------
Income (loss) from operations... 9,811 1,902 (250) 11,463
Interest expense..................... 10,648 23 -- 10,671
Other (income) expense, net.......... 256 (20) -- 236
------- ------- ------- -------
10,904 3 -- 10,907
Income (loss) before income taxes and
extraordinary item................. (1,093) 1,899 (250) 556
Income taxes......................... 789 791 -- 1,580
------- ------- ------- -------
Income (loss) before extraordinary
item............................... $ (1,882) $1,108 $ (250) $ (1,024)
======= ======= ======= =======
</TABLE>
- ---------------
<TABLE>
<S> <C> <C>
(1) Represents the results of operations of Hutchinson for the year ended
December 31, 1996.
(2) Represents the incremental amortization due to the application of
purchase accounting in the Hutchinson acquisition resulting from an
increase in the basis of net assets acquired. Intangible assets
includes non-deductible goodwill that is amortized over 30 years.
Amortization of intangible assets from the Hutchinson acquisition.... $ 250
========
</TABLE>
32
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
HAWK HUTCHINSON PRO FORMA PRO FORMA
CORPORATION ACQUISITION(A) ADJUSTMENTS AS ADJUSTED
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash................................................. $ 25,774 $ 290 $ (10,490)(b) $ 15,574
Accounts receivable.................................. 16,783 1,378 -- 18,161
Inventories.......................................... 20,864 445 -- 21,309
Deferred income taxes and other current assets....... 3,367 335 -- 3,702
-------- ------- ------- --------
Total current assets............................. 66,788 2,448 (10,490) 58,746
-------- ------- ------- --------
Property, plant and equipment.......................... 58,897 2,817 -- 61,714
less -- accumulated depreciation..................... (14,755) -- -- (14,755)
-------- ------- ------- --------
Total property, plant and equipment.............. 44,142 2,817 -- 46,959
-------- ------- ------- --------
Other Assets:
Intangible assets.................................... 39,939 906 7,512(c) 48,357
Net assets for sale and other assets................. 7,572 176 -- 7,748
-------- ------- ------- --------
Total other assets..................................... 47,511 1,082 7,512 56,105
-------- ------- ------- --------
TOTAL ASSETS........................................... $ 158,441 $ 6,347 $ (2,978) $ 161,810
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 8,194 $ 519 -- $ 8,713
Accrued compensation................................. 6,775 -- -- 6,775
Other accrued expenses............................... 2,405 250 -- 2,655
-------- ------- ------- --------
Total current liabilities........................ 17,374 769 -- 18,143
-------- ------- ------- --------
Long-Term Liabilities:
Long-term debt, including current portion............ 129,183 750 1,500(d) 131,433
Deferred income taxes................................ 4,090 350 -- 4,440
Other................................................ 2,004 -- -- 2,004
-------- ------- ------- --------
Total long-term obligations...................... 135,277 1,100 1,500 137,877
-------- ------- ------- --------
Detachable stock warrants, subject to put option and
redeemable preferred stock........................... 4,600 4,718 (4,718)(e) 4,600
Shareholders' equity (deficit)......................... 1,190 (240) 240 (f) 1,190
-------- ------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 158,441 $ 6,347 $ (2,978) $ 161,810
======== ======= ======= ========
</TABLE>
- ---------------
<TABLE>
<S> <C> <C>
(a) Reflects adjustments to assets acquired and liabilities assumed of Hutchinson based on their estimated fair
values under the purchase method of accounting. The allocation of the aggregate purchase price below is
preliminary and assumes the historic net book value of tangible assets approximates their fair value. The
Hutchinson acquisition was completed on January 2, 1997. Independent appraisals of assets acquired are
currently in process. This information together with the results of an independent audit as of the acquisition
date and further analysis by management will be necessary for management to make the final valuation of the
Hutchinson business. Accordingly, some portion of the excess of purchase price over the historical cost of the
net assets acquired may ultimately be allocated to specific tangible and intangible assets and liabilities.
The final allocation of purchase cost and the resulting effect on net income may differ from the pro forma
amounts included herein.
(b) Represents the net adjustment to cash as a result of the following:
Purchase of common stock of Hutchinson, plus related fees and expenses........................................ $(10,200)
Cash as of December 31, 1996 not acquired in connection with the Hutchinson acquisition....................... (290)
--------
$(10,490)
========
(c) Represents the net increase in intangible assets due to the application of purchase price accounting for
assets acquired in the Hutchinson acquisition................................................................. $ 7,512
========
(d) Represents the net effect on long-term debt resulting from:
Hutchinson Acquisition Notes.................................................................................. $ 1,500
========
(e) Represents the net effect on detachable stock warrants and redeemable preferred stock as a result of:
Elimination of detachable stock warrants in conjunction with the Hutchinson acquisition....................... $ (3,284)
Elimination of redeemable preferred stock in conjunction with the Hutchinson acquisition...................... (1,434)
--------
$ (4,718)
========
(f) Represents the net effect on shareholders' equity as a result of:
Elimination of shareholders' equity in connection with the Hutchinson acquisition............................. $ 240
========
</TABLE>
33
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PRO FORMA RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
As discussed earlier and in greater detail below, the Company completed the
acquisitions of (1) Helsel in June 1994, (2) SKW in June 1995, (3) certain
friction products assets of GKN in March 1996 and (4) Hutchinson in January
1997. Due to the effects of these acquisitions and the related application of
purchase accounting, the historical consolidated financial data of the Company,
Helsel, SKW and Hutchinson for periods through December 31, 1996 are not
comparable. As a result, the following discussion of pro forma results of
operations and financial condition is presented.
In June 1994, a group led by Mr. Harbert and Mr. Weinberg completed the
acquisition of the assets and certain related liabilities of Helsel in a
transaction accounted for under the purchase method of accounting. The aggregate
purchase price was approximately $8.6 million. The acquisition was financed
primarily through borrowings of approximately $5.1 million. In June 1995, Helsel
became a wholly-owned subsidiary of the Company in a transaction accounted for
as a merger of entities under common control.
In June 1995, the Company completed the acquisition of the assets and
certain related liabilities of SKW in a transaction accounted for under the
purchase method of accounting. The aggregate purchase price was approximately
$61.6 million. The acquisition was financed through borrowings under the Old
Credit Facility and the issuance of the Senior Subordinated Notes.
In March 1996, the Company purchased certain friction products assets of
GKN. The aggregate purchase price was approximately $1.5 million. The purchase
was financed through borrowings under the Old Credit Facility.
In January 1997, the Company acquired Hutchinson for (1) $10.0 million in
cash at closing, subject to adjustment for changes in stockholders' equity and
actual 1996 Hutchinson EBITDA, (2) the Hutchinson Acquisition Notes, which are
8.0% two-year notes in the aggregate original principal amount of $1.5 million,
and (3) contingent payments to be made by the Company only if Hutchinson meets
certain EBITDA targets. The cash payment was financed with the proceeds of the
Offering. There is no assurance that the Company will be able to successfully
integrate Hutchinson into its operations.
The purchase prices for Helsel, SKW and Hutchinson were 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 $26.9 million of goodwill related to these acquisitions on the pro
forma December 31, 1996 balance sheet. The annual amortization of goodwill will
result in non-cash charges to future operations of approximately $1.4 million
per year based on 15 to 30 year amortization periods.
The derivation of certain of the pro forma financial information discussed
below is described in "Unaudited Pro Forma Consolidated Financial Information."
For purposes of the following discussion, the pro forma unaudited consolidated
statements of operations of the Company for the years ended December 31, 1995
and 1996, respectively, were prepared to illustrate the estimated effects of the
acquisitions of Helsel, SKW and Hutchinson and the financing thereof as if the
acquisitions had occurred at the beginning of each respective period.
The unaudited pro forma consolidated statement of operations data and the
unaudited pro forma consolidated balance sheet data do not purport to represent
(1) the actual results of operations or financial condition of the Company had
the acquisitions of Helsel, SKW and Hutchinson occurred on the dates assumed, or
(2) the results of operations or financial position to be expected in the
future.
34
<PAGE> 35
This section should be read in conjunction with the historical financial
statements of the Company, Helsel, SKW and Hutchinson, including the notes
thereto, and the other financial information pertaining to the Company, Helsel,
SKW and Hutchinson, including the information set forth under "Capitalization,"
"Unaudited Pro Forma Consolidated Financial Information," "Selected Consolidated
Financial Data," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition," included elsewhere herein.
PRO FORMA RESULTS OF OPERATIONS
The following table presents, for the periods indicated, before giving
effect to the Offering and the application of net proceeds therefrom, certain
components from the Company's Unaudited Pro Forma Consolidated Statements of
Operations and the percentage of net sales represented by such components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996
------------------ ------------------
$ % $ %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................................................................. $127,692 100.0 $132,618 100.0
Gross profit............................................................... 34,494 27.0 34,958 26.4
Selling, technical and administrative expenses............................. 15,528 12.2 16,262 12.3
Amortization of intangible assets.......................................... 2,754 2.2 3,205 2.4
Plant consolidation expense................................................ -- -- 4,028 3.0
Income from operations..................................................... 15,612 12.2 11,463 8.6
</TABLE>
The following comparisons of the financial results of the Company by period
shows, among other things, a decrease in pro forma gross profit margin for 1996
compared to 1995. This decrease is primarily a result of temporary production
inefficiencies arising from the relocation of manufacturing operations from the
LaVergne, Tennessee facility to the Medina and Brook Park, Ohio plants in 1996,
as well as certain other plant consolidation activities undertaken by the
Company during 1996. These plant consolidation activities entailed the movement
of more than 185 pieces of production equipment from operating facilities, as
well as the hiring of approximately 120 new production employees at the Medina
and Brook Park facilities to replace the approximately 175 production employees
at the Company's facility in LaVergne.
PRO FORMA 1996 COMPARED TO 1995
Pro Forma Net Sales. Pro forma net sales increased $4.9 million, or 3.9%,
from $127.7 million in 1995 to $132.6 million in 1996. Friction product pro
forma net sales increased $4.3 million, or 4.3%, from $99.1 million in 1995 to
$103.4 million in 1996. This increase was primarily attributable to increased
aftermarket pro forma net sales of friction products used in construction and
agricultural equipment and increased pro forma net sales of specialty friction
products, partially offset by lower pro forma net sales of friction products for
heavy truck clutches resulting from lower truck production. Precision engineered
component pro forma net sales increased $705,000, or 2.5% from $28.6 million in
1995 to $29.3 million in 1996. The increase was primarily attributable to higher
pro forma net sales of small motors and powder metal components used in
hydraulic mechanisms.
Pro Forma Gross Profit. Pro forma gross profit in 1996 was $35.0 million,
an increase of $464,000, or 1.3%, from $34.5 million in 1995. As a percentage of
pro forma net sales, pro forma gross profit was 26.4% in 1996 and 27.0% in 1995.
Pro forma gross profit as a percentage of sales decreased primarily as a result
of costs associated with the start-up of production (other than moving expenses)
in connection with the manufacturing facility consolidation program.
Pro Forma Selling, Technical and Administrative ("ST&A") Expenses. Pro
forma ST&A expenses increased $734,000, or 4.7%, from $15.5 million in 1995 to
$16.2 million in 1996. As a
35
<PAGE> 36
percentage of pro forma net sales, pro forma ST&A expenses increased from 12.2%
to 12.3% over such periods.
Pro Forma Income from Operations. Pro forma income from operations of
$11.5 million for 1996 decreased $4.2 million, or 26.6%, compared to the $15.6
million pro forma income from operations in 1995. As a percentage of pro forma
net sales, pro forma income from operations declined from 12.2% in 1995 to 8.6%
in 1996. The decrease reflects $4.0 million of plant consolidation expenses
primarily related to the relocation of machinery and equipment and, to a lesser
extent, lower margins due to the costs associated with the manufacturing
facility consolidation program and the higher pro forma ST&A costs described
above.
36
<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL 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 acquisitions of Helsel, SKW, and Hutchinson occurred in June 1994, June 1995
and January 1997, respectively, and the purchase of certain friction products
assets of GKN was completed in March 1996. This data should be read in
conjunction with the more detailed information contained in the consolidated
financial statements and notes thereto, "Unaudited Pro Forma Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere in this Prospectus.
37
<PAGE> 38
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1992 1993 1994 1995(1) 1996
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. $ 24,931 $ 28,417 $ 41,395 $ 84,643 $ 123,997
Cost of sales............................................. 14,929 16,834 26,771 61,164 91,884
-------- -------- -------- -------- --------
Gross profit.............................................. 10,002 11,583 14,624 23,479 32,113
Operating expenses
Selling, technical, and administrative.................... 4,582 4,833 6,294 11,575 15,468
Amortization of intangibles............................. 1,304 954 954 1,924 2,806
Plant consolidation expense (2)......................... -- -- -- -- 4,028
-------- -------- -------- -------- --------
Income from operations.................................... 4,116 5,796 7,376 9,980 9,811
Other expenses, net:
Interest expense.......................................... 2,903 2,654 3,267 7,323 10,648
Other expense (income), net............................... -- -- (234) (130) 256
-------- -------- -------- -------- --------
Income 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)
Income taxes.............................................. 494 1,716 1,845 1,593 789
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)
Extraordinary item........................................ (233) -- -- -- (1,196)
Cumulative effect of change in accounting for income
taxes................................................... -- 284 -- --
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 952 $ 1,142 $ 2,287 $ 762 $ (3,078)
======== ======== ======== ======== ========
Preferred stock dividend requirements..................... (263) (263) (294) (326) (226)
Income (loss) before extraordinary item applicable to
common shareholders..................................... 689 879 1,993 436 (2,108)
Net income (loss) applicable to common shareholders....... 689 879 1,993 436 (3,304)
Income (loss) before extraordinary item per share
applicable to common shareholders....................... .74 .94 1.76 .28 (1.20)
Net Income (loss) per share applicable to common
shareholders............................................ .74 .94 1.76 .28 (1.88)
Number of shares used to compute per share data........... 930,000 931,667 1,132,689 1,538,162 1,760,946
OTHER DATA:
EBITDA, as adjusted (3)................................... $ 6,290 $ 7,716 $ 9,842 $ 15,507 $ 22,257
EBITDA, as adjusted as a percentage of net sales.......... 25.2% 27.2% 23.8% 18.3% 17.9%
Capital additions......................................... 446 586 1,871 3,781 8,275
Depreciation and amortization............................. 2,174 1,920 2,466 5,527 8,418
Cash flows from:
Operating Activities.................................... 2,935 3,240 4,821 7,713 5,866
Investing Activities.................................... (446) (586) (6,498) (67,388) (8,113)
Financing Activities.................................... (2,679) (2,660) 2,312 59,748 27,250
Ratio of EBITDA, as adjusted, to interest expense
(3)(4).................................................. 2.2x 2.9x 3.0x 2.1x 2.1x
Ratio of long term debt (including current portion) to
EBITDA, as adjusted (3)(4).............................. 4.2x 3.1x 2.7x 6.1x 5.8x
Ratio of earnings to fixed charges (5).................... 1.2x 1.8x 2.0x 1.3x --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995(1) 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................... $ 1,053 $(3,709) $(4,076) $15,565 $48,700
Property, plant and equipment, net.................................. 6,020 5,627 10,166 39,460 44,142
Total assets........................................................ 33,729 33,925 43,645 127,419 158,441
Long-term debt (including current portion).......................... 26,457 24,050 26,726 94,906 129,183
Detachable stock warrants, subject to put option.................... -- -- -- 4,600 4,600
Shareholders' equity................................................ 2,488 3,377 5,898 3,948 1,190
</TABLE>
- ---------------
(1) Revised to reflect the acquisition of minority interest in Helsel. See Note
C of Notes to the Company's Consolidated Financial Statements.
(2) Reflects charges in 1996 relating primarily to the relocation of machinery
and equipment.
(3) As used herein, "EBITDA, as adjusted" is defined as income from operations
plus depreciation and amortization excluding plant consolidation expense.
EBITDA, as adjusted, is presented because (i) it is a widely accepted
financial indicator of a company's ability to incur and service debt, (ii)
it reflects the non-cash effect on earnings of generally high levels of
amortization expense associated with the acquisitions, and (iii) it is the
basis on which compliance with the financial covenants contained in the
Indenture, the New Revolving Credit Agreement and the Senior Subordinated
Notes is principally determined. However, EBITDA, as adjusted, does not
purport to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flow, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. Also, the measure of EBITDA, as adjusted, may not be comparable
to similar measures reported by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) The ratios for the periods presented reflect that the Company has
substantial leverage. See "Risk Factors -- Substantial Leverage and Debt
Service Requirements."
(5) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary items, interest expense, amortization of
deferred financing costs, income taxes and a portion of rent expense
representative of interest, by the sum of interest expense, amortization of
deferred financing costs, a portion of rent expense representative of
interest and preferred stock dividend requirements. The ratio of earnings to
fixed charges is not meaningful for periods that result in a deficit. For
the year ended December 31, 1996, the deficit of earnings to fixed charges
was $1.5 million.
38
<PAGE> 39
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 friction products
(83.4% of sales in 1996) and precision engineered components (16.6%). Since
1989, Hawk has pursued a strategic plan of fostering growth by making
complementary acquisitions and broadening its customer base. Set forth below is
certain information with respect to the acquisitions completed before December
31, 1996:
<TABLE>
<CAPTION>
EFFECTIVE DATE YEAR
ACQUISITION OF ACQUISITION BUSINESS FOUNDED
- -------------------- -------------- ---------------------------------------------------- -------
<S> <C> <C> <C>
FPC and Logan March 1989 Aerospace and industrial friction products and 1961
powder metal for specialty industrial applications
Helsel June 1994 Powder metal for specialty fluid power applications 1974
SKW June 1995 Friction products for industrial applications 1924
</TABLE>
In March 1996, the Company also purchased certain assets of GKN used in the
manufacture of friction products for industrial applications.
All of these acquisitions were asset purchases and 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 $22.0 million of goodwill reflected on the December 31, 1996
balance sheet. The annual amortization of goodwill will result in non-cash
charges to future operations of approximately $1.3 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 basis of presentation
relating to the following discussion of the "Results of Operations" fully
reflects the effects of purchase accounting and, accordingly, reflects the
increased amortization expense.
The acquisition of Helsel significantly increased the precision engineered
component business of the Company, and the acquisition of SKW and the purchase
of certain friction products assets of GKN brought to the Company a substantial
industrial friction product line to complement FPC's core aerospace friction
product line. These transactions 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 FPC business generated a gross profit margin of 40.8% in 1993. 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 27.8% in 1995 and 25.9% in
1996. The Company believes that the gross profit margins of the industrial and
specialty friction products and precision engineered 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, which is
expected to result in an estimated 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 its existing facilities,
which is expected to result in an estimated $3.6 million in annualized cost
savings from reduction of overhead expenses. The Company incurred and expended
$4.0 million of costs relating primarily to the relocation of machinery and
equipment in 1996. The Company does not expect to incur any additional material
future costs relating to the manufacturing facility consolida-
39
<PAGE> 40
tion program. 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.
At the time of the Offering, 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 Old 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 in 1996. See
"Description of Certain Indebtedness -- Old Credit Facility."
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.
RECENT EVENTS
In pursuit of the Company's strategy of acquiring businesses with a major
market position that will expand the Company's product offerings, technical
capabilities and customer base, the Company acquired all the outstanding capital
stock of Hutchinson, a privately-owned company, in January 1997. The Company
acquired Hutchinson for (1) $10.0 million in cash at the closing, subject to
adjustment for changes in stockholders' equity, (2) the Hutchinson Acquisition
Notes, which are 8.0% two-year notes in the aggregate original principal amount
of $1.5 million, and (3) contingent payments to be made by the Company in
amounts equal to (a) 30.0% of the amount by which Hutchinson's EBITDA exceeds
$2.6 million in 1997, 1998 and 1999, and (b) the amount payable pursuant to the
$500,000 Contingent Payment Obligation. Interest on the Hutchinson Acquisition
Notes is payable quarterly and principal will be payable in equal installments
of $1.0 million on each anniversary date of its issuance; provided that the
holders of the Hutchinson Acquisition Notes may extend the final maturity date
by up to nine months to preserve their option to convert the Hutchinson
Acquisition Notes into Class A Common Stock. The subsidiary of the Company that
acquired Hutchinson is a Guarantor. There is no assurance that the Company will
be able to successfully integrate Hutchinson into its operations. See "The
Transactions -- Hutchinson Acquisition" and "Business -- Hutchinson
Acquisition."
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>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales............................................................................. 100.0% 100.0% 100.0%
Gross profit.......................................................................... 35.3 27.8 25.9
Selling, technical & administrative expenses.......................................... 15.2 13.7 12.5
Plant consolidation expense........................................................... -- -- 3.2
Amortization of intangible assets..................................................... 2.3 2.3 2.2
Income from operations................................................................ 17.8 11.8 7.9
Interest expense...................................................................... 7.9 8.7 8.6
Other (income) expense, net........................................................... (0.6) (0.2) 0.2
Income (loss) before income taxes..................................................... 10.5 3.3 (0.9)
Income taxes.......................................................................... 4.5 1.9 0.6
Minority interest..................................................................... 0.5 0.5 --
Income before extraordinary item...................................................... 5.5 0.9 (1.5)
Extraordinary item.................................................................... -- -- (1.0)
Net income (loss)..................................................................... 5.5 0.9 (2.5)
</TABLE>
40
<PAGE> 41
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. Precision engineered component net sales increased $212,000, or
1.0%, from $20.4 million in 1995 to $20.6 million in 1996. The increase in
precision engineered 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.
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 million
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 decrease of
$3.8 million compared to net income of $762,000 in 1995, as a result of the
factors noted above.
41
<PAGE> 42
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. Precision engineered
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,
acquired in June 1994, accounted for $9.2 million, or 97.4%, of the net sales
increase in 1995. The remaining precision engineered component sales increase
was primarily due to increased sales of powder metal components for fluid power
control 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.
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
The acquisitions of Helsel, SKW and the friction products assets of GKN
were financed primarily by the issuance of $30.0 million of the Senior
Subordinated Notes and borrowings under the Old Credit Facility in the amount of
$72.0 million. As a result of these acquisitions and the Offering, the Company
has, and following the Exchange Offer will continue to have, substantial
indebtedness.
42
<PAGE> 43
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.
The Company is subject to certain restrictive covenants contained in the
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 restrictions affecting
subsidiaries; sale-leaseback transactions; and mergers and consolidations. See
"Description of the Exchange Notes -- Certain Covenants."
Concurrently with the Offering, the Company and its domestic subsidiaries
entered into the New Revolving Credit Facility, consisting of a revolving credit
loan that will equal the lesser of (1) $25.0 million, or (2) the sum of 85% of
eligible accounts receivable and 60% of eligible inventory. The New Revolving
Credit Facility is secured by substantially all of the accounts receivable,
inventory and intangibles of the Company and its domestic subsidiaries. In
addition, the New Revolving Credit Facility contains financial and other
covenants with respect to the Company and its subsidiaries that, among other
matters, would prohibit the payment of any dividends to the Company by the
subsidiaries of the Company in the event of a default under the terms of the New
Revolving Credit Facility, restrict the creation of certain liens and require
the maintenance of certain minimum interest coverage. Amounts outstanding under
the New Revolving Credit Facility are due November 27, 1999 and bear interest at
a variable rate based on the London Interbank Offered Rate ("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. Currently, there are no amounts
outstanding under the New Revolving Credit Facility.
The Company has outstanding $30.0 million of Senior Subordinated Notes.
Principal payments on these notes are due in equal installments of $10.0 million
on January 31, 2004, and June 30, 2004 and 2005. These notes contain certain
financial and other covenants and restrictions, including restrictions on the
ability of less than wholly-owned subsidiaries of the Company, if any, to pay
dividends or make other distributions to the Company.
Net cash provided by operating activities was $5.9 million for 1996, and
$7.7 million for 1995. The $1.8 million decrease in cash provided by operating
activities for the 1996 period was primarily a result of decreased net income,
partially offset by increased depreciation and amortization. Net cash provided
by operating activities was $7.7 million for 1995 and $4.8 million for 1994. The
$2.9 million increase in net cash provided by operating activities in 1995
versus 1994 resulted from higher non-cash charges in 1995 for depreciation and
amortization and higher working capital requirements associated with the
acquisition of SKW, partially offset by lower net income.
Net cash used in investing activities was $8.1 million and $67.4 million
for 1996 and 1995, respectively. The cash used in investing activities in 1996
consisted of $8.3 million of purchases of property, plant and equipment,
including the purchase and relocation of certain friction products assets of
GKN. In 1995, cash used in investing activities consisted of $61.6 million
attributable to the acquisition of SKW, $3.8 million of capital expenditures and
$2.0 million in loans to certain shareholders. The net cash used in investing
activities of $6.5 million for 1994 reflects the Helsel acquisition and $1.9
million in capital expenditures.
Net cash provided by financing activities was $27.3 million for 1996 and
$59.7 million for 1995. The 1996 net cash provided by financing activities was
attributable to the proceeds from the Offering, and an increase in borrowings
under the Old Credit Facility attributable to capital expenditures, including
the purchase and relocation of certain friction product assets of GKN. The
increase in cash provided by financing activities of $59.7 million for 1995 was
primarily attributable to increased borrowings under the Old Credit Facility,
and the issuance of the Senior Subordinated Notes, associated with the SKW
acquisition, partially offset by repayment of the prior credit facility and the
redemption of stock warrants.
43
<PAGE> 44
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) making additional
strategic acquisitions of complementary businesses. The Company's capital
expenditures were $3.8 million in 1995 and $10.3 million in 1996, which includes
$1.5 million to acquire and relocate the friction products assets of GKN.
The Company believes that cash flow from operating activities, cash
available from the sale of the Notes 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, use the proceeds of the Notes 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 can be no assurance that any such refinancing or asset sales
would be possible or that any additional financing could be obtained.
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.
44
<PAGE> 45
BUSINESS
HISTORY
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 now a wholly-owned subsidiary of the Company. The assets and liabilities
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. Concurrently
with the closing of the Offering, Old Hawk, 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.
GENERAL
Hawk designs, engineers, manufactures and markets friction products (83.4%
of sales in 1996) and precision engineered components (16.6%). The Company is a
leading worldwide supplier of friction products for brakes, clutches and
transmissions used in aerospace, industrial and specialty applications. The
Company is also a leading supplier of precision engineered components primarily
made from powder metals, including pump elements, gears, transmission plates,
pistons and anti-lock brake sensor rings, used in industrial applications. The
Company focuses on manufacturing products requiring sophisticated engineering
and production techniques for applications in aerospace and specialty industrial
markets where it has achieved a major market position.
