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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950152-02-002664.txt : 20020415
<SEC-HEADER>0000950152-02-002664.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950152-02-002664
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020401
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HAWK CORP
CENTRAL INDEX KEY: 0000849240
STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728]
IRS NUMBER: 341608156
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13797
FILM NUMBER: 02597001
BUSINESS ADDRESS:
STREET 1: 200 PUBLIC SQ STE 30-5000
STREET 2: STE 29-2500
CITY: CLEVELAND
STATE: OH
ZIP: 44114
BUSINESS PHONE: 2168613553
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>l92278ae10-k.txt
<DESCRIPTION>HAWK CORPORATION 10-K/YEAR ENDED 12-31-2001
<TEXT>
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO. 001-13797
-----------------
HAWK CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
<S> <C>
DELAWARE 34-1608156
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114-2301
------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 861-3553
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- ------------------- ------------------------------------
<S> <C>
Series B 10.25% Senior Notes due 2003 New York Stock Exchange
Class A Common Stock, par value $.01 New York Stock Exchange
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 2002, the registrant had 8,557,240 shares of Class A Common
Stock, net of treasury shares, and 0 shares of Class B non-voting Common Stock
outstanding. As of that date, the aggregate market value of the voting stock of
the registrant held by non-affiliates was $22,296,597 (based upon the closing
price of $4.25 per share of Class A Common Stock on the New York Stock Exchange
on March 15, 2002). For purposes of this calculation, the registrant deems the
3,310,982 shares of Class A Common Stock held by all of its Directors and
executive officers to be the shares of Class A Common Stock held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2002 Proxy Statement of Hawk Corporation are incorporated
by reference into Part III of this Form 10-K.
As used in this Form 10-K, the terms "Company," "Hawk" and "Registrant"
mean Hawk Corporation and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise. Except as otherwise stated, the
information contained in this Form 10-K is as of December 31, 2001.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS
Hawk Corporation, founded in 1989, is a holding company, the principal
assets of which consist of the capital stock of its manufacturing subsidiaries,
Friction Products Co., S.K. Wellman Corp., S.K. Wellman SpA, S.K. Wellman of
Canada Limited, Hawk Composites (Suzhou) Company Limited, Helsel, Inc.,
Sinterloy Corporation, Allegheny Clearfield, Inc. (formerly Clearfield Powdered
Metals, Inc. and Allegheny Powder Metallurgy, Inc.), Net Shape Technologies LLC,
Hawk Motors, Inc., Hawk Motors de Mexico, Hawk Brake, Inc., Quarter Master
Industries, Inc., Tex Racing Enterprises, Inc. and Logan Metal Stampings, Inc.
Through its subsidiaries, Hawk operates primarily in four reportable segments:
friction products, precision powder metal components, performance automotive and
motor components.
The Company's friction products are made from proprietary formulations of
composite materials that primarily consist of cold-rolled steel, metal powders,
resins 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. Friction products
manufactured by the Company include friction components for use in brakes,
transmissions and clutches in aerospace, construction, agriculture, truck and
specialty vehicle markets. The Company's precision components are made from
formulations of composite powder metal alloys. The precision components segment
manufactures a variety of components for use in fluid power, truck, lawn and
garden, construction, agriculture, home appliance, automotive and office
equipment markets. In its performance automotive segment, the Company
manufactures brakes, clutches and gearboxes for the performance automotive
markets. Through its motor segment, the Company designs and manufactures die-
cast aluminum rotors for fractional and subfractional horsepower electric motors
used in appliances, business equipment, pumps and HVAC equipment. The Company
also designs and produces integral horsepower custom motors and generators.
BUSINESS STRATEGY
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. The Company's business strategy
includes the following principal elements:
- Focus on High-Margin, Specialty Applications. The Company operates
primarily in 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 product
pricing. 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 2001 and 2000 were 21.7% and
27.1%, respectively.
- New Product Introduction. A key part of the Company's strategy is the
introduction of products for new applications, 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 the product,
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. To
enhance its growth strategy, the Company has expanded its product line
offerings through outsourcing opportunities, especially in the motor
segment where a majority of rotors are still made in-house by motor
manufacturers.
