-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AloAqraxy7wGu4Rs9BBKtuJQg698GZ1ovmHWXLufI0BiQ0IaBEbIK6rvPzstVeCY w1AtUuni6wlh/bZKlEDT6w== 0000950152-97-008908.txt : 19971231 0000950152-97-008908.hdr.sgml : 19971231 ACCESSION NUMBER: 0000950152-97-008908 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971230 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWK CORP CENTRAL INDEX KEY: 0000849240 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341608156 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-40535 FILM NUMBER: 97747046 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQUARE, SUITE 30-5000 STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: (216) 861-3553 MAIL ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114-2301 FORMER COMPANY: FORMER CONFORMED NAME: HAWK GROUP OF COMPANIES INC DATE OF NAME CHANGE: 19950417 S-1/A 1 HAWK CORPORATION FORM S-1/AMENDMENT NO. 2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1997 REGISTRATION NO. 333-40535 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HAWK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1608156 3499 - -------------------------------- -------------------------------- -------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION (PRIMARY STANDARD INDUSTRIAL INCORPORATION OR ORGANIZATION) NO.) CLASSIFICATION CODE NO.)
200 PUBLIC SQUARE, SUITE 30-5000 CLEVELAND, OHIO 44114 (216) 861-3553 - -------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) NORMAN C. HARBERT CHAIRMAN OF THE BOARD 200 PUBLIC SQUARE, SUITE 30-5000 CLEVELAND, OHIO 44114 (216) 861-3553 - -------------------------------------------------------------------------------- (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) With copies to: MARC C. KRANTZ, ESQ. GLENN E. MORRICAL, ESQ. KOHRMAN JACKSON & KRANTZ P.L.L. ARTER & HADDEN LLP ONE CLEVELAND CENTER, 20TH FLOOR 1100 HUNTINGTON BUILDING 1375 EAST NINTH STREET 925 EUCLID AVENUE CLEVELAND, OHIO 44114 CLEVELAND, OHIO 44115 (216) 736-7204 (216) 696-1100
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] _________________ ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 30, 1997 SHARES LOGO HAWK CORPORATION CLASS A COMMON STOCK ($.01 PAR VALUE) Of the shares of Class A Common Stock offered hereby (the "Offering"), shares are being sold by Hawk Corporation ("Hawk" or the "Company") and shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders except that certain of the Selling Stockholders will use a portion of the proceeds to prepay in part certain notes outstanding to the Company. See "Principal and Selling Stockholders" and "Certain Transactions -- Transactions Concurrent with the Offering." Upon completion of the Offering, certain directors and executive officers of the Company will beneficially own all of the outstanding shares of Series D Preferred Stock, par value $.01 per share, of the Company (the "Series D Preferred Stock"). For as long as certain conditions are met, the holders of the Series D Preferred Stock will be entitled to elect a majority of the members of the Board of Directors of the Company and to vote as a separate class on fundamental corporate transactions. Accordingly, the holders of the Series D Preferred Stock may thereby control and direct the policies of the Board of Directors and, in general, determine the outcome of various matters submitted to the stockholders for approval, including fundamental corporate transactions. See "Risk Factors -- Effective Voting Control by Existing Stockholders" and "Description of Capital Stock." Prior to the Offering, there has been no public market for the Company's Class A Common Stock. It is currently expected that the public offering price will be between $ and $ per share. See "Underwriting" for information relating to the method of determining the public offering price. The Company has applied to have the Class A Common Stock listed on the New York Stock Exchange under the symbol "HWK." THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================ UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------ Per Share............... $ $ $ $ - ------------------------------------------------------------------------------------------------ Total(3)................ $ $ $ $ ================================================================================================
(1) See "Underwriting" for indemnification arrangements. (2) Before deducting estimated expenses of $ payable by the Company. (3) Certain of the Selling Stockholders have granted to the Underwriters a 30-day option to purchase up to an aggregate of additional shares of Class A Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Class A Common Stock are being offered by the several Underwriters named herein, subject to prior sale and acceptance by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that Class A Common Stock will be available for delivery on or about , 1998 at the offices of Schroder & Co. Inc., New York, New York. SCHRODER & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. , 1998 3 LOGO THE COMPANY DESIGNS, ENGINEERS, MANUFACTURES AND MARKETS SPECIALIZED COMPONENTS, PRINCIPALLY MADE FROM POWDER METALS, USED IN A WIDE VARIETY OF AEROSPACE, INDUSTRIAL AND COMMERCIAL APPLICATIONS. [PHOTOGRAPH OF FRICTION PRODUCTS] Friction products for brakes, clutches and transmissions. [PHOTOGRAPH OF POWDER METAL COMPONENTS] Powder metal components for a variety of industrial applications. [PHOTOGRAPH OF DIE-CAST ALUMINUM ROTORS] Die-cast aluminum rotors for small electric motors. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK INCLUDING OVER-ALLOTMENTS, STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Hawk is a holding company, the principal assets of which consist of the capital stock of its manufacturing subsidiaries, Friction Products Co. ("FPC"), S.K. Wellman Corp. ("SKW"), Helsel, Inc. ("Helsel"), Logan Metal Stampings, Inc. ("Logan"), Hutchinson Products Corporation ("Hutchinson") and Sinterloy Corporation ("Sinterloy"). Unless otherwise indicated, the information in this Prospectus (1) reflects a -for-one split of each share of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and Class B Non-Voting Common Stock, par value $.01 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock") prior to the Offering, (2) assumes the Company's replacement of its existing senior revolving credit facility with a new $50.0 million unsecured revolving credit facility (the "New Revolving Credit Facility"), the Company's entry into a new $35.0 million five year unsecured term loan facility (the "New Term Loan Facility") and the payment in full, together with accrued interest thereon of the Company's $30.0 aggregate principal amount of 12% senior subordinated notes (the "Senior Subordinated Note Redemption") concurrently with the closing of the Offering, (3) assumes completion of the Preferred Stock Redemption, as described in this Prospectus, concurrently with the closing of the Offering, (4) assumes the Company's redemption of $35.0 million of its 10 1/4% Senior Notes due 2003 (the "Senior Note Redemption") as soon as practicable after the closing of the Offering, and (5) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY GENERAL Hawk designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The Company is a leading worldwide supplier of friction products for brakes, clutches and transmissions used in aerospace, industrial and specialty applications. Friction products represented 68.9% of Company sales in the first nine months of 1997. Hawk is also a leading supplier of powder metal components for industrial applications, including pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings. In addition, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. Hawk is the largest independent supplier of original equipment and replacement friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The Company is also the largest supplier of friction materials to the general aviation (non-commercial, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. The Company believes that it is a leading supplier of friction materials to manufacturers of construction and agricultural equipment and truck clutches, including Caterpillar, John Deere, New Holland and Eaton. In addition, the Company is a major supplier of friction products for use in specialty applications, such as brakes for Harley-Davidson motorcycles, AM General Humvees and Bombardier, Polaris and Arctco ("Arctic Cat") snowmobiles. The Company's powder metal components are used primarily in industrial applications, often as lower cost replacements for parts manufactured by traditional forging, casting or stamping technologies. The Company targets three areas of the powder metal component marketplace: high precision components that are used in fluid power applications requiring tight tolerances; large structural powder metal parts used in construction, agricultural and truck applications; and smaller, high volume parts for which the Company can utilize its efficient pressing and sintering capabilities. The Company is also the largest independent U.S. manufacturer of die-cast aluminum rotors for use in subfractional (less than 1/20 horsepower) electric motors. 3 5 The Company believes that its diverse customer base and extensive sales to the aerospace and industrial aftermarkets reduce its exposure to economic fluctuations. The Company estimates that aftermarket sales of friction products have comprised approximately 50% of the Company's net friction product sales in recent years. The Company also believes that its principal tradenames are well-known in the domestic and international marketplace and are associated with quality and extensive customer support, including specialized product engineering and strong aftermarket service. Since its formation in 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base. From 1991 through the 12 month period ended September 30, 1997, the Company's net sales and income from operations increased at a compound annual rate of 38.3% and 35.5%, respectively. The Company reported a loss before extraordinary item of $1.9 million in 1996, and expects to incur a net loss, after extraordinary charges, in the first quarter of 1998 as a result of the incurrence of non-recurring extraordinary charges of $3.6 million in prepayment penalties ($2.2 million net after tax) and $1.9 million as a result of the write-off of previously capitalized deferred financing costs ($1.1 million net after tax), each arising from the Senior Note Redemption. For the first nine months of 1997, the Company's net sales and income from operations (before non-recurring costs in 1996 of $3.7 million for plant consolidation expenses) increased 24.2% and 55.8%, respectively, compared to the corresponding period in 1996. Since 1994, sales growth has been primarily driven by the acquisitions of Helsel, SKW and Hutchinson. These acquisitions tripled the net sales of the Company and, because the acquisitions were financed primarily with indebtedness, have caused the Company to become highly leveraged. As a result, the Company's interest expense grew at a compound annual rate of 103.5% from $3.3 million in 1994 to $13.5 million in 1996 pro forma for all acquisitions. The Company's net sales, pro forma for all acquisitions, during the period from 1991 through the 12 month period ended September 30, 1997 grew internally at a compound annual rate of 9.7%. BUSINESS STRATEGY The Company's business strategy includes the following principal elements: - Focus on High-Margin, Specialty Applications. The Company operates primarily in aerospace, industrial and commercial markets that require sophisticated engineering and production techniques. In developing new applications, as well as in evaluating acquisitions, the Company seeks to compete in markets requiring such engineering expertise and technical capability, rather than in markets in which the primary competitive factor is price. The Company believes margins for its products in these markets are higher than in other manufacturing markets that use standardized products. The Company's gross margins in 1996 and the first nine months of 1997 were 25.9% and 28.7%, respectively. - New Product Introduction. A key part of the Company's strategy is the introduction of new products which incorporate improved performance characteristics or reduced costs in response to customer needs. Because friction products are the consumable, or wear, component of brake, clutch and transmission systems, the introduction of new friction products in conjunction with a new system provides the Company with the opportunity to supply the aftermarket for the life of the system. For example, the ability to service the aftermarket for a particular aircraft braking system will likely provide the Company with a stable market for its friction products for the life of an aircraft, which can be 30 years or more. The Company also seeks to grow by applying its existing products and technologies to new specialized applications where its products have a performance or technological advantage. For example, the Company recently developed a powder metal pump element for a customer's power steering unit that improved pumping efficiency and dependability while reducing noise and cost. - Pursuit of Strategic Acquisitions. Many of the markets in which the Company competes are fragmented, providing the Company with attractive acquisition opportunities. The Company will continue to seek to acquire complementary businesses with leading market positions that will 4 6 enable it to expand its product offerings, technical capabilities and customer base. Historically, the Company has been able to achieve significant cost reductions through the integration of its acquisitions. For example, since the acquisition of SKW in 1995, the Company has consolidated SKW's headquarters facility and one of SKW's two U.S. manufacturing facilities into its existing facilities, resulting in $5.4 million of annualized cost savings. - Expanding International Sales. To take advantage of worldwide growth in its end user markets, the Company expanded its international presence through the acquisition of SKW in 1995, which resulted in the addition of manufacturing facilities in Italy and Canada and a worldwide distribution network. The Company continues to expand its European operations to meet strong demand in established markets throughout Europe. The Company also believes that further opportunities to expand sales exist in emerging economies. Sales from the Company's international facilities have grown from $15.7 million in 1995 to $20.3 million for the 12 month period ended September 30, 1997. - Leveraging Customer Relationships. The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company believes that its commitment to quality, service and just-in-time delivery enables it to build and maintain strong and stable customer relationships. The Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years. The Company believes that strong relationships with its customers provide it with significant competitive advantages in obtaining and securing new business opportunities. ------------------------ Unless the context otherwise requires, the terms "Company" and "Hawk" as used in this Prospectus refer to Hawk Corporation, a Delaware corporation, its consolidated subsidiaries and its predecessors by merger. The Company's principal executive offices are located at 200 Public Square, Suite 30-5000, Cleveland, Ohio 44114, and its telephone number is (216) 861-3553. Hawk has applied for the registration of the Wellman Friction Products trademark. Velvetouch(R), Fibertuff(R), Feramic(R),Velvetouch Feramic(R), Velvetouch Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are registered trademarks of the Company and Hawk Brake is a tradename of the Company. Trademarks and tradenames of corporations other than the Company are also referred to in this Prospectus. 5 7 THE OFFERING Class A Common Stock offered: By the Company............................. shares(1) By the Selling Stockholders................ shares(1)(2) Total.............................. shares(1) Class A Common Stock outstanding after the Offering................................... shares(1)(2)(3) Class B Common Stock outstanding after the Offering................................... 0 shares Total Common Stock outstanding after the Offering................................... shares(1)(2)(3) Use of proceeds.............................. To effect the Senior Subordinated Note Redemption, to effect the Senior Note Redemption, to effect the Preferred Stock Redemption and for working capital and general corporate purposes.(4) Proposed NYSE symbol......................... HWK
- --------------- (1) Does not include shares that may be sold by certain of the Selling Stockholders pursuant to the Underwriters' over-allotment option. See "Principal and Selling Stockholders" and "Underwriting." (2) The Company will not receive any proceeds from the sale of Class A Common Stock by the Selling Stockholders except that certain of the Selling Stockholders will use a portion of the proceeds to prepay in part certain notes outstanding to the Company. See "Use of Proceeds" and "Certain Transactions -- Transactions Concurrent with the Offering." (3) Does not include 700,000 shares of Class A Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares will be reserved for options to be outstanding as of the closing of the Offering), or shares of Class A Common Stock, based on an assumed public offering price of $ per share, issuable upon conversion of 8.0% two-year notes that were issued by the Company in connection with the acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal balance of the notes is convertible at the option of the holders thereof into shares of Class A Common Stock at the public offering price. (4) Certain of the shares to be redeemed in the Preferred Stock Redemption are owned by directors and executive officers of the Company. See "Use of Proceeds" and "Certain Transactions -- Transactions Concurrent with the Offering." 6 8 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA (in thousands, except per share data)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- -------------------------------------- 1994 1995 1996 1996 1997 -------- -------- ------------------------- -------- ------------------------- ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) -------- ------------ -------- ------------ INCOME STATEMENT DATA: Net sales...................... $ 41,395 $ 84,643 $123,997 $144,215 $ 93,672 $116,362 $124,985 Gross profit................... 14,624 23,479 32,113 39,133 24,649 33,422 37,374 Plant consolidation expense(2)................... -- -- 4,028 4,028 3,749 50 50 Income from operations......... 7,376 9,980 9,811 14,257 6,880 16,556 19,617 Interest expense............... 3,267 7,323 10,648 13,527 7,321 10,639 11,039 Extraordinary item(3).......... -- -- (1,196) (1,196) -- -- -- Net income (loss).............. 2,287 762 (3,078) (2,207) (1,359) 3,261 4,894 Net income (loss) per share applicable to common stockholders................. $ $ $ $ $ $ $ Number of shares used to compute per share data....... AS ADJUSTED FOR THE OFFERING(4): Interest expense............... $ $ Net income (loss).............. Net income (loss) per share applicable to common stockholders................. Number of shares used to compute per share data....... OTHER DATA: Depreciation and amortization................. $ 2,466 $ 5,527 $ 8,418 $ 9,967 $ 6,688 $ 7,166 $ 7,669 Capital expenditures (including capital leases).............. 1,871 3,781 10,294 12,646 9,142 4,975 5,245
SEPTEMBER 30, 1997 --------------------------------- ACTUAL AS ADJUSTED(5) -------------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 3,629 $ Working capital..................................................... 28,605 Total assets........................................................ 170,215 Total long-term debt................................................ 131,296 Detachable stock warrants, subject to put option(6)................. 9,300 -- Stockholders' equity (deficit)...................................... (1,448)
- --------------- (1) The pro forma income statement data and pro forma other data for the year ended December 31, 1996 and the nine months ended September 30, 1997 include the historical operations of the Company and give effect to the Hutchinson and Sinterloy acquisitions as if they occurred as of January 1, 1996. This data should be read in conjunction with the more detailed information contained in the "Unaudited Pro Forma Consolidated Statements of Operations" and notes thereto included elsewhere in this Prospectus. (2) Reflects charges in 1996 and 1997 relating primarily to the relocation of machinery and equipment. (3) Reflects write-off of deferred financing costs, net of $798,000 in income taxes. (4) As adjusted income statement data for the year ended December 31, 1996 and for the nine months ended September 30, 1997 assume the sale by the Company of shares of Class A Common Stock in the Offering as of January 1, 1996 and the application of net proceeds thereof as set forth under "Use of Proceeds." (footnotes continued on the following page) 7 9 (5) As adjusted balance sheet data assume the sale by the Company of shares of Class A Common Stock in the Offering as of September 30, 1997 and the application of net proceeds therefrom as set forth under "Use of Proceeds," the exchange of the detachable warrants for shares of Class B Common Stock, the redemption of all 1,375 outstanding shares of Series A Preferred Stock, 351 of the outstanding shares of Series B Preferred Stock and seven of the outstanding shares of Series C Preferred Stock, together with accrued and unpaid dividends thereon, the Senior Note Redemption and the Company's entry into the New Term Loan Facility. (6) Effective June 30, 1995, the Company issued $30.0 million aggregate principal amount of 12% senior subordinated notes with detachable warrants that provide the holders the option to purchase shares of the Company's Class B Common Stock at a nominal price. Beginning in the year 2001, the warrant holders have the right to put the warrants to the Company for cash, at prices based on the fair market value of the Company at the date of put, as determined by an independent third party. The warrant holders' put option is terminated upon the closing of an initial public offering. For financial reporting purposes, the carrying value of the warrants, including the put option (classified as detachable stock warrants, subject to put option, on the Company's balance sheet), was adjusted to $9.3 million as of September 30, 1997, based on revisions to the estimated present value of the future fair market value of the Company. 8 10 RISK FACTORS This Prospectus contains forward-looking statements that involve certain risks and uncertainties. Statements in this Prospectus regarding future financial performance and other statements containing the words "expect," "believe," "anticipate," "project," "estimate," "predict," "intend" and similar expressions are forward-looking statements. Actual results and events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in this Prospectus. Prospective investors should consider carefully the following factors, in addition to the other information contained in this Prospectus, prior to making an investment in the Class A Common Stock. ANTICIPATED LOSS IN FIRST QUARTER OF 1998; RECENT LOSS The Company expects to incur non-recurring extraordinary charges of $3.6 million in prepayment penalties ($2.2 million net after tax) and $1.9 million as a result of the write-off of previously capitalized deferred financing costs ($1.1 million net after tax), each arising from the Senior Note Redemption. As a result of the penalties and charges, if the Senior Note Redemption occurs as anticipated in the first quarter of 1998, the Company expects to incur a net loss, after extraordinary charges, in that quarter. In 1996, the Company incurred $4.0 million of non-recurring charges related to plant consolidation expenses and $2.0 million ($1.2 million after tax) of non-recurring extraordinary charges as a result of the write-off of previously capitalized deferred financing costs arising from the termination of a then- existing credit facility. In 1996, the Company reported a loss before extraordinary item of $1.9 million and a loss applicable to holders of the Company's common stock of $3.3 million. On a pro forma basis, after giving effect to the Hutchinson and Sinterloy acquisitions as if they occurred as of January 1, 1996, the Company's 1996 loss before extraordinary item would have been $1.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." SUBSTANTIAL LEVERAGE; NEW TERM LOAN FACILITY; SENIOR NOTE REDEMPTION The Company has, and following the Offering will continue to have, substantial indebtedness under the indenture ("Senior Note Indenture") relating to the Company's 10 1/4% Senior Notes due 2003 (the "Senior Notes"). In addition, the Company anticipates entering into the New Term Loan Facility concurrently with the closing of the Offering. Although the Company has entered into a commitment letter with Bankers Trust Company with respect to the New Term Loan Facility, there is no assurance that the Company and Bankers Trust Company will enter into the New Term Loan Facility. The commitment letter is subject to customary terms and conditions, including the closing of the Offering and the use of the proceeds of the Offering to effect the Senior Note Redemption. Failure to enter into the New Term Loan Facility and to effect the Senior Note Redemption will prohibit the Company from benefitting from the lower interest rate that the Company expects to be available initially on the New Term Loan Facility compared to the Senior Notes. In the future, the Company may incur additional indebtedness under the New Revolving Credit Facility to be entered into concurrently with the Offering or under additional facilities for working capital and to finance the acquisition of additional businesses. None of the Senior Notes, New Term Loan Facility or New Revolving Credit Facility is or will be secured by any assets, stock or other collateral of the Company, except that all such indebtedness is or will be guaranteed by the Company's domestic subsidiaries. The Company's debt service requirements may reduce funds available for operations and future business opportunities and increase the Company's vulnerability to adverse general economic and industry conditions and competition. As of September 30, 1997, the Company had total indebtedness, including current maturities, of $131.3 million. On an as adjusted basis, after giving effect to the Offering, the Company's total indebtedness as of September 30, 1997 would have been $104.4 million, and the Company's ratio of net debt to total capitalization would have been 55.9%. The Company's ability to make scheduled payments of the principal of or interest on, or to refinance, its indebtedness and to make scheduled payments under its lease agreements depends on its future performance, which is subject to economic, 9 11 financial, competitive and other factors beyond its control. Any default under the documents governing indebtedness of the Company could have a significant adverse effect on the market value of the Class A Common Stock. Certain of the Company's competitors currently operate on a less leveraged basis and may have greater operating and financing flexibility than the Company. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ACQUISITION STRATEGY The Company expects to continue a strategy of identifying and acquiring complementary businesses. There is no assurance that the Company will continue to identify suitable new acquisition candidates, obtain financing necessary to complete such acquisitions, acquire businesses on satisfactory terms, enter into any definitive acquisition agreements or, if entered into, that future acquisitions will be successful or will achieve results comparable to the Company's existing business. The Company could incur substantial additional indebtedness in connection with its acquisition strategy. Any such additional indebtedness may reduce funds available for operations and future business opportunities and increase the Company's vulnerability to adverse general economic and industry conditions and competition. See "Business -- Business Strategy" and "Business -- Acquisitions." FLUCTUATIONS IN QUARTERLY RESULTS The Company's results of operations are subject to fluctuations from quarter to quarter due to changes in demand for its products and other factors. Demand for the Company's products in each of the geographic end markets it serves can vary significantly from quarter to quarter due to changes in demand for products that incorporate or utilize the Company's products and other factors beyond the Company's control, such as the unusually high customer demand at Sinterloy in the first six months of 1997, prior to its acquisition by the Company, which high customer demand the Company does not expect to continue in the comparable periods in 1998. In the third quarter, net sales of the Company's products are typically lower than the first two quarters because of planned production shut downs at the Company's Italian facility, and in the fourth quarter, net sales of the Company's products are typically lower than the first two quarters because of holiday-related manufacturing facility shut downs by the Company and certain of its customers. Therefore, year-to-year comparisons of quarterly results may not be meaningful, and quarterly results during the year are not necessarily indicative of the results that may be expected for any future period or for the entire year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." COMPETITION The principal industries in which the Company competes are competitive and fragmented, with many small manufacturers and only a few manufacturers that generate sales in excess of $50 million. The larger competitors may have financial and other resources substantially greater than those of the Company. The Company competes for new business principally at the beginning of the development of new applications and at the redesign of existing applications by its customers. For example, new model development for the Company's aircraft braking system customers generally begins two to five years prior to full scale production of new braking systems. Product redesign initiatives by customers typically involve long lead times as well. Although the Company has been successful in the past in obtaining this new business, there is no assurance that the Company will continue to obtain such business in the future. The Company also competes with manufacturers using different technologies, such as carbon composite ("carbon-carbon") friction materials for aircraft braking systems. There is no assurance that competition from these technologies or others will not adversely affect the Company's business, financial condition and results of operations. See "Business -- Competition." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company has manufacturing facilities in Italy and Canada. As a percentage of total Company net sales, net sales from the Company's international facilities were 9.5% in 1995, 15.6% in 1996 and 13.8% in the 12 month period ended September 30, 1997. One of the elements of the Company's 10 12 business strategy is its continued expansion into international markets. As a result, the Company is subject to certain risks inherent in conducting business internationally, including unexpected changes in regulatory requirements, export restrictions, currency controls, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political and economic instability, fluctuations in currency exchange rates, difficulty in accounts receivable collection and potentially adverse tax consequences. The Company is also subject to risks associated with the imposition of protective legislation and regulations, including those relating to import or export or otherwise resulting from trade or foreign policy. In addition, because of the Company's foreign operations, revenues and expenses are denominated in currencies other than U.S. dollars, including Italian lira and, to a lesser extent, Canadian dollars. Changes in exchange rates may have a significant effect on the Company's business, financial condition and results of operations. The Company does not currently participate in currency hedging transactions. However, as the Company's international operations expand, the Company may participate in such hedging transactions in the future. There is no assurance that one or more of the foregoing international operation risks will not have a material adverse effect on the Company's international operations, and, consequently, on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview," "Business -- Business Strategy" and Note L to the Company's Consolidated Financial Statements. RELIANCE ON SIGNIFICANT CUSTOMERS The Company's sales to Aircraft Braking Systems represented approximately 10.4% of the Company's consolidated net sales in 1996 and approximately 8.7% of the Company's consolidated net sales in the first nine months of 1997. In addition, the Company's top five customers accounted for 40.1% of the Company's consolidated net sales in 1996 and 34.2% of the Company's consolidated net sales in the first nine months of 1997. Thus, a significant decrease or interruption in business from any of the Company's larger customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Customers." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the performance of its senior management team, including Norman C. Harbert, the Company's Chairman of the Board, Chief Executive Officer and President, and Ronald E. Weinberg, Vice-Chairman of the Board and Treasurer. Although the Company believes that its senior management team has significant depth, the loss of services of any of the Company's executive officers could have an adverse impact on the Company. The future success of the Company will depend in large part on its continued ability to attract and retain qualified engineers and other professionals, either through direct hiring or acquisition of other businesses employing such professionals. There is no assurance that the Company will be able to attract and retain such personnel. See "Management." COLLECTIVE BARGAINING AGREEMENTS As of September 30, 1997, 43% of the Company's employees were represented by unions, including approximately 75 employees at Hutchinson who are covered under a collective bargaining agreement with the International Association of Machinists and Aerospace Workers that expires in June 1998, and approximately 100 employees at SKW's Orzinuovi, Italy plant who are represented by a national mechanics union under an agreement that expires in December 1998. Although the Company believes its relations with its union employees are good, there is no assurance that Hutchinson and SKW will be successful in negotiating new agreements with the unions representing their employees on terms favorable to the Company or can do so without experiencing work stoppages by some of their employees. Because of the importance of Hutchinson and SKW's Orzinuovi, Italy plant to the profitability of the Company, any work stoppage could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees." 11 13 SUPPLY AND PRICE OF RAW MATERIALS The principal raw materials used by the Company are copper, steel and iron powder and custom-fabricated cellulose sheet. The Company has no long-term supply agreements with any of its major suppliers. However, the Company has generally been able to obtain sufficient supplies of raw materials for its operations and changes in prices of such supplies over the past few years have not had a significant effect on its operations. Although the Company believes that such raw materials are readily available from alternate sources, an interruption in the Company's supply of powder metal or cellulose sheet or a substantial increase in the price of any of these raw materials could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Suppliers and Raw Materials." EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS Upon the closing of the Offering, the Company's directors and executive officers will beneficially own an aggregate of approximately % of the outstanding shares of Class A Common Stock (approximately % if the Underwriters' over-allotment option is exercised in full) and 100% of the outstanding shares of the Company's Series D Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"). Norman C. Harbert, Chairman of the Board, Chief Executive Officer, President and a Director of the Company, Ronald E. Weinberg, Vice-Chairman of the Board, Treasurer and a Director of the Company, and Byron S. Krantz, Secretary and Director of the Company will beneficially own approximately %, % and %, respectively, of the outstanding shares of Class A Common Stock (approximately %, % and %, respectively, if the Underwriters' over-allotment option is exercised in full), and will beneficially own 45%, 45% and 10%, respectively, of the outstanding shares of Series D Preferred Stock, after the Offering. The Series D Preferred Stock is entitled to elect a majority of the members of the Board of Directors of the Company and to vote as a separate class on fundamental corporate transactions. Accordingly, if any two of these stockholders vote their shares of Series D Preferred Stock in the same manner, they will have sufficient voting power (without the consent of the Company's other holders of Class A Common Stock) to elect a majority of the members of the Board of Directors, to thereby control and direct the policies of the Board of Directors and, in general, to determine the outcome of various matters submitted to the stockholders for approval, including fundamental corporate transactions. In addition, Messrs. Harbert, Weinberg and Krantz have entered into an agreement regarding the election of the Company's Board of Directors. This agreement and the voting rights of the Series D Preferred Stock may render more difficult or tend to discourage mergers, acquisitions, tender offers or proxy contests, even when stockholders other than Messrs. Harbert, Weinberg and Krantz consider such a transaction to be in their best interests. See "Principal and Selling Stockholders," "Certain Transactions -- Transactions Concurrent with the Offering" and "Description of Capital Stock." GOVERNMENT REGULATION The Company's sales to manufacturers of aircraft braking systems represented 20.8% of the Company's consolidated net sales in 1996, and 18.6% of the Company's consolidated net sales in the first nine months of 1997. Each aircraft braking system, including the friction products supplied by the Company, must meet stringent Federal Aviation Administration ("FAA") criteria and testing requirements. The Company has been able to meet these requirements in the past. However, there is no assurance that a review by the FAA of a braking system including the Company's materials will not result in determinations that could have a material adverse effect on the Company's business, financial condition and results of operations, nor can there be any assurance that the Company or its customers will be able to continue to meet FAA requirements in the future. See "Business -- Government Regulation." 12 14 ENVIRONMENTAL MATTERS Manufacturers such as the Company are subject to stringent environmental standards imposed by federal, state, local and foreign environmental and worker health and safety laws, regulations and ordinances, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Certain of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants. Compliance with environmental laws also may require the acquisition of permits or other authorizations for certain activities and compliance with various standards or procedural requirements. The nature of the Company's operations, the long history of industrial uses at some of its current or former facilities, and the operations of predecessor owners or operators of certain of the businesses expose the Company to risk of liabilities or claims with respect to environmental and worker health and safety matters. The Company believes that it is in substantial compliance with all material environmental and worker health and safety laws applicable to its operations. There can be no assurance, however, that a review of the Company's past, present or future environmental or worker health and safety compliance by courts or regulatory authorities will not result in determinations that could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Environmental Matters." PRODUCT LIABILITY Manufacturers such as the Company are from time to time the subject of product liability claims. Although the Company maintains liability insurance coverage that it believes to be adequate, there can be no assurance that the Company will be able to maintain such coverage or obtain alternate coverage in the future at a reasonable cost, or that such coverage will be sufficient to satisfy future product liability claims. If the Company's insurance coverage is insufficient, such product liability claims, if successful, could have a material adverse effect on the Company's business, financial condition and results of operations. INTELLECTUAL PROPERTY MATTERS The Company relies on a combination of internal procedures, confidentiality agreements, patents, trademarks and trade secrets law and common law, including the law of unfair competition, to protect its intellectual property. There is no assurance that the Company's intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. In addition, the laws of certain foreign countries in which the Company's products may be sold do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its proprietary information could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Intellectual Property Matters." ANTI-TAKEOVER EFFECT OF THE COMPANY'S GOVERNING DOCUMENTS Certain provisions of the Company's Second Amended and Restated Certificate of Incorporation and Amended and Restated By-laws may be deemed to have anti-takeover effects and may discourage, defer or prevent a change of control of the Company. These provisions (1) enable the holders of the Series D Preferred Stock to elect a majority of the Board of Directors, (2) provide that only the Board of Directors, the Chairman or Vice-Chairman of the Board or holders of at least 25% of the outstanding voting stock of the Company may call special meetings of the stockholders, (3) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings, (4) authorize preferred stock, the terms of which (including voting rights, if any) may be determined by the Board of Directors and which may be issued without stockholder approval and (5) prohibit action by stockholders other than at a meeting. See "Description of Capital Stock -- Anti-Takeover Effects of the Company's Governing Documents" and "Description of Capital Stock -- Preferred Stock." 13 15 In addition, on November 13, 1997, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each share of Common Stock outstanding at the close of business on January 16, 1998. A Right will also be attached, until it is redeemed or exchanged or expires, to each share of Common Stock subsequently issued (including the shares of Class A Common Stock offered hereby). The Rights will have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons (other than certain exempt persons, which include Norman C. Harbert, Ronald E. Weinberg and any of their respective affiliates) that acquires more than 15% of the Class A Common Stock on terms not approved by the Board of Directors. The Rights could discourage or make more difficult a merger, tender offer or similar transaction. See "Description of Capital Stock -- Rights Agreement." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Class A Common Stock in the public market following the Offering could adversely affect the market price for the Class A Common Stock. Upon the closing of the Offering, the Company will have shares of Class A Common Stock outstanding. The holders of the shares of Common Stock outstanding prior to the Offering and all the directors, executive officers and significant employees of the Company who held Class A Common Stock prior to the Offering have agreed not to offer, sell or otherwise dispose of such shares or any shares of Common Stock purchased by them directly from the Company after the effective date of the Offering, until 180 days after the effective date, without the prior written consent of Schroder & Co. Inc. After such date, all such shares may be sold subject to the limitations of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). See "Shares Eligible for Future Sale." LACK OF PRIOR PUBLIC MARKET Prior to the Offering, there has been no public market for the Company's Common Stock. The Company has applied to have the Class A Common Stock listed on the New York Stock Exchange. Regardless of whether the Class A Common Stock is approved for listing on the New York Stock Exchange, there is no assurance as to the development or liquidity of any trading market for the Class A Common Stock or that the purchasers of the Class A Common Stock will be able to resell their shares at prices equal to or greater than the public offering price. The public offering price for the Class A Common Stock will be determined by negotiations between the Company and Schroder & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation and McDonald & Company Securities, Inc., as representatives (the "Representatives") of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the public offering price of the shares of Class A Common Stock. POSSIBLE VOLATILITY OF STOCK PRICE After completion of the Offering, the market price of the Class A Common Stock could be subject to significant fluctuations due to variations in the quarterly financial results of the Company and other factors, such as changes in earnings estimates by analysts, conditions in the overall economy and the financial markets, natural disasters and other developments affecting the Company and its competitors. In addition, the securities markets have recently experienced significant price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance, and these fluctuations may adversely affect the market price of the Class A Common Stock. DILUTION Based on the September 30, 1997 financial statements of the Company, purchasers of the Class A Common Stock will experience immediate dilution of $ in the tangible net book value per share of the Class A Common Stock, assuming a public offering price of $ per share. See "Dilution." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of shares of Class A Common Stock offered hereby (based on an assumed public offering price of $ per share) are estimated to be $ million ($ million if the Underwriters' over-allotment option is exercised in full) after deduction of the estimated underwriting discounts and commissions and expenses of the Offering. The Company will not receive any proceeds from the sale of Class A Common Stock by the Selling Stockholders except that certain of the Selling Stockholders will use a portion of the proceeds to prepay in part certain notes outstanding to the Company. See "Certain Transactions -- Transactions Concurrent With the Offering." As part of its strategy of identifying and acquiring complementary businesses, the Company has from time to time engaged, and expects to engage in the future, in discussions relating to such potential acquisitions. There is no assurance that the Company will continue to identify suitable new acquisition candidates, obtain financing necessary to complete such acquisitions, acquire businesses on satisfactory terms or enter into any definitive acquisition agreements or, if entered into, that future acquisitions will be successful or will achieve results comparable to the Company's existing business. At this time, the Company has no outstanding commitments or agreements regarding any future acquisitions. See "Risk Factors -- Acquisition Strategy." The following table sets forth the estimated sources and uses of the proceeds to the Company from the sale of shares of Class A Common Stock in the Offering and the New Term Loan Facility, and the completion of the Senior Note Redemption, the Senior Subordinated Note Redemption and the Preferred Stock Redemption.
AMOUNT -------------- (IN THOUSANDS) SOURCES The Offering................................................ $ New Term Loan Facility(1)................................... 35,000 -------- Total Sources..................................... $ ======== USES Senior Note Redemption(2)................................... $ 35,000 Prepayment Premium for Senior Note Redemption(2)............ 3,588 Senior Subordinated Note Redemption(3)...................... 30,300 Preferred Stock Redemption(4): Series A Preferred Stock.................................. 1,409 Series B Preferred Stock.................................. 354 Series C Preferred Stock.................................. 8 Working Capital and General Corporate Purposes(5)........... -------- Total Uses........................................ $ ========
- --------------- (1) See "Capitalization" for a description of the New Term Loan Facility. (2) The Senior Notes bear interest at the rate of 10 1/4% per annum. The Company anticipates that it will effect the Senior Note Redemption, in accordance with the terms of the Senior Note Indenture, as soon as practicable after the closing of the Offering. Under the Senior Note Redemption, $35.0 million in principal amount of the Senior Notes will be redeemed. At the time of the Senior Note Redemption, the Company expects to incur non-recurring extraordinary charges of $3.6 million in prepayment penalties and $1.9 million as a result of the write-off of previously capitalized deferred financing costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (footnotes continued on the following page) 15 17 (3) Represents payment in full of the Senior Subordinated Notes, together with accrued and unpaid interest thereon (assuming a payment date of January 31, 1998). Principal payments on the Senior Subordinated Notes are due in equal installments of $10.0 million on January 31, 2004 and June 30, 2004 and 2005. Interest on the Senior Subordinated Notes is payable quarterly at 12.0% per annum. (4) Represents the redemption (the "Preferred Stock Redemption") of all 1,375 outstanding shares of the Company's Series A Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of 351 of the outstanding shares of the Company's Series B Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and of seven of the outstanding shares of the Company's Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), in each case at a redemption price equal to the price paid per share together with accrued and unpaid dividends thereon (assuming a redemption date of January 31, 1998). Certain of the shares of Series A, Series B and Series C Preferred Stock to be redeemed in the Preferred Stock Redemption are owned by directors and executive officers of the Company as follows: (1) the Series A Preferred Stock owned by Clanco Partners I, of which William J. O'Neill, Jr. is the managing partner, Clanco Family Partners, L.P. ("Clanco FLP"), of which Mr. O'Neill is a director of its general partner, and Dorothy K. O'Neill Revocable Trust, of which Mr. O'Neill is a co-trustee, will be redeemed; (2) the Series B Preferred Stock owned by Clanco FLP, Jeffrey H. Berlin, Douglas D. Wilson and Thomas A. Gilbride will be redeemed; and (3) the Series C Preferred Stock owned by Mr. Berlin and Dan T. Moore, III, and certain fractional shares of Series C Preferred Stock owned by Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and their respective affiliates, will be redeemed. See "Certain Transactions -- Transactions Concurrent with the Offering." (5) Pending use of these remaining proceeds, the Company will invest them in money market funds or other short-term interest bearing securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on the Class A Common Stock. The Company currently intends to retain earnings, if any, to finance the growth and development of its business and does not anticipate paying any cash dividends in the foreseeable future. Any future dividends will depend on the earnings, capital requirements and financial condition of the Company, and on such other factors as the Company's Board of Directors may consider relevant. In addition, the New Revolving Credit Facility, New Term Loan Facility and the Senior Note Indenture prohibit or will prohibit the payment of cash dividends on the Class A Common Stock except upon compliance with certain conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 16 18 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at September 30, 1997, as adjusted to reflect (1) the sale of shares of Class A Common Stock offered by the Company hereby (at an assumed public offering price of $ per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," (2) the exercise of warrants to purchase shares of Class B Common Stock (which will be automatically converted on a one-for-one basis into shares of Class A Common Stock upon the sale by certain of the Selling Stockholders in the Offering), (3) the replacement of the Company's existing senior revolving credit facility (the "Old Revolving Credit Facility") with the New Revolving Credit Facility, and (4) the Company's entry into the New Term Loan Facility. This table should be read in conjunction with the historical consolidated financial statements of the Company and the notes thereto, included elsewhere in this Prospectus.