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 Lockheed L-1011 aircraft and is
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 large trucks, including Dana,
Caterpillar and John Deere. 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
Arctic Cat snowmobiles. The Company's precision engineered components made from
powder metals are used in a wide variety of industrial applications, often as a
lower cost replacement for parts manufactured by a traditional forging, casting
or stamping technology.
The Company believes that its diverse customer base and broad aftermarket
product line lessens its exposure to economic fluctuations. The Company
estimates that aftermarket sales of friction products have comprised
approximately 50.0% 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 Hawk's formation in 1989, Hawk has pursued a strategic plan of
fostering growth by making complementary acquisitions and broadening its
customer base. From 1991 to 1996, the Company's net sales and income from
operations (before non-recurring costs of $4.0 million for plant consolidation
expenses in 1996) increased at a compound annual rate of 42.6% and 34.9%,
respectively, and for 1996, the Company's net sales and income from operations
(before such non-recurring costs) increased 46.5% and 38.7%, respectively,
compared to 1995. Since 1994, the sales
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<PAGE> 46
growth has been primarily driven by the acquisitions of Helsel and SKW. The
acquisitions tripled the net sales of the Company. In addition, the Company's
net sales during the period from 1991 to 1996 grew internally, without giving
effect to the acquisitions, at a compound annual rate of 12.9%.
ACQUISITIONS
The Company believes that its management team has demonstrated the ability
to identify, complete and integrate strategic acquisitions. Building on the base
of its original FPC and Logan subsidiaries, the Company has successfully made or
plans to make the following acquisitions:
Helsel. The June 1994 Helsel acquisition expanded the Company's
precision engineered component business with the acquisition of a leading
manufacturer of powder metal components for the specialty fluid power
market. Since the acquisition, the Company has made approximately $5.0
million in capital improvements at Helsel, increasing its capacity by
approximately 29.0%. By focusing on Helsel's specialty in the fluid power
control market and increasing capacity, sales at Helsel have increased over
30.2% since its acquisition by the Company.
S.K. Wellman. The June 1995 SKW acquisition furthered the Company's
strategy of consolidating friction product manufacturers. While the
Company's FPC subsidiary has a leading position as a supplier of friction
products to the aerospace market, SKW is a leading supplier of friction
products to original equipment manufacturers in industrial markets. Tracing
its history back to the manufacture of transmission friction discs for the
Model T in the 1920s, SKW has brought an established, well-known 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. Since the acquisition, the Company has consolidated one
of SKW's two U.S. manufacturing facilities and SKW's executive offices into
other facilities of the Company.
Friction Products Assets of GKN. In March 1996, the Company continued
its consolidation strategy with its purchase of certain friction products
assets of GKN (principally machinery and equipment), which were based in
the United Kingdom. This purchase also expanded the Company's international
presence. Moreover, the strength of GKN, as a leading supplier of friction
products to the industrial aftermarket in Europe, complemented the
Company's industrial product lines focused on original equipment
manufacturers located in Europe. The Company has consolidated the GKN
operation with the Company's Italian facility, while maintaining a sales
office in the United Kingdom to service its worldwide customers.
Hutchinson. The acquisition of Hutchinson furthers the Company's
strategy of acquiring complementary businesses with a major market position
that will expand the Company's product offerings, technical capabilities
and customer base. Hutchinson designs and manufactures precision engineered
components consisting primarily of rotors for small motors used in small
appliances and office equipment. The Company believes that Hutchinson is
one of the largest independent domestic suppliers of rotors for use in
these small horsepower motors. Additionally, Hutchinson manufactures
aluminum extruded fan spacers for use in commercial diesel engines for
heavy off-road equipment and precision metal castings for use in commercial
hand power tools and gasoline pumping units. The Company also believes
Hutchinson has growth opportunities arising from the trend in original
equipment motor manufacturers to outsource their production of rotors. See
"Risk Factors -- Acquisition Plans" and "Business -- Hutchinson
Acquisition."
Both the friction product and precision engineered 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
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believes that it can continue to make strategic acquisitions of other friction
product and precision engineered component manufacturers. To effect its
acquisition strategy, the Company engages in discussions, from time to time,
with other manufacturers in friction products and complementary precision
engineered component businesses. However, the Company has no outstanding
commitments or agreements regarding any future acquisitions. See "Risk
Factors -- Acquisition Plans."
BUSINESS STRATEGY
The Company seeks to grow by continuing to focus on a balanced product mix
targeted at high margin specialty applications. The principal elements of the
Company's business strategy include:
- Focus on High-Margin, Specialty Applications. The Company operates
in aerospace and specialty industrial markets that typically 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 markets that use standardized products. The
Company's gross margin in 1996 was 25.9%.
- Leveraging Customer Relationships. The Company's engineers work
closely with its 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 have enabled it to
build and maintain strong and stable customer relationships. The Company
also believes that it is the sole source for specific applications with
respect to more than 85.0% of its sales. Each of the Company's 10 largest
customers have been customers of the Company or its predecessors for more
than 10 years. As further testimony to its customer satisfaction record,
the Company has received numerous preferred supplier awards from many of
its leading customers, including Aircraft Braking Systems, BFGoodrich
Aerospace, Dana, Caterpillar, Allison Transmission and John Deere.
- New Product Introduction. The Company believes that the
introduction of new products in conjunction with a new brake, clutch or
transmission system is particularly important in the friction products
business. This importance arises because the friction material is the
consumable, or wear, component of such 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 that system.
For example, on an aircraft braking system, this ability to service the
aftermarket will likely give the Company a stable market for its friction
products for the life of the 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 has
recently introduced high performance friction material for use in racing
car brakes, which the Company believes may have additional applications in
the industrial market for heavy duty braking systems, such as those for
school buses, ambulances and urban delivery vehicles.
- Expanding International Sales. In recent years, the Company has
significantly expanded its international presence. With the acquisition of
SKW in 1995 and the purchase of certain friction products assets of GKN in
1996, the Company has acquired manufacturing facilities in Italy and
Canada, a sales office in the United Kingdom and a worldwide distribution
network for its products. The Company's distributors are located in
established markets throughout Europe, Canada and the Far East, as well as
emerging markets in South and Central America and Southeast Asia. As a
result of these acquisitions, sales from the Company's international
facilities grew from 9.7% of total Company net sales in 1995 to 15.9% in
1996. The Company believes that its ability to actively support
multinational customers on a global basis will allow it to increase its
sales to new and existing customers.
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- Pursuit of Strategic Acquisitions. The fragmented friction product
and powder metal component industries are undergoing consolidation. The
Company will continue to seek to acquire complementary businesses with a
major market position that will enable it to expand its product offerings,
technical capabilities and customer base. In assimilating acquired
companies, the Company may rationalize operations to reduce costs and
improve profitability. 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 an estimated $5.4 million of annualized cost savings.
PRODUCTS AND MARKETS
The Company focuses on supplying the aerospace and specialty industrial
markets that typically require sophisticated engineering and production
techniques. In 1996, the Company's sales by principal end markets were:
<TABLE>
<S> <C>
Other - 6.6
Specialty - 10.7
Heavy Truck - 11.1
Agriculture - 13.2
Precision Engineered Components - 16.6
Construction - 21.0
Aerospace - 20.8
</TABLE>
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The table below sets forth the Company's net sales (in millions) for 1996
by principal end markets, principal products and selected customers and
applications.
<TABLE>
<CAPTION>
PRINCIPAL
END MARKETS PRINCIPAL SELECTED SELECTED
(IN MILLIONS) PRODUCTS CUSTOMERS APPLICATIONS
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Friction Products: Brake Linings Aircraft Braking Systems Boeing 727, 737, 757
Aerospace ($25.8) BFGoodrich McDonnell Douglas DC-9,
Parker Hannifin DC-10, MD-80
Lockheed L-1011
- ------------------------------------------------------------------------------------------------------------------
Construction ($26.1) Brake Linings Caterpillar Caterpillar Crawler
Transmission Discs Allison Transmission Tractors, Motor Graders and
Volvo Wheel Loaders
Clark Harth Allison 7000/8000/9000
Series Transmissions
- ------------------------------------------------------------------------------------------------------------------
Agriculture ($16.4) Brake Linings John Deere John Deere 7000 and 8000
Transmission Discs New Holland Series Tractors
Clutch Buttons AGCO New Holland 150+ hp
Case-Poclain Tractors
- ------------------------------------------------------------------------------------------------------------------
Heavy Truck ($13.7) Clutch Buttons Dana Navistar,
Ford, Paccar and Mack
Class 6, 7, 8 Trucks
- ------------------------------------------------------------------------------------------------------------------
Specialty and Other Brake Linings Hayes Brake Harley-Davidson Motorcycles
($21.4) Transmission Discs Bombardier Snowmobiles
Kelsey-Hayes AM General Humvees
United Technologies Fuel Cells
- ------------------------------------------------------------------------------------------------------------------
Precision Engineered Powder Metal Gears, Hydro-Gear Hydrostatic Transmissions
Components ($20.6) Rotors and Parker Hannifin Fluid Power Controls
Transmission Components Caterpillar Construction Equipment
Vickers Industrial Pumps
Gilbarco Gasoline Pumps
Eaton Truck Transmissions
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Friction Products
The Company's friction products are made from proprietary 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 act to slow and stop airplanes when taxiing or landing. Friction
products manufactured by the Company also include friction linings for use in
automatic and power shift transmissions, clutch buttons that serve as the main
contact point between an engine and a transmission, and brake linings for use in
other types of braking systems.
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 specialty 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.
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The Company estimates that aftermarket sales of friction products have
historically comprised approximately 50.0% of the Company's net friction product
sales. The Company believes that its stable aftermarket sales component enables
the Company to reduce its risk 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 Lockheed L-1011
aircraft and is 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 the aircraft brake manufacturer with
which the Company is working in conjunction, are successful in obtaining the
rights to supply an aircraft, the Company can generally supply its friction
products as long as that model continues to fly because it is generally
expensive to redesign a braking system and meet the FAA requirements. Moreover,
FAA maintenance requirements mandate that brake linings be changed after a
specified number of take-offs and landings, which varies by aircraft type,
resulting in a continued and steady market for the Company's aerospace friction
products.
Construction and Agricultural Vehicles and Equipment and Heavy
Trucks. The Company supplies a variety of friction products for use in brakes,
clutches and transmissions on construction and agricultural vehicles and
equipment and heavy trucks. These components are designed to precise tolerances
and permit the brakes to stop or slow a moving vehicle and the clutch and/or
transmission 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 the friction product for the life of the system.
The Company supplies transmission discs and brake linings for manufacturers
of construction equipment, such as Caterpillar. The Company believes it is the
second largest domestic supplier of such friction products. Replacement
components for construction equipment are sold through Caterpillar and various
aftermarket distributors.
The Company also supplies clutch buttons, transmission discs and brake
linings for manufacturers of agricultural equipment, such as 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 these original equipment manufacturers as well as various aftermarket
distributors.
In addition, the Company supplies clutch buttons for heavy trucks to
original equipment manufacturers, such as Dana. The Company believes it is the
leading domestic supplier of replacement clutch buttons for heavy trucks.
Replacement components are sold through Dana and various aftermarket
distributors.
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 in the industrial
market.
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Other. In addition to providing metal stampings for its friction
business, the Company also sells transmission plates and other components to the
automotive and trucking industries.
Precision Engineered Components
The Company's engineered components are specialty engineered products
consisting primarily of powder metal components, such as pump elements, gears,
transmission plates, pistons and anti-lock brake sensor rings.
The principal markets served by the Company's precision engineered
components business include the fluid power industry and manufacturers of truck
and off-road vehicle transmissions, other drive mechanisms and anti-lock braking
systems. According to the Metal Powder Industries Foundation, an industry trade
group, the size of the worldwide market for powder metal products, including
powder metal components supplied to the automobile industry, was approximately
$3.0 billion in 1995, an increase of over 15% per year since 1991. The Company
focuses on the estimated $1.0 billion market for powder metal components used in
industrial applications. 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
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.
Fluid Power and Industrial Applications. The Company manufactures a
variety of precision engineered components made from different 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. As the Company's core powder
metal technology improves, enabling its components to be substituted for wrought
steel or iron components, the Company increasingly competes with companies using
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 substitution of powder metal components for cast or forged components in
industrial applications will continue for the foreseeable future, providing the
Company with increased product and market opportunities.
HUTCHINSON ACQUISITION
As part of the Company's strategy of acquiring complementary businesses
with a major market position that will expand the Company's product offerings,
technical capabilities and customer base, the Company acquired all the
outstanding capital stock of Hutchinson, a privately-owned company, in January
1997. Hutchinson designs and manufactures precision engineered components
consisting primarily of rotors for small motors used in small appliances and
office equipment. The Company believes that Hutchinson is one of the largest
independent domestic suppliers of rotors for use in these small horsepower
motors. Additionally, Hutchinson manufactures aluminum extruded fan spacers for
use in commercial diesel engines for heavy off-road equipment and precision
metal castings for use in commercial hand power tools and gasoline pumping
units. The Company also believes Hutchinson has growth opportunities arising
from the trend in original equipment motor manufacturers to outsource their
production of rotors.
The management of Hutchinson remained in place following the Hutchinson
acquisition. Upon the acquisition of Hutchinson, the Company entered into an
employment agreement with Timothy J. Houghton, President and CEO and a principal
stockholder 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 Hutchinson's
EBITDA growth
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during 1997, 1998, and 1999. Mr. Houghton was a shareholder of Hutchinson prior
to the acquisition.
Hutchinson owns its 35,000 square foot manufacturing facility and a 10,000
square foot warehouse, each of which is located in Alton, Illinois. The Company
believes that Hutchinson's facilities are adequate for its needs for the
foreseeable future.
As of December 31, 1996, Hutchinson employed approximately 75 people,
including 67 hourly employees and 8 salaried employees. The hourly employees are
covered under a collective bargaining agreement with the International
Association of Machinists and Aerospace Workers expiring in June 1998. The
Company believes that Hutchinson's relationship with its employees and their
union is good.
There is no assurance that the Company will be able to successfully
integrate Hutchinson into its operations. See "The Transactions -- Hutchinson
Acquisition."
MANUFACTURING
The manufacturing process for the Company's friction products and precision
engineered components made of powder metal materials are essentially similar. In
general, both use composite metal alloys in powder form to make high quality
powder metal components. The basic manufacturing steps, blending/compounding,
molding/compacting, sintering (or bonding) and secondary machining/treatment are
as follows:
- Blending/compounding: Composite metal alloys in powder form,
lubricants and other additives are blended together according to scientific
formulas, many of which are proprietary. 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 the
powder alloy is compacted under high pressure into the 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, which enable the Company to produce large, complex
components.
- Sintering: After compacting, the molded part is heated to a
specific temperature in computer-controlled furnaces, enabling the metal
powders to bond metallurgically and harden and strengthen the part while
retaining the 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, the 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, components are automatically re-pressed, heat
treated, precision coined, ground or drilled or applied 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
the molded composite friction materials, cellulose composite friction materials
are then bonded to a steel plate or core with a resin-based polymer.
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<PAGE> 53
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 insure that tight tolerances have been met and the
quality of 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 allow the manufacture of friction
products with numerous performance advantages, such as greater wear resistance,
increased stopping power, lower noise and smoother engagement. For example, on
the DC-9 aircraft, which was originally manufactured in the 1960s, the Company's
brake linings have to be changed every 600 cycles (a cycle is one take off and
one landing). On the 757 aircraft, which was originally produced in the 1980s,
the Company's brake linings do not require replacement until after more than
1,500 cycles.
The Company maintains an extensive library of proprietary friction product
formulas that serve as a starting point for new product development. Each
formula has a written set of ingredients and processes to generate repeatability
in production. Some formulas may have as many as 15 different components. A 1.0%
to 2.0% change in the mixture can produce significantly different performance
characteristics.
The Company also believes that its precision engineered components business
is capable of producing powder metal components that are more complex and larger
than components produced by traditional methods. 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
otherwise be impractical or impossible to produce using conventional
metalworking processes.
CUSTOMERS
The Company's engineers closely work 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 has enabled it to build and maintain strong and stable customer
relationships. Each of the Company's 10 largest customers have been customers of
the Company or its predecessors for more than 10 years, and the Company believes
that it supplies over 85.0% of its products to its customers on a sole source
basis for specific applications.
The Company believes that its recent acquisitions have broadened product
lines and increased its technological capabilities and will further enhance its
relationships with its customers and expand its preferred supplier status. In
addition, because many of the Company's customers have instituted programs for
evaluating and rating suppliers, the Company believes that its relationship with
these customers will be enhanced. The programs, which test quality, cost control
and reliability of delivery among other factors, are used by the Company's
customers to determine who will be considered for new business. As testimony to
its customer satisfaction record, the Company has received numerous preferred
supplier awards from its leading customers, including Aircraft Braking Systems,
BFGoodrich Aerospace, Dana, Caterpillar and John Deere.
The Company's sales to Aircraft Braking Systems represented approximately
10.4% of the Company's consolidated net sales in 1996 and approximately 13.8% of
the Company's consolidated net sales in 1995. In addition, the Company's top
five customers accounted for approximately 40.1% of the Company's consolidated
net sales in 1996 and approximately 40.9% of the Company's
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consolidated net sales in 1995. Although the Company does have long-term
contracts with several of its significant customers, these contracts do not
include minimum purchase requirements and may be terminated by the customers at
any time. See "Risk Factors -- Reliance on Significant Customers."
MARKETING AND SALES
The Company markets its friction products throughout the United States and
the world. In the United States, eight product managers have responsibility for
the sales and marketing of distinct Company friction product lines. The product
managers operate from the Company's facilities in Ohio. The 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. In addition, the Company's
friction products for the replacement market are sold through domestic
distributors.
International sales for the Company's friction products are directed from
the Company's facilities in Canada and Italy and a sales office in the United
Kingdom. The Company has recently hired a Director of International Sales, who
is located in Ohio, and is primarily responsible for expanding the Company's
business in new international markets. The Company's international sales force
consists of six manufacturers' representatives and five distributors who
represent the Company's products in their respective countries throughout the
world.
The Company's marketing and sales of its precision engineered components
are directed by four product managers operating from the Company's facilities in
Ohio and Indiana. The Company markets its precision engineered components
throughout the world.
SUPPLIERS AND RAW MATERIALS
The principal raw materials used by the Company are copper powder,
cellulose, steel and iron powder. 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 on 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 industries in which the Company competes are highly competitive and
fragmented, with many small manufacturers and only a few manufacturers
generating sales in excess of $50 million. The larger competitors have financial
and other resources substantially greater than those of the Company. None of
these larger competitors competes 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 precision engineered components are quality, engineering
expertise and technical capability, new product innovation, timely delivery and
service. The Company believes 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 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 can be no assurance
that the Company will continue to obtain such business in the future.
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The Company also competes with manufacturers using 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
justifies 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 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 can be no assurance that competition from these
technologies or others will not adversely affect the Company's operations in the
future. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented approximately 20.8% of the Company's consolidated net sales in 1996
and approximately 26.1% of the Company's consolidated net sales in 1995. 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 insure continued and future compliance.
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 --
Government Regulation."
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MANUFACTURING FACILITIES AND OTHER PROPERTIES
The Company's operations are conducted through the following manufacturing
facilities, all of which are owned by it, except as noted:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL FUNCTIONS
- ------------------------------- -------------- ---------------------------------------------
<S> <C> <C>
Akron, Ohio.................... 69,000 Manufacturing of metal components used in
friction products
Brook Park, Ohio............... 111,000 Manufacturing of friction products, Domestic
and International Sales, Research and
Development, and Administration
Cleveland, Ohio(1)............. 6,200 Principal executive offices
Medina, Ohio(2)................ 108,000 Manufacturing of friction products and powder
metal components, Sales, Marketing,
Research and Development, Customer Service
and Support, and Administration
Solon, Ohio(2)................. 58,000 Research and Development
Campbellsburg, Indiana......... 60,000 Manufacturing engineered components, Sales,
Marketing, Customer Service and Support,
and Administration
Concord, Ontario, Canada(3).... 15,000 Manufacturing of friction products,
Distribution and Warehousing
Orzinuovi, Italy(4)............ 75,000 Manufacturing of friction products,
International Sales and Marketing
</TABLE>
- ---------------
(1) 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."
(2) The Company has placed the Solon facility on the market for sale. The
Company does not anticipate incurring any material gain or loss as a result
of the sale. Following the completion of the sale, the Company anticipates
expanding its Medina facility to accommodate the consolidation of the Solon
facility. The additional space will be used for research and development and
for warehousing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."
(3) Leased.
(4) The Company is expanding this facility by 22,000 square feet to accommodate
manufacturing equipment acquired in the purchase of certain friction
products assets of GKN.
In June 1996, the Company closed its manufacturing facility located 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 and that it has sufficient capacity to meet its current
operational needs. With the planned expansion of the Orzinuovi, Italy facility,
the Company believes that it will have sufficient capacity to accommodate its
needs through 1997.
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<PAGE> 57
EMPLOYEES
As of December 31, 1996, the Company had 974 employees, consisting of 124
management, supervisory and administrative personnel, 69 engineering, quality
control and laboratory personnel, 26 sales and marketing personnel and 755
manufacturing personnel.
Approximately 251 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 92 employees at the
Company's Akron, Ohio facility are covered under a collective bargaining
agreement with the United Automobile Workers expiring in July 1997; and
approximately 125 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. Certain provisions of the Italian national
mechanics union contract, which expire in December 1997, also govern the local
union. The Company has experienced no strikes and believes its relations with
its employees and their unions to be good.
TRADEMARKS
Velvetouch(R), Feramic(R) and Fibertuff(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." The Company also relies on common law, including the law of unfair
competition, to protect its trademarks and services. The Company is not aware of
any pending claims of infringement or other challenges to the Company's right to
use its trademarks.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course
of business. In the Company's opinion, the outcome of these matters will not
have a material adverse effect on the Company's financial condition, liquidity
or results of operations.
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<PAGE> 58
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) 63 Chairman of the Board, Chief Executive Officer,
President and Director
Ronald E. Weinberg(1)(2) 55 Vice-Chairman of the Board, Treasurer and Director
Douglas D. Wilson 53 Executive Vice President
Jess F. Helsel 72 President -- Helsel, Inc.
Thomas A. Gilbride 43 Vice President-Finance
Jeffrey H. Berlin 34 Vice President-Marketing and Corporate Development
Paul R. Bishop(2)(3) 53 Director
Byron S. Krantz(3) 61 Secretary and Director
Dan T. Moore, III(1) 56 Director
William J. O'Neill, Jr.(2) 63 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 38 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 27 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 and Milwaukee markets and operates a
direct mail business, and Mr. Weinberg has served as Chairman of the Board of
that company since that date.
Douglas D. Wilson has served as the 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 served at Transamerica Delaval Inc., a manufacturing company,
for sixteen years as the General Manager of three different businesses: Gems
Sensors Division, Delroyd Gear Division and Adel Aerospace Division. Mr. Wilson
has been the Chairman of the
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<PAGE> 59
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 45 years of experience
in the powder metal industry.
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.
Jeffrey H. Berlin has served as the Vice President-Marketing and Corporate
Development of the Company since July 1994. From August 1991 to July 1994, Mr.
Berlin served the Company as its Director of Corporate Development. From 1989 to
1991, Mr. Berlin helped develop an acquisition program for American Consumer
Products, Inc., a manufacturer of consumer hardware products.
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 has been a director of Belden & Blake
Corporation, an oil and gas drilling company, since April 1994 and a director of
Key Bank National Association since July 1992.
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 office, since 1983. He has also served as the Managing
Partner of Clanco Partners I since March 1989.
COMPOSITION OF BOARD OF DIRECTORS
The Company's By-laws provide that the stockholders of the Company may
determine the authorized number of directors. Currently, the Company has six
directors authorized. Directors hold office for a term of one year or until
their successors have been duly elected and qualified. Under an existing
shareholders' agreement, certain shareholders have the right to designate one
member of the Board of Directors of the Company. See "Principal
Stockholders -- Stockholder Agreements."
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 and Helsel. See "Employment
Agreements."
Certain transactions among the Company and its directors or entities
affiliated with certain directors of the Company are described below in
"Principal Stockholders -- Stockholder Agreements" and "Certain Transactions."
BOARD COMMITTEES
The Nominating Committee of the Board of Directors was formed in September
1996 to recommend qualified candidates for election as directors of the Company.
The Audit Committee of the Board of Directors was formed in September 1996 to
review 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
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<PAGE> 60
was formed in September 1996 to review and make recommendations regarding the
compensation of executive officers of the Company and to review general policy
relating to the compensation and benefits of employees of the Company.
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 $5,000 plus $1,000 per board meeting attended by each
such director. The Company will also reimburse all directors for all expenses
incurred in connection with their services as directors. No additional
consideration is paid to the directors for committee participation.
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
--------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
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 Chief 1995 340,000 350,000 11,400(2) 12,500(3)
Executive Officer
Ronald E. Weinberg............................ 1996 266,000 410,000 20,300(4) --
Vice-Chairman of the Board and Treasurer 1995 231,000 350,000 13,400(4) --
Douglas D. Wilson............................. 1996 166,000 120,000 1,600(5) --
Executive Vice President 1995 159,000 100,000 -- --
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)
Vice President-Marketing and Corporate 1995 96,000 75,000 2,500(8) --
Development
</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 his 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. His 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.
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<PAGE> 61
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 such Named Executive Officer during 1995 or
1996.
BENEFIT PLANS
FPC Profit Sharing Plan. FPC maintains a tax-qualified profit sharing
plan, including features under section 401(k) of the Internal Revenue Code, that
covers the majority 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.
SKW Retirement Savings and Profit Sharing Plan. SKW also sponsors a
tax-qualified defined contribution plan, including features under section 401(k)
of the Internal Revenue Code, that covers the majority of its non-union U.S.
employees. The plan generally provides for voluntary employee pre-tax
contributions ranging from 1% to 15%, a 10% matching SKW contribution (up to a
maximum of 1% of an employee's compensation), 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 Internal Revenue Code, that covers substantially all of its
employees. The plan generally provides for voluntary employee pre-tax
contributions ranging from 1% to 16%, 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, hired on and
after January 1, 1989, 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, and
Wage Continuation Agreements, each dated June 30, 1995, as amended, 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. 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. Mr. Weinberg devotes a substantial amount of his time
and effort to the business of the Company, but under the
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<PAGE> 62
terms of his employment agreement, he is not required to devote all of his time
and efforts 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. and devotes a significant amount of his time and efforts to the business
of those companies. If either Mr. Harbert or Mr. Weinberg dies during the term
of their respective employment agreements or is no longer in the active employ
of the Company solely because of a mental or physical disability, the Company
will pay 50% of his annual base salary, but in no event less than 50% of his
average salary in the preceding two years before his death or disability, to his
spouse annually until the date of her death. If either Mr. Harbert or Mr.