2
<PAGE>
- Expanding International Sales. Through its friction and motor segments,
which have foreign manufacturing facilities in Italy, Canada, China and
Mexico and the friction segment's worldwide distribution network, the
Company continues to expand its international operations in established
markets throughout Europe, Asia and North America. In 2000, the Company
opened a facility located in Suzhou, China. This facility, which began
production in 2001, will primarily serve friction customers on a
worldwide basis. The Company also believes that further opportunities to
expand sales exist in emerging economies. In 2000, the Company commenced
initial production at its rotor manufacturing facility in Monterrey,
Mexico. This facility will service motor customers located in Mexico and
Latin America. This facility is expected to reach full production in
2002. Sales from the Company's international facilities were $23.6
million in 2001.
- Expanding 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's 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. The Company and its
predecessors have relationships with a number of customers dating back to
the 1940's. The Company believes that strong relationships with its
customers provide it with significant competitive advantages in obtaining
and securing new business opportunities.
PRODUCTS AND MARKETS
The Company focuses on supplying components to the aerospace, industrial,
performance automotive and motor 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. The Company believes this
diversification has reduced its economic exposure to the cyclical effects of any
particular industry.
FRICTION PRODUCTS
The Company's friction segment manufactures products made from proprietary
formulations of composite materials that primarily consist of metal powders,
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 components in aircraft braking systems slow and stop airplanes when
landing or taxiing. Friction products manufactured by the Company also include
friction components 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 components for use in many truck, construction,
agriculture and specialty vehicle braking systems.
The Company's friction products are custom-designed to meet the performance
requirements of a specific application and must meet 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 segment include
manufacturers of aircraft brakes, truck clutches, heavy-duty construction and
agricultural vehicle brakes, motorcycle and snowmobile brakes and transmissions.
Based upon net sales, the Company believes that it is among the top 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 minimize its exposure to adverse economic cycles.
3
<PAGE>
Aerospace. The Company believes it is the only independent supplier of
friction materials to the manufacturers of braking systems for the Boeing 727,
737 and 757, the DC-9, DC-10, MD-80 and Bombardier's Canadair regional jet
series of aircraft. The Company believes it 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(s) supplied by the Company, must meet stringent Federal
Aviation Administration 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
not economically feasible to redesign a braking system. Moreover, FAA
maintenance requirements mandate that brake components 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.
As a result of the terrorist attacks on September 11, 2001, the aerospace
markets served by the Company suffered an immediate downturn. Air travel
schedule curtailments by the airlines were significant as a result of the steep
declines in customer traffic. Based on recent trends however, the Company
expects air travel growth to gradually return as the year progresses. However,
any sustained decline in airline traffic, such as the decline that occurred
after the tragic events of September 11, 2001, will have a negative impact on
the Company's aerospace business.
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 2001 Current
Market Outlook, which was published prior to September 11, approximately 74
percent of the 14,548 airplanes in the world fleet are single-aisle commercial
aircraft. The report also forecasts single-aisle aircraft to increase by
approximately 9,497 to 24,045 by the end of 2020. The Boeing report also states
that world airline passenger traffic is projected to increase 4.7 percent per
year over the next nineteen years through 2020. The Company expects that
continued growth in world airline traffic, combined with the increasing number
of single-aisle aircraft, will cause long-term demand for the Company's
aerospace friction products to remain strong, although the market is expected to
remain soft throughout the remainder of 2002.
Construction/Agriculture/Trucks/Specialty. The Company supplies a variety
of friction products for use in brakes, clutches and transmissions on
construction and agriculture equipment, trucks and specialty vehicles. 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. A portion of the Company's sales to
original equipment manufacturers find their way into the aftermarket. The
Company believes that its trademarks, including Velvetouch(R) and
Sheepbridge(R), are well known in the aftermarket for these components. As with
the Company's aerospace friction products, new friction product introduction in
conjunction with a new brake, clutch or transmission system provides the Company
with the opportunity to supply the aftermarket with the friction product for the
life of the system.
- Construction Equipment. The Company supplies friction products such as
transmission discs, clutch facings and brake components 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 original equipment manufacturers as well as various aftermarket
distributors.