SEPTEMBER 30, 1997 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (in thousands) Long-term debt (including current portion) Old Revolving Credit Facility(1)................................... -- -- New Revolving Credit Facility(2)................................... -- -- Senior Notes(3).................................................... $100,000 $ 65,000 New Term Loan Facility(2).......................................... -- 35,000 Senior Subordinated Notes(4)....................................... 26,862 -- Hutchinson acquisition notes....................................... 1,500 1,500 Other obligations.................................................. 2,934 2,934 -------- -------- Total long-term debt............................................ $131,296 $ 104,434 ======== ======== Detachable stock warrants, subject to put option(4).................. $ 9,300 $ -- -------- -------- Stockholders' equity Series A Preferred Stock, $.01 par value: authorized: 2,625 shares; issued and outstanding: 1,375 shares, $1,375,000 aggregate liquidation value (actual); issued and outstanding: none (as adjusted); Series B Preferred Stock, $.01 par value: authorized: 702 shares; issued and outstanding: 702 shares, $702,000 aggregate liquidation value (actual); issued and outstanding: none (as adjusted); and Series C Preferred Stock, $.01 par value: authorized: 1,189 shares; issued and outstanding: 1,189 shares, $1,189,000 aggregate liquidation value (actual); issued and outstanding: none (as adjusted)............................. $ 1 -- Series D Preferred Stock, $.01 par value: authorized: 1,530 shares; issued and outstanding: none (actual); issued and outstanding: 1,530 shares, $1,530,000 aggregate liquidation value (as adjusted)....................................................... -- $ 1 Series E Preferred Stock, $.01 par value: authorized: 100,000 shares; issued and outstanding: none (actual and as adjusted)... -- -- Class A Common Stock, $.01 par value: authorized: 2,200,000 shares; issued and outstanding: 1,443,978 shares (actual); authorized: 75,000,000 shares; issued and outstanding: shares (as adjusted)(5).................................................... 14 Class B Common Stock, $.01 par value: authorized: 10,000,000 shares; issued and outstanding: none (actual and as adjusted)... -- -- Additional paid-in capital......................................... 1,964 Retained earnings (deficit)........................................ (2,653) Other equity adjustments........................................... (774) (774) -------- -------- Total stockholders' equity (deficit)............................ (1,448) -------- -------- Total capitalization....................................... $139,148 $ ======== ========
(footnotes on the following page) 17 19 - --------------- (1) Borrowings of up to the lesser of (1) $25.0 million, or (2) the sum of 85.0% of eligible accounts receivable and 60.0% of eligible inventory, under the Company's existing bank credit facility (the "Old Revolving Credit Facility") were available at LIBOR plus 2.25% per annum or, at the Company's option, a variable rate based on the lending bank's prime rate plus 1.0% per annum, for working capital and general corporate purposes. Amounts outstanding under the Old Revolving Credit Facility are due November 27, 1999. The Old Revolving Credit Facility was secured by substantially all of the accounts receivable, inventory and intangibles of the Company and its domestic subsidiaries. The Old Revolving Credit Facility will be terminated at the closing of the Offering. (2) Concurrently with the closing of the Offering, the Company expects to enter into the New Revolving Credit Facility and the New Term Loan Facility. Amounts outstanding under each facility will be due five years from the closing date, and will bear interest at a variable rate based on the Eurodollar Rate plus 0.75% per annum or, at the Company's option, a variable rate based on either the lending bank's prime rate or the federal funds rate plus 0.5% per annum, with both rates subject to increase in the event the Company does not meet certain debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratios. The New Revolving Credit Facility and the New Term Loan Facility will be unsecured, will be guaranteed by the Company's domestic subsidiaries and will be used for working capital and general corporate purposes. The New Revolving Credit Facility will not be subject to a borrowing base formula. The commitment fee on the unused portion of the New Revolving Credit Facility is 0.25% per annum of such unused portion, which fee is subject to increase in the event the Company does not meet the debt to EBITDA ratios. (3) The Company anticipates that it will effect the Senior Note Redemption, in accordance with the terms of the Senior Note Indenture, as soon as practicable after the closing of the Offering. Under the Senior Note Redemption, $35.0 million in principal amount of the Senior Notes will be redeemed. At the time of the Senior Note Redemption, the Company expects to incur non-recurring extraordinary charges of $3.6 million in prepayment penalties ($2.2 million net after tax) and $1.9 million as a result of the write-off of previously capitalized deferred financing costs ($1.1 million net after tax), which are reflected in adjusted retained earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (4) Effective June 30, 1995, the Company issued $30.0 million aggregate principal amount of Senior Subordinated Notes with detachable warrants that provide the holders the option to purchase shares of the Company's Class B Common Stock at a nominal price. Beginning in the year 2001, the warrant holders have the right to put the warrants back to the Company for cash, at prices based on the fair market value of the Company at the date of put, as determined by an independent third party. The warrant holders' put option is terminated upon the closing of an initial public offering. For financial reporting purposes, at June 30, 1995, the fair value of the warrants, including the put option, was estimated to be $4.6 million and classified as detachable stock warrants, subject to put option, on the Company's balance sheet. The resulting discount is being amortized over the life of the debt as non-cash, imputed interest. This discount is based on an effective interest rate of 14.2%. The unamortized discount at September 30, 1997 was $3.1 million. Adjustments to the carrying value of the detachable stock warrants are determined by management based on revisions to the estimated present value of the future fair market value of the Company. The carrying value of the warrants, including the put option, was adjusted to $9.3 million as of September 30, 1997. (5) Does not include 700,000 shares of Class A Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares will be reserved for options to be outstanding as of the closing of the Offering), or shares of Class A Common Stock, based on an assumed public offering price of $ per share, issuable upon conversion of 8.0% two-year notes that were issued by the Company in connection with the acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal balance is convertible at the option of the holders thereof into shares of Class A Common Stock at the public offering price. 18 20 DILUTION At September 30, 1997, the Company's net tangible book value was $ million or $ per share of Class A Common Stock. Net tangible book value per share represents the Company's tangible assets less total liabilities divided by the number of shares of Class A Common Stock, assuming the exercise of warrants to purchase shares of Class B Common Stock which will be converted on a one-for-one basis into shares of Class A Common Stock upon the sale by the Selling Stockholders in the Offering and the application of the net proceeds of the Offering to effect the Preferred Stock Redemption. After giving effect to the sale of the shares of Class A Common Stock offered hereby (at an assumed public offering price of $ per share of Class A Common Stock) and after deduction of underwriting discounts and commissions and estimated offering expenses (estimated at $ million), the net tangible book value of the Company at September 30, 1997 would have been $ , or $ per share of Class A Common Stock. This represents an immediate increase in net tangible book value of $ per share of Class A Common Stock to existing stockholders and an immediate dilution of $ per share of Class A Common Stock to new purchasers. The following table illustrates this dilution per share of Class A Common Stock: Public offering price per share of Class A Common Stock...... $ Net tangible book value per share of Class A Common Stock as of September 30, 1997(1)............................. $ Increase per share of Class A Common Stock attributable to the sale of Class A Common Stock in the Offering........ Pro forma net tangible book value per share of Class A Common Stock after giving effect to the Offering(1)............... -------- Dilution per share of Class A Common Stock to new purchasers(1).............................................. $ ========
The following table summarizes, on a pro forma basis as of September 30, 1997, the difference between the number of shares of Class A Common Stock purchased from the Company, the aggregate consideration paid and the average price per share of Class A Common Stock paid by existing stockholders and by new purchasers who purchase Class A Common Stock in the Offering (based upon an assumed public offering price of $ per share of Class A Common Stock), without giving effect to estimated underwriting, discounts and commissions and expenses of the Offering:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- ------- ---------- ------- --------- Existing stockholders(1)... % $1,426,500 % $ New purchasers............. % $ % $ Total(1)......... 100% $ 100% $
- --------------- (1) Does not include 700,000 shares of Class A Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares will be reserved for options to be outstanding as of the closing of the Offering). See "Management -- Stock Option Plan." Also does not include shares of Class A Common Stock, based on an assumed public offering price of $ per share, issuable upon conversion of 8.0% two-year notes that were issued by the Company in connection with the acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal balance is convertible at the option of the holders thereof into shares of Class A Common Stock at the public offering price. 19 21 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The unaudited pro forma consolidated statements of operations of the Company for the year ended December 31, 1996 and the nine months ended September 30, 1997, include the historical operations of the Company and give effect to the Hutchinson acquisition in January 1997 and the Sinterloy acquisition in August 1997 as if they occurred as of January 1, 1996. The unaudited pro forma consolidated statements of operations have been prepared by the Company's management. The information is not designed to represent and does not represent what the Company's results of operations actually would have been had the aforementioned transactions been completed as of January 1, 1996, or to project the Company's results of operations for any future period. For example, because of unusually high customer demand at Sinterloy in the first six months of 1997, the Company expects that Sinterloy's results of operations in the nine months ended September 30, 1998 will be lower than those achieved by Sinterloy in the nine months ended September 30, 1997. The pro forma adjustments are based on available information and certain assumptions that the Company currently believes are reasonable under the circumstances. The unaudited pro forma consolidated statements of operations should be read in conjunction with the more detailed information contained in the historical consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. 20 22 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (in thousands, except share and per share data)
HISTORICAL ADJUSTMENTS HAWK HUTCHINSON SINTERLOY FOR CORPORATION ACQUISITION ACQUISITION ACQUISITIONS PRO FORMA ----------- ---------- ----------- ----------- --------- Net sales.................................. $ 123,997 $8,621 $11,597 -- $144,215 Cost of sales.............................. 91,884 5,776 7,422 -- 105,082 --------- ------- ------- -------- ------ Gross profit............................... 32,113 2,845 4,175 -- 39,133 Expenses: Selling, technical, and administrative expenses............................... 15,468 794 1,053 $ 11(1) 17,326 Amortization of intangibles.............. 2,806 149 -- 567(2) 3,522 Plant consolidation expense.............. 4,028 -- -- -- 4,028 --------- ------- ------- -------- ------ Total expenses............................. 22,302 943 1,053 578 24,876 --------- ------- ------- -------- ------ Income from operations..................... 9,811 1,902 3,122 (578) 14,257 Interest expense........................... 10,648 23 9 2,847(3) 13,527 Other (income) expense, net................ 256 (20) (32) -- 204 --------- ------- ------- -------- ------ Income (loss) before income taxes and extraordinary item....................... (1,093) 1,899 3,145 (3,425) 526 Income taxes............................... 789 791 34 (77)(4) 1,537 --------- ------- ------- -------- ------ Income (loss) before extraordinary item.... $ (1,882) $1,108 $ 3,111 $(3,348) $ (1,011) ========= ======= ======= ======== ====== Preferred stock dividend requirements...... $ (226) $ (226) ========= ====== Loss applicable to common stockholders, excluding extraordinary item of $1,196... $ (2,108) $ (1,237) ========= ====== Loss per share applicable to common stockholders............................. $ $ ========= ====== Number of shares used to compute per share data..................................... ========= ======
- --------------- (1) Represents incremental depreciation expense due to the write up of plant, property and equipment to fair market value under the purchase method of accounting in the acquisition of Sinterloy............................................................................... $ 11 ====== (2) Represents incremental amortization due to an increase in intangible assets from applying the purchase method of accounting in the Sinterloy and Hutchinson acquisitions. Intangible assets include goodwill that is amortized over 30 years. Sinterloy.................................................................................. $ 317 Hutchinson................................................................................. 250 ------ $ 567 ====== (3) Represents incremental interest expense, assuming an interest rate of 10.25%, based on the imputed funding required to effect the acquisitions of: Sinterloy.................................................................................. 1,801 Hutchinson................................................................................. 1,046 ------ $2,847 ====== (4) Represents income taxes that would have been incurred had Hutchinson and Sinterloy been included in the Company's consolidated group for tax reporting purposes.................... $ (77) ======
21 23 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 (in thousands, except share and per share data)
HISTORICAL HAWK SINTERLOY ADJUSTMENTS CORPORATION ACQUISITION FOR ACQUISITION PRO FORMA ----------- ----------- ---------------- --------- Net sales...................................... $ 116,362 $ 8,623 -- $124,985 Cost of sales.................................. 82,940 4,671 -- 87,611 --------- ------ ------- -------- Gross profit................................... 33,422 3,952 -- 37,374 Expenses: Selling, technical, and administrative expenses................................... 14,241 643 $ 9(1) 14,893 Amortization of intangibles.................. 2,575 -- 239(2) 2,814 Plant consolidation expenses................. 50 -- 50 --------- ------ ------- -------- Total expenses............................... 16,866 643 248 17,757 --------- ------ ------- -------- Income from operations......................... 16,556 3,309 (248) 19,617 Interest expense............................... 10,639 -- 400(3) 11,039 Other (income) expense, net.................... 122 (61) -- 61 --------- ------ ------- -------- Income before income taxes..................... 5,795 3,370 (648) 8,517 Income taxes................................... 2,534 -- 1,089(4) 3,623 --------- ------ ------- -------- Net income..................................... $ 3,261 $ 3,370 $ (1,737) $ 4,894 ========= ====== ======= ======== Preferred stock dividend requirements.......... $ (240) $ (240) ========= ======== Net income applicable to common stockholders... $ 3,021 $ 4,654 ========= ======== Net income per share applicable to common stockholders................................. $ $ ========= ======== Number of shares used to compute per share data......................................... ========= ========
- --------------- (1) Represents incremental depreciation expense due to the write-up of plant, property and equipment to fair market value under the purchase method of accounting in the acquisition of Sinterloy............................................................................... $ 9 ====== (2) Represents incremental amortization due to an increase in intangible assets from applying the purchase method of accounting in the acquisition of Sinterloy. Intangible assets include goodwill that is amortized over 30 years........................................... $ 239 ====== (3) Represents the net adjustment to interest expense, assuming an interest rate of 10.25%, based on the imputed funding required to effect the acquisition of Sinterloy............... $ 400 ====== (4) Represents income taxes that would have been incurred had Sinterloy been included in the Company's consolidated group for tax reporting purposes.................................... $1,089 ======
22 24 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) The selected consolidated financial data presented below under the captions "Income Statement Data," "Other Data" and "Balance Sheet Data" as of and for each of the five years ended December 31, 1992, 1993, 1994, 1995 and 1996, have been derived from the audited consolidated financial statements of the Company. The selected consolidated financial data as of and for the nine months ended September 30, 1996 and 1997 have been derived from the unaudited consolidated financial statements of the Company, which have been prepared by management on the same basis as the audited consolidated financial statements of the Company, and, in the opinion of management of the Company, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such data for such periods and as of such dates. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for any other interim period or the full year. The acquisitions of Helsel, SKW, Hutchinson and Sinterloy occurred in June 1994, June 1995, January 1997 and August 1997, respectively. This data should be read in conjunction with the more detailed information contained in the consolidated financial statements and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales............................... $ 24,931 $ 28,417 $ 41,395 $ 84,643 $123,997 $ 93,672 $116,362 Cost of sales........................... 14,929 16,834 26,771 61,164 91,884 69,023 82,940 -------- -------- -------- -------- -------- -------- -------- Gross profit.......................... 10,002 11,583 14,624 23,479 32,113 24,649 33,422 Selling, technical and administrative... 4,582 4,833 6,294 11,575 15,468 11,612 14,241 Amortization of intangibles............. 1,304 954 954 1,924 2,806 2,408 2,575 Plant consolidation expense(1).......... -- -- -- -- 4,028 3,749 50 -------- -------- -------- -------- -------- -------- -------- Income from operations................ 4,116 5,796 7,376 9,980 9,811 6,880 16,556 Interest expense........................ 2,903 2,654 3,267 7,323 10,648 7,321 10,639 Other expense (income), net............. -- -- (234) (130) 256 55 122 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes, minority interest, extraordinary item and cumulative effect of change in accounting principle............. 1,213 3,142 4,343 2,787 (1,093) (496) 5,795 Income taxes............................ 494 1,716 1,845 1,593 789 863 2,534 Minority interest....................... -- -- 211 432 -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. 719 1,426 2,287 762 (1,882) (1,359) 3,261 Extraordinary item(2)................... 233 -- -- -- (1,196) -- -- Cumulative effect of change in accounting for income taxes........... -- 284 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)..................... $ 952 $ 1,142 $ 2,287 $ 762 $ (3,078) $ (1,359) $ 3,261 ======== ======== ======== ======== ======== ======== ======== Preferred stock dividend requirements... $ (263) $ (263) $ (294) $ (326) $ (226) $ (170) $ (240) Income (loss) before extraordinary item applicable to common stockholders........................ 456 879 1,993 436 (2,108) (1,529) 3,021 Net income (loss) applicable to common stockholders........................ 689 879 1,993 436 (3,304) (1,529) 3,021 Income (loss) before extraordinary item per share applicable to common stockholders.......................... Net income (loss) per share applicable to common stockholders................ Number of shares used to compute per share data............................ OTHER DATA: Depreciation and amortization........... $ 2,174 $ 1,920 $ 2,466 $ 5,527 $ 8,418 $ 6,688 $ 7,166 Capital expenditures (including capital leases)............................... 446 586 1,871 3,781 10,294 9,142 4,975
(footnotes on the following page) 23 25
DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents............... $ 68 $ 63 $ 730 $ 771 $ 25,774 $ 1,894 $ 3,629 Working capital (deficit)............... 1,053 (3,709) (4,076) 15,565 48,700 19,009 28,605 Property, plant and equipment, net...... 6,020 5,627 10,166 39,460 44,142 44,284 51,963 Total assets............................ 33,729 33,925 43,645 127,419 158,441 132,894 170,215 Total long-term debt.................... 26,457 24,050 26,726 94,906 129,183 102,146 131,296 Detachable stock warrants, subject to put option(3)......................... -- -- -- 4,600 4,600 4,600 9,300 Stockholders' equity (deficit).......... 2,488 3,377 5,898 3,948 1,190 2,698 (1,448)
- --------------- (1) Reflects charges in 1996 and 1997 relating primarily to the relocation of machinery and equipment. (2) Reflects utilization of tax loss carryforward in 1992 and write-off in 1996 of deferred financing costs, net of $798,000 in income taxes. (3) Effective June 30, 1995, the Company issued $30.0 million aggregate principal amount of Senior Subordinated Notes with detachable warrants that provide the holders the option to purchase shares of the Company's Class B Common Stock at a nominal price. Beginning in the year 2001, the warrant holders have the right to put the warrants to the Company for cash, at prices based on the fair market value of the Company at the date of put, as determined by an independent third party. The warrant holders' put option is terminated upon the closing of an initial public offering. For financial reporting purposes, the carrying value of the warrants, including the put option (classified as detachable stock warrants, subject to put option, on the Company's balance sheet), was adjusted to $9.3 million as of September 30, 1997, based on revisions to the estimated present value of the future fair market value of the Company. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in connection with the Company's consolidated financial statements and notes thereto and other financial information, included elsewhere in this Prospectus. OVERVIEW Hawk is a manufacturing holding company that, through its operating subsidiaries, designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. Since 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base:
EFFECTIVE DATE YEAR ACQUISITION OF ACQUISITION BUSINESS FOUNDED - ----------------- -------------- --------------------------------------------- ------- FPC and Logan March 1989 Friction products for brakes, clutches and 1961 transmissions used in aerospace, industrial and specialty applications Helsel June 1994 High precision powder metal components used 1974 primarily in fluid power applications SKW June 1995 Friction products for industrial applications 1924 Hutchinson January 1997 Die-cast aluminum rotors for small electric 1947 motors used in business equipment, appliances and exhaust fans Sinterloy August 1997 Powder metal components for business 1969 equipment
The above acquisitions were accounted for under the purchase method of accounting, with the purchase price allocated to the estimated fair market value of the assets acquired and liabilities assumed. In the acquisitions, any excess of the purchase price paid over the estimated fair value of the net assets acquired was allocated to goodwill, which resulted in approximately $40.1 million of goodwill reflected on the September 30, 1997 balance sheet. The annual amortization of goodwill will result in non-cash charges to future operations of approximately $1.8 million per year (of which the majority of such amortization is deductible for tax purposes) based on amortization periods ranging from 15 to 40 years. The acquisitions of Helsel, SKW, Hutchinson and Sinterloy caused a significant change in the Company's product mix and resulted in a reduction in the Company's gross profit margin. The Company's gross profit margin in 1993 was 40.8%. The acquisition of Helsel had the effect of reducing the Company's overall gross profit margin to 35.3% in 1994. The acquisition of SKW had the effect of further reducing the Company's overall gross profit margin to 27.7% in 1995 and 25.9% in 1996. The Company believes that the gross profit margins of the industrial and specialty friction products and powder metal components produced by SKW and Helsel, respectively, exceed gross profit margins realized in other markets that use standardized products. However, these margins are exceeded by those achieved by the Company's FPC business, as a result of FPC's proprietary products and leading position in the aerospace friction products market. In 1995, the Company consolidated SKW's headquarters facility into the Company's existing facilities, which resulted in an annualized cost savings of $1.8 million due to the elimination of redundant expenses. During 1996, the Company consolidated one of SKW's two U.S. manufacturing facilities into the Company's existing facilities, which resulted in $3.6 million in annualized cost savings from reduction of overhead expenses. The Company incurred $4.0 million of costs relating primarily to the relocation of machinery and equipment in 1996. In addition, the manufacturing facility consolidation program had the effect of decreasing the gross profit margins in 1996 primarily as a result of the temporary production inefficiencies arising from the relocation of manufacturing operations. Partly as a result of the elimination of these temporary production inefficiencies, gross margins increased to 28.7% for the nine months ended September 30, 1997 from 26.3% for the corresponding period in 1996. 25 27 The Company expects to incur non-recurring extraordinary charges of $3.6 million in prepayment penalties ($2.2 million net after-tax) and $1.9 million as a result of the write-off of previously capitalized deferred financing costs ($1.1 million net after tax), each arising from the Senior Note Redemption. As a result of the penalties and charges, if the Senior Note Redemption occurs as anticipated in the first quarter of 1998, the Company expects to incur a net loss, after extraordinary charges, in that quarter. In November 1996, the Company incurred $2.0 million ($1.2 million after-tax) of non-recurring extraordinary charges as a result of the write-off of previously capitalized deferred financing costs arising from the termination of the Company's previous senior credit facility. Primarily because of the non-recurring charges relating to the manufacturing facility consolidation program and the deferred financing costs, the Company incurred a net loss of $3.1 million in 1996. The Company's foreign operations expose it to the risk of exchange rate fluctuations. For example, because the Company's Italian operation typically generates positive net cash flow, which is denominated in lire, a decline in the value of the lira relative to the dollar would adversely affect the Company's reported sales and earnings. In addition, the restatement of foreign currency denominated assets and liabilities into U.S. dollars gives rise to foreign exchange gains or losses which are recorded in stockholders' equity. The Company does not currently participate in hedging transactions related to foreign currency. See Note L to the Company's Consolidated Financial Statements. RESULTS OF OPERATIONS The following table presents, for the periods indicated, items in the Company's income statements as a percentage of net sales:
NINE MONTHS YEAR ENDED ENDED SEPTEMBER DECEMBER 31, 30, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit................................. 35.3 27.8 25.9 26.3 28.7 Selling, technical and administrative expenses*.................................... 15.2 13.7 12.5 12.4 12.2 Amortization of intangible assets.............. 2.3 2.3 2.2 2.6 2.2 Plant consolidation expense.................... -- -- 3.2 4.0 -- Income from operations....................... 17.8 11.8 7.9 7.3 14.2 Interest expense............................... 7.9 8.7 8.6 7.8 9.1 Other (income) expense, net.................... (0.6) (0.2) 0.2 -- 0.1 Income (loss) before income taxes............ 10.5 3.3 (0.9) (0.5) 5.0 Income taxes................................... 4.5 1.9 0.6 0.9 2.2 Minority interest.............................. 0.5 0.5 -- -- -- Income before extraordinary item............. 5.5 0.9 (1.5) (1.5) 2.8 Extraordinary item............................. -- -- (1.0) -- -- Net income (loss)............................ 5.5 0.9 (2.5) (1.5) 2.8
- --------------- * The Company's technical expenses consist primarily of research and product development expenses. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Net Sales. Net sales increased by $22.7 million, or 24.2%, from $93.7 million during the first nine months of 1996 to $116.4 million during the first nine months of 1997. The net sales increase was attributable to the acquisitions of Hutchinson and, to a lesser extent, Sinterloy and strong customer demand in all of the Company's product lines. Sales attributable to Hutchinson, which was acquired in January 1997, and Sinterloy, which was acquired in August 1997, were $8.7 million and $1.7 million, respectively, for the period ending September 30, 1997, or 45.8% of the net sales increase. 26 28 Gross Profit. Gross profit increased $8.8 million to $33.4 million during the first nine months of 1997, a 35.6% increase over gross profit of $24.6 million during the first nine months of 1996. The gross profit margin increased to 28.7% during the first nine months of 1997 from 26.3% during the comparable period in 1996. The increase was attributable to cost savings resulting from the consolidation of one of the Company's manufacturing facilities during 1996 into existing Company facilities, as well as favorable product mix. Selling, Technical and Administrative Expenses. Selling, technical and administrative ("ST&A") expenses increased $2.6 million, or 22.6%, from $11.6 million during the first nine months of 1996 to $14.2 million during the first nine months of 1997. As a percentage of net sales, ST&A remained relatively constant at 12.2% during the first nine months of 1997 compared to 12.4% during the comparable period of 1996. Income from Operations. Income from operations increased $9.7 million, or 140.6%, from $6.9 million in the first nine months of 1996 to $16.6 million in the first nine months of 1997. Income from operations as a percentage of net sales increased to 14.2% in the first nine months of 1997 from 7.3% in the comparable nine month period of 1996, reflecting cost savings from the consolidation of facilities, reduced plant consolidation expenses, increased sales and a more favorable product mix. Interest Expense. Interest expense increased $3.3 million, or 45.3%, to $10.6 million in the first nine months of 1997 from $7.3 million in the comparable nine month period in 1996. The increase is attributable to higher debt levels, a result of the issuance of the Senior Notes in the fourth quarter of 1996. Income Taxes. The provision for income taxes increased $1.6 million to $2.5 million in the first nine months of 1997 (43.7% of pre-tax income) from $0.9 million in the comparable period of 1996, reflecting the increase in pre-tax income. Net Income (Loss). As a result of the factors noted above, net income was $3.3 million in the first nine months of 1997 compared to a loss of $1.4 million in the comparable nine month period of 1996. 1996 COMPARED TO 1995 Net Sales. Net sales increased $39.4 million, or 46.5%, from $84.6 million in 1995 to $124.0 million in 1996. Net friction product sales increased $39.2 million, or 61.1%, from $64.2 million in 1995 to $103.4 million in 1996. The net friction product sales increase was primarily attributable to the purchase of SKW in June 1995. Sales attributable to the acquired company in 1996 were $68.9 million compared to $32.3 million of SKW sales that were included in the Company's results for 1995, representing a net increase of $36.6 million, or 93.3%, of the friction product net sales increase. The remaining net friction product sales increase of $2.6 million in 1996, or 6.7% of the increase, was primarily attributable to increased aftermarket sales of friction products used in construction and agricultural equipment and increased sales of specialty friction products. These sales increases were partially offset by lower sales of friction products for heavy truck clutches resulting from lower truck production. Powder metal component net sales increased $212,000, or 1.0%, from $20.4 million in 1995 to $20.6 million in 1996. The increase in powder metal component sales was primarily attributable to higher sales of powder metal components used in hydraulic mechanisms. Gross Profit. Gross profit in 1996 was $32.1 million, an increase of $8.6 million, or 36.8%, from $23.5 million in 1995. As a percentage of net sales, gross profit was 25.9% in 1996 and 27.8% in 1995. Gross profit as a percentage of sales decreased primarily as a result of the change in product mix resulting from the SKW acquisition and costs associated with the start-up of production (other than moving expenses) in connection with the manufacturing facility consolidation program. As a result of the SKW acquisition, sales of the Company's higher margin aerospace friction products declined from 25.5% of net sales in 1995 to 20.8% of net sales in 1996. Combined sales of the Company's lower margin construction and agriculture friction products increased from 17.6% of net sales in 1995 to 34.2% of net sales in 1996. 27 29 ST&A Expenses. ST&A expenses increased $3.9 million, or 33.6%, from $11.6 million in 1995 to $15.5 million in 1996. As a percentage of net sales, ST&A expenses declined from 13.7% to 12.5% over such periods, primarily as a result of the reductions in the overhead of SKW and the increase in net sales, as a result of the SKW acquisition, partially offset by higher incentive compensation at the Company's friction product facilities. Income from Operations. Income from operations of $9.8 million in 1996 decreased $169,000, or 1.7%, from $10.0 million in 1995. As a percentage of net sales, income from operations declined from 11.8% in 1995 to 7.9% in 1996. In addition to the change in product mix resulting from the SKW acquisition and production start-up costs and increased ST&A expenses referred to above, the decrease reflects $4.0 million in non-recurring costs in 1996 in connection with the SKW manufacturing facility consolidation program and $882,000 in increased amortization of goodwill and deferred financing costs primarily resulting from the acquisition of SKW. Interest Expense. Interest expense increased $3.3 million, or 45.4%, from $7.3 million in 1995 to $10.6 million in 1996. The increase is primarily related to the higher average amount of outstanding indebtedness in 1996 resulting from the acquisition of SKW. Income Taxes. The provision for income taxes decreased $804,000 from $1.6 million in 1995 (57.2% of pre-tax income) to $789,000 of expense in 1996. Extraordinary Item. In 1996, the Company incurred $2.0 million of non-recurring extraordinary charges as a result of the write-off of previously capitalized deferred financing costs arising from the termination of the Old Credit Facility. Net Income (Loss). The net loss for 1996 was $3.1 million, a change of $3.8 million compared to net income of $762,000 in 1995, as a result of the factors noted above. 1995 COMPARED TO 1994 Net Sales. Net sales increased $43.2 million, or 104.5%, from $41.4 million in 1994 to $84.6 million in 1995. Friction product net sales increased $33.8 million, or 110.9%, from $30.4 million in 1994 to $64.2 million in 1995. The net friction product sales increase was attributable to the purchase of SKW in June 1995, and to a lesser extent, to increased sales of linings for aircraft braking systems due to the sustained improvement of the U.S. commercial airline industry. Sales attributable to SKW in 1995, including brake lining sales, were $32.3 million, or 95.7%, of the friction product net sales increase. Sales for the Company's other friction products businesses were unchanged as increased aftermarket sales and sales of heavy truck clutches resulting from increased truck production were offset by sales declines to original equipment manufacturers of construction and agricultural equipment. Powder metal component net sales increased $9.5 million, or 86.6%, from $10.9 million in 1994 to $20.4 million in 1995, primarily as a result of the full year inclusion of Helsel which was acquired in June 1994. The full year inclusion of Helsel accounted for $9.2 million, or 97.4%, of the net sales increase in 1995. The remaining powder metal component sales increase was primarily due to increased sales of powder metal components for fluid power applications and for anti-lock brake sensor rings for use in heavy trucks. Gross Profit. Gross profit in 1995 was $23.5 million, an increase of $8.9 million, or 60.6%, from $14.6 million in 1994. As a percentage of net sales, gross profit was 35.3% in 1994 and 27.8% in 1995. This change was primarily a result of a change in product mix resulting from the acquisitions of SKW and Helsel and $2.4 million in additional cost of sales as a result of the write up of inventory purchased in the SKW acquisition to fair value. Gross profit margins in the existing friction products business grew slightly due to the increased proportion of high margin aircraft brake lining sales. ST&A Expenses. ST&A expenses increased $5.3 million, or 83.9%, from $6.3 million in 1994 to $11.6 million in 1995. As a percentage of net sales, ST&A expenses declined from 15.2% to 13.7% over such periods, primarily as a result of the reductions in the overhead of SKW and the increase in net sales, as a result of the SKW acquisition. 28 30 Income from Operations. Income from operations increased $2.6 million, or 35.3%, from $7.4 million in 1994 to $10.0 million in 1995. As a percentage of net sales, income from operations declined from 17.8% in 1994 to 11.8% in 1995, primarily as a result of the change in product mix following the SKW and Helsel acquisitions and, to a lesser extent, increased amortization of goodwill and deferred financing costs of $910,000, primarily as a result of the acquisitions. Interest Expense. Interest expense increased $4.1 million, or 124.2%, from $3.3 million in 1994 to $7.3 million in 1995. The increase is primarily related to the higher average amount of outstanding indebtedness in 1995 resulting from the acquisition of SKW. Income Taxes. The provision for income taxes decreased $252,000 from $1.8 million in 1994 (42.5% of pre-tax income) to $1.6 million in 1995 (57.2% of pre-tax income). The increase in the effective tax rate in 1995 was primarily the result of increased non-deductible amortization, earnings from foreign operations and adjustments to the Company's worldwide tax liability. Net Income. Net income decreased $1.5 million, or 66.7%, from $2.3 million in 1994 to $762,000 in 1995, as a result of the factors noted above. LIQUIDITY AND CAPITAL RESOURCES As a result of the recent acquisitions and the issuance of the Senior Notes, the Company has, and will continue to have, substantial indebtedness. The Company will therefore be required to use a substantial portion of its cash flow from operations for the payment of interest expense on indebtedness. In the first nine months of 1997, interest expense was equal to 104.4% of the Company's cash flow from operations. The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under its Old Revolving Credit Facility (subject to a borrowing base of a portion of the eligible accounts receivable and inventory). As of September 30, 1997, there were no amounts outstanding under the Old Revolving Credit Facility. Concurrently with closing of the Offering, the Company expects to enter into the $50.0 million New Revolving Credit Facility and the $35.0 million New Term Loan Facility and to terminate the Old Revolving Credit Facility. Bankers Trust Company, the lender under the Old Revolving Credit Facility, will be the lender under the New Revolving Credit Facility and the New Term Loan Facility. The New Revolving Credit Facility and the New Term Loan Facility will be unsecured, will be guaranteed by the Company's domestic subsidiaries and will be used for working capital and general corporate purposes. The New Revolving Credit Facility will not be subject to a borrowing base formula. Each facility will contain financial and other covenants with respect to the Company and its subsidiaries that, among other matters, will prohibit the payment of cash dividends on the Class A Common Stock except upon compliance with certain conditions, restrict the creation of liens, sales of assets, sale-leaseback transactions and transactions with affiliates and require the maintenance of certain minimum debt and interest coverage ratios, including a debt coverage ratio (total debt to consolidated EBITDA) of less than or equal to 4.0 to 1.0 and an interest coverage ratio (consolidated EBITDA to net interest expense) greater than or equal to 2.5 to 1.0. The Company expects to be in compliance with all such covenants at closing. Amounts outstanding under each facility will be due five years from the closing date, and bear interest at a variable rate based on the Eurodollar Rate plus 0.75% per annum or, at the Company's option, a variable rate based on either the lending bank's prime rate or the federal funds rate plus 0.5% per annum, with both rates subject to increase in the event the Company does not meet certain debt to EBITDA ratios. Replacement of the Old Revolving Credit Facility with the New Revolving Credit Facility and entry into the New Term Loan Facility are subject to the closing of the Offering and use of the proceeds of the Offering to effect the Senior Note Redemption. The Company has outstanding $100.0 million of Senior Notes, which are unsecured senior obligations of the Company. The Senior Notes, which mature on December 1, 2003, are guaranteed on a senior unsecured basis by each of the present and future domestic subsidiaries of the Company. 29 31 Principal payments on the Senior Notes are due semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1997, to holders of record on the immediately preceding May 15 and November 15, respectively. Interest on the Senior Notes accrues at the rate of 10 1/4% per annum. The Company is subject to certain restrictive covenants contained in the Senior Note Indenture, including, but not limited to, covenants imposing limitations on: the incurrence of additional indebtedness; certain payments, including dividends and investments; the creation of liens; sales of assets and preferred stock; transactions with interested persons; payment and stock issuance restrictions affecting subsidiaries; sale-leaseback transactions; and mergers and consolidations. The Company anticipates that it will effect the Senior Note Redemption, in accordance with the terms of the Senior Note Indenture, as soon as practicable after the closing of the Offering. Under the Senior Note Redemption, $35.0 million in principal amount of the Senior Notes will be redeemed. See "Use of Proceeds." As of September 30, 1997, the Company was in compliance with the terms of its indebtedness. Net cash provided by operating activities was $10.2 million for the nine month period ended September 30, 1997 as compared to $2.8 million in the comparable period of 1996. The increase in net income of $4.6 million and non-cash charges in addition to an improved working capital position at September 30, 1997 accounted for the increased operating cash flow. Net cash used in investing activities was $30.7 million and $7.5 million for the nine month periods ending September 30, 1997 and 1996, respectively. The cash used in investing activities in the 1997 period consisted of $26.0 million attributable to the acquisitions of Hutchinson and Sinterloy and $4.8 million for the purchases of property, plant and equipment. In the comparable period of 1996, cash used in investing activities consisted primarily of expenditures for property, plant and equipment. Net cash used in financing activities was $1.6 million for the nine month period ended September 30, 1997 and was used primarily for payment of capital lease obligations. In the comparable nine month period of 1996, net cash provided by financing activities of $5.8 million was primarily attributable to an increase in borrowing under the Company's previous credit facilities. The primary uses of capital by the Company are (1) to pay interest on, and to repay principal of, indebtedness, (2) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product development, and (3) for making additional strategic acquisitions of complementary businesses. The Company's capital expenditures were $9.1 million in the nine month period ended September 30, 1996 and $5.0 million for the comparable period of 1997. The Company anticipates that 1998 capital expenditures will be approximately $14.1 million, primarily for the expansion of the Company's existing manufacturing facilities and the purchase of additional equipment to expand the Company's manufacturing capacity. The Company believes that cash flow from operating activities, funds available from the sale of the Class A Common Stock in the Offering and additional funds available under the New Revolving Credit Facility will be sufficient to meet its currently anticipated operating and capital expenditure requirements and service its indebtedness for the next 12 months. If the Company cannot generate sufficient cash flow from operating activities or borrow under the New Revolving Credit Facility to meet such obligations, then the Company may be required to take certain actions, including refinancing all or a portion of its existing debt, selling assets or obtaining additional financing. There is no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain quarterly statement of operations data. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere 30 32 herein and, in management's opinion, includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the information for each of the quarters presented.
1996 1997 ------------------------------------------- ------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- (in thousands) Net sales..................... $31,422 $31,501 $30,749 $30,325 $36,884 $40,097 $39,381 Gross profit.................. 8,366 8,208 8,075 7,464 10,516 12,420 10,486 Selling, technical and administrative expenses..... 3,669 3,986 3,957 3,856 4,554 4,893 4,794 Amortization of intangibles... 651 932 825 398 829 797 949 Plant consolidation expenses.................... 600 1,539 1,610 279 -- -- 50 Income from operations........ 3,446 1,751 1,683 2,931 5,133 6,730 4,693 Interest expense.............. 2,513 2,461 2,347 3,327 3,679 3,380 3,580 Other expense (income), net... 5 5 45 201 (250) 280 92 Income (loss) before income taxes and extraordinary item........................ 928 (715) (709) (597) 1,704 3,070 1,021 Income (loss) before extraordinary item.......... 512 (721) (1,150) (523) 898 1,887 476 Extraordinary item............ -- -- -- (1,196) -- -- -- Net income (loss)............. $ 512 $ (721) $(1,150) $(1,719) $ 898 $ 1,887 $ 476
The Company's results of operations are subject to fluctuations from quarter to quarter due to changes in demand for its products and other factors. Demand for the Company's products in each of the geographic end markets it serves can vary significantly from quarter to quarter due to changes in demand for products that incorporate or utilize the Company's products and other factors beyond the Company's control, such as the unusually high customer demand at Sinterloy in the first six months of 1997, prior to its acquisition by the Company, which high customer demand the Company does not expect to continue in comparable periods in 1998. In the third quarter, net sales of the Company's products are typically lower than the first two quarters because of planned production shut downs at the Company's Italian facility, and in the fourth quarter, net sales of the Company's products are typically lower than the first two quarters because of holiday-related manufacturing facility shut downs by the Company and certain of its customers. Therefore, year-to-year comparisons of quarterly results may not be meaningful, and quarterly results during the year are not necessarily indicative of the results for any future period or for the entire year. See "Risk Factors -- Fluctuation in Quarterly Results." INFLATION Inflation generally affects the Company by increasing interest expense of floating rate indebtedness and by increasing the cost of labor, equipment and raw materials. The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant effect on its results of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under SFAS No. 128, "basic earnings per share" will be calculated based upon the weighted average number of shares actually outstanding, and "diluted earnings per share" will be calculated based upon the weighted average number of common shares outstanding and other potential common shares if they are dilutive. SFAS No. 128 will be adopted by the Company on December 31, 1997 and all prior periods will be 31 33 restated. The adoption of SFAS No. 128 is not expected to have a material impact on the Company's earnings per share for any of the periods presented. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company intends to fully comply with the provisions of this statement upon its required adoption in the first quarter of 1998, and does not anticipate a significant impact on the financial statements. Also in June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required in 1998. 32 34 BUSINESS OVERVIEW Hawk designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The Company is a leading worldwide supplier of friction products for brakes, clutches and transmissions used in aerospace, industrial and specialty applications. Friction products represented 68.9% of Company sales in the first nine months of 1997. Hawk is also a leading supplier of powder metal components for industrial applications, including pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings. In addition, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. Hawk is the largest independent supplier of original equipment and replacement friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The Company is also the largest supplier of friction materials to the general aviation (non-commercial, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. The Company believes that it is a leading supplier of friction materials to manufacturers of construction and agricultural equipment and truck clutches, including Caterpillar, John Deere, New Holland and Eaton. In addition, the Company is a major supplier of friction products for use in specialty applications, such as brakes for Harley-Davidson motorcycles, AM General Humvees and Bombardier, Polaris and Arctco ("Arctic Cat") snowmobiles. The Company's powder metal components are used primarily in industrial applications, often as lower cost replacements for parts manufactured by traditional forging, casting or stamping technologies. The Company targets three areas of the powder metal component marketplace: high precision components that are used in fluid power applications requiring tight tolerances; large structural powder metal parts used in construction, agricultural and truck applications; and smaller, high volume parts for which the Company can utilize its efficient pressing and sintering capabilities. The Company is also the largest independent U.S. manufacturer of die-cast aluminum rotors for use in subfractional electric motors. The Company believes that its diverse customer base and extensive sales to the aerospace and industrial aftermarkets reduce its exposure to economic fluctuations. The Company estimates that aftermarket sales of friction products have comprised approximately 50% of the Company's net friction product sales in recent years. The Company also believes that its principal tradenames are well-known in the domestic and international marketplace and are associated with quality and extensive customer support, including specialized product engineering and strong aftermarket service. Since its formation in 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base. From 1991 through the 12 month period ended September 30, 1997, the Company's net sales and income from operations increased at a compound annual rate of 38.3% and 35.5%, respectively. The Company reported a loss before extraordinary item of $1.9 million in 1996, and expects to incur a net loss, after extraordinary charges, in the first quarter of 1998 as a result of the incurrence of non-recurring extraordinary charges of $3.6 million in prepayment penalties ($2.2 million net after tax) and $1.9 million as a result of the write-off of previously capitalized deferred financing costs ($1.1 million net after tax), each arising from the Senior Note Redemption. For the first nine months of 1997, the Company's net sales and income from operations (before non-recurring costs in 1996 of $3.7 million for plant consolidation expenses) increased 24.2% and 55.8%, respectively, compared to the corresponding period in 1996. Since 1994, sales growth has been primarily driven by the acquisitions of Helsel, SKW and Hutchinson. These acquisitions tripled the net sales of the Company and, because the acquisitions were financed primarily with indebtedness, have caused the Company to become highly leveraged. As a result, the Company's interest expense grew at a compound annual rate of 103.5% from $3.3 million in 1994 to $13.5 million in 1996 pro forma for all 33 35 acquisitions. The Company's net sales, pro forma for all acquisitions, during the period from 1991 through the 12 month period ended September 30, 1997 grew internally at a compound annual rate of 9.7%. BUSINESS STRATEGY The Company's business strategy includes the following principal elements: - Focus on High-Margin, Specialty Applications. The Company operates primarily in aerospace, industrial and commercial markets that require sophisticated engineering and production techniques. In developing new applications, as well as in evaluating acquisitions, the Company seeks to compete in markets requiring such engineering expertise and technical capability, rather than in markets in which the primary competitive factor is price. The Company believes margins for its products in these markets are higher than in other manufacturing markets that use standardized products. The Company's gross margins in 1996 and the first nine months of 1997 were 25.9% and 28.7%, respectively. - New Product Introduction. A key part of the Company's strategy is the introduction of new products which incorporate improved performance characteristics or reduced costs in response to customer needs. Because friction products are the consumable, or wear, component of brake, clutch and transmission systems, the introduction of new friction products in conjunction with a new system provides the Company with the opportunity to supply the aftermarket for the life of the system. For example, the ability to service the aftermarket for a particular aircraft braking system will likely provide the Company with a stable market for its friction products for the life of an aircraft, which can be 30 years or more. The Company also seeks to grow by applying its existing products and technologies to new specialized applications where its products have a performance or technological advantage. For example, the Company recently developed a powder metal pump element for a customer's power steering unit that improved pumping efficiency and dependability while reducing noise and cost. - Pursuit of Strategic Acquisitions. Many of the markets in which the Company competes are fragmented, providing the Company with attractive acquisition opportunities. The Company will continue to seek to acquire complementary businesses with leading market positions that will enable it to expand its product offerings, technical capabilities and customer base. Historically, the Company has been able to achieve significant cost reductions through the integration of its acquisitions. For example, since the acquisition of SKW in 1995, the Company has consolidated SKW's headquarters facility and one of SKW's two U.S. manufacturing facilities into its existing facilities, resulting in $5.4 million of annualized cost savings. - Expanding International Sales. To take advantage of worldwide growth in its end user markets, the Company expanded its international presence through the acquisition of SKW in 1995, which resulted in the addition of manufacturing facilities in Italy and Canada and a worldwide distribution network. The Company continues to expand its European operations to meet strong demand in established markets throughout Europe. The Company also believes that further opportunities to expand sales exist in emerging economies. Sales from the Company's international facilities have grown from $15.7 million in 1995 to $20.3 million for the 12 month period ended September 30, 1997. - Leveraging Customer Relationships. The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company believes that its commitment to quality, service and just-in-time delivery enables it to build and maintain strong and stable customer relationships. The Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years. The Company believes that strong relation- 34 36 ships with its customers provide it with significant competitive advantages in obtaining and securing new business opportunities. HISTORY The Company believes that its management team has demonstrated the ability to identify, complete and integrate strategic acquisitions. In 1989, an investor group led by Norman C. Harbert, Chairman of the Board, President and Chief Executive Officer and a stockholder of the Company, and Ronald E. Weinberg, Vice-Chairman of the Board, Treasurer and a stockholder of the Company, formed The Hawk Group of Companies, Inc., an Ohio corporation, to acquire the assets and liabilities of FPC and Logan, each an Ohio corporation that is a wholly-owned subsidiary of the Company. The assets of Helsel were acquired in June 1994 by a group led by Mr. Harbert and Mr. Weinberg, and, in June 1995, Helsel became a wholly-owned subsidiary of the Company upon its merger with a subsidiary of the Company. The Company acquired the capital stock of SKW in June 1995, at which time the Company was reincorporated as a Delaware corporation by means of a parent-subsidiary merger. In October 1996, the Company changed its name to Hawk Corporation. In November 1996, Hawk Holding Corp., a Delaware corporation that was a principal stockholder of the Company, merged with and into the Company. In January 1997, the Company acquired the capital stock of Hutchinson and, in August 1997, the Company purchased the assets of Sinterloy. ACQUISITIONS Building on the base of its original FPC and Logan subsidiaries, the Company has successfully made the following acquisitions: - Helsel. The June 1994 Helsel acquisition provided the Company with the ability to manufacture medium sized, high precision powder metal components used primarily in fluid power applications. Following the acquisition, the Company made approximately $5 million in capital improvements at Helsel, increasing its capacity by approximately 30%. By focusing on its expertise in fluid power applications and by increasing capacity, Helsel has increased its sales over 50% since its acquisition by the Company. - S.K. Wellman. The June 1995 SKW acquisition furthered the Company's strategy of consolidating friction product manufacturers. Tracing its history back to the manufacture of transmission friction discs for the Model T in the 1920s, SKW brought an established, well-known original equipment and aftermarket industrial product line to the Company to complement FPC's core aerospace product line. In addition, the acquisition provided the Company with strategic access to international markets through SKW's manufacturing facilities in Italy and Canada and an established distribution network throughout Europe and the Far East. Following the acquisition, the Company consolidated one of SKW's two U.S. manufacturing facilities and SKW's executive offices into other facilities of the Company. - Hutchinson. The January 1997 Hutchinson acquisition furthered the Company's strategy of acquiring complementary businesses and expanded the Company's product offerings, technical capabilities and customer base. Hutchinson designs and manufactures die-cast aluminum rotors. The Company believes that Hutchinson is one of the largest independent domestic suppliers of these rotors, which are used in subfractional (less than 1/20 horsepower) electric motors for use in business equipment, appliances and exhaust fans. The Company also believes Hutchinson has growth opportunities arising from the trend by original equipment motor manufacturers to outsource production of rotors. Additionally, Hutchinson manufactures extruded aluminum fan spacers used in commercial diesel engines for heavy trucks and off-road equipment and precision metal castings used in hand power tools and gasoline pumping units. - Sinterloy. The August 1997 acquisition of Sinterloy expanded the Company's powder metal components business primarily into the business equipment market. Sinterloy's ability to manufacture high volume small to medium sized powder metal components complements the Company's 35 37 other powder metal businesses, which generally produce lower volume, higher precision components. Both the friction product and powder metal component industries are fragmented and are undergoing consolidation due in part to the additional resources needed (1) to perform the research and development necessary to satisfy customers' increasingly stringent quality and performance criteria, and (2) to meet just-in-time delivery requirements. As a result, the Company believes that it can continue to make strategic acquisitions that may include other friction product and powder metal component manufacturers. To effect its acquisition strategy, the Company engages in discussions, from time to time, with other manufacturers in friction products, powder metal component and other complementary businesses. At this time, the Company has no outstanding commitments or agreements regarding any future acquisitions. See "Risk Factors -- Acquisition Strategy." 36 38 PRODUCTS AND MARKETS The Company focuses on supplying components to the aerospace, industrial and commercial markets that require sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. Through acquisitions and product line expansions, the Company has diversified its end markets, which diversification, the Company believes, has reduced its economic exposure to the cyclicality of any particular industry. In the first nine months of 1997, the Company's sales by principal products and principal end markets were: Principal Products Friction Products 69 Powder Metal Components 18 Rotors 5 Other* 8