Weinberg is not married at the time of his death or disability, the Company will
pay, for a period of two years, his base salary at the time of his death to his
estate or beneficiaries. If either 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.
Upon the acquisition of Helsel by a group led by Mr. Harbert and Mr.
Weinberg, Jess F. Helsel entered into an Employment Agreement and Consulting
Agreement, each effective July 1, 1994. (A subsidiary of the Company assumed
these agreements in June 1995 when Helsel became a wholly-owned subsidiary of
the Company. See "Certain Transactions -- The 1995 Helsel Transaction.") Mr.
Helsel has agreed to serve as President of Helsel through the expiration of the
term of the employment agreement in June 1997. Mr. Helsel receives an annual
base salary of $150,000 and a bonus equal to 25% of the amount by which Helsel's
earnings before interest, income taxes, depreciation, amortization, certain
corporate charges and payment of Mr. Helsel's bonus for a calendar year in the
term exceed $1.4 million. 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 terms of the Consulting Agreement, the Company
will pay Mr. Helsel $150,000 for each of the first two years after the
expiration of the 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 four years after the expiration of the term of his employment
agreement.
Upon the acquisition of Hutchinson, the Company entered into an employment
agreement with Timothy J. Houghton, President and CEO and a principal
stockholder 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 Hutchinson's
EBITDA growth during 1997, 1998 and 1999.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus,
information regarding the beneficial ownership of the Company's Class A Common
Stock and Class B Non-Voting Common Stock, $0.01 par value per share ("Class B
Common Stock," and together with the Class A Common Stock, the "Common 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 Common
Stock, (2) each director or executive officer who beneficially owns any shares
of Common Stock, and (3) all directors and executive officers of the Company as
a group. Unless otherwise indicated, the Company believes that all persons named
in the table have sole investment and voting power over the shares of Common
Stock owned. Unless otherwise specified, the address of all the stockholders is
the address of the Company set forth in this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK(2) COMMON STOCK(3)
--------------------- -------------------
NAME OF BENEFICIAL OWNER (1) NUMBER PERCENT NUMBER PERCENT
- -------------------------------------------------- --------- ------- ------- -------
<S> <C> <C> <C> <C>
William J. O'Neill, Jr.(4)........................ 463,492 32.1% -- --
Clanco Partners I(5).............................. 461,757 32.0 -- --
Harbert Family Limited Partnership(6)............. 342,905 23.7 -- --
Norman C. Harbert(7).............................. 381,006 26.4 -- --
Weinberg Family Limited Partnership(8)............ 333,800 23.1 -- --
Ronald E. Weinberg(9)............................. 370,889 25.7 -- --
Connecticut General Life Insurance Company(10).... -- -- 211,514 66.7%
CIGNA Mezzanine Partners III, L.P.(11)............ -- -- 105,456 33.3
Krantz Family Limited Partnership(12)............. 75,505 5.2 -- --
Byron S. Krantz(13)............................... 83,894 5.8 -- --
Jeffrey H. Berlin................................. 80,417 5.6 -- --
Douglas D. Wilson................................. 16,978 1.2 -- --
Thomas A. Gilbride................................ 14,913 1.0 -- --
Dan T. Moore, III................................. 3,161 * -- --
Jess F. Helsel.................................... 1,735 * -- --
Paul R. Bishop.................................... 1,735 * -- --
All directors and executive officers as a group
(11 individuals)................................ 1,418,220 98.2% -- --
</TABLE>
- ---------------
* Less than 1.0%.
(1) All listed stockholders owning shares of Class A Common Stock are parties
to agreements governing the voting and disposition of all Class A Common
Stock held by such stockholders. Each such party disclaims beneficial
ownership of the shares of Class A Common Stock owned by each other party.
See "Stockholder Agreements."
(2) The Class A Common Stock is the only voting security of the Company. The
Class B Common Stock (as defined) is not entitled to vote. See "Description
of Capital Stock."
(3) The shares of Class B Common Stock are issuable upon the exercise of
warrants and may be converted on a one-for-one basis into Class A Common
Stock under certain circumstances.
(4) Includes 461,757 shares held by Clanco. Mr. O'Neill is the managing partner
of Clanco Partners I, an Ohio general partnership ("Clanco"), and as a
result has voting and dispositive power over the shares held by Clanco.
(5) Clanco is an Ohio general partnership whose address is c/o William J.
O'Neill, Jr., 30195 Chagrin Boulevard, Suite 310, Pepper Pike, Ohio 44124.
Its managing partner is William J. O'Neill, Jr.
(6) Harbert Family Limited Partnership is an Ohio limited partnership. Its
managing general partner is Norman C. Harbert.
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<PAGE> 64
(7) Includes 342,905 shares held by the Harbert Family 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.
(8) Weinberg Family Limited Partnership is an Ohio limited partnership. Its
managing general partner is Ronald E. Weinberg.
(9) Includes 333,800 shares held by the Weinberg Family 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.
(10) Connecticut General Life Insurance Company is a Connecticut corporation
whose address is c/o CIGNA Investments, Inc., 900 Cottage Grove, Hartford,
Connecticut 06152-2307.
(11) CIGNA Mezzanine Partners III, L.P. is a Delaware limited partnership whose
address is c/o CIGNA Investments, Inc., 900 Cottage Grove, Hartford,
Connecticut 06152-2307.
(12) 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. Its managing general partner is Byron S. Krantz.
(13) Includes 75,505 shares held by the Krantz Family Limited Partnership. 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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (1) 2,200,000
authorized shares of Class A Common Stock, 1,443,978 shares of which are
outstanding, (2) 375,000 authorized shares of Class B Common Stock, none of
which are outstanding, and (3) 500,000 authorized shares of Serial Preferred
Stock, $0.01 par value per share ("Preferred Stock"), of which 1,375 shares of
Series A Preferred Stock, 702 shares of redeemable 9% cumulative preferred
stock, par value $0.01 per share, Series B (the "Series B Preferred Stock") and
1,188.9 shares of Series C Preferred Stock are outstanding. 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 Amended and
Restated Certificate of Incorporation of the Company, as amended (the
"Certificate"), and the By-laws of the Company, which are available as described
under "Available Information."
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. 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 Hawk
Controlling Stockholder Merger, the Company canceled 1,250 outstanding shares of
Series A Preferred Stock and issued 1,188.9 shares of Series C Preferred Stock.
Once cancelled, those shares of Series A Preferred Stock were permanently
retired. See "Certain Transactions -- Transactions Concurrent with the
Offering."
The following is a description of the terms of the Series A, Series B and
Series C Preferred Stock:
- The shares of Series A, Series B and Series C Preferred Stock have
identical powers, preferences, rights, qualifications, limitations and
restrictions except for dividend rights. Dividends on the Series A,
Series B and Series C Preferred Stock are cumulative and accrue at the
rate of 10% per annum, payable quarterly, for the Series A and Series C
Preferred Stock and 9% per annum, payable quarterly, for the Series B
Preferred Stock.
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- The holders of the Series A, Series B and Series C Preferred Stock have
no voting rights unless: (1) an amendment to the Company's Certificate of
Incorporation is proposed that would change the preferences of the Series
A, Series B or Series C Preferred Stock or cause the issuance of
Preferred Stock with attributes that are senior to the Series A, Series B
or Series C Preferred Stock or increase the number of shares of Class A
Common Stock or Class B Common Stock, in which event they would have the
right, voting separately as a class, to approve the amendment; or (2) the
Company fails to declare and pay in cash the full amount of dividends
payable on the Series A, Series B or Series C Preferred Stock in any six
consecutive quarters, in which event the holders of either or both series
of Preferred Stock on which such dividends have not been paid would have
the right, subject to certain conditions and voting separately as a
class, to elect one director to the Board of Directors until all
dividends in default on such series of Preferred Stock have been paid in
full and dividends for the then current dividend period have been
declared and funds therefor set apart.
- The Company 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 A, Series B and Series C 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 (or, in the case of the
Series A and Series C Preferred Stock, for a new debt instrument with
certain specified terms).
- Each share of Series A, Series B and Series C 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 A, Series B and Series C
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 A, Series
B and Series C Preferred Stock are not listed or quoted on any stock
exchange or market.
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 directors. 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 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.
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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 other conversion rights or redemption or sinking fund provisions with respect
to such stock.
STOCKHOLDER AGREEMENTS
The stockholders of the Company have entered into the following stockholder
agreements:
Shareholders' Agreement with CIGNA. Connecticut General Life Insurance
Company and CIGNA Mezzanine Partners III, L.P. (together, "CIGNA") entered into
a Shareholders' Agreement with the Company, Old Hawk, Mr. Harbert, Mr. Weinberg
and Mr. Krantz (collectively, the "Hawk Shareholders") in June 1995 in
connection with CIGNA's purchase of the Senior Subordinated Notes and an
aggregate of 316,970 warrants to purchase Class B Common Stock from the Company.
See "Description of Certain Indebtedness -- Senior Subordinated Notes." Under
this agreement, the Company has the option to repurchase the warrants and CIGNA
has the option to put the warrants back to the Company at prices based on a fair
market value formula. The Company's repurchase right commences June 30, 2001 and
CIGNA's put right commences June 30, 2000. The repurchase and put rights
terminate automatically upon an initial public offering by the Company. In the
event that any of the Hawk Shareholders desires to sell any or all of its or his
shares of Class A Common Stock (other than to certain eligible persons), the
agreement contains a "tag-along" provision giving CIGNA the right to include a
proportionate amount of the warrants or capital stock of the Company issued upon
exercise of the warrants in any such sale. The agreement also provides for a
"drag-along" provision giving CIGNA the right to sell all the warrants or
capital stock of the Company issued upon the exercise of the warrants in any
sale by the Hawk Shareholders of all their shares of Class A Common Stock to any
person or entity that is not a subsidiary or affiliate of the Company.
In addition, the agreement grants certain registration rights to the
holders of shares of Common Stock or other capital stock of the Company issued
upon exercise of the warrants (collectively, "Registrable Shares"). The holders
of at least 50% of the Registrable Shares have the right to demand registration
of all or any part of their Registrable Shares under the Securities Act. In
addition, in the event that the Company at any time proposes to register any of
its securities under the Securities Act (other than certain registrations of
shares offered solely to the Company's employees or existing stockholders), the
holders of Registrable Shares will have the right, subject to certain exceptions
and limitations, to have the Registrable Shares then owned by them included in
such registration. The Company has agreed that, in the event of any registration
of Registrable Shares in accordance with the provisions of the agreement, it
will indemnify the holders thereof, and certain related persons, against
liabilities incurred in connection with such registration, including liabilities
arising under the Securities Act. Registration expenses of the selling
stockholders (other than underwriting or any other fees, discounts or
commissions incurred in the sale of the Registrable Securities, certain transfer
taxes and the fees and expenses of any accountants or other representatives
retained by such stockholders) will be paid by the Company.
Shareholders' Agreement with Clanco and Its Affiliates. In June 1995, the
Company entered into a Shareholders' Agreement with Clanco, Clanco Partners III,
William J. O'Neill, Jr., the William J. O'Neill, Sr. Irrevocable Trust A, the
Dorothy K. O'Neill Revocable Trust, Martha B. Horsburgh and Sheldon M. Sager
(collectively with any transferees thereof, the "Clanco Shareholders"), and the
Hawk Shareholders. The agreement, as amended, imposes restrictions on the
transfer by the Clanco Shareholders of their shares of Class A Common Stock and
Series A, Series B and Series C Preferred Stock and grants to the Hawk
Shareholders a right of first refusal in the event that any of the Clanco
Shareholders desires to sell any or all of his, her or its shares of such stock
to a bona fide offeror (other than another Clanco Shareholder). In the event
that the Hawk Shareholders desire to sell any or all of their shares of Class A
Common Stock or Series A, Series B or Series C Preferred Stock in an
arm's-length transaction, the agreement also contains a "tag-along" provision
that gives the Hawk Shareholders the right, subject to certain exceptions and
limitations, to demand
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that the Clanco Shareholders sell a proportionate amount of their shares of such
stock in that sale. Pursuant to the agreement, the Clanco Shareholders have the
right to designate one member of the Board of Directors of the Company and the
Hawk Shareholders are required to vote their shares of Class A Common Stock in
favor of the election of that designee.
Stockholder's Agreement with Dan T. Moore, III. The Hawk Shareholders and
Dan T. Moore, III, a Director of the Company, are parties to a Stockholder's
Agreement, dated June 6, 1991, as amended, that (1) grants to the Hawk
Shareholders a right of first refusal in the event that Mr. Moore desires to
sell any or all of his shares of Class A Common Stock to a bona fide offeror and
(2) grants to Mr. Moore the option to put all of his shares to the Hawk
Shareholders at a price based on a fair market value formula. The put right
commences June 1, 1997 and terminates on May 31, 1999, and is subordinated to
the New Revolving Credit Facility, the Notes and the Senior Subordinated Notes.
The agreement will terminate upon the earlier of the purchase of all shares of
Class A Common Stock owned by Mr. Moore by any or all of the Hawk Shareholders
or the consummation of an initial public offering by the Company.
Shareholders' Agreement with All Other Stockholders. In June 1995, the
Company entered into a Shareholders' Agreement with Paul R. Bishop, Jeffrey H.
Berlin, Barry J. Feld, Thomas A. Gilbride, Jess F. Helsel, Fredric M. Roberts,
Gary Siciliano and Douglas D. Wilson (collectively, the "Other Shareholders")
and the Hawk Shareholders. The agreement, as amended, provides for, among other
things, restrictions on the transfer by the Other Shareholders of their shares
of Class A Common Stock and Series A, Series B and Series C Preferred Stock, a
right of first offer in favor of the Hawk Shareholders in the event that any of
the Other Shareholders desires to sell any or all of his shares of such stock,
and the mandatory purchase by the Hawk Shareholders of all of the shares of an
Other Shareholder upon the death, disability, retirement or termination of
employment of such Other Shareholder at the applicable price set forth therein.
In the event that the Hawk Shareholders desire to sell any or all of their
shares of Class A Common Stock or Series A, Series B or Series C Preferred Stock
in an arm's-length transaction, the agreement contains a "tag-along" provision
that gives the Hawk Shareholders the right to demand that the Other Shareholders
sell a proportionate amount of their shares of such stock in that sale. The
agreement also contains an irrevocable proxy and power of attorney granted by
each of the Other Shareholders to Mr. Harbert, Mr. Weinberg and Mr. Krantz, or
any of them, with respect to the voting of such Other Shareholder's shares of
Class A Common Stock. The agreement will terminate upon the sooner to occur of
the purchase by any of the Hawk Shareholders of all shares of Class A Common
Stock owned by the Other Shareholders, or the sale by the Hawk Shareholders of
all of their respective shares of Class A Common Stock.
Stockholders' Voting Agreement. Messrs. Harbert, Weinberg and Krantz have
also entered into a Stockholders' Voting Agreement, effective as of November 27,
1996, that provides that to the extent that any of them owns any shares of
voting stock of the Company, including any shares of Class A Common 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
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 shall direct. If any of Messrs. Harbert, Weinberg or Krantz 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 for the selling stockholder as a Director will terminate.
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CERTAIN TRANSACTIONS
TRANSACTIONS CONCURRENT WITH THE OFFERING
Concurrently with the closing of the Offering, the Company completed the
Hawk Controlling Stockholder Merger, thereby merging Old Hawk with and into the
Company in a tax-free reorganization under Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended. Old Hawk had no material assets other than the
capital stock of the Company. Prior to the merger, Old Hawk owned 33.9% of 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. Old Hawk's only liabilities were its debts to the
Company and Old Hawk's stockholders in the aggregate amount of approximately
$870,000. As a result of the merger, the Series A Preferred Stock owned by Old
Hawk 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 Old Hawk less $61,000 of indebtedness of Old Hawk 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 Old Hawk and then reissued the same
amount of shares of Class A Common Stock pro rata to the Old Hawk stockholders.
The common stockholders of Old Hawk included: Norman C. Harbert, Chairman of the
Board, President, Chief Executive Officer and a stockholder of the Company who
owned 44.2% of Old Hawk; Ronald E. Weinberg, Vice-Chairman of the Board,
Treasurer and a stockholder of the Company who owned 42.1%; Byron S. Krantz, a
Director, Secretary and a 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 shareholder of the Company, and Clanco, 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.
Old Hawk'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 Old Hawk 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
Old Hawk stockholders.
STOCKHOLDER NOTES
Certain stockholders of the Company issued notes to the Company on June 30,
1995 (the "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 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 June 1995 Notes remain
outstanding.
In addition, Clanco 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's
note was $162,500. Clanco repaid its note to the Company in full in August 1996.
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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 shareholders led
by Mr. Harbert and Mr. Weinberg. Helsel was operated by the control group of
Company shareholders 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 or immediate family members of such persons became the beneficial owners
of the number of shares of Class A Common Stock and Series B Preferred Stock set
forth opposite their names:
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B
NAME OF STOCKHOLDER COMMON STOCK COMMON STOCK
- --------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
William J. O'Neill, Jr.*................................. 2,203 315
Norman C. Harbert........................................ 1,645 158
Ronald E. Weinberg....................................... 1,645 158
Jeffrey H. Berlin........................................ 784 13
Byron S. Krantz.......................................... 365 35
Douglas D. Wilson........................................ 38 3
Thomas A. Gilbride....................................... 24 1
Paul R. Bishop........................................... 17 --
Jess F. Helsel........................................... 17 --
</TABLE>
- ---------------
* Includes 2,186 shares of Class A Common Stock issued to Clanco Partners III,
an Ohio general partnership of which Mr. O'Neill was the managing general
partner prior to its liquidation in 1995, and 315 shares of Series B Preferred
Stock owned by Clanco Family Partners, L.P. ("Clanco FPLP"), 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
9.25%), is payable in four equal annual principal installments of $125,000 and
quarterly installments of interest accrued on the outstanding principal balance
(currently $375,000), 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 William J. O'Neill,
Jr. is a co-trustee. Mr. O'Neill is a director of the Company. All of these
notes were repaid in full in June 1995.
THE 1995 PARENT-SUBSIDIARY MERGER
In June 1995, in connection with the merger of Helsel into a subsidiary of
the Company and the acquisition of SKW, the Company, which until that time had
been an Ohio corporation, reincorporated as a Delaware corporation in a
parent-subsidiary merger. Pursuant to the terms of the merger, each outstanding
share of common stock of Hawk, the Ohio corporation, was converted into one
fully-paid share of Class A Common Stock of the Company. In addition, each
outstanding share of preferred stock of Hawk, the Ohio corporation, was, by
virtue of the merger, converted into one
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fully-paid share of Series A Preferred Stock of the Company. The terms of the
Series A Preferred Stock of the Company are identical in all material respects
to the terms of the preferred stock of the Ohio corporation. At the time of the
merger, Old Hawk received 490,000 shares of Class A Common Stock and 1,250
shares of Series A Preferred Stock, and the following directors and executive
officers of the Company and immediate family members of such persons became the
beneficial owners of the number of shares of Class A Common Stock and Series A
Preferred Stock set forth opposite their names:
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS A
NAME OF STOCKHOLDER COMMON STOCK PREFERRED STOCK
- --------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
William J. O'Neill, Jr.(1)............................... 458,128 1,375
Norman C. Harbert(2)..................................... 162,812 --
Ronald E. Weinberg(3).................................... 162,812 --
Jeffrey H. Berlin........................................ 79,633 --
Byron S. Krantz(4)....................................... 36,109 --
Douglas D. Wilson........................................ 13,779 --
Thomas A. Gilbride....................................... 5,405 --
Paul R. Bishop........................................... 1,718 --
Jess F. Helsel........................................... 1,718 --
</TABLE>
- ---------------
(1) Includes 456,410 shares of Class A Common Stock and 985 shares of Series A
Preferred Stock owned by Clanco Partners I, of which Mr. O'Neill is the
managing general partner, 290 shares of Series A Preferred Stock owned by
Clanco FPLP, of which Mr. O'Neill is a director of its general partner, and
100 shares of Series A Preferred Stock owned by the Dorothy K. O'Neill
Revocable Trust, of which Mr. O'Neill is a co-trustee and of which Mr.
O'Neill's mother, Dorothy K. O'Neill, is the beneficiary.
(2) All 162,812 shares are owned by the Harbert Family Limited Partnership, of
which Mr. Harbert is the managing general partner.
(3) All 162,812 shares are owned by the Weinberg Family Limited Partnership, of
which Mr. Weinberg is the managing general partner.
(4) All 36,109 shares are owned by the Krantz Family Limited Partnership, of
which Mr. Krantz is the managing general partner.
OTHER TRANSACTIONS
The Company is a party to an expense sharing arrangement under which the
Company shares the expenses of its Cleveland, Ohio headquarters with Weinberg
Capital Corporation, of which Mr. Weinberg is President and sole shareholder.
The Company pays (1) approximately 50% of the overhead costs of the
headquarters, including, without limitation, rent, utilities and copying
expenses, and (2) all clearly-identifiable and reasonable out-of-pocket
expenses, such as telephone and travel, incurred by personnel in the
headquarters office directly on behalf of the Company. The aggregate amount of
the payments by the Company for the shared headquarters were $128,000 in 1996,
$130,000 in 1995 and $95,000 in 1994.
The Company purchases raw materials from a corporation of which Dan T.
Moore, III is an officer and principal stockholder. Mr. Moore is a director of
the Company. In 1996, the Company paid $901,000 for such raw materials.
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 Transactions and the purchase of certain friction products assets
of GKN.
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
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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 CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company and its
subsidiaries that remains outstanding after the closing of the Transactions. To
the extent such summary contains descriptions of the New Revolving Credit
Facility and other loan documents, such descriptions do not purport to be
complete and are qualified in their entirety by reference to such documents,
which are available as described under "Available Information."
NEW REVOLVING CREDIT FACILITY
BT Commercial Corporation acted as agent and provided the New Revolving
Credit Facility, consisting of a revolving credit loan that equals the lesser of
(1) $25.0 million, or (2) the sum of 85% of eligible accounts receivable and 60%
of the value (at the lower of cost or market) of eligible inventory. The New
Revolving Credit Facility is secured by substantially all of the accounts
receivable, inventory and intangibles of the Company and its domestic
subsidiaries. In addition, the New Revolving Credit Facility contains financial
and other covenants with respect to the Company and its subsidiaries that, among
other matters, would prohibit the payment of any dividends to the Company by the
subsidiaries of the Company in the event of a default under the terms of the New
Revolving Credit Facility, restrict the creation of certain liens, restrict
capital expenditures and require the maintenance of certain interest coverage.
Amounts outstanding under the New Revolving Credit Facility are due November 27,
1999 and bear interest at a variable rate based on the London Interbank Offered
Rate ("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. Interest payment
dates will vary depending on the interest rate option selected by the Company,
but generally, interest will be payable monthly. The commitment fee on the
unused portion of the New Revolving Credit Facility is 0.5% of such unused
portion. Currently, there are no amounts outstanding under the New Revolving
Credit Facility.
SENIOR SUBORDINATED NOTES
Under a Senior Subordinated Note and Warrant Purchase Agreement, dated as
of June 30, 1995, as amended, the Company has outstanding an aggregate of $30.0
million of Senior Subordinated Notes to Connecticut General Life Insurance
Company and CIGNA Mezzanine Partners III, L.P. The Senior Subordinated Notes
mature 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. The Senior Subordinated Notes are guaranteed by certain
domestic subsidiaries of the Company. Concurrently with the closing of the
Offering, the Company and the holders of the Senior Subordinated Notes entered
into an amendment that, among other matters, (1) changed the initial principal
payment date from June 30, 2003 to January 31, 2004, (2) subordinated the Senior
Subordinated Notes to the Exchange Notes and the New Revolving Credit Facility,
and (3) subordinated the Senior Subordinated Note guarantees to the Guarantees.
In addition, the holders of the Senior Subordinated Notes granted a waiver to
permit the Hawk Controlling Stockholder Merger.
The Senior Subordinated Notes contain certain financial and other covenants
and restrictions with respect to the Company and its subsidiaries that include:
the mandatory prepayment of the Senior Subordinated Notes upon a "change in
control" (as defined), provided that the Company has obtained the consent of the
holders of the Exchange Notes and the notes issued under the New Revolving
Credit Facility; restrictions on the incurrence of additional indebtedness;
restrictions on the creation of certain liens; restrictions on mergers and
similar transactions; restrictions on certain
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asset and capital stock sales; and restrictions on the ability of the Company to
pay dividends or make other distributions and on the ability of less than
wholly-owned subsidiaries of the Company, if any, to pay dividends or make other
distributions to the Company.
The Company issued detachable warrants to the Senior Subordinated Note
holders to purchase 316,970 shares of Class B Common Stock at a price per share
of $0.01, subject to customary anti-dilution provisions. The warrants may be
exercised at anytime on or prior to June 30, 2005. The Company has the option to
repurchase the warrants and the warrant holders have the option to put the
warrants back to the Company at prices based on a fair market value formula. The
Company's repurchase right commences June 30, 2001 and the warrant holders put
right commences June 30, 2000. The repurchase and put rights terminate
automatically upon an initial public offering by the Company. The put right is
subordinate to the Notes and the New Revolving Credit Facility and will be
subordinate to the Exchange Notes. See "Principal Stockholders -- Description of
Capital Stock -- Common Stock," "Principal Stockholders -- Stockholder
Agreements" and Note E of Notes to the Company's Consolidated Financial
Statements appearing elsewhere in this Prospectus.
CERTAIN OTHER INDEBTEDNESS
In connection with its acquisition of Helsel's assets from 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. The note bears interest at
the rate of prime plus 1% per annum (currently 9.25%), is payable in four equal
annual principal installments of $125,000 and quarterly installments of interest
accrued on the outstanding principal balance (currently $375,000), and is
secured by a security interest in Helsel's assets and certain guaranties made by
the Company, Mr. Harbert and Mr. Weinberg.
In addition, Helsel has outstanding a capital lease securing certain
equipment. Lease payments are due monthly in the amount of approximately $21,900
through the termination date of September 1, 2002.
In connection with its acquisition of the stock of Hutchinson in January
1997, the Company issued the Hutchinson Acquisition Notes, which are 8.0%
two-year notes in the aggregate original principal amount of $1.5 million, and
incurred the $500,000 Contingent Payment Obligation, which is to be paid only if
Hutchinson meets certain EBITDA targets. See "The Transactions -- Hutchinson
Acquisition," "Use of Proceeds" and "Business -- Hutchinson Acquisition."