- Agriculture Equipment. The Company supplies friction products such as
clutch facings, transmission discs and brake components to manufacturers
of agriculture equipment, including John Deere and Case New Holland
(CNH). The Company believes it is the second largest domestic supplier of
such friction products.
4
<PAGE>
Replacement components for agricultural equipment are sold through
original equipment manufacturers, as well as various aftermarket
distributors.
- 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 original equipment
manufacturers and various aftermarket distributors.
- Specialty Friction. The Company supplies friction products for use in
specialty applications, such as brake pads for Harley-Davidson
motorcycles, General Motors' Hummer 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
product performance.
PRECISION COMPONENTS
The Company's precision components segment is a leading supplier of powder
metal components consisting primarily of pump, motor and transmission elements,
gears, pistons and other component parts 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 products industry with a focus on the
North American industrial market. The Metal Powder Industries Federation, an
industry trade group, estimates that this market had sales of over $5.0 billion.
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, (2) transmissions, other drive mechanisms and anti-lock
braking systems used in trucks and off-road and lawn and garden equipment, (3)
gears and other components for use in home appliances and office equipment and
(4) components used in automotive applications. The Company believes that the
market for powder metal components will continue to grow as the Company's core
powder metal technology benefits from advances that permit production of powder
metal components with 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's precision component segment operates in six facilities, each
targeting a specific 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 expects 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. The Company 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.
- High Volume. Sinterloy and Allegheny Clearfield target smaller, high
volume parts where they can utilize efficient pressing and sintering
capabilities to their best advantage. Sinterloy's primary market has been
powder metal components for the automotive and business equipment market.
Allegheny Clearfield's
5
<PAGE>
market focus has been primarily to the lawn and garden, home appliance,
power hand tool, and truck markets. The Company believes that the high
volume capabilities of these operations will provide the Company with
cross-selling opportunities from the Company's other precision component
facilities.
- Metal Injection Molding. Net Shape manufactures small complex metal
injection molded parts for a variety of industries, such as
telecommunications and small hand tools. The Company believes that
through its relationship with traditional powder metal end-users, that
significant cross-selling opportunities exist for metal injected molded
parts.
PERFORMANCE AUTOMOTIVE
Under the Hawk Performance(R) and Hawk Brake(R) trade names, the Company
supplies high performance friction material for use in racing car brakes. 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 and has targeted these markets as future growth
opportunities. Additionally, the Company supplies premium branded clutch and
drive train components through its Quarter Master and Tex Racing subsidiaries.
The products are used by leading teams in the NASCAR and CART racing series as
well as drivers in the SCCA and ASA racing circuits, high-performance street
vehicles, and other road race and oval track competition cars.
MOTOR COMPONENTS
The Company believes that its motor segment, which operates through its
Hawk Motors and Hawk Motors de Mexico subsidiaries, is the largest independent
U.S. manufacturer of die-cast aluminum rotors for use in fractional and
subfractional horsepower electric motors. These motors are used in a wide
variety of applications such as office equipment, small household appliances,
business equipment, pumps and HVAC equipment. The Company estimates that
approximately 70% of all rotors in the subfractional horsepower motor market are
made internally by large motor manufacturers. However, the Company believes its
motor division has growth opportunities arising from the trend by original
equipment motor manufacturers to outsource their production of rotors. The
Company now produces rotors for two of the three largest motor manufacturers in
North America. In 2000, the Company commenced production at its rotor
manufacturing factory in Monterrey, Mexico, where a large portion of fractional
and subfractional motors are manufactured. Output at this facility is expected
to reach full production levels during 2002. The Company also designs and
produces integral horsepower custom motors and generators through a business
relationship with Potencia Industrial, S.A. de C.V., located in Mexico City,
Mexico.
BUSINESS SEGMENT INFORMATION
(in millions)
The following table sets forth comparative operating results and assets by
each of the Company's operating segments.