Principal Markets Aerospace 19 Truck 15 Construction 19 Agricultural 12 Other** 20 Pump & Motor 10 Lawn & Garden 5
- --------------- * Includes steel stampings, precision metal castings and extruded aluminum fan spacers. ** Includes motorcycles and snowmobiles, performance racing automotive, automotive (original equipment and aftermarket) and power hand tools. Friction Products The Company's friction products are made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers. Friction products are the replacement elements used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. For example, the friction brake linings in aircraft braking systems slow and stop airplanes when landing or taxiing. Friction products manufactured by the Company also include friction linings for use in automatic and power shift transmissions, clutch facings that serve as the main contact point between an engine and a transmission, and brake linings for use in other types of braking systems. 37 39 The Company's friction products are custom-designed to meet the performance requirements of a specific application and must meet or exceed the customer's performance specifications, including temperature, pressure, component life and noise level criteria. The engineering required in designing a friction material for a specific application dictates a balance between the component life cycle and the performance application of the friction material in, for example, stopping or starting movement. Friction products are consumed through customary use in a brake, clutch or transmission system and require regular replacement. Because the friction material is the consumable, or wear, component of such systems, new friction product introduction in conjunction with a new system provides the Company with the opportunity to supply the aftermarket with that friction product for the life of the system. The principal markets served by the Company's friction products business include manufacturers of aircraft brakes, truck clutches, heavy-duty construction and agricultural vehicle brakes, clutches and transmissions, as well as manufacturers of motorcycle, snowmobile and performance racing brakes. Based upon net sales, the Company believes that it is among the top three worldwide manufacturers of friction products used in aerospace and industrial applications. The Company estimates that aftermarket sales of friction products have comprised approximately 50% of the Company's net friction product sales in recent years. The Company believes that its stable aftermarket sales component enables the Company to reduce its exposure to adverse economic cycles. Aerospace. The Company is the largest independent supplier of friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The Company is also the largest supplier of friction materials to the general aviation (non-commercial, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. Each aircraft braking system, including the friction materials supplied by the Company, must meet stringent FAA criteria and certification requirements. New model development and FAA testing for the Company's aircraft braking system customers generally begins two to five years prior to full scale production of new braking systems. If the Company and its aircraft brake system manufacturing partner are successful in obtaining the rights to supply a particular model of aircraft, the Company will typically supply its friction products to that model's aircraft braking system for as long as the model continues to fly because it is generally too expensive to redesign a braking system and meet FAA requirements. Moreover, FAA maintenance requirements mandate that brake linings be changed after a specified number of take-offs and landings, which the Company expects to result in a continued and steady market for its aerospace friction products. The Company's friction products for commercial aerospace applications are primarily used on "single-aisle" aircraft that are flown on shorter routes, resulting in more takeoffs and landings than larger aircraft. The Company believes its friction products provide an attractive combination of performance and cost effectiveness in these applications. According to Boeing's 1997 Current Market Outlook, there were over 7,500 single-aisle commercial aircraft in the world at the end of 1996, and this number is projected to increase to approximately 11,000 by the end of 2006. The Boeing report also states that world airline traffic is projected to increase 5.5% per year through 2006. The Company expects that continued growth in world airline traffic, combined with the increasing number of single-aisle aircraft, will cause demand for the Company's aerospace friction products to remain strong. For example, Boeing is utilizing BFGoodrich braking systems with the Company's friction material on many of its new 737-600, -700 and -800 series aircraft. Construction/Agricultural/Trucks. The Company supplies a variety of friction products for use in brakes, clutches and transmissions on construction and agricultural vehicles and equipment and trucks. These components are designed to precise tolerances and permit brakes to stop or slow a moving vehicle and the clutch or transmission systems to engage or disengage. The Company believes it is a leading supplier to original equipment manufacturers and to the aftermarket. The Company believes that its trademark, Velvetouch(R) is well-known in the aftermarket for these components. As with the Company's aerospace friction products, new friction product introduction in conjunction with a new brake, clutch or transmission system provides the Company with the opportunity to supply the aftermarket with 38 40 the friction product for the life of the system. The Company expects to grow with its domestic customers in these applications as they continue to penetrate worldwide markets. The Company also expects strong sales growth from its facility in Italy as its primary customers, New Holland, Same Deutz and Clark Hurth, continue to grow in European and emerging economic markets. Construction Equipment. The Company supplies friction products such as transmission discs, clutch facings and brake linings to manufacturers of construction equipment, including Caterpillar. The Company believes it is the second largest domestic supplier of these types of friction products. Replacement components for construction equipment are sold through manufacturers such as Caterpillar, as well as various aftermarket distributors. Demand for Hawk's friction products in the construction sector is partially driven by demand for new construction equipment and the overall level of construction activity. According to an industry publication, unit sales of construction equipment in North America have grown 10.1% per year from 1992 to 1996. This growth has been driven by economic expansion, a favorable interest rate environment and the evolution of the rental market for construction equipment. Additionally, there has been strong demand for construction equipment overseas, driven principally by infrastructure development in emerging economies. Currently, the Company is experiencing healthy demand in this market sector as a result of these favorable trends. Agricultural Equipment. The Company supplies friction products such as clutch facings, transmission discs and brake linings for manufacturers of agricultural equipment, including John Deere and New Holland. The Company believes it is the second largest domestic supplier of such friction products. Replacement components for agricultural equipment are sold through original equipment manufacturers as well as various aftermarket distributors. Demand for Hawk's friction products in the agricultural sector is partially driven by a healthy domestic farm economy and the replacement of aging equipment resulting from underinvestment during the 1980s. According to an industry publication, since 1992, unit sales of U.S. two wheel drive tractors over 100 horsepower have grown at a compound annual rate of 8.0%. In addition, the Company has been experiencing strong demand from the agricultural equipment market in Europe. Medium and Heavy Trucks. The Company supplies friction products for clutch facings used in medium and heavy trucks to original equipment manufacturers, such as Eaton. The Company believes it is the leading domestic supplier of replacement friction products used in these applications. Replacement components are sold through Eaton and various aftermarket distributors. Demand for Hawk's friction products in the truck sector is driven by utilization and original equipment manufacturing volume. Demand for Class 8 (heavy) trucks has been strong over the past several years. According to an industry publication, sales of Class 8 diesel trucks in 1996 were an estimated 185,000 units, which represents a 46% increase over the 127,000 units sold in 1992. Class 8 truck sales volumes have continued to grow in 1997. As a result, the Company is currently experiencing strong demand for friction products in the truck sector. Specialty. The Company supplies friction products for use in other specialty applications, such as brake pads for Harley-Davidson motorcycles, AM General Humvees and Bombardier, Polaris Industries and Arctic Cat snowmobiles. The Company believes that these markets are experiencing significant growth and the Company will continue to increase its market share with its combination of superior quality and longer product life. Under the "Hawk Brake" tradename, the Company also supplies high performance friction material for use in racing car brakes. The Company's high performance brake pad for race cars can operate in temperatures of over 1,100 degrees Fahrenheit. The Company believes that this performance racing material may have additional applications such as braking systems for passenger and school buses, police cars and commercial delivery vehicles. Other. In addition to providing metal stampings for its friction business, the Company's Logan subsidiary also sells transmission plates and other components to the automotive and trucking industries. 39 41 Powder Metal Components The Company is a leading supplier of powder metal components consisting primarily of pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings for applications ranging from lawn and garden tractors to industrial equipment. Since Hawk's founding in 1989, it has participated in the growing powder metal parts and products industry with a focus on the North American industrial market, which the Metal Powder Industries Federation ("MPIF"), an industry trade group, estimates had sales of over $1.0 billion in 1996. According to MPIF, the value of iron powder shipments in North America increased by over 10% per year from 1991 to 1996, and North American powder manufacturers are anticipating an average annual growth rate of almost 6% per year for the next ten years. Fluid Power and Industrial Applications. The Company manufactures a variety of components made from powder metals for use in (1) fluid power applications, such as pumps and other hydraulic mechanisms, and (2) transmissions, other drive mechanisms and anti-lock braking systems used in trucks and off-road equipment. The Company believes that the market for powder metal components will continue to grow as the Company's core powder metal technology benefits from advances that permit production of powder metal components with increased design flexibility, greater densities and closer tolerances that provide improved strength, hardness and durability for demanding applications, and enable the Company's powder metal components to be substituted for wrought steel or iron components produced with forging, casting or stamping technologies. Powder metal components can often be produced at a lower cost per unit than products manufactured with forging, casting or stamping technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste. The Company believes that the current trend of substituting powder metal components for forged, cast or stamped components in industrial applications will continue for the foreseeable future, providing the Company with increased product and market opportunities. The Company produces powder metal components in three facilities, each targeting an important aspect of the market place: - High Precision. Helsel's pressing and finishing capabilities enable it to specialize in tight tolerance fluid power components such as pump elements and gears. In addition, the Company believes that Helsel's machining capabilities provide it with a competitive advantage by giving it the ability to supply a completed part to its customers, typically without any subcontracted precision machining. The Company believes that Helsel's growth will be driven by existing customers' new design requirements and new product applications primarily for pumps, motors and transmissions. - Large Size Capability. While Helsel and Sinterloy have small to medium sized powder metal part capability, FPC has the capability to make structural powder metal components that are among the largest used in North America. The Company expects its sales of larger powder metal components to continue to grow as the Company creates new designs for existing customers and benefits from market growth, primarily in current construction, agricultural and truck applications. For example, the Company believes that sales of its powder metal components used in anti-lock braking systems will benefit as domestic trucks comply with the U.S. Department of Transportation's regulations requiring the installation of anti-lock braking systems on new trucks. - High Volume. Sinterloy targets smaller, high volume parts where it can utilize its efficient pressing and sintering capabilities to their best advantage. Sinterloy's primary market for growth is powder metal components for the business equipment market. The Company believes that the addition of Sinterloy's capabilities will provide the Company with cross-selling opportunities from the Company's other powder metal facilities. 40 42 Die-Cast Aluminum Rotors The Company believes that Hutchinson is the largest independent U.S. manufacturer of die-cast aluminum rotors for use in subfractional electric motors. These motors are used in a wide variety of applications such as business equipment, small household appliances and exhaust fans. The Company believes that more than 90 million subfractional motors are manufactured in the United States annually. Hutchinson manufactured approximately 30 million rotors for these motors in 1996. Increased office automation, increased sales of small household appliances and increased sales of exhaust fans for heating, ventilation and air conditioning systems in commercial buildings and residential buildings are all factors that are expected to increase the growth of subfractional motor sales. The Company estimates that approximately 50% of all rotors in the subfractional motor market are made internally by motor manufacturers such as Emerson and General Electric. However, the Company believes Hutchinson has growth opportunities arising from the trend by original equipment motor manufacturers to outsource their production of rotors. MANUFACTURING The manufacturing processes for most of the Company's friction products and powder metal components are essentially similar. In general, both use composite metal alloys in powder form to make high quality powder metal components. The basic manufacturing steps, consisting of blending/compounding, molding/compacting, sintering (or bonding) and secondary machining/treatment, are as follows: - Blending/compounding: Composite metal alloys in powder form are blended with lubricants and other additives according to scientific formulas, many of which are proprietary to the Company. The formulas are designed to produce precise performance characteristics necessary for a customer's particular application, and the Company often works together with its customers to develop new formulas that will produce materials with greater energy absorption characteristics, durability and strength. - Molding/compacting: At room temperature, a specific amount of a powder alloy is compacted under pressure into a desired shape. The Company's molding presses are capable of producing pressures of up to 3,000 tons. The Company believes that it has some of the largest presses in the powder metal industry, enabling it to produce large, complex components. - Sintering: After compacting, molded parts are heated in furnaces to specific temperatures, enabling metal powders to metallurgically bond, harden and strengthen the molded parts while retaining their desired shape. For friction materials, the friction composite part is also bonded directly to a steel plate or core, creating a strong continuous metallic part. - Secondary machining/treatment: If required by customer specifications, a molded part undergoes additional processing. These processing operations are generally necessary to attain increased hardness or strength, tighter dimensional tolerances or corrosion resistance. To achieve these specifications, parts are heat treated, precision coined, ground or drilled or treated with a corrosion resistant coating, such as oil. Certain of the Company's friction products, which are primarily used in oil-cooled brakes and power shift transmissions, do not require all of the foregoing steps. For example, molded composite friction materials are molded under high temperatures and cured in electronically-controlled ovens and then bonded to a steel plate or core with a resin-based polymer. Cellulose composite friction materials are blended and formed into continuous sheets and then stamped into precise shapes by computer-controlled die cutting machines. Like molded composite friction materials, cellulose composite friction materials are then bonded to a steel plate or core with a resin-based polymer. The Company's die-cast aluminum rotors are produced in a three-step process. Steel stamped disks forming the laminations of the rotors are first skewed (stacked) and then loaded into dies into 41 43 which molten aluminum is injected to create the rotors. The rotor castings created in the dies are then machined to produce finished rotors. These rotors are manufactured in a variety of sizes and shapes to customers' design specifications. Quality Control. Throughout its design and manufacturing process, the Company focuses on quality control. For product design, each Company manufacturing facility uses state-of-the-art testing equipment to replicate virtually any application required by the Company's customers. This equipment is essential to the Company's ability to manufacture components that meet stringent customer specifications. To ensure that tight tolerances have been met and that the requisite quality is inherent in its finished products, the Company uses statistical process controls, a variety of electronic measuring equipment and computer-controlled testing machinery. The Company has also established programs within each of its facilities to detect and prevent potential quality problems. TECHNOLOGY The Company believes that it is an industry leader in the development of systems, processes and technologies which enable it to manufacture friction products with numerous performance advantages, such as greater wear resistance, increased stopping power, lower noise and smoother engagement. The Company's expertise is evidenced by its aircraft brake linings, which are currently being installed on the braking systems of the newly-designed Boeing 737-600, -700 and - -800 series of aircraft. The Company maintains an extensive library of proprietary friction product formulas that serve as starting points for new product development. Each formula has a specific set of ingredients and processes to generate repeatability in production. Some formulas may have as many as 15 different components. A slight change in a mixture can produce significantly different performance characteristics. The Company uses a variety of technologies and materials in developing and producing its products, such as graphitic and cellulose composites. The Company believes its expertise in the development and production of products using these different technologies and materials gives it a competitive advantage over other friction product manufacturers, which typically have expertise in only one or two types of friction material. The Company also believes that its powder metal components business is able to produce a wide range of products from small precise components to large structural parts. The Company has presses that produce some of the largest powder metal parts in the world, and its powder metal technology permits the manufacture of complex components with specific performance characteristics and close dimensional tolerances that would be impractical to produce using conventional metalworking processes. CUSTOMERS The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company believes that its working relationship with its customers on development and design, and the Company's commitment to quality, service and just-in-time delivery have enabled it to build and maintain strong and stable customer relationships. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years, and the Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. The Company believes that its recent acquisitions have broadened product lines, increased its technological capabilities and will further enhance its customer relationships and expand its preferred supplier status. As a result of its commitment to customer service and satisfaction, the Company has received numerous preferred supplier awards from its leading customers, including Aircraft Braking Systems, BFGoodrich Aerospace, Caterpillar, John Deere and New Holland. The Company's sales to Aircraft Braking Systems represented 10.4% of the Company's consolidated net sales in 1996 and 8.7% of the Company's consolidated net sales in the first nine months of 42 44 1997. In addition, the Company's top five customers accounted for 40.1% of the Company's consolidated net sales in 1996 and 34.2% of the Company's consolidated net sales in the first nine months of 1997. See "Risk Factors -- Reliance on Significant Customers." MARKETING AND SALES The Company markets its products globally through eleven product managers, who operate from the Company's facilities in the United States, Italy and Canada and a sales office in the United Kingdom. The Company's product managers and sales force work directly with the Company's engineers who provide the technical expertise necessary for the development and design of new products and for the improvement of the performance of existing products. The Company's friction products are sold both directly to original equipment manufacturers and to the aftermarket through its original equipment customers and a network of distributors and representatives throughout the world. The Company's marketing and sales of its powder metal components and die-cast aluminum rotors are directed by six product managers. The Company sells its powder metal components and rotors to original equipment manufacturers through independent sales representatives. SUPPLIERS AND RAW MATERIALS The principal raw materials used by the Company are copper, steel and iron powder and custom-formulated cellulose sheet. The Company believes that its relationships with its suppliers are good. In an effort to ensure a continued source of supply of the Company's raw materials at competitive prices, the Company concentrates on developing relationships with its suppliers. In many instances, the Company works in close consultation with its suppliers in the development of new combinations of powder metal. Thus, although the Company has no long-term supply agreements with any of its major suppliers, the Company has generally been able to obtain sufficient supplies of these raw materials for its operations. See "Risk Factors -- Supply and Price of Raw Materials." COMPETITION The principal industries in which the Company competes are competitive and fragmented, with many small manufacturers and only a few manufacturers that generate sales in excess of $50 million. Larger competitors may have financial and other resources substantially greater than those of the Company. None of these competitors compete with the Company in all of its product lines. The Company believes that the principal competitive factors in the sale of its friction products and powder metal components are quality, engineering expertise and technical capability, new product innovation, timely delivery and service. The Company believes that its strong and stable customer relationships evidence that it competes favorably with respect to each of these factors. The Company competes for new business principally at the beginning of the development of new applications and at the redesign of existing applications by its customers. For example, new model development for the Company's aircraft braking system customers generally begins two to five years prior to full scale production of new braking systems. Product redesign initiatives by customers typically involve long lead times as well. The Company also competes with manufacturers that use different technologies. The metallic aircraft braking systems for which the Company supplies friction materials compete with a "carbon-carbon" braking system. Carbon-carbon braking systems are significantly lighter than the metallic aircraft braking systems for which the Company supplies friction materials, but are more expensive. The carbon-carbon brakes are typically used on wide-body aircraft, such as the Boeing 747 and military aircraft, where the advantages in reduced weight justify the additional expense. In addition, as the Company's core powder metal technology improves, enabling its components to be substituted for wrought steel or iron components, the Company also increasingly competes with companies using 43 45 forging, casting or stamping technologies. Powder metal components can often be produced at a lower cost per unit than products manufactured with forging, casting or stamping technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste. As a result, powder metal components are increasingly being substituted for metal parts manufactured using more traditional technologies. There is no assurance that competition from these technologies or others will not adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Competition." GOVERNMENT REGULATION The Company's sales to manufacturers of aircraft braking systems represented 20.8% of the Company's consolidated net sales in 1996 and 18.6% of the Company's consolidated net sales in the first nine months of 1997. Each aircraft braking system, including the friction products supplied by the Company, must meet stringent FAA criteria and testing requirements. The Company has been able to meet these requirements in the past and continuously reviews FAA compliance procedures to help ensure continued and future compliance. See "Risk Factors -- Government Regulation." ENVIRONMENTAL MATTERS Manufacturers such as the Company are subject to stringent environmental standards imposed by federal, state, local and foreign environmental laws and regulations, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Certain of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants. Compliance with environmental laws also may require the acquisition of permits or other authorizations for certain activities and compliance with various standards or procedural requirements. The Company is also subject to the federal Occupational Safety and Health Act and similar foreign and state laws. The nature of the Company's operations, the long history of industrial uses at some of its current or former facilities, and the operations of predecessor owners or operators of certain of the businesses expose the Company to risk of liabilities or claims with respect to environmental and worker health and safety matters. The Company reviews its procedures and policies for compliance with environmental and health and safety laws and regulations and believes that it is in substantial compliance with all such material laws and regulations applicable to its operations. The costs of compliance with environmental, health and safety requirements have not been material to the Company. See "Risk Factors -- Environmental Matters." 44 46 MANUFACTURING FACILITIES AND OTHER PROPERTIES The Company's material operations are conducted through the following facilities, all of which are owned, except as noted:
APPROXIMATE LOCATION SQUARE FOOTAGE PRINCIPAL FUNCTIONS - --------------------------- -------------- ------------------------------------------------- Medina, Ohio............... 148,000 Manufacturing of friction products and powder metal components, sales and marketing, research and development, product engineering, customer service and support, and administration Brook Park, Ohio........... 111,000 Manufacturing of friction products, domestic and international sales and marketing, product engineering, customer service and support, and administration Orzinuovi, Italy........... 97,000 Manufacturing of friction products, international sales and marketing, research and development, and administration Akron, Ohio................ 81,000 Manufacturing of metal stampings Campbellsburg, Indiana..... 75,000 Manufacturing of powder metal components, sales and marketing, product engineering, customer service and support, and administration Solon, Ohio(1)............. 58,000 Research and development Solon Mills, Illinois(2)... 42,000 Manufacturing of powder metal components, sales and marketing, customer service and support Alton, Illinois............ 37,000 Manufacturing of die-cast aluminum rotors, sales and marketing, customer service and support, and administration Concord, Ontario, 15,000 Manufacturing of friction products, distribution Canada(2)................ and warehousing Cleveland, Ohio(3)......... 6,200 Principal executive offices
- --------------- (1) Approximately 20,000 square feet of the Solon facility is leased to a third party. (2) Leased. (3) Leased. The Company is party to an expense sharing arrangement under which the Company shares the expenses of its corporate headquarters located in Cleveland with a company owned by Mr. Weinberg. See "Certain Transactions -- Other Transactions." In June 1996, the Company closed its manufacturing facility in LaVergne, Tennessee that it acquired in the SKW acquisition and consolidated its operations with existing Company facilities. The Company has placed the LaVergne facility on the market for sale and does not anticipate incurring any material gain or loss as a result of the sale. The Company's Italian facility is subject to certain security interests granted to its lenders. The Company believes that substantially all of its property and equipment is in good condition. Several of the Company's facilities are operating at or near capacity. With the planned expansion of these facilities, as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," the Company believes that it will have sufficient capacity to accommodate its needs through 1999. 45 47 EMPLOYEES As of September 30, 1997, the Company had 1,258 employees, consisting of 107 management, supervisory and administrative personnel, 114 engineering, quality control and laboratory personnel, 36 sales and marketing personnel and 1,001 manufacturing personnel. Approximately 300 employees at the Company's Brook Park, Ohio plant are covered under a collective bargaining agreement with the United International Paperworkers Union expiring in October 2000; approximately 80 employees at the Company's Akron, Ohio facility are covered under a collective bargaining agreement with the United Automobile Workers expiring in July 2000; and approximately 100 employees at the Company's Orzinuovi, Italy plant are represented by a national mechanics union under an agreement that expires in December 1998 and by a local union under an agreement that expires in December 2000. Approximately 75 hourly employees of Hutchinson are covered under a collective bargaining agreement with the International Association of Machinists and Aerospace Workers expiring in June 1998. The Company has experienced no strikes and believes its relations with its employees and their unions to be good. See "Risk Factors -- Collective Bargaining Agreements" and "Risk Factors -- Dependence on Key Personnel." INTELLECTUAL PROPERTY MATTERS Velvetouch(R), Fibertuff(R), Feramic(R), Velvetouch Feramic(R), Velvetouch Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are among the federally registered trademarks of the Company. Velvetouch(R) is the Company's principal trademark for use in the friction products aftermarket and is registered in 26 countries. In addition, the Company has a pending application with the United States Patent and Trademark Office to register the trademark "Wellman Friction Products." Although the Company maintains patents related to its business, the Company does not believe that its competitive position is dependent on patent protection or that its operations are dependent on any individual patent. To protect its intellectual property, the Company relies on a combination of internal procedures, confidentiality agreements, patents, trademarks, trade secrets law and common law, including the law of unfair competition. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use any of its intellectual property. See "Risk Factors -- Intellectual Property Matters." LEGAL PROCEEDINGS The Company is involved in lawsuits that arise in the ordinary course of its business. In the Company's opinion, the outcome of these matters will not have a material adverse effect on the Company's business, financial condition or results of operations. 46 48 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:
NAME AGE POSITION - ------------------------------------ --- ------------------------------------------------ Norman C. Harbert(1)................ 64 Chairman of the Board, Chief Executive Officer, President and Director Ronald E. Weinberg(1)............... 56 Vice-Chairman of the Board, Treasurer and Director Jeffrey H. Berlin................... 35 Executive Vice President Douglas D. Wilson................... 54 Executive Vice President, President -- FPC and President -- SKW Thomas A. Gilbride.................. 44 Vice President-Finance Jess F. Helsel...................... 73 President -- Helsel Timothy J. Houghton................. 53 President -- Hutchinson Paul R. Bishop(2)(3)................ 54 Director Byron S. Krantz(3).................. 62 Secretary and Director Dan T. Moore, III(1)................ 57 Director William J. O'Neill, Jr.(2).......... 64 Director
- --------------- (1) Member of the Nominating Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee Norman C. Harbert has served as the Chairman of the Board, President, Chief Executive Officer and Director of the Company since March 1989. Mr. Harbert has over 39 years of manufacturing experience. From 1987 to 1988, Mr. Harbert was Chairman, President and CEO of Maverick Tube Corporation, an oil drilling equipment manufacturer, and from 1981 to 1986, he served as President and CEO of Ajax Magnethermic Corporation, an international manufacturer of induction heating and melting equipment. Prior to that time, Mr. Harbert served at Reliance Electric Company for 22 years where, in 1980, his last position was as General Manager, Rotating Products Group, with primary responsibility for a division with annual sales of $250 million. Mr. Harbert is a director of New West Eyeworks, Inc., a retail eyewear chain that operates throughout the western United States, Second Bancorp Inc., a bank holding company, and Caliber System, Inc., a transportation company (formerly known as Roadway Services, Inc.). Ronald E. Weinberg has served as Vice-Chairman of the Board, Treasurer and Director of the Company since March 1989. Mr. Weinberg has over 28 years of experience in the ownership and management of operating companies, including a number of manufacturing companies. In 1988, Mr. Weinberg led an investor group in the acquisition of New West Eyeworks, Inc., a retail eyewear chain that operates throughout the western United States, and Mr. Weinberg has served as Chairman of the Board of that company since that date. In 1986, Mr. Weinberg led an investor group in the acquisition of SunMedia Corp., which publishes a chain of weekly newspapers in the Cleveland market and operates a direct marketing company, and Mr. Weinberg has served as Chairman of the Board of that company since the acquisition date. Jeffrey H. Berlin has served as an Executive Vice President of the Company since May 1997. Between July 1994 and May 1997, Mr. Berlin served as the Vice President -- Marketing and Corporate Development of the Company. From August 1991 to July 1994, Mr. Berlin served the Company as its Director of Corporate Development. From 1984 to 1991, Mr. Berlin held various corporate finance positions including Director of Corporate Development for American Consumer Products, Inc., a manufacturer of consumer hardware products. 47 49 Thomas A. Gilbride has served as Vice President -- Finance of the Company since January 1993. Between March 1989 and January 1993, Mr. Gilbride was employed by the Company in various financial and administrative capacities. Douglas D. Wilson has served as an Executive Vice President of the Company since September 1996, the President of FPC since January 1992 and the President of SKW since June 1995. From November 1990 to December 1991, he was the Executive Vice President of FPC. Mr. Wilson was President and Chief Executive Officer of Cleveland Gear Company, a gear manufacturing business, from 1986 to 1990. Mr. Wilson has been the Chairman of the Industry Advisory Group of the Center for Advanced Friction Studies at the University of Illinois at Carbondale since its formation in April 1996. Jess F. Helsel has served as President of Helco, Inc. (the predecessor to Helsel) since 1974 and has continued in that capacity since the sale of Helsel's assets to the Company in June 1994. Mr. Helsel has over 52 years of experience in the powder metal industry. Timothy J. Houghton has served as President of Hutchinson Foundry Products Company (the predecessor to Hutchinson) since 1992 and has continued in that capacity since the acquisition of Hutchinson by the Company in January 1997. Mr. Houghton also served as Chief Executive Officer of Hutchinson Foundry Products Company from 1992 until January 1997. Paul R. Bishop has served as a Director since May 1993. Mr. Bishop has served as the Chairman, President and Chief Executive Officer of H-P Products, Inc., a manufacturer of central vacuum systems and fabricated tubing and fittings, since 1977. Mr. Bishop was a director of Belden & Blake Corporation, an oil and gas drilling company, from April 1994 to July 1997 and a director of Key Bank National Association from July 1992 to June 1997. Byron S. Krantz has been the Secretary and a Director since March 1989. Mr. Krantz has been a partner in the law firm of Kohrman Jackson & Krantz P.L.L. since its formation in 1984. Dan T. Moore, III has served as a Director since March 1989. Mr. Moore has been the founder, owner and President of Dan T. Moore Company, Inc. since 1969, Soundwich, Inc. since 1988, Flow Polymers, Inc. since 1985 and Perfect Impression, Inc. since July 1994, all of which are manufacturing companies. Mr. Moore has also been Chairman of the Board of Advanced Ceramics Corporation since March 1993. He has been a director of Invacare Corporation, a manufacturer of health care equipment, since 1979. William J. O'Neill, Jr. has served as a Director since March 1989. Mr. O'Neill has been the President and Chief Executive Officer of Clanco Management Corp., an O'Neill family management company, since 1983. He has also served as the Managing Partner of Clanco Partners I, an Ohio general partnership, since March 1989. The Company's executive officers serve at the discretion of the Board of Directors, although the Company or its subsidiaries have entered into employment agreements with Messrs. Harbert, Weinberg, Helsel and Houghton. See "Employment Agreements." COMPOSITION OF BOARD OF DIRECTORS The Board of Directors of the Company consists of six members elected by the holders of the Class A Common Stock and Series D Preferred Stock. The Company's Second Amended and Restated Certificate of Incorporation provides that the holders of the Series D Preferred Stock have the right to elect a majority of the directors and that the holders of the Class A Common Stock have the right to elect the remainder. The directors are elected at the annual meeting of stockholders of the Company and each director holds office until the next annual meeting of the stockholders and until his successor has been duly elected and qualified. See "Risk Factors -- Effective Voting Control by Existing Stockholders" and "Description of Capital Stock -- Preferred Stock." 48 50 Certain transactions among the Company and its directors or entities affiliated with certain directors of the Company are described below in "Principal and Selling Stockholders -- Stockholder Agreement" and "Certain Transactions." BOARD COMMITTEES The Nominating Committee of the Board of Directors recommends qualified candidates for election as directors of the Company. The Audit Committee of the Board of Directors reviews the accounting and reporting principles, policies and practices followed by the Company and the adequacy of the Company's internal, financial and operating controls. The Compensation Committee of the Board of Directors reviews and makes recommendations regarding the compensation of executive officers of the Company and reviews general policy relating to the compensation and benefits of employees of the Company. The Compensation Committee also administers option grants under the Company's 1997 Stock Option Plan (the "1997 Plan"). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the formation of the Compensation Committee in September 1996, the Board of Directors made all determinations with respect to executive officer compensation. The Compensation Committee consists of Messrs. Bishop and Krantz. Mr. Bishop was not at any time during 1996, or at any other time, an officer or employee of the Company. Mr. Krantz is Secretary of the Company and a partner in the law firm of Kohrman Jackson & Krantz P.L.L., which provides legal services to the Company. See "Certain Transactions -- Other Transactions." DIRECTOR COMPENSATION The Company pays each director, other than Messrs. Harbert, Weinberg or Krantz, an annual fee of $10,000 that is payable $5,000 in cash and $5,000 in shares of Class A Common Stock at the then current market price, rounded to the nearest 50 shares. In addition, the Company pays each such director $1,000 in cash for each board meeting that such director attends and $500 in cash for each telephonic board meeting that such director participates in. The Company also reimburses all directors for all expenses incurred in connection with their services as directors. No additional consideration is paid to the directors for committee participation. 49 51 EXECUTIVE COMPENSATION The following table sets forth the compensation awarded or paid by the Company during 1995 and 1996 to its President and Chief Executive Officer and the Company's four other most highly compensated officers and key employees (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------------ OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION COMPENSATION - ----------------------------------------- ---- -------- -------- ------------ ------------ Norman C. Harbert........................ 1996 $377,000 $410,000 $ 14,500(2) $ 20,306(3) Chairman of the Board, President and 1995 340,000 350,000 11,400(2) 12,500(3) Chief Executive Officer Ronald E. Weinberg....................... 1996 266,000 410,000 20,300(4) -- Vice-Chairman of the Board and 1995 231,000 350,000 13,400(4) -- Treasurer Douglas D. Wilson........................ 1996 166,000 120,000 1,600(5) -- Executive Vice President; President -- 1995 159,000 100,000 -- -- FPC; and President -- SKW Jess F. Helsel........................... 1996 150,000 912,000(6) 12,300(7) -- President -- Helsel 1995 150,000 910,000(6) 12,300(7) -- Jeffrey H. Berlin........................ 1996 137,000 100,000 10,700(8) -- Executive Vice President 1995 96,000 75,000 2,500(8) --
- --------------- (1) Bonuses earned in 1995 were paid in 1996 and bonuses earned in 1996 were paid in 1997. (2) Includes $9,200 and $9,500 contributed in 1995 and 1996, respectively, by FPC to FPC's profit sharing plan on behalf of Mr. Harbert and $2,200 and $5,000 in medical reimbursements made in 1995 and 1996, respectively. (3) Represents the premiums paid by the Company for a term life insurance policy of which Mr. Harbert is the insured and Mr. Harbert's wife is the beneficiary. (4) Includes $9,200 and $9,500 contributed in 1995 and 1996, respectively, by FPC to FPC's profit sharing plan on behalf of Mr. Weinberg and $4,200 and $10,800 in medical reimbursements made in 1995 and 1996, respectively. (5) Consists entirely of medical reimbursements. (6) Upon the Company's acquisition of Helsel, the Company entered into an Employment Agreement with Mr. Helsel. Mr. Helsel's bonus is determined in accordance with an earnings formula set forth in that Employment Agreement. See "Employment Agreements." (7) Includes $1,800 contributed by Helsel to Helsel's Employee's Savings and Investment Plan, as matching contributions relating to before-tax contributions made by Mr. Helsel under such plan, and $10,500 contributed by Helsel to Helsel's profit sharing plan on behalf of Mr. Helsel. (8) Includes $2,500 and $9,500 contributed in 1995 and 1996, respectively, by FPC to FPC's profit sharing plan on behalf of Mr. Berlin and $1,200 in medical reimbursements made in 1996. None of the Named Executive Officers received any perquisites or other personal benefits, securities or property that exceeded the lesser of $50,000 or 10% of the salary and bonus for each Named Executive Officer during 1995 or 1996. STOCK OPTION PLAN The 1997 Plan was adopted in November 1997, and provides for the grant of options to purchase an aggregate of 700,000 shares of the Company's Class A Common Stock. The 1997 Plan provides for the grant to employees of incentive stock options within the meaning of sec.422 of the Internal Revenue 50 52 Code of 1986, as amended (the "Code"), and for the grant of nonstatutory stock options to eligible employees (including directors and officers) and non-employee directors. Incentive stock options may be exercisable for up to ten years at an option price of not less than the fair market value of the Common Stock on the date that the option is granted, or for up to five years at an option price of not less than 110% of the fair market value of the Common Stock on the date the option is granted in the case of an officer or other key employee who owns, at the time the option is granted, more than ten percent of the Common Stock. Nonstatutory stock options may be exercisable for up to ten years at such exercise price and upon such terms and conditions as the Compensation Committee of the Board of Directors may determine. The 1997 Plan is administered by the Compensation Committee of the Board of Directors, which is charged with designating those persons to whom options are to be granted and determining the terms of options granted, including the exercise price, the number of shares subject to the option, and the time of the exercise. In granting options the Compensation Committee will take into consideration the past performance and anticipated future contribution of the potential option recipient and such other considerations the Committee deems relevant. Options granted under the 1997 Plan are subject to the following restrictions, among others: (1) the per share exercise price must be equal to or greater than 100%, or equal to or greater than 110% in the case of an officer or other key employee who owns, at the time an incentive stock option is granted, more than ten percent of the Class A Common Stock, of the fair market value of a share of Common Stock on the date of grant of the option, except in the case of a nonstatutory stock option in which the committee has discretion to set a per share exercise price of less than 100% of fair market value on the date of grant of the option; and (2) no option may be exercisable after the expiration of ten years from the date of its grant, and in the case of an incentive stock option granted to an officer or other key employee who owns, at the time an incentive stock option is granted, more than ten percent of the Class A Common Stock, no option is exercisable after the expiration of five years from the date of grant. If the option holder ceases to be employed by the Company because he or she is terminated for Cause (as defined in the 1997 Plan), any options held by the terminated employee will automatically expire. If an option holder's employment by the Company is terminated by reason of a mental or physical disability or death, then his or her options will expire one year after the date of termination. If an option holder's employment is terminated for any other reason, then his or her options will terminate three months from the date of termination. The 1997 Plan provides that unless otherwise provided in an individual grant, an option will become immediately fully exercisable upon the occurrence of certain transactions, such as the merger or sale of the Company. The 1997 Plan authorizes the Company to make loans to option holders to enable them to exercise their options. Such loans must (1) provide for recourse to the optionee, (2) bear interest at a rate no less than the prime rate of interest of the Company's principal lender and (3) be secured by the shares of Common Stock purchased. The Board of Directors has the authority to amend or terminate the 1997 Plan, provided that no such action impairs the rights of the holder of any outstanding option without the written consent of such holder, and provided further that certain amendments of the 1997 Plan are subject to stockholder approval. Unless terminated sooner, the 1997 Plan will terminate ten years from its effective date. At the closing of the Offering, options to purchase 310,000 shares of Class A Common Stock will be outstanding under the 1997 Plan at an exercise price equal to the public offering price and options to purchase 390,000 shares of Class A Common Stock will remain available for grant. BENEFIT PLANS FPC Profit Sharing Plan. FPC maintains a tax-qualified profit sharing plan, including features under section 401(k) of the Code, that covers substantially all of its employees. The plan generally provides for voluntary employee pre-tax contributions ranging from 1% to 10% and a discretionary FPC contribution allocated to each employee based on compensation. 51 53 SKW Retirement Savings and Profit Sharing Plan. SKW also sponsors a tax-qualified defined contribution plan, including features under section 401(k) of the Code, that covers substantially all of its non-union U.S. employees. The plan generally provides for voluntary employee pre-tax contributions ranging from 1% to 15%, a matching SKW contribution in an amount equal to 10% of the first 6% of the employee's contribution, and a discretionary SKW contribution allocated to each employee based on compensation. Helsel Employee's Savings and Investment Plan. Helsel maintains a tax-qualified savings and investment plan, including features under section 401(k) of the Code, that covers substantially all of its employees. The plan generally provides for voluntary employee pre-tax contributions ranging from 1% to 23%, a 50% matching contribution by Helsel (up to a maximum of 2% of an employee's compensation), and a discretionary Helsel contribution. Helsel Employee's Retirement Plan. Helsel sponsors a tax-qualified defined contribution plan that covers substantially all of its employees. The retirement plan provides eligible employees with an annual Helsel contribution equal to 7% of their compensation. FPC Pension Plan. FPC sponsors a tax-qualified non-contributory, defined benefit pension plan covering substantially all of its employees and Logan's non-union employees. The plan provides participating employees with retirement benefits at normal retirement age (as defined in the plan) based on specified formulas. In no event will the amount of annual retirement income determined under these formulas and payable at the participant's retirement date be greater than $90,000. In addition, federal law defines the maximum amount of annual compensation that may be taken into account in calculating the amount of the pension benefit as follows: 1989 -- $200,000; 1990 -- $209,200; 1991 -- $222,220; 1992 -- $228,860; 1993 -- $235,840; 1994 through 1996 -- $150,000; 1997 -- $160,000 (indexed for inflation). The estimated annual benefit payable at normal retirement age for each Named Executive Officer who is eligible to participate in the FPC pension plan is as follows: Mr. Harbert -- $59,200; Mr. Weinberg -- $88,100; Mr. Wilson -- $90,000; and Mr. Berlin -- $90,000. EMPLOYMENT AGREEMENTS Pursuant to Employment Agreements, each dated as of November 1, 1996, Mr. Harbert has agreed to serve as Chairman of the Board, President and Chief Executive Officer of Hawk, and Mr. Weinberg has agreed to serve as Vice-Chairman of the Board and Treasurer, through December 2004. Mr. Harbert will receive an annual base salary of $403,625 in 1997. Mr. Weinberg will receive an annual base salary of $303,625 in 1997. Each receives an annual bonus based on the incentive compensation programs in effect for the Company's subsidiaries. The base salary may be adjusted by the Compensation Committee of the Board. If either Mr. Harbert or Mr. Weinberg becomes mentally or physically disabled during the term, the Company will pay his annual base salary, at the same rate preceding the disability, for the remainder of the term of the employment agreement. In the event of the death or disability of either Mr. Harbert or Mr. Weinberg during the term, the Company will also pay any of his bonus earned but not paid. Neither Mr. Harbert nor Mr. Weinberg may engage in any competitive business while he is employed by the Company and for a period of two years thereafter. Mr. Harbert is required to devote substantially all of his business time and effort to the Company but may serve on the boards of other companies and charitable organizations. Under the terms of Mr. Weinberg's employment agreement, he is not required to devote all of his time and effort to the business of the Company, and in recent periods, he has devoted approximately 60% of his time and effort to the business of the Company. Mr. Weinberg also serves as Chairman of the Board of New West Eyeworks, Inc. and Chairman of the Board of SunMedia Corp. Prior to the Offering, the Company will enter into a split dollar life insurance agreement with each of Mr. Harbert and Mr. Weinberg (the "Split Dollar Agreements") pursuant to which the Company will purchase term life insurance policies on the lives of Mr. Harbert and Mr. Weinberg in the face amounts of $1.0 million and $3.8 million, respectively. Under the terms of the Split Dollar Agreements, the Company will pay the annual premiums of the insurance policies in the amount of $46,163 for Mr. 52 54 Harbert's policy and $58,586 for Mr. Weinberg's policy, and the Company will be reimbursed for such payments from the policy proceeds in an amount equal to the greater of the cash value of the policies or the total amount of premiums paid during the term of the policies. The remaining proceeds of each policy will be paid to beneficiaries designated by the insured. The Split Dollar Agreements will terminate upon the occurrence of any of the following events: (1) total cessation of the Company's business; (2) the bankruptcy, receivership or dissolution of the Company; or (3) the termination of the insured's employment by the Company (other than for reason of his death or mental or physical disability). Upon the termination of a Split Dollar Agreement, the insured will have the right to purchase the policy covered thereby for an amount equal to the greater of the cash value of the policy or the total amount of premiums paid during the term of the policy. An existing Wage Continuation Agreement between the Company and Mr. Harbert will be amended and restated prior to the closing of the Offering in connection with the Company's entry into a Split Dollar Agreement with Mr. Harbert. The Wage Continuation Agreement, as amended and restated, will provide that if Mr. Harbert dies during the term of his employment agreement or is no longer in the active employ of the Company solely because of a mental or physical disability, the Company will pay his spouse a monthly wage continuation payment until her death in an amount equal to $12,500 per month (on an after-tax basis) less a monthly annuity (on an after-tax basis) to be purchased for the spouse of Mr. Harbert with Mr. Harbert's share of the proceeds of the split dollar insurance policy on Mr. Harbert's life. An existing Wage Continuation Agreement between the Company and Mr. Weinberg will be terminated prior to the Offering in connection with the Company's entry into a Split Dollar Agreement with Mr. Weinberg. Upon the acquisition of Helsel by a group led by Mr. Harbert and Mr. Weinberg, Jess F. Helsel entered into an Employment Agreement and a Consulting Agreement, each effective July 1, 1994. Mr. Helsel agreed to serve as President of Helsel through the expiration of the term of the employment agreement in June 1997. In June 1997, these agreements were amended to extend the term of the employment agreement by an additional year ending in June 1998 and to delay the commencement of the term of the consulting agreement until July 1998. Mr. Helsel receives an annual base salary of $150,000 and an annual bonus determined in accordance with specified formulas based on the amount by which Helsel's earnings before interest, income taxes, depreciation, amortization, certain corporate charges and payment of Mr. Helsel's bonus exceeds specified targets. If Mr. Helsel becomes mentally or physically disabled during the term, the Company will pay his annual base salary and bonus for the remainder of the term. Under the amended consulting agreement, the Company will pay Mr. Helsel $150,000 for each of the first two years after the expiration of the extended term of the employment agreement and $75,000 for each of the third and fourth years after the expiration of such term. Mr. Helsel may not engage in any competitive business while he is employed by the Company and for a period of five years after the expiration of the extended term of his employment agreement. Upon the acquisition of Hutchinson, the Company entered into an Employment Agreement, dated January 2, 1997, with Timothy J. Houghton, President of Hutchinson. Under the terms of the three year employment agreement, Mr. Houghton will receive an annual base salary of $160,000 and a bonus determined in accordance with a specified formula based on the growth in Hutchinson's earnings before interest, income taxes, depreciation and amortization during 1997, 1998 and 1999. Mr. Houghton may not engage in any competitive business while he is engaged by the Company and for a period of five years after the expiration of his employment agreement. 53 55 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth, as of the date of this Prospectus and assuming exercise in full of the Underwriters' over-allotment option, information regarding the beneficial ownership of the Company's Class A Common Stock and Series D Preferred Stock (collectively, the "Voting Stock"), by (1) each stockholder known by the Company to be the beneficial owner of more than five percent of each class of the Company's outstanding shares of Voting Stock, (2) each director or executive officer who beneficially owns any shares of Voting Stock, and (3) all directors and executive officers of the Company as a group. The information set forth in the table below does not include shares of Class A Common Stock, based on an assumed public offering price of $ per share, issuable upon conversion of 8.0% two-year notes in the aggregate principal amount of $1.5 million (of which up to $500,000 of the then-outstanding principal balance is convertible at the option of the holders thereof into shares of Class A Common Stock) that were issued by the Company in connection with the acquisition of Hutchinson, and assumes the exercise of warrants to purchase shares of Class B Common Stock (which will be automatically converted on a one-for-one basis into shares of Class A Common Stock upon the sale by certain of the Selling Stockholders in the Offering). See "Management -- Stock Option Plan" and "Certain Transactions -- Transactions Concurrent with the Offering." In addition, the information set forth in the table below does not include the following options to purchase shares of Class A Common Stock which will be issued at the closing of the Offering under the 1997 Plan: Mr. Berlin -- 20,000; Mr. Wilson -- 20,000; Mr. Gilbride -- 15,000; Mr. Harbert -- 10,000; Mr. Helsel -- 10,000; Mr. Weinberg -- 10,000; Mr. Bishop -- 5,000; Mr. Krantz -- 5,000; Mr. Moore -- 5,000; and Mr. O'Neill -- 5,000. Each of the foregoing options will have an exercise price equal to the public offering price and will vest over a five-year period with 20% of each such option becoming exercisable on each of the first five anniversaries of the effective date of grant. See "Management -- Stock Option Plan." Unless otherwise indicated, the Company believes that all persons named in the tables have sole investment and voting power over the shares of Voting Stock owned. Unless otherwise specified, the address of all the stockholders is the address of the Company set forth in this Prospectus.