As of December 31, 1996, the Company's foreign subsidiaries had outstanding
various bank loans and capital leases in an aggregate principal amount of
approximately $1.2 million with maturity dates from April 1997 to October 2002.
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued under an Indenture (the "Indenture"),
dated as of November 27, 1996, by and between the Company, the Guarantors and
Bank One Trust Company, NA, as trustee (the "Trustee"). Upon the issuance of the
Exchange Notes, or the effectiveness of a Shelf Registration Statement, the
Indenture will be subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). As used in this "Description of the
Exchange Notes" section, references to the Exchange Notes shall include the
Notes that are not exchanged pursuant to the Exchange Offer and the "Company"
means Hawk, but not any of its subsidiaries (unless the context otherwise
requires).
The following is a summary of the material provisions of the Indenture.
This summary does not purport to be complete and is subject to the detailed
provisions of, and is qualified in its entirety by reference to, the Trust
Indenture Act, the Exchange Notes and the Indenture, including the
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definitions of certain terms contained therein and including those terms made
part of the Indenture by reference to the Trust Indenture Act. A copy of the
Indenture may be obtained as described under "Available Information." The
definitions of certain terms used in the following summary are set forth below
under "Certain Definitions." Reference is made to the Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
MATURITY AND INTEREST
The Exchange Notes will be unsecured senior obligations of the Company
limited in aggregate principal amount to $100,000,000. The Exchange Notes will
mature on December 1, 2003. Interest on the Exchange Notes will accrue at the
rate of 10 1/4% per annum and will be payable semi-annually in arrears on June 1
and December 1 in each year, commencing on June 1, 1997, to holders of record on
the immediately preceding May 15 and November 15, respectively. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of the original issuance of
the Exchange Notes (the "Issue Date"). Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
Principal of, and premium, if any, and interest on, the Exchange Notes will
be payable at the office or agency of the Company maintained for such purpose in
the city of New York or, at the option of the Company, payment of interest may
be made by check mailed to the holders of the Exchange Notes at their respective
addresses as set forth in the register of holders of Exchange Notes. Until
otherwise designated by the Company, the Company's office or agency in the City
of New York will be the office of the Trustee maintained for such purpose. The
Exchange Notes will be issued in fully registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof. No service charge will
be made for any transfer, exchange or redemption of Exchange Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
THE GUARANTEES
Each of the Guarantors will fully and unconditionally guarantee (each, a
"Guarantee") on a joint and several basis all of the Company's obligations under
the Exchange Notes and the Indenture, including its obligations to pay
principal, premium, if any, and interest with respect to the Exchange Notes.
Except as provided below in "Certain Covenants," the Company is not restricted
from selling or otherwise disposing of any of the Guarantors.
Pursuant to the Guarantees, if the Company defaults in payment of any
amount owing in respect of any Exchange Notes, each Guarantor will be obligated
to duly and punctually pay the same. Pursuant to the terms of the Indenture,
each of the Guarantors has agreed that its obligations under its Guarantee will
be unconditional, irrespective of the validity, regularity or enforceability of
the Exchange Notes or the Indenture, the absence of any action to enforce the
same or any other circumstance that might otherwise constitute a legal or
equitable discharge or defense of a guarantor.
Concurrently with the creation or acquisition by the Company of any
Subsidiary (other than a Foreign Subsidiary and other than an Unrestricted
Subsidiary), the Company, such Subsidiary and the Trustee shall execute and
deliver a supplement to the Indenture providing that such Subsidiary will be a
Guarantor thereunder.
If no Default exists or would exist under the Indenture, concurrently with
any sale or disposition (by merger or otherwise) of any Guarantor (other than a
transaction subject to the provisions described under "Merger, Consolidation and
Sale of Assets") by the Company or a Restricted Subsidiary to any person that is
not an Affiliate of the Company or any of the Restricted Subsidiaries that is in
compliance with the terms of the Indenture, such Guarantor and each Subsidiary
of such
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Guarantor that is also a Guarantor will automatically and unconditionally be
released from all obligations under its Guarantee.
The obligations of each Guarantor will be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor, result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law.
RANKING
The Indebtedness of the Company evidenced by the Exchange Notes will rank
senior in right of payment to all subordinated indebtedness of the Company and
will rank pari passu in right of payment with all other existing and future
unsecured senior indebtedness of the Company. However, the Exchange Notes will
be effectively subordinated to all secured indebtedness of the Company and the
Guarantors and to all future and existing indebtedness, including trade
payables, of the Company's subsidiaries that are not Guarantors.
The Guarantees will be senior unsecured obligations of the Guarantors,
ranking senior in right of payment to all subordinated indebtedness of the
Guarantors and will rank pari passu in right of payment with all other existing
and future unsecured senior indebtedness of such Guarantor. However, the
Guarantees will be effectively subordinated to all secured indebtedness of the
Guarantors. See "Risk Factors -- Ranking of the Exchange Notes."
REDEMPTION
Mandatory Redemption. The Exchange Notes are not subject to any mandatory
sinking fund redemption prior to maturity.
Optional Redemption. The Exchange Notes are redeemable in cash at the
option of the Company, in whole or in part, at any time on or after December 1,
2000, at the redemption prices (expressed as percentages of the principal amount
of the Exchange Notes) set forth below, plus in each case accrued and unpaid
interest thereon, if any, to the date of redemption, if redeemed during the
twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------- ----------
<S> <C>
2000......................................................... 105.125%
2001......................................................... 102.563%
2002 and thereafter.......................................... 100.000%
</TABLE>
In addition, at any time or from time to time on or prior to December 1,
1999, the Company may, at its option, redeem up to $35.0 million of the
aggregate principal amount of the Exchange Notes in cash with the net proceeds
of one or more Public Equity Offerings, at a redemption price equal to 110.25%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of redemption; provided, however, that (1) not less than $65.0 million
aggregate principal amount of the Exchange Notes is outstanding immediately
after giving effect to any such redemption (other than any Exchange Notes owned
by the Company or any of its Affiliates) and (2) such redemption is effected
within 60 days after the consummation of any such Public Equity Offering.
Selection and Notice. If less than all of the Exchange Notes are to be
redeemed at any time, selection of the Exchange Notes to be redeemed will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Exchange Notes are listed or,
if the Exchange Notes are not listed on a securities exchange, on a pro rata
basis or by lot or any other method as the Trustee shall deem fair and
appropriate; provided, however, that Exchange Notes redeemed in part shall only
be redeemed in integral multiples of $1,000; provided, further, that any such
redemption pursuant to the provisions relating to a Public Equity Offering shall
be made on a pro rata basis or on as nearly a pro rata basis as practicable
(subject to the procedures of The Depository Trust Company or any other
depositary), unless such method is
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otherwise prohibited. Notices of any optional or mandatory redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Exchange Notes to be redeemed at such holder's
registered address. If any Exchange Note is to be redeemed in part only, the
notice of redemption that relates to such Exchange Note shall state the portion
of the principal amount thereof to be redeemed, and the Trustee shall
authenticate and mail to the holder of the original Exchange Note a new Exchange
Note in principal amount equal to the unredeemed portion of the original
Exchange Note promptly after the original Exchange Note has been canceled. On
and after the redemption date, interest will cease to accrue on Exchange Notes
or portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (as defined in "Certain Definitions"
below), each holder of Exchange Notes will have the right, unless the Company
has given a notice of redemption, subject to the terms and conditions of the
Indenture, to require the Company to offer to purchase all or any portion (equal
to $1,000 or an integral multiple thereof) of such holder's Exchange Notes at a
purchase price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase, in accordance
with the terms set forth below (a "Change of Control Offer").
The New Revolving Credit Facility restricts the Company's ability to
purchase Exchange Notes pursuant to a Change of Control Offer. Any additional
credit agreements or other agreements relating to unsubordinated indebtedness to
which the Company becomes a party may contain similar restrictions. Moreover,
the New Revolving Credit Facility contains a "change of control" provision that
is similar to the provision in the Indenture relating to a Change of Control,
and the occurrence of such a "change of control" would constitute a default
under the New Revolving Credit Facility. The New Revolving Credit Facility may
not permit the purchase of the Exchange Notes absent consent of the lenders
thereunder in the event of a Change of Control. Notwithstanding the foregoing,
the failure of the Company to effect a Change of Control Offer would constitute
an Event of Default under the Indenture.
If the Company is unable to obtain the requisite consents and/or repay all
indebtedness that restricts the Company's ability to repurchase the Exchange
Notes upon the occurrence of a Change of Control, the Company may not be able to
commence a Change of Control Offer to purchase the Exchange Notes within 30 days
of the occurrence of the Change of Control. Such failure would constitute an
Event of Default under the Indenture. The Company's failure to commence such a
Change of Control Offer would also constitute an event of default under the New
Revolving Credit Facility that would permit the lenders thereunder to accelerate
all of the Company's indebtedness under the New Revolving Credit Facility. If a
Change of Control were to occur, there can be no assurance that the Company
would have sufficient assets to first satisfy its obligations under the New
Revolving Credit Facility or other agreements relating to indebtedness, if
accelerated, and then to purchase all of the Exchange Notes that might be
delivered by holders seeking to accept a Change of Control Offer.
On or before the 30th day following the occurrence of any Change of
Control, the Company will mail to each holder of Exchange Notes at such holder's
registered address a notice stating: (1) that a Change of Control has occurred
and that such holder has the right to require the Company to purchase all or a
portion (equal to $1,000 or an integral multiple thereof) of such holder's
Exchange Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase (the "Change of Control Purchase Date"), which shall be a business
day, specified in such notice, that is not earlier than 30 days or later than 60
days from the date such notice is mailed; (2) the amount of accrued and unpaid
interest, if any, as of the Change of Control Purchase Date; (3) that any
Exchange Note not tendered will continue to accrue interest; (4) that, unless
the Company defaults in the payment of the purchase price for the Exchange Notes
payable pursuant to the Change of Control Offer, any
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Exchange Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest on the Change of Control Purchase Date; (5) the
procedures, consistent with the Indenture, to be followed by a holder of
Exchange Notes in order to accept a Change of Control Offer or to withdraw such
acceptance; and (6) such other information as may be required by the Indenture
and applicable laws and regulations.
On the Change of Control Purchase Date, the Company will (1) accept for
payment all Exchange Notes or portions thereof tendered pursuant to the Change
of Control Offer, (2) deposit with the Paying Agent (as defined) the aggregate
purchase price of all Exchange Notes or portions thereof accepted for payment,
and (3) deliver or cause to be delivered to the Trustee all Exchange Notes
tendered pursuant to the Change of Control Offer. The Paying Agent shall
promptly mail to each holder of Exchange Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Exchange Notes plus
accrued and unpaid interest, if any, thereon, and the Trustee shall promptly
authenticate and mail to each holder of Exchange Notes accepted for payment in
part a new Exchange Note equal in principal amount to any unpurchased portion of
the Exchange Notes, and any Exchange Note not accepted for payment in whole or
in part shall be promptly returned to the holder of such Exchange Note. On and
after a Change of Control Purchase Date, interest will cease to accrue on the
Exchange Notes or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ("incur") any Indebtedness (including Acquired
Debt), except that the Company may incur Indebtedness (including Acquired Debt)
if, at the time of, and immediately after giving pro forma effect to, such
incurrence of Indebtedness, the Consolidated Cash Flow Coverage Ratio of the
Company for the most recently ended four fiscal quarters would be at least 2.0
to 1.0 if incurred during the period from the Issue Date through December 1,
1998, and 2.25 to 1.0 if incurred thereafter.
The foregoing limitations do not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(1) Indebtedness of the Company arising under the New Revolving Credit
Facility in an aggregate principal amount not to exceed at any time
outstanding the greater of (a) $25.0 million, less any permanent reduction
in commitments thereunder, and (b) the sum, at such time, of (i) 85% of the
consolidated book value of net accounts receivable of the Company and the
Restricted Subsidiaries and (ii) 60% of the consolidated book value of
inventory of the Company and the Restricted Subsidiaries;
(2) Indebtedness of the Company represented by the Exchange Notes and
Indebtedness of the Guarantors represented by the Guarantees;
(3) Indebtedness of the Company or any Restricted Subsidiary not
covered by any other clause of this paragraph that is outstanding on the
Issue Date ("Existing Indebtedness");
(4) Indebtedness owed by any Restricted Subsidiary to the Company or
to another Restricted Subsidiary, or owed by the Company to any Restricted
Subsidiary that, if owed to a
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Restricted Subsidiary that is not a Guarantor, is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under the Indenture and the Exchange Notes; provided,
however, that any such Indebtedness shall at all times be held by a Person
that is either the Company or a Restricted Subsidiary; provided further,
however, that upon either (a) the transfer or other disposition of any such
Indebtedness to a Person other than the Company or another Restricted
Subsidiary or (b) the sale, lease, transfer or other disposition of shares
of Capital Stock (including by consolidation or merger) of any such
Restricted Subsidiary to a Person other than the Company or another
Restricted Subsidiary, the incurrence of such Indebtedness shall be deemed
to be an incurrence that is not permitted by this clause (4);
(5) Indebtedness of the Company or any Restricted Subsidiary arising
with respect to Interest Rate Agreement Obligations and Currency Agreement
Obligations incurred for the purpose of fixing or hedging interest rate
risk or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or with respect to any receivable or liability the payment of
which is determined by reference to a foreign currency;
(6) Indebtedness represented by performance, completion, guarantee,
surety and similar bonds provided by the Company or any Restricted
Subsidiary in the ordinary course of business consistent with past
practice;
(7) Any Indebtedness incurred in connection with or given in exchange
for the renewal, extension, substitution, refunding, defeasance,
refinancing or replacement (a "refinancing") of any Indebtedness incurred
as permitted under the first paragraph of this covenant or any Indebtedness
described in clauses (1), (2) and (3) above and this clause (7)
("Refinancing Indebtedness"); provided, however, that: (a) the principal
amount of such Refinancing Indebtedness shall not exceed the principal
amount (or accreted amount, if less) of the Indebtedness so refinanced
(plus the premiums and reasonable expenses to be paid in connection
therewith, that, with respect to such premiums, shall not exceed the stated
amount of any premium or other payment required to be paid in connection
with such a refinancing pursuant to the terms of the Indebtedness being
refinanced); (b) if the Weighted Average Life to Maturity of the
Indebtedness being refinanced is equal to or greater than the Weighted
Average Life to Maturity of the Exchange Notes, the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced; (c) with respect to Refinancing Indebtedness other than
Senior Debt incurred by the Company, such Refinancing Indebtedness shall
rank no more senior than, and, if applicable, shall be at least as
subordinated in right of payment to the Exchange Notes as, the Indebtedness
being refinanced; and (d) the obligor on such Refinancing Indebtedness
shall be the obligor on the Indebtedness being refinanced or the Company;
(8) Indebtedness of the Company or any Restricted Subsidiary (a)
representing Capitalized Lease Obligations and any refinancings thereof
and/or (b) in respect of Purchase Money Obligations for property acquired,
constructed or improved in the ordinary course of business and any
refinancings thereof, that taken together in the aggregate do not exceed
$5.0 million at any time outstanding;
(9) Indebtedness of the Company or any Restricted Subsidiary relating
to the acquisition of Hutchinson Foundry Products Company in an aggregate
amount not to exceed $2.0 million (the "Hutchinson Notes");
(10) Commodity agreements entered into in the ordinary course of
business to protect against fluctuations in the prices of raw materials and
not for speculative purposes;
(11) Indebtedness incurred by the Company or any Restricted Subsidiary
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of
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business, including, without limitation, letters of credit in respect of
workers' compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding workers' compensation
claims or self-insurance;
(12) Guarantees by the Company of Indebtedness of a Restricted
Subsidiary permitted to be incurred under the Indenture and Guarantees of
the Exchange Notes by the Guarantors;
(13) Indebtedness of the Company or any Restricted Subsidiary arising
from agreements providing for indemnification, adjustment of purchase price
or similar obligations, in each case incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided that the maximum liability in respect
of such Indebtedness shall not exceed the gross proceeds actually received
by the Company and its Restricted Subsidiaries in connection with such
disposition; and
(14) Indebtedness of the Company or any Restricted Subsidiary in
addition to that described in clauses (1) through (13) above, and any
renewals, extensions, substitutions, refinancings or replacements of such
Indebtedness, so long as the aggregate principal amount of all such
Indebtedness incurred pursuant to this clause (14) does not exceed $5.0
million at any one time outstanding.
For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included.
Indebtedness of any Person that is outstanding at the time such Person
becomes a Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary shall be deemed to have been incurred at
the time such Person becomes a Restricted Subsidiary or is merged with or into
or consolidated with the Company or a Restricted Subsidiary, and Indebtedness
that is assumed at the time of the acquisition of any asset shall be deemed to
have been incurred at the time of such acquisition.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined reasonably and in
good faith by the Board of Directors of the Company):
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(2) the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under "Limitation on Incurrence of Indebtedness;" and
(3) the aggregate amount of all Restricted Payments made after the
Issue Date shall not exceed the sum of:
(a) an amount equal to 50% of the Company's aggregate cumulative
Consolidated Net Income accrued on a cumulative basis during the period
(treated as one accounting period) beginning on the Issue Date and
ending on the date of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit); plus
(b) the aggregate amount of all net cash proceeds received since
the Issue Date by the Company from the issuance and sale (other than to
a Restricted Subsidiary) of, or equity contribution with respect to,
Capital Stock (other than Disqualified Stock) and the
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principal amount of Indebtedness of the Company or any Restricted
Subsidiary that has been converted into or exchanged for Capital Stock
(other than Disqualified Stock), in any such case to the extent that
such proceeds are not used (i) to redeem, repurchase, retire or
otherwise acquire Capital Stock or any Indebtedness of the Company or
any Restricted Subsidiary pursuant to clause (2) of the next paragraph
or (ii) to make any Restricted Investment pursuant to clause (4) of the
next paragraph; plus
(c) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from (i) the payment of dividends or the
repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, (ii) the release
or extinguishment of any guarantee of Indebtedness of any Unrestricted
Subsidiary, and (iii) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued as provided in the definition of
"Investment"), such aggregate amount of the net reduction in Investments
not to exceed in the case of any Unrestricted Subsidiary the amount of
Restricted Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in
the calculation of the amount of Restricted Payments; plus
(d) to the extent that any Restricted Investment that was made
after the Issue Date is sold for cash or otherwise liquidated or repaid
for cash, the amount of cash proceeds received with respect to such
Restricted Investment, net of taxes and the cost of disposition, not to
exceed the amount of Restricted Investments made after the Issue Date.
The foregoing provisions will not prohibit the following actions
(collectively, "Permitted Payments"):
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture (which payment shall be deemed to have
been paid on such date of declaration for purposes of clause (3) of the
preceding paragraph);
(2) the redemption, repurchase, retirement or other acquisition of any
Capital Stock or any Indebtedness of the Company or any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Restricted Subsidiary) of, or equity
contribution with respect to, Capital Stock of the Company (other than any
Disqualified Stock), including without limitation the Hawk Controlling
Stockholder Merger that occurred concurrently with the Offering;
(3) any purchase or defeasance of Subordinated Indebtedness to the
extent required upon a Change of Control or Asset Sale (as defined therein)
by the Indenture or other agreement or instrument pursuant to which such
Subordinated Indebtedness was issued, but only if the Company (a) in the
case of a Change of Control, has complied with its obligations under the
provisions described under "Change of Control" or (b) in the case of an
Asset Sale, has applied the Net Proceeds from such Asset Sale in accordance
with the provisions described under "Limitation on Asset Sales;"
(4) any Restricted Investment made with the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
or equity contribution with respect to, Capital Stock of the Company (other
than any Disqualified Stock);
(5) loans or advances to employees of the Company or any of its
Subsidiaries which loans or advances exist on the Issue Date and other
loans or advances to employees of the Company or any Subsidiary to pay
reasonable relocation expenses;
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(6) Restricted Investments in an amount such that the sum of the
aggregate amount of Restricted Investments made pursuant to this clause (6)
after the Issue Date does not exceed at any time $2.0 million; and
(7) the payment of any dividend on, or redemption of any or all of,
the Company's redeemable 10% cumulative preferred stock, par value, $0.01
per share, Series A; redeemable 9% cumulative preferred stock, par value,
$0.01 per share, Series B; and redeemable 10% cumulative preferred stock,
par value, $0.01 per share, Series C, in each case, outstanding on the
Issue Date.
provided, however, that in the case of clauses (3) and (6) of this paragraph, no
Default or Event of Default shall have occurred and be continuing.
For purposes of clause (3) of the first paragraph of this covenant, the
Permitted Payments referred to in clauses (1) and (6) above shall be included in
the aggregate amount of Restricted Payments made since the Issue Date, and any
other Permitted Payments described above shall be excluded.
Limitation on Asset Sales. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless (1) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) of the assets or other
property sold or disposed of in the Asset Sale and (2) at least 75% of such
consideration consists of either cash or Cash Equivalents; provided, however,
that for purposes of this covenant, "cash" shall include (a) the amount of any
Indebtedness (other than any Indebtedness that is by its terms subordinated to
the Notes) of the Company or such Restricted Subsidiary as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto that is assumed by the transferee of any such assets or other
property in such Asset Sale (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis such that there is no further
recourse to the Company or any of the Restricted Subsidiaries with respect to
such liabilities and (b) any notes, obligations or securities received by the
Company or such Restricted Subsidiary from such transferee that are converted
within 60 days by the Company or such Restricted Subsidiary into cash (to the
extent of the cash received).
Within 180 days after any Asset Sale, the Company may elect to apply the
Net Proceeds from such Asset Sale to (1) permanently reduce any Senior Debt of
the Company and/or (2) make an investment in, or acquire assets and properties
that will be used in, the business of the Company and the Restricted
Subsidiaries existing on the Issue Date or in businesses reasonably related
thereto. Pending the final application of any such Net Proceeds, the Company or
any Restricted Subsidiary may temporarily reduce Indebtedness of the Company
under the New Revolving Credit Facility or temporarily invest such Net Proceeds
in any Investments described under clauses (1) through (3) of the definition of
Permitted Investments. Any Net Proceeds from an Asset Sale not applied or
invested as provided in the first sentence of this paragraph within 180 days of
such Asset Sale will be deemed to constitute "Excess Proceeds."
Each date that the aggregate amount of Excess Proceeds in respect of which
an Asset Sale Offer (as defined below) has not been made exceeds $5.0 million
shall be deemed an "Asset Sale Offer Trigger Date." As soon as practicable, but
in no event later than 20 business days after each Asset Sale Offer Trigger
Date, the Company shall commence an offer (an "Asset Sale Offer") to purchase
the maximum principal amount of Exchange Notes that may be purchased out of the
Excess Proceeds. Any Exchange Notes to be purchased pursuant to an Asset Sale
Offer shall be purchased pro rata based on the aggregate principal amount of
Exchange Notes outstanding, and all Exchange Notes shall be purchased at an
offer price in cash in an amount equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase. To the
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extent that any Excess Proceeds remain after completion of an Asset Sale Offer,
the Company may use the remaining amount for general corporate purposes
otherwise permitted by the Indenture. In the event that the Company is
prohibited under the terms of any agreement governing outstanding Senior Debt of
the Company from repurchasing Exchange Notes with Excess Proceeds pursuant to an
Asset Sale Offer as set forth in the first sentence of this paragraph, the
Company shall promptly use all Excess Proceeds to permanently reduce such
outstanding Senior Debt of the Company. Upon the consummation of any Asset Sale
Offer, the amount of Excess Proceeds shall be deemed to be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not later than
the 20th business day after the related Asset Sale Offer Trigger Date to each
holder of Exchange Notes at such holder's registered address, stating: (1) that
an Asset Sale Offer Trigger Date has occurred and that the Company is offering
to purchase the maximum principal amount of Exchange Notes that may be purchased
out of the Excess Proceeds (to the extent provided in the immediately preceding
paragraph), at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of the purchase (the "Asset Sale Offer Purchase Date"), which shall be a
business day, specified in such notice, that is not earlier than 30 days or
later than 60 days from the date such notice is mailed, (2) the amount of
accrued and unpaid interest, if any, as of the Asset Sale Offer Purchase Date,
(3) that any Exchange Note not tendered will continue to accrue interest, (4)
that, unless the Company defaults in the payment of the purchase price for the
Exchange Notes payable pursuant to the Asset Sale Offer, any Exchange Notes
accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest after the Asset Sale Offer Purchase Date, (5) the procedures,
consistent with the Indenture, to be followed by a holder of Exchange Notes in
order to accept an Asset Sale Offer or to withdraw such acceptance, and (6) such
other information as may be required by the Indenture and applicable laws and
regulations.
On the Asset Sale Offer Purchase Date, the Company will (1) accept for
payment the maximum principal amount of Exchange Notes or portions thereof
tendered pursuant to the Asset Sale Offer that can be purchased out of Excess
Proceeds from such Asset Sale that are to be applied to an Asset Sale Offer, (2)
deposit with the Paying Agent the aggregate purchase price of all Exchange Notes
or portions thereof accepted for payment, and (3) deliver or cause to be
delivered to the Trustee all Exchange Notes tendered pursuant to the Asset Sale
Offer. If less than all Exchange Notes tendered pursuant to the Asset Sale Offer
are accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Exchange Notes to be purchased by the Company shall
be in compliance with the requirements of the principal national securities
exchange, if any, on which the Exchange Notes are listed or, if the Exchange
Notes are not so listed, on a pro rata basis or by lot; provided, however, that
Exchange Notes accepted for payment in part shall only be purchased in integral
multiples of $1,000. The Paying Agent shall promptly mail to each holder of
Exchange Notes or portions thereof accepted for payment an amount equal to the
purchase price for such Exchange Notes plus accrued and unpaid interest, if any,
thereon, and the Trustee shall promptly authenticate and mail to such holder of
Exchange Notes accepted for payment in part a new Exchange Note equal in
principal amount to any unpurchased portion of the Exchange Notes, and any
Exchange Note not accepted for payment in whole or in part shall be promptly
returned to the holder of such Exchange Note. On and after an Asset Sale Offer
Purchase Date, interest will cease to accrue on the Exchange Notes or portions
thereof accepted for payment, unless the Company defaults in the payment of the
purchase price therefor. The Company will publicly announce the results of the
Asset Sale Offer on or as soon as practicable after the Asset Sale Offer
Purchase Date.