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Net sales to external customers:
Friction products........................................ $100.4 $112.5 $114.6
Precision components..................................... 58.3 72.0 61.1
Performance automotive................................... 16.7 9.4 3.3
Motor.................................................... 9.0 8.4 8.6
------ ------ ------
Consolidated............................................... $184.4 $202.3 $187.6
====== ====== ======
</Table>
6
<PAGE>
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Gross profit (loss):
Friction products........................................ $ 24.5 $ 29.7 $ 27.2
Precision components..................................... 11.5 19.4 17.8
Performance automotive................................... 4.3 4.0 1.5
Motor.................................................... (0.3) 1.8 2.3
------ ------ ------
Consolidated............................................... $ 40.0 $ 54.9 $ 48.8
====== ====== ======
Operating income (loss):
Friction products........................................ $ 8.6 $ 12.0 $ 10.0
Precision components..................................... 0.3 8.4 8.7
Performance automotive................................... (1.9) 0.4 0.2
Motor.................................................... (3.4) (1.3) (0.3)
------ ------ ------
Consolidated............................................... $ 3.6 $ 19.5 $ 18.6
====== ====== ======
</Table>
<Table>
<Caption>
DECEMBER 31
---------------
2001 2000
------ ------
<S> <C> <C>
Total assets:
Friction products......................................... $ 99.1 $110.3
Precision components...................................... 69.0 72.6
Performance automotive.................................... 19.6 17.2
Motor..................................................... 16.4 15.3
------ ------
Consolidated................................................ $204.1 $215.4
====== ======
</Table>
MANUFACTURING
The manufacturing processes for most of the Company's friction products,
performance automotive brake products and powder metal precision components are
similar. In general, all 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. 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.
With its metal injection molding equipment, the Company can create
complex shapes not obtainable with conventional powder metal presses.
- Sintering: After compacting, molded parts are heated in furnaces to
specific temperatures slightly below melting, 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
sintered 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
7
<PAGE>
heat or steam treated, precision coined or flattened, ground, machined or
treated with a corrosion resistant coating.
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, 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 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 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.
FOREIGN OPERATIONS
The Company's foreign operations are subject to the usual risks of
operating in foreign jurisdictions. They include, but are not limited to,
exchange controls, currency restrictions and fluctuations, changes in local
economics and changes in political conditions. The assets associated with the
Company's foreign operations are located in countries where the Company believes
such risk to be minimal. For certain financial information regarding the
Company's international operations, see "Note M -- Business Segments" and "Note
N -- Supplemental Guarantor Information," to the accompanying consolidated
financial statements beginning on page 40 of this Form 10-K.
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 components, which are currently
being installed on many of the braking systems of the Boeing 737-600, -700, -800
and -900 and Bombardier's Canadair regional jet series of aircraft as well as
new series of industrial equipment from various original equipment manufactures.
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. 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 precision 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
8
<PAGE>
components with specific performance characteristics and close dimensional
tolerances that would be impractical to produce using conventional metalworking
processes. With its metal injection molding technology used at the Company's Net
Shape facility, the Company is able to create complex shapes previously not
available using conventional powder metal technology.
The Company's motor business is able to produce a wide range of rotors for
the fractional and subfractional motor industries. The Company has developed
customized manufacturing processes for rotors and created specialty rotor die
construction techniques. In addition, the Company has also designed the highly
automated machines necessary for the production of its rotors.
CUSTOMERS
The Company's engineers work closely with customers to develop and design
new products and improve the performance of existing products. The Company's
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. The Company
or its predecessors has had relationships with many of its customers which date
back to the 1940's, 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. Management believes the Company's relationships
with its customers are good.
The Company's 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 the
Company's commitment to customer service and satisfaction, the Company is a
preferred supplier to many of the world's leading original equipment
manufacturers, including Aircraft Braking Systems, Goodrich, Caterpillar, Eaton,
Deere, CNH, Hydro-Gear, Sauer-Danfos, Parker Hannifin, Electrolux, Haldex, AO
Smith, Emerson and Fasco Motors.
The Company's top five customers accounted for 24.4% of the Company's
consolidated net sales in 2001 and 24.8% of the Company's consolidated net sales
in 2000.
MARKETING AND SALES
The Company markets its products globally through product management and
sales professionals, who operate primarily from the Company's facilities in the
United States, Italy, China and Canada. 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 also sells