OWNERSHIP PRIOR TO THE OFFERING OWNERSHIP AFTER THE OFFERING ------------------- SHARES OF ------------------------------------- CLASS A CLASS A CLASS A SERIES D COMMON STOCK(1) COMMON COMMON STOCK(1) PREFERRED STOCK(1) ------------------- STOCK ---------------- ------------------ NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT SHARES PERCENT - ----------------------------- --------- ------- ------------- ------ ------- ------ ------- William J. O'Neill, Jr.(2)... 26.3% % -- -- Norman C. Harbert(3)(4)...... 21.6% % 689 45% Ronald E. Weinberg(3)(5)..... 21.1% % 689 45% CIGNA Mezzanine Partners III, L.P.(6).................... 12.0% -- -- -- -- Connecticut General Life Insurance Company(7)....... 6.0% -- -- -- -- Byron S. Krantz(3)(8)........ 4.8% -- % 152 10% Jeffrey H. Berlin............ 4.6% -- % -- -- Douglas D. Wilson............ * -- * -- -- Thomas A. Gilbride........... * -- * -- -- Dan T. Moore, III............ * -- * -- -- Jess F. Helsel............... * -- * -- -- Paul R. Bishop............... * -- * -- -- All directors and executive officers as a group (11 individuals)............... 81.0% % 1,530 100%
- --------------- * Less than 1.0%. (1) The Class A Common Stock and Series D Preferred Stock are the only voting securities of the Company that will be outstanding after the Offering. See "Description of Capital Stock." (2) Includes shares held by Clanco Partners I, an Ohio general partnership, prior to the Offering and shares after the Offering. Mr. O'Neill is the managing partner of Clanco Partners I and as a result has voting and dispositive power over the shares held by Clanco Partners I. Clanco Partners I 54 56 is an Ohio general partnership whose address is c/o William J. O'Neill, Jr., 30195 Chagrin Boulevard, Suite 310, Pepper Pike, Ohio 44124. (3) Each of these stockholders is a party to an agreement governing the voting and disposition of all shares of Class A Common Stock of which such stockholders are the legal or beneficial owners. Each such stockholder disclaims beneficial ownership of the shares of Class A Common Stock owned by the other such stockholders. See "Stockholder Agreement." (4) Includes shares held by the Harbert Family Limited Partnership. The Harbert Family Limited Partnership is an Ohio limited partnership. Mr. Harbert is the managing general partner of the Harbert Family Limited Partnership and as a result has voting and dispositive power over the shares held by the Harbert Family Limited Partnership. (5) Includes shares held by the Weinberg Family Limited Partnership. The Weinberg Family Limited Partnership is an Ohio limited partnership. Mr. Weinberg is the managing general partner of the Weinberg Family Limited Partnership and as a result has voting and dispositive power over the shares held by the Weinberg Family Limited Partnership. (6) CIGNA Mezzanine Partners III, L.P. is a Delaware limited partnership whose address is c/o CIGNA Investments, Inc., 900 Cottage Grove Road, Hartford, Connecticut 06152-2206. Assumes the exercise of warrants to purchase shares of Class B Common Stock which will be converted on a one-for-one basis into shares of Class A Common Stock upon sale by CIGNA Mezzanine Partners III, L.P. in the Offering. (7) Connecticut General Life Insurance Company is a Connecticut corporation whose address is c/o CIGNA Investments, Inc., 900 Cottage Grove Road, Hartford, Connecticut 06152-2206. Assumes the exercise of warrants to purchase shares of Class B Common Stock which will be converted on a one-for-one basis into shares of Class A Common Stock upon sale by Connecticut General Life Insurance Company in the Offering. (8) Includes shares held by the Krantz Family Limited Partnership. The Krantz Family Limited Partnership is an Ohio limited partnership whose address is c/o Byron S. Krantz, One Cleveland Center, 20th Floor, Cleveland, Ohio 44114. Mr. Krantz is the managing general partner of the Krantz Family Limited Partnership and as a result has voting and dispositive power over the shares held by the Krantz Family Limited Partnership. STOCKHOLDER AGREEMENT Messrs. Harbert, Weinberg and Krantz are parties to a Stockholders' Voting Agreement, effective as of November 27, 1996, that as amended provides that to the extent that any of them is the legal or beneficial owner of any shares of voting stock of the Company, including any shares of Class A Common Stock or Series D Preferred Stock, they will vote those shares (1) in favor of electing Messrs. Harbert, Weinberg and Krantz (so long as each desires to serve) or their respective designees to the Board of Directors of the Company, (2) in favor of electing such other directors to the Board of Directors as a majority of Messrs. Harbert, Weinberg and Krantz or their respective designees shall direct and (3) with respect to such matters as are submitted to a vote of the stockholders of the Company as a majority of Messrs. Harbert, Weinberg and Krantz or their respective designees shall direct. If any of Messrs. Harbert, Weinberg or Krantz or their respective affiliates sells more than 50% of the Class A Common Stock beneficially owned by such individual on the date of the Offering, the obligation of the other parties to continue to vote their shares of Class A Common Stock and Series D Preferred Stock for the selling stockholder or his designee as a director will terminate. The agreement will terminate upon the first to occur of the mutual written agreement of the parties to terminate the agreement or the death of the last to die of Mr. Harbert, Mr. Weinberg or their respective designees; provided that the provisions described in clauses (1) and (2) above will terminate sooner in the event that none of Messrs. Harbert, Weinberg and Krantz (or any designee thereof) remains on the Board of Directors. 55 57 CERTAIN TRANSACTIONS TRANSACTIONS CONCURRENT WITH THE OFFERING Preferred Stock Redemption. Upon the closing of the Offering, the Company will effect the Preferred Stock Redemption by (1) redeeming all of the outstanding shares of Series A Preferred Stock, 351 of the 702 outstanding shares of Series B Preferred Stock and seven of the 1,189 outstanding shares of Series C Preferred Stock, at their liquidation value, plus accrued and unpaid dividends, and (2) exchanging the remaining outstanding shares of Series B and Series C Preferred Stock for an equal number of shares of Series D Preferred Stock. Assuming such transactions are consummated as of January 31, 1998, the Series A Preferred Stock will be redeemed for approximately $1.4 million, the Series B Preferred Stock for approximately $354,000 and the Series C Preferred Stock for approximately $8,000, including accrued and unpaid dividends. See "Use of Proceeds." The Series A Preferred Stock redemption proceeds will be distributed to the holders of Series A Preferred Stock, including approximately: $1.0 million to Clanco Partners I, of which William J. O'Neill, Jr. is the managing partner; $297,000 to Clanco Family Partners, L.P., of which Mr. O'Neill is a director to its general partner; and $103,000 to the Dorothy K. O'Neill Revocable Trust, of which Mr. O'Neill is also a co-trustee. The Series B Preferred Stock redemption proceeds will be distributed to certain holders of Series B Preferred Stock, including approximately $317,000 to Clanco FLP. Following the Preferred Stock Redemption, the Company will exchange all shares of Series B and Series C Preferred Stock of which each of Messrs. Harbert, Weinberg and Krantz is the legal and beneficial owner for an equal number of shares of Series D Preferred Stock. Immediately prior to the Preferred Stock Redemption, Mr. Weinberg will purchase certain shares of Series C Preferred Stock from other stockholders so that, following the exchange described in the preceding sentence, he will own the same amount of shares of Series D Preferred Stock as Mr. Harbert. Upon the closing of the Offering, Messrs. Harbert, Weinberg and Krantz will own all of the outstanding shares of Series D Preferred Stock and there will be no shares of Series A, Series B or Series C Preferred Stock outstanding. See "Principal and Selling Stockholders" and "Description of Capital Stock -- Preferred Stock." All shares of Series A, Series B and Series C Preferred Stock redeemed or exchanged in the Preferred Stock Redemption will be cancelled and permanently retired. For a description of the terms of the Series D Preferred Stock, see "Description of Capital Stock -- Preferred Stock." The Company will not implement the Preferred Stock Redemption or the exchange of Series B and Series C Preferred Stock for Series D Preferred Stock unless the Offering is consummated. Partial June 1995 Note Repayment. On June 30, 1995, Mr. Harbert and Mr. Weinberg, along with others, issued notes to the Company to repay certain indebtedness incurred by them with respect to the acquisition of Helsel (the "June 1995 Notes"). Each of Mr. Harbert's and Mr. Weinberg's note has outstanding principal in the amount of $802,000. The June 1995 Notes are due and payable on July 1, 2002 and bore interest at the prime rate plus 1.25% per annum through September 30, 1996, and at the prime rate thereafter. The Company expects that each of Mr. Harbert and Mr. Weinberg will use a portion of the proceeds they receive as Selling Stockholders to repay $302,000 in principal on the June 1995 Notes, reducing the outstanding principal balance on their respective notes to $500,000. See "Stockholder Notes." HAWK CONTROLLING STOCKHOLDER MERGER In November 1996, concurrently with the closing of the offering of the Senior Notes, the Company completed the merger of Hawk Holding Corp., a Delaware corporation and a principal stockholder of the Company ("Hawk Holding"), with and into the Company in a tax-free reorganization under Section 368(a)(1)(A) of the Code (the "Hawk Controlling Stockholder Merger"). Hawk Holding had no material assets other than the capital stock of the Company. Prior to the merger, Hawk Holding owned 33.9% of 56 58 the outstanding shares of Class A Common Stock of the Company and 1,250 shares of the Series A Preferred Stock with a liquidation value of $1.25 million, plus accrued and unpaid dividends. Hawk Holding's only liabilities were its debts to the Company and Hawk Holding's stockholders in the aggregate amount of approximately $870,000. As a result of the merger, the Series A Preferred Stock owned by Hawk Holding was canceled, and the Company issued its Series C Preferred Stock in the aggregate amount of approximately $1.19 million ($1.25 million less $61,000), which was equal to the liquidation value of the Series A Preferred Stock owned by Hawk Holding less $61,000 of indebtedness of Hawk Holding to the Company, which was cancelled in the merger. In the merger, the Company also canceled the shares of Class A Common Stock of the Company owned by Hawk Holding and then reissued the same amount of shares of Class A Common Stock pro rata to the Hawk Holding stockholders. The common stockholders of Hawk Holding included: Norman C. Harbert, Chairman of the Board, President, Chief Executive Officer and a Director and stockholder of the Company who owned 44.2% of Hawk Holding; Ronald E. Weinberg, Vice-Chairman of the Board, Treasurer and a Director and stockholder of the Company who owned 42.1%; Byron S. Krantz, Secretary and a Director and stockholder of the Company who owned 9.7%; Thomas A. Gilbride, Vice President - Finance and a stockholder of the Company who owned 1.9%; and Dan T. Moore, III, a Director of the Company, Douglas D. Wilson, Executive Vice President and a stockholder of the Company, and Clanco Partners I, each of whom owned less than 1.0%. William J. O'Neill, Jr., a Director and a stockholder of the Company, is the managing partner of Clanco Partners I. Hawk Holding's liabilities included $61,000 of indebtedness to the Company under a note that bore interest at the prime rate and was due on demand, and approximately $809,000 of indebtedness to certain of its stockholders under a note that bore interest at the prime rate plus 1.75% per annum and was due March 14, 1994. Upon the effectiveness of the Hawk Controlling Stockholder Merger, the $61,000 indebtedness of Hawk Holding to the Company was canceled. Of the $809,000 aggregate principal amount of indebtedness to stockholders, approximately $364,000 was owed to Mr. Harbert for his portion of the note, $347,000 was owed to Mr. Weinberg for his portion and $81,000 was owed to Mr. Krantz for his portion. Upon the effectiveness of the Hawk Controlling Stockholder Merger, the $809,000 aggregate principal amount of indebtedness was converted into Series C Preferred Stock with a liquidation value of $809,000, and the Company issued Series C Preferred Stock with a liquidation value of $380,000 pro rata to the Hawk Holding stockholders. THE 1995 HELSEL TRANSACTION In June 1995, Helsel became a wholly-owned subsidiary of the Company. Helsel was acquired in June 1994 by a control group of Company stockholders led by Messrs. Harbert and Weinberg. Helsel was operated by the control group of Company stockholders from the date of the 1994 acquisition until its merger in June 1995 with a subsidiary of the Company. Pursuant to the terms of that merger, each outstanding share of common stock of Helsel was converted into shares of Class A Common Stock of the Company at an exchange ratio based on an independent valuation. Each outstanding share of the preferred stock of Helsel was surrendered in exchange for one fully paid share of Series B Preferred Stock of the Company. The terms of the Series B Preferred Stock of the Company are identical in all material respects to the terms of the Helsel preferred stock. At the time of the merger, the following directors and executive officers of the Company became the beneficial owners of the number of shares of Class A Common Stock (as adjusted for the stock split) and Series B Preferred Stock set forth opposite their names: 57 59
SHARES SHARES OF CLASS A OF SERIES B NAME OF STOCKHOLDER COMMON STOCK PREFERRED STOCK - ----------------------------------------------- ------------ --------------- William J. O'Neill, Jr.*....................... 315 Norman C. Harbert.............................. 158 Ronald E. Weinberg............................. 158 Jeffrey H. Berlin.............................. 13 Byron S. Krantz................................ 35 Douglas D. Wilson.............................. 3 Thomas A. Gilbride............................. 1 Paul R. Bishop................................. -- Jess F. Helsel................................. --
- --------------- * Includes shares of Class A Common Stock issued to a predecessor-in-interest of Clanco Partners I and 315 shares of Series B Preferred Stock owned by Clanco FLP, of which Mr. O'Neill is a director of its general partner. In connection with its acquisition of Helsel's assets from Helco, Inc. ("Helco"), the Company issued a secured promissory note in the original principal amount of $500,000 to Helco, which note is due August 1, 1999. Jess F. Helsel, the President of Helsel, is a director, officer and stockholder of Helco. The note bears interest at the rate of prime plus 1% per annum (currently 9.5%), is payable in four equal annual principal installments of $125,000 and quarterly installments of interest accrued on the outstanding principal balance (currently $250,000), and is secured by a security interest in Helsel's assets and certain guaranties made by the Company, Mr. Harbert and Mr. Weinberg. On July 1, 1994, the Company issued 9% subordinated notes to the investment group formed to acquire Helsel, Inc. in the aggregate principal amount of $200,000. One such note, in the original principal amount of $90,000, was issued to the William J. O'Neill, Sr. Irrevocable Trust A, of which Mr. O'Neill is a co-trustee. All of these notes were repaid in full in June 1995. STOCKHOLDER NOTES Certain stockholders of the Company issued June 1995 Notes as follows: by Mr. Harbert in the original principal amount of approximately $802,000; by Mr. Weinberg in the original principal amount of approximately $802,000; by Mr. Wilson in the original principal amount of $162,500; and by Mr. Krantz in the original principal amount of approximately $60,000. The June 1995 Notes remain outstanding. The Company expects that Mr. Harbert and Mr. Weinberg will use a portion of the proceeds they receive as Selling Stockholders to prepay in part their June 1995 Notes. See "Transactions Concurrent with the Offering." In addition, Clanco Partners I issued a note to the Company on June 30, 1995 with the same terms as the June 1995 Notes. The original principal amount of Clanco Partners I's note was $162,500. Clanco Partners I repaid its note to the Company in full in August 1996. OTHER TRANSACTIONS The Company is a party to an expense sharing arrangement under which the Company shares certain expenses of its Cleveland, Ohio headquarters with Weinberg Capital Corporation, of which Mr. Weinberg is President and sole shareholder. Pursuant to a formula based on full-time equivalent personnel, the Company pays approximately 54% of the overhead costs of the headquarters, including, without limitation, rent, utilities and copying, telephone and other expenses. The aggregate amount of the payments by the Company for the shared headquarters were approximately $170,000 in the first nine months of 1997, $128,000 in 1996, $130,000 in 1995 and $95,000 in 1994. 58 60 The Company purchases raw materials from a corporation of which Dan T. Moore, III is an officer and a principal shareholder. Mr. Moore is a Director of the Company. The Company paid approximately $860,000 for such raw materials in the first nine months of 1997 and $901,000 in 1996. Byron S. Krantz, a Director and the Secretary of the Company, is a partner of the law firm of Kohrman Jackson & Krantz P.L.L., which provides legal services to the Company. The Company paid legal fees to Kohrman Jackson & Krantz P.L.L. in 1996 of $469,000 for services in connection with a variety of matters, including the registration, sale and exchange of the Senior Notes and the Hawk Controlling Stockholder Merger. The Company believes that the terms of the transactions and the agreements described above are on terms at least as favorable as those which it could otherwise have obtained from unrelated parties. On-going and future transactions with related parties will be: (1) on terms at least as favorable as those that the Company would be able to obtain from unrelated parties; (2) for bona fide business purposes; and (3) approved by a majority of the disinterested and non-employee directors. DESCRIPTION OF CAPITAL STOCK At the time of the Offering, the authorized capital stock of the Company consists of (1) 75,000,000 authorized shares of Class A Common Stock, $.01 par value per share, shares of which will be outstanding upon consummation of the Offering, (2) 10,000,000 authorized shares of Class B Common Stock, none of which will be outstanding upon consummation of the Offering, and (3) 500,000 authorized shares of Serial Preferred Stock, $.01 par value per share ("Preferred Stock"), of which no shares of Series A, Series B or Series C Preferred Stock and 1,530 shares of Series D Preferred Stock will be outstanding upon consummation of the Offering and of which 100,000 shares of Series E Preferred Stock, par value $.01 per share (the "Series E Preferred Stock"), will be reserved for issuance upon consummation of the Offering. The foregoing description of the Company's capital stock assumes (1) the sale by the Selling Stockholders of shares of Class A Common Stock in the Offering, (2) the exercise of warrants to purchase shares of Class B Common Stock (which will be automatically converted on a one-for-one basis into shares of Class A Common Stock upon the sale by certain of the Selling Stockholders in the Offering) and (3) the consummation of the Preferred Stock Redemption. See "Use of Proceeds" and "Certain Transactions -- Transactions Concurrent with the Offering." The following summary description of the capital stock of the Company does not purport to be complete and is qualified in its entirety by reference to the Second Amended and Restated Certificate of Incorporation of the Company (the "Certificate") and to the Amended and Restated By-laws of the Company (the "By-laws"), copies of which are available as described under "Available Information." COMMON STOCK The powers, preferences and rights of the Class A Common Stock, and the qualifications, limitations and restrictions thereof, are in all respects identical to those of the Class B Common Stock, except for voting and conversion rights. The Class B Common Stock was issued to comply with certain regulatory requirements imposed upon stockholders that are affiliates of insurance institutions. Each holder of Class A Common Stock is entitled to one vote per share owned of record on the applicable record date on all matters presented to a vote of the stockholders, including the election of certain directors. See "Management -- Composition of Board of Directors" and "Preferred Stock." Except as may otherwise be required by the Delaware General Corporation Law and the Certificate, the holders of Class B Common Stock are not entitled to vote on any matters to be voted on by the stockholders of the Company. The Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis (1) automatically upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act, and (2) at the request of a third party transferee under certain circumstances. In case of any merger or consolidation of the Company with any other entity as a result 59 61 of which the holders of Class A Common Stock are entitled to receive cash, property, stock or other securities with respect to or in exchange for their Class A Common Stock, or in case of any sale or conveyance of all or substantially all of the assets of the Company, the holders of each share of Class B Common Stock have the right thereafter to convert such share of Class B Common Stock into the kind and amount of cash, property, stock or other securities receivable upon such consolidation, merger, sale or conveyance by a holder of one share of Class A Common Stock. Subject to the rights of the holders of any outstanding Preferred Stock, each holder of Common Stock is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. Upon liquidation or dissolution of the Company, each holder of Common Stock will be entitled to share pro rata in any distribution of the Company's assets after the payment of all debts and other liabilities, subject to the rights of the holders of any outstanding Preferred Stock. The holders of the Class A and Class B Common Stock have no preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights (other than as stated herein) or redemption or sinking fund provisions with respect to such stock. All outstanding shares of Common Stock are, and when issued the shares of Class A Common Stock offered hereby will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority (without action by the stockholders) to issue the authorized and unissued Preferred Stock in one or more additional series, to designate the number of shares constituting any such series, and to fix, by resolution, the preferences, rights, privileges, restrictions and other rights thereof, including voting rights, liquidation preferences, dividend rights and conversion and redemption rights of such series. Under certain circumstances, the Company could issue this Preferred Stock as a method of discouraging, delaying or preventing a change of control of the Company. The Company does not currently intend to issue any additional shares of Preferred Stock. Concurrently with the closing of the Offering and pursuant to the Preferred Stock Redemption, the Company will (1) redeem all of the outstanding shares of Series A Preferred Stock, 351 of the 702 outstanding shares of Series B Preferred Stock and seven of the 1,189 outstanding shares of Series C Preferred Stock, and (2) exchange the remaining outstanding shares of Series B and Series C Preferred Stock for an equal number of shares of Series D Preferred Stock. As a result of the Preferred Stock Redemption, all redeemed or exchanged shares of Series A, Series B and Series C Preferred Stock will be cancelled and permanently retired. See "Certain Transactions -- Transactions Concurrent with the Offering." The following is a description of the terms of the Series D Preferred Stock: - Dividends on the Series D Preferred Stock are cumulative and accrue at the rate of 9.8% per annum, payable quarterly. - The holders of the Series D Preferred Stock have the right to elect a majority of the members of the Board of Directors and to vote separately as a class on any proposal to effect a fundamental corporate change (such as a merger, consolidation, recapitalization or sale of all or substantially all of the assets of the Company) that is submitted to the stockholders of the Company for a vote. The voting rights of the shares of Series D Preferred Stock will terminate: (1) as to any of the Harbert, Weinberg or Krantz family groups owning such shares on the date of consummation of the Offering (each, a "Family Group") in the event that such Family Group sells or otherwise ceases to control more than 50% of the total number of shares of Class A Common Stock owned by it on the date of consummation of the Offering, as adjusted; (2) as to all of such shares upon the earlier to occur of (a) the date of death of the last to die of Mr. Harbert, his son (Carl J. Harbert, II), Mr. Weinberg or his son (Ronald E. Weinberg, Jr.) or (b) the date that both the Harbert and Weinberg Family Groups sell or cease to control more than 50% of the total number of shares of Class A Common Stock owned by them on the date of consummation of the 60 62 Offering, as adjusted; and (3) as to any of the Family Groups in the event of the breach by such Family Group of the restrictions on transfer of the Series D Preferred Stock described below. See "Management -- Composition of Board of Directors" and "Anti-Takeover Effects of the Company's Governing Documents." - Shares of Series D Preferred Stock may only be sold or transferred between any of the Family Groups or any of the members of such Family Groups. Any Family Group that sells or transfers shares in violation of such transfer restrictions and any transferee receiving such shares will not be entitled to vote its shares of Series D Preferred Stock. - The Company may, either (1) with the consent of all holders of the Series D Preferred Stock for as long as they have the voting rights described above, or (2) without the consent of such holders following the termination of such voting rights, redeem all of the outstanding shares of Series D Preferred Stock, provided the Company is not in default in the payment of any dividends on such series of Preferred Stock then outstanding, for $1,000 per share plus all accrued and unpaid dividends to the date of redemption. - Each share of Series D Preferred Stock is entitled to a liquidation preference equal to $1,000 per share plus any accrued and unpaid dividends thereon after payment of all debts and other liabilities of the Company and before any payment or distribution is made on the Common Stock (or any other subordinate class or series of stock of the Company). The holders of the Series D Preferred Stock have no preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or sinking fund provisions with respect to such stock. The Series D Preferred Stock is not listed or quoted on any stock exchange or market. In addition, the Board of Directors has authorized the issuance of up to 100,000 shares of Series E Preferred Stock in connection with the Rights Agreement. For a description of the Rights Agreement and the terms of the Series E Preferred Stock, see "Rights Agreement." SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Generally, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a broad range of "business combinations" with an "interested stockholder" (defined generally as a person owning 15% of more of a corporation's outstanding voting stock) for three years following the date such person became an interested stockholder unless: (1) before the person becomes an interested stockholder, the board of directors of the corporation approves either the transaction resulting in such person becoming an interested stockholder or the business combination; (2) upon consummation of the transaction that resulted in the person becoming an interested stockholder, the interested stockholder owns 85% or more of the outstanding voting stock of the corporation (excluding shares owned by directors who are also officers of the corporation or shares held by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (3) following the date on which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder. In the Certificate, the Company has opted to be governed by the foregoing provisions of Section 203. ANTI-TAKEOVER EFFECTS OF THE COMPANY'S GOVERNING DOCUMENTS Certain provisions of the Certificate and By-laws of the Company may be deemed to have an anti-takeover effect and may delay, discourage or prevent a change of control of the Company. In addition to the ability of the Board of Directors to issue Preferred Stock, these provisions include the following: Vacancies on Board of Directors. The Certificate provides that, subject to the terms of the Preferred Stock, only the Board of Directors may fill vacant directorships. As a result, a stockholder 61 63 interested in gaining control of the Company will be precluded from removing incumbent directors and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. Special Meetings of Stockholders. The Certificate provides that special meetings of stockholders of the Company may be called only by a majority of the Board of Directors, the Chairman or Vice-Chairman of the Board or at least 25% of the stockholders of the Company entitled to vote. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. Elimination of Actions by Written Consent. The Certificate provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The By-laws provide that stockholders seeking to bring business before an annual or special meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must give the Company not less than 60 days nor more than 90 days prior notice of such intent; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, such stockholder must give the Company notice of its proposal or nomination in compliance with the provisions of the By-laws no later than the close of business on the tenth day following the notice of the meeting; and provided further that in the event Rule 14a-8, as amended from time to time, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires notice of a stockholders' proposal to be received by the Company more than 90 days prior to the meeting, such longer notice period shall control. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. None of the foregoing provisions may be amended or repealed except by an affirmative vote of the holders of at least two-thirds of the outstanding shares of voting stock of the Company. RIGHTS AGREEMENT Adoption of Rights Agreement. On November 13, 1997, the Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. The dividend is payable to the stockholders of record as of 5:00 P.M., Cleveland, Ohio time, on January 16, 1998 (the "Effective Date"), and with respect to Common Stock issued thereafter until the Distribution Date (as defined below) and, in certain circumstances, with respect to Common Stock issued after the Distribution Date. Except as set forth below, each Right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series E Preferred Stock (the "Preferred Shares") at a price of $70.00 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of January 16, 1998 (the "Rights Agreement"), between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"). The following summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement (a copy of which is available as described under "Available Information"), including the definitions therein of certain terms used in the foregoing description. Issue of Right Certificates. The Rights are attached to all certificates representing outstanding Common Stock, and no separate Right Certificates (as defined below) have been distributed. The Rights will separate from the Common Stock on the earliest to occur of (1) the first date of public announcement that any person or entity, alone or together with its affiliates and associates (a "Person"), other than those that are Exempt Persons (as defined below), has acquired beneficial ownership of 15% or more of the outstanding Class A Common Stock (other than pursuant to certain permitted offers), or (2) the close of business on the tenth business day (or such later date as the Board of Directors of the 62 64 Company may determine) following the commencement of, or first public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in any Person becoming an Acquiring Person (as defined below), including, in the case of both clauses (1) and (2) above, any such date which is after the date of the Rights Agreement and prior to the issuance of the Rights (the earliest of such dates being called the "Distribution Date"). Any Person whose acquisition of Common Stock causes a Distribution Date pursuant to clause (1) above is an "Acquiring Person." The first date of public announcement that a Person has become an Acquiring Person is the "Shares Acquisition Date." For purposes of the Rights Agreement, the definition of Acquiring Person excludes certain Persons (the "Exempt Persons"), including Mr. Harbert, Mr. Weinberg and their respective affiliates and associates. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption, exchange, or expiration of the Rights), new Common Stock certificates issued after the Effective Date upon transfer or new issuance of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption, exchange, or expiration of the Rights), the surrender for transfer of any certificates for Common Stock outstanding as of the Effective Date will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As promptly as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date (and to each initial record holder of certain Common Stock issued after the Distribution Date), and such separate Right Certificates alone will evidence the Rights. Exercise and Expiration of Rights. The Rights are not exercisable until the Distribution Date and will expire at 5:00 P.M., Cleveland, Ohio time, on January 16, 2008, unless earlier redeemed or exchanged by the Company as described below. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. Flip-In Provision. In the event that any Person, other than those that are Exempt Persons, becomes an Acquiring Person other than pursuant to certain permitted offers, each holder of a Right will have (subject to the terms of the Rights Agreement) the right to receive upon exercise the number of shares of Common Stock, or, in the discretion of the Board of Directors, the number of one one-thousandths of a Preferred Share (or, in certain circumstances, other securities of the Company) determined in accordance with a formula based on the then Purchase Price divided by 50% of the then current per share market price of the Class A Common Stock (the "Flip-In Right"). Notwithstanding the foregoing, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or any affiliate or associate thereof will be null and void. Flip-Over Provision. In the event that, at any time following the Shares Acquisition Date, (1) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding Common Stock immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power, or (2) more than 50% of the Company's assets or earning power is sold or transferred, in either case with or to an Acquiring Person or any affiliate or associate thereof, or any other person in which such Acquiring Person, affiliate or associate has an interest, or any Person acting on behalf of or in concert with such Acquiring Person, affiliate or associate, or, if in such transaction all holders of Common Stock are not treated alike, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right (the "Flip-Over Right") to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company or the Company, as the case may be, having a value determined in accordance with a formula based on the then Purchase Price divided by 50% of the then current per share market price of the common stock of such acquiring company. The holder of a Right will continue to have the Flip-Over Right whether or not such holder exercises or surrenders the Flip-In Right. 63 65 Adjustment of Purchase Price. The Purchase Price payable, and the number of one one-thousandths of a Preferred Share or other securities issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (1) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (2) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then current market price of the Preferred Shares or (3) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular quarterly cash dividends or a dividend payable in preferred shares) or of subscription rights or warrants (other than "equivalent preferred shares," as defined in the Rights Agreement). The Purchase Price is also subject to adjustment in the event of a stock split of the Common Stock, or a stock dividend on the Common Stock payable in Common Stock, or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date. Redemption of Rights. At any time prior to the earlier to occur of either (1) a Person becoming an Acquiring Person or (2) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Board of Directors. The Company may at its option pay the Redemption Price in cash or Common Stock. Additionally, the Company may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price after a Shares Acquisition Date and before the expiration of any period during which the Flip-Over Right may be exercised in connection with a merger or other business combination transaction or series of transactions involving the Company in which all holders of Common Stock are treated alike but not involving (other than as a holder of Common Stock being treated like all other such holders) any Person acting directly or indirectly on behalf of, or in concert with, any Acquiring Person, or its affiliates or associates. The Board of Directors may only redeem Rights if a majority of the Disinterested Directors (as defined in the Rights Agreement) authorizes such redemption. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Exchange of Rights. At any time after a Person becomes an Acquiring Person but before such Acquiring Person, together with all affiliates and associates thereof, becomes the "Beneficial Owner" (defined in the Rights Agreement) of 50% or more of the Common Stock then outstanding, the Company may, at its option, exchange all or part of the then outstanding and exercisable Rights (other than those owned by the Acquiring Person, together with any affiliates and associates of such Acquiring Person, which have become null and void) at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction involving either the Common Stock or the Preferred Shares occurring after the date of the Rights Agreement (the "Exchange Ratio"). The Board of Directors may only exchange Rights if a majority of the Disinterested Directors authorizes such exchange. Immediately upon the action of the Board of Directors ordering the exchange of any Rights and without any further action and without any notice, the right to exercise such rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such rights held by such holder multiplied by the Exchange Ratio. Amendment of Rights Agreement. Prior to the Distribution Date, the Company may supplement or amend any provision of the Rights Agreement without the approval of the holders of Common Stock. From and after the Distribution Date, the Company generally may supplement or amend the Rights Agreement without the approval of the holders of Right Certificates in order (1) to cure any ambiguity, (2) to correct or supplement any provision which may be defective or inconsistent with any other provisions, (3) to shorten or lengthen any time period or (4) to change or supplement the provisions in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Right Certificates (other than an Acquiring Person or an affiliate or associate of an Acquiring Person). The Company may not supplement or amend any provision of the 64 66 Rights Agreement unless a majority of the Disinterested Directors authorizes such supplement or amendment. Anti-Takeover Effects of Rights. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to an Acquiring Person that acquires more than 15% of the Class A Common Stock on terms not approved by a majority of the Disinterested Directors. The Rights could discourage or make more difficult a merger, tender offer or similar transaction. However, the Rights should not interfere with any merger or other business combination approved by a majority of the Disinterested Directors prior to the time an Acquiring Person becomes such, because until such time the Rights may be redeemed by the Company. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate provides that directors and officers shall be indemnified against liabilities arising from their service as directors or officers to the fullest extent permitted by law, including payment in advance of a final disposition of a director's or officer's expenses and attorneys' fees incurred in defending any action, suit or proceeding. Except in the case of an action, suit or proceeding brought by or in the right of the Company against an officer or director, a court must approve such indemnification if the officer or director is adjudged liable. Presently, the Delaware General Corporation Law provides that to be entitled to indemnification an individual must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the Company's best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Delaware law permits a corporation to purchase and maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Delaware General Corporation Law. The Company maintains a directors' and officers' liability insurance policy. At present, there is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by any director or officer. LIMITATION ON DIRECTOR LIABILITY The Certificate also provides that, to the fullest extent permitted by the Delaware General Corporation Law, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. This provision presently limits a director's liability except where a director (1) breaches his or her duty of loyalty to the Company or its stockholders, (2) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (3) authorizes payment of an unlawful dividend or stock repurchase or redemption or (4) obtains an improper personal benefit. This provision is consistent with Section 102(b)(7) of the Delaware General Corporation Law, which is designed, among other things, to encourage qualified individuals to serve as directors of Delaware corporations. The Company believes this provision will assist it in maintaining and securing the services of qualified directors who are not employees of the Company. This provision has no effect on the availability of non-monetary equitable remedies, such as injunction or rescission. If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is Continental Stock Transfer & Trust Company, New York, New York. 65 67 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have shares of Class A Common Stock (excluding shares that may be sold by the Company upon exercise of the Underwriters' over-allotment option) and no shares of Class B Common Stock outstanding. Of these shares, shares of Class A Common Stock sold in the Offering will be freely tradeable without restriction (except as to affiliates of the Company) or registration under the Securities Act. The remaining outstanding shares of Class A Common Stock held by existing stockholders of the Company will be "restricted securities" within the meaning of Rule 144 under the Securities Act ("Rule 144"). Of those shares, shares held by non-affiliates of the Company are available for immediate sale in the public market subject to the limitations of Rule 144. All of the Company's directors and executive officers have agreed that for a period of 180 days after the date of the Offering they will not, without the prior written consent of Schroder & Co. Inc., offer, sell or otherwise dispose of any shares of Class A Common Stock held by them as of the effective date of the Offering or purchased by them directly from the Company thereafter. Given these contractual restrictions, beginning 180 days after the date of the Offering, of such shares would be available for immediate sale in the public market subject to the limitations of Rule 144. In addition, a substantial number of shares of Class A Common Stock issuable upon exercise of options granted pursuant to the 1997 Plan will become eligible for future sale in the public market at prescribed times. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder is entitled to sell within any three- month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Class A Common Stock (approximately shares immediately after the Offering) or the average weekly trading volume of the Class A Common Stock on the New York Stock Exchange during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission, Washington, D.C. (the "Commission"). Sales under Rule 144 are also subject to certain manner of sales provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the later of the date of acquisition of restricted shares from the Company or from any affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144 without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company intends to file a registration statement on Form S-8 under the Securities Act to register an aggregate of 700,000 shares of Class A Common Stock reserved for issuance under the 1997 Plan. The registration statement is expected to be filed and to become effective within 180 days following the date of this Prospectus. Shares of Common Stock issued upon exercise of options granted under the 1997 Plan after the effective date of such registration statement will be eligible for sale in the public market subject to the contractual restrictions described above and, in the case of options exercised by affiliates, the Rule 144 volume limitations applicable to affiliates. Since there has been no public market for shares of Class A Common Stock of the Company, the Company is unable to predict the effect, if any, that sales made under Rule 144, pursuant to future registration statements, or otherwise, may have on any then prevailing market price of the Class A Common Stock. Nevertheless, sales of a substantial amount of the Class A Common Stock in the public market could adversely affect market prices, as well as the Company's ability to raise additional capital through an offering of securities. 66 68 UNDERWRITING The Underwriters named below have severally agreed, subject to certain conditions, to purchase from the Company and the Selling Stockholders the aggregate number of shares of Class A Common Stock set forth opposite their respective names:
NUMBER OF UNDERWRITERS SHARES ------------ ----------- Schroder & Co. Inc. ........................................... Donaldson, Lufkin & Jenrette Securities Corporation............ McDonald & Company Securities, Inc. ........................... ------------ Total................................................ ============
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Class A Common Stock offered hereby, if any are purchased. The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares to the public initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters propose initially to offer a concession not in excess of $ per share to certain dealers, including the Underwriters; that the Underwriters and such dealers may initially allow a discount not in excess of $ per share to other dealers; and that the public offering price and the concession and discount to dealers may be changed by the Representatives after the commencement of the Offering. Certain of the Selling Stockholders have granted to the Underwriters options expiring at the close of business on the 30th day after the date of the Underwriting Agreement, to purchase up to an aggregate of additional shares of Class A Common Stock, at the public offering price less underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. The Underwriters may exercise the options only to cover over-allotments, if any. To the extent that the Underwriters exercise these options, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares proportionate to such Underwriter's initial commitment. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against liabilities, including liabilities under the Securities Act. The Company and all its directors, executive officers, significant employees and existing stockholders have agreed not to offer to sell, grant any option to purchase or otherwise dispose of any shares of Class A Common Stock held by them for a period of 180 days after the date of this Prospectus, without the prior written consent of Schroder & Co. Inc. See "Shares Eligible for Future Sale." The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Application has been made to have the Class A Common Stock approved for quotation on the New York Stock Exchange under the symbol HWK. The Underwriters have advised the New York Stock Exchange that the minimum distribution, issuance and aggregate market value requirements for listing on the New York Stock Exchange will be achieved in the Offering. The Representatives have advised the Company that, pursuant to Regulation M under the Exchange Act, certain persons participating in the Offering may engage in transactions, including over-allotments, stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the Class A Common Stock at a level above that which might otherwise prevail in the open market. An "over-allotment" refers to the Underwriters' sale of more shares of Class A Common Stock than they are required to purchase from the 67 69 Company and the Selling Stockholders in the Offering, thereby creating a short position in the Class A Common Stock for the account of the Underwriters. A "stabilizing bid" is a bid for or the purchase of Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the market price of the Class A Common Stock. A "syndicate covering transaction" is a bid for or the purchase of Class A Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the Offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the Offering if the shares of Class A Common Stock originally sold by such Underwriter or syndicate member are purchased by the Representatives in a syndicate covering transaction and therefore have not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Prior to the Offering, there has been no public market for the Class A Common Stock. The public offering price will be negotiated between the Company and the Representatives. Among the factors to be considered in determining the public offering price, in addition to prevailing market conditions, will be the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related business. Schroder & Co. Inc. and McDonald & Co. Securities, Inc. acted as placement agents for the Senior Notes and received customary compensation. LEGAL MATTERS Certain legal matters with respect to the Class A Common Stock will be passed upon for the Company by Kohrman Jackson & Krantz P.L.L., Cleveland, Ohio. Byron S. Krantz, a partner in Kohrman Jackson & Krantz P.L.L., owns shares of Class A Common Stock and 152 shares of Series D Preferred Stock, has been granted an option to purchase shares of Class A Common Stock pursuant to the 1997 Plan and is the Secretary and a Director of the Company. Marc C. Krantz, a son of Byron S. Krantz and a partner in Kohrman Jackson & Krantz P.L.L., is the Assistant Secretary of the Company. The Company paid legal fees to Kohrman Jackson & Krantz P.L.L. in 1996 of $469,000 for services in connection with a variety of matters, including the registration, sale and exchange of the Senior Notes and the Hawk Controlling Stockholder Merger. Certain legal matters will be passed upon for the Underwriters by Arter & Hadden LLP, Cleveland, Ohio. EXPERTS The consolidated financial statements of the Company and its subsidiaries as of September 30, 1997, December 31, 1996 and 1995 and for the nine months ended September 30, 1997 and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Helco, Inc. as of June 30, 1994, and the related statements of income, stockholder's equity and cash flows for the year then ended included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of SKW and subsidiaries as of December 31, 1994 and 1993, and for each of the two years in the period ended December 31, 1994, and for the statements of operations and cash flows for the six month period ended June 30, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth 68 70 in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The balance sheets of Houghton Acquisition Corporation d/b/a Hutchinson Foundry Products Company as of December 31, 1996 and 1995 and the related statements of income, stockholders' equity (deficit) and cash flows for the years ended December 31, 1996, 1995 and 1994 included in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Sinterloy Inc. as of December 31, 1996 and 1995, and the related statements of income, stockholder's equity and cash flows for the years then ended included in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is currently subject to certain of the informational requirements of the Exchange Act, and in accordance therewith and the terms of the Senior Note Indenture, files reports, statements, and other information with the Commission. Such reports, statements and other information filed by the Company may be inspected and copied at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of fees prescribed by the Commission. In addition, the Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act with respect to the Offering. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. For further information with respect to the Company and the Offering, reference is made to the Registration Statement, which may be inspected at the office of the Commission without charge and copies of which may be obtained from and upon request of the Commission and payment of the prescribed fee. REPORTS TO HOLDERS OF CLASS A COMMON STOCK The Company intends to distribute to its stockholders annual reports containing financial statements audited by its independent auditors and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 69 71 HAWK CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- HAWK CORPORATION Report of Independent Auditors....................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997.. F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 30, 1996 (unaudited) and 1997......... F-5 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 30, 1997............................................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 30, 1996 (unaudited) and 1997......... F-7 Notes to Consolidated Financial Statements........................................... F-9 HELCO, INC. Report of Independent Auditors....................................................... F-29 Balance Sheet as of June 30, 1994.................................................... F-30 Statement of Income for the year ended June 30, 1994................................. F-31 Statement of Shareholder's Equity for the year ended June 30, 1994................... F-32 Statement of Cash Flows for the year ended June 30, 1994............................. F-33 Notes to Financial Statements........................................................ F-34 S.K. WELLMAN LIMITED, INC. Report of Independent Auditors....................................................... F-37 Consolidated Balance Sheets as of December 31, 1993 and 1994......................... F-38 Consolidated Statements of Operations for the years ended December 31, 1993 and 1994 and the six months ended June 30, 1995............................................. F-39 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993 and 1994........................................................................... F-40 Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994, and the six months ended June 30, 1995............................................. F-41 Notes to Consolidated Financial Statements........................................... F-42 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY Report of Independent Accountants.................................................... F-49 Balance Sheets as of December 31, 1995 and 1996...................................... F-50 Statements of Income for the years ended December 31, 1994, 1995 and 1996............ F-51 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996...................................................................... F-52 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996........ F-53 Notes to Financial Statements........................................................ F-54 SINTERLOY, INC. Report of Independent Auditors....................................................... F-62 Balance Sheets as of December 31, 1995, 1996 and June 30, 1997 (unaudited)........... F-63 Statements of Income for the years ended December 31, 1995 and 1996 and six months ended June 30, 1997 (unaudited).................................................... F-64 Statements of Shareholder's Equity for the years ended December 31, 1995 and 1996 and six months ended June 30, 1997 (unaudited)......................................... F-65 Statements of Cash Flows for the years ended December 31, 1995 and 1996 and six months ended June 30, 1997 (unaudited)............................................. F-66 Notes to Financial Statements........................................................ F-67
F-1 72 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Hawk Corporation We have audited the accompanying consolidated balance sheets of Hawk Corporation and subsidiaries as of September 30, 1997 and December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for the nine months ended September 30, 1997 and for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawk Corporation and subsidiaries at September 30, 1997 and December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the nine months ended September 30, 1997 and for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Cleveland, Ohio December 19, 1997 F-2 73 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, --------------------- SEPTEMBER 30, 1995 1996 1997 -------- -------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................ $ 771 $ 25,774 $ 3,629 Accounts receivable, less allowance of $276 in 1995, $182 in 1996 and $216 in 1997.............................. 17,307 16,783 24,962 Inventories: Raw materials and work-in-process..................... 14,575 16,707 18,102 Finished products..................................... 5,530 4,157 4,465 -------- -------- --------- 20,105 20,864 22,567 Deferred income taxes.................................... 1,042 2,432 1,283 Other current assets..................................... 1,189 935 1,703 -------- -------- --------- Total current assets................................ 40,414 66,788 54,144 PROPERTY, PLANT AND EQUIPMENT: Land..................................................... 1,080 1,080 1,218 Buildings and improvements............................... 6,619 7,615 10,283 Machinery and equipment.................................. 38,990 45,766 57,012 Furniture and fixtures................................... 1,118 1,611 1,988 Construction in progress................................. 653 2,825 808 -------- -------- --------- 48,460 58,897 71,309 Less accumulated depreciation............................ 9,000 14,755 19,346 -------- -------- --------- Total property, plant and equipment................. 39,460 44,142 51,963 OTHER ASSETS: Intangible assets........................................ 39,821 39,939 56,569 Net assets held for sale................................. 3,604 3,604 3,604 Shareholder notes........................................ 2,000 1,838 1,675 Other.................................................... 2,120 2,130 2,260 -------- -------- --------- Total other assets.................................. 47,545 47,511 64,108 -------- -------- --------- TOTAL ASSETS............................................... $127,419 $158,441 $ 170,215 ======== ======== =========
F-3 74 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1997 DETACHABLE STOCK DECEMBER 31, WARRANTS AND -------------------- SEPTEMBER 30, PRO FORMA 1995 1996 1997 SHAREHOLDERS' EQUITY(1) -------- -------- ------------- ----------------------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.......................... $ 8,488 $ 8,194 $ 11,878 Accrued compensation...................... 7,364 6,775 7,206 Other accrued expenses.................... 3,537 2,405 4,860 Current portion of long-term debt......... 5,460 714 1,595 -------- -------- --------- Total current liabilities.......... 24,849 18,088 25,539 LONG-TERM LIABILITIES: Long-term debt............................ 89,446 128,469 129,701 Deferred income taxes..................... 2,348 4,090 5,065 Other..................................... 2,228 2,004 2,058 -------- -------- --------- Total long-term liabilities........ 94,022 134,563 136,824 DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION.................................... 4,600 4,600 9,300 $ -- SHAREHOLDERS' EQUITY (DEFICIT): Series A preferred stock, $.01 par value and an aggregate liquidation value of $2,625, plus any accrued and unpaid dividends, with 10% cumulative dividend (2,625 shares authorized, 1,375 shares issued and outstanding); Series B preferred stock, $.01 par value and an aggregate liquidation value of $702, plus any accrued and unpaid dividends, with 9% cumulative dividend (702 shares authorized, issued and outstanding); Series C preferred stock, $.01 par value and an aggregate liquidation value of $1,190, plus any accrued and unpaid dividends with 10% cumulative dividend (1,190 shares authorized, issued and outstanding)............................ 1 1 1 1 Class A common stock, $.01 par value; 2,200,000 shares authorized, 1,443,978 issued and outstanding.................. 14 14 14 14 Class B common stock, $.01 par value, 375,000 shares authorized, none issued or outstanding.......................... 3 Additional paid-in capital................ 1,724 1,964 1,964 1,964 Retained earnings (deficit)............... 2,330 (974) (2,653) 4,891 Other equity adjustments.................. (121) 185 (774) (774) -------- -------- --------- --------- Total shareholders' equity (deficit)........................ 3,948 1,190 (1,448) $ 6,099 -------- -------- --------- ========= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................................. $127,419 $158,441 $ 170,215 ======== ======== =========
(1) The Unaudited Pro Forma Detachable Stock Warrants and Shareholders' Equity above gives effect to the exchange of the detachable stock warrants, subject to put option, for shares of Class B Common Stock, and the redemption of all 1,375 outstanding shares of Series A Preferred Stock, 351 of the outstanding shares of Series B Preferred Stock and seven of the outstanding shares of Series C Preferred Stock, together with accrued and unpaid dividends thereon. See notes to consolidated financial statements. F-4 75 HAWK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------- --------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Net sales.......................... $ 41,395 $ 84,643 $ 123,997 $ 93,672 $ 116,362 Cost of sales...................... 26,771 61,164 91,884 69,023 82,940 --------- --------- --------- --------- --------- Gross profit....................... 14,624 23,479 32,113 24,649 33,422 Expenses: Selling, technical and administrative expenses....... 6,294 11,575 15,468 11,612 14,241 Amortization of intangibles...... 954 1,924 2,806 2,408 2,575 Plant consolidation expense...... 4,028 3,749 50 --------- --------- --------- --------- --------- Total expenses..................... 7,248 13,499 22,302 17,769 16,866 --------- --------- --------- --------- --------- Income from operations............. 7,376 9,980 9,811 6,880 16,556 Interest expense................... 3,267 7,323 10,648 7,321 10,639 Other (income) expense, net........ (234) (130) 256 55 122 --------- --------- --------- --------- --------- Income (loss) before income taxes, minority interest and extraordinary item............... 4,343 2,787 (1,093) (496) 5,795 Income taxes....................... 1,845 1,593 789 863 2,534 Minority interest.................. 211 432 --------- --------- --------- --------- --------- Income (loss) before extraordinary item............................. 2,287 762 (1,882) (1,359) 3,261 Extraordinary item--write-off of deferred financing costs, net of $798 income taxes................ (1,196) --------- --------- --------- --------- --------- Net income (loss).................. $ 2,287 $ 762 $ (3,078) $ (1,359) $ 3,261 ========= ========= ========= ========= ========= Preferred stock dividend requirements..................... $ (294) $ (326) $ (226) $ (170) $ (240) ========= ========= ========= ========= ========= Income (loss) before extraordinary item applicable to common shareholders..................... $ 1,993 $ 436 $ (2,108) $ (1,529) $ 3,021 ========= ========= ========= ========= ========= Net income (loss) applicable to common shareholders.............. $ 1,993 $ 436 $ (3,304) $ (1,529) $ 3,021 ========= ========= ========= ========= ========= Income (loss) before extraordinary item per share applicable to common shareholders.............. $ 1.76 $ .28 $ (1.20) $ (.87) $ 1.72 ========= ========= ========= ========= ========= Net income (loss) per share applicable to common shareholders..................... $ 1.76 $ .28 $ (1.88) $ (.87) $ 1.72 ========= ========= ========= ========= ========= Number of shares used to compute per share data................... 1,132,689 1,538,162 1,760,946 1,760,946 1,760,946 ========= ========= ========= ========= =========
See notes to consolidated financial statements. F-5 76 HAWK CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
COMMON PREFERRED COMMON COMMON STOCK PREFERRED PREFERRED STOCK STOCK STOCK $.01 ADDITIONAL STOCK STOCK $.01 PAR NO PAR $3 PAR PAR PAID-IN 10% 9% VALUE VALUE VALUE VALUE CAPITAL --------- --------- --------- ------ ------ ------ ---------- Balance at January 1, 1994............................. $ 2,625 $ 377 Issuance of stock............................ $ 370 $ 158 Net income................................... Preferred stock dividend..................... ------- ----- ----- ----- ----- ---- ------- Balance at December 31, 1994........................... 2,625 370 377 158 Merger of Helsel and Hawk.................... (2,625) (370) $ 1 (377) (158) $ 14 $ 8,724 Net income................................... Preferred stock dividend..................... Purchase of warrants......................... (7,000) Foreign currency translation adjustment...... Additional minimum pension liability......... ------- ----- ----- ----- ----- ---- ------- Balance at December 31, 1995........................... 1 14 1,724 Merger of Hawk Holding Corp. and Hawk........ 240 Net loss..................................... Preferred stock dividend..................... Foreign currency translation adjustment...... Additional minimum pension liability......... ------- ----- ----- ----- ----- ---- ------- Balance at December 31, 1996........................... 1 14 1,964 Adjustment to carrying value of detachable warrants.................................... Net income................................... Preferred stock dividend..................... Foreign currency translation adjustment...... Minimum pension liability ................... ------- ----- ----- ----- ----- ---- ------- Balance at September 30, 1997................ $ $ $ 1 $ $ $ 14 $ 1,964 ======= ===== ===== ===== ===== ==== ======= RETAINED OTHER EARNINGS EQUITY (DEFICIT) ADJUSTMENTS TOTAL -------- ----------- ------- < Balance at January 1, 1994............................. $ 375 $ 3,377 Issuance of stock............................ 528 Net income................................... 2,287 2,287 Preferred stock dividend..................... (294) (294) ------- ------- ------- Balance at December 31, 1994........................... 2,368 5,898 Merger of Helsel and Hawk.................... (474) 4,735 Net income................................... 762 762 Preferred stock dividend..................... (326) (326) Purchase of warrants......................... (7,000) Foreign currency translation adjustment...... $ 207 207 Additional minimum pension liability......... (328) (328) ------- ------- ------- Balance at December 31, 1995........................... 2,330 (121) 3,948 Merger of Hawk Holding Corp. and Hawk........ 240 Net loss..................................... (3,078) (3,078) Preferred stock dividend..................... (226) (226) Foreign currency translation adjustment...... 315 315 Additional minimum pension liability......... (9) (9) ------- ------- ------- Balance at December 31, 1996........................... (974) 185 1,190 Adjustment to carrying value of detachable warrants.................................... (4,700) (4,700) Net income................................... 3,261 3,261 Preferred stock dividend..................... (240) (240) Foreign currency translation adjustment...... (1,296) (1,296) Minimum pension liability ................... 337 337 ------- ------- ------- Balance at September 30, 1997................ $(2,653) $ (774) $(1,448) ======= ======= =======
See notes to consolidated financial statements. F-6 77 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------- --------------------------- 1994 1995 1996 1997 ----------- ----------- ----------- 1996 ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................. $ 2,287 $ 762 $ (3,078) $(1,359) $ 3,261 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.... 2,466 5,527 8,418 6,688 7,166 Accretion of discount on debt.... 325 650 488 487 Deferred income taxes............ 302 377 352 1,568 Minority interest................ 211 432 Extraordinary item, net of tax... 1,196 Changes in operating assets and liabilities, net of acquired assets: Accounts receivable.............. (451) (53) 524 (1,208) (5,319) Inventories...................... (380) (1,398) (759) (241) (865) Other assets..................... 4 1,115 4 (1,126) (925) Accounts payable................. 235 196 (294) 350 2,800 Other liabilities................ 147 430 (1,147) (805) 2,023 ------- -------- --------- ------- -------- Net cash provided by operating activities....................... 4,821 7,713 5,866 2,787 10,196 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Helco, Inc............. (4,627) Purchase of S.K. Wellman Limited, Inc., net of cash acquired....... (61,607) Purchase of Hutchinson Foundry Products Company................. (10,639) Purchase of Sinterloy, Inc......... (15,449) Purchases of property, plant and equipment........................ (1,871) (3,781) (8,275) (7,669) (4,798) Loans to shareholders.............. (2,000) Payments received on shareholder notes............................ 162 162 163 ------- -------- --------- ------- -------- Net cash used in investing activities....................... (6,498) (67,388) (8,113) (7,507) (30,723) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings on long- term debt........................ 3,880 102,000 181,373 5,317 Payments on long-term debt......... (3,555) (30,726) (149,765) (783) Net borrowings (payments) under revolving credit lines........... 1,280 (1,280) Purchase of warrants............... (7,000) Proceeds from sale of preferred stock, including minority interest......................... 702 Proceeds from sale of common stock, including minority interest...... 300 Deferred financing costs........... (2,799) (4,678) 417 (565) Payments of preferred stock dividends........................ (295) (326) (226) (170) (240) Other.............................. (121) 546 279 (30) ------- -------- --------- ------- -------- Net cash provided by (used in) financing activities............. 2,312 59,748 27,250 5,843 (1,618) ------- -------- --------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 635 73 25,003 1,123 (22,145) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 63 698 771 771 25,774 ------- -------- --------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 698 $ 771 $ 25,774 $ 1,894 $ 3,629 ======= ======== ========= ======= ========
See notes to consolidated financial statements. F-7 78 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED (DOLLARS IN THOUSANDS) SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------ ------ ------- ------------- Cash payments for interest.................... $2,743 $6,260 $11,024 $ 8,137 ====== ====== ======= Cash payments for income taxes................ $1,852 $1,929 $ 1,153 $ 1,490 ====== ====== ======= Noncash investing and financing activities: Equipment purchased with capital leases..... $ 2,019 $ 177 ======= Acquisition of Helsel minority interest through issuance of stock................ $4,735 ======
Reconciliation of assets acquired and liabilities assumed
HELCO -- 1994 ----------------- Fair value of assets acquired............................................. $ 8,615 Liabilities assumed....................................................... (3,488) Subordinated note payable issued.......................................... (500) -------- Cash paid for acquisition................................................. $ 4,627 ========
SK WELLMAN -- 1995 ----------------- 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 =========
HUTCHINSON -- 1997 ----------------- Fair value of assets acquired............................................. $ 13,747 Liabilities assumed....................................................... (1,608) Note payable issued....................................................... (1,500) -------- Cash paid for acquisition................................................. $ 10,639 ========
SINTERLOY -- 1997 ----------------- Fair value of assets acquired............................................. $ 16,043 Liabilities assumed....................................................... (594) -------- Cash paid for acquisition................................................. $ 15,449 ========
See notes to consolidated financial statements. F-8 79 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 NINE MONTHS ENDED SEPTEMBER 30, 1997 A. BASIS OF PRESENTATION The consolidated financial statements of Hawk Corporation and its wholly-owned subsidiaries, also include, effective July 1, 1994, the accounts of Helsel, Inc. (Helsel), effective July 1, 1995, the accounts of S.K. Wellman Corp. (Wellman), effective January 2, 1997, the accounts of Hutchinson Products Corporation (Hutchinson) and, effective August 1, 1997, the accounts of Sinterloy Corporation (Sinterloy) (collectively, the Company). See Note C. All significant intercompany accounts and transactions have been eliminated in the accompanying financial statements. Certain amounts have been reclassified in 1994, 1995 and 1996 to conform with the 1997 presentation. All references to 1997 in the Notes to Consolidated Financial Statements refer to the nine months ended September 30, 1997. The Company designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The accompanying unaudited consolidated financial statements at September 30, 1996 have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. B. SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The Company principally uses either the straight-line or the unit method of depreciation for financial reporting purposes based on annual rates sufficient to amortize the cost of the assets over their estimated useful lives (5 to 40 years). Accelerated methods of depreciation are used for federal income tax purposes. INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method over periods ranging from 3 to 40 years. The ongoing value and remaining useful life of intangible assets are subject to periodic evaluation and the Company currently expects the carrying amounts to be fully recoverable. If events and circumstances indicate that intangible assets might be impaired, an undiscounted cash flow methodology would be used to determine whether an impairment loss should be recognized. See Note D. F-9 80 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at weighted average exchange rates. Gains and losses resulting from translation are included in other equity adjustments in the consolidated balance sheets. REVENUE RECOGNITION Revenue from the sale of the Company's products is recognized upon shipment to the customer. Costs and related expenses to manufacture the products are recorded as cost of sales when the related revenue is recognized. SIGNIFICANT CONCENTRATIONS The Company provides credit, in the normal course of its business, to original equipment and after-market manufacturers. The Company's customers are not concentrated in any specific geographic region. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations. The percentage of consolidated net sales to major customers are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 1996 ---- ---- ---- Customer A................................................. 22.6% 13.8% 10.4% Customer B................................................. 11.0 9.8 8.9
Accounts receivable balances from these customers represent approximately 18% and 13% of the Company's consolidated accounts receivable at December 31, 1995 and 1996, respectively. PRODUCT RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. The Company's expenditures for product development and engineering were (in thousands) approximately $1,158 in 1994, $2,000 in 1995, $2,639 in 1996 and $2,333 in 1997. ADVERTISING Advertising costs are expensed as incurred. Advertising expenses amounted to (in thousands) approximately $106, $385, $197 and $191 in 1994, 1995, 1996 and 1997, respectively. INCOME TAXES The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities in the balance sheet. The liability method requires that deferred income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial reporting bases of assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1995 and 1996 and September 30, 1997, the carrying value of the Company's financial instruments, which include cash, cash equivalents and long-term debt, approximate their fair value. F-10 81 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common shares and common share equivalents (warrants) outstanding during the respective periods. Earnings available to common shareholders reflects an adjustment for preferred stock dividends paid during the respective periods. SUPPLEMENTAL NET INCOME (LOSS) PER SHARE Supplemental pro forma income (loss) before taxes and extraordinary item and net income (loss), considering only the repayment of the Senior Subordinated Notes and a portion of the Senior Notes (see Note E) with a portion of the proceeds of a contemplated public offering of shares of common stock and the proceeds from a $35.0 million five year unsecured term loan facility, would have been $ and $ , respectively, for the year ended December 31, 1996, and $ and $ , respectively, for the nine months ended September 30, 1997. Supplemental pro forma net income (loss) per share would have been $ for the year ended December 31, 1996 and $ for the nine months ended September 30, 1997, based on the weighted average number of shares of common stock outstanding during the period plus the estimated number of shares necessary to be issued in such public offering, and considering the proceeds from a $35.0 million five year unsecured term loan facility, in order to obtain sufficient proceeds to repay the Senior Subordinated Notes and a portion of the Senior Notes. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. The Company adopted SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 did not have a material effect on the Company's financial position or results of operations. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under SFAS No. 128, "basic earnings per share" will be calculated based upon the weighted average number of shares actually outstanding, and "diluted earnings per share" will be calculated based upon the weighted average number of common shares outstanding and other potential common shares if they are dilutive. SFAS No. 128 will be adopted by the Company on December 31,1997 and all prior periods will be restated. The adoption of SFAS No. 128 is not expected to have a material impact on the Company's earnings per share for any of the periods presented. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company intends to fully comply with the provisions of this statement upon its required adoption in the first quarter of 1998, and does not anticipate a significant impact to the financial statements. F-11 82 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Also in June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required in 1998. C. BUSINESS ACQUISITIONS Effective June 30, 1994, Helsel, a corporation owned 53% by a control group of Company shareholders (Hawk Control Group) and 47% by other investors, commenced operations and acquired substantially all of the net assets of Helco, Inc. (Helco) for approximately $8.6 million. The acquisition was accounted for as a purchase. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of the acquisition. The excess of fair market value of identifiable assets less liabilities over the purchase price resulted in negative goodwill, which was applied to reduce property, plant and equipment. The acquisition was financed through long-term debt and the sale of $702,000 of preferred stock and $300,000 of common stock. Effective June 30, 1995, Helsel became a wholly-owned subsidiary of the Company whereby each outstanding share of common stock of Helsel was exchanged, based on an independent valuation, for .0693955 shares of common stock of the Company. Additionally, the Company issued one share of 9% preferred stock for each share of Helsel preferred stock. In total, 6,940 Class A common shares and 702 Series B preferred shares were issued to the Helsel shareholders. Because the Hawk Control Group owned a controlling interest in Helsel, the 1995 transaction has been accounted for as a merger of entities under common control and the Company's 1994 financial statements have been restated to include Helsel since June 30, 1994. In addition, the acquisition of the other investors' 47% interest in Helsel, effective June 30, 1995, has been accounted for as the purchase of a minority interest. Accordingly, the excess of the purchase price over the estimated fair value of the minority interest ($3.6 million) was recorded as goodwill and is being amortized over 30 years. A summary of the combination and financial results for Helsel and the Company, as of December 31, 1994 and for the period July 1, 1994 through December 31, 1994, follows:
LESS: CONSOLIDATED MINORITY HAWK HELSEL HAWK INTEREST CORPORATION ------ ------- -------- ------------ (IN THOUSANDS) 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
In connection with the acquisition, the Company entered into an employment agreement through June 1997 with the previous shareholder of Helco, who continues to serve as President of Helsel. Terms of the employment agreement include an annual salary of $150,000 and a bonus based on earnings. Amounts earned under this contract are charged to current operations. Effective June 30, 1995, Wellman acquired for cash substantially all of the net assets of S.K. Wellman Limited, Inc. for approximately $62 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of the net assets acquired in the amount of $15.8 million is being amortized over 15 years and is included in intangible assets. The operating results of Wellman are included in the Company's consolidated statements of operations since the date F-12 83 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED of acquisition. As a result of this acquisition, the Company consolidated certain operating facilities. Accordingly, the net carrying value of the facilities the Company closed and is planning to sell are reflected as net assets held for sale on the accompanying balance sheets at December 31, 1995 and 1996 and September 30, 1997. The net assets held for sale are stated at the lower of the carrying amount or fair value less costs to sell and consist primarily of land and buildings. In addition, for the year ended December 31, 1996, the Company incurred and expended approximately $4.0 million of costs relating primarily to the relocation of machinery and equipment. Effective January 2, 1997, Hutchinson acquired all of the outstanding capital stock of Hutchinson Foundry Products Company for (1) $10.6 million in cash; (2) $1.5 million in 8.0% two-year convertible notes; and (3) contingent payments to be made by the Company if certain earnings targets are met. The acquisition has been accounted for as a purchase. The excess of the purchase price over the estimated fair value of the capital stock acquired in the amount of $7.7 million is being amortized over 30 years and is included in intangible assets. The results of operations of Hutchinson are included in the Company's consolidated statements of income since the date of acquisition. Effective August 1, 1997, Sinterloy acquired substantially all of the assets (except cash) and assumed certain liabilities of Sinterloy, Inc., for $15.4 million in cash, subject to an adjustment based on the adjusted net equity position of Sinterloy, Inc. at closing. As of September 30, 1997, a closing adjustment had not been determined. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of the assets less the assumed liabilities in the amount of $10.4 million is being amortized over 30 years and is included in intangible assets. The results of operations of Sinterloy are included in the Company's consolidated statements of operations since the date of acquisition. The following unaudited pro forma consolidated results of operations give effect to the Hutchinson and Sinterloy acquisitions as though they had occurred on January 1, 1996 and include certain adjustments, such as additional amortization expense as a result of goodwill and increased interest expense related to debt incurred for the acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1997 -------- -------- (IN THOUSANDS) Net sales....................................... $108,834 $124,985 ======== ======== Net (loss) income............................... $ (506) $ 4,894 ======== ========
Pro forma net sales and net income are not necessarily indicative of the net sales and net income that would have occurred had the acquisitions been made at the beginning of the respective years or the results which may occur in the future. In November 1996, the Company merged with Hawk Holding Corp. (Old Hawk), a corporation that owned approximately 34% of the outstanding common stock of the Company, in a tax-free reorganization. At the time of the merger, Old Hawk was 96% owned by the Hawk Control Group and 4% owned by other investors. In the merger, the Company acquired and canceled the shares of Class A common stock of the Company owned by Old Hawk and reissued the same amount of shares of Class A common stock pro rata to the Old Hawk stockholders. In addition, the Company acquired and canceled the Class A preferred stock of the Company owned by Old Hawk, and issued 1,190 shares of Class C preferred stock, which has a liquidation value substantially equal to the aggregate liquidation value of the Class A preferred stock previously owned by Old Hawk. Since the Company and Old Hawk were under common control, the Company has recorded the acquisition of the Hawk Control Group's interest in Old Hawk at historical cost and the acquisition of the other investors' ownership interest as a purchase of minority interest. Accordingly, the excess of the purchase price over the estimated fair value F-13 84 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED of the minority interest acquired in the amount of $240,000 was recorded as goodwill and is being amortized over 30 years. D. INTANGIBLE ASSETS The components of intangible assets and related amortization periods are as follows:
DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 ------- ------- ------------- (IN THOUSANDS) Product certifications (19 to 40 years)................................. $20,820 $20,820 $20,820 Goodwill (15 to 40 years)................ 21,772 22,012 40,103 Deferred financing costs (3 to 7 years)................................. 2,779 4,678 5,611 Proprietary formulations and patents (10 years)................................. 1,806 1,806 1,806 Other.................................... 779 779 960 ------- ------- ------- 47,956 50,095 69,300 Accumulated amortization................. (8,135) (10,156) (12,731) ------- ------- ------- $39,821 $39,939 $56,569 ======= ======= =======
Product certifications were acquired and valued based on the Company's position as a certified supplier of friction materials to the major manufacturers of commercial aircraft brakes. E. LONG-TERM DEBT
DECEMBER 31, --------------------- SEPTEMBER 30, 1995 1996 1997 ------- -------- ------------- (IN THOUSANDS) Term Loans.............................. $57,090 Revolving Credit Line................... 10,400 Senior Subordinated Notes............... 25,725 $ 26,375 $ 26,862 Senior Notes............................ 100,000 100,000 Other................................... 1,691 2,808 4,434 ------- -------- -------- 94,906 129,183 131,296 Less current portion.................... 5,460 714 1,595 ------- -------- -------- $89,446 $128,469 $ 129,701 ======= ======== ========
As a result of the acquisition of Wellman in June 1995, the Company entered into a Secured Credit Agreement Facility (Credit Agreement) with several participating banks, and repaid all previous credit facilities. In November 1996, in connection with the issuance of new Senior Notes (discussed below), the Credit Agreement was cancelled, all outstanding borrowings were repaid, and the Company incurred an extraordinary charge of $1,994,000 relating to the write-off of previously capitalized deferred financing costs. Prior to its cancellation in November 1996, the Credit Agreement consisted of (1) two term loans requiring quarterly interest payments, based on certain published rates, and quarterly principal payments in accordance with payment schedules from September 1995 through June 2002; and (2) a $22,000,000 revolving credit line with a commitment fee of one half percent per annum on the unused portion and interest payable quarterly based on certain published rates. In addition, effective June 30, 1995, the Company issued $30,000,000 in Senior Subordinated Notes with $10,000,000 maturing on January 31, 2004, and June 30, 2004 and 2005. Interest is payable quarterly at a fixed rate of 12%. In connection with the senior subordinated notes, the Company issued detachable warrants to the lender that provide the lender the option to purchase 316,970 shares of the F-14 85 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Company's Class B common stock at a per share price of $.01. The warrants are exercisable through the year 2005. Beginning in the year 2001, the Company has the option to repurchase the warrants and the warrant holders have the right to put the warrants to the Company for cash, at prices based on the fair market value of the Company at the date of put as determined by an independent third party. The warrant holders' put option is terminated upon the occurrence of certain events, including the closing of an initial public offering. For financial reporting purposes, at June 30, 1995, the fair value of the warrants, including the put option, was estimated to be $4,600,000 and classified as detachable stock warrants, subject to put option on the accompanying balance sheet. The resulting discount is being amortized over the life of the debt as non-cash, imputed interest. The discount is based on an effective interest rate of 14.2%. The unamortized discount at December 31, 1995, December 31, 1996, and September 30, 1997 totaled $4,275,000, $3,625,000, and $3,138,000, respectively. Adjustments to the carrying value of the detachable stock warrants are based on revisions to the estimated present value of the future fair market value of the Company, with a corresponding charge or credit to retained earnings. The carrying value of the warrants, including the put option, was adjusted to $9.3 million as of September 30, 1997. In November 1996, the Company issued $100,000,000 in Senior Notes due on December 1, 2003, unless previously redeemed, at the Company's option, in accordance with the terms of the Notes. Interest is payable semi-annually on June 1 and December 1 of each year commencing June 1, 1997, at a fixed rate of 10.25%. The Senior Notes and the notes for which certain of the Senior Notes have been exchanged (Exchange Notes and, together with the Senior Notes, the Senior Notes) are fully and unconditionally guaranteed on a joint and several basis by each of the direct or indirect wholly-owned domestic subsidiaries of the Company (Guarantor Subsidiaries). (See Note M). Also, in November 1996, the Company executed a new $25,000,000 Revolving Credit Facility (Credit Facility) which matures in November 1999. The Company pays a commitment fee of 0.5% per annum on the unused portion. Interest is payable monthly at LIBOR plus 2.25% per annum, or at the Company's option, a variable rate based on the prime rate plus 1.0% per annum, payable at various interest periods per the Credit Facility. The Credit Facility contains covenants with respect to the Company and its subsidiaries that, among other things, prohibit the payment of any dividends to the Company by the subsidiaries of the Company (including the Guarantor Subsidiaries) in the event of a default under the terms of the Credit Facility. There were no outstanding borrowings under the Credit Facility at December 31, 1996 or September 30, 1997. Aggregate principal payments due on long-term debt as of September 30, 1997 are as follows (in thousands): three months ending December 31, 1997 -- $172; 1998 -- $1,581; 1999 -- $1,502; 2000 -- $450; 2001 -- $535; 2002 -- $228; thereafter -- $126,828. F. SHAREHOLDERS' EQUITY In accordance with a Merger Agreement and Plan of Reorganization dated June 30, 1995, the Company, formerly an Ohio corporation, was merged with and into a Delaware corporation under the same name. Concurrently, each issued and outstanding share of common stock, without par value, of the previous corporation was converted into one fully paid share of Class A common stock, par value $.01 per share, of the merged corporation. Additionally, each issued and outstanding share of preferred stock, $1,000 par value per share, of the previous corporation was converted into one fully paid share of Series A preferred stock, par value $.01 per share, of the merged corporation. The Company's authorized preferred stock includes 2,625 shares of Class A preferred stock, 702 shares of Class B preferred stock and 1,190 shares of Class C preferred stock. Dividends are cumulative at the rate of 10% of $1,000 per share for Class A and Class C preferred stock and 9% of $1,000 F-15 86 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED per share for Class B preferred stock. Each share of preferred stock is: (1) entitled to a liquidation preference equal to $1,000 per share plus any accrued and unpaid dividends, (2) not entitled to vote, except in certain circumstances, (3) redeemable in whole, at the option of the Company, for $1,000 per share plus all accrued dividends to the date of redemption. The Company's authorized common shares of 2,575,000 includes 2,200,000 shares of Class A voting and 375,000 shares of Class B non-voting. Each share of the Class B common stock is convertible into one share of Class A common stock upon the occurrence of certain events. All of the outstanding shares are Class A. In June 1995, the Company repurchased detachable warrants covering 2,000 shares of Class B common stock for a negotiated price of $7,000,000. The warrants were originally issued in connection with a subordinated note that was paid in full when the Company entered into the Credit Agreement as described in Note E. G. EMPLOYEE BENEFITS The Company has several defined benefit pension plans which cover certain employees. Benefits payable are based primarily on compensation and years of service or a fixed annual benefit for each year of service. Certain hourly employees are also covered under collective bargaining agreements. The Company funds the plans in amounts sufficient to satisfy the minimum amounts required under ERISA. A summary of the components of net periodic pension cost (income) for the plans is as follows:
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED --------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------- ------- ------- ------------- (IN THOUSANDS) Service cost.................. $ 246 $ 382 $ 400 $ 339 Interest cost................. 421 665 727 617 Actual return on plan assets...................... (165) (1,732) (1,435) (2,165) Net amortization and deferral.................... (293) 673 576 1,335 ------- ------- ------- ------- $ 209 $ (12) $ 268 $ 126 ======= ======= ======= =======
F-16 87 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of the actuarially determined benefit obligations and trustees net assets for Company administered defined benefit pension plans is presented below, along with a reconciliation of the plans' funded status to amounts recognized in the Company's balance sheets. The plans' assets are primarily invested in fixed income and equity securities.