The foregoing provisions will not apply to a transaction consummated in
compliance with the provisions of the Indenture described under "Merger,
Consolidation and Sale of Assets" below.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and
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regulations in connection with any Asset Sale Offer and will be deemed not to be
in violation of any of the covenants under the Indenture to the extent such
compliance is in conflict with such covenants.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness (other than
Permitted Liens) on any asset now owned or hereafter acquired, or any income or
profits therefrom, or assign or convey any right to receive income therefrom to
secure any such Indebtedness, unless (1) if such Lien secures Indebtedness that
is pari passu with the Exchange Notes, then the Exchange Notes are secured on an
equal and ratable basis with the obligations so secured until such time as such
obligation is no longer secured by a Lien or (2) if such Lien secures
Indebtedness that is subordinated to the Exchange Notes, any such Lien shall be
subordinated to a Lien granted to the holders of the Exchange Notes in the same
collateral as that securing such Lien to the same extent as such subordinated
Indebtedness is subordinated to the Exchange Notes.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause to become effective any consensual encumbrance or consensual restriction
on the ability of any Restricted Subsidiary to (1) pay dividends or make any
other distributions to the Company or any other Restricted Subsidiary on its
Capital Stock or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (2) make loans or advances to, or issue Guarantees
for the benefit of, the Company or any other Restricted Subsidiary or (3)
transfer any of its properties or assets to the Company or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of (a) the New Revolving Credit Facility, (b) applicable law, (c) any
instrument governing Indebtedness or Capital Stock of an Acquired Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition); provided,
however, that no such encumbrance or restriction is applicable to any Person, or
the properties or assets of any Person, other than the Acquired Person, (d) by
reason of customary non-assignment, subletting or net worth provisions in leases
or other agreements entered into in the ordinary course of business and
consistent with past practices, (e) Purchase Money Indebtedness for property
acquired in the ordinary course of business that impose restrictions only on the
property so acquired, (f) an agreement for the sale or disposition of assets or
the Capital Stock of such Restricted Subsidiary; provided, however, that such
restriction or encumbrance is only applicable to such Restricted Subsidiary or
assets, as applicable, and such sale or disposition otherwise is permitted by
the provisions described under "Limitation on Asset Sales;" provided, further,
however, that such restriction or encumbrance shall be effective only for a
period from the execution and delivery of such agreement through a termination
date not later than 180 days after such execution and delivery, (g) Refinancing
Indebtedness permitted under the Indenture, (h) the Indenture, the Exchange
Notes and the Guarantees, (i) other Indebtedness permitted to be incurred
subsequent to the Issue Date pursuant to the provisions of the covenant
described under "Limitation on Incurrence of Indebtedness;" provided, however,
that any such restrictions are ordinary and customary with respect to the type
of Indebtedness being incurred, (j) encumbrances and restrictions imposed by
Liens incurred in accordance with the covenant described under "Limitation on
Liens," (k) customary provisions in joint venture agreements and other similar
agreements, and (l) encumbrances and restrictions imposed by amendments,
restatements, renewals, replacements or refinancings of the contracts,
instruments or obligations referred to in clauses (a) through (k) above;
provided that such encumbrances and restrictions are, in the good faith judgment
of the Company's Board of Directors, no more restrictive, in any material
respect, than those contained in such contracts, instruments or obligations
immediately prior to such amendment, restatement, renewal, replacement or
refinancing.
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Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company unless (1) such transaction or
series of transactions is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could reasonably
be obtainable at such time in a comparable transaction in arm's-length dealings
with an unrelated third party and (2) the Company delivers to the Trustee (a)
with respect to any transaction or series of transactions involving aggregate
payments in excess of $500,000, an Officers' Certificate certifying that such
transaction or series of related transactions complies with clause (1) above and
(b) with respect to any transaction or series of transactions involving
aggregate payments in excess of $2.0 million, an Officers' Certificate
certifying that such transaction or series of related transactions has been
approved by a majority of the members of the Board of Directors of the Company
(and approved by a majority of the Independent Directors or, in the event there
is only one Independent Director, by such Independent Director), and (c) with
respect to any transaction or series of transactions involving aggregate
payments in excess of $5.0 million, an opinion as to the fairness to the Company
from a financial point of view issued by an investment banking firm of national
standing.
Notwithstanding the foregoing, this covenant will not apply to (1)
employment agreements or compensation or employee benefit arrangements with any
officer, director or employee of the Company or any of its Restricted
Subsidiaries entered into in the ordinary course of business (including
customary benefits thereunder and including reimbursement or advancement of
out-of-pocket expenses, and director's and officer's liability insurance), (2)
the expense sharing arrangement between the Company and Weinberg Capital
Corporation regarding the expenses incurred with respect to the Company's
Cleveland, Ohio headquarters, (3) the Hawk Controlling Stockholder Merger that
occurred concurrently with the Offering, (4) the secured promissory note in the
original principal amount of $500,000 issued to Helco, (5) the Hutchinson Notes,
(6) any transaction entered into by or among the Company or one of its
Restricted Subsidiaries with one or more Restricted Subsidiaries of the Company,
(7) any transaction permitted by the second paragraph under "Limitation on
Restricted Payments," (8) transactions permitted by, and complying with, the
provisions described under "Merger, Consolidation and Sale of Assets," and (9)
transactions with suppliers or other purchases or sales of goods or services, in
each case in the ordinary course of business (including, without limitation,
pursuant to joint venture agreements) and otherwise in compliance with the terms
of the Indenture which, in the reasonable determination of the Board of
Directors of the Company, are on terms no less favorable to the Company or its
Restricted Subsidiaries than those that could reasonably have been obtained at
such time from an unaffiliated party.
Limitation on Designation of Unrestricted Subsidiaries. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under the Indenture (a "Designation")
unless:
(1) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(2) immediately after giving effect to such Designation, the Company
would be able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant described under "Limitation on
Incurrence of Indebtedness;" and
(3) the Company would not be prohibited under the Indenture from
making an Investment at the time of Designation in an amount (the
"Designation Amount") equal to the greater of (a) the book value of such
Restricted Subsidiary on such date and (b) the Fair Market Value of such
Restricted Subsidiary on such date.
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In the event of any such Designation, the Company shall be deemed to have made
an Investment in the Designation Amount constituting a Restricted Payment
pursuant to the covenant described under "Limitation on Restricted Payments" for
all purposes of the Indenture.
The Indenture will further provide that the Company will not designate an
Unrestricted Subsidiary as a Restricted Subsidiary (a "Redesignation"), unless:
(1) no Default shall have occurred and be continuing at the time of
and after giving effect to such Redesignation; and
(2) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Redesignation shall be deemed to
have been incurred at such time and shall have been permitted to be
incurred for all purposes of the Indenture.
An Unrestricted Subsidiary shall be deemed to be redesignated as a
Restricted Subsidiary at any time if (1) the Company or any other Restricted
Subsidiary (a) provides credit support for, or a guarantee of, any Indebtedness
of such Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (b) is directly or indirectly liable
for any Indebtedness of such Unrestricted Subsidiary, (2) a default with respect
to any Indebtedness of such Unrestricted Subsidiary (including any right that
the holders thereof may have to take enforcement action against it) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its final scheduled maturity or (3) such Unrestricted Subsidiary incurs
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any Restricted Subsidiary.
All Designations and Redesignations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Subsidiaries that are not designated by the Board of Directors as Restricted or
Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The
Designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be
deemed a Designation of all of the Subsidiaries of such Unrestricted Subsidiary
as Unrestricted Subsidiaries.
Provision of Financial Statements and Information. The Indenture provides
that, following effectiveness of the Exchange Offer, whether or not the Company
is then subject to Section 13(a) or 15(d) of the Exchange Act, the Company will
file with the Commission, so long as any Exchange Notes are outstanding, the
annual reports, quarterly reports and other periodic reports that the Company
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d) if the Company were so subject, and such documents shall be filed
with the Commission on or prior to the respective dates (the "Required Filing
Dates") by which the Company would have been required so to file such documents
if the Company were so subject; provided the Commission will accept such
filings. The Company will also in any event (1) within 15 days of each Required
Filing Date, file with the Trustee, and supply the Trustee with copies for
delivery to the holders of the Exchange Notes, the annual reports, quarterly
reports and other periodic reports that the Company would have been required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act
if the Company were subject to such Sections and (2) if the Commission will not
accept the filing of such documents, promptly upon written request and payment
of the reasonable cost of duplication and delivery, supply copies of such
documents to any prospective holder of the Exchange Notes.
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (1) payment of principal, premium and interest; (2)
maintenance of an office or agency in the City of New York; (3) maintenance of
corporate existence; (4) payment of taxes and other claims; (5) maintenance of
properties; and (6) maintenance of insurance.
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MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides that the Company shall not, in any single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the Surviving Person), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets (determined on a consolidated basis for the Company and its Restricted
Subsidiaries) in one or more related transactions to, another Person, and the
Company will not permit any Restricted Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries, taken
as a whole, to another Person, unless: (1) the Surviving Person is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (2) the Surviving Person (if other than the Company or
a Guarantor) assumes all the obligations of the Company under the Exchange
Notes, the Indenture and, if then in effect, the Registration Rights Agreement
pursuant to a supplemental indenture or other written agreement, as the case may
be, in a form reasonably satisfactory to the Trustee; (3) immediately after such
transaction, no Default or Event of Default shall have occurred and be
continuing; (4) immediately after giving effect to such transaction or series of
related transactions, (a) in the case of a transaction involving the Company,
the Surviving Person shall have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction or series of related transactions or (b) in the case of a
transaction involving a Restricted Subsidiary of the Company, the Surviving
Person shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of such Restricted Subsidiary immediately prior to such
transaction or series of related transactions; and (5) after giving pro forma
effect to such transaction, the Surviving Person would be permitted to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "Limitation on Incurrence of
Indebtedness." Notwithstanding clauses (3), (4) and (5) above, any Restricted
Subsidiary that is a Guarantor may consolidate with, merge into or transfer all
or part of its properties and assets to the Company or another Restricted
Subsidiary that is a Guarantor.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company or a Guarantor is not the Surviving Person, such Surviving
Person shall succeed to, and be substituted for, and may exercise every right
and power of, the Company, and the Company shall be discharged from its
obligations under, the Indenture, the Exchange Notes and the Registration Rights
Agreement.
EVENTS OF DEFAULT
The Indenture provides that each of the following constitutes an Event of
Default:
(1) a default for 30 days in the payment when due of interest on, or
Liquidated Damages (if any) with respect to, any Exchange Note;
(2) a default in the payment when due of principal on any Exchange
Note, whether upon maturity, acceleration, optional or mandatory
redemption, required repurchase or otherwise;
(3) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses (1)
and (2) above) which failure continues for 60 days after written notice
thereof has been given to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the then outstanding Exchange Notes;
(4) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $5.0 million in
the aggregate and, if not already matured at its final maturity in
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accordance with its terms, such Indebtedness shall have been accelerated
and such acceleration is not rescinded, annulled or cured within 10 days
thereafter;
(5) one or more judgments, orders or decrees for the payment of money
in excess of $5.0 million, either individually or in the aggregate, shall
be entered against the Company or any Restricted Subsidiary or any of their
respective properties and which judgments, orders or decrees are not paid,
discharged, bonded or stayed or stayed pending appeal for a period of 60
days after their entry;
(6) certain events of bankruptcy, insolvency or reorganization of the
Company or any Restricted Subsidiary; or
(7) any Guarantee shall for any reason cease to be in full force and
effect or become invalid.
If any Event of Default (other than as specified in clause (6) of the
preceding paragraph with respect to the Company) occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Exchange Notes may, and the Trustee at the request of such holders
shall, declare all the Exchange Notes to be due and payable immediately by
notice in writing to the Company, and to the Company and the Trustee if by the
holders, specifying the respective Event of Default and that such notice is a
"notice of acceleration," and the Exchange Notes shall become immediately due
and payable. Notwithstanding the foregoing, in the case of an Event of Default
arising from the event specified in clause (6) of the preceding paragraph with
respect to the Company, the principal of, premium, if any, and any accrued
interest on all outstanding Exchange Notes shall ipso facto become immediately
due and payable without further action or notice. Holders of the Exchange Notes
may not enforce the Indenture or the Exchange Notes except as provided in the
Indenture.
The holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Trustee may on behalf of the holders of
all of the Exchange Notes waive any existing Default or Event of Default and its
consequences under the Indenture except (1) a continuing Default or Event of
Default in the payment of the principal of, or premium, if any, or interest on,
the Exchange Notes (which may only be waived with the consent of each holder of
Exchange Notes affected), or (2) in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each Exchange Note outstanding. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Exchange Notes
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Exchange Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal, premium or interest) if it determines that withholding notice is
in their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, interest on or Liquidated Damages, if any, with respect to
any of the Exchange Notes or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company in the Indenture, or in any of the Exchange Notes or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator, shareholder, officer, director, employee or controlling person of
the Company or of any successor Person thereof. Each Holder, by accepting the
Exchange Notes, waives and releases all such liability.
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DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors discharged with respect to the
outstanding Exchange Notes and the Guarantees ("defeasance"). Such defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Exchange Notes and to have satisfied
all other obligations under the Exchange Notes and the Indenture except for (1)
the rights of holders of the outstanding Exchange Notes to receive, solely from
the trust fund described below, payments in respect of the principal of,
premium, if any, and interest on such Exchange Notes when such payments are due,
(2) the Company's obligations with respect to the Exchange Notes concerning
issuing temporary Exchange Notes, registration of Exchange Notes mutilated,
destroyed, lost or stolen Exchange Notes, and the maintenance of an office or
agency for payment, (3) the rights, powers, trusts, duties and immunities of the
Trustee under the Indenture, and (4) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("covenant defeasance") and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Exchange Notes. In the event that a
covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute Events of Default with respect to the Exchange Notes.
In order to exercise either defeasance or covenant defeasance: (1) the
Company shall irrevocably deposit with the Trustee, as trust funds in trust, for
the benefit of the holders of the Exchange Notes, cash in United States dollars,
U.S. Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the report of a nationally
recognized firm of independent public accountants or a nationally recognized
investment banking firm, to pay and discharge the principal of, premium, if any,
and interest on the outstanding Exchange Notes to redemption or maturity; (2)
the Company shall have delivered to the Trustee an opinion of counsel in the
United States to the effect that the holders of the outstanding Exchange Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance or covenant defeasance, as the case may be, and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance or covenant
defeasance, as the case may be, had not occurred (in the case of defeasance,
such opinion must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable federal income tax laws); (3) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as clause (iv) under the first paragraph under "Events of
Default" is concerned, at any time during the period ending on the 91st day
after the date of deposit; (4) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a Default under, the Indenture
or any other agreement or instrument to which the Company or any Guarantor is a
party or by which any of them is bound; (5) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that (a) the trust funds will
not be subject to any rights of any creditors of the Company of any Guarantor
(other than holders of the Exchange Notes) and (b) after the 91st day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; and (6) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result
therefrom.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the
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Indenture) as to all outstanding Exchange Notes when: (1) either (a) all the
Exchange Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Exchange Notes that have been replaced or paid and Exchange Notes for
whose payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for cancellation or
(b) all Exchange Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and the Company has irrevocably deposited or caused
to be deposited with the Trustee an amount in United States dollars sufficient
to pay and discharge the entire indebtedness on the Exchange Notes not
theretofore delivered to the Trustee for cancellation, for the principal of,
premium, if any, and interest to the date of deposit; (2) the Company and the
Guarantors have paid or caused to be paid all other sums payable under the
Indenture, the Exchange Notes and the Guarantees by the Company and the
Guarantors; and (3) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture, the Exchange
Notes or the Guarantees may be amended or supplemented with the written consent
of the holders of at least a majority in aggregate principal amount of the then
outstanding Exchange Notes (including consents obtained in connection with a
tender offer or exchange offer for the Exchange Notes), and any existing Default
or Event of Default or compliance with any provision of the Indenture, the
Exchange Notes or the Guarantees may be waived with the consent of the holders
of a majority in principal amount of the then outstanding Exchange Notes
(including consents obtained in connection with a tender offer or exchange offer
for Exchange Notes).
Without the consent of each holder affected, an amendment or waiver shall
not (1) reduce the principal amount of the Exchange Notes whose holders must
consent to an amendment, supplement or waiver, (2) reduce the principal of or
change the fixed maturity of any Exchange Note, or alter or waive the provisions
with respect to the redemption of the Exchange Notes in a manner adverse to the
holders of the Exchange Notes other than with respect to a Change of Control
Offer or an Asset Sale Offer, (3) reduce the rate of or change the time for
payment of interest on any Exchange Notes, (4) waive a Default or Event of
Default in the payment of principal of, premium, if any, or interest on the
Exchange Notes (except that holders of at least a majority in aggregate
principal amount of the then outstanding Exchange Notes may (a) rescind an
acceleration of the Exchange Notes that resulted from a non-payment default, and
(b) waive the payment default that resulted from such acceleration), (5) make
any Exchange Note payable in money other than that stated in the Exchange Notes,
(6) make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of holders of Exchange Notes to receive payments of
principal of, or premium, if any, or interest on, the Exchange Notes, (7)
following the occurrence of a Change of Control, amend, change or modify the
Company's obligation to make and consummate a Change of Control Offer in the
event of a Change of Control or modify any of the provisions or definitions with
respect thereto in a manner adverse to the holders of the Exchange Notes, or
following the occurrence of an Asset Sale, amend, change or modify the Company's
obligation to make and consummate an Asset Sale Offer or modify any of the
provisions or definitions with respect thereto in a manner adverse to the
holders of the Exchange Notes or (8) release any Guarantor from any of its
obligations under its Guarantee or the Indenture other than in compliance with
the Indenture.
Notwithstanding the foregoing, without the consent of any holder of
Exchange Notes, the Company, the Guarantors and the Trustee may amend or
supplement the Indenture, the Exchange Notes or the Guarantees (1) to cure any
ambiguity, defect or inconsistency, (2) to provide for uncertificated Exchange
Notes in addition to or in place of certificated Exchange Notes, (3) to provide
for the assumption of the Company's obligations to holders of the Exchange Notes
in the event of any Disposition involving the Company in which the Company is
not the Surviving Person,
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(4) to make any change that would provide any additional rights or benefits to
the holders of the Exchange Notes or that does not adversely affect the rights
of any such holder, (5) to release any Guarantee permitted to be released under
the Indenture or (6) to comply with the requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
TRANSFER AND EXCHANGE
The registered holder of a Exchange Note will be treated as the owner of it
for all purposes. A holder may transfer or exchange Exchange Notes in accordance
with the Indenture. The Exchange Agent (as defined) and the Trustee may require
a holder among other things to furnish appropriate endorsements and transfer
documents and the Company may require a holder to pay any taxes and fees
required by law or permitted by the Indenture. Neither the Company nor the
Exchange Agent shall be required to issue, register the transfer of or exchange
any Exchange Note (1) during a period beginning at the opening of business on
the day that the Trustee receives notice of any redemption from the Company and
ending at the close of business on the day the notice of redemption is sent to
holders, (2) selected for redemption, in whole or in part, except the unredeemed
portion of any Exchange Note being redeemed in part may be transferred or
exchanged, and (3) during a Change of Control Offer or an Asset Sale Offer if
such Exchange Note is tendered pursuant to such Change of Control Offer or Asset
Sale Offer and not withdrawn.
THE TRUSTEE
Bank One Trust Company, NA is the Trustee under the Indenture and has been
appointed by the Company as Exchange Agent and Paying Agent with regard to the
Exchange Notes. Bank One Columbus, NA, an affiliate of the Trustee, was a lender
to the Company under the Old Credit Facility, and received a portion of the
proceeds of the Notes used to repay and terminate the Old Credit Facility.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) contains limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined in the Trust Indenture Act), it
must eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Exchange Notes and the Guarantees will be governed by
the laws of the State of Ohio, without regard to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of all other terms used in the
Indenture.
"Acquired Debt" means, with respect to any specified Person, Indebtedness
of any other Person (the "Acquired Person") existing at the time the Acquired
Person merges with or into, or becomes a Restricted Subsidiary of, such
specified Person, including Indebtedness incurred in connection with, or in
contemplation of, the Acquired Person merging with or into, or becoming a
Restricted Subsidiary of, such specified Person; provided, however, that
Indebtedness of such Acquired Person that is redeemed, defeased, retired or
otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Acquired Person merges with or into or becomes a
Restricted Subsidiary of such specified Person shall not be Acquired Debt.
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"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with") of any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (1) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary of any assets (including by way of a
sale-and-leaseback) other than in the ordinary course of business, or (2) the
issuance or sale of Capital Stock of any Restricted Subsidiary, in the case of
each of (1) and (2), whether in a single transaction or a series of related
transactions, to any Person (other than to the Company or a Restricted
Subsidiary and other than directors' qualifying shares) for Net Proceeds in
excess of $100,000.
"Capital Lease Obligation" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, of
such Person, including any Preferred Stock.
"Cash Equivalents" means: (1) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (2)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Rating Services or Moody's Investors
Service, Inc.; (3) commercial paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.; (4) certificates of deposit or bankers' acceptances
(or, with respect to foreign banks, similar instruments) maturing within one
year from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $200 million; (5)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (1) above entered into with any bank
meeting the qualifications specified in clause (4) above; and (6) investments in
money market funds that invest substantially all their assets in securities of
the types described in clauses (1) through (5) above.
"Cash Flow" means, with respect to any period, Consolidated Net Income for
such period, plus, to the extent deducted in computing such Consolidated Net
Income: (1) extraordinary net losses, plus (2) provision for taxes based on
income or profits and any provision for taxes utilized in computing the
extraordinary net losses under clause (1) hereof, plus (3) Consolidated Interest
Expense, plus (4) depreciation, amortization and all other non-cash charges
(including amortization of goodwill and other intangibles).
"Change of Control" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) (other than Permitted Holders) is or becomes (including by
merger, consolidation or otherwise) the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or
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indirectly, of 50% or more of the voting power of the total outstanding Voting
Stock of the Company; (2) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
Board of Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of such Board of Directors of the Company then in office;
(3) the approval by the holders of Capital Stock of the Company of any plan or
proposal for the liquidation or dissolution of the Company (whether or not
otherwise in compliance with the terms of the Indenture); or (4) the sale or
other disposition (including by merger, consolidation or otherwise) of all or
substantially all of the Capital Stock or assets of the Company to any Person or
group (as defined in Rule 13d-5 of the Exchange Act) (other than to the
Permitted Holders) as an entirety or substantially as an entirety in one
transaction or a series of related transactions.
"Consolidated Cash Flow Coverage Ratio" means, for any period, the ratio of
(1) the aggregate amount of Cash Flow for such period, to (2) Consolidated
Interest Expense for such period, determined on a pro forma basis after giving
pro forma effect to: (a) the incurrence of the Indebtedness giving rise to the
calculation of the Consolidated Cash Flow Coverage Ratio and (if applicable) the
application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, at the beginning of such period; (b) the incurrence,
repayment or retirement of any other Indebtedness by the Company and its
Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such period; (c) in the case
of Acquired Debt, the related acquisition as if such acquisition had occurred at
the beginning of such period; and (d) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, or any related repayment of
Indebtedness, in each case since the first day of such period, assuming such
acquisition or disposition had been consummated on the first day of such period.
"Consolidated Interest Expense" means, with respect to any period, the sum
of (1) the interest expense of the Company and its Restricted Subsidiaries for
such period, including, without limitation, (a) amortization of debt discount,
(b) the net payments, if any, under interest rate contracts (including
amortization of discounts), (c) the interest portion of any deferred payment
obligation and (d) accrued interest, plus (2) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued
by the Company and its Restricted Subsidiaries during such period, and all
capitalized interest of the Company and its Restricted Subsidiaries, plus (3)
all dividends paid during such period by the Company and its Restricted
Subsidiaries with respect to any Disqualified Stock (other than by any
Restricted Subsidiary to the Company or any other Restricted Subsidiary and
other than any dividend paid in Capital Stock (other than Disqualified Stock)),
and all dividends paid during such period by any Restricted Subsidiary with
respect to any Preferred Stock, in each case, as determined on a consolidated
basis in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted to the extent included in calculating such net income (or loss), by
excluding, without duplication, (1) all extraordinary gains but not losses (less
all fees and expenses relating thereto), (2) the portion of net income (or loss)
of the Company and its Restricted Subsidiaries allocable to interests in
unconsolidated Persons or Unrestricted Subsidiaries, except to the extent of the
amount of dividends or distributions actually paid to the Company or its
Restricted Subsidiaries by such other Person during such period, (3) net income
(or loss) of any Person combined with the Company or any of its Restricted
Subsidiaries on a "pooling-of-
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interests" basis attributable to any period prior to the date of combination,
(4) net gain but not losses (less all fees and expenses relating thereto) in
respect of disposition of assets (including, without limitation, pursuant to
sale and leaseback transactions) other than in the ordinary course of business,
or (5) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income to the Company is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Stock of
such Person.
"Currency Agreement Obligations" means the obligations of any person under
a foreign exchange contract, currency swap agreement or other similar agreement
or arrangement to protect such person against fluctuations in currency values.
"Default" means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Stock" means (1) any Preferred Stock of any Restricted
Subsidiary and (2) any Capital Stock that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable), or upon
the happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof (other than upon a change of control of the Company in
circumstances where the holders of the Exchange Notes would have similar
rights), in whole or in part on or prior to the stated maturity of the Exchange
Notes.
"Dollars" and "$" means lawful money of the United States of America.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Foreign Subsidiary" means a Restricted Subsidiary not organized under the
laws of the United States or any political subdivision thereof and the
operations of which are located entirely outside the United States.
"GAAP" means generally accepted accounting principles in the United States
set forth in the Statements of Financial Accounting Standards and the
Interpretations, Accounting Principles Board Opinions and AICPA Accounting
Research Bulletins that are applicable as of the Issue Date and consistently
applied.
"Guarantee" has the meaning ascribed to that term under "The Guarantees."
"guarantee" means, as applied to any obligation, (1) a guarantee (other
than endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (2) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
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"Guarantor" means (1) each of Friction Products Co., Logan Metal Stampings,
Inc., Hawk Brake, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman
Friction Products U.K. Corp., Helsel, Inc., and Hutchinson Products Corporation
and (2) any other Subsidiary of the Company that guarantees the Exchange Notes.
"Indebtedness" means, with respect to any Person, without duplication, and
whether or not contingent, (1) all indebtedness of such Person for borrowed
money or that is evidenced by a note, bond, debenture or similar instrument, (2)
all obligations of such Person to pay the deferred or unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such service, (3) all Capital Lease Obligations of such
Person, (4) all obligations of such Person in respect of letters of credit or
bankers' acceptances issued or created for the account of such Person, (5) to
the extent not otherwise included in this definition, all net obligations of
such Person under Interest Rate Agreement Obligations or Currency Agreement
Obligations of such Person, (6) all liabilities of others of the kind described
in the preceding clause (1), (2) or (3) secured by any Lien on any property
owned by such Person, provided, however, that if the obligations secured by a
Lien (other than a Permitted Lien not securing any liability that would itself
constitute Indebtedness) or any assets or property have not been assumed by such
Person in full or are not such Person's legal liability in full, the amount of
such Indebtedness for purposes of this definition shall be limited to the lesser
of the amount of Indebtedness secured by such Lien and the Fair Market Value of
the property subject to such Lien; (7) all Disqualified Stock issued by such
Person and all Preferred Stock issued by a Subsidiary of such Person, and (8) to
the extent not otherwise included, any guarantee by such Person of any other
Person's indebtedness or other obligations described in clauses (1) through (7)
above. "Indebtedness" of the Company and the Restricted Subsidiaries shall not
include current trade payables incurred in the ordinary course of business and
payable in accordance with customary practices, and non-interest bearing
installment obligations and accrued liabilities incurred in the ordinary course
of business that are not more than 90 days past due. The principal amount
outstanding of any Indebtedness issued with original issue discount is the
accreted value of such Indebtedness. Notwithstanding the foregoing, Indebtedness
shall not include Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business; provided
that such Indebtedness is extinguished within 3 business days of the incurrence
thereof.
"Independent Director" means a director of the Company other than a
director (1) who (apart from being a director of the Company or any Subsidiary
of the Company) is an employee, associate or Affiliate of the Company or a
Subsidiary of the Company, or (2) who is a director, employee, associate or
Affiliate of another party (other than the Company or any of its Subsidiaries)
to the transaction in question.
"Interest Rate Agreement Obligations" means, with respect to any Person,
the Obligations of such Person under (1) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (2) other agreements
or arrangements designed to protect such Person against fluctuations in interest
rates.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (1) "Investment" shall include and be valued at
the Fair Market Value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an
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Unrestricted Subsidiary and shall exclude the Fair Market Value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (2) the amount of any
Investment shall be the original cost of such Investment plus the cost of all
additional Investments by the Company or any of its Restricted Subsidiaries,
without any adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment, reduced by the
payment of dividends or distributions in connection with such Investment or any
other amounts received in respect of such Investment; provided, however,that no
such payment of dividends or distributions or receipt of any such other amounts
shall reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, greater than
50% of the outstanding Common Stock of such Restricted Subsidiary, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the Fair Market Value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means November 27, 1996.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages owing under the
Registration Rights Agreement.
"Net Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate cash or Cash Equivalent proceeds received by such Person and/or its
Affiliates in respect of such Asset Sale, which amount is equal to the excess,
if any, of (1) the cash or Cash Equivalent received by such Person and/or its
Affiliates (including any cash payments received by way of deferred payment
pursuant to, or monetization of, a note or installment receivable or otherwise,
but only as and when received) in connection with such Asset Sale, over (2) the
sum of (a) the amount of any Indebtedness that is secured by such asset and that
is required to be repaid by such Person in connection with such Asset Sale, plus
(b) all fees, commissions and other expenses incurred by such Person in
connection with such Asset Sale, plus (c) provision for taxes, including income
taxes, directly attributable to the Asset Sale or to required prepayments or
repayments of Indebtedness with the proceeds of such Asset Sale, plus (d) if
such Person is a Restricted Subsidiary, any dividends or distributions payable
to holders of minority interests in such Restricted Subsidiary from the proceeds
of such Asset Sale.
"New Revolving Credit Facility" means the New Revolving Credit Facility
between the Company and the lenders named therein as the same may be amended,
modified, renewed, refunded, replaced or refinanced from time to time, including
(1) any related notes, letters of credit, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time,
and (2) any notes, guarantees, collateral documents, instruments and agreements
executed in connection with any such amendment, modification, renewal,
refunding, replacement or refinancing.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
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"Permitted Holders" means any of Norman C. Harbert, Ronald E. Weinberg,
Byron S. Krantz, Clanco Partners I or any "group" (as defined in Rule 13d-5 of
the Exchange Act) consisting of any or all of the foregoing.
"Permitted Investments" means: (1) any Investment in the Company or any
Restricted Subsidiary that is a Guarantor; (2) any Investment in Cash
Equivalents; (3) any Investment in a Person (an "Acquired Person") if, as a
result of such Investment, (a) the Acquired Person becomes a Restricted
Subsidiary of the Company and becomes a Guarantor of the Exchange Notes, or (b)
the Acquired Person either (i) is merged, consolidated or amalgamated with or
into the Company or one of its Restricted Subsidiaries that is a Guarantor of
the Exchange Notes and the Company or such Restricted Subsidiary is the
Surviving Person, or (ii) transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or one of its Restricted Subsidiaries
that is a Guarantor of the Exchange Notes; (4) Investments in accounts and notes
receivable acquired in the ordinary course of business; (5) any securities
received in connection with an Asset Sale that complies with the covenant
described under "Limitations on Asset Sales;" (6) Interest Rate Obligations and
Currency Agreement Obligations permitted pursuant to the second paragraph of the
covenant described under "Limitation on Incurrence of Indebtedness" above; and
(7) investments in or acquisitions of Capital Stock or similar interests in
Persons (other than Affiliates of the Company) received in the bankruptcy or
reorganization of or by such Person or any exchange of such investment with the
issuer thereof or taken in settlement of or other resolution of claims or
disputes.
"Permitted Liens" means: (1) Liens securing Indebtedness under the New
Revolving Credit Facility; (2) Liens securing Indebtedness of a Person existing
at the time that such Person is merged into or consolidated with the Company or
a Restricted Subsidiary, provided, however, that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not extend to
any assets other than those of such Person; (3) Liens on property acquired by
the Company or a Restricted Subsidiary, provided, however, that such Liens were
in existence prior to the contemplation of such acquisition and do not extend to
any other property; (4) Liens in respect of Interest Rate Obligations and
Currency Agreement Obligations permitted under the Indenture; (5) Liens in favor
of the Company, any Restricted Subsidiary or any Guarantor; (6) Liens existing
or created on the Issue Date; and (7) Liens securing the Exchange Notes.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Capital Stock) of the Company pursuant to an
effective registration statement filed under the Securities Act.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company or the Restricted Subsidiaries,
and any additions and accessions thereto, that are purchased, constructed or
improved by the Company or any Restricted Subsidiary at any time after the Issue
Date; provided, however, that (1) any security agreement or conditional sales or
other title retention contract pursuant to which the Lien on such assets is
created (collectively, a "Security Agreement") shall be entered into within 90
days after the purchase or substantial completion of the construction of such
assets and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom, (2)
at no time shall the aggregate principal amount of the outstanding Indebtedness
secured thereby be increased, except in connection with the purchase of
additions and accessions
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thereto and except in respect of fees and other obligations in respect of such
Indebtedness and (3) (a) the aggregate outstanding principal amount of
Indebtedness secured thereby (determined on a per asset basis in the case of any
additions and accessions) shall not at the time such Security Agreement is
entered into exceed 100% of the purchase price to the Company or any Restricted
Subsidiary of the assets subject thereto or (b) the Indebtedness secured thereby
shall be with recourse solely to the assets so purchased or acquired, any
additions and accessions thereto and any proceeds therefrom.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means: (1) any dividend or other distribution declared
or paid on any Capital Stock of the Company (other than (a) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or (b) dividends or distributions payable to the Company or any
Restricted Subsidiary); (2) any payment to purchase, redeem or otherwise acquire
or retire for value any Capital Stock of the Company; (3) any payment to
purchase, redeem, defease or otherwise acquire or retire for value, prior to any
scheduled maturity, repayment or sinking fund payment, any Indebtedness that is
subordinated in right of payment to the Exchange Notes other than a purchase,
redemption, defeasance or other acquisition or retirement for value that is paid
for with the proceeds of Refinancing Indebtedness that is permitted under the
covenant described under "Certain Covenants -- Limitation on Incurrence of
Indebtedness;" or (4) any Restricted Investment.
"Restricted Subsidiary" means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
"Senior Debt" means the principal of and interest (including post-petition
interest) on, and all other amounts owing in respect of, (1) the New Revolving
Credit Facility, (2) Indebtedness evidenced by the Exchange Notes, and (3) any
other Indebtedness incurred by the Company (including, but not limited to,
reasonable fees and expenses of counsel and all other charges, fees and expenses
incurred in connection with such Indebtedness), unless the instrument creating
or evidencing such Indebtedness or pursuant to which such Indebtedness is
outstanding expressly provides that such Indebtedness is on a parity with or
subordinated in right of payment to the Notes. Notwithstanding the foregoing,
Senior Debt shall not include (1) any Indebtedness for federal, state, local or
other taxes, (2) any Indebtedness among or between the Company, any of its
Subsidiaries and/or their Affiliates, (3) any Indebtedness incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business or any obligations in respect of any such Indebtedness, (4) any
Indebtedness that is incurred in violation of the Indenture, or (5) Indebtedness
of the Company that is expressly subordinate or junior in right of payment to
any other Indebtedness of the Company.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the Exchange Notes.
"Subsidiary" of a Person means (1) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, (2)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner or (3) any other Person (other than a corporation or limited
partnership) in which such Person or one or more other Subsidiaries of such
Person, or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has more than 50% of the outstanding partnership or similar
interests or has the power, by contract or otherwise, to direct or cause the
direction of the policies, management and affairs thereof.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
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"Unrestricted Subsidiary" means a Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "Limitation
on Designations of Unrestricted Subsidiaries" and not redesignated a Restricted
Subsidiary in compliance with such covenant.
"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (1) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (2) the then outstanding
aggregate principal amount of such Indebtedness.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Company expects that the
Exchange Notes initially will each be represented by a single global certificate
in fully registered form (the "Global Note") and will be deposited with the
Trustee as custodian for The Depository Trust Company ("DTC") and registered in
the name of a nominee of DTC.
If a holder tendering Notes so requests, such holder's Exchange Notes will
be issued in registered form (the "Certificated Notes"). Certificated Notes will
initially be registered in the name of a nominee of DTC and be deposited with,
or on behalf of, DTC. Beneficial owners of Certificated Notes, however, may
request registration of such Certificated Notes in their names or in the names
of their nominees.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers (including the Placement Agents), banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the DTC system
is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Global Note. The Company expects that upon the issuance of the Global
Note, DTC or its custodian will credit, on its book-entry registration and
transfer system, the respective principal amount of Exchange Notes of the
individual beneficial interests represented by such Global Note to the accounts
of persons who have accounts with such depositary. Ownership of beneficial
interests in the Global Note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in the Global Note will be able to transfer that interest
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except in accordance with DTC's applicable procedures, in addition to those
provided for under the Indenture.
Payments of the principal of, premium (if any) and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the record relating to or payments made on
account of beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any record relating to such beneficial ownership
interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium or interest in respect of the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
The Company expects that transfers between participants in DTC will be
effected in the ordinary way in accordance with DTC rules and will be settled in
same-day funds. If a holder requires physical delivery of a Certificated Note
for any reason, including to sell Exchange Notes to persons in states which
require physical delivery of such Exchange Notes or to pledge such Exchange
Notes, such holder must transfer its interest in the Global Note in accordance
with the normal procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account the DTC interest in the Global Note is credited
and only in respect of such portion of the aggregate principal amount of
Exchange Notes as to which such participant or participants have given such
direction. However, if there is an Event of Default under the Exchange Notes or
the Indenture, DTC will exchange the Global Note for Certificated Notes that it
will distribute to its participants.
Although DTC customarily agrees to the foregoing procedures in order to
facilitate transfers of interests in global notes among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company, the Guarantors nor the Trustee
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Securities. Subject to certain conditions, any person having
a beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for Exchange Notes in the form of Certificated
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). In addition, if DTC is at any
time unwilling or unable to continue as a depositary for the Global Note and a
successor depositary is not appointed by the Company within 90 days,
Certificated Notes will be issued in exchange for the Global Note.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the exchange of Notes for Exchange Notes pursuant to the
Exchange Offer and of the ownership of Exchange Notes as of the date hereof.
Except where noted, it deals only with Exchange Notes held as capital assets and
does not deal with special situations, such as those of dealers in securities or
currencies, financial institutions, life insurance companies, persons holding
Exchange Notes as a part of a hedging or conversion transaction or a straddle or
holders of Exchange Notes whose
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"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations, rulings and judicial decisions thereunder as of
the date hereof, and such authorities may be repealed, revoked or modified so as
to result in federal income tax consequences different from those discussed
below.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES OR
TENDERING NOTES FOR EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT
OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE
LAWS OF ANY OTHER TAXING JURISDICTION.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following paragraph sets forth the opinion of Kohrman Jackson & Krantz
P.L.L. relating to certain United States federal income tax consequences of the
exchange of Notes for Exchange Notes pursuant to the Exchange Offer as of the
date hereof. PERSONS CONSIDERING THE EXCHANGE OF NOTES FOR EXCHANGE NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN
LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER
THE LAWS OF ANY OTHER TAXING JURISDICTION.
The exchange of the Notes for Exchange Notes pursuant to the Exchange Offer
should not be treated as an "exchange" for federal income tax purposes because
the Exchange Notes should not be considered to differ materially in kind or
extent from the Notes. Rather, the Exchange Notes received by a holder of Notes
should be treated as a continuation of the Notes in the hands of such holder. As
a result, there should be no federal income tax consequences to a holder
exchanging Notes for the Exchange Notes pursuant to the Exchange Offer.
PAYMENTS OF INTEREST
Except as set forth below, stated interest on an Exchange Note will
generally be taxable to a United States Holder as ordinary income from domestic
sources at the time it is paid or accrued in accordance with the United States
Holder's method of accounting for tax purposes. As used herein, a "United States
Holder" of an Exchange Note means a holder that is a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust the income of which is subject to United States federal
income taxation regardless of its source. A "Non-United States Holder" is a
holder that is not a United States Holder.
MARKET DISCOUNT
If a United States Holder purchases an Exchange Note for an amount that is
less than its stated principal amount, the amount of the difference will be
treated as "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market discount
rules, a United States Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, an
Exchange Note as ordinary income to the extent of the market discount which has
not previously been included in income and is treated as having accrued on such
Exchange Note at the time of such payment or disposition. In addition, the
United States Holder may be required to defer, until the maturity of the
Exchange Note or its earlier disposition in a taxable transaction, the deduction
of all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Exchange Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Note, unless
the United States Holder elects to accrue on a constant interest method. A
United States Holder of an Exchange Note may elect to include market discount in
income currently as it accrues (on either a ratable or constant interest
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method), in which case the rule described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service ("IRS").
AMORTIZABLE BOND PREMIUM
A United States Holder that purchases an Exchange Note for an amount in
excess of the sum of all amounts payable on the Exchange Note after the purchase
date other than stated interest will be considered to have purchased the
Exchange Note at a "premium." A United States Holder generally may elect to
amortize the premium over the remaining term of the Exchange Note on a constant
yield method. The amount amortized in any year will be treated as a reduction of
the United States Holder's interest income from the Exchange Note. Bond premium
on an Exchange Note held by a United States Holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition of the Exchange Note. The election to amortize premium on a constant
yield method once made applies to all debt obligations held or subsequently
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
SALE, EXCHANGE AND RETIREMENT OF EXCHANGE NOTES
A United States Holder's tax basis in an Exchange Note will, in general, be
the United States Holder's cost therefor, increased by market discount
previously included in income by the United States Holder and reduced by any
amortized premium and any cash payments on the Exchange Note other than stated
interest. Upon the sale, exchange, retirement or other disposition of an
Exchange Note, a United States Holder will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange, retirement or
other disposition (less any accrued interest, which will be taxable as such) and
the adjusted tax basis of the Exchange Note. Such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if at the time of sale,
exchange, retirement or other disposition the Exchange Note has been held for
more than one year. Under current law, net capital gains of individuals are,
under certain circumstances, taxed at lower rates than items of ordinary income.
The deductibility of capital losses is subject to limitations.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(1) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest on an Exchange Note owned by a Non-United States
Holder, provided (a) that the beneficial owner does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (b) the
beneficial owner is not a controlled foreign corporation that is related to
the Company through stock ownership, (c) the beneficial owner is not a bank
whose receipt of interest on an Exchange Note is described in section
881(c)(3)(A) of the Code and (d) the beneficial owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(2) no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange, retirement or other disposition of an
Exchange Note; and
(3) an Exchange Note beneficially owned by an individual who at the
time of death is a Non-United States Holder will not be subject to United
States federal estate tax as a result of such individual's death, provided
that such individual does not actually or constructively own
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10% or more of the total combined voting power of all classes of stock of
the company entitled to vote within the meaning of section 871(h)(3) of the
Code and provided that the interest payments with respect to such Note
would not have been, if received at the time of such individual's death,
effectively connected with the conduct of a United States trade or business
by such individual.
To satisfy the requirement referred to in clause (1)(d) above, the
beneficial owner of such Note, or a financial institution holding the Exchange
Note on behalf of such owner, must provide, in accordance with specified
procedures, a paying agent of the Company with a statement to the effect that
the beneficial owner is not a United States person. Pursuant to current
temporary Treasury regulations, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a United States person (which certification may be
made on an Internal Revenue Service Form W-8 (or successor form)) or (2) a
financial institution holding the Exchange Note on behalf of the beneficial
owner certifies, under penalties of perjury, that such statement has been
received by it and furnishes a paying agent with a copy thereof.
If a non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in clause (1) above, payments of
premium, if any, and interest made to such non-United States Holder will be
subject to a 30% withholding tax unless the beneficial owner of the Exchange
Note provides the Company or its paying agent, as the case may be, with a
properly executed (1) IRS Form 1001 (or successor form) claiming an exemption
from withholding under the benefit of a tap treaty or (2) IRS Form 4224 (or
successor form) stating that interest paid on the Exchange Note is not subject
to withholding tax because it is effectively connected with the beneficial
owner's conduct of a trade or business in the United States.
If a non-United States Holder is engaged in a trade or business in the
United States and premium, if any, or interest on the Exchange Note is
effectively connected with the conduct of such trade or business, the non-United
States Holder, although exempt from the withholding tax discussed above, will be
subject to United States federal income tax on such interest on a net income
basis in the same manner as if it were a United States Holder. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, such premium, if any, and
interest on an Exchange Note will be included in such foreign corporation's
earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of an Exchange Note generally will not be subject to United States
federal income tax unless (1) such gain or income is effectively connected with
a trade or business in the United States of the Non-United States Holder, or (2)
in the case of a Non-United States Holder who is an individual, such individual
is present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Exchange Notes and to the
proceeds of sale of an Exchange Note made to United States Holders other than
certain exempt recipients (such as corporations). A 31% backup withholding tax
will apply to such payments if the United States Holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United States
Holders if a statement described in clause (1)(d) under "Non-United States
Holders" has been received and the payor does not have actual knowledge that the
beneficial owner is a United States person.
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In addition, backup withholding and information reporting will not apply if
payments of the principal, interest or premium on an Exchange Note are paid or
collected by a foreign office of a custodian, nominee or other foreign agent on
behalf of the beneficial owner of such Exchange Note, or if a foreign office of
a broker (as defined in applicable Treasury regulations) pays the proceeds of
the sale of an Exchange Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States federal income tax purposes, a
United States person, a controlled foreign corporation or a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (1) such
custodian, nominee, agent or broker has documentary evidence in its records that
the beneficial owner is not a United States person and certain other conditions
are met or (2) the beneficial owner otherwise establishes an exemption.
Temporary Treasury regulations provide that the Treasury is considering whether
backup withholding will apply with respect to such payments of principal,
interest or the proceeds of a sale that are not subject to backup withholding
under the current regulations.
Payments of principal, interest and premium on an Exchange Note paid to the
beneficial owner of an Exchange Note by a United States office of a custodian,
nominee or agent, or the payment by the United States office of a broker of the
proceeds of sale of an Exchange Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in clause (1)(d) under "Non-United States Holders" and the payor
does not have actual knowledge that the beneficial owner is a United States
person or otherwise establishes an exemption. Under proposed United States
Treasury regulations not currently in effect, backup withholding will not apply
to such payments absent actual knowledge that the payee is a United States
person. The IRS recently proposed regulations addressing certain withholding,
certification and information rules which could affect the treatment of the
payment of the amounts described above (the "Proposed Regulations"). The
Proposed Regulations would provide alternative methods for satisfying the
certification requirement described in clause (1)(d) under "Non-United States
Holders." The Proposed Regulations also would require, in the case of Exchange
Notes held by foreign partnerships, that (1) the certification described in
clause (1)(d) under "Non-United States Holders" be provided by the partners
rather than by the foreign partnership and (2) the partnership provide certain
information, including a United States taxpayer identification number. A look
through rule would apply in the case of tiered partnerships. The Proposed
Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the Proposed Regulations will be adopted or
as to the provisions they will include if and when adopted in temporary or final
form. Non-United States Holders should consult their tax advisors regarding the
application of these rules to their particular situations, the availability of
an exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed United States Treasury
regulations addressing the withholding and information reporting rules.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
Under Proposed Treasury Regulations, not currently in effect, the statement
requirement referred to in clause (1)(d) under "Non-United States Holders" may
be satisfied with other documentary evidence for interest paid after December
31, 1997 with respect to an offshore account or through certain foreign
intermediaries.
REGISTRATION RIGHTS
The Company, the Guarantors and the Placement Agents entered into the
Registration Rights Agreement on the Issue Date pursuant to which the Company
and the Guarantors agreed, for the
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benefit of holders of the Notes, that they will, at their expense (1) on or
prior to the 45th day following the Issue Date, file the Exchange Offer
Registration Statement with the Commission with respect to the Exchange Offer
pursuant to which the Notes will be exchanged for the Exchange Notes, which will
have terms identical to the Notes (except that the Exchange Notes will not
contain terms with respect to transfer restrictions or any provision relating to
this paragraph) and (2) use their best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act by the
120th day after the Issue Date. Upon effectiveness of the Exchange Offer
Registration Statement, the Company and the Guarantors will offer to all holders
of the Notes an opportunity to exchange their securities for a like principal
amount of the Exchange Notes. The Company and the Guarantors agreed to keep the
Exchange Offer open for acceptance for not less than 20 business days (or
longer, if required by applicable law) after the date the Exchange Offer
Registration Statement is declared effective, and will comply with Regulation
14E and Rule 13e-4 under the Exchange Act (other than the filing requirements of
Rule 13e-4). For each Note surrendered to the Company for exchange pursuant to
the Exchange Offer, the holder of such Note will receive an Exchange Note having
a principal amount at maturity equal to that of the surrendered Note. Interest
on each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Note surrendered in exchange therefor or, if no
interest has been paid on such Note, from the Issue Date.
Under existing interpretations of the Commission contained in several
no-action letters to third parties, the Exchange Notes would generally be freely
transferable by holders thereof after the Exchange Offer without further
registration under the Securities Act (subject to certain representations
required to be made by each holder of Notes, as set forth below). However, any
purchaser of Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (1) will not be able to rely on the interpretation of the staff of the
Commission, (2) will not be able to tender its Notes in the Exchange Offer and
(3) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
In addition, in connection with any resales of Exchange Notes, any broker-dealer
that acquired the Notes for its own account as a result of market making or
other trading activities must deliver a prospectus meeting the requirements of
the Securities Act. The Commission has taken the position that such
broker-dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. The Company has agreed to make available, for a period
of up to 120 days after consummation of the Exchange Offer, copies of this
Prospectus, as it may be amended or supplemented from time to time, to any such
broker-dealer and any other persons, if any, with similar prospectus delivery
requirements, for use in connection with any resale of Exchange Notes. A
broker-dealer or any other person that delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations thereunder).
Each holder of the Notes who wishes to exchange its Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations to
the Company and the Guarantors, including that (1) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (2) it
has no arrangement or understanding with any person to participate in a public
distribution (within the meaning of the Securities Act) of the Exchange Notes
and (3) it is not an "affiliate," as defined in Rule 405 of the Securities Act,
of the Company or any Guarantor, or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable to it.
In addition, each holder who is not a broker-dealer will be required to
represent that it is not engaged in, and does not intend to engage in, a public
distribution of the Exchange Notes. The
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Letter of Transmittal relating to the Exchange Offer states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. In the absence
of an exemption, each broker-dealer that received the Notes from the Company in
the Offering and not as a result of market-making or other trading activities
must comply with the registration requirements of the Securities Act.
In the event that (1) any changes in law or the applicable interpretations
of the Staff do not permit the Company and the Guarantors to effect the Exchange
Offer, (2) if for any other reason the Exchange Offer is not consummated by the
150th day following the Issue Date, (3) if any of the Placement Agents so
requests with respect to the Notes not eligible to be exchanged for Exchange
Notes in the Exchange Offer or (4) if any holder of Notes is not eligible to
participate in the Exchange Offer or does not receive freely tradeable Exchange
Notes in the Exchange Offer, then the Company and the Guarantors will, at their
expense, (a) promptly file the Shelf Registration Statement permitting resales
from time to time of the Notes, (b) use their best efforts to cause the Shelf
Registration Statement to become effective and (c) use their best efforts to
keep the Shelf Registration Statement current and effective until three years
from the date it becomes effective or such shorter period that will terminate
when all the Notes covered by the Shelf Registration Statement have been sold
pursuant thereto. The Company, at its expense, will provide to each holder of
the Notes copies of the prospectus, which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Notes from time to time. A holder of Notes who sells
such Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of the Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
Although the Company and the Guarantors intend to file the registration
statements described above, as required, there can be no assurance that such
registration statements will be filed, or, if filed, that they will become
effective. In the event that (1) the Exchange Offer Registration Statement is
not filed with Commission on or prior to the 45th day after the Issue Date or
declared effective on or prior to the 120th day after the Issue Date, (2) the
Exchange Offer is not consummated on or prior to the 150th day following the
Issue Date, (3) the Shelf Registration Statement is not filed or declared
effective within the required time periods or (4) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective (except as specifically permitted therein)
for a period of 15 consecutive days without being succeeded immediately by an
additional Exchange Offer Registration Statement or Shelf Registration
Statement, as the case may be, filed and declared effective (each such event, a
"Registration Default"), then the interest rate borne by the Notes shall be
increased by 0.50% per annum for the 90-day period following such Registration
Default. Such interest rate will increase by an additional 0.25% per annum at
the beginning of each subsequent 90-day period following such Registration
Default, up to a maximum aggregate increase of 1.50% per annum. From and after
the date that all Registration Defaults have been cured, the Notes will bear
interest at the rate set forth on the cover page of this Prospectus.
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The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed to
make available, for a period of up to 120 days after consummation of the
Exchange Offer, copies of this Prospectus, as amended or supplemented, to any
broker-dealer and any other persons, if any, with similar prospectus delivery
requirements, for use in connection with any resale of Exchange Notes. In the
absence of an exemption, each broker-dealer that received the Notes from the
Company in the Offering and not as a result of market-making or other trading
activities must comply with the registration requirements of the Securities Act.