ASSETS ACCUMULATED EXCEED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS --------------------------------- --------------------------------- 1995 1996 1997 1995 1996 1997 ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Actuarial present value of accumulated benefit obligations: Vested.................. $(5,960) $(6,186) $(7,461) $(2,559) $(2,594) $(2,209) Non-vested.............. (60) (57) (124) (214) (198) (164) ------- ------- ------- ------- ------- ------- $(6,020) $(6,243) $(7,585) $(2,773) $(2,792) $(2,373) ======= ======= ======= ======= ======= ======= Projected benefit obligations............. $(6,634) $(6,943) $(8,218) $(2,773) $(2,909) $(2,373) Plan assets at fair value................... 7,524 8,677 12,054 1,693 2,261 2,153 ------- ------- ------- ------- ------- ------- Projected benefit obligations less than (in excess of) plan assets.................. 890 1,733 3,836 (1,080) (648) (220) Unrecognized net loss..... 371 (263) (1,995) 328 (65) (197) Prior service cost not yet recognized in net periodic pension cost... 134 134 188 361 347 266 Unrecognized net (asset) obligation.............. (231) (208) (129) 151 125 52 Adjustment required to recognize minimum liability............... (840) ------- ------- ------- ------- ------- ------- PREPAID (ACCRUED) PENSION COST.................... $ 1,164 $ 1,396 $ 1,900 $(1,080) $ (241) $ (99) ======= ======= ======= ======= ======= =======
The following assumptions were used in accounting for the defined benefit plans:
1994 1995 1996 1997 ----- ----- ---- ---- Used to compute the projected benefit obligation: Discount rate............................................ 8.0% 8.0% 7.5% 7.5% Annual salary increase................................... 3.0 3.0 3.0 3.0 Expected long-term rate of return on plan assets........... 10.0 10.0 9.5 9.0
The Company also sponsors several defined contribution plans which provide voluntary employee contributions and, in certain plans, matching and discretionary employer contributions. Expenses associated with these plans were (in thousands) approximately $290 in 1994, $920 in 1995, $690 in 1996, and $590 in 1997. H. LEASE OBLIGATIONS The Company has capital lease commitments for buildings and equipment. Future minimum annual rentals, including interest expense, are (in thousands): three months ending December 31, 1997 -- F-17 88 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED $219, 1998 -- $875, 1999 -- $737, 2000 -- $491, 2001 -- $580, 2002 -- $238. Amount representing interest is $538. Total capital lease obligations are included in other long-term debt. Amortization of assets recorded under capital leases is included with depreciation expense. The Company leases certain office and warehouse facilities and equipment under operating leases. Rental expense (in thousands) was approximately $77 in 1994, $270 in 1995, $609 in 1996 and $677 in 1997. Future minimum lease commitments under these agreements which have an original or existing term in excess of one year as of September 30, 1997 are as follows (in thousands): three months ending December 31, 1997 -- $220; 1998 -- $874; 1999 -- $545; 2000 -- $528; 2001 -- $504; 2002 -- $435 and thereafter -- $318. I. INCOME TAXES The provision (credit) for income taxes, except for the effect of the extraordinary item, consists of the following:
YEAR ENDED DECEMBER 31 NINE MONTHS ---------------------------- ENDED 1994 1995 1996 SEPTEMBER 30, 1997 ------ ------ ------ ------------------ (IN THOUSANDS) Current: Federal........................... $1,369 $ 907 $ (624) $ 802 State and local................... 174 235 129 80 Foreign........................... 74 932 84 ------ ------ ----- ------ 1,543 1,216 437 966 Deferred: Federal........................... 237 365 299 1,510 State and local................... 65 12 53 58 ------ ------ ----- ------ 302 377 352 1,568 ------ ------ ----- ------ TOTAL INCOME TAXES.................. $1,845 $1,593 $ 789 $2,534 ====== ====== ===== ======
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. At December 31, 1996 the Company had net operating loss carryforwards of approximately $1,600,000 which expire in 2011. F-18 89 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company also had $622,000 of Alternative Minimum Tax (AMT) credit carryforwards that do not expire. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31 ---------------- SEPTEMBER 30 1995 1996 1997 ------ ------ ------------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforward................. $ 545 Reserve for severance costs..................... $ 237 Accrued vacation................................ 259 318 $ 500 Accrued pension costs........................... 466 AMT credit carryforward......................... 622 Other accruals.................................. 509 595 535 Other........................................... 302 352 248 ------ ------ ------ Total deferred tax assets......................... 1,773 2,432 1,283 Deferred tax liabilities: Tax over book depreciation and amortization..... 2,659 4,090 4,797 Other........................................... 420 268 ------ ------ ------ Total deferred tax liabilities.................... 3,079 4,090 5,065 ------ ------ ------ NET DEFERRED TAX LIABILITIES...................... $1,306 $1,658 $ 3,782 ====== ====== ======
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:
YEAR ENDED DECEMBER 31, NINE MONTHS --------------------------- ENDED 1994 1995 1996 SEPTEMBER 30, 1997 ---- ----- ------ ------------------ Income tax (credit) at federal statutory rate..................... 34.0% 34.0% (34.0)% 34.0% State and local tax, net of federal tax benefit........................ 3.0 5.7 3.9 4.0 Nondeductible goodwill amortization....................... 2.2 7.2 3.7 3.1 Adjustment for worldwide tax rates and other, net..................... 3.1 9.0 26.4 2.6 ---- ---- ---- ---- Provision for income taxes........... 42.3% 55.9% 0.0% 43.7% ==== ==== ==== ====
Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, which may be offset by foreign tax credits, and withholding taxes payable to various foreign countries. J. CONTINGENCIES The Company has wage continuation agreements with two of its officers/shareholders. In the event the officer/shareholder dies or becomes permanently disabled while employed by the Company, each agreement provides for payments to be made annually to the officer/shareholder's spouse based on a compensation formula, until the spouse's death. F-19 90 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED K. RELATED PARTIES In June 1995, certain shareholders of the Company issued interest-bearing notes to the Company in the amount of $2 million, in order to enable them to repay certain indebtedness incurred by them with respect to the acquisition of Helsel. The notes are due and payable on July 1, 2002 and bear interest at the prime rate plus 1.25% through September 30, 1996 and at the prime rate thereafter. L. GEOGRAPHIC INFORMATION Geographic information for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 is as follows:
1995 1996 1997 -------------------------------- -------------------------------- -------------------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- (IN THOUSANDS) Net sales............. $ 76,570 $ 8,073 $ 84,643 $104,622 $ 19,375 $123,997 $101,113 $ 15,249 $116,362 Income from operations.......... 9,242 738 9,980 7,326 2,485 9,811 15,865 691 16,556 Net income (loss)..... 481 281 762 (3,788) 710 (3,078) 2,976 285 3,261 Total assets.......... 113,293 14,126 127,419 141,139 17,302 158,441 151,831 18,384 170,215
The Company has foreign operations in Canada and Italy. The Company had no foreign operations in 1994. M. SUPPLEMENTAL GUARANTOR INFORMATION As discussed in Note E, each of the Guarantor Subsidiaries of the Senior Notes has fully and unconditionally guaranteed on a joint and several basis the obligation to pay principal, premium, if any, and interest with respect to the Senior Notes. The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company. The following supplemental consolidating condensed financial statements present (in thousands): 1. Consolidating condensed balance sheets as of December 31, 1995, December 31, 1996, and September 30, 1997, consolidating condensed statements of income for the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1996 (unaudited) and 1997 and consolidating condensed statements of cash flows for the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1996 (unaudited) and 1997. 2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada and Italy acquired in 1995) with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries of the Senior Notes are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The Credit Facility contains covenants with respect to the Company and its subsidiaries that, among other things, would prohibit the payment of any dividends to the Company by the subsidiaries of the Company (including the Guarantor Subsidiaries) in the event of a default under the terms of the Credit Facility. F-20 91 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1995 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======== ======= ========== ========
F-21 92 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1996 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents.......... $ 25,187 $ 5 $ 582 $ 25,774 Accounts receivable, net........... 189 10,884 5,710 16,783 Inventories, net................... 16,120 4,744 20,864 Deferred income taxes.............. 1,390 1,042 2,432 Other current assets............... 67 373 495 935 -------- -------- ------- ---------- -------- Total current assets........ 26,833 28,424 11,531 66,788 OTHER ASSETS: Investment in subsidiaries......... 775 6,457 $ (7,232) Inter-company advances, net........ 108,607 19,543 (128,150) Property, plant and equipment...... 38,394 5,748 44,142 Intangible assets.................. 504 39,435 39,939 Other.............................. 1,838 5,318 416 7,572 -------- -------- ------- ---------- -------- Total other assets.......... 111,724 109,147 6,164 (135,382) 91,653 -------- -------- ------- ---------- -------- Total assets......................... $138,557 $137,571 $17,695 $ (135,382) $158,441 ======== ======== ======= ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................... $ (157) $ 5,167 $ 3,184 $ 8,194 Accrued compensation............... 100 5,856 819 6,775 Other accrued expenses............. (719) 2,728 396 2,405 Current portion of long-term debt............................. 289 425 714 -------- -------- ------- ---------- -------- Total current liabilities... (776) 14,040 4,824 18,088 LONG-TERM LIABILITIES: Long-term debt..................... 126,375 1,290 804 128,469 Deferred income taxes.............. 2,729 1,057 304 4,090 Other.............................. 1,272 732 2,004 Inter-company advances, net........ 3,532 120,819 4,574 $ (128,925) -------- -------- ------- ---------- -------- Total long-term liabilities............... 132,636 124,438 6,414 (128,925) 134,563 -------- -------- ------- ---------- -------- Total liabilities........... 131,860 138,478 11,238 (128,925) 152,651 Detachable stock warrants, subject to put option......................... 4,600 4,600 Shareholders' equity (deficit)....... 2,097 (907) 6,457 (6,457) 1,190 -------- -------- ------- ---------- -------- Total liabilities and shareholders' equity............................. $138,557 $137,571 $17,695 $ (135,382) $158,441 ======== ======== ======= ========== ========
F-22 93 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents.......... $ 3,540 $ 40 $ 49 $ 3,629 Accounts receivable, net........... 67 18,703 6,576 $ (384) 24,962 Inventories, net................... 17,801 4,766 22,567 Deferred income taxes.............. 190 1,093 1,283 Other current assets............... 142 614 947 1,703 -------- -------- ------- ---------- -------- Total current assets........ 3,939 38,251 12,338 (384) 54,144 OTHER ASSETS: Investment in subsidiaries......... 790 5,765 (6,555) Inter-company advances, net........ 132,535 1,463 9 (134,007) Property, plant and equipment...... 46,385 5,578 51,963 Intangible assets.................. 233 56,336 56,569 Other.............................. 1,675 7,180 459 (1,775) 7,539 -------- -------- ------- ---------- -------- Total other assets.......... 135,233 117,129 6,046 (142,337) 116,071 -------- -------- ------- ---------- -------- Total assets......................... $139,172 $155,380 $18,384 $ (142,721) $170,215 ======== ======== ======= ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable................... $ 7,982 $ 3,896 $ 11,878 Accrued compensation............... $ 64 6,278 864 7,206 Other accrued expenses............. (2,068) 7,242 70 $ (384) 4,860 Current portion of long-term debt............................. 1,175 420 1,595 -------- -------- ------- ---------- -------- Total current liabilities... (2,004) 22,677 5,250 (384) 25,539 LONG-TERM LIABILITIES: Long-term debt..................... 126,862 2,839 129,701 Deferred income taxes.............. 4,378 350 337 5,065 Other.............................. 484 1,574 2,058 Inter-company advances, net........ 2,986 127,338 5,458 (135,782) -------- -------- ------- ---------- -------- Total long-term liabilities............... 134,226 131,011 7,369 (135,782) 136,824 -------- -------- ------- ---------- -------- Total liabilities........... 132,222 153,688 12,619 (136,166) 162,363 -------- -------- ------- ---------- -------- Detachable stock warrants, subject to put option......................... 9,300 9,300 Shareholders' equity (deficit)....... (2,350) 1,692 5,765 (6,555) (1,448) -------- -------- ------- ---------- -------- Total liabilities and shareholders' equity............................. $139,172 $155,380 $18,384 $ (142,721) $170,215 ======== ======== ======= ========== ========
F-23 94 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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 ======= ======== ======= ======== ========
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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) ======= ======== ======= ======== ========
F-24 95 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) ------------------------------------------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ Net sales.............................. $ 79,001 $14,671 $ 93,672 Cost of sales.......................... 57,902 11,121 69,023 ------- -------- ------- -------- -------- Gross profit........................... 21,099 3,550 24,649 Expenses: Selling, technical and administrative expenses........................... 10,498 1,114 11,612 Amortization of intangible assets.... 2,408 2,408 Plant consolidation expense.......... 3,749 3,749 ------- -------- ------- -------- -------- Total expenses......................... 16,655 1,114 17,769 Income from operations................. 4,444 2,436 6,880 Interest expense, net.................. $ 198 6,588 256 $ 279 7,321 Income (loss) from equity investees.... (1,161) 633 528 Other (income) expense, net............ (148) 482 (279) 55 ------- -------- ------- -------- -------- Income (loss) before income taxes...... (1,359) (1,363) 1,698 528 (496) Income taxes (credit).................. (202) 1,065 863 ------- -------- ------- -------- -------- Net income (loss)...................... $(1,359) $ (1,161) $ 633 $ 528 $ (1,359) ======= ======== ======= ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ Net sales............................ $101,113 $15,249 $116,362 Cost of sales........................ 70,609 12,331 82,940 ------- -------- ------- -------- -------- Gross profit......................... 30,504 2,918 33,422 Expenses: Selling, technical and administrative expenses.......... 12,053 2,188 14,241 Amortization of intangible assets........................... $ 8 2,528 39 2,575 Plant consolidation expense........ 50 50 ------- -------- ------- -------- -------- Total expenses....................... 8 14,631 2,227 16,866 Income (loss) from operations........ (8) 15,873 691 16,556 Interest expense, net................ 487 9,830 322 10,639 Income from equity investees......... 3,173 285 $ (3,458) Other (income) expense, net.......... (635) 757 122 ------- -------- ------- -------- -------- Income before income taxes........... 3,313 5,571 369 (3,458) 5,795 ------- -------- ------- -------- -------- Income taxes......................... 52 2,398 84 2,534 ------- -------- ------- -------- -------- Net income........................... $ 3,261 $ 3,173 $ 285 $ (3,458) $ 3,261 ======= ======== ======= ======== ========
F-25 96 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======== ======= ======== ========
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ Net cash and cash equivalents and cash equivalents provided by (used in) operating activities........... $ (408) $ 4,168 $ 2,106 $ 5,866 Cash flows from investing activities: Purchase of property, plant and equipment........................ (6,247) (2,028) (8,275) Other.............................. 162 162 -------- -------- ------- -------- -------- Net cash and cash equivalents used in investing activities............... (6,085) (2,028) (8,113) Cash flows from financing activities: Proceeds from borrowings of long- term debt........................ 178,901 1,966 506 181,373 Payments on long-term debt......... (149,314) (164) (287) (149,765) Deferred financing costs........... (4,678) (4,678) Payment of preferred stock dividend......................... (226) (226) Other.............................. 546 546 -------- -------- ------- -------- -------- Net cash and cash equivalents provided by financing activities... 24,683 2,348 219 27,250 Net increase (decrease) in cash.... 24,275 431 297 25,003 Cash and cash equivalents, at beginning of period................ 408 78 285 771 -------- -------- ------- -------- -------- Cash and cash equivalents, at end of period............................. $ 24,683 $ 509 $ 582 $ 25,774 ======== ======== ======= ======== ========
F-26 97 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ Net cash (used in) provided by operating activities............... $ (4,920) $ 4,640 $ 3,067 $ 2,787 Cash flows from investing activities: Purchase of property, plant and equipment........................ (6,053) (1,616) (7,669) Payments received on shareholder notes............................ 162 162 -------- -------- ------- -------- -------- Net cash provided by (used in) investing activities............... 162 (6,053) (1,616) (7,507) Cash flows from financing activities: Proceeds (payments) from borrowings of long-term debt................ 5,935 274 (892) 5,317 Payment of preferred stock dividend......................... (170) (170) Deferred financing costs........... 55 362 417 Other.............................. 279 279 -------- -------- ------- -------- -------- Net cash provided by (used in) financing activities............... 5,820 915 (892) 5,843 -------- -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents................... 1,062 (498) 559 1,123 Cash and cash equivalents at beginning of period................ 408 46 317 771 -------- -------- ------- -------- -------- Cash and cash equivalents at end of period............................. $ 1,470 $ (452) $ 876 $ 1,894 ======== ======== ======= ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ Net cash and cash equivalents provided by operating activities... $ 6,299 $ 3,640 $ 257 $ 10,196 Cash flows from investing activities: Purchase of Hutchinson Foundry Products Company................. (10,639) (10,639) Purchase of Sinterloy, Inc......... (15,449) (15,449) Purchase of property, plant and equipment........................ (4,603) (195) (4,798) Payments received on shareholder loans............................ 163 163 -------- -------- ------- -------- -------- Net cash used in investing activities......................... (25,925) (4,603) (195) (30,723) Cash flows from financing activities: (Payments) proceeds on long-term debt............................. (1,751) 1,591 (623) (783) Deferred financing costs........... (565) (565) Payment of preferred stock dividend......................... (240) (240) Other.............................. (30) (28) 28 (30) -------- -------- ------- -------- -------- Net cash (used in) provided by financing activities............... (2,021) 998 (595) (1,618) -------- -------- ------- -------- -------- Net (decrease) increase in cash and cash equivalents................... (21,647) 35 (533) (22,145) Cash and cash equivalents at beginning of period................ 25,187 5 582 25,774 -------- -------- ------- -------- -------- Cash and cash equivalents at end of period............................. $ 3,540 $ 40 $ 49 $ 3,629 ======== ======== ======= ======== ========
F-27 98 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED N. SUBSEQUENT EVENTS INITIAL PUBLIC OFFERING On November 13, 1997, the Company's board of directors authorized the filing of a registration statement with the Securities and Exchange Commission permitting the Company to sell up to an aggregate of shares of its Class A Common Stock (not including the underwriters' over-allotment option) to the public. Under the terms of the public offering (the Offering) currently contemplated, the Senior Subordinated Notes, together with accrued and unpaid interest thereon, will be repaid in full $35.0 million of the Senior Notes, together with accrued and unpaid interest thereon, will be repaid and certain shares of the Company's Series A, Series B and Series C Preferred Stock will be redeemed, together with accrued and unpaid dividends thereon. RIGHTS AGREEMENT On November 13, 1997, the board of directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. The dividend is payable to the stockholders of record as of January 16, 1998, and with respect to Common Stock issued thereafter until the Distribution Date, as defined in the Rights Agreement, and in certain circumstances, with respect to Common Stock issued after the Distribution Date. Except as set forth in the Rights Agreement, each Right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series E Preferred Stock (the "Series E Preferred Shares") at a price of $70 per one one-thousandth of a Series E Preferred Share, subject to adjustment. UNSECURED TERM LOAN AND REVOLVING CREDIT FACILITIES Concurrently with the public offering, the Company intends to enter into a $35.0 million five year unsecured term loan facility and replace its existing Credit Facility with a new unsecured revolving credit facility. REDEMPTION OF CERTAIN SENIOR NOTES The Company anticipates that it will redeem $35.0 million of its Senior Notes ("Senior Note Redemption"), in accordance with the terms of the Senior Note Indenture, as soon as practicable after the closing of the Offering. At the time of the Senior Note Redemption, the Company expects to incur non-recurring extraordinary charges of $3.6 million in prepayment penalties and $1.9 million as a result of the write-off of previously capitalized deferred financing costs, each arising from the Senior Note Redemption. STOCK OPTION PLAN The 1997 Stock Option Plan was adopted in November 1997, and provides for the grant of options to purchase an aggregate of 700,000 shares of the Company's Class A Common Stock. The 1997 Plan provides for the grant to employees of incentive stock options within the meaning of the Internal Revenue Code and for the grant of nonstatutory options to eligible employees and non-employee directors. Incentive stock options may be exercisable for up to ten years at an option price of not less than the fair market value of the Common Stock on the date that the option is granted, or for up to five years at an option price of not less than 110% of the fair market value of the Class A Common Stock on the date the option is granted in the case of an officer or other key employee who owns, at the time the option is granted, more than ten percent of the Class A Common Stock. Nonstatutory stock options may be exercisable for up to ten years at such exercise price and upon such terms and conditions as a committee of the board of directors may determine. The 1997 Plan provides that unless otherwise provided in an individual grant, an option will become immediately fully exercisable upon the occurrence of certain transactions, such as the merger or sale of the Company. At the closing of the Offering, options to purchase 310,000 shares of Class A Common Stock will be outstanding under the 1997 Plan at an exercise price equal to the public offering price and options to purchase 390,000 shares of Class A Common Stock will remain available for grant. F-28 99 REPORT OF INDEPENDENT AUDITORS Board of Directors Helco, Inc. We have audited the accompanying balance sheet of Helco, Inc. as of June 30, 1994, and the related statements of income, shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Helco, Inc. at June 30, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Cleveland, Ohio July 26, 1994 F-29 100 HELCO, INC. BALANCE SHEET JUNE 30, 1994 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 ==========
See notes to financial statements. F-30 101 HELCO, INC. STATEMENT OF INCOME YEAR ENDED JUNE 30, 1994 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 ===========
See notes to financial statements. F-31 102 HELCO, INC. STATEMENT OF SHAREHOLDER'S EQUITY YEAR ENDED JUNE 30, 1994
COMMON RETAINED STOCK EARNINGS TOTAL ------- ---------- ---------- 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 ======= ========== ==========
See notes to financial statements. F-32 103 HELCO, INC. STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 1994 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 ==========
See notes to financial statements. F-33 104 HELCO, INC. NOTES TO FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 1994 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS Helco, Inc. (the Company), previously doing business as Helsel, Inc., manufactures, markets and distributes powdered metal parts for its customers located primarily throughout the midwestern United States. CASH AND CASH EQUIVALENTS The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is provided over the estimated service lives of the respective classes of property, plant and equipment assets using accelerated methods. Gains and losses upon disposal or retirement are recorded in current operations. PRODUCT RESEARCH AND DEVELOPMENT Costs incurred in research, product development and engineering ($221,270) are charged to operations as incurred. INCOME TAXES Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to accruals recorded for book purposes that are not deductible for tax purposes until paid and the use of accelerated depreciation methods for property, plant and equipment for income tax purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS At June 30, 1994, the carrying value of the Company's financial instruments, which include cash, cash equivalents and long-term debt, approximate their fair value. All of the Company's long-term debt bears interest at variable rates. See Note B. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. F-34 105 HELCO, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED B. LONG-TERM DEBT Long-term debt at June 30, 1994 was as follows: 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 ==========
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: 1995............................................................... $ 432,360 1996............................................................... 270,324 1997............................................................... 269,987 1998............................................................... 184,000 1999............................................................... 105,521 Later years........................................................ 588,507 ---------- TOTAL DEBT......................................................... $1,850,699 ==========
C. EMPLOYEE BENEFITS The Company has a qualified defined contribution pension plan covering substantially all of its employees. Contributions are based on a percent of the individual employee's earnings. Expenses associated with the plan totaled $214,986 during the year ended June 30, 1994. The Company also sponsors an employees' savings and retirement plan in which certain of its employees are eligible to participate. Participants may elect to contribute a portion of their compensation to the plan. The Company is required to contribute 50% of the participant's contribution, not to exceed 2% of the participant's earnings. Expenses associated with the plan totaled $29,967 during the year ended June 30, 1994. F-35 106 HELCO, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED D. INCOME TAXES Income taxes set forth in the statement of income are as follows: Current: Federal............................................................ $670,212 State.............................................................. 168,751 -------- 838,963 Deferred............................................................. 26,852 -------- $865,815 ========
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: Income tax at federal statutory rate..................................... 34.0% State and local tax, net................................................. 5.2 Other, net............................................................... 1.4 ---- 40.6% ====
E. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISKS During the year ended June 30, 1994, the Company had sales approximating $9,068,879 to four customers. At June 30, 1994 amounts due from these customers included in accounts receivable was $1,458,672. F. SUBSEQUENT EVENT Effective July 1, 1994, substantially all of the net assets of the Company were sold to a group of outside investors. F-36 107 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders S.K. Wellman Limited, Inc. We have audited the consolidated balance sheets of S.K. Wellman Limited, Inc. and subsidiaries (a wholly-owned subsidiary of MLX Corp.) as of December 31, 1993 and 1994, and the related consolidated statements of operations, shareholder's equity, and cash flows for the years then ended. We have also audited the statements of operations and cash flows of S.K. Wellman Limited, Inc. and subsidiaries for the six months ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of S.K. Wellman Limited, Inc. and subsidiaries at December 31, 1993 and 1994, and the consolidated results of their operations and their cash flows for the years ended December 31, 1993 and 1994 and the six months ended June 30, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Cleveland, Ohio September 26, 1996 F-37 108 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------- 1994 1993 ------- ------- ASSETS Current assets: Cash................................................................ $ 290 $ 446 Accounts receivable................................................. 8,357 9,638 Inventories: Raw materials and work-in-process................................ 6,151 7,328 Finished products................................................ 2,298 2,353 ------- ------- 8,449 9,681 Prepaid expenses and other current assets........................... 585 957 Deferred income taxes............................................... 825 618 ------- ------- Total current assets.................................................. 18,506 21,340 Property, plant and equipment: Land and improvements............................................... 1,179 1,239 Buildings and improvements.......................................... 6,908 7,376 Machinery and equipment............................................. 15,686 17,581 Construction in progress............................................ 533 1,178 ------- ------- 24,306 27,374 Less accumulated depreciation and amortization...................... 12,250 14,012 ------- ------- 12,056 13,362 Other assets: Receivable from MLX Corp............................................ 1,467 2,151 Intangible assets, less accumulated amortization of $3,060 in 1993 and $3,558 in 1994............................................... 2,370 1,925 Other............................................................... 536 510 ------- ------- TOTAL ASSETS.......................................................... $34,935 $39,288 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.................................................... $ 3,356 $ 4,615 Accrued compensation and benefits................................... 2,214 2,764 Accrued taxes....................................................... 403 769 Other accrued liabilities and expenses.............................. 1,481 1,552 Current portion of long-term debt................................... 53 61 ------- ------- Total current liabilities............................................. 7,507 9,761 Long-term liabilities: Debt................................................................ 12,390 10,997 Deferred income taxes............................................... 224 181 Other............................................................... 2,261 2,893 ------- ------- Total long-term liabilities........................................... 14,875 14,071 Shareholder's equity: Preferred stock, $100 par value -- authorized 20,000 shares; none outstanding Common stock, $1 par value -- authorized and outstanding 250,000 shares........................................................... 250 250 Retained earnings................................................... 14,044 16,838 Other equity adjustments............................................ (1,536) (1,427) Cost of 3,750 shares of common stock held for retirement............ (205) (205) ------- ------- Total shareholder's equity............................................ 12,553 15,456 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................ $34,935 $39,288 ======= =======
See notes to consolidated financial statements. F-38 109 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED -------------------- JUNE 30, 1993 1994 1995 ------- ------- ---------- 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 ======= ======= ========
See notes to consolidated financial statements. F-39 110 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK TOTAL COMMON RETAINED OTHER EQUITY HELD FOR SHAREHOLDER'S STOCK EARNINGS ADJUSTMENTS RETIREMENT EQUITY ------ -------- ------------ ---------- ------------- 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 ==== ======= ======== ====== =======
See notes to consolidated financial statements. F-40 111 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER SIX MONTHS 31, ENDED -------------------- JUNE 30, 1993 1994 1995 ------- ------- ---------- 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 ======= ======= ========
See notes to consolidated financial statements. F-41 112 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE SIX MONTHS ENDED JUNE 30, 1995 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS S.K. Wellman Limited, Inc. (S.K. Wellman or the Company), is a wholly-owned subsidiary of MLX Corp. (MLX). The Company designs and manufactures proprietary high-energy friction material and related products for original equipment and aftermarket applications in the aircraft industry and for heavy equipment brakes, transmissions and clutches. The Company serves many large manufacturing companies around the world through subsidiary manufacturing and sales offices located in Brook Park, Ohio; LaVergne, Tennessee; Solon, Ohio; Concord, Ontario; Orzinuovi, Italy; and an affiliation with Tokai Carbon Co., Limited in Tokyo, Japan. On June 30, 1995, substantially all of the net assets of the Company were acquired, for cash, by Hawk Corporation for a purchase price of approximately $62 million. The acquisition was accounted for as a purchase. The operating results of the Company have been included in Hawk Corporation's consolidated financial statements since the date of acquisition. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of S.K. Wellman and its wholly-owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories are stated at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method over the weighted average lives indicated in the following table. The components of intangible assets are as follows:
1993 1994 LIFE ------- -------- -------- (IN THOUSANDS) 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 ======= ========
F-42 113 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PRODUCT RESEARCH AND DEVELOPMENT Costs incurred in research, product development and engineering ($3.4 million in 1993 and 1994 and $1.9 million for the six months ended June 30, 1995) are charged to operations as incurred. The Company recorded the research and product development portion of this expense ($1.7 million in 1993, $1.4 million in 1994 and $.7 million for the six months ended June 30, 1995) as selling, general and administrative expense in the Consolidated Statements of Operations. FOREIGN CURRENCY TRANSLATION The assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates with the resulting cumulative translation adjustment reflected as an Other Equity Adjustment in shareholder's equity. Exchange adjustments resulting from certain transactions, included in other (expense) income in the accompanying Consolidated Statements of Operations were a $255,000 loss in 1993, $95,000 income in 1994 and $10,000 income for the six months ended June 30, 1995. INCOME TAXES In accordance with a tax sharing agreement between MLX and the Company, MLX charges the Company for federal income taxes computed as if the Company was not part of the consolidated federal income tax return. In addition, the Company records provisions for foreign, state and local income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to accruals recorded for book purposes that are not deductible for tax purposes until paid and the use of accelerated depreciation methods for property, plant and equipment for income tax purposes. RECLASSIFICATION Certain reclassifications have been made in the 1993 financial statements to conform with the 1994 and 1995 presentation. B. RELATIONSHIP WITH MLX CORP. The Company has a Management Services Agreement with MLX under which MLX provides certain senior management and financial services to the Company for a fee. The Company advanced $4 million in cash to MLX in 1990 and made additional advances totaling $1.2 million in 1993 and $1.8 million in 1994. The Company charges MLX interest on these advances at a rate which is equal to the rate which the Company pays on its senior credit facility. The intercompany balance is adjusted quarterly for charges by MLX for federal income taxes on the Company's taxable income. F-43 114 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED C. LONG-TERM DEBT The components of long-term debt are as follows:
1994 1993 ------- ------- (IN THOUSANDS) 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 ======= =======
The Company has available a $19.7 million credit facility (the senior credit facility). During 1994, the loan and security agreement was amended to extend the expiration of the facility through January 1998 and to consolidate the real estate term facility, the original equipment term note and the proceeds used to repay the seller note into the consolidated term loan. The senior credit facility provides for four borrowing components with varying rates and repayment obligations. Included in the senior credit facility is a secured revolving credit component with a maximum borrowing limit of $7.2 million which expires in January 1998. This revolving loan bears interest at prime rate plus 1.25% (9.75%) at December 31, 1994 compared to prime rate plus 2.0% (8%) at December 31, 1993. The amount which may be borrowed is subject to certain availability formulas regarding accounts receivable and inventory. The senior credit facility also includes a secured consolidated term loan component with an initial balance of $8.5 million. This loan requires monthly amortization of $101,000 with any remaining unpaid balance payable in January 1998. The loan bears an initial interest rate of prime plus 2% dropping to prime plus 1.75% after certain conditions are met. These components of the senior credit facility are secured by a lien on substantially all the North American assets of the Company and a pledge of the common stock of its Italian subsidiary. The agreements require the Company to, among other things, maintain specified levels of working capital, net worth and profitability. This agreement also limits cash dividends and loans to MLX. Under the most restrictive covenants, retained earnings in the amount of approximately $1.3 million were free from limitations on the payment of dividends to MLX at December 31, 1994. An additional component of the senior credit facility is a $2 million, unsecured, 30-month mezzanine term facility expiring in July 1995 with monthly amortization requirements of $67,000 and an interest rate of prime plus 3.5%. This facility may be prepaid, under certain circumstances, with no penalty. The senior credit facility also has available a line of credit intended to fund capital expenditures up to a maximum of $2 million. This note bears interest at prime rate plus 1.75% and requires equal monthly amortization payments based on a five year term with any remaining unpaid balance payable in January 1997. Advances are made at the Company's request and may occur at any time until January 1997. At December 31, 1994 no amounts were outstanding under the arrangement. F-44 115 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The note payable to bank was used to fund certain capital expenditures in Italy. The note bears interest at 9%, is unsecured, and is due in varying quarterly installments through December 1996. The Company intends to finance current maturities of long-term borrowings, except the Italian note payable to bank, through availability under the revolving credit facility. Aggregate maturities and other reductions of debt are: 1995 -- $61,000; 1996 -- $1.3 million; 1997 -- $1.2 million and 1998 -- $8.5 million. Interest paid was $1.4 million in 1993, $1.2 million in 1994 and $.6 million for the six months ended June 30, 1995. D. EMPLOYEE BENEFITS The Company sponsors a defined contribution pension plan which covers a majority of its U.S. employees. The plan provides for voluntary employee contributions, a matching Company contribution and a discretionary Company contribution. Expenses related to this plan were $470,000, $516,000 and $285,000 in 1993, 1994 and for the six months ended June 30, 1995, respectively. The Company and certain of its subsidiaries sponsor two non-contributory defined benefit pension plans covering certain of their U.S. and Canadian employees. Benefits under one plan is based on compensation during the years immediately preceding retirement. Under the other plan, the benefits are based on a fixed annual benefit for each year of credited service. It is the Company's policy to make contributions to these plans sufficient to meet minimum funding requirements of the applicable laws and regulations, plus such additional amounts, if any, as the Company's actuarial consultants advise to be appropriate. Plan assets consist principally of equity securities and fixed income instruments. A summary of the components of net periodic pension costs for the plans is as follows:
1994 1993 ------ ------ (IN THOUSANDS) 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%
F-45 116 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following table presents the funded status and amounts recognized in the consolidated financial statements at December 31, 1993 and 1994, related to the defined benefit plans (in thousands):
DECEMBER 31, 1993 DECEMBER 31, 1994 ---------------------------- ---------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ----------- ----------- ----------- ----------- 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) ======= ======= ===== =======
The Company provides a fixed noncontributory benefit toward postretirement health care for certain of its U.S. retired union employees. Projected future costs of providing postretirement health care benefits are recognized as expense as employees render service. In 1993, the Company recognized a transition obligation amounting to approximately $540,000, for prior service costs as of January 1, 1993. This transition obligation is being amortized into general and administrative expenses over 20 years. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7%. Postretirement benefit costs amounted to $62,000, $50,000 and $13,500 in 1993, 1994 and the six months ended June 30, 1995, respectively. E. LEASES The Company has lease commitments for buildings and equipment. Future minimum annual rentals are: 1995 -- $211,000, 1996 -- $188,000, 1997 -- $158,000 1998 -- $115,000, 1999 -- $47,000, thereafter -- $135,000. Amount representing interest is $211,000. The Company leases certain office and warehouse facilities and equipment under operating leases. Rental expense was $312,000, $367,000 and $162,000, in 1993, 1994 and the six months ended June 30, 1995, respectively. Future minimum lease commitments under these agreements which have an original or existing term in excess of one year as of December 31, 1994 are as follows: 1995 -- $259,000; 1996 -- $128,000; 1997 -- $76,000; 1998 -- $11,000 and 1999 -- $9,000. F-46 117 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED F. INCOME TAXES The results of the Company's operations are included in the consolidated federal income tax returns of MLX Corp. Income taxes set forth in the Consolidated Statements of Operations are as follows (in thousands):
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED ------------------ JUNE 30, 1993 1994 1995 ------ ------ ---------- Federal: Current.................................... $1,810 $1,298 $1,016 Deferred................................... (388) 191 0 ------ ------ ------ 1,422 1,489 1,016 219 699 424 Foreign, State and local: Current.................................... 375 295 256 Deferred................................... (61) ------ ------ ------ 314 295 256 ------ ------ ------ $1,955 $2,483 $1,696 ====== ====== ======
The provision for income taxes differ from the amounts computed by applying the federal statutory rate as follows:
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED -------------- JUNE 30, 1993 1994 1995 ---- ---- ---------- 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% ==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax F-47 118 S.K. WELLMAN LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED purposes. Significant components of the Company's net deferred tax assets as of December 31, 1993 and 1994 are as follows (in thousands):
1993 1994 ----- ----- 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 ===== =====
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:
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED -------------- JUNE 30, 1993 1994 1995 ---- ---- ---------- Customer A.......................................... 16% 15% 17% Customer B.......................................... 9% 9% 13% Customer C.......................................... 14% 16% 12%
The Company provides credit, in the normal course of its business, to original equipment and after-market companies in the aircraft and heavy equipment industries. The Company's customers are not concentrated in any specific geographic region. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations. F-48 119 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Houghton Acquisition Corporation d/b/a Hutchinson Foundry Products Company: We have audited the accompanying balance sheets of Houghton Acquisition Corporation d/b/a Hutchinson Foundry Products Company (the "Company") as of December 31, 1996 and 1995 and the related statements of income, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. St. Louis, Missouri February 5, 1997 F-49 120 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ---------- ---------- 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 ========== ==========
The accompanying notes are an integral part of the financial statements. F-50 121 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---------- ---------- ---------- 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 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-51 122 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
RETAINED ADDITIONAL EARNINGS COMMON PAID-IN (ACCUMULATED STOCK CAPITAL DEFICIT) TOTAL ------ ---------- ------------ ----------- 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) ======= ========= ============ ===========
The accompanying notes are an integral part of the financial statements. F-52 123 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ---------- 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 ============ ===========
The accompanying notes are an integral part of the financial statements. F-53 124 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 1. DESCRIPTION OF BUSINESS: Effective December 31, 1992, Houghton Acquisition Corporation (the "Company") purchased substantially all of the assets of Hutchinson Foundry Products Company. The Company's principal business is the production and sale of rotors for use in subfractional horsepower motors and, to a lesser extent, the machining and sale of aluminum extrusions and castings, principally fan spacers used by engine manufacturers and gas nozzles used in gasoline pumping units. The Company sells its products primarily in the Midwest region of the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, bank deposits and highly liquid investments purchased with original maturities of three months or less. B. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out method. C. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment acquired in conjunction with the Acquisition (see Note 1) were recorded at their estimated fair value at the acquisition date based on independent appraisals obtained near the acquisition date. Property, plant and equipment purchased subsequent to the acquisition are recorded at cost. Depreciation is computed utilizing the straight-line method over the estimated useful lives of the assets which are as follows: Land improvements............................................ 15 years Buildings.................................................... 20 years Machinery and equipment...................................... 10 years Vehicles and computers....................................... 3-5 years
Upon retirement or replacement, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in earnings. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments which extend the useful lives of the assets are capitalized. D. DEBT FINANCING COSTS: Costs incurred in connection with obtaining and securing the bank loan agreement have been capitalized and are being amortized over the period of the related borrowings. Amortization expense for 1996, 1995 and 1994 was $10,586, $68,948 and $68,957, respectively. E. NONCOMPETE AGREEMENT: In connection with the acquisition (see Note 1), the Company entered into a noncompete agreement with the seller valued at $500,000. Under this noncompete agreement, the seller has agreed not to compete with the Company through December 31, 1997. The value of the noncompete agreement is being amortized over the term of the agreement using the straight-line method. Amortization expense was $100,000 for 1996, 1995 and 1994. F. GOODWILL: The excess of the purchase price of the Company over the fair value of the tangible and identifiable intangible net assets acquired (see Note 1) has been allocated to goodwill. Goodwill is being amortized on a straight-line basis over a period of forty years. Amortization expense was $26,234 for 1996, 1995 and 1994. F-54 125 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED At each balance sheet date, management assesses whether there has been a permanent impairment of the value of goodwill. The factors considered by management in performing this assessment include current operating results, trends and prospects as well as the effects of obsolescence, demand, competition and other economic factors. Management has concluded that no impairment of the value of goodwill has occurred as of any of the balance sheet dates presented. G. OTHER INTANGIBLE ASSETS: Other intangible assets at December 31, 1996 consist of organization costs which are being amortized over five years. Amortization expense related to these costs amounted to $12,028 for 1996. Prior to 1996, other intangible assets also included a sales agreement and a union employment agreement, the values of which were based on independent appraisals at the date of acquisition (see Note 1). These intangible assets were amortized on a straight-line basis over the terms of the respective agreements and became fully amortized during 1995. Amortization expense related to other intangible assets amounted to $297,978 and $494,069 in 1995 and 1994, respectively. H. INCOME TAXES: Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates as of the balance sheet date which are expected to be applied to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. I. PREFERRED STOCK AND STOCK WARRANTS: The proceeds received related to the preferred stock and stock warrants have been allocated to the respective instruments based upon their estimated fair values as of March 10, 1993, the effective date of the related Securities Purchase Agreement. The preferred stock is being accreted to its redemption value as of March 10, 1998 using the interest method. The stock warrants are being accreted on a straight-line basis to their estimated value as of their earliest put date, March 10, 1998, using a formula based on a multiple of earnings adjusted for certain items as defined in the Securities Purchase Agreement. Accretion is effected via corresponding decreases to the Company's retained earnings and constitutes noncash transactions for purposes of the accompanying statements of cash flows. J. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK: The Company has entered into an agreement with one of its largest customers which entitles the Company to be this customer's exclusive supplier of die cast rotors, under certain terms and conditions. The current agreement extends through August 31, 1998. F-55 126 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED The following is a summary of sales and uncollateralized accounts receivable by year and as of December 31, respectively, to individual customers in amounts that exceeded ten percent of total Company net sales and accounts receivable, respectively:
NUMBER OF CUSTOMERS COMBINED PERCENT OF WITH SALES TO TOTAL SIGNIFICANT SIGNIFICANT COMPANY YEAR ENDED DECEMBER 31, SALES CUSTOMERS NET SALES ------------------------------------------- ----------- -------------- ---------- 1996....................................... 2 $3.9 million 45% 1995....................................... 2 $3.9 million 48% 1994....................................... 3 $5.0 million 58%
NUMBER OF CUSTOMERS COMBINED PERCENT OF WITH ACCOUNTS TOTAL SIGNIFICANT RECEIVABLE COMPANY ACCOUNTS OF SIGNIFICANT ACCOUNTS AS OF DECEMBER 31, RECEIVABLE CUSTOMERS RECEIVABLE -------------------------------------------- ----------- -------------- ---------- 1996........................................ 3 $860,000 62% 1995........................................ 2 $577,000 57%
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:
1996 1995 -------- -------- Raw materials........................................... $260,216 $102,455 Work-in-process......................................... 107,145 30,579 Finished goods.......................................... 77,390 93,116 --------- --------- $444,751 $226,150 ========= =========
5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following as of December 31:
1996 1995 ---------- ---------- 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 =========== ===========
As of December 31, 1996, machinery and equipment includes $650,628 of assets acquired pursuant to capital lease agreements and accumulated depreciation and depreciation expense include $21,688 related to those assets as of December 31, 1996 and for the year then ended. F-56 127 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED Depreciation expense amounted to $313,160, $289,064 and $282,642 for the years ended December 31, 1996, 1995 and 1994, respectively. 6. DEBT: Long-term debt consists of the following as of December 31:
1996 1995 --------- --------- 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 ========== ==========
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: 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 ==========
F-57 128 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED 8. COMMON STOCK, PREFERRED STOCK AND STOCK WARRANTS: Common stock consists of the following as of December 31:
1996 1995 ---------- ---------- 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 ========== ==========
Preferred stock consists of the following as of December 31:
1996 1995 ---------- ---------- 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 ========== ==========
Stock warrants consist of the following as of December 31:
1996 1995 ---------- ---------- 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 ========== ==========
The Company has also issued other common stock purchase warrants to two individuals to purchase an aggregate of 217 shares of the Company's common stock on or before March 15, 1998 at an exercise price of approximately $446 per share. Pursuant to the terms of the Securities Purchase Agreement, preferred stockholders and warrant holders are protected against dilution or other impairment of their respective interests. F-58 129 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED Amounts recorded for accretion of the Cumulative Redeemable Preferred Stock and Common Stock Purchase Warrants were as follows for the years ended December 31:
CUMULATIVE REDEEMABLE COMMON STOCK PREFERRED PURCHASE STOCK WARRANTS ---------- ------------ 1996............................................. $ 74,000 $1,014,054 1995............................................. $ 64,000 $ 739,058 1994............................................. $ 55,000 $ 899,412
9. INCOME TAXES: The Company's provision for income taxes consists of the following for the years ended December 31:
1996 1995 1994 -------- -------- -------- 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 ======== ======== ========
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:
1996 1995 1994 -------- -------- -------- 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 ======== ======== ========
F-59 130 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED The significant components of the Company's deferred tax assets and liabilities recognized in the accompanying balance sheets as of December 31 are as follows:
1996 1995 -------- -------- 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 ======== ========
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:
1996 1995 1994 -------- --------- -------- 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 ======== ========= =========
F-60 131 HOUGHTON ACQUISITION CORPORATION D/B/A HUTCHINSON FOUNDRY PRODUCTS COMPANY NOTES TO FINANCIAL STATEMENTS -- CONTINUED The following table presents the funded status of the Plan determined as of December 31:
1996 1995 --------- -------- 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 ========= ========
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:
1996 1995 1994 ---- ---- ---- Weighted-average discount rate.......................... 7.5 % 7.5 % 8.0 % Long-term rate of return on plan assets................. 9.0 % 9.0 % 9.0 %
The Company also has a 401(k) defined contribution plan for substantially all of its employees. Participants may contribute up to 15% of their compensation each year. The Company, at its discretion, may elect to match a percentage of employees' contributions each year, as determined by its Board of Directors, not to exceed the maximum amount deductible for federal income tax purposes. The Company contributed $5,000, $5,000 and $10,000 to the 401(k) plan in 1996, 1995 and 1994, respectively. 11. SUBSEQUENT EVENT: In January 1997, all of the Company's common stock, preferred stock and related common stock purchase warrants were sold to Hawk Corporation ("Hawk"), a Delaware Corporation headquartered in Cleveland, Ohio. Hawk is a manufacturer of various products requiring sophisticated engineering and production techniques in numerous industrial markets. No adjustments have been reflected in the accompanying financial statements as a result of this transaction. F-61 132 REPORT OF INDEPENDENT AUDITORS Shareholder Sinterloy, Inc. We have audited the accompanying balance sheets of Sinterloy, Inc. as of December 31, 1996 and 1995, and the related statements of income, shareholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sinterloy, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Cleveland, Ohio August 22, 1997 F-62 133 SINTERLOY, INC. BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1995 1996 1997 ---------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................ $ 545,412 $1,552,611 $ 2,301,628 Accounts receivable.............................. 965,982 1,294,066 1,666,361 Inventories...................................... 316,640 506,835 407,256 Prepaid expenses................................. 64,750 10,642 18,353 ---------- ---------- ---------- Total current assets..................... 1,892,784 3,364,154 4,393,598 Property and equipment: Machinery and equipment.......................... 1,706,700 3,410,892 3,662,128 Office furniture and fixtures.................... 91,642 65,314 72,324 ---------- ---------- ---------- 1,798,342 3,476,206 3,734,452 Less accumulated depreciation.................... 869,347 1,350,392 1,569,425 ---------- ---------- ---------- 928,995 2,125,814 2,165,027 ---------- ---------- ---------- TOTAL ASSETS....................................... $2,821,779 $5,489,968 $ 6,558,625 ========== ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable................................. $ 232,075 $ 755,503 $ 298,043 Accrued expenses................................. 135,758 222,513 187,902 Accrued income taxes............................. 16,000 30,000 -- Current portion of note payable.................. 22,174 23,687 24,482 ---------- ---------- ---------- Total current liabilities................ 406,007 1,031,703 510,427 Note payable....................................... 109,896 86,209 73,766 Shareholder's equity: Common stock, no par value, 100,000 shares authorized, issued and outstanding............ 10,000 10,000 10,000 Retained earnings................................ 2,295,876 4,362,056 5,964,432 ---------- ---------- ---------- Total shareholder's equity............... 2,305,876 4,372,056 5,974,432 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY......... $2,821,779 $5,489,968 $ 6,558,625 ========== ========== ==========
See notes to financial statements. F-63 134 SINTERLOY, INC. STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED ---------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ---------------- (UNAUDITED) Net sales................................... $ 7,586,030 $11,596,950 $7,734,875 Cost of sales............................... 5,215,868 7,422,194 4,091,492 ----------- ---------- ---------- Gross profit................................ 2,370,162 4,174,756 3,643,383 General and administrative expenses......... 868,970 1,053,213 515,804 ----------- ---------- ---------- Operating income............................ 1,501,192 3,121,543 3,127,579 Other income (expense): Miscellaneous income...................... 5,720 783 7,638 Loss on sale of equipment................. -- (1,628) -- Interest income........................... 12,604 32,485 42,860 Interest expense.......................... (18,733) (8,668) (3,575) ----------- ---------- ---------- Other income (expense) -- net............... (409) 22,972 46,923 ----------- ---------- ---------- Income before income taxes.................. 1,500,783 3,144,515 3,174,502 Income taxes................................ 36,077 33,767 -- ----------- ---------- ---------- NET INCOME.................................. $ 1,464,706 $ 3,110,748 $3,174,502 =========== ========== ==========
See notes to financial statements. F-64 135 SINTERLOY, INC. STATEMENTS OF SHAREHOLDER'S EQUITY
COMMON RETAINED STOCK EARNINGS TOTAL ------- ----------- ----------- Balance at January 1, 1995.......................... $10,000 $ 1,223,233 $ 1,233,233 Net income.......................................... 1,464,706 1,464,706 Cash distribution to shareholder.................... (392,063) (392,063) ------- ----------- ----------- Balance at December 31, 1995........................ 10,000 2,295,876 2,305,876 Net income.......................................... 3,110,748 3,110,748 Cash distributions to shareholder................... (1,044,568) (1,044,568) ------- ----------- ----------- Balance at December 31, 1996........................ 10,000 4,362,056 4,372,056 ======= =========== =========== Net income (unaudited).............................. 3,174,502 3,174,502 Cash distributions to shareholder (unaudited)....... (1,572,126) (1,572,126) ------- ----------- ----------- Balance at September 30, 1997 (unaudited)........... $10,000 $ 5,964,432 $ 5,974,432 ======= =========== ===========
See notes to financial statements. F-65 136 SINTERLOY, INC. STATEMENTS OF CASH FLOWS
DECEMBER 31, SIX MONTHS ENDED --------------------------- JUNE 30, 1995 1996 1997 ----------- ---------- ---------------- (UNAUDITED) OPERATING ACTIVITIES Net income.................................. $ 1,464,706 $3,110,748 $3,174,502 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................. 267,539 509,276 219,033 Loss on sale of equipment................ -- 1,628 -- Change in operating assets and liabilities: Accounts receivable.................... (262,316) (328,084) (372,295) Inventories............................ (65,321) (190,195) 99,579 Prepaid expenses....................... (53,983) (10,642) (7,711) Accounts payable....................... 83,207 523,428 (457,460) Accrued expenses and other............. 112,943 86,755 (64,611) Accrued income taxes................... 11,500 14,000 ----------- ---------- ---------- Net cash provided by operating activities... 1,558,275 3,716,914 2,591,037 INVESTING ACTIVITIES Purchases of property and equipment......... (536,543) (1,642,973) (258,246) FINANCING ACTIVITIES Payments on line of credit.................. (200,000) -- -- Payments on note payable.................... (20,758) (22,174) (11,648) Shareholder distributions................... (392,063) (1,044,568) (1,572,126) ----------- ---------- ---------- Net cash used in financing activities....... (612,821) (1,066,742) (1,583,774) ----------- ---------- ---------- Net increase in cash........................ 408,911 1,007,199 749,017 Cash and cash equivalents at beginning of year..................................... 136,501 545,412 1,552,611 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 545,412 $1,552,611 $2,301,628 =========== ========== ==========
See notes to financial statements. F-66 137 SINTERLOY, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 SIX MONTHS ENDED JUNE 30, 1997 A. BASIS OF PRESENTATION Sinterloy, Inc. (the Company) is primarily engaged in the production of structural sintered metal parts. The plant facility is located in Solon Mills, Illinois. The Company was incorporated in Illinois on March 23, 1988. UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying unaudited financial statements at June 30, 1997 and for the six months ended June 30, 1997 have been prepared in accordance with generally accepted accounting principles for the interim financial information and with Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consisted of the following:
DECEMBER 31, ---------------------- JUNE 30, 1995 1996 1997 -------- -------- ----------- (UNAUDITED) Raw material and supplies.............................. $ 92,799 $242,791 $ 297,042 Work in process........................................ 126,135 148,789 68,787 Finished goods......................................... 97,706 115,255 41,427 -------- -------- -------- $316,640 $506,835 $ 407,256 ======== ======== ========
PROPERTY AND EQUIPMENT Property and equipment has been recorded at cost. Depreciation is provided by using an accelerated method over the useful lives of the assets. Estimated useful lives range from 3 to 7 years. INCOME TAXES Effective October 1, 1994, the Company elected S Corporation status. Under those provisions, the shareholder is liable for individual income taxes on the Company's taxable income. The Company is responsible for paying Illinois Replacement Tax of 1.5% of taxable income. States taxes paid in 1996 and 1995 were $19,767 and $24,577, respectively. F-67 138 SINTERLOY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ form those estimates. C. NOTE PAYABLE
DECEMBER 31, ---------------------- JUNE 30, 1995 1996 1997 -------- -------- ----------- (UNAUDITED) Payable to a former shareholder, in monthly installments of $2,621 principal and interest, bearing interest at 6.62%, due February, 2001, unsecured............................................ $132,070 $109,896 $ 98,248 Less current portion................................... 22,174 23,687 24,482 -------- -------- -------- LONG-TERM NOTE PAYABLE................................. $109,896 $ 86,209 $ 73,766 ======== ======== ========
Aggregate maturities of long-term debt are as follows:
DECEMBER 31, 1996 ----------------- 1997.......................................... $ 23,687 1998.......................................... 25,304 1999.......................................... 27,081 2000.......................................... 28,875 2001.......................................... 4,949 --------- $ 109,896 =========
During 1995, 1996 and 1997, the Company had a revolving line of credit with a maximum of $500,000 bearing interest at prime. There were no borrowings on the line of credit at December 31, 1996 and 1995 and June 30, 1997. Interest paid in 1996 and 1995 was $8,668 and $18,733, respectively. D. LEASE COMMITMENT In 1995, the Company leased its facilities from a third party with monthly rental payments of $5,429. In February 1996 the facilities were purchased by the Company's sole shareholder who leases the facilities to the Company under a five year operating lease through January 31, 2001. Beginning March 1996, monthly rental payments were increased to $13,150 due to a significant addition to the facility in 1996. The Company also has operating leases for two vehicles and other miscellaneous equipment. Rent expense was $148,650 and $56,288 for the years ended December 31, 1996 and 1995, respectively. Future minimum lease commitments are as follows:
DECEMBER 31, 1996 ----------------- 1997.......................................... $ 166,206 1998.......................................... 157,800 1999.......................................... 157,800 2000.......................................... 157,800 2001.......................................... 13,150 --------- $ 652,756 =========
F-68 139 SINTERLOY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED E. PROFIT SHARING PLAN On September 1, 1993, the Company established a 401(k) profit sharing plan. Eligible employees may elect to defer up to 10% of their total compensation or as prescribed by the Internal Revenue Service regulations. The Company contributes a matching fifty percent (50%) of each employee's elective deferral. Additionally, the plan allows for the Company to make discretionary contributions. Company contributions for the years ended December 31, 1996 and 1995 were $59,203 and $53,375, respectively. The discretionary portion of the contributions was $20,000 for the years ended December 31, 1996 and 1995. F. MAJOR CUSTOMERS For the years ended December 31, 1996 and 1995, the Company generated approximately 72% and 60%, respectively, of its revenue from three major customers. Accounts receivable from the three customers was $887,525 and $684,687, as of December 31, 1996 and 1995, respectively. G. SUBSEQUENT EVENT Effective August 1, 1997, the Company sold substantially all of its assets except cash, and certain liabilities for $15,000,000 (the purchase price). The purchase price will be adjusted dollar for dollar based on the adjusted net equity position of the Company at closing compared to the net equity position of the Company at December 31, 1996. F-69 140 Hawk Logo THE COMPANY'S PRINCIPAL MARKETS [PHOTOGRAPH OF HARVESTING MACHINE] Agriculture [PHOTOGRAPH OF BULLDOZER] Construction [PHOTOGRAPH OF AIRPLANE] Aerospace [PHOTOGRAPH OF TRUCK] Truck 141 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION, OR AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary.................................... 3 Risk Factors............................... 9 Use of Proceeds............................ 15 Dividend Policy............................ 16 Capitalization............................. 17 Dilution................................... 19 Unaudited Pro Forma Consolidated Statements of Operations............................ 20 Selected Consolidated Financial Data....... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 25 Business................................... 33 Management................................. 47 Principal and Selling Stockholders......... 54 Certain Transactions....................... 56 Description of Capital Stock............... 59 Shares Eligible for Future Sale............ 66 Underwriting............................... 67 Legal Matters.............................. 68 Experts.................................... 68 Available Information...................... 69 Reports to Holders of Class A Common Stock............................. 69 Index to Financial Statements.............. F-1
====================================================== ====================================================== SHARES LOGO HAWK CORPORATION CLASS A COMMON STOCK ($.01 PAR VALUE) ------------------------ SCHRODER & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. , 1998 ====================================================== 142 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses payable by the Registrant in connection with the Offering (other than underwriting discounts and commissions) will be as follows: Securities and Exchange Commission registration fee...................... $ 31,819 NASD filing fee.......................................................... 11,000 NYSE listing fee......................................................... 88,100 Registrar and transfer agent's fees and expenses......................... * Printing expenses........................................................ * Accounting fees and expenses............................................. * Legal fees and expenses.................................................. * Miscellaneous............................................................ * -------- Total.......................................................... $ * ========
- --------------- * To be provided by amendment. All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the NYSE listing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law, which enables a corporation in its original certificate or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director's fiduciary duty, except (1) for any breach of the director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the Delaware General Corporation Law (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (4) for any transaction from which a director derived an improper personal benefit. The Certificate, a copy of which is filed as Exhibit 3.1 to this Registration Statement, contains provisions permitted by Section 102(b)(7) of the Delaware General Corporation Law. Reference also is made to Section 145 of the Delaware General Corporation Law, which grants a corporation power to indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses (including attorneys' fees) which such officer or director actually and reasonably incurred. Any indemnification made under Section 145, unless ordered by a court, shall be authorized upon a determination that indemnification of the director, officer, employee or II-1 143 agent is proper because the person has met the applicable standard of conduct required by this section. Such determination shall be made with respect to a person who is a director or officer at the time of such determination by a majority vote of the directors who are not parties to such action, suit, or proceeding, even though less than a quorum, or by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or if there are no such directors, or if such directors so direct, by independent legal counsel, or by the stockholders. The Certificate provides for the indemnification of directors and officers of the Registrant to the fullest extent permitted by the Delaware General Corporation Law. The Registrant maintains an insurance policy that provides protection, within the maximum liability limits of the policy and subject to a deductible amount for each claim, to the Registrant under its indemnification obligations and to the directors and officers of the Registrant with respect to certain matters that are not covered by the Registrant's indemnification obligations. At present, there is no pending litigation or proceeding involving any director or officer of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any director or officer. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Registrant against certain civil liabilities that may be incurred in connection with the Offering, including certain liabilities under the Securities Act. In addition, the Selling Stockholders have agreed to indemnify the Registrant, each Underwriter, their respective directors and officers and each person who controls the Registrant or any such Underwriter (within the meaning of the Securities Act) against any losses, claims, damages, liabilities (or proceedings in respect thereof) and expenses resulting from any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission of a material fact required to be stated in this Registration Statement or any prospectus or preliminary prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein (in the case of any prospectus, in light of the circumstances under which they were made) not misleading, but only to the extent that such untrue statement is contained in, or such omission is from, information so concerning a Selling Stockholder furnished in writing by such Selling Stockholder expressly for use therein; provided that the indemnification obligation of a Selling Stockholder is limited to an amount equal to the proceeds received by such Selling Stockholder pursuant to this Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The 1995 Parent-Subsidiary Merger. In June 1995, in connection with the merger of Helsel into a subsidiary of the Registrant and the acquisition of SKW, the Registrant, which until that time had been an Ohio corporation ("Old Hawk"), reincorporated as a Delaware corporation in a parent-subsidiary merger. Pursuant to the terms of the merger, each outstanding share of common stock of Old Hawk was converted into one fully-paid share of Class A Common Stock of the Registrant. In addition, each outstanding share of preferred stock of Old Hawk was, by virtue of the merger, converted into one fully-paid share of Series A Preferred Stock of the Registrant. The terms of the Series A Preferred Stock of the Registrant are identical in all material respects to the terms of the Old Hawk preferred stock. The 1995 Helsel Merger. In June 1995, Helsel became a wholly-owned subsidiary of the Registrant by merging with a subsidiary of the Registrant. Pursuant to the terms of that merger, each outstanding share of common stock of Helsel was converted into shares of the Class A Common Stock of the Registrant at an exchange ratio based on an independent valuation. Each outstanding share of the preferred stock of Helsel was surrendered in exchange for one fully paid share of Series B Preferred Stock of the Registrant. The terms of the Series B Preferred Stock of the Registrant are identical in all material respects to the terms of the Helsel preferred stock. II-2 144 The 1995 Refinancing. During the refinancing of the Registrant on June 30, 1995, the Registrant issued warrants to purchase up to shares (subject to adjustment) of Class B Common Stock to its subordinated lenders in connection with their purchase of a total of $30,000,000 of Senior Subordinated Notes. The Hutchinson Acquisition. In connection with its acquisition of Hutchinson, the Registrant issued certain 8.0% two-year notes in the aggregate principal amount of $1.5 million, of which up to $500,000 of the principal balance thereof outstanding on the effective date of the Offering is convertible at the option of the holders thereof into shares of Class A Common Stock at the public offering price of the Class A Common Stock. Exemptions from Registration. The sales of Preferred Stock, Class A Common Stock and warrants described above were each made pursuant to an exemption from registration under Section 4(2) of the Securities Act. The certificates representing the shares of Preferred Stock, Common Stock and the warrants are restricted as to transfer and legended to describe such restrictions. No underwriters were involved in such transactions. Issuances Concurrent with the Offering. Concurrently with the effective date of the Offering, the Registrant will issue shares of Class B Common Stock (which will be automatically converted on a one-for-one basis into shares of Class A Common Stock at the time of the Offering) upon the exercise of certain warrants held by the Selling Stockholders pursuant to an exemption from registration under Section 4(2) of the Securities Act. As of the closing of the Offering, pursuant to the Section 4(2) exemption, the Registrant will (1) exchange the shares of Series B and Series C Preferred Stock owned beneficially and of record by Norman C. Harbert, Ronald E. Weinberg and Byron S. Krantz for an equal number of shares of Series D Preferred Stock, and (2) grant to various directors and employees of the Registrant options to purchase an aggregate of 310,000 shares of Class A Common Stock pursuant to the Registrant's 1997 Plan. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: See the Exhibit Index following the signature page to this Registration Statement. (b) Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 145 (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 146 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on December 30, 1997. HAWK CORPORATION By: /s/ THOMAS A. GILBRIDE ------------------------------------ Thomas A. Gilbride, Vice President-Finance Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. NORMAN C. HARBERT* Chairman of the Board, Chief December 30, 1997 - ---------------------------------------- Executive Officer, Norman C. Harbert President and Director (principal executive officer) RONALD E. WEINBERG* Vice-Chairman of the Board, December 30, 1997 - ---------------------------------------- Treasurer and Director Ronald E. Weinberg (principal financial officer) /s/ THOMAS A. GILBRIDE Vice President - Finance December 30, 1997 - ---------------------------------------- (principal accounting Thomas A. Gilbride officer) /s/ BYRON S. KRANTZ Secretary and Director December 30, 1997 - ---------------------------------------- Byron S. Krantz PAUL R. BISHOP* Director December 30, 1997 - ---------------------------------------- Paul R. Bishop DAN T. MOORE, III* Director December 30, 1997 - ---------------------------------------- Dan T. Moore, III WILLIAM J. O'NEILL, JR.* Director December 30, 1997 - ---------------------------------------- William J. O'Neill, Jr.
*By: /s/ BYRON S. KRANTZ ----------------------------------------------- Byron S. Krantz Attorney-in-Fact II-5 147 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 2.1*** Stock Purchase Agreement, dated November 7, 1996, among the Registrant, Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation setting forth the terms of the Hutchinson acquisition (omitting certain exhibits and schedules setting forth the forms of opinions of counsel, relating to the purchase price adjustment mechanism and relating to the business of Houghton Acquisition Corporation d.b.a. Hutchinson Foundry Products Company, which the Registrant undertakes to furnish supplementally to the Commission upon request) 2.2**** Asset Purchase Agreement, dated as of July 10, 1997, by and among the Registrant, Sinterloy, Inc. and Robert G. Sierks setting forth the terms of the Sinterloy acquisition (omitting the exhibits and schedules setting forth the form of various ancillary documents and relating to the business of Sinterloy, which the Registrant undertakes to furnish supplementally to the Commission upon request) 3.1 Form of the Registrant's Second Amended and Restated Certificate of Incorporation 3.2 Form of the Registrant's Amended and Restated By-laws 4.1* Specimen Common Stock certificate 4.2 Form of Rights Agreement between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent 4.3*** Indenture, dated as of November 27, 1996, by and among the Registrant, Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Hutchinson Products Corporation, and Bank One Trust Company, NA, as Trustee 4.4*** Form of 10 1/4% Senior Note due 2003 4.5*** Form of Series B 10 1/4% Senior Note due 2003 4.6*** Stockholders' Voting Agreement, effective as of November 27, 1996, by and among the Registrant, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership 5.1* Opinion of Kohrman Jackson & Krantz P.L.L. as to the validity of the Class A Common Stock being registered 10.1 The Registrant's 1997 Stock Option Plan 10.2** Form of Incentive Stock Option Agreement 10.3** Form of Non-Statutory Stock Option Agreement 10.4*** Employment Agreement, dated as of November 1, 1996, between the Registrant and Norman C. Harbert 10.5*** Wage Continuation Agreement, effective as of June 30, 1995, between the Registrant and Norman C. Harbert 10.6*** Letter agreement, dated November 1, 1996, amending the Wage Continuation Agreement, effective as of June 30, 1995, between the Registrant and Norman C. Harbert 10.7*** Employment Agreement, dated as of November 1, 1996, between the Registrant and Ronald E. Weinberg 10.8*** Wage Continuation Agreement, effective as of June 30, 1995, between the Registrant and Ronald E. Weinberg 10.9*** Letter agreement, dated November 1, 1996, amending the Wage Continuation Agreement, effective as of June 30, 1995, between the Registrant and Ronald E. Weinberg 10.10*** Employment Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel 10.11*** Consulting Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel
148
EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------- 10.12** Letter agreement, dated as of June 1997, amending the Employment Agreement and the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel 10.13** Employment Agreement, dated January 2, 1997, between the Registrant and Timothy J. Houghton 10.14*** Promissory Note, dated July 1, 1994, in the principal amount of $500,000, issued by the Registrant to Helco, Inc. 10.15*** Form of the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Registrant 10.16*** Letter agreement, dated October 1, 1996, amending the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Registrant 10.17** Form of Convertible Promissory Note, dated January 2, 1997, in the aggregate principal amount of $1.5 million, issued by the Registrant to each of Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation 10.18*** Credit Agreement, dated as of November 27, 1996, among Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp. and Hutchinson Products Corporation, as Borrowers, and the Registrant, as Funds Administrator, and BT Commercial Corporation, as Lender and Agent (omitting certain exhibits and schedules setting forth the form of various ancillary documents and relating to the business of the Registrant, which omitted exhibits and schedules the Registrant undertakes to furnish supplementally to the Commission upon request) 10.19*** General Security Agreement, dated as of November 27, 1996, made by Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp. and Hutchinson Products Corporation in favor of BT Commercial Corporation, as Agent 10.20*** Trademark Security Agreement, dated as of November 27, 1996, made by S.K. Wellman Corp. in favor of BT Commercial Corporation, as Agent 10.21*** Trademark Security Agreement, dated as of November 27, 1996, made by Friction Products Co. in favor of BT Commercial Corporation, as Agent 10.22*** Patent Security Agreement, dated as of November 27, 1996, made by S.K. Wellman Corp. in favor of BT Commercial Corporation, as Agent 10.23*** Patent Security Agreement, dated as of November 27, 1996, made by Friction Products Co. in favor of BT Commercial Corporation, as Agent 10.24*** Agency and Contribution Agreement, dated as of November 27, 1996, among the Registrant, as Funds Administrator, and Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp. and Hutchinson Products Corporation, as Borrowers 10.25***** Assumption and Joinder Agreement, dated as of August 1, 1997, between Sinterloy Corporation and BT Commercial Corporation, as Agent 10.26***** Substituted and Restated Revolving Note, dated as of August 1, 1997, in the principal amount of up to $25,000,000, made by Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Hutchinson Products Corporation and Sinterloy Corporation in favor of BT Commercial Corporation, as Agent 21.1** Subsidiaries of the Registrant 23.1* Consent of Kohrman Jackson & Krantz P.L.L. (included in its opinion filed as Exhibit 5.1 hereto) 23.2 Consents of Ernst & Young LLP 23.3 Consent of Coopers & Lybrand L.L.P.
149
EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------- 24.1** Reference is made to the Signatures section of this Registration Statement for the Power of Attorney contained therein
- --------------- * To be filed by amendment. ** Previously filed. *** Incorporated by reference to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-18433), as filed with the Commission on December 20, 1996. **** Incorporated by reference to the Registrant's Form 8-K (Reg. No. 333-18433), as filed with the Commission on July 16, 1997. ***** Incorporated by reference to the Registrant's Form 10-Q for the quarterly period ended June 30, 1997 (Reg. No. 333-18433), as filed with the Commission on August 14, 1997. EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 FORM OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HAWK CORPORATION ARTICLE I NAME The name of the corporation is Hawk Corporation (the "Corporation"). ARTICLE II REGISTERED OFFICE IN DELAWARE The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III PURPOSE The Corporation is formed for the purpose of engaging in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as it presently exists or may be amended in the future (the "Delaware General Corporation Law"). ARTICLE IV CAPITAL STRUCTURE 4.1 Authorized Capital Stock. The aggregate number of shares of all classes of stock that the Corporation is authorized to issue is 85,500,000 shares, consisting of: (a) 75,000,000 shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"); (b) 10,000,000 shares of Class B Non-Voting Common Stock, par value $0.01 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"); and (c) 500,000 shares of Serial Preferred Stock, par value $0.01 per share (the "Preferred Stock"). 2 4.2 Class A Common Stock and Class B Common Stock. (a) Powers, Preferences and Rights. Except as may otherwise be provided by this Second Amended and Restated Certificate of Incorporation, as may be amended from time to time by resolutions of the Board of Directors designating a class or series of Preferred Stock pursuant to Section 4.4 hereof (this "Certificate of Incorporation"), or by the Delaware General Corporation Law, the powers, preferences and rights of the Class A Common Stock and the Class B Common Stock, and the qualifications, limitations or restrictions thereof, shall be in all respects identical. (b) Voting Rights. Except as may otherwise be provided by this Certificate of Incorporation or by the Delaware General Corporation Law, (i) all rights to vote and all voting power shall be vested exclusively in the holders of the Class A Common Stock and (ii) each holder of Class A Common Stock shall be entitled to one vote for each share held of record on the applicable record date on all matters presented for a vote of the stockholders of the Corporation, including, without limitation, the election of directors. Except as otherwise required by the Delaware General Corporation Law, the holders of Class B Common Stock shall not be entitled to vote on any matters to be voted on by the stockholders of the Corporation. (c) Dividends; Recapitalizations. Except as may otherwise be provided by this Certificate of Incorporation or by the Delaware General Corporation Law, if, as and when dividends on the Class A Common Stock and the Class B Common Stock are declared payable from time to time by the Board of Directors as provided in this Section 4.2(c), whether payable in cash, property, stock or other securities, the holders of Class A Common Stock and the holders of Class B Common Stock shall be entitled to share equally, on a per share basis, in such dividends; provided, however, that (i) if dividends are declared that are payable in shares of Class A Common Stock, or in shares of Class B Common Stock, dividends shall be declared that are payable at the same rate on both classes of stock and the dividends payable in shares of Class A Common Stock shall be payable only to holders of Class A Common Stock and dividends payable in shares of Class B Common Stock shall be payable only to holders of Class B Common Stock, and (ii) if the dividends consist of other voting securities of the Corporation, the Corporation shall make available to each holder of Class B Common Stock, at such holder's written request, dividends consisting of non-voting securities (except as otherwise required by the Delaware General Corporation Law) of the Corporation which non-voting securities are otherwise identical to such voting securities and are convertible into such voting securities on the same terms as the Class B Common Stock is convertible into the Class A Common Stock. If the Corporation shall in any manner split, subdivide, combine or reclassify the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class of common stock shall be proportionally split, subdivided, combined or reclassified in the same manner and on the same basis as the outstanding shares of Class A Common Stock or Class B Common Stock, as the case may be, have been subdivided or combined or reclassified. (d) Mergers and Consolidations. In case of any merger or consolidation of the Corporation with any other entity as a result of which the holders of Class A Common Stock shall -2- 3 be entitled to receive cash, property, stock or other securities with respect to or in exchange for Class A Common Stock, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation, a holder of one share of Class B Common Stock shall have the right thereafter, so long as the conversion rights set forth in Section 4.2(e) hereof shall exist, to convert such share of Class B Common Stock into the kind and amount of cash, property, stock or other securities receivable upon such consolidation, merger, sale or conveyance by a holder of one share of Class A Common Stock, and shall have no other conversion rights with regard to such share of Class B Common Stock. The provisions of this Section 4.2(d) shall similarly apply to successive mergers, consolidations, sales or conveyances. (e) Conversion of Class B Common Stock. (i) Conversion at Qualified Public Offering. Each share of Class B Common Stock sold in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (a "Public Offering"), shall automatically be converted into an equal number of shares of Class A Common Stock immediately upon the closing of such sale. (ii) Conversion Upon Certain Transfers. Each share of Class B Common Stock shall be converted into an equal number of shares of Class A Common Stock upon the written request (the "Conversion Request") of any third party transferee ("Transferee") acquiring such shares of Class B Common Stock from any holder of Class B Common Stock so long as such Transferee (A) is not an affiliate of the transferor of such Class B Common Stock and (B) makes such Conversion Request within fifteen days of the date such Class B Common Stock is transferred by such transferor to such Transferee. Other than as set forth in Section 4.2(d) and in this Section 4.2(e), a holder of Class B Common Stock shall have no conversion rights with respect to such Class B Common Stock. (f) Conversion Procedures. Any holder of shares of Class B Common Stock desiring to convert such shares, or any such holder whose shares shall have been automatically converted, into shares of Class A Common Stock shall surrender the certificate or certificates representing the Class B Common Stock being converted, or so converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation, or at such office of a transfer agent for the Class B Common Stock or office in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Class B Common Stock by the Corporation, accompanied by written notice of conversion. Such notice of conversion shall specify (i) the number of shares of Class B Common Stock that are the subject of such conversion, (ii) the name or names in which such holder wishes the certificate or certificates for Class A Common Stock and for any Class B Common Stock not to be so converted to be issued, (iii) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, (iv) the date upon which the person giving such notice acquired the Class B Common Stock that is -3- 4 the subject of such notice of conversion and (v) that the conversion of such Class B Common Stock is required pursuant to Section 4.2(e)(i) above or permitted pursuant to Section 4.2(e)(ii) above. Upon surrender of a certificate representing Class B Common Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by overnight or first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Class A Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Class B Common Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of Class B Common Stock that shall not have been converted. The issuance of certificates representing shares of Class A Common Stock issuable upon the conversion of shares of Class B Common Stock by the registered holder thereof pursuant to the provisions of this Certificate of Incorporation shall be made without charge to the converting holder for any tax imposed on the Corporation in respect of the issue thereof; provided that the Corporation shall not be required to pay any tax that may be payable with respect to any transfer involved in the issue and delivery of any certificate in a name other than that of the registered holder of the shares of Class B Common Stock being converted, and the Corporation shall not be required to issue or deliver any such certificate unless and until the person requesting the issue thereof shall have paid the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. Shares of the Class B Common Stock converted into Class A Common Stock as provided in this Section 4.2(f) shall resume the status of authorized but unissued shares of Class B Common Stock. (g) Effective Date of Conversion. The issuance by the Corporation of shares of Class A Common Stock upon a conversion of Class B Common Stock into Class A Common Stock pursuant to Section 4.2(e)(i) above shall be deemed to be effective upon the consummation or closing of the sale pursuant to the Public Offering covering such Class B Common Stock. The issuance by the Corporation of shares of Class A Common Stock upon conversion of Class B Common Stock into Class A Common Stock pursuant to Section 4.2(e)(ii) above shall not be deemed to be effective until receipt of a timely and complete Conversion Request from the Transferee, reasonably satisfactory in form and substance to the Corporation. The person or persons entitled to receive the Class A Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Class A Common Stock as of the effective date of conversion. (h) Liquidating Distributions. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or upon any sale or conveyance of all or substantially all of the assets of the Corporation, after payment or provision for payment of all the liabilities of the Corporation and the expenses of liquidation, and after the holders of the Preferred Stock shall have been paid in full the amounts, if any, to which they are entitled or a sum sufficient for such payment in full shall have been set aside, the remaining assets of the Corporation available for distribution shall be distributed ratably to the holders of the Class A Common Stock and Class B Common Stock in accordance with their respective rights and interests. For the purpose of this Section 4.2(h), a merger, consolidation, sale or conveyance shall not be deemed to be a liquidation -4- 5 or winding up of the Corporation unless the transaction provides for the cessation of the business of the Corporation. (i) Reservation of Class A Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Class A Common Stock, solely for issuance upon the conversion of Class B Common Stock as herein provided, free from any preemptive rights or other obligations, such number of shares of Class A Common Stock as shall from time to time be issuable upon the conversion of all the Class B Common stock then outstanding; provided that, except as provided in this Certificate of Incorporation, the shares of Class A Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any shares of Class B Common Stock are outstanding. 4.3 Amendment and Waiver. No amendment, modification or waiver of any provisions of Sections 4.1 or 4.2 hereof or of this Section 4.3 that adversely affects the rights, preferences or privileges of the Class A Common Stock or Class B Common Stock shall be effective without the affirmative vote of the holders of at least 51% of the outstanding shares of such class of Common Stock entitled to vote at a meeting of the holders of such class of Common Stock duly called for such purpose. 4.4 Preferred Stock. (a) Designations by Board of Directors. The Preferred Stock may be issued from time to time in one or more classes or series with such voting rights, full or limited, or without voting rights, and with such designations, preferences and relative, participating, optional or special rights, and qualifications, limitations or restrictions as are stated herein and as shall be stated and expressed in the resolution or resolutions providing for the issue of such stock adopted by the Board of Directors as hereinafter prescribed. (b) Terms of the Preferred Stock. Subject to the rights of the holders of the Class A Common Stock and Class B Common Stock, authority is hereby expressly granted to and vested in the Board of Directors or any designated committee thereof to authorize the issuance of the Preferred Stock from time to time in one or more classes or series, to determine and take necessary proceedings to fully effectuate the issuance and redemption of any such Preferred Stock and, with respect to each class or series of Preferred Stock, to fix and state from time to time, by resolution or resolutions providing for the issuance thereof, the following: (i) the number of shares to constitute the class or series and the designations thereof; (ii) whether the class or series is to have voting rights, full or limited, or to be without voting rights; (iii) the preferences and relative, participating, optional or special rights, if any, and qualifications, limitations or restrictions thereof, if any, of the class or series; -5- 6 (iv) whether the shares of the class or series will be redeemable and, if redeemable, the redemption price or prices and the time or times at which, and the terms and conditions upon which, such shares will be redeemable and the manner of redemption; (v) whether the shares of the class or series will be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement and, if such retirement or sinking funds are to be established, the annual amount thereof and the terms and conditions relative to the operation thereof; (vi) the dividend rate, whether dividends are payable in cash, stock or otherwise, the conditions upon which and the times when such dividends are payable, the preference or relation to the payment of dividends on any other class or series of stock, whether or not such dividends will be cumulative or noncumulative and, if cumulative, the date or dates from which such dividends will accumulate; (vii) the preferences, if any, and the amounts thereof that the holders of the class or series will be entitled to receive upon the voluntary or involuntary dissolution, liquidation or winding up of, or upon any distribution of the assets of, the Corporation; (viii) whether the shares of the class or series will be convertible into, or exchangeable for, the shares of any other class or classes, or of any other series of the same or any other class or classes, of stock of the Corporation and the conversion price or prices, or ratio or ratios, or rate or rates, at which such conversion or exchange may be made, with such adjustments, if any, as shall be expressed or provided for in such resolution or resolutions; and (ix) such other special rights and protective provisions with respect to the class or series as the Board of Directors or any designated committee thereof may deem advisable. The shares of each class or series of Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The Board of Directors or any designated committee thereof may from time to time increase the number of shares of Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized but unissued shares of Preferred Stock not designated for any other class or series thereof. The Board of Directors or any designated committee thereof may from time to time decrease the number of shares of Preferred Stock designated for any existing class or series by a resolution subtracting from such class or series any unissued shares of Preferred Stock designated for such class or series, and the shares so subtracted shall become authorized, unissued and undesignated shares of Preferred Stock. -6- 7 ARTICLE V BOARD OF DIRECTORS 5.1 Number and Term of Directors. The Board of Directors shall consist of not less than three nor more than fifteen members, with the exact number to be fixed from time to time by resolution of the Board of Directors. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. The directors shall serve until their respective successors are duly elected and qualified or until their earlier resignation, death or removal from office. Except as may otherwise be provided by this Certificate of Incorporation, the stockholders may remove a director from office prior to the expiration of his or her term by an affirmative vote of two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. 5.2 Director Vacancies. Except as may otherwise be provided by this Certificate of Incorporation, (i) whenever any vacancy on the Board of Directors occurs because of death, resignation, retirement, disqualification, removal, increase in the number of directors or otherwise, a majority of the directors then in office, although less than a majority of the entire Board of Directors, may fill the vacancy or vacancies for the balance of the unexpired term or terms, at which time a successor or successors shall be duly elected by the stockholders and qualified, and (ii) only the remaining directors of the Corporation shall have the authority, in accordance with the foregoing procedure, to fill any vacancy that exists on the Board of Directors. 5.3 Elimination of Ballot for the Election of Directors. The directors of the Corporation need not be elected by written ballot. 5.4 Amendment of Bylaws. In furtherance and not in limitation of the power conferred upon the Board of Directors by the Delaware General Corporation Law, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time the Bylaws of the Corporation without any action on the part of the stockholders except as otherwise specifically provided in the By-laws of the Corporation. 5.5 Amendment. This Article V shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. ARTICLE VI INDEMNIFICATION RIGHTS AND LIMITATION OF DIRECTOR LIABILITY 6.1 Indemnification Rights. (a) To the maximum extent permitted under the Delaware General Corporation Law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason -7- 8 of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. (b) To the maximum extent permitted under the Delaware General Corporation Law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit. 6.2 Advancement of Expenses. (a) To the maximum extent permitted under the Delaware General Corporation Law, the Corporation shall pay all expenses (including attorneys' fees) actually and reasonably incurred by any person by reason of the fact that such person is or was a director of the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Corporation as authorized by the Delaware General Corporation Law. (b) To the maximum extent permitted under the Delaware General Corporation Law, the Corporation shall pay all expenses (including attorneys' fees) actually and reasonably incurred by any person by reason of the fact that such person is or was an officer of the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding (other than an action by the Corporation on its own behalf, it being understood that such an action does not include any derivative suit instituted by a stockholder of the Corporation) in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Corporation as authorized by the Delaware General Corporation Law. 6.3 Limitation on Liability of Directors. To the maximum extent permitted under the Delaware General Corporation Law, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for the breach of his or her fiduciary duty as a director. 6.4 Nonexclusivity and Benefit. The indemnification rights granted pursuant to this Article VI shall not be exclusive of other indemnification rights, if any, granted to such person and shall inure to the benefit of the heirs and legal representatives of such person. -8- 9 6.5 Effect of Repeal, Amendment or Termination. To the maximum extent permitted under the Delaware General Corporation Law, no repeal of or restrictive amendment of this Article VI and no repeal, restrictive amendment or termination of effectiveness of any law authorizing this Article VI shall apply to or affect adversely any right or protection of any director, officer, employee or agent of the Corporation, for or with respect to any acts or omissions of such person occurring prior to such repeal, amendment or termination of effectiveness. 6.6 Retroactive Effect. To the maximum extent permitted under the Delaware General Corporation Law, the indemnification and advancement of expenses provided by this Article VI shall apply with respect to acts or omissions occurring prior to the adoption of this Article VI. ARTICLE VII STOCKHOLDERS 7.1 Elimination of Right of Stockholders to Act by Consent. No action required to be taken or that may be taken at any annual or special meeting of holders of the Common Stock may be taken without a vote at a meeting duly called and held for such purpose, and the right of such holders to consent in writing, without a meeting, to the taking of any action is specifically denied. 7.2 Special Meetings. Except as otherwise required by the Delaware General Corporation Law, special meetings of holders of the Common Stock may be called only by (i) the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, (ii) the Chairman of the Board, (iii) the Vice-Chairman of the Board or (iv) the holders of at least 25% of the outstanding shares of Common Stock entitled to vote at the special meeting. The business transacted at any special meeting shall be limited to the purposes stated in the notice of such meeting. 7.3 Amendment. This Article VII shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. ARTICLE VIII BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS The Corporation hereby elects to be governed by Section 203 of the Delaware General Corporation Law; provided that this Article VIII shall not apply to restrict a "business combination," as such term is defined in Section 203 of the Delaware General Corporation Law, between the Corporation and an "interested stockholder," as such term is defined in Section 203 of the Delaware General Corporation Law, if the interested stockholder became such prior to the effective date of this Certificate of Incorporation. -9- 10 IN WITNESS WHEREOF, the undersigned have executed and subscribed this Second Amended and Restated Certificate of Incorporation, and hereby affirm the foregoing as true under the penalties of perjury, as of this _____ day of January, 1998. --------------------------------- Name: Norman C. Harbert Title: Chairman of the Board Attest: - ------------------------------------ Name: Byron S. Krantz Title: Secretary -10- 11 FORM OF CERTIFICATE OF DESIGNATION OF THE SERIES D PREFERRED STOCK OF HAWK CORPORATION PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board and Secretary, respectively, of Hawk Corporation, a Delaware corporation (the "Corporation"), hereby certify that: Pursuant to authority conferred upon the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, and pursuant to the provisions of Section 151 of the Delaware General Corporation Law, the Board of Directors, at a telephonic meeting held on November 13, 1997, duly adopted a resolution creating a new series of Serial Preferred Stock, par value $0.01 per share, of the Corporation, as follows: RESOLVED, that pursuant to the authority expressly vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a new series of Serial Preferred Stock of the Corporation is hereby created, of which the powers, designations, preferences and relative, participating, optional or other rights, and qualifications and restrictions, shall be as follows: Section 1. Effective Date. The provisions of this Certificate of Designation shall become effective only upon the effective date of the initial public offering of shares of Common Stock described in the Corporation's Registration Statement on Form 5-1 (Reg. No.333-40535), as originally filed with the Securities and Exchange Commission on November 19, 1997, as amended from time to time (the "Effective Date"). Section 2. Designation and Amount. There shall be a series of the Serial Preferred Stock of the Corporation that shall be designated as the "Series D Preferred Stock," par value $0.01 per share, and the number of shares constituting such series shall be 1,530. Subject to Section 5 hereof, such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series D Preferred Stock to a number less than that of the shares of Series D Preferred Stock then outstanding. Any capitalized terms used herein without definition shall have the meanings assigned to them in the Certificate of Incorporation of the Corporation. 12 Section 3. Dividends and Distributions. (a) The holders of Series D Preferred Stock shall be entitled to receive, out of funds legally available for that purpose, cash dividends at the rate of nine and four-fifths percent (9.8%) of the Series D Liquidation Preference (as defined in Section 4 hereof) per annum. Such dividends shall be cumulative from the Effective Date and shall be payable quarterly in arrears, when and as declared by the Board of Directors, on the last business day in March, June, September and December of each year that such Series D Preferred Stock is outstanding to holders of record on such date, commencing on the Effective Date and prorated from the Effective Date through March 31, 1998. Dividends on account of arrearages for any past due dividends may be declared and paid on any date to holders of record on such payment date. Arrearages must be paid prior to the payment of current dividends and shall be deemed to be paid first on account of the longest outstanding arrearage. (b) If full cash dividends have been declared and are not paid or made available to the holders of all outstanding shares of Series D Preferred Stock and funds legally available are insufficient to permit payment in full in cash to all such holders of the preferential amounts to which they are then entitled, then the entire amount legally available for payment of cash dividends shall be distributed among the holders of the Series D Preferred Stock ratably in proportion to the full amount to which they would otherwise be respectively entitled, and any remainder not paid in cash to the holders of the Series D Preferred Stock shall cumulate as provided in Section 3(c) hereof. (c) If on any dividend payment date, the holders of the Series D Preferred Stock have not received the full dividends provided for in Section 3(a) hereof then such dividends shall cumulate, whether or not declared, with additional dividends thereon for each succeeding full dividend period during which such dividends shall remain unpaid. Unpaid dividends for any period less than a full dividend period shall cumulate on a day-to-day basis and shall be computed on the basis of a 365-day year. (d) So long as any shares of Series D Preferred Stock are outstanding, the Corporation shall not declare or pay on any Common Stock any dividend whatsoever, whether in cash, stock, property or otherwise, nor shall the Corporation make any distribution on any Common Stock, nor shall any Common Stock be purchased or redeemed by the Corporation, nor shall any monies be paid or made available for a sinking fund for the purchase or redemption of any Common Stock, unless all dividends to which the holders of the Series D Preferred Stock are entitled to for all previous dividend periods have been paid or declared and a sum of money sufficient for the payment thereof set apart. Section 4. Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, before any payment or distribution shall be made to the holders of Common Stock, the holders of each share of Series D Preferred Stock shall be entitled to receive an amount of cash equal to $1,000 per share (the "Series D Liquidation Preference") plus any accrued or unpaid dividends thereon to such date. After the payment or the setting apart for payment of amounts so payable to the holders of the Series D Preferred Stock, the -2- 13 remaining assets of the Corporation shall be available for distribution among the holders of Common Stock according to their respective rights and priorities. If the assets or surplus funds to be distributed to the holders of the Series D Preferred Stock are insufficient to permit the payment to such holders of the full preferential amounts to which they are entitled, then the assets and surplus fluids legally available for distribution shall be distributed ratably among the holders of the Series D Preferred Stock ratably in proportion to the full preferential amount each such holder is otherwise entitled to receive. Section 5. Voting Rights. (a) Subject to Sections 5(b), 5(c) and 5(d) hereof, and notwithstanding any provisions of the Certificate of Incorporation to the contrary, the holders of the shares of Series D Preferred Stock issued and outstanding from time to time shall have the right, acting as a separate class, to: (i) Elect a majority of the directors to the Board of Directors (the directors elected by the holders of the Series D Preferred Stock being hereinafter referred to as the "Series D Preferred Directors"). (ii) Fill any vacancy or vacancies on the Board of Directors caused by the death, resignation, retirement, disqualification or removal of any of the Series D Preferred Directors. (iii) Remove a Series D Preferred Director from the Board of Directors prior to the expiration of his or her term, with or without cause, by an affirmative vote of at least a majority of the outstanding shares of Series D Preferred Stock entitled to vote. Only the holders of shares of Series D Preferred Stock may remove a Series D Preferred Director from the Board of Directors. (iv) Vote on any proposal submitted to the stockholders of the Corporation for approval that would: (A) amend, alter or repeal any of the provisions of the Certificate of Incorporation so as to adversely affect any right, preference, privilege or voting power of the Series D Preferred Stock or the holders thereof including, without limitation, any proposal to change the method of electing the members of the Board of Directors; (B) provide for the consolidation or merger of the Corporation with one or more other corporations or entities or the sale, lease, exchange, transfer or other disposition of all or substantially all of the Corporation's assets, provided, however, that the purchase for cash, stock or otherwise by the Corporation of all or any part of the assets, stock or other securities of another corporation or entity shall not be deemed to be such a consolidation or merger; or (C) create or authorize, or increase the authorized or issued amount of any class or series of capital stock ranking senior to the Series D Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassify any authorized capital stock of the Corporation into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to -3- 14 purchase any such shares. No such proposal shall be adopted or effected absent the affirmative vote or written consent of the holders of at least a majority of the outstanding shares of Series D Preferred Stock entitled to vote. (b) The holders of all shares of Series D Preferred Stock shall permanently cease to have any of the voting rights specified in Section 5(a) hereof from and after the earlier to occur of: (i) the date that the last of each of the Harbert Family Group (as defined in Section 5(e) hereof) and the Weinberg Family Group (as defined in Section 5(e) hereof) shall Transfer (as defined in Section 5(e) hereof) a portion of its Class A Common Stock so as to reduce its Aggregate Equity Interest (as defined in Section 5(e) hereof) in the Corporation to less than fifty percent (50%) of its Initial Aggregate Equity Interest (as defined in Section 5(e) hereof) in the Corporation; and (ii) the death of the last to die of Norman C. Harbert, Carl J. Harbert II, Ronald E. Weinberg, Sr. or Ronald E. Weinberg, Jr. (c) A Family Group (as defined in Section 5(e) hereof) shall permanently cease to have any of the voting rights specified in Section 5(a) hereof with respect to all of its shares of Series D Preferred Stock from and after the earlier to occur of: (i) the date that such Family Group shall Transfer a portion of its Class A Common Stock so as to reduce its Aggregate Equity Interest in the Corporation to less than fifty percent (50%) of its Initial Aggregate Equity Interest in the Corporation; and (ii) the date that any member of such Family Group shall Transfer any shares of Series D Preferred Stock, or shall grant or assign (or agree to grant or assign) any right to vote or proxy with respect to any such shares, in contravention of the restrictions set forth in Section 6 hereof. (d) No Person to whom any shares of Series D Preferred Stock are Transferred, or to whom any right to vote or proxy with respect any shares of Series D Preferred Stock is granted or assigned, in contravention of the restrictions set forth in Section 6 hereof shall have any of the voting rights specified in Section 5(a) hereof. In the event that any Person that is not an individual and that is a member of a Family Group ceases to be controlled by or maintained principally for the benefit of a member of any Family Group, such Person shall cease to have any of the voting rights specified in Section 5(a) hereof. (e) For purposes hereof the following capitalized terms have the meanings specified below: -4- 15 (i) "Aggregate Equity Interest" shall mean the aggregate equity interest in the Corporation of a particular Family Group represented by the total number of shares of Class A Common Stock held thereby. (ii) "Family Group" shall mean any of the Harbert Family Group, the Weinberg Family Group or the Krantz Family Group. (iii) "Harbert Family Group" shall mean Norman C. Harbert, members of the immediate family of the foregoing, any other lineal descendants of the foregoing, any estate of any of the foregoing, any trusts established principally for the benefit of any of the foregoing, and any other entity controlled by any of the foregoing (including, without limitation, the Harbert Family Limited Partnership), but shall not include any entity that ceases to be controlled by or maintained principally for the benefit of a member of the Harbert Family Group. (iv) "Initial Aggregate Equity Interest" shall mean the Aggregate Equity Interest of a Family Group on the Effective Date, as appropriately adjusted to reflect any subsequent subdivision or combination of the outstanding shares of Class A Common Stock into a greater or lesser number of shares of Class A Common Stock, whether as a result of a merger, consolidation, stock split, stock dividend, reclassification or otherwise. (v) "Krantz Family Group" shall mean Byron S. Krantz, members of the immediate family of the foregoing, any other lineal descendants of the foregoing, any estate of any of the foregoing, any trusts established principally for the benefit of any of the foregoing, and any other entity controlled by any of the foregoing (including, without limitation, the Krantz Family Limited Partnership), but shall not include any entity that ceases to be controlled by or maintained principally for the benefit of a member of the Krantz Family Group. (vi) "Person" shall mean any individual, corporation, partnership, limited liability company, estate, trust, association, private foundation, joint stock company or other entity, and shall also mean a "group" as the term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. (vii) "Transfer" shall mean any sale, transfer, gift, hypothecation, pledge, assignment, devise or other disposition of shares of Class A Common Stock or Series D Preferred Stock (including the granting of any option to purchase, or the execution and delivery of any agreement for the sale, transfer or other disposition of such shares), whether voluntary, involuntary or by operation of law, and whether of record, constructively, beneficially or otherwise. The terms "Transfers" and "Transferred" shall have correlative meanings. (viii) "Weinberg Family Group" shall mean Ronald E. Weinberg, Sr., members of the immediate family of the foregoing, any other lineal descendants of the -5- 16 foregoing, any estate of any of the foregoing, any trusts established principally for the benefit of any of the foregoing, and any other entity controlled by any of the foregoing (including, without limitation, the Weinberg Family Limited Partnership), but shall not include any entity that ceases to be controlled by or maintained principally for the benefit of a member of the Weinberg Family Group. Section 6. Restrictions on Transfer. (a) Until the Restrictions Termination Date (as defined in Section 6(d) hereof) or until the holders of all outstanding shares of Series D Preferred Stock agree otherwise in writing: (i) Shares of Series D Preferred Stock may be Transferred only among the Family Groups and among the members of such Family Groups. Any Transfer of shares of Series D Preferred Stock in contravention of such restriction shall have the consequences set forth in Sections 5(c)(ii) and 5(d) hereof. In the event that any Person that is not an individual and that is a member of a Family Group ceases to be controlled by or maintained principally for the benefit of a member of any Family Group, such event shall constitute a constructive Transfer in contravention of this Section 6(a). (ii) A holder of Series D Preferred Stock having the voting rights set forth in Section 5(a) hereof may only grant or assign such voting rights, revocably or irrevocably, to one or more Family Groups or members of a Family Group. (iii) Each certificate for shares of Series D Preferred Stock issued by the Corporation shall bear the following legend: The shares of Series D Preferred Stock represented by this certificate are subject to certain restrictions set forth in the Certificate of Designation of the Series D Preferred Stock, which is incorporated by operation of law in the Certificate of Incorporation of the Corporation. Any transfer of the shares of Series D Preferred Stock represented by this certificate in contravention of such restrictions shall result in the loss of all voting rights applicable to such shares, except as otherwise required by the Delaware General Corporation Law. The Corporation will mail without charge to any requesting stockholder a copy of the Certificate of Incorporation, including the express terms of each class and series of the authorized capital Stock of the Corporation, within five days after receipt of a written request therefor. (b) For purposes hereof the term "Restrictions Termination Date" shall mean the date that all holders of Series D Preferred Stock permanently cease to have any of the voting rights specified in Section 5(a) hereof in accordance with the provisions of Section 5(b) or 5(c) hereof. Section 7. Special Meetings. The Secretary of the Corporation may, and upon the written request of the holders of at least ten percent (10%) of the number of shares of the Series D -6- 17 Preferred Stock then outstanding addressed to the Secretary at the principal office of the Corporation shall, call a special meeting of the holders of the Series D Preferred Stock for the purpose of exercising any of the voting rights described in Section 5(a) hereof to be held in the case of such written request within thirty days after delivery of such request, and in either case to be held at a place and upon the notice provided by the Delaware General Corporation Law and in the By-laws of the Corporation. Section 8. Redemption. (a) The Corporation may, at any time and from time to time as may be determined by the Board of Directors, redeem all but not less than all, of the Series D Preferred Stock for an amount equal to the Series D Liquidation Preference plus all accrued dividends to the date of redemption, provided that (i) the Corporation is not in default in the payment of any dividends on the Series D Preferred Stock then outstanding, and (ii) the Corporation has obtained the consent of any and all holders of Series D Preferred Stock that then have any of the voting rights set forth in Section 5(a) hereof. (b) The Corporation shall provide notice of any redemption pursuant to this Section 8 specifying the time and place of redemption, by first class or certified mail, postage prepaid, to each holder of shares of Series D Preferred Stock at the address for such holder last shown on the records of the Corporation or its transfer agent, not more than sixty nor less than thirty days before the applicable redemption date. Upon mailing of any such notice of redemption, the Corporation shall become obligated to redeem Series D Preferred Stock specified in such notice. (c) No redeemed shares of Series D Preferred Stock shall be entitled to any dividends declared after the redemption date, and on such date all rights of the holder of such shares as a stockholder of the Corporation by reason of the ownership of such shares shall cease, except the right to receive the price of such shares without interest, upon presentation and surrender of the certificate representing such shares, and such shares will not after such redemption date be deemed to be outstanding. (d) On or before the redemption date, the Corporation shall deposit an amount equal to the Series D Liquidation Preference, plus all accrued dividends to the redemption date, for all outstanding shares of Series D Preferred Stock with a bank or trust company in a trust fund for the benefit of the respective holders of the shares designated for redemption together with instructions and authority to the bank or trust company to pay such price for such shares to the respective holders, after the redemption date upon receipt of notification from the Corporation that such holder has surrendered all of the certificates representing such holder's shares of Series D Preferred Stock to the Corporation. The Corporation shall have the right to request the return of the balance of any monies deposited by the Corporation remaining unclaimed at the expiration of sixty days following the redemption date. Section 9. Reacquired Shares. Any shares of Series D Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled -7- 18 promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Serial Preferred Stock and may be reissued as part of a new series of Serial Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 10. Ranking. Subject to Section 5(a)(iv)(C) hereof the Series D Preferred Stock shall rank on a parity with all other series of the Serial Preferred Stock as to the payment of dividends and the distribution of assets. Section 11. Severability. In the event any term, provision, sentence or paragraph of this Certificate of Designation is declared by a court of competent jurisdiction to be invalid or unenforceable, such term, provision, sentence or paragraph shall be deemed severed from the remainder of this Certificate of Designation, and the balance of this Certificate of Designation shall remain in effect and be enforced to the fullest extent permitted by law and shall be construed to preserve the intent and purposes of this Certificate of Designation. Any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term, provision, sentence or paragraph of this Certificate of Designation in any other jurisdiction. IN WITNESS WHEREOF, the undersigned have executed and subscribed this Certificate of Designation, and hereby affirm the foregoing as true under the penalties of perjury, as of this _____ day of January, 1998. ------------------------------ Name: Norman C. Harbert Title: Chairman of the Board Attest: - ----------------------------------- Name: Byron S. Krantz Title: Secretary -8- 19 FORM OF CERTIFICATE OF DESIGNATION OF THE SERIES E PREFERRED STOCK OF HAWK CORPORATION PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board and Secretary, respectively, of Hawk Corporation, a Delaware corporation (the "Corporation"), hereby certify that: Pursuant to authority conferred upon the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, and pursuant to the provisions of Section 151 of the Delaware General Corporation Law, the Board of Directors, at a telephonic meeting held on November 13, 1997, duly adopted a resolution creating a new series of Serial Preferred Stock, par value $0.01 per share, of the Corporation, as follows: RESOLVED, that pursuant to the authority expressly vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a new series of Serial Preferred Stock of the Corporation is hereby created (the "Series E Preferred Stock"), of which the powers, designations, preferences and relative, participating, optional or other rights, and qualifications and restrictions, shall be as follows: Section 1. Designation and Amount. There shall be a series of the Serial Preferred Stock of the Corporation that shall be designated as the "Series E Preferred Stock," par value $0.01 per share, and the number of shares constituting such series shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series E Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. Section 2. Dividends and Distributions. The holders of shares of Series E Preferred Stock shall be entitled to receive, out of any funds legally available and when and as declared by the Board of Directors, dividends and other distributions of the same kind but at the rate of 1,000 times the aggregate amount per share of the dividends or other distributions received by the holders of shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock"). Dividends and other distributions shall be declared and paid to the holders of shares of Series E -19- 20 Preferred Stock of record, on such dates respectively preceding the payment thereof as may be fixed by the Board of Directors in declaring any such dividends, at the same time that dividends or other distributions are declared and paid to holders of shares of Common Stock. Such dividends shall not accrue or be cumulative. In the event the Corporation shall, at any time after the January 16, 1998 (the "Effective Date"), (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of shares of Common Stock that were outstanding immediately prior to such event. Section 3. Voting Rights. The holders of shares of Series E Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series E Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the holders of shares of Class A Common Stock of the Corporation (the "Class A Common Stock"). In the event the Corporation shall, at any time after the Effective Date, (i) declare any dividend on shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of shares of Series E Preferred Stock and the holders of shares of Class A Common Stock shall vote together as one class on all matters submitted to a vote of the holders of the Class A Common Stock. (c) Except as set forth herein, holders of shares of Series E Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of shares of Class A Common Stock as set forth herein) for taking any corporate action. Section 4. Reacquired Shares. Any shares of Series E Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Serial Preferred Stock and may be reissued as part of a new series of Serial Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. -2- 21 Section 5. Liquidation, Dissolution or Winding Up. The holders of shares of Series E Preferred Stock shall, in case of liquidation, dissolution, or winding up of the affairs of the Corporation, be entitled to receive in full, out of the assets of the Corporation, including its capital, an amount equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock, subject to the provision for adjustment hereinafter set forth. In the event the Corporation shall at any time (i) declare any dividend on shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Except as set forth above, the holders of shares of Series E Preferred Stock shall have the same rights and shall be treated in the same manner with respect to any liquidation, dissolution or winding up as holders of shares of Common Stock. Section 6. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the holders of shares of Series E Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series E Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 8. Redemption. The Series E Preferred Stock shall not be redeemable. Section 9. Ranking. The Series E Preferred Stock shall rank junior to all other series of the Serial Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall specifically provide otherwise. Section 10. Amendment. The Second Amended and Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the shares of Series E Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds (66 2/3%) of the outstanding shares of Series E Preferred Stock, voting separately as a class. -3- 22 Section 11. Fractional Shares. Shares of Series E Preferred Stock may be issued in fractions of a share that are one one-thousandths or integral multiples of one one-thousandths of a share, which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of the holders of Series E Preferred Stock. IN WITNESS WHEREOF, the undersigned have executed and subscribed this Certificate of Designation, and hereby affirm the foregoing as true under the penalties of perjury, as of this _____ day of January, 1998. ------------------------------------- Name: Norman C. Harbert Title: Chairman of the Board Attest: - ------------------------------------------- Name: Byron S. Krantz Title: Secretary -4- EX-3.2 3 EXHIBIT 3.2 1 Exhibit 3.2 FORM OF AMENDED AND RESTATED BY-LAWS OF HAWK CORPORATION ARTICLE I STOCKHOLDERS 1.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors of the Corporation (the "Board"). Any other proper business may be transacted at the annual meeting. 1.2. Special Meetings. Except as otherwise required by the General Corporation Law of the State of Delaware as it presently exists or may be amended in the future (the "Delaware General Corporation Law"), special meetings of the holders of the Class A Common Stock, par value $0.01 per share, or Class B Non-Voting Common Stock, par value $0.01 per share, of the Corporation (together, the "Common Stock") may be called only as set forth in the certificate of incorporation of the Corporation, as amended and/or restated from time to time (the "Certificate of Incorporation"). 1.3. Notice of Meetings. Written notice of every meeting of stockholders shall be given not less than ten nor more than sixty days before the date of the meeting by or at the direction of the President, the Secretary or such other person as the Board may appoint, to each stockholder entitled to vote at such meeting. The notice shall include the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. If mailed, notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. 1.4. Waiver of Notice of Meetings of Stockholders. Any written waiver of notice, signed by a stockholder entitled to notice, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting constitutes a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the stockholders, need be specified in any written waiver of notice. 1.5. Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such reconvened meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the reconvened meeting, the Corporation may transact any business which could have been transacted at the original meeting. If the adjournment is for more than thirty days, 2 or if after the adjournment a new record date is fixed for the reconvened meeting, a notice of the reconvened meeting shall be given to each stockholder of record entitled to vote at the meeting. 1.6. Quorum. Except as otherwise provided by the Delaware General Corporation Law, the Certificate of Incorporation or these By-laws, at each meeting of stockholders the presence in person or by proxy of the holders of shares of stock having a majority of the votes which could be cast by the holders of all outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. Shares of stock of the Corporation belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, will neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing does not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.5 of these Amended and Restated By-laws (the "By-laws") until a quorum is in attendance. 1.7. Organization of Meetings. Meetings of stockholders shall be presided over by the Chairman of the Board or, if the Chairman of the Board is not present, by the Vice-Chairman of the Board or, in the absence of the foregoing persons, by a chairman chosen by the stockholders at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 1.8. Action by Vote. Except as otherwise provided by the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Except as otherwise provided by the Certificate of Incorporation, at all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect directors. Unless otherwise provided by the Delaware General Corporation Law, the Certificate of Incorporation or these By-laws, all other elections, proposals and questions shall be determined by the vote of the holders of shares of stock having a majority of the votes which could be cast by the holders of all shares of stock entitled to vote thereon which are present in person or represented by proxy at the meeting. Voting at stockholder meetings need not be by written ballot. 1.9. Representation by Proxy. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an -2- 3 instrument in writing revoking the proxy or another duly executed proxy bearing a later date wi th the Secretary prior to the taking of a vote. 1.10. Inspectors of Election. The Board in advance of any meeting of stockholders shall appoint one or more inspectors of election ("Inspectors of Election") to act at the meeting or any adjournment of the meeting. Each Inspector of Election, before entering upon the discharge of his duties, must take and sign an oath faithfully to execute the duties of Inspector of Election at such meeting with strict impartiality and according to the best of his ability. Inspectors of Election shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by the Delaware General Corporation Law. The Inspectors of Election may appoint or retain other persons or entities to assist them in the performance of their duties as inspectors. 1.11. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which record date: (a) in the case of determination of stockholders entitled to notice of or to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by the Delaware General Corporation Law, not be more than sixty nor less than ten days before the date of such meeting; and (b) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (b) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the reconvened meeting. -3- 4 1.12. List of Stockholders Entitled to Vote. The officer or agent responsible for maintaining the stock ledger of the Corporation shall prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 1.13. Advance Notice of Stockholder Proposed Business. At a meeting of the holders of the Common Stock, only such business may be conducted as is properly brought before the meeting. To be properly brought before a meeting, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by or at the direction of the Board, or (iii) otherwise properly brought before the meeting by a holder of Common Stock. In addition to any other applicable requirements, for business to be properly brought before a meeting of the holders of the Common Stock, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the meeting; provided, however, that in the event that less than seventy days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first; and provided further that in the event Rule 14a-8, as amended from time to time, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires that notice of a stockholder's proposal be received by the Corporation more than ninety days prior to the meeting, such longer notice period shall control. A stockholder's notice to the Secretary must set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of Common Stock that are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at a meeting of the holders of the Common Stock except in accordance with the procedures set forth in this Section 1.13; provided, however, that nothing in this Section 1.13 shall be deemed to preclude discussion by any stockholder of any business properly brought before such a meeting in accordance with said procedure. The chairman at a meeting of the holders of the Common Stock shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.13, and if he should so determine, he -4- 5 shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding anything contained in these By-laws to the contrary, this Section 1.13 shall not be altered, amended or repealed except by the Board pursuant to the Certificate of Incorporation or an affirmative vote of at least two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. 1.14. Elimination of Action By Written Consent of Stockholders. No action required to be taken or which may be taken at any annual or special meeting of holders of the Common Stock may be taken without a vote at a meeting duly called and held for such purpose, and the right of such holders to consent in writing, without a meeting, to the taking of any action is specifically denied. Notwithstanding anything contained in these By-laws to the contrary, this Section 1.14 shall not be altered, amended or repealed except by the Board pursuant to the Certificate of Incorporation or an affirmative vote of at least two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. ARTICLE II BOARD OF DIRECTORS 2.1. Powers. Subject to applicable provisions of the Delaware General Corporation Law and any limitations in the Certificate of Incorporation or these By-laws, the Board shall manage the business and affairs of the Corporation and exercise all corporate powers. 2.2. Number and Term. The number of directors of the Corporation and the terms of office of such directors shall be as set forth in the Certificate of Incorporation. 2.3. Election; Removal; Vacancies; Resignation. The election and removal of directors and the filling of vacancies on the Board shall be as set forth in the Certificate of Incorporation. Any director may resign at any time upon written notice to the Corporation. Such resignation shall take effect on the date of receipt of such notice or at any later time set forth in such notice and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 2.4. Regular Meetings. The Board shall hold a regular meeting immediately after each annual meeting of stockholders. Other regular meetings of the Board may be held at such places within or without the State of Delaware and at such times as the Board may determine. Notice of a regular meeting need not be given. 2.5. Special Meetings. Special meetings of the Board may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board or the Vice-Chairman of the Board. Notice of a special meeting of the Board shall be given by the officer calling the meeting at least twenty-four hours before the special meeting. -5- 6 2.6. Waiver of Notice of Meetings of Directors. Any written waiver of notice, signed by a director entitled to notice, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when the director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the directors, need be specified in any written waiver of notice. 2.7. Quorum; Vote Required for Action. At all meetings of the Board a majority of the whole Board shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present at the meeting may adjourn the meeting until a majority attends. Except in cases in which the Certificate of Incorporation or these By-laws otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. 2.8. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of the Corporation's directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of the Corporation's directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (b) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. 2.9. Organization of Meetings. Meetings of the Board shall be presided over by the Chairman of the Board or, if the Chairman of the Board is not present, by the Vice-Chairman of the Board or, in their absence, by a chairman chosen by the directors at the meeting. The Secretary shall -6- 7 act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.10. Telephonic Meetings Permitted. Members of the Board, or any committee designated by the Board, may participate in meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meetings can hear each other, and participation in meetings pursuant to this Section shall constitute presence in person at such meetings. 2.11. Action by Written Consent of Directors. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent in writing, and the writing or writings are filed with the minutes of proceedings of the Board or such committee. 2.12. Compensation of Directors. In the discretion of the Board, the Corporation may pay each director such fees for his services as director and reimburse him for his reasonable expenses incurred in the performance of his duties as director, as determined by the Board. Nothing contained in this Section may be construed to preclude any director from serving the Corporation in any other capacity and receiving reasonable compensation for such service. Members of any special or standing committees may be allowed like compensation for attending committee meetings. 2.13. Committees. The Board may, by resolution, designate, change the membership of or terminate the existence of any committee or committees. Each committee shall consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by the Delaware General Corporation Law and to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation. 2.14. Committee Rules. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these By-laws. 2.15. Stockholder Nominations for Director Candidates. Except as may otherwise be provided in the Certificate of Incorporation, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board may be made at a meeting of stockholders only (i) by or at the direction of the Board, (ii) by any nominating committee or person appointed by the Board or (iii) by any stockholder of -7- 8 the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.15. Such nominations, other than those made by or at the direction of the Board, must be made pursuant to timely notice in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the meeting; provided, however, that in the event that less than seventy days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. Such stockholder's notice to the Secretary must set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the class and number of shares of capital stock of the Corporation that are beneficially owned by the person, and (d) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a, as amended from time to time, under the Exchange Act; and (ii) as to the stockholder giving the notice, (a) the name and record address of the stockholder, and (b) the class and number of shares of capital stock of the Corporation that are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if he should so determine and declare, the defective nomination shall be disregarded. Notwithstanding anything contained in these By-laws to the contrary, this Section 2.15 shall not be altered, amended or repealed except by the Board pursuant to the Certificate of Incorporation or by an affirmative vote of at least two-thirds of the outstanding shares of all capital stock entitled to vote at a stockholders' meeting duly called for such purpose. ARTICLE III OFFICERS 3.1. Enumeration; Appointment. The Board shall appoint a President, Secretary and Treasurer, and it may, if it so determines, elect a Chairman of the Board and/or Vice-Chairman of the Board from among its members. The Board may also appoint, or empower the Chairman or Vice-Chairman of the Board, or the President, to appoint, such other officers and agents as the business of the Corporation may require. Any number of offices may be held by the same person. The Board may require any officer, agent or employee to give security for the faithful performance of his duties. -8- 9 3.2. Term of Office; Resignation; Removal; Vacancies. Each officer shall hold office until his successor is appointed and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The Board may, when in its judgment the best interests of the Corporation will be served, remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board. 3.3. Powers and Duties. The officers of the Corporation shall have such powers and duties in the management of the Corporation as may be prescribed in these By-laws and by the Board and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board. 3.4. Compensation of Officers. The Board shall determine the officers' salaries, and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the Corporation. ARTICLE IV CAPITAL STOCK 4.1. Stock Certificates. Every stockholder, upon written request, shall be entitled to a certificate signed by or in the name of the Corporation by two officers of the Corporation, certifying the number of shares owned by him in the Corporation. Any or all of the signatures on the certificate may be by facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 4.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. Upon written request by a stockholder, the Corporation may issue a new certificate of stock in the place of any certificate previously issued by the Corporation, alleged to have been lost, stolen or destroyed. The Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. 4.3. Transfer on Books. Subject to the restrictions, if any, stated or noted on the stock certificate, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the stock certificate properly endorsed or accompanied by a written assignment and power of attorney properly executed, with any necessary transfer stamps affixed and with such proof of the authenticity of signature as the Board or the transfer agent of the Corporation may reasonably require. -9- 10 4.4. Registered Stockholders. Except as may be otherwise required by the Delaware General Corporation Law, by the Certificate of Incorporation or by these By-laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote or to give any consent with respect to such stock and to be held liable for such calls and assessments, if any, as may lawfully be made on such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been properly transferred on the books of the Corporation. It shall be the duty of each stockholder to notify the Corporation of his current mailing address. ARTICLE V MISCELLANEOUS 5.1. Certificate of Incorporation. These By-laws are subject to the Certificate of Incorporation and, in the case of any conflict with the Certificate of Incorporation, the Certificate of Incorporation shall control. 5.2. Amendment of By-laws. These By-laws may be amended or repealed, and new by-laws may be made, by the Board. 5.3. Location of Records. The books and records of the Corporation may be kept outside of the State of Delaware at such location or locations as may be designated from time to time by the Board. 5.4. Fiscal Year. The fiscal year of the Corporation shall be the calendar year, unless otherwise fixed by resolution of the Board. 5.5. Corporate Seal. The Corporation shall not have a corporate seal. * - 10 - EX-4.2 4 EXHIBIT 4.2 1 Exhibit 4.2 ================================================================================ FORM OF RIGHTS AGREEMENT DATED AS OF JANUARY 16, 1998 BETWEEN HAWK CORPORATION AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY, AS RIGHTS AGENT ================================================================================ 2 TABLE OF CONTENTS
Page ---- Defined Term Cross Reference Sheet.........................................................................iv Section 1. Certain Definitions.............................................................................1 Section 2. Appointment of Rights Agent.....................................................................6 Section 3. Issue of Rights Certificates....................................................................6 Section 4. Form of Rights Certificate......................................................................8 Section 5. Countersignature and Registration...............................................................9 Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates...................................................................9 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.................................................................................10 Section 8. Cancellation and Destruction of Rights Certificates...................................................................................12 Section 9. Reservation and Availability of Preferred Stock................................................13 Section 10. Preferred Shares Record Date...................................................................14 Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights.....................................................................14 Section 12. Certificate of Adjusted Purchase Price or Number of Shares...............................................................................21 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power........................................................................21 Section 14. Fractional Rights and Fractional Shares........................................................23 Section 15. Rights of Action...............................................................................25
ii 3
Page ---- Section 16. Agreement of Rights Holders....................................................................25 Section 17. Rights Certificate Holder Not Deemed a Stockholder....................................................................................26 Section 18. Concerning the Rights Agent....................................................................26 Section 19. Merger or Consolidation or Change of Name of Rights Agent...................................................................................27 Section 20. Duties of Rights Agent.........................................................................27 Section 21. Change of Rights Agent.........................................................................29 Section 22. Issuance of New Rights Certificates............................................................30 Section 23. Redemption and Termination.....................................................................30 Section 24. Exchange.......................................................................................32 Section 25. Notice of Certain Events.......................................................................33 Section 26. Notices........................................................................................34 Section 27. Supplements and Amendments.....................................................................34 Section 28. Determination and Actions by the Board of Directors, etc.................................................................................35 Section 29. Successors.....................................................................................35 Section 30. Benefits of this Agreement.....................................................................35 Section 31. Severability...................................................................................36 Section 32. Governing Law..................................................................................36 Section 33. Counterparts...................................................................................36 Section 34. Descriptive Headings...........................................................................36
iii 4 DEFINED TERM CROSS REFERENCE SHEET
Acquiring Person..................................................................................Section 1(a) Act...............................................................................................Section 1(b) Adjustment Shares............................................................................Section 11(a)(ii) Adjusted Number of Shares...................................................................Section 11(a)(iii) Adjusted Purchase Price.....................................................................Section 11(a)(iii) Affiliate.........................................................................................Section 1(c) Agreement.............................................................................................Preface Associate........................................................................................Section 1 (c) Beneficial Owner..................................................................................Section 1(d) beneficially own..................................................................................Section 1(d) Business Day......................................................................................Section 1(e) capital stock equivalent....................................................................Section 11(a)(iii) close of business.................................................................................Section 1(f) Class A Common Shares.............................................................................Section 1(g) Class B Common Shares.............................................................................Section 1(h) Common Shares.....................................................................................Section 1(i) Company...............................................................................................Preface current per share market price...............................................................Section 11(d)(ii) Disinterested Director............................................................................Section 1(j) Distribution Date.................................................................................Section 1(k) Effective Date........................................................................................Preface equivalent preferred shares......................................................................Section 11(b) Exchange Act......................................................................................Section 1(l) Exchange Ratio...................................................................................Section 24(a) Exempt Event......................................................................................Section 1(m) Exempt Person.....................................................................................Section 1(n) Final Expiration Date.............................................................................Section 1(o) Interested Stockholder............................................................................Section 1(p) NASDAQ............................................................................................Section 1(q) Permitted Offer...................................................................................Section 1(r) Person............................................................................................Section 1(s) Preferred Shares..................................................................................Section 1(t) Principal Party..................................................................................Section 13(b)
iv 5
Proration Factor............................................................................Section 11(a)(iii) Purchase Price....................................................................................Section 1(u) Redemption Date...................................................................................Section 1(v) Redemption Price..............................................................................Section 23(a)(i) Right.................................................................................................Preface Rights Certificate................................................................................Section 3(a) Rights Agent..........................................................................................Preface Rights Agreement..................................................................................Section 3(c) Section 11(a)(ii) Event...........................................................................Section 1(w) Section 13 Event..................................................................................Section 1(x) Security......................................................................................Section 11(d)(i) Shares Acquisition Date...........................................................................Section 1(y) Subsidiary........................................................................................Section 1(z) Summary of Rights.................................................................................Section 3(b) then outstanding.............................................................................Section 1(d)(iii) Trading Day...................................................................................Section 11(d)(i) Triggering Event.................................................................................Section 1(aa) voting securities................................................................................Section 13(a)
v 6 FORM OF RIGHTS AGREEMENT THIS RIGHTS AGREEMENT, dated as of January 16, 1998 (the "Agreement"), is made and entered into between HAWK CORPORATION, a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Rights Agent (the "Rights Agent"). On November 13, 1997, the Board of Directors of the Company authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share (as hereinafter defined) of the Company outstanding at the close of business on January 16, 1998 (the "Effective Date"), each Right representing the right to purchase one one-thousandth of a share of Series E Preferred Stock, par value $0.01 par value, of the Company, having the rights, powers and preferences set forth in the form of Certificate of Designation attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Effective Date and the Distribution Date (as such terms are hereinafter defined), provided, however, that Rights may be issued with respect to Common Shares that shall become outstanding after the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date in accordance with the provisions of Section 22 of this Agreement. Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the then outstanding Class A Common Shares (other than as a result of a Permitted Offer (as hereinafter defined)) or was such a Beneficial Owner at any time after the date hereof, whether or not such Person continues to be the Beneficial Owner of 15% or more of the then outstanding Class A Common Shares, but shall not include the Company, any Subsidiary of the Company, any employee benefit plan or employee stock ownership plan of the Company or of any Subsidiary of the Company or any person organized, appointed or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such plan. In any case, an Exempt Person (as such term is hereinafter defined), so long as such Person remains an Exempt Person, is not an Acquiring Person and an acquisition of Class A Common Shares by an Exempt Person is not a Triggering Event, so long as such acquisition is an Exempt Event. Notwithstanding the foregoing, no Person shall become an "Acquiring Person:" (i) as the result of an acquisition of Class A Common Shares by the Company that, by reducing the number 1 7 of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Class A Common Shares then outstanding; (ii) as the result of such Person becoming the Beneficial Owner of 15% or more of the Class A Common Shares then outstanding as determined above solely as a result of an Exempt Event; provided, however, that if a Person becomes the Beneficial Owner of 15% or more of the Class A Common Shares then outstanding by reason of such a share acquisition by the Company or the occurrence of such an Exempt Event and such Person shall, after becoming the Beneficial Owner of any such Class A Common Shares, become the Beneficial Owner of any additional Class A Common Shares by any means whatsoever (other than as a result of the subsequent occurrence of an Exempt Event, a share acquisition by the Company, a stock dividend or a subdivision of the Class A Common Shares into a larger number of shares or a similar transaction), then such Person shall be deemed to be an "Acquiring Person;" or (iii) if (A) within five Business Days after such Person would otherwise have become an Acquiring Person (but for the operation of this subclause (iii)), such Person notifies the Board of Directors that such Person did so inadvertently, and (B) within two Business Days after such notification (or such greater period of time as may be determined by action of the Board of Directors, but in no event greater than five Business Days), such Person divests itself of a sufficient number of Class A Common Shares so that such Person is the Beneficial Owner of less than 15% of the outstanding Class A Common Shares. (b) "Act" shall mean the Securities Act of 1933, as amended and as in effect on the date of this Agreement. (c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act; provided, however, that, for purposes of this Agreement, the terms "Affiliate" and "Associate" shall not include any Person that is an Exempt Person. (d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own," any securities: (i) that such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) that such Person or any of such Person's Affiliates or Associates has (A) the right or obligation to acquire (whether such right or obligation is exercisable or effective immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or 2 8 consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); and provided further, that prior to the occurrence of a Triggering Event, a Person shall not be deemed to be the "Beneficial Owner" of or to "beneficially own" securities issuable upon exercise of the Rights; or (iii) that are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) relating to the acquisition, holding, voting (except to the extent contemplated by the proviso to Section l(d)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, (x) the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder, and (y) no Person is to be deemed a "Beneficial Owner" of, or to "beneficially own," any securities owned by any other Person that is an Exempt Person. (e) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or a day on which banking institutions in the State of Ohio are authorized or obligated by law or executive order to close. (f) "Close of business" on any given date shall mean 5:00 P.M., Cleveland, Ohio time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Cleveland, Ohio time, on the next succeeding Business Day. (g) "Class A Common Shares" when used with reference to the Company shall mean shares of the Class A Common Stock, par value $0.01 per share, of the Company. (h) "Class B Common Shares" when used with reference to the Company shall mean shares of the Class B Non-Voting Common Stock, par value $0.01 per share, of the Company. (i) "Common Shares" when used with reference to the Company shall mean the shares of Class A Common Stock and Class B Common Stock. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. 3 9 (j) "Disinterested Director" means any director of the Board of Directors of the Company who is not (i) a Person proposing or attempting to effect a business combination or similar transaction with the Company (including, without limitation, a merger, tender offer or exchange offer, sale of substantially all of the Company's assets, or liquidation of the Company's assets) or any Affiliate or Associate of such Person or Person acting directly or indirectly on behalf of, or as a representative of, or in concert with, any such Person, Affiliate or Associate, (ii) an Acquiring Person, an Affiliate or Associate of an Acquiring Person, or a Person acting directly or indirectly on behalf of, or as a representative of, or in concert with, an Acquiring Person or an Affiliate or Associate of an Acquiring Person, or (iii) any Person who was directly or indirectly proposed or nominated as a director of the Company by an Acquiring Person. (k) "Distribution Date" shall have the meaning set forth in Section 3 hereof. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended and in effect on the date of this Agreement. (m) "Exempt Event" shall mean (i) the acquisition of additional Common Shares by an Exempt Person, so long as such Person does not cease to be an Exempt Person under Section 1(n), or (ii) with respect to any Person, the acquisition by such Person of Beneficial Ownership of Class A Common Shares solely as a result of the occurrence of a Triggering Event and the effect of such Triggering Event on the last proviso of Section 1(d)(ii), other than a Triggering Event in which such Person becomes an Acquiring Person. (n) "Exempt Person" shall mean: (i) the Company; (ii) any Subsidiary; (iii) any employee benefit plan of the Company or of any Subsidiary; (iv) any Person holding Common Shares for any such employee benefit plan or for employees of the Company or of any Subsidiary pursuant to the terms of such employee benefit plan; (v) Norman C. Harbert, his spouse or issue, any trust of which Mr. Harbert and/or his spouse is the grantor of or of which Mr. Harbert, his spouse, his issue or any charity is a beneficiary, the Harbert Family Limited Partnership, an Ohio limited partnership, and any Person controlled, directly or indirectly, by Mr. Harbert; (vi) Ronald E. Weinberg, his spouse or issue, any trust of which Mr. Weinberg and/or his spouse is the grantor of or of which Mr. Weinberg, his spouse, his issue or any charity is a beneficiary, the Weinberg Family Limited Partnership, an Ohio limited partnership, and any Person controlled, directly or indirectly, by Mr. Weinberg; and (vii) William J. O'Neill, Jr., his spouse or issue, any trust of which Mr. O'Neill and/or his spouse is the grantor of or of which Mr. O'Neill, his spouse, his issue or any charity is a beneficiary, and any Person controlled, directly or indirectly, by Mr. O'Neill; provided, however, that an Exempt Person shall cease to be an Exempt Person at the time that all or any part of such Exempt Person's interest in the Common Shares becomes reportable on Schedule 13D under the Exchange Act (or any comparable or successor report) as part of a "group" (as that term is used in Rule 13d- 5(b) of the General Rules and Regulations under the Exchange Act, or any successor provision) that beneficially owns 15% or more of the then outstanding Class A Common Shares and includes one or more Persons (including any Affiliate or Associate thereof) who are not Exempt Persons and who individually or in the aggregate beneficially own in excess of 1% of the then outstanding Class A Common Shares (other than any group that may arise solely because of the (A) Shareholders' 4 10 Agreement, dated June 30, 1995, by and among Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz, the Krantz Family Limited Partnership, Jeffrey H. Berlin, Barry J. Feld, Thomas A. Gilbride, Jess F. Helsel, Fredric M. Roberts, Gary Siciliano, Douglas D. Wilson and the Company, (B) Stockholders' Voting Agreement, dated November 22, 1996, by and among Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz, the Krantz Family Limited Partnership and the Company and/or (C) Stockholders' Agreement, dated as of June 6, 1991, by and among Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Dan T. Moore, each as may be amended from time to time); and provided further that each of the Persons named in Section 1(n)(vii) shall cease to be an Exempt Person at the closing of the Company's initial public offering. (o) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof. (p) "Interested Stockholder" shall mean any Acquiring Person or any Affiliate or Associate of an Acquiring Person or any other Person in which any such Acquiring Person, Affiliate or Associate has an interest which represents in excess of 5% of the total combined economic or voting power of such Person, or any other Person acting directly or indirectly on behalf of, or in concert with, any such Acquiring Person, Affiliate or Associate. (q) "NASDAQ" shall mean the National Association of Securities Dealers, Inc. Automated Quotation System. (r) "Permitted Offer" shall mean a tender or exchange offer for all outstanding Common Shares at a price and on terms determined, prior to the purchase of shares under such tender or exchange offer, by at least a majority of the Disinterested Directors to be adequate (taking into account all factors that such directors deem relevant) and otherwise in the best interests of the Company and its stockholders (other than the Person or any Affiliate or Associate thereof on whose behalf the offer is being made) taking into account all factors that such directors may deem relevant. (s) "Person" shall mean any individual, firm, partnership, corporation, limited liability company, trust, association, joint venture or other entity, and shall include any successor (by merger or otherwise) of such entity. (t) "Preferred Shares" shall mean the Series E Preferred Stock, $0.01 par value per share, of the Company, having the rights, powers and preferences set forth in the form of Certificate of Designation attached hereto as Exhibit A. (u) "Purchase Price" shall have the meaning set forth in Section 4(a) hereof, subject to adjustment as set forth in Section 7(b) hereof. (v) "Redemption Date" shall have the meaning set forth in Section 7(a) hereof. (w) "Section 11(a)(ii) Event" shall mean any event described in Section 11(a)(ii) hereof. 5 11 (x) "Section 13 Event" shall mean any event described in clause (x), (y) or (z) of Section 13(a) hereof. (y) "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such; provided, that if such Person is determined not to have become an Acquiring Person pursuant to Section 1(a) hereof, then no Shares Acquisition Date shall be deemed to have occurred. (z) "Subsidiary" of any Person shall mean any corporation or other Person of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person, or which is otherwise controlled by such Person. (aa) "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. In the event the Company appoints one or more Co-Rights Agents, the respective duties of the Rights Agents and any Co-Rights Agents shall be as the Company shall determine. Section 3. Issue of Rights Certificates. (a) Until the earlier of (i) the Shares Acquisition Date or (ii) the close of business on the tenth day (or such later date as may be determined by action of the Company's Board of Directors) after the date of the commencement by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan or employee stock ownership plan of the Company or of any Subsidiary of the Company or any Person organized, appointed or established by the Company or of any Subsidiary of the Company for or pursuant to the terms of any such plan) of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan or employee stock ownership plan of the Company or of any Subsidiary of the Company or any Person or entity organized, appointed or established by the Company or of any Subsidiary of the Company for or pursuant to the terms of any such plan) to commence (which intention to commence remains in effect for five Business Days after such announcement), a tender or exchange offer the consummation of which would result in any Person becoming an Acquiring Person (including, in the case of both (i) and (ii), any such date which is after the date of this Agreement and prior to the issuance of the Rights), the earlier of such dates being herein referred to as the "Distribution Date," (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates, and (y) the right to receive Rights Certificates will be transferable only 6 12 in connection with the transfer of the underlying Common Shares (including a transfer to the Company); provided, however, that if a tender offer is terminated prior to the occurrence of a Distribution Date, then no Distribution Date shall occur as a result of such tender offer. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate, in substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each Common Share so held. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As promptly as practicable following the Effective Date, the Company will send a copy of a Summary of Rights to Purchase Series E Preferred Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Effective Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the Effective Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Effective Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with such Common Shares. As a result of the execution of this Agreement on January 16, 1998, each Common Share outstanding as of the Close of Business on January 16, 1998 shall, subject to the terms and conditions of this Agreement, also represent one Right and shall, subject to the terms and conditions of this Agreement, represent the right to purchase one one-thousandth of a share of Preferred Stock. (c) Certificates for Common Shares which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Effective Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall be deemed also to be certificates for Rights and shall bear the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between Hawk Corporation and Continental Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1998 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Hawk Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Hawk Corporation will mail to the holder of this certificate a summary of the Rights Agreement (as in effect on he date of mailing) without charge 7 13 promptly after receipt of a written request therefor. Under certain circumstances, Rights that are or were beneficially owned by Acquiring Persons or their Affiliates or Associates (as such terms are defined in the Rights Agreement) and any subsequent holder of such Rights may become null and void. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Effective Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. Form of Rights Certificate. (a) The Rights Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Effective Date, and on their face shall entitle the holders thereof to purchase such number of one one-thousandths of a Preferred Share as shall be set forth therein at the price per one one-thousandth of a Preferred Share set forth therein (the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights which are null and void pursuant to Section 7(e) of this Agreement, any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, and any Rights Certificate transferred pursuant to a plan, arrangement or understanding that a majority of the Disinterested Directors has determined is part of or has, as a primary purpose or effect, the avoidance of Section 7(e) shall contain (to the extent feasible) the following legend: The Rights represented by this Right Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Right Certificate and the Rights represented hereby may become null and 8 14 void in the circumstances specified in Section 7(e) of the Rights Agreement. The provisions of Section 7(e) of this Rights Agreement shall be operative whether or not the foregoing legend is contained on any such Rights Certificate. Section 5. Countersignature and Registration. The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Vice-Chairman of the Board, its Chief Executive Officer, its President, any of its Vice Presidents, or its Treasurer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated as the appropriate place for surrender of such Rights Certificate for transfer, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the certificate number and the date of each of the Rights Certificates. Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of one one-thousandths of a Preferred Share (or, following a Triggering Event, other securities, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the 9 15 certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split-up, combination or exchange of Rights Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the appropriate form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price for the total number of one one-thousandths of a Preferred Share (or other securities, as the case may be) as to which such surrendered Rights are exercised, at or prior to the earliest of (i) the close of business on January 16, 2008 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), (iii) the time at which the Rights are exchanged as provided in Section 24 hereof, or (iv) the consummation of a transaction contemplated by Section 13(d) hereof. (b) The Purchase Price for each one one-thousandth of a Preferred Share pursuant to the exercise of a Right shall initially be $70.00, shall be subject to adjustment from time to time as provided in the next sentence and in Sections 11 and 13(a) hereof and shall be payable in accordance with paragraph (c) below. Anything in this Agreement to the contrary notwithstanding, in the event that, at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case, each Common Share outstanding following such subdivision, combination or consolidation shall continue to have a Right associated therewith and the Purchase Price following any such event shall be proportionately adjusted to equal the result obtained by multiplying the Purchase Price immediately prior to such event by a fraction the numerator of which 10 16 shall be the total number of Common Shares outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of Common Shares outstanding immediately following the occurrence of such event. The adjustment provided for in the preceding sentence shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the appropriate form of election to purchase and the certificate duly executed, accompanied by payment of the Purchase Price for the Preferred Shares (or other securities, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 6 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall, subject to Section 20(k), thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent) certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company, in its sole discretion, shall have elected to deposit the Preferred Shares issuable upon exercise of the Rights hereunder into a depositary, requisition from the depositary agent depositary receipts representing such number of one one-thousandths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company will direct the depositary agent to comply with such requests, (ii) when appropriate, requisition from the Company the amount of cash, if any, to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. In the event that the Company is obligated to issue other securities (including Common Shares) of the Company pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities are available for distribution by the Rights Agent, if and when appropriate. In addition, in the case of an exercise of the Rights by a holder pursuant to Section 11(a)(ii), the Rights Agent shall return such Rights Certificate to the registered holder thereof after imprinting, stamping or otherwise indicating thereon that the rights represented by such Rights Certificate no longer include the rights provided by Section 11(a)(ii) of the Rights Agreement and if less than all the Rights represented by such Rights Certificate were so exercised, the Rights Agent shall indicate on the Rights Certificate the number of Rights represented thereby which continue to include the rights provided by Section 11(a)(ii). (d) In case the registered holder of any Rights Certificate shall exercise (except pursuant to Section 11(a)(ii)) less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to the registered holder of such Rights Certificate or to his duly authorized assigns, subject 11 17 to the provisions of Section 14 hereof, or the Rights Agent shall place an appropriate notation on the Rights Certificate with respect to those Rights exercised. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any Affiliate or Associate thereof) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any Affiliate or Associate thereof) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has a continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer that a majority of the Disinterested Directors has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the appropriate form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise (other than a partial exercise), transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. Reservation and Availability of Preferred Shares. The Company covenants and agrees that at all times prior to the occurrence of a Section 11(a)(ii) Event it will cause to be 12 18 reserved and kept available out of its authorized and unissued Preferred Shares, or any authorized and issued Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights and, after the occurrence of a Section 11(a)(ii) Event, shall, to the extent reasonably practicable, so reserve and keep available a sufficient number of Common Shares (and/or other securities) which may be required to permit the exercise in full of the Rights pursuant to this Agreement. So long as the Preferred Shares (and, after the occurrence of a Section 11(a)(ii) Event, Common Shares or any other securities) issuable upon the exercise of the Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares (or other securities) reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares (or Common Shares and/or other securities, as the case may be) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares or other securities (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and non-assessable shares or securities. The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates or of any Preferred Shares (or Common Shares and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares (or Common Shares and/or other securities, as the case may be) in a name other than that of, the registered holder of the Rights Certificates evidencing Rights surrendered for exercise, or to issue or deliver any certificates for Preferred Shares or depositary receipts for Preferred Shares (or other securities, as the case may be) upon the exercise of any Rights, until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. The Company shall use its best efforts to (i) file, as soon as practicable following the Shares Acquisition Date (or, if required by law, at such earlier time following the Distribution Date as so required), a registration statement under the Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act and the rules and regulations thereunder) until the date of the expiration of the rights provided by Section 11(a)(ii). The Company will also take such action as may be appropriate under the blue sky laws of the various states. 13 19 Section 10. Preferred Shares Record Date. Each person in whose name any certificate for Preferred Shares (or Common Shares and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares (or Common Shares and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that, if the date of such surrender and payment is a date upon which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are open. Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares or (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. If an event occurs which would require an adjustment under both Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii). (ii) In the event that any Person, alone or together with its Affiliates and Associates, shall become an Acquiring Person, then proper provision shall be made so that each holder of a Right (except as provided below and in Section 7(e) hereof) shall, for a period of 60 days after the later of the occurrence of any such event or the effective date of an appropriate registration statement under the Act pursuant to Section 9 hereof, have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price, in accordance with the terms of this Agreement, such number of Class A or Class B Common Shares, as the case may be (or, in the discretion of the 14 20 Board of Directors, one one-thousandths of a Preferred Share), as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that product by 50% of the then current per share market price of the Company's Class A Common Shares (determined pursuant to Section 11(d) hereof) on the date of such first occurrence (such number of shares being referred to as the "Adjustment Shares"); provided, however, that if the transaction that would otherwise give rise to the foregoing adjustment is also subject to the provisions of Section 13 hereof, then only the provisions of Section 13 hereof shall apply and no adjustment shall be made pursuant to this Section 11(a)(ii). Holders of Class B Common Shares that exercise Rights associated with such Class B Common Shares in accordance with this Section 11(a)(ii) shall only be entitled to receive Class B Common Shares upon such exercise. (iii) In the event that there shall not be sufficient treasury shares or authorized but unissued (and unreserved) Common Shares to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) and the Rights become so exercisable (and the Board of Directors has determined to make the Rights exercisable into fractions of a Preferred Share), notwithstanding any other provision of this Agreement, to the extent necessary and permitted by applicable law, each Right shall thereafter represent the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, (x) a number of (or fractions of) Common Shares (up to the maximum number of Common Shares which may permissibly be issued) and (y) one one-thousandth of a Preferred Share or a number of (or fractions of) other equity securities of the Company (or, in the discretion of the Board of Directors, debt) which the Board of Directors has determined to have the same aggregate current market value (determined pursuant to Sections 11(d)(i) and (ii) hereof, to the extent applicable) as one Common Share (such number of, or fractions of, Preferred Shares (or other equity securities or debt of the Company) being referred to as a "capital stock equivalent"), equal in the aggregate to the number of Adjustment Shares; provided, however, if sufficient Common Shares and/or capital stock equivalents are unavailable, then the Company shall, to the extent permitted by applicable law, take all such action as may be necessary to authorize additional Common Shares or capital stock equivalents for issuance upon exercise of the Rights, including the calling of a meeting of stockholders; and provided, further, that if the Company is unable to cause sufficient Common Shares and/or capital stock equivalents to be available for issuance upon exercise in full of the Rights, then each Right shall thereafter represent the right to receive the Adjusted Number of Shares upon exercise at the Adjusted Purchase Price (as such terms are hereinafter defined). As used herein, the term "Adjusted Number of Shares" shall be equal to that number of (or fractions of) Common Shares (and/or capital stock equivalents) equal to the product of (x) the number of Adjustment Shares and (y) a fraction, the numerator of which is the number of Common Shares (and/or capital stock equivalents) available for issuance upon exercise of the Rights and the denominator of which is the aggregate number of Adjustment Shares otherwise issuable upon exercise in full of all Rights (assuming there were a sufficient number of Common Shares available) (such fraction being referred to as the "Proration Factor"). The "Adjusted Purchase Price" shall mean the product of the Purchase Price and the Proration Factor. The Board of Directors may, but shall not be required to, establish 15 21 procedures to allocate the right to receive Common Shares and capital stock equivalents upon exercise of the Rights among holders of Rights. (b) In case the Company shall fix a record date for the issuance of rights (other than the Rights), options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights and privileges as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as determined pursuant to Section 11(d) hereof) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current per share market price, and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon the exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be determined in good faith by a majority of the Disinterested Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price (as determined pursuant to Section 11(d) hereof) of the Preferred Shares on such record date, less the fair market value (as determined in good faith by a majority of the Disinterested Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of 16 22 such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ, such other exchange or market system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Disinterested Directors if the Disinterested Directors constitute a majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors. If on any such date no such market maker is making a market in the Security, the fair value of the Security on such date as determined in good faith by the Disinterested Directors if the Disinterested Directors constitute a majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. Subject to Section 11(d)(ii) hereof, if any Security is not publicly held or so listed or traded, the "current per share market price" of such Security shall mean the fair market value per share as determined in good faith by the Disinterested Directors if the Disinterested Directors constitute a 17 23 majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares (or one one-thousandth of a Preferred Share) shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Class A Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one thousand. If neither the Class A Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the the Disinterested Directors if the Disinterested Directors constitute a majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-thousandth of a Preferred Share, or one ten-thousandth of any other share or security, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which mandates such adjustment or (ii) the Final Expiration Date. (f) If, as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 18 24 (h) Unless the Company shall have exercised its election as provided in Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and 11(c) hereof, each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a Preferred Share (calculated to the nearest one ten-thousandth of a Preferred Share) obtained by (i) multiplying (x) the number of Preferred Shares covered by a Right immediately prior to this adjustment of the Purchase Price by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one-thousandths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Preferred Shares issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per share and the number of shares which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of the number of one one-thousandths of a Preferred Share, Common Shares or other securities issuable upon exercise of the Rights, the Company shall take any 19 25 corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue such number of fully paid and non-assessable one one-thousandths of a Preferred Share, Common Shares or other securities at such adjusted Purchase Price. (1) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of one one-thousandths of a Preferred Share, Common Shares or other securities of the Company, if any, issuable upon such exercise over and above the number of one one-thousandths of a Preferred Share, Common Shares or other securities of the Company, if any, issuable upon exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything to the contrary in this Section 11 notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that (i) any consolidation or subdivision of the Preferred Shares, (ii) issuance wholly for cash of Preferred Shares at less than the current market price, (iii) issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, (iv) stock dividends, or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which does not violate Section 11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which does not violate Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which does not violate Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger, sale or transfer there are any charter or bylaw provisions or any rights, warrants or other instruments or securities outstanding or agreements in effect or other actions taken, which would materially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the stockholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13 hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such other Person shall have executed and delivered to the Rights Agent a supplemental agreement evidencing compliance with this Section 11(n). 