Hawk and the Guarantors will not receive any cash proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act any profit on any such
resale of Exchange Notes and any commission or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
Hawk and the Guarantors have jointly and severally agreed to pay all
expenses incident to the Exchange Offer other than commissions or concessions of
any brokers or dealers and will indemnify the holders of the Exchange Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes and the Guarantees
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.,
is a stockholder, 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 Transactions and the purchase of certain
friction products assets of GKN.
105
<PAGE> 106
EXPERTS
The consolidated financial statements of the Company and subsidiaries as of
December 31, 1996 and 1995 and for the years then ended, 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 consolidated financial statements of the Company and subsidiaries as of
December 31, 1994 and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited, as to combination only, 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 the Hawk Group of Companies, Inc.
and subsidiaries as of and for the years ended December 31, 1994 and 1993
included in this Prospectus have been audited by Deloitte and Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to a change in method of accounting for income taxes effective January 1, 1993
to conform with Statement of Financial Accounting Standard No. 109), and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Helsel as of December 31, 1994, and for the
period from July 1, 1994 through December 31, 1994, 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, shareholder'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 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.
106
<PAGE> 107
CHANGE IN INDEPENDENT AUDITORS
In December 1995, the Board of Directors of the Company authorized the
Company to retain Ernst & Young LLP as its independent auditors. The Company's
engagement of Deloitte & Touche LLP, the independent auditors, terminated by its
terms upon issuance of its report on March 14, 1995 (April 10, 1995 as to Note
9). Deloitte & Touche LLP was not retained and provided no subsequent audit or
consultation services on other accounting matters to the Company upon the
completion of this engagement. The report of Deloitte & Touche LLP for the year
ended December 31, 1994 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or application
of accounting principles or practices. During the year ended December 31, 1994
and through the issuance of its report, there were no disagreements with
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.
107
<PAGE> 108
(This page intentionally left blank)
<PAGE> 109
THE HAWK CORPORATION
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HAWK CORPORATION
Report of Independent Auditors....................................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996......................... F-4
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996............................................................................... F-6
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996................................................................ F-7
Consolidated Statements of Cash Flows for the year ended December 31, 1994, 1995 and
1996............................................................................... F-8
Notes to Consolidated Financial Statements*.......................................... F-10
HAWK GROUP OF COMPANIES, INC. (AS PUBLISHED CONSOLIDATED FINANCIAL STATEMENTS)
Independent Auditors' Report......................................................... F-26
Consolidated Balance Sheets as of December 31, 1993 and 1994......................... F-27
Consolidated Statements of Income for the years ended December 31, 1993 and 1994..... F-28
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993
and 1994........................................................................... F-29
Consolidated Statements of Cash Flows for the year ended December 31, 1993 and 1994.. F-30
Notes to Consolidated Financial Statements........................................... F-31
HELSEL, INC.
Report of Independent Auditors....................................................... F-37
Balance Sheet as of December 31, 1994................................................ F-38
Statement of Income for the period from July 1, 1994 through December 31, 1994....... F-39
Statement of Shareholders' Equity for the period from July 1, 1994 through December
31, 1994........................................................................... F-40
Statement of Cash Flows for the period from July 1, 1994 through December 31, 1994... F-41
Notes to Financial Statements........................................................ F-42
HELCO, INC.
Report of Independent Auditors....................................................... F-45
Balance Sheet as of June 30, 1994.................................................... F-46
Statement of Income for the year ended June 30, 1994................................. F-47
Statement of Shareholder's Equity for the year ended June 30, 1994................... F-48
Statement of Cash Flows for the year ended June 30, 1994............................. F-49
Notes to Financial Statements........................................................ F-50
S.K. WELLMAN CORP. FINANCIAL STATEMENTS
Report of Independent Auditors....................................................... F-53
Consolidated Balance Sheets as of December 31, 1993 and 1994......................... F-54
Consolidated Statements of Operations for the years ended December 31, 1993 and 1994
and the six months ended June 30, 1995............................................. F-56
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993
and 1994........................................................................... F-57
Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994,
and the six months ended June 30, 1995............................................. F-58
Notes to Consolidated Financial Statements........................................... F-59
</TABLE>
- ---------------
* Note M sets forth tabular consolidated condensed financial statements of Hawk,
the Guarantors as a group and the non-guarantor subsidiaries of Hawk as a
group, together with any other required disclosure contemplated by applicable
rules promulgated under the Exchange Act.
F-1
<PAGE> 110
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY FINANCIAL
STATEMENTS
Report of Independent Accountants.................................................... F-66
Balance Sheets as of December 31, 1995 and 1996...................................... F-67
Statements of Income for the years ended December 31, 1994, 1995 and 1996............ F-68
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994,
1995 and 1996...................................................................... F-69
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996........ F-70
Notes to Financial Statements........................................................ F-71
</TABLE>
F-2
<PAGE> 111
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 December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' 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 consolidated financial position of Hawk
Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
We also have audited, as to combination only, the accompanying consolidated
statements of operations, shareholders' equity, and cash flows of Hawk
Corporation and subsidiaries for the year ended December 31, 1994. As described
in Notes A and C to such statements, these statements have been combined from
the consolidated statements of The Hawk Group of Companies, Inc. and
subsidiaries and Helsel, Inc. which statements are presented separately herein.
The report of the other auditors who audited the statements of The Hawk Group of
Companies, Inc. as of and for the year ended December 31, 1994, appears
elsewhere herein. Our report on the statements of Helsel, Inc. as of December
31, 1994 and for the period July 1, 1994 through December 31, 1994, also appears
elsewhere herein. In our opinion, the accompanying consolidated financial
statements for 1994 have been properly combined on the basis described in Notes
A and C.
Ernst & Young LLP
Cleveland, Ohio
March 13, 1997
F-3
<PAGE> 112
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 771 $ 25,774
Accounts receivable, less allowance of $276 in 1995
and $182 in 1996............................................... 17,307 16,783
Inventories:
Raw materials and work-in-process.............................. 14,575 16,707
Finished products.............................................. 5,530 4,157
------- --------
20,105 20,864
Deferred income taxes............................................. 1,042 2,432
Other current assets.............................................. 1,189 935
------- --------
Total current assets...................................... 40,414 66,788
PROPERTY, PLANT AND EQUIPMENT:
Land.............................................................. 1,080 1,080
Buildings and improvements........................................ 6,619 7,615
Machinery and equipment........................................... 38,990 45,766
Furniture and fixtures............................................ 1,118 1,611
Construction in progress.......................................... 653 2,825
------- --------
48,460 58,897
Less accumulated depreciation..................................... 9,000 14,755
------- --------
Total property, plant and equipment....................... 39,460 44,142
OTHER ASSETS:
Intangible assets................................................. 39,821 39,939
Net assets held for sale.......................................... 3,604 3,604
Shareholder notes................................................. 2,000 1,838
Other............................................................. 2,120 2,130
------- --------
Total other assets........................................ 47,545 47,511
------- --------
TOTAL ASSETS........................................................ $ 127,419 $ 158,441
======= ========
</TABLE>
F-4
<PAGE> 113
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 8,488 $ 8,194
Accrued compensation......................................................... 7,364 6,775
Other accrued expenses....................................................... 3,537 2,405
Current portion of long-term debt............................................ 5,460 714
------- --------
Total current liabilities............................................ 24,849 18,088
LONG-TERM LIABILITIES:
Long-term debt............................................................... 89,446 128,469
Deferred income taxes........................................................ 2,348 4,090
Other........................................................................ 2,228 2,004
------- --------
Total long-term liabilities.......................................... 94,022 134,563
DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION............................... 4,600 4,600
SHAREHOLDERS' EQUITY:
Series A preferred stock, $.01 par value and an aggregate liquidation value
of $2,625,000, plus any accrued or 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 $702,000, plus any accrued or 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 $1,190,000, plus any accrued or unpaid dividends with 10%
cumulative dividend (1,190 shares authorized, issued and outstanding)..... 1 1
Class A common stock, $.01 par value; 2,200,000 shares authorized, 1,443,978
issued and outstanding.................................................... 14 14
Class B common stock, $.01 par value, 375,000 shares authorized, none issued
or outstanding
Additional paid-in capital................................................... 1,724 1,964
Retained earnings (deficit).................................................. 2,330 (974)
Other equity adjustments..................................................... (121) 185
------- --------
Total shareholders' equity........................................... 3,948 1,190
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 127,419 $ 158,441
======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 114
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales.............................................. $ 41,395 $ 84,643 $ 123,997
Cost of sales.......................................... 26,771 61,164 91,884
--------- --------- ---------
Gross profit........................................... 14,624 23,479 32,113
Expenses:
Selling, technical and administrative expenses....... 6,294 11,575 15,468
Amortization of intangibles.......................... 954 1,924 2,806
Plant consolidation expense.......................... 4,028
--------- --------- ---------
Total expenses......................................... 7,248 13,499 22,302
--------- --------- ---------
Income from operations................................. 7,376 9,980 9,811
Interest expense....................................... 3,267 7,323 10,648
Other (income) expense, net............................ (234) (130) 256
--------- --------- ---------
Income (loss) before income taxes, minority interest
and extraordinary item............................... 4,343 2,787 (1,093)
Income taxes........................................... 1,845 1,593 789
Minority interest...................................... 211 432
--------- --------- ---------
Income (loss) before extraordinary item................ 2,287 762 (1,882)
Extraordinary item -- write-off of deferred
financing costs, net of $798 income taxes............ (1,196)
--------- --------- ---------
NET INCOME (LOSS)...................................... $ 2,287 $ 762 $ (3,078)
========= ========= =========
Preferred stock dividend requirements.................. $ (294) $ (326) $ (226)
========= ========= =========
Income (loss) before extraordinary item applicable to
common shareholders.................................. $ 1,993 $ 436 $ (2,108)
========= ========= =========
Net income (loss) applicable to common shareholders.... $ 1,993 $ 436 $ (3,304)
========= ========= =========
Income (loss) before extraordinary item per share
applicable to common shareholders.................... $ 1.76 $ .28 $ (1.20)
========= ========= =========
Net income (loss) per share applicable to common
shareholders......................................... $ 1.76 $ .28 $ (1.88)
========= ========= =========
Number of shares used to compute per share data........ 1,132,689 1,538,162 1,760,946
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 115
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HAWK CORPORATION
--------------------------------------------------------------------------------
PREFERRED COMMON COMMON
PREFERRED STOCK STOCK STOCK ADDITIONAL RETAINED OTHER
STOCK $.01 PAR NO PAR $.01 PAR PAID-IN EARNINGS EQUITY
10% VALUE VALUE VALUE CAPITAL (DEFICIT) ADJUSTMENTS
--------- --------- ------ --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994................... $ 2,625 $ 377 $ 375
Purchase of Helco, Inc. .....................
Net income................................... 2,052
Preferred stock dividend..................... (263)
------ --- ---- --- ------ ------ ----
Balance at December 31, 1994................. 2,625 377 2,164
Merger of Helsel and Hawk.................... (2,625) $ 1 (377) $ 14 8,724 (270)
Net income................................... 762
Preferred stock dividend..................... (326)
Purchase of warrants......................... (7,000)
Foreign currency translation adjustment...... $ 207
Additional minimum pension liability......... (328)
------ --- ---- --- ------ ------ ----
Balance at December 31, 1995................. 1 14 1,724 2,330 (121)
Merger of Hawk Holding Corp. and Hawk........ 240
Net loss..................................... (3,078)
Preferred stock dividend..................... (226)
Foreign currency translation adjustment...... 315
Additional minimum pension liability......... (9)
------ --- ---- --- ------ ------ ----
Balance at December 31, 1996................. $ $ 1 $ $ 14 $ 1,964 $ (974) $ 185
====== === ==== === ====== ====== ====
<CAPTION>
HELSEL, INC
-----------------------------
COMMON
PREFERRED STOCK
STOCK $3 PAR RETAINED
9% VALUE EARNINGS TOTAL
--------- ------ -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1994................... $ 3,377
Purchase of Helco, Inc. ..................... $ 370 $ 158 528
Net income................................... $ 235 2,287
Preferred stock dividend..................... (31) (294)
---- ---- ---- ------
Balance at December 31, 1994................. 370 158 204 5,898
Merger of Helsel and Hawk.................... (370) (158) (204) 4,735
Net income................................... 762
Preferred stock dividend..................... (326)
Purchase of warrants......................... (7,000)
Foreign currency translation adjustment...... 207
Additional minimum pension liability......... (328)
---- ---- ---- ------
Balance at December 31, 1995................. 3,948
Merger of Hawk Holding Corp. and Hawk........ 240
Net loss..................................... (3,078)
Preferred stock dividend..................... (226)
Foreign currency translation adjustment...... 315
Additional minimum pension liability......... (9)
---- ---- ---- ------
Balance at December 31, 1996................. $ $ $ $ 1,190
==== ==== ==== ======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 116
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ 2,287 $ 762 $ (3,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 2,466 5,527 8,418
Accretion of discount on debt........................... 325 650
Deferred income taxes................................... 302 377 352
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
Inventories............................................. (380) (1,398) (759)
Other assets............................................ 4 1,115 4
Accounts payable........................................ 235 196 (294)
Other liabilities....................................... 147 430 (1,147)
------- -------- -------
Net cash provided by operating activities.................... 4,821 7,713 5,866
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Helco, Inc....................................... (4,627)
Purchase of S. K. Wellman Limited, Inc., net of cash
acquired.................................................. (61,607)
Purchases of property, plant and equipment................... (1,871) (3,781) (8,275)
Loans to shareholders........................................ (2,000)
Payments received on shareholder notes....................... 162
------- -------- -------
Net cash used in investing activities........................ (6,498) (67,388) (8,113)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt................... 3,880 102,000 181,373
Payments on long-term debt................................... (3,555) (30,726) (149,765)
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)
Payments of preferred stock dividends........................ (295) (326) (226)
Other........................................................ (121) 546
------- -------- -------
Net cash provided by financing activities.................... 2,312 59,748 27,250
------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 635 73 25,003
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 63 698 771
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 698 $ 771 $ 25,774
======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 117
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash payments for interest................................... $ 2,743 $ 6,260 $ 11,024
====== ====== ======
Cash payments for income taxes............................... $ 1,852 $ 1,929 $ 1,153
====== ====== ======
Noncash investing and financing activities:
Equipment purchased with capital leases.................... $ 2,019
========
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>
See notes to consolidated financial statements.
F-9
<PAGE> 118
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
A. BASIS OF PRESENTATION
The consolidated financial statements of Hawk Corporation, formerly the
Hawk Group of Companies, Inc., and its wholly-owned subsidiaries, also include,
effective July 1, 1994, the accounts of Helsel, Inc. (Helsel), and, effective
July 1, 1995, the accounts of S.K. Wellman Limited, Inc. (Wellman)
(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 and 1995 to conform with the 1996
presentation.
The Company operates in one principal business segment, the design,
engineering, manufacturing and marketing of friction products and precision
engineered components for aerospace, industrial and other specialty
applications.
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 flows methodology would be used to determine whether an impairment loss
should be recognized. See Note D.
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.
F-10
<PAGE> 119
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 in the aerospace, industrial
and specialty 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.
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 approximately
$1,158,000 in 1994, $2,000,000 in 1995 and $2,639,000 in 1996.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses amounted
to approximately $106,000, $385,000 and $197,000 in 1994, 1995 and 1996,
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, the carrying value of the Company's
financial instruments, which include cash, cash equivalents and long-term debt,
approximate their fair value.
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 availa-
F-11
<PAGE> 120
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ble to common shareholders includes an adjustment for preferred stock dividends
paid during the respective periods.
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.
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.
F-12
<PAGE> 121
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
On June 30, 1995, the Company acquired for cash substantially all of the
net assets of Wellman 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
income since the date of acquisition. As a result of this acquisition, the
Company is consolidating certain operating facilities. Accordingly, the net
carrying value of the facilities the Company plans to close and sell are
reflected as net assets held for sale on the accompanying balance sheets at
December 31, 1995 and 1996. 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.
The following unaudited pro forma consolidated results of operations give
effect to the above acquisitions as though they had occurred on January 1, 1994
and include certain adjustments, such as additional amortization expense as a
result of goodwill, increased interest expense related to debt incurred for the
acquisitions and the elimination of management fees that are not charged under
the new ownership.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................. $ 109,568 $ 119,559
======== ========
Net income................................................ $ 6,067 $ 2,500
======== ========
</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
F-13
<PAGE> 122
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 was 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 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
----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Product certifications (19 to 40 years)....................... $ 20,820 $ 20,820
Goodwill (15 to 40 years)..................................... 21,772 22,012
Deferred financing costs (3 to 7 years)....................... 2,779 4,678
Proprietary formulations and patents (10 years)............... 1,806 1,806
Other......................................................... 779 779
------- -------
47,956 50,095
Accumulated amortization...................................... (8,135) (10,156)
------- -------
$ 39,821 $ 39,939
======= =======
</TABLE>
The Company valued product certifications based on the Company's position
as a certified single source supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
E. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Term Loans................................................... $ 57,090
Revolving Credit Line........................................ 10,400
Senior Subordinated Notes.................................... 25,725 $ 26,375
Senior Notes................................................. 100,000
Other........................................................ 1,691 2,808
------- --------
94,906 129,183
Less current portion......................................... 5,460 714
------- --------
$ 89,446 $ 128,469
======= ========
</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
F-14
<PAGE> 123
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(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 June 30, 2003, 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
Company's Class B common stock at a per share price of $.01. The warrants are
exercisable through the year 2005. The Company has the option to repurchase the
warrants and the warrant holder has a put option to sell the warrants back to
the Company for cash at prices based on a fair market value formula defined as
the fair salable value of the Company at the date of put as determined by an
independent third party beginning in the year 2001. The warrant holders put
option to sell the warrants back to the Company is terminated upon the
occurrence of certain events, including the consummation of an initial public
offering.
For financial reporting purposes, the fair value of the warrants, including
the put option, was estimated to be $4,600,000 and classified as detachable
stock warrant, subject to put option on the accompanying balance sheets. The
fair market value of the warrants including the put option is estimated based
upon management's assumptions applied to discounted projected future earnings of
the Company. 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 and December 31,
1996 totaled $4,275,000 and $3,625,000, respectively.
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 are, and the notes for which the Senior Notes will be
exchanged (Exchange Notes) will be, 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.
Aggregate principal payments due on long-term debt as of December 31, 1996
are as follows (in thousands): 1997 -- $714; 1998 -- $771; 1999 -- $574;
2000 -- $255; 2001 -- $267; thereafter -- $126,602.
F-15
<PAGE> 124
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 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 or 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>
YEAR ENDED DECEMBER 31
------------------------------
1994 1995 1996
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................. $ 246 $ 382 $ 400
Interest cost............................................ 421 665 727
Actual return on plan assets............................. (165) (1,732) (1,435)
Net amortization and deferral............................ (293) 673 576
----- ------- -------
$ 209 $ (12) $ 268
===== ======= =======
</TABLE>
A summary of the actuarially determined benefit obligations and trusteed
net assets for Company administered defined benefit pension plans is presented
below, along with a reconciliation
F-16
<PAGE> 125
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
1995 1996 1995 1996
-------- -------- -------- --------
ACCUMULATED
ASSETS EXCEED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
--------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested...................................... $ (5,960) $ (6,186) $ (2,559) $ (2,594)
Non-vested.................................. (60) (57) (214) (198)
------- ------- ------- -------
$ (6,020) $ (6,243) $ (2,773) (2,792)
======= ======= ======= =======
Projected benefit obligations.................... $ (6,634) $ (6,943) $ (2,773) $ (2,909)
Plan assets at fair value........................ 7,524 8,677 1,693 2,261
------- ------- ------- -------
Projected benefit obligations less than (in
excess of) plan assets......................... 890 1,733 (1,080) (648)
Unrecognized net loss............................ 371 (263) 328 (65)
Prior service cost not yet recognized in net
periodic pension cost.......................... 134 134 361 347
Unrecognized net (asset) obligation.............. (231) (208) 151 125
Adjustment required to recognize minimum
liability...................................... (840)
------- ------- ------- -------
PREPAID (ACCRUED) PENSION COST AT DECEMBER 31.... $ 1,164 $ 1,396 $ (1,080) $ (241)
======= ======= ======= =======
</TABLE>
The following assumptions were used in accounting for the defined benefit
plans:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Used to compute the projected benefit obligation as of
December 31:
Discount rate.............................................. 8.0% 8.0% 7.5%
Annual salary increase..................................... 3.0 3.0 3.0
Expected long-term rate of return on plan assets for the year
ended December 31.......................................... 10.0 10.0 9.5
</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
approximately $290,000 in 1994, $920,000 in 1995 and $690,000 in 1996.
H. LEASE OBLIGATIONS
The Company has capital lease commitments for buildings and equipment.
Future minimum
annual rentals are: 1997 -- $813,000, 1998 -- $791,000, 1999 -- $558,000,
2000 -- $323,000, 2001 -- $313,000, thereafter -- $239,000. Amount representing
interest is $625,000. 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 was approximately $77,000 in 1994,
$270,000 in 1995 and $609,000 in 1996. Future minimum lease commitments under
these agreements which have an original or existing term
F-17
<PAGE> 126
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
in excess of one year as of December 31, 1996 are as follows: 1997 -- $490,000;
1998 -- $328,000; 1999 -- $304,000; 2000 -- $244,000 and
thereafter -- $1,222,000.
I. INCOME TAXES
The provision for income taxes, except for the effect of the extraordinary
item, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $1,369 $ 907 $ (624)
State and local...................................... 174 235 129
Foreign.............................................. 74 932
------- ------- -------
1,543 1,216 437
Deferred:
Federal.............................................. 237 365 299
State and local...................................... 65 12 53
------- ------- -------
302 377 352
------- ------- -------
TOTAL INCOME TAXES..................................... $1,845 $1,593 $ 789
======= ======= =======
</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. 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 as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................................ $ 545
Reserve for severance costs.................................... $ 237
Accrued vacation............................................... 259 318
Accrued pension costs.......................................... 466
AMT credit carryforward........................................ 622
Other accruals................................................. 509 595
Other.......................................................... 302 352
------ ------
Total deferred tax assets........................................ 1,773 2,432
Deferred tax liabilities:
Tax over book depreciation and amortization.................... 2,659 4,090
Other.......................................................... 420
------ ------
Total deferred tax liabilities................................... 3,079 4,090
------ ------
NET DEFERRED TAX LIABILITIES..................................... $1,306 $1,658
====== ======
</TABLE>
F-18
<PAGE> 127
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
-------------------------
1994 1995 1996
---- ---- -----
<S> <C> <C> <C>
Income tax credit at federal statutory rate................. 34.0% 34.0% (34.0)%
State and local tax, net of federal tax benefit............. 3.0 5.7 3.9
Nondeductible goodwill amortization......................... 2.2 7.2 3.7
Adjustment for worldwide tax rates and other, net........... 3.1 9.0 26.4
---- ---- ----
Provision for income taxes.................................. 42.3% 55.9% 0%
==== ==== ====
</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.
K. RELATED PARTIES
In July 1995, the Company issued interest-bearing notes in the amount of $2
million to certain shareholders enabling the shareholders to repay outstanding
personal loans. 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 is as
follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------- -------------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............ $ 76,570 $ 8,073 $ 84,643 $ 104,622 $ 19,375 $ 123,997
Income from
operations......... 9,242 738 9,980 7,326 2,485 9,811
Net income (loss).... 481 281 762 (3,788) 710 (3,078)
Total assets......... 113,293 14,126 127,419 141,139 17,302 158,441
</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
F-19
<PAGE> 128
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
any, and interest with respect to the Senior Notes, and upon completion of the
exchange offer, the Exchange 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 and
December 31, 1996, consolidating condensed statements of income for the
years ended December 31, 1995 and 1996 and consolidating condensed
statements of cash flows for the years ended December 31, 1995 and 1996.
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 or Exchange 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> 129
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> 130
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.................. $ 24,683 $ 509 $ 582 $ $ 25,774
Accounts receivable, net................... 11,073 5,710 16,783
Inventories, net........................... 16,120 4,744 20,864
Deferred income taxes...................... 2,432 2,432
Other current assets....................... 440 495 935
-------- -------- -------- --------- --------
Total current assets................. 24,683 30,574 11,531 66,788
OTHER ASSETS:
Investment in subsidiaries................. 1,165 4,108 $ (5,273)
Inter-company advances, net................ 100,865 5,155 (106,020)
Property, plant and equipment.............. 38,394 5,748 44,142
Intangible assets.......................... 4,678 35,261 39,939
Other...................................... 2,103 5,446 23 7,572
-------- -------- -------- --------- --------
Total other assets................... 108,811 88,364 5,771 (111,293) 91,653
-------- -------- -------- --------- --------
Total assets................................. $133,494 $118,938 $ 17,302 $ (111,293) $158,441
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $ 5,010 $ 3,184 $ 8,194
Accrued compensation....................... 5,956 819 6,775
Other accrued expenses..................... $ 1,322 687 396 2,405
Current portion of long-term debt.......... 289 425 714
-------- -------- -------- --------- --------
Total current liabilities............ 1,322 11,942 4,824 18,088
LONG-TERM LIABILITIES:
Long-term debt............................. 126,382 1,283 804 128,469
Deferred income taxes...................... 3,786 304 4,090
Other...................................... 1,272 732 2,004
Inter-company advances, net................ 101,941 4,079 $ (106,020)
-------- -------- -------- --------- --------
Total long-term liabilities.......... 126,382 108,282 5,919 (106,020) 134,563
-------- -------- -------- --------- --------
Total liabilities.................... 127,704 120,224 10,743 (106,020) 152,651
-------- -------- -------- --------- --------
Detachable Stock Warrants, Subject to Put
Option..................................... 4,600 4,600
Shareholders' Equity (Deficit)............... 1,190 (1,286) 6,559 (5,273) 1,190
-------- -------- -------- --------- --------
Total Liabilities and Shareholders' Equity... $133,494 $118,938 $ 17,302 $ (111,293) $158,441
======== ======== ======== ========= ========
</TABLE>
F-22
<PAGE> 131
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-23
<PAGE> 132
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 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-24
<PAGE> 133
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
N. SUBSEQUENT EVENT
Effective January 2, 1997, the Company acquired all of the outstanding
capital stock of Hutchinson Foundry Products Company (Hutchinson) for (1) $10.0
million in cash, subject to adjustment, and (2) $1.5 million in 8.0% two-year
convertible notes and $500,000 in 8.0% three-year notes. The acquisition will be
accounted for under the purchase method of accounting, and the results of
operations of Hutchinson will be included in the results of operations of the
Company beginning in 1997. Hutchinson'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. Hutchinson's annual sales during 1996 were approximately
$8,620,000. Hutchinson is a Guarantor Subsidiary of the Senior Notes and, upon
completion of the exchange offer, will be a Guarantor of the Exchange Notes.
F-25
<PAGE> 134
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
The Hawk Group of Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Hawk
Group of Companies, Inc. and Subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, shareholders' 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, such consolidated financial statements present fairly, in
all material respects, the financial position of The Hawk Group of Companies,
Inc. and Subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 14, 1995
(April 10, 1995 as to Note 9)
F-26
<PAGE> 135
THE HAWK GROUP OF COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 271 $ 32
Investments......................................................... 32 31
Accounts receivable, less allowance for doubtful accounts of $232
and $229 in 1994 and 1993, respectively (Note 2)................. 4,336 3,753
Inventories (Notes 2 and 3)......................................... 4,534 3,671
Deferred income taxes (Note 6)...................................... 322 192
Other current assets................................................ 736 603
------- -------
Total current assets............................................. 10,231 8,282
Property, plant and equipment -- net (Notes 2 and 4).................. 5,548 5,627
Intangible and other assets (Note 5).................................. 19,062 20,016
------- -------
TOTAL ASSETS.......................................................... $34,841 $33,925
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 731 $ 769
Accrued incentive compensation...................................... 2,123 2,041
Accrued liabilities................................................. 1,619 1,227
Income taxes payable................................................ 95 404
Current portion of long-term debt (Note 2).......................... 9,539 7,550
------- -------
Total current liabilities........................................ 14,107 11,991
Long-term debt, Less current portion (Note 2)......................... 13,000 16,500
Deferred income taxes (Note 6)........................................ 2,568 2,057
Shareholders' equity:
10% preferred stock, $1,000 par value, 2,625 shares authorized,
issued and outstanding........................................... 2,625 2,625
Common stock, no par value, 12,000 shares authorized, 7,500 shares
outstanding and 18 treasury shares in both years................. 377 377
Accumulated earnings................................................ 2,164 375
------- -------
Total shareholders' equity....................................... 5,166 3,377
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $34,841 $33,925
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE> 136
THE HAWK GROUP OF COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Net revenues.......................................................... $32,840 $28,417
Cost of goods sold:
Material, labor and overhead........................................ 18,214 15,277
Incentive compensation.............................................. 944 739
Depreciation........................................................ 927 818
------- -------
Total cost of goods sold.............................................. 20,085 16,834
------- -------
Gross profit.......................................................... 12,755 11,583
Operating expenses:
Technical and selling............................................... 1,769 1,496
Administrative...................................................... 2,043 1,905
Incentive compensation.............................................. 1,244 1,284
Depreciation........................................................ 172 148
Amortization........................................................ 954 954
------- -------
Total operating expenses.............................................. 6,182 5,787
------- -------
Operating income...................................................... 6,573 5,796
Interest.............................................................. 3,017 2,654
------- -------
Income before income taxes and cumulative effect of change in
accounting principle................................................ 3,556 3,142
Income taxes (Note 6)................................................. 1,504 1,716
------- -------
Income before cumulative effect of change in accounting principle..... 2,052 1,426
Cumulative effect of change in accounting for income taxes (Note 6)... (284)
------- -------
NET INCOME............................................................ $ 2,052 $ 1,142
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-28
<PAGE> 137
THE HAWK GROUP OF COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED COMMON EARNINGS
STOCK STOCK (DEFICIT) TOTAL
--------- ------ ----------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1993..................... $ 2,625 $367 $ (504) $2,488
Net income for 1993............................ 1,142 1,142
Preferred stock dividends...................... (263) (263)
Sale of stock (200 shares)..................... 10 10
------ ---- ------ ------
Balance at December 31, 1993................... 2,625 377 375 3,377
Net income for 1994............................ 2,052 2,052
Preferred stock dividends...................... (263) (263)
------ ---- ------ ------
Balance at December 31, 1994................... $ 2,625 $377 $ 2,164 $5,166
====== ==== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE> 138
THE HAWK GROUP OF COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 2,052 $ 1,142
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 2,053 1,920
Deferred income taxes--noncurrent............................... 511 1,222
Changes in current assets and liabilities:
Accounts receivable............................................. (583) (352)
Inventories..................................................... (863) (844)
Deferred income taxes--current.................................. (130) (192)
Other current assets............................................ (133) (148)
Accounts payable and accrued liabilities........................ 436 88
Income taxes payable............................................ (309) 404
------- -------
Net cash provided by operating activities....................... 3,034 3,240
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES --
Capital expenditures............................................... (1,021) (586)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt........................................ (1,511) (2,407)
Preferred stock dividends paid..................................... (263) (263)
Proceeds from sale of common stock................................. 10
------- -------
Net cash provided by financing activities.......................... (1,774) (2,660)
------- -------
Net increase (decrease) in cash...................................... 239 (6)
Cash at beginning of year............................................ 32 38
------- -------
Cash at end of year.................................................. $ 271 $ 32
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-30
<PAGE> 139
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations -- The Hawk Group of Companies, Inc. (Company) is a leading
producer of the metallic friction materials used in commercial and general
aviation brake assemblies for both the original equipment and replacement
markets. Aviation products customers accounted for approximately 45% and 51% of
consolidated 1994 and 1993 revenues, respectively, and 61% and 49% of December
31, 1994 and 1993 accounts receivable, respectively.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany accounts, transactions and profits are eliminated in
consolidation.
Investments -- The Company records investments at cost, which approximates
market value.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost less accumulated depreciation. Expenditures for maintenance, repairs and
minor replacements and betterments that do not materially prolong the useful
lives of the assets are expensed when incurred.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets. The useful lives range from 5 to 31.5
years. The composite method is used for the plant and equipment acquired as a
whole on March 14, 1989, and the unit method is used for individual assets
subsequently capitalized. The composite method of depreciation recognizes no
gain or loss on normal property dispositions because the property cost is
credited to the property accounts and charged to the accumulated depreciation
accounts. Any proceeds are credited to the accumulated depreciation accounts.
However, if there are any abnormal dispositions of property, the cost and
related depreciation amounts are removed from the accounts and any profit or
loss is reflected in income. The unit method of depreciation reflects any gain
or loss on property dispositions in income.
Intangible and Other Assets -- Goodwill is amortized using the
straight-line method over a period of 40 years. Other intangibles, principally
purchased technology, are amortized using the straight-line method over periods
of 3 to 41 years.
2. DEBT
The Company and its subsidiaries have a Secured Credit Agreement
(Agreement) which provides for borrowings totalling $30,250. The Agreement
provides for three borrowing facilities, each of which is secured by the
Company's accounts receivable, inventories and property, plant and equipment in
addition to the common stock of its subsidiaries. The Company made cash payments
for interest of $2,547 and $2,916 for 1994 and 1993, respectively.
F-31
<PAGE> 140
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the Agreement consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Senior Subordinated Note...................................... $ 9,500 $ 9,500
Revolving Step Down Term Loan................................. 9,000 9,000
Working Capital Loan.......................................... 4,039 5,550
------- -------
Total............................................... 22,539 24,050
Less current portion.......................................... 9,539 7,550
------- -------
Long-term debt................................................ $13,000 $16,500
======= =======
</TABLE>
Senior Subordinated Note -- The Senior Subordinated Note is due in one
installment of $9,500 on December 31, 1996. Interest is payable quarterly at a
fixed rate of 14.393%.
Revolving Step Down Term Loan -- Interest on the Revolving Step Down Term
Loan is payable monthly at the prime rate plus 1.75% (10.25% at December 31,
1994). Maturities due each year are: 1995 -- $5,500 and 1996 -- $3,500.
Working Capital Loan -- The Working Capital Loan agreement makes available to
the Company a credit facility totalling $10,000. The Company pays a commitment
fee of one-half percent per annum on the unused portion. Interest is payable
monthly at the prime rate plus 1.75% (10.25% at December 31, 1994). The Working
Capital Loan matures on December 31, 1995. The Company has the ability, with the
consent of the lender, to extend this loan for one additional one year period.
It is management's intent to exercise this option.
Covenants -- The Agreement contains certain financial ratio and covenant
requirements such as minimum adjusted net worth and working capital, as defined.
Under the most restrictive covenants, the Company is required to maintain
minimum interest coverage, cash flow and total liabilities ratios.
Warrants -- In connection with the Agreement, the Company issued warrants
to the lender for the purchase of 2,500 shares of its Common Stock at a per
share price of $50. On December 31, 1990, the Company borrowed $1,250 under its
working capital facility and used the proceeds to repurchase warrants for 500
shares. The remaining warrants to purchase 2,000 shares are exercisable through
March 13, 1999, and are subject to certain antidilution adjustments. The Company
has the option to repurchase these warrants at stipulated prices.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
Raw materials................................................... $2,388 $1,055
In process and finished goods................................... 2,146 2,616
------ ------
$4,534 $3,671
====== ======
</TABLE>
F-32
<PAGE> 141
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Land.......................................................... $ 440 $ 440
Buildings..................................................... 2,808 2,802
Machinery and equipment....................................... 6,667 5,723
Furniture and fixtures........................................ 669 590
Construction in progress...................................... 75 75
------- -------
10,659 9,630
Accumulated depreciation...................................... (5,111) (4,003)
------- -------
Property, plant and equipment -- net.......................... $ 5,548 $ 5,627
======= =======
</TABLE>
The Company leases its corporate headquarters together with an affiliate of
a shareholder of the Company. The Company's allocation of the annual rent
approximates $47. The lease expires in 1999. The expenses of maintaining this
office are also shared with the affiliate. Rental expense included in the
results of operations was $49 and $52 for 1994 and 1993, respectively.
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Product certifications........................................ $20,820 $20,820
Goodwill...................................................... 2,366 2,366
Debt issuance costs........................................... 750 750
Other......................................................... 2,585 2,585
------- -------
26,521 26,521
Accumulated amortization...................................... (7,459) (6,505)
------- -------
$19,062 $20,016
------- -------
</TABLE>
6. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach for recording income taxes rather than
the deferred method as prescribed by previous accounting standards. The
cumulative effect on prior years of this change in accounting principles
decreased net income by $284, and is reported separately in the consolidated
statement of operations for the year ended December 31, 1993. As permitted under
SFAS No. 109, the Company elected not to restate the financial statements of any
prior years.
F-33
<PAGE> 142
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes. The components of the net deferred tax asset (liability) at December
31, 1994 consist of the following:
<TABLE>
<CAPTION>
FEDERAL STATE LOCAL TOTAL
------- ----- ----- -------
<S> <C> <C> <C> <C>
Assets................................................ $ 268 $ 43 $ 11 $ 322
Liabilities........................................... (2,183) (353) (32) (2,568)
------- ----- ---- -------
Total....................................... $(1,915) $(310) $ (21) $(2,246)
======= ===== ==== =======
</TABLE>
Deferred tax assets result principally from provisions and accruals which
are deductible in future periods and uniform capitalization relating to
inventory costing. Deferred tax liabilities result principally from the
difference in amortization methods used for intangibles for tax purposes
compared to financial reporting purposes and the use of accelerated depreciation
methods for tax purposes compared to the straight-line method for financial
reporting purposes for property, plant and equipment.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
CURRENT:
Federal....................................................... $1,026 $ 769
State......................................................... 82 189
City.......................................................... 15 11
------ ------
Total................................................. 1,123 969
------ ------
DEFERRED:
Federal....................................................... 316 672
State......................................................... 55 63
City.......................................................... 10 12
------ ------
Total................................................. 381 747
------ ------
Total income taxes.............................................. $1,504 $1,716
====== ======
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
----- -----
<S> <C> <C>
Income tax at federal statutory rate............................... 34.0% 34.0%
State and local tax, net........................................... 3.0 5.8
Nondeductible goodwill amortization and other...................... 2.2 6.5
Federal tax audit settlement....................................... 5.6
Other, net......................................................... 3.1 2.7
----- -----
Total income taxes................................................. 42.3% 54.6%
===== =====
</TABLE>
The Company made cash payments for income taxes of $1,482 and $600 in 1994
and 1993, respectively.
F-34
<PAGE> 143
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT BENEFITS
The Company's subsidiaries sponsor a non-contributory, defined benefit
pension plan covering substantially all employees. The plan provides
participating employees with retirement benefits in accordance with benefit
provision formulas which are based on years of service and/or compensation. The
Company funds pension costs in accordance with the plan and legal requirements.
Pension cost for the plan is based on the projected unit credit actuarial
cost method using an assumed 8.0% discount rate for 1994 compared to 7.5% for
1993, 10% expected long-term rate of return on assets and 3% rate of increase in
compensation levels.
Components of net periodic pension cost of this plan were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
----- -----
<S> <C> <C>
Service cost...................................................... $ 246 $ 207
Interest cost..................................................... 421 411
Actual return on plan assets...................................... (165) (624)
Net amortization and deferral..................................... (293) 210
----- -----
$ 209 $ 204
===== =====
</TABLE>
The funded status of the plan and the amounts recognized in the Company's
balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation..................................... $5,004 $4,660
Unvested benefit obligation................................... 93 460
------ ------
Accumulated benefit obligation................................ 5,097 5,120
Effect of projected future salary increases................... 469 496
------ ------
Projected benefit obligation.................................. 5,566 5,616
Plan assets at fair market value................................ 5,193 5,093
------ ------
Projected benefit obligation in excess of plan assets........... (373) (523)
Unrecognized net loss........................................... 931 990
Unamortized net obligation...................................... 134 134
------ ------
Prepaid pension cost............................................ $ 692 $ 601
====== ======
</TABLE>
In connection with a collective bargaining agreement, the Company
contributes to a pension plan based on hours worked by the covered employees.
Pension cost for this plan was $20 and $36 in 1994 and 1993, respectively.
The Company sponsors a defined contribution pension plan which covers a
majority of its employees. The plan provides for voluntary employee
contributions and elective salary deferral options with a discretionary Company
contribution. Expenses related to this plan were $131 and $108 in 1994 and 1993,
respectively.
8. COMMON STOCK
During 1993, the Company sold 200 shares of common stock at $50 per share,
thus increasing the number of common shares outstanding and reducing treasury
shares.
F-35
<PAGE> 144
THE HAWK GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
On April 10, 1995, the Company entered into a definitive agreement with MLX
Corp., a publicly-held company, to purchase all of the capital stock of its
subsidiary S.K. Wellman Limited, Inc. (with revenues of approximately $60,000)
for a purchase price of approximately $60,000. The purchase will be financed
principally with proceeds from an umbrella financing arrangement which will also
be used to repay the Company's current indebtedness and any related costs and
settle any remaining obligations for the warrants the lender owns. The Company
will account for the transaction as a purchase if consummated.
F-36
<PAGE> 145
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Helsel, Inc.
We have audited the accompanying balance sheet of Helsel, Inc. as of
December 31, 1994, and the related statements of income, shareholders' equity
and cash flows for the period from July 1, 1994 through December 31, 1994. 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 Helsel, Inc. at December 31,
1994, and the results of its operations and its cash flows for the period from
July 1, 1994 through December 31, 1994 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
February 3, 1995
F-37
<PAGE> 146
HELSEL, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 427,091
Accounts receivable.......................................................... 2,021,147
Inventories.................................................................. 1,336,894
Deferred income taxes........................................................ 115,000
Prepaid expenses............................................................. 27,198
----------
Total current assets........................................................... 3,927,330
Property, plant and equipment:
Land......................................................................... 68,778
Building..................................................................... 716,131
Manufacturing equipment...................................................... 4,014,377
Office equipment............................................................. 206,434
----------
5,005,720
Less accumulated depreciation................................................ 387,488
----------
4,618,232
Deferred expenses, less accumulated amortization of $19,409.................... 258,788
----------
TOTAL ASSETS................................................................... $ 8,804,350
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................... $ 1,279,410
Accounts payable............................................................. 997,691
Accrued payroll and payroll taxes............................................ 837,420
Accrued income taxes......................................................... 50,000
Current portion of long-term debt............................................ 963,212
----------
Total current liabilities...................................................... 4,127,733
Long-term debt, less current portion........................................... 3,224,027
Deferred income taxes.......................................................... 36,000
Shareholders' equity:
Preferred stock--par value $1,000 with 9% cumulative dividend;
702 authorized, issued and outstanding shares............................. 702,000
Common stock--par value $3 per share; 100,000 shares authorized, issued and
outstanding............................................................... 300,000
Retained earnings............................................................ 414,590
----------
Total shareholders' equity..................................................... 1,416,590
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 8,804,350
==========
</TABLE>
See notes to financial statements.
F-38
<PAGE> 147
HELSEL, INC.
STATEMENT OF INCOME
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C>
Net sales...................................................................... $ 8,554,937
Cost of goods sold............................................................. 6,685,804
----------
Gross margin................................................................... 1,869,133
Selling, general and administrative expenses................................... 887,443
Research and development costs................................................. 178,312
----------
Operating income............................................................... 803,378
Other income (expenses):
Tool sales................................................................... 221,365
Miscellaneous income......................................................... 12,921
Interest expense............................................................. (250,484)
----------
(16,198)
Income before income taxes..................................................... 787,180
Income tax expense -- Note D................................................... 341,000
----------
Net income..................................................................... $ 446,180
==========
</TABLE>
See notes to financial statements.
F-39
<PAGE> 148
HELSEL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Balance at July 1, 1994.................. $ 0
Sale of stock............................ $ 702,000 $300,000 $1,002,000
Net income............................... $446,180 446,180
Dividends on preferred stock............. (31,590) (31,590)
-------- -------- -------- ----------
Balance at December 31, 1994............. $ 702,000 $300,000 $414,590 $1,416,590
======== ======== ======== ==========
</TABLE>
See notes to financial statements.
F-40
<PAGE> 149
HELSEL, INC.
STATEMENT OF CASH FLOW
PERIOD FROM JULY 1, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 446,180
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 413,146
Deferred income taxes........................................................ (79,000)
Loss on sale of equipment.................................................... 6,636
Changes in operating assets and liabilities, net of effect of acquired asset
and assumed liabilities:
Accounts receivable..................................................... 132,149
Inventories............................................................. 483,224
Other assets............................................................ 169,380
Accounts payable........................................................ 272,494
Other liabilities....................................................... (26,019)
----------
Net cash provided by operating activities...................................... 1,818,190
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certain assets and assumption of certain liabilities of Helco,
Inc.......................................................................... (4,626,932)
Purchase of property and equipment............................................. (850,517)
----------
Net cash used in investing activities.......................................... (5,477,449)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit............................................... 1,279,410
Proceeds from long-term debt................................................... 3,880,000
Principal payments on long-term debt........................................... (2,043,470)
Proceeds from sale of stock.................................................... 1,002,000
Dividends paid................................................................. (31,590)
----------
Net cash provided by financing activities...................................... 4,086,350
----------
CASH AT END OF PERIOD.......................................................... $ 427,091
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period from July 1, 1994 through December 31, 1994 for:
Interest..................................................................... $ 195,747
==========
Income taxes................................................................. $ 370,000
==========
RECONCILIATION OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
Fair value of assets acquired.................................................. $ 8,615,284
Liabilities assumed............................................................ (3,488,352)
Subordinated note payable issued for acquisition of Helco, Inc................. (500,000)
----------
CASH PAID FOR ACQUISITION...................................................... $ 4,626,932
==========
</TABLE>
See notes to financial statements.
F-41
<PAGE> 150
HELSEL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
A. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Helsel, Inc. (the Company) acquired substantially all of the net assets of
Helco Inc. on July 1, 1994, for a total purchase price of approximately $8.6
million which includes liabilities assumed, proceeds from long-term debt, the
sale of preferred and common stock and a note payable to the seller. 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 and short-term debt and the sale of $702,000 of
preferred stock and $300,000 of common stock.
During the six month's ended December 31, 1994, the Company had sales
approximating $5,730,000 to four customers. At December 31, 1994 amounts due
from these customers, included in accounts receivable, was $1,386,000.
The company manufactures, markets and distributes powdered metal parts for
its customers located primarily throughout the midwestern United States.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
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 assets using
accelerated methods.
Deferred Expenses
The Company has capitalized certain costs related to the debt incurred as a
result of the acquisition and is amortizing those costs over the life of the
debt.
B. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<S> <C>
Raw materials.................................................. $ 266,524
Work-in process................................................ 496,821
Finished goods................................................. 573,549
----------
$ 1,336,894
==========
</TABLE>
F-42
<PAGE> 151
HELSEL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. DEBT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<S> <C>
Term note, payable in four quarterly installments of $207,500
beginning October 1, 1994, and 23 quarterly installments of
$118,750 beginning August 1, 1995, interest is payable
monthly at the bank's prime lending rate (8.50% at December
31, 1994) plus 1.25% through June 30, 1995 and plus .75%
thereafter................................................... $ 3,472,500
Subordinated note, payable to the owner of Helco, Inc. in four
annual installments of $125,000 beginning August 1, 1996,
interest is payable quarterly at the prime lending rate per
the Wall Street Journal (8.25% at December 31, 1994) plus
1%........................................................... 500,000
Subordinated note, payable in 12 annual installments beginning
October 1, 1995, interest payable quarterly at 9%............ 200,000
Other.......................................................... 14,739
----------
4,187,239
Less current portion........................................... 963,212
----------
$ 3,224,027
==========
</TABLE>
The future maturities of long-term debt outstanding are as follows:
$963,212 in 1995; $703,408 in 1996; $603,616 in 1997; $603,836 in 1998; $600,667
in 1999, and $712,500 thereafter.
The Company has a revolving line of credit with a bank callable after June
30, 1997 with a borrowing capacity of $2.5 million, bearing interest at the
bank's prime lending rate (8.5% at December 31, 1994) plus .5%.
An additional line of credit for capital expenditures is available to the
Company through June 30, 1995 with a borrowing capacity of $700,000 bearing
interest at the bank's prime rate plus 1%. No amount was outstanding on this
line at December 31, 1994.
The term loan and credit line are collateralized by substantially all
tangible assets of the Company.
D. INCOME TAXES
Income taxes are summarized as follows:
<TABLE>
<S> <C>
Current:
Federal........................................................ $ 343,000
State.......................................................... 77,000
--------
420,000
Deferred......................................................... (79,000)
--------
$ 341,000
========
</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. At December 31, 1994 the
Company had deferred tax liabilities of $36,000 resulting from accelerated
depreciation methods and deferred tax assets of $115,000 primarily related to
accrued pension and salary expense.
F-43
<PAGE> 152
HELSEL, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The provision for income taxes differs 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......................................... 6.5
Other, net....................................................... 2.9
-----
43.4%
=====
</TABLE>
E. EMPLOYEE BENEFIT PLANS
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. Contributions to the plan totaled $144,157
during the six months ended December 31, 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. The Company contributed $15,157 to this plan
during the six months ended December 31, 1994.
F-44
<PAGE> 153
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-45
<PAGE> 154
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-46
<PAGE> 155
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-47
<PAGE> 156
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-48
<PAGE> 157
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-49
<PAGE> 158
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-50
<PAGE> 159
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-51
<PAGE> 160
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-52
<PAGE> 161
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-53
<PAGE> 162
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
======= =======
</TABLE>
F-54
<PAGE> 163
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
------- -------
<S> <C> <C>
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-55
<PAGE> 164
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS
---------------------- ENDED
1993 1994 JUNE 30, 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-56
<PAGE> 165
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-57
<PAGE> 166
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS
---------------------- ENDED
1993 1994 JUNE 30, 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-58
<PAGE> 167
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-59
<PAGE> 168
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-60
<PAGE> 169
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-61
<PAGE> 170
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-62
<PAGE> 171
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 EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED 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-63
<PAGE> 172
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
DECEMBER 31 SIX MONTHS
------------------ ENDED
1993 1994 JUNE 30, 1995
------ ------ -------------
<S> <C> <C> <C>
Federal:
Current......................................... $1,810 $1,298 $ 1,016
Deferred........................................ (388) 191 0
------ ------ ------
1,422 1,489 1,016
Foreign........................................... 219 699 424
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
DECEMBER 31 SIX MONTHS
---------------- ENDED
1993 1994 JUNE 30, 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
F-64
<PAGE> 173
S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax 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
DECEMBER 31 SIX MONTHS
-------------- ENDED
1993 1994 JUNE 30, 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-65
<PAGE> 174
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-66
<PAGE> 175
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-67
<PAGE> 176
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-68
<PAGE> 177
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-69
<PAGE> 178
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-70
<PAGE> 179
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-71
<PAGE> 180
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-72
<PAGE> 181
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 COMBINED
CUSTOMERS ACCOUNTS PERCENT OF
WITH RECEIVABLE TOTAL
SIGNIFICANT OF COMPANY
ACCOUNTS 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-73
<PAGE> 182
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-74
<PAGE> 183
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-75
<PAGE> 184
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 COMMON STOCK
REDEEMABLE PURCHASE
PREFERRED 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>
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>
F-76
<PAGE> 185
HOUGHTON ACQUISITION CORPORATION d/b/a
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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>
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
F-77
<PAGE> 186
HOUGHTON ACQUISITION CORPORATION d/b/a
HUTCHINSON FOUNDRY PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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-78
<PAGE> 187
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 188
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES
COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION
IS FURNISHED OR THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................... 2
Summary.................................... 3
Risk Factors............................... 12
The Transactions........................... 19
The Exchange Offer......................... 21
Use of Proceeds............................ 29
Capitalization............................. 30
Unaudited Pro Forma Consolidated Financial
Information.............................. 31
Management's Discussion and Analysis of Pro
Forma Results of Operations and Financial
Condition................................ 34
Selected Consolidated Financial Data....... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 39
Business................................... 45
Management................................. 58
Principal Stockholders..................... 63
Certain Transactions....................... 68
Description of Certain Indebtedness........ 71
Description of the Exchange Notes.......... 72
Certain U.S. Federal Income Tax
Consequences............................. 98
Registration Rights........................ 102
Plan of Distribution....................... 105
Legal Matters.............................. 105
Experts.................................... 106
Change in Independent Auditors............. 107
Index to Financial Statements.............. F-1
</TABLE>
UNTIL JUNE 18, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
======================================================
======================================================
----------------
PROSPECTUS
----------------
$100,000,000
LOGO
HAWK CORPORATION
OFFER TO EXCHANGE
SERIES B
10 1/4% SENIOR NOTES DUE 2003
FOR ALL OUTSTANDING
10 1/4% SENIOR NOTES DUE 2003
MARCH 20, 1997
======================================================