20 26 (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23 or Section 27 hereof, take (or permit any Subsidiary to take) any action the purpose of which is to, or if at the time such action is taken it is reasonably foreseeable that the effect of such action is to, materially diminish or otherwise eliminate the benefits intended to be afforded by the Rights. (p) The exercise of rights under Section 11(a)(ii) shall only result in the loss of rights under Section 11(a)(ii) to the extent so exercised and shall not otherwise affect the rights represented by the Rights under this Rights Agreement, including the rights represented by Section 13. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares and the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 26 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, on or following the Shares Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any Interested Stockholder, or if in such merger or consolidation all holders of Common Shares are not treated alike, (y) the Company shall consolidate with, or merge with, any Interested Stockholder or, if in such merger or consolidation all holders of Common Shares are not treated alike, and the Company shall be the continuing or surviving corporation of such consolidation or merger (other than, in a case of any transaction described in (x) or (y), a merger or consolidation which would result in all of the securities generally entitled to vote in the election of directors ("voting securities") of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into securities of the surviving entity) all of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation and the holders of such securities not having changed as a result of such merger or consolidation), or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Interested Stockholder or Persons or, if in such transaction all holders of Common Shares are not treated alike (other than the Company or any Subsidiary of the Company in one or more transactions each of which does not violate Section 11(o) hereof), then, and in each such case (except as provided in Section 13(d) hereof), proper provision shall be made so that (i) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of freely tradable Common Shares of the Principal Party (as hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall equal the result obtained by (A) multiplying the then current 21 27 Purchase Price by the number of one one-thousandths of a Preferred Share for which a Right is then exercisable (without taking into account any adjustment previously made pursuant to Section 11(a)(ii)) hereof and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such Principal Party (determined pursuant to Section 11(d) hereof) on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; and (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. (b) "Principal Party" shall mean (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which Common Shares of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation (including, if applicable, the Company if it is the surviving corporation); and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; provided, however, that in any of the foregoing cases: (A) if the Common Shares of such Person are not at such time and have not been continuously over the preceding twelve month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Shares of which are and have been so registered, "Principal Party" shall refer to such other Person; (B) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Shares of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Shares having the greatest aggregate market value; and (C) in case such Person is owned, directly or indirectly, by a joint venture formed by two or more Persons that are not owned, directly or indirectly, by the same Person, the rules set forth in (A) and (B) above shall apply to each of the chains of ownership having an interest in such joint venture as if such party were a "Subsidiary" of both or all of such joint venturers and the Principal Parties in each such chain shall bear the obligations set forth in this Section 13 in the same ratio as their direct or indirect interests in such Person bear to the total of such interests. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of its authorized Common Shares which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable 22 28 after the date of any consolidation, merger, sale or transfer mentioned in paragraph (a) of this Section 13, the Principal Party at its own expense shall: (i) prepare and file a registration statement under the Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Final Expiration Date; and (ii) use its best efforts to qualify or register the Rights and the securities purchasable upon exercise of the Rights under the blue sky laws of such jurisdictions as may be necessary or appropriate; and (iii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all material respects with the requirements for registration on Form 10 under the Exchange Act. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. The rights under this Section 13 shall be in addition to the rights to exercise Rights and adjustments under Section 11(a)(ii) and shall survive any exercise thereunder. (d) Notwithstanding anything in this Agreement to the contrary, the provisions of this Section 13 shall not be applicable to a transaction described in clauses (x) and (y) of Section 13(a) if: (i) such transaction is consummated with a Person or Persons who acquired Common Shares pursuant to a Permitted Offer (or a wholly owned Subsidiary of any such Person or Persons); (ii) the price per Common Share offered in such transaction is not less than the price per Common Share paid to all holders of Common Shares whose shares were purchased pursuant to such Permitted Offer; and (iii) the form of consideration offered in such transaction is the same as the form of consideration paid pursuant to such Permitted Offer. Upon consummation of any such transaction contemplated by this Section 13(d), all Rights hereunder shall expire. Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on 23 29 the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Disinterested Directors if the Disinterested Directors constitute a majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Disinterested Directors if the Disinterested Directors constitute a majority of the Board of Directors or, if the Disinterested Directors do not constitute a majority of the Board of Directors, by an independent investment banking firm selected by the Board of Directors shall be used and shall be binding on the Rights Agent. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are one one-thousandths or integral multiples of one one-thousandth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-thousandth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-thousandths of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not one one-thousandths or integral multiples of one one-thousandth of a Preferred Share, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of one of the transactions or events specified in Section 11 giving rise to the right to receive Common Shares, capital stock equivalents (other than Preferred Shares) or other securities upon the exercise of a Right, the Company shall not be required to issue fractions of shares or units of such Common Shares, capital stock equivalents or other securities upon exercise of the Rights or to distribute certificates which evidence fractions of such Common Shares, capital stock equivalents or other securities. In lieu of fractional shares or units of such Common Shares, capital stock equivalents or other securities, the Company may pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a share or unit of such Common Shares, capital stock equivalents or other securities. For purposes of this Section 14(c), the current 24 30 market value shall be determined in the manner set forth in Section 11(d) hereof for the Trading Day immediately prior to the date of such exercise and, if such capital stock equivalent is not traded, each such capital stock equivalent shall have the value of one one-thousandth of a Preferred Share. (d) The holder of a Right by the acceptance of the Right expressly waives the right to receive any fractional Rights or any fractional share upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. Section 16. Agreement of Rights Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate form fully executed; (c) subject to Section 6 and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificate or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary; and 25 31 (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or a beneficial interest in a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation. Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or other distributions or to exercise any preemptive or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly. The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Rights Certificate or certificate for Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or all or substantially all of the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this 26 32 Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of an Acquiring Person and the determination of the current per share market price of any Security) be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Vice-Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. 27 33 (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature on such Rights Certificates) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required under the provisions of Section 11 or Section 13 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in Section 12 hereof); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares, Common Shares or other securities to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Shares, Common Shares or other securities will, when issued, be validly authorized and issued, fully paid and non-assessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder and certificates delivered pursuant to any provision hereof from any one of the Chairman of the Board, the Vice-Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company, and is authorized to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered by it in good faith or lack of action in accordance with instructions of any such officer. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, omission, default, neglect or 28 34 misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, omission, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights hereunder if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause (1), (2) and/or (3) thereof, the Rights Agent shall not take any further action with respect to such requested exercise of transfer without first consulting with the Company. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (i) a corporation organized and doing business under the laws of the United States or of any other state of the United States, so long as such corporation complies with the applicable rules and requirements of the New York Stock Exchange, as such rules and requirements may be amended or modified from time to time, is authorized to exercise stock transfer or corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 (or such lower number as approved by the Board of Directors), or (ii) an affiliate of a corporation described in clause (i) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor 29 35 Rights Agent and each transfer agent of the Common Shares or Preferred Shares and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the earliest of the Redemption Date, the Final Expiration Date and the consummation of a transaction contemplated by Section 13(d) hereof, the Company (i) shall with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, or upon the exercise, conversion or exchange of securities, notes or debentures issued by the Company, and (ii) may, in any other case, if deemed necessary or appropriate by the Board of Directors, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that no Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption and Termination. (a) (i) Subject to Section 23(a)(iii), the Board of Directors may, at its option, redeem all, but not less than all, the then outstanding Rights at a redemption price of $0.001 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), at any time prior to the earlier of (A) a Section 11(a)(ii) Event, or (B) the Final Expiration Date. The Company may, at its option, pay the Redemption Price either in Common Shares (based on the "current per share market price," as defined in Section 11(d)(i) hereof, of the Common Shares at the time of redemption) or cash; provided that if the Company elects to pay the Redemption Price in Common Shares, the Company shall not be required to issue any fractional Common Shares and the number of Common Shares issuable to each holder of Rights shall be rounded down to the next whole share. (ii) In addition, subject to Section 23(a)(iii), the Board of Directors may, at its option, at any time following a Shares Acquisition Date but prior to any Section 13 Event, redeem all, but not less than all, of the then outstanding Rights at the Redemption Price in connection with any merger, consolidation, sale or other transfer (in one transaction or in a series of related transactions) of assets or earning power aggregating 50% or more of the earning power of the Company and its Subsidiaries (taken as a whole) in which all holders of Common Shares are treated 30 36 alike and not involving (other than as a holder of Common Shares being treated like all other such holders) an Interested Stockholder. (iii) The Board of Directors may only redeem Rights pursuant to Section 23(a)(i) or Section 23(a)(ii) hereof if a majority of the Disinterested Directors authorizes such redemption. (b) In the case of a redemption permitted under Section 23(a)(i), immediately upon the date for redemption set forth (or determined in the manner specified in) in a resolution of the Board of Directors ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. In the case of a redemption permitted only under Section 23(a)(ii), evidence of which shall have been filed with the Rights Agent, the right to exercise the Rights will terminate and represent only the right to receive the Redemption Price upon the later of ten Business Days following the giving of such notice or the expiration of any period during which the rights under Section 11(a)(ii) may be exercised. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within ten days after such date for redemption set forth in a resolution of the Board of Directors ordering the redemption of the Rights, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 and other than in connection with the purchase of Common Shares prior to the Distribution Date. (c) The Company may, at its option, discharge all of its obligations with respect to the Rights by (i) issuing a press release announcing the manner of redemption of the Rights in accordance with this Agreement and (ii) mailing payment of the Redemption Price to the registered holders of the Rights at their last addresses as they appear on the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent of the Common Shares, and upon such action, all outstanding Rights and Rights Certificates shall be null and void without any further action by the Company. 31 37 Section 24. Exchange. (a) Subject to Section 24(e), the Board of Directors may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) and Section 11(a)(ii) hereof) for Common Shares of the Company at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction involving either the Common Shares or the Preferred Shares occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, any entity holding Common Shares for or pursuant to the terms of any such plan or any trustee, administrator or fiduciary of such a plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to Section 24(a) hereof and without any further action and without any notice, the right to exercise such rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) and Section 11(a)(ii) hereof) held by each holder of Rights. (c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for some or all of the Common Shares exchangeable for Rights, at the initial rate of one one-thousandth of a Preferred Share (or equivalent preferred share) for each Common Share, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Shares pursuant to the terms thereof, so that the fraction of a Preferred Share delivered in lieu of each Common Share shall have the same voting rights as one Common Share. (d) The Board of Directors shall not authorize any exchange transaction referred to in Section 24(a) hereof unless at the time such exchange is authorized there shall be sufficient Common Shares or Preferred Shares issued but not outstanding, or authorized but unissued, to permit the exchange of Rights as contemplated in accordance with this Section 24. 32 38 (e) The Board of Directors may only exchange Rights pursuant to Section 24(a) hereof if a majority of the Disinterested Directors authorizes such exchange. Section 25. Notice of Certain Events. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which does not violate Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer) in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which does not violate Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of such proposed action to the extent feasible and file a certificate with the Rights Agent to that effect, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 20 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Preferred Shares, whichever shall be the earlier. (b) In case of a Section 11(a)(ii) Event, then (i) the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof and (ii) all references in the preceding Section 25(a) to Preferred Shares shall be deemed thereafter to refer also, if appropriate, to Common Shares and/or, if appropriate, other securities of the Company. 33 39 Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Hawk Corporation 200 Public Square Suite 30-5000 Cleveland, Ohio 44114 Attention: Corporate Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Attention: Compliance Department Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate or, if prior to the Distribution Date, to the holder of certificates representing Common Shares shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. (a) Prior to the Distribution Date, subject to Section 27(b) hereof, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing Common Shares. From and after the Distribution Date, subject to Section 27(b) hereof, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, however, that this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable, or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon the delivery 34 40 of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment, provided that such supplement or amendment does not adversely affect the rights or obligations of the Rights Agent under Section 18 or Section 20 of this Agreement. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. (b) The Company shall not supplement or amend any provision of this Agreement unless a majority of the Disinterested Directors authorizes such supplement or amendment. Section 28. Determination and Actions by the Board of Directors, etc. The Board of Directors (and where expressly provided for herein, the Disinterested Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors (or the Disinterested Directors, as the case may be), or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including, without limitation, a determination to redeem or not redeem the Rights or to amend the Agreement and whether any proposed amendment adversely affects the interests of the holders of Rights Certificates). For all purposes of this Agreement, any calculation of the number of Common Shares or other securities outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Common Shares or any other securities of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board of Directors (or the Disinterested Directors) in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties, and (y) not subject the Board of Directors (or the Disinterested Directors) to any liability to the holders of the Rights Certificates. Section 29. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 30. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent, the Exempt Persons and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent, the Exempt Persons and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares). 35 41 Section 31. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and a majority of the Disinterested Directors determine in their good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the Close of Business on the tenth day following the date of such determination by the Disinterested Directors. Section 32. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 33. Governing Law. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 34. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 36 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the date and year first above written. Attest: HAWK CORPORATION By: By: -------------------------------- ---------------------------------- Byron S. Krantz Norman C. Harbert Secretary Chairman of the Board Attest: CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: By: -------------------------------- ---------------------------------- Name: Name: ------------------------------ --------------------------------- Title: Title: ------------------------------ -------------------------------- 37 43 EXHIBIT A [FORM OF CERTIFICATE OF DESIGNATION OF THE SERIES E PREFERRED STOCK] CERTIFICATE OF DESIGNATION OF THE SERIES E PREFERRED STOCK OF HAWK CORPORATION PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW Norman C. Harbert and Byron S. Krantz, being the Chairman of the Board and Secretary, respectively, of Hawk Corporation, a Delaware corporation (the "Corporation"), hereby certify that: Pursuant to authority conferred upon the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, and pursuant to the provisions of Section 151 of the Delaware General Corporation Law, the Board of Directors, at a telephonic meeting held on November 13, 1997, duly adopted a resolution creating a new series of Serial Preferred Stock, par value $0.01 per share, of the Corporation, as follows: RESOLVED, that pursuant to the authority expressly vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a new series of Serial Preferred Stock of the Corporation is hereby created (the "Series E Preferred Stock"), of which the powers, designations, preferences and relative, participating, optional or other rights, and qualifications and restrictions, shall be as follows: Section 1. Designation and Amount. There shall be a series of the Serial Preferred Stock of the Corporation that shall be designated as the "Series E Preferred Stock," par value $0.01 per share, and the number of shares constituting such series shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series E Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. A-1 44 Section 2. Dividends and Distributions. The holders of shares of Series E Preferred Stock shall be entitled to receive, out of any funds legally available and when and as declared by the Board of Directors, dividends and other distributions of the same kind but at the rate of 1,000 times the aggregate amount per share of the dividends or other distributions received by the holders of shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock"). Dividends and other distributions shall be declared and paid to the holders of shares of Series E Preferred Stock of record, on such dates respectively preceding the payment thereof as may be fixed by the Board of Directors in declaring any such dividends, at the same time that dividends or other distributions are declared and paid to holders of shares of Common Stock. Such dividends shall not accrue or be cumulative. In the event the Corporation shall, at any time after January 16, 1998 (the "Effective Date"), (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of shares of Common Stock that were outstanding immediately prior to such event. Section 3. Voting Rights. The holders of shares of Series E Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series E Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the holders of shares of Class A Common Stock of the Corporation (the "Class A Common Stock"). In the event the Corporation shall, at any time after the Effective Date, (i) declare any dividend on shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of shares of Series E Preferred Stock and the holders of shares of Class A Common Stock shall vote together as one class on all matters submitted to a vote of the holders of the Class A Common Stock. (c) Except as set forth herein, holders of shares of Series E Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of shares of Class A Common Stock as set forth herein) for taking any corporate action. A-2 45 Section 4. Reacquired Shares. Any shares of Series E Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Serial Preferred Stock and may be reissued as part of a new series of Serial Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 5. Liquidation, Dissolution or Winding Up. The holders of shares of Series E Preferred Stock shall, in case of liquidation, dissolution, or winding up of the affairs of the Corporation, be entitled to receive in full, out of the assets of the Corporation, including its capital, an amount equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock, subject to the provision for adjustment hereinafter set forth. In the event the Corporation shall at any time (i) declare any dividend on shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of shares of Series E Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Except as set forth above, the holders of shares of Series E Preferred Stock shall have the same rights and shall be treated in the same manner with respect to any liquidation, dissolution or winding up as holders of shares of Common Stock. Section 6. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the holders of shares of Series E Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series E Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 8. Redemption. The Series E Preferred Stock shall not be redeemable. A-3 46 Section 9. Ranking. The Series E Preferred Stock shall rank junior to all other series of the Serial Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall specifically provide otherwise. Section 10. Amendment. The Second Amended and Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the shares of Series E Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds (66 2/3%) of the outstanding shares of Series E Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Shares of Series E Preferred Stock may be issued in fractions of a share that are one one-thousandths or integral multiples of one one-thousandths of a share, which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of the holders of Series E Preferred Stock. IN WITNESS WHEREOF, the undersigned have executed and subscribed this Certificate of Designation, and hereby affirm the foregoing as true under the penalties of perjury, as of this _____ day of __________, 199___. ------------------------------------- Name: Norman C. Harbert Title: Chairman of the Board Attest: - ------------------------------------ Name: Byron S. Krantz Title: Secretary A-4 47 EXHIBIT B [FORM OF RIGHTS CERTIFICATE] Certificate No. R- Rights ----- ------------ NOT EXERCISABLE AFTER JANUARY 16, 2008, OR EARLIER IF NOTICE OF REDEMPTION OR EXCHANGE IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO EXCHANGE, AT THE OPTION OF THE COMPANY, AT ONE COMMON SHARE PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME VOID TO THE EXTENT PROVIDED IN AND UNDER THE CIRCUMSTANCES SPECIFIED IN SECTION 7(E) OF THE RIGHTS AGREEMENT.]* RIGHTS CERTIFICATE This certifies that _________________________, or _______ registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of January 16, 1998 (the "Rights Agreement") between HAWK CORPORATION, a Delaware corporation (the "Company"), and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M. (Cleveland, Ohio time) on January 16, 2008 at the office of the Rights Agent in New York, New York, one one-thousandth of a fully-paid, nonassessable share of Series E Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of $70.00 per one one-thousandth of a share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the appropriate Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of January 16, 1998, based on the Preferred Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of shares of Preferred Stock or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events. - -------------------- * The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentences. B-1 48 This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates. Copies of the Rights Agreement are on file at the principal office of the Company and are also available upon written request to the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the principal office of the Rights Agent, may be exercised for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised (other than pursuant to Section 11(a)(ii) of the Rights Agreement) in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. If this Rights Certificate shall be exercised in whole or in part pursuant to Section 11(a)(ii) of the Rights Agreement, the holder shall be entitled to receive this Rights Certificate duly marked to indicate that such exercise has occurred as set forth in the Rights Agreement. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Rights Certificate may be redeemed by the Company at its option at a redemption price of $0.001 per Right, and the redemption price may be satisfied by issuing Common Shares (pursuant to Section 23(a)(i) of the Rights Agreement). In addition, the Rights evidenced by this Rights Certificate may be exchanged by the Company at its option at an exchange ratio of one Common Share per Right. No fractional shares of Preferred Stock will be issued upon the exercise of any Rights or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depository receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder, as such, of this or any other Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company that may at any time be issuable on the exercise of the Rights represented hereby or thereby, nor shall anything contained herein or in any other Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 of the Rights Agreement), or to receive dividends or other distributions, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised. B-2 49 This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company. Dated: January 16, 1998 Attested by: HAWK CORPORATION By: By: -------------------------------- ---------------------------------- Byron S. Krantz Norman C. Harbert Secretary Chairman of the Board Countersigned: CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: -------------------------------- Authorized Officer B-3 50 [FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate) FOR VALUE RECEIVED, _______________________ hereby sells, assigns and transfers unto____________________________________________________________ (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ________________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: ------------------------- - ------------------------------- Signature Signature Guaranteed: - ------------------------------- B-4 51 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: ------------------------- - ------------------------------- Signature Signature Guaranteed: - ------------------------------- NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-5 52 FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Rights Certificate) To: HAWK CORPORATION The undersigned hereby irrevocably elects to exercise ____________________ Rights represented by this Rights Certificate to purchase the shares of Preferred Stock or other securities, cash or assets issuable upon the exercise of the Rights and requests that certificates for such shares be issued in the name of and deliverable to: - ------------------------------------------------------------------------------- (Please insert social security or other identifying number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: - ------------------------------------------------------------------------------- (Please insert social security or other identifying number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) Dated: Signature Guaranteed: -------------------------- - -------------------------------- ------------------------------ Signature B-6 53 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) the Rights evidenced by this Rights Certificate are [ ] are not [ ] being sold, assigned or transferred by or on behalf of a Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person; (3) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: ---------------------- - ---------------------------- Signature Signature Guaranteed: - ----------------------------- NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-7 54 EXHIBIT C SUMMARY OF RIGHTS TO PURCHASE SERIES E PREFERRED SHARES On November 13, 1997, the Board of Directors of Hawk Corporation, a Delaware corporation (the "Company"), declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Class A Common Stock, par value $0.01 per share (the "Class A Common Shares" and Class B Common Stock, par value $0.01 per share (the "Class B Common Shares and together with the Class A Common Shares, the "Common Shares"), of the Company. The dividend is payable to the stockholders of record as of 5:00 P.M., Cleveland, Ohio time, on January 16, 1998 (the "Effective Date"), and with respect to Common Shares issued thereafter until the Distribution Date (as hereinafter defined) and, in certain circumstances, with respect to Common Shares issued after the Distribution Date. Except as set forth below, each Right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series E Preferred Stock, par value $0.01 per share (the "Preferred Shares"), at a price of $70.00 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of January 16, 1998 (the "Rights Agreement"), between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"). A. Issue of Right Certificates The Rights are attached to all certificates representing outstanding Common Shares, and no separate Right Certificates (as hereinafter defined) have been distributed. The Rights will separate from the Common Shares on the earliest to occur of (i) the first date of public announcement that a Person (defined in the Rights Agreement), alone or together with its Affiliates and Associates (defined in the Rights Agreement), other than those that are exempt persons, has acquired beneficial ownership (as defined in the Rights Agreement) of 15% or more of the outstanding Class A Common Shares (except pursuant to a Permitted Offer); or (ii) the close of business on the tenth (10th) business day (or such later date as the Board of Directors may determine) following the commencement of, or first public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in any Person becoming an Acquiring Person (as hereinafter defined), including, in the case of both (i) and (ii), any such date which is after the date of this Rights Agreement and prior to the issuance of the Rights (the earliest of such dates being called the "Distribution Date"). A Person, alone or together with its Affiliates and Associates, whose acquisition of Common Shares causes a Distribution Date pursuant to clause (i) above is an "Acquiring Person." The first date of public announcement that a Person, alone or together with its Affiliates and Associates, has become an Acquiring Person is the "Shares Acquisition Date." C-1 55 The Rights Agreement provides that until the Distribution Date the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption, exchange, or expiration of the Rights), new Common Share certificates issued after the Effective Date upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption, exchange, or expiration of the Rights), the surrender for transfer of any certificates for Common Shares outstanding as of the Effective Date, even without such notation or a copy of the Summary of Rights to Purchase Series E Preferred Shares being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As promptly as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date (and to each initial record holder of certain Common Shares issued after the Distribution Date), and such separate Right Certificates alone will evidence the Rights. B. Exercise of Rights; Final Expiration Date of Rights The Rights are not exercisable until the Distribution Date and will expire at 5:00 P.M., Cleveland, Ohio time, on January 16, 2008, unless earlier redeemed or exchanged by the Company as described below. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. C. Flip-In Provision In the event that any Person other than certain exempt persons becomes an Acquiring Person (except pursuant to a Permitted Offer), each holder of a Right will have (subject to the terms of the Rights Agreement) the right to receive upon exercise the number of Common Shares, or, in the discretion of the Board of Directors, the number of one one-thousandths of a Preferred Share (or, in certain circumstances, other securities of the Company) having a value (immediately prior to such "Triggering Event," as defined the Rights Agreement) determined in accordance with a formula based on the then Purchase Price divided by 50% of the then current per share market price of the Class A Common Shares (the "Flip-In Right"). Notwithstanding the foregoing, following the occurrence of the event described above, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or any Affiliate or Associate thereof will be null and void. A "Permitted Offer" shall mean a tender or exchange offer for all outstanding Common Shares at a price and on terms determined, prior to the purchase of shares under such tender or exchange offer, by at least a majority of the Disinterested Directors to be adequate (taking into account all factors that such directors deem relevant) and otherwise in the best interests of the Company and its stockholders (other than the Person or any Affiliate or Associate thereof on whose behalf the offer is being made) taking into account all factors that such directors may deem relevant. "Disinterested Director" means any director of the Board of Directors of the Company who is not (i) a Person proposing or attempting to effect a business combination or similar transaction with the Company (including, without limitation, a merger, tender offer or exchange offer, sale of substantially all of the Company's assets, or liquidation of the Company's assets) or any Affiliate or Associate of such Person or Person acting directly or indirectly on behalf C-2 56 of, or as a representative of, or in concert with, any such Person, Affiliate or Associate, (ii) an Acquiring Person, an Affiliate or Associate of an Acquiring Person, or a Person acting directly or indirectly on behalf of, or as a representative of, or in concert with, an Acquiring Person or an Affiliate or Associate of an Acquiring Person, or (iii) any Person who was directly or indirectly proposed or nominated as a director of the Company by an Acquiring Person. D. Flip-Over Provision In the event that, at any time following the Shares Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding Common Shares immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power, or (ii) more than 50% of the Company's assets or earning power is sold or transferred, in either case with or to an Acquiring Person or any Affiliate or Associate thereof, or any other person in which such Acquiring Person, Affiliate or Associate has an interest, or any person acting on behalf of or in concert with such Acquiring Person, Affiliate or Associate, or, if in such transaction all holders of Common Shares are not treated alike, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right (the "Flip-Over Right") to receive, upon exercise, common shares of the acquiring company having a value determined in accordance with a formula based on the then Purchase Price divided by 50% of the then current per share market price of the common stock of such acquiring company. The holder of a Right will continue to have the Flip-Over Right whether or not such holder exercises or surrenders the Flip-In Right. E. Adjustment of Purchase Price The Purchase Price payable, and the number of one one-thousandths of a Preferred Share or other securities issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular quarterly cash dividends or a dividend payable in preferred shares) or of subscription rights or warrants (other than "equivalent preferred shares," as defined in the Rights Agreement). The Purchase Price is also subject to adjustment in the event of a stock split of the Common Shares, or a stock dividend on the Common Shares payable in Common Shares, or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional one-thousandths of a Preferred Share will be issued, and in lieu thereof, an adjustment in cash will C-3 57 be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. F. Redemption of Rights At any time prior to the earlier to occur of (i) a person becoming an Acquiring Person or (ii) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Board of Directors. The Company may at its option pay the Redemption Price in cash or Common Shares. Additionally, the Company may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price after a Shares Acquisition Date and before the expiration of any period during which the Flip-Over Right may be exercised in connection with a merger or other business combination transaction or series of transactions involving the Company in which all holders of Common Shares are treated alike but not involving (other than as a holder of Common Shares being treated like all other such holders) any Person acting directly or indirectly on behalf of, or in concert with, any Acquiring Person, or its Affiliates or Associates. The Board of Directors may only redeem Rights if a majority of the Disinterested Directors (as defined in the Rights Agreement) authorizes such redemption. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. G. Exchange of Rights At any time after a Person becomes an Acquiring Person but before such Acquiring Person, together with all Affiliates and Associates of such Person, becomes the "Beneficial Owner" (defined in the Rights Agreement) of 50% or more of the Common Shares then outstanding, the Company may, at its option, exchange all or part of the then outstanding and exercisable Rights (other than those owned by the Acquiring Person, together with any Affiliates and Associates of such Acquiring Person, which have become null and void) at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction involving either the Common Shares or the Preferred Shares occurring after the date of the Rights Agreement (the "Exchange Ratio"). The Board of Directors may only exchange Rights if a majority of the Disinterested Directors authorizes such exchange. Immediately upon the action of the Board of Directors ordering the exchange of any Rights and without any further action and without any notice, the right to exercise such rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such rights held by such holder multiplied by the Exchange Ratio. H. Possible Tax Consequences While the distribution of the Rights will not be taxable to stockholders of the Company, stockholders may, depending upon the circumstances, recognize taxable income should the Rights become exercisable or upon the occurrence of certain events thereafter. C-4 58 I. Amendment of Rights Agreement Prior to the Distribution Date, the Company may supplement or amend any provision of the Rights Agreement without the approval of the holders of Common Stock. From and after the Distribution Date, the Company generally may supplement or amend the Rights Agreement without the approval of the holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision which may be defective or inconsistent with any other provisions, (iii) to shorten or lengthen any time period or (iv) to change or supplement the provisions in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). The Company may not supplement or amend any provision of the Rights Agreement unless a majority of the Disinterested Directors authorizes such supplement or amendment. J. Copy Available A copy of the Rights Agreement was filed with the Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form S-1. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. C-5 EX-10.1 5 EXHIBIT 10.1 1 Exhibit 10.1 [HAWK LOGO] 1997 STOCK OPTION PLAN 1. PURPOSE. The purpose of this Plan is to advance the interests of HAWK CORPORATION, a Delaware corporation (the "Company"), and its Subsidiaries by providing additional incentive to attract and retain qualified and competent persons who are key to the Company or its Subsidiaries, including key employees, Officers and Directors, and upon whose efforts and judgment the success of the Company and its Subsidiaries is largely dependent, by encouraging such persons to own stock in the Company. 2. DEFINITIONS. As used herein, the following terms shall have the meaning indicated: (a) "Board" shall mean the Board of Directors of the Company. (b) "Change of Control" shall mean the occurrence of any of the following: (i) any transaction (which shall include a series of transactions occurring within sixty days or occurring pursuant to a plan), that has the result that stockholders of the Company immediately before such transaction cease to own at least 51% of the voting stock of the Company or of any entity that results from the participation of the Company in a reorganization, consolidation, merger, liquidation or any other form of corporate transaction; (ii) the stockholders of the Company approve a plan of merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive (unless the approved merger, consolidation, reorganization, liquidation or dissolution is subsequently abandoned); or (iii) the stockholders of the Company approve a plan for the sale, lease, exchange, transfer, assignment or other disposition of all or substantially all the property and assets of the Company (unless such plan is subsequently abandoned). (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Committee" shall mean the compensation committee appointed by the Board pursuant to Section 13 hereof or, if not appointed, the full Board. (e) "Common Stock" shall mean the Company's Class A Common Stock, par value $0.01 per share. (f) "Controlled Entity" shall mean any trust, partnership, limited liability company or other entity in which such person that receives Options under this Plan acts as trustee, managing partner, managing member or otherwise controls; provided that, to the extent any such Option received under this Plan is awarded to a spouse pursuant to any divorce proceeding, such 2 interest shall be deemed to be terminated and forfeited notwithstanding any vesting provisions or other terms herein or in the agreement evidencing such Option. (g) "Director" shall mean a member of the Board. (h) "Effective Date" shall mean the closing date of the initial public offering by the Company contemplated by the Registration Statement filed on Form S-1 (File No. 333-40535). (i) "Fair Market Value" of a Share on any date of reference shall be the "Closing Price" (as defined below) of the Common Stock on the business day immediately preceding such date, unless the Committee in its sole discretion shall determine otherwise in a fair and consistent manner. For the purpose of determining Fair Market Value, the "Closing Price" of the Common Stock on any business day shall be (i) if the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of Common Stock on such system, or (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the ten preceding days. (j) "Incentive Stock Option" shall mean an incentive stock option as defined in Section 422 of the Code. (k) "Non-Employee Director" shall mean a Director who: (i) is not an Officer or employee of the Company or any Subsidiary; (ii) does not (A) receive compensation, directly or indirectly, from the Company or any Subsidiary for services rendered as a consultant or in any other capacity other than as a Director, except for an amount that does not exceed the dollar amount for which disclosure would be required under Item 404(a) of Regulation S-K, 17 C.F.R. Section 229.404(a), or (B) possess an interest in any transaction for which disclosure would be required under Item 404(a) of Regulation S-K, 17 C.F.R. Section 229.404(a); and (iii) is not engaged in a business relationship for which disclosure would be required under Item 404(b) of Regulation S-K, 17 C.F.R. Section 229.404(b). (l) "Non-Statutory Stock Option" shall mean an Option which is not an Incentive Stock Option. (m) "Officer" shall mean the Company's Chairman, Vice-Chairman, president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice president of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. - 2 - 3 Officers of Subsidiaries shall be deemed Officers of the Company if they perform such policy-making functions for the Company. As used in this paragraph, the phrase "policy-making function" does not include policy-making functions that are not significant. (n) "Option" (when capitalized) shall mean any option granted under this Plan. (o) "Optionee" shall mean a person to whom a stock option is granted under this Plan or any person who succeeds to the rights of such person under this Plan by reason of the death of such person. (p) "Plan" shall mean this 1997 Stock Option Plan of the Company. (q) "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (r) "Share(s)" shall mean a share or shares of the Common Stock. (s) "Subsidiary" shall mean a "subsidiary corporation" as defined in Section 424(f) of the Code. 3. SHARES AND OPTIONS. The Company may grant to Optionees from time to time Options to purchase an aggregate of up to 700,000 Shares from Shares held in the Company's treasury or from authorized and unissued Shares. If any Option granted under this Plan shall terminate, expire, or be canceled or surrendered as to any Shares, new Options may thereafter be granted covering such Shares. Subject to the provisions of Section 14 hereof, an Option granted hereunder shall be either an Incentive Stock Option or a Non-Statutory Stock Option as determined by the Committee at the time of grant of such Option and shall clearly state whether it is an Incentive Stock Option or Non-Statutory Stock Option. Subject to Section 17 hereof, all Incentive Stock Options shall be granted within ten years from the date this Plan is adopted by the Board or the date this Plan is approved by the stockholders of the Company, whichever is earlier. 4. DOLLAR LIMITATION. Options otherwise qualifying as Incentive Stock Options hereunder will not be treated as Incentive Stock Options to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares, with respect to which Options meeting the requirements of Code Section 422(b) are exercisable for the first time by any individual during any calendar year (under all plans of the Company and any Subsidiary), exceeds $100,000. 5. CONDITIONS FOR GRANT OF OPTIONS. (a) Each Option shall be evidenced by a written agreement that may contain any term deemed necessary or desirable by the Committee, provided such terms are not inconsistent with this Plan or any applicable law. Optionees shall be those persons selected by the Committee from the class of all Directors, Officers and regular employees of the Company or its Subsidiaries. Any person who files with the Committee, in a form satisfactory to the Committee, a written waiver of - 3 - 4 eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver. (b) In granting Options to Directors, Officers and employees of the Company or its Subsidiaries, the Committee shall take into consideration the contribution the person has made to the success of the Company or its Subsidiaries and such other factors as the Committee shall determine. The Committee shall also have the authority to consult with and receive recommendations from officers and other personnel of the Company and its Subsidiaries with regard to these matters. The Committee may from time to time in granting Options to Directors, Officers and employees of the Company or its Subsidiaries under this Plan prescribe such other terms and conditions concerning such Options as it deems appropriate, including, without limitation, (i) prescribing the date or dates on which the Option becomes exercisable, (ii) providing that the Option rights accrue or become exercisable in installments over a period of years, or upon the attainment of stated goals or both, or (iii) relating an Option to the continued employment of the Optionee for a specified period of time, provided that such terms and conditions are not more favorable to an Optionee than those expressly permitted herein. (c) The Options granted to employees under this Plan shall be in addition to regular salaries, pension, life insurance or other benefits related to their employment with the Company or its Subsidiaries. Neither this Plan nor any Option granted under this Plan shall confer upon any person any right to employment or continuance of employment by the Company or its Subsidiaries. 6. OPTION PRICE. The option price per Share of any Option shall be any price determined by the Committee but shall not be less than the par value per Share; provided, however, that in no event shall the option price per Share of any Incentive Stock Option be less than the Fair Market Value of the Shares underlying such Option on the date such Option is granted. 7. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate option price of the Shares as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee's payment to the Company of an amount that is sufficient to satisfy all applicable federal or state tax withholding requirements relating to exercise of the Option, if any. Unless further limited by the Committee in any Option, the option price of any Shares purchased shall be paid in cash, by certified or official bank check, by money order, with Shares or by a combination of the above; provided further, however, that the Committee in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, the value of the Shares surrendered shall be their Fair Market Value on the date the Option is exercised. The Company in its sole discretion may, on an individual basis or pursuant to a general program established in connection with this Plan, lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to obtain the cash necessary to exercise all or a portion of an Option granted hereunder or to pay any tax liability of the Optionee attributable to such exercise. If the exercise price is paid in whole or in part with Optionee's promissory note, such note shall (i) provide for full recourse to the maker, (ii) be - 4 - 5 collateralized by the pledge of the Shares that the Optionee purchases upon exercise of such Option, (iii) bear interest at a rate no less than the base lending rate of the Company's principal lender or if there is no such lender at a rate no less than the prime rate as published from time to time in THE WALL STREET JOURNAL, and (iv) contain such other terms as the Committee in its sole discretion shall reasonably require. No Optionee shall be deemed to be a holder of any Shares subject to an Option unless and until a stock certificate or certificates for such Shares are issued to such person(s) under the terms of this Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 10 hereof. 8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in such amounts, at such intervals and upon such terms as the Committee shall provide in such Option, except as otherwise provided in this Section 8. (a) The expiration date of an Option shall be determined by the Committee at the time of grant, but in no event shall an Option be exercisable after the expiration of ten years from the date of grant of the Option. (b) Unless otherwise provided in any Option, each outstanding Option shall become immediately fully exercisable upon any Change in Control. (c) The Committee may in its sole discretion accelerate the date on which any Option may be exercised and may accelerate the vesting of any Shares subject to any Option or previously acquired by the exercise of any Option. 9. TERMINATION OF OPTION PERIOD. (a) The unexercised portion of any Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (i) three months after the date on which the Optionee's employment is terminated for any reason other than by reason of (A) Cause, which, solely for purposes of this Plan, shall mean the termination of the Optionee's employment by reason of the Optionee's willful misconduct or gross negligence, (B) a mental or physical disability (within the meaning of Section 22(e)(3) of the Code) as determined by a medical doctor satisfactory to the Committee, or (C) death; (ii) immediately upon the termination of the Optionee's employment for Cause; (iii) one year after the date on which the Optionee's employment is terminated by reason of a mental or physical disability (within the meaning of Section 22(e)(3) of the Code) as determined by a medical doctor satisfactory to the Committee; or - 5 - 6 (iv) (A) one year after the date of termination of the Optionee's employment by reason of death of the Optionee, or (B) three months after the date on which the Optionee dies if the Optionee dies during the one year period specified in Section 9(a)(iii) hereof. (b) The Committee in its sole discretion may, by giving written notice (a "cancellation notice"), cancel, effective upon the date of the consummation of any corporate transaction described in Sections 2(b)(ii) or (iii) hereof, any Option that remains unexercised on such date. Such cancellation notice shall be given a reasonable period of time prior to the proposed date of such cancellation and may be given either before or after approval of such corporate transaction. 10. ADJUSTMENT OF SHARES. (a) If at any time while this Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of Shares, then and in such event: (i) appropriate adjustment shall be made in the maximum number of Shares available for grant under this Plan, so that the same percentage of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same percentage of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price. (b) Subject to the specific terms of any Option, the Committee may change the terms of Options outstanding under this Plan, with respect to the option price or the number of Shares subject to the Options, or both, when, in the Committee's sole discretion, such adjustments become appropriate by reason of any corporate transaction described in Sections 2(b)(ii) or (iii) hereof. (c) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of or exercise price of Shares then subject to outstanding Options granted under this Plan. (d) Without limiting the generality of the foregoing, the existence of outstanding Options granted under this Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities, or preferred or preference stock that - 6 - 7 would rank above the Shares subject to outstanding Options; (iv) the dissolution or liquidation of the Company; (v) any sale, lease, exchange, transfer, assignment or other disposition of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceeding, whether of a similar character or otherwise. 11. TRANSFERABILITY OF OPTIONS. (a) No Incentive Stock Option shall be transferable by the Optionee other than by will, the laws of descent and distribution, and each Incentive Stock Option shall be exercisable during the Optionee's lifetime only by the Optionee. (b) A person that receives Non-Statutory Stock Options under this Plan or such person's beneficiary shall have the power or right to sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of such person's or beneficiary's Non-Statutory Stock Options received under this Plan only as follows: (i) to the spouse or any children or grandchildren of such person that receives Non-Statutory Stock Options under this Plan; (ii) as a charitable contribution or gift to or for the use of any person or entity described in Section 170(c) of the Code; (iii) to any Controlled Entity; or (iv) by will or the laws of intestate succession. 12. ISSUANCE OF SHARES. As a condition of any sale or issuance of Shares upon exercise of any Option, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any such federal or state securities or other law or regulation including, but not limited to, the following: (i) a representation and warranty by the Optionee to the Company, at the time any Option is exercised, that he is acquiring the Shares to be issued to him for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and (ii) a representation, warranty and/or agreement to be bound by any legends that are, in the opinion of the Committee, necessary or appropriate to comply with the provisions of any securities law deemed by the Committee to be applicable to the issuance of the Shares and are endorsed upon the Share certificates. 13. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by the Committee, which shall consist of not less than two Directors. The Committee shall have all of the powers of the Board with respect to this Plan; provided that if any member of the Committee is not a Non-Employee Director, then the Board shall approve any Option that the Committee proposes to grant hereunder. The Board may change the membership of the Committee at any time and fill any vacancy occurring in the membership of the Committee by appointment. (b) The Committee, from time to time, may adopt rules and regulations for carrying out the purposes of this Plan. The Committee's determinations and its interpretation and construction of any provision of this Plan shall be final and conclusive. - 7 - 8 (c) Any and all decisions or determinations of the Committee shall be made either (i) by a majority vote of the members of the Committee at a meeting or (ii) without a meeting by the unanimous written consent of the members of the Committee. 14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other provisions of this Plan to the contrary, an Incentive Stock Option shall not be granted to any person owning directly or indirectly (through attribution under Section 424(d) of the Code) at the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or of its subsidiary as defined in Section 424 of the Code at the date of grant) unless the option price of such Option is at least 110% of the Fair Market Value of the Shares subject to such Option on the date the Option is granted, and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 15. INTERPRETATION. (a) The Plan shall be administered and interpreted so that all Incentive Stock Options granted under this Plan will qualify as Incentive Stock Options under Section 422 of the Code. If any provision of this Plan should be held invalid for the granting of Incentive Stock Options or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead this Plan shall be construed and enforced as if such provision had never been included in this Plan. (b) This Plan shall be governed by the laws of the State of Ohio. (c) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. (d) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 16. AMENDMENT AND DISCONTINUATION OF THE PLAN. (a) Either the Board or the Committee may from time to time amend or discontinue this Plan or any Option; provided, however, that, except to the extent provided in Section 10, no such amendment may, without approval by the stockholders of the Company, (i) materially increase the benefits accruing to participants under this Plan, (ii) materially increase the number of securities which may be issued under this Plan, or (iii) materially modify the requirements as to eligibility for participation in this Plan; and provided further, that, except to the extent provided in Section 9, no amendment or suspension of this Plan or any Option issued hereunder shall substantially impair any Option previously granted to any Optionee without the consent of such Optionee. (b) Notwithstanding anything herein to the contrary, the provisions of this Plan which govern the exercise price per Share under each such Option, when and under what circumstances such Option will be granted and the period within which each such Option may be exercised, shall not be amended more than once every six months (even with stockholder approval) - 8 - 9 other than to conform to changes to (i) the Code, or the rules promulgated thereunder, (ii) the Employee Retirement Income Security Act of 1974, as amended, or the rules promulgated thereunder, or (iii) rules promulgated by the Securities and Exchange Commission. 17. EFFECTIVE DATE AND TERMINATION DATE. The Plan shall be effective upon the Effective Date and shall terminate on the tenth anniversary of the Effective Date. * - 9 - EX-23.2 6 EXHIBIT 23.2 1 Exhibit 23.2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report on the consolidated financial statements of Hawk Corporation dated December 19, 1997, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-40535) and related Prospectus of Hawk Corporation for the registration of ________ shares of its common stock. /s/ Ernst & Young LLP Cleveland, Ohio December 29, 1997 2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report on the financial statements of Helco, Inc. dated July 26, 1994, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-40535) and related Prospectus of Hawk Corporation for the registration of _____ shares of its common stock. /s/ Ernst & Young LLP Cleveland, Ohio December 29, 1997 3 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report on the financial statements of Sinterloy, Inc. dated August 22, 1997, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-40535) and related Prospectus of Hawk Corporation for the registration of _______ shares of its common stock. /s/ Ernst & Young LLP Cleveland, Ohio December 29, 1997 4 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report on the consolidated financial statements of S.K. Wellman Limited Inc. and Subsidiaries dated September 26, 1996, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-40535) and related Prospectus of Hawk Corporation for the registration of ________ shares of its common stock. /s/ Ernst & Young LLP Cleveland, Ohio December 29, 1997 EX-23.3 7 EXHIBIT 23.3 1 Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-40535) to be filed on or about December 30, 1997, of our report dated February 5, 1997, on our audit of the financial statements of Houghton Acquisition Corporation d/b/a Hutchinson Foundry Products Company. We also consent to the reference to our firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. St. Louis, Missouri December 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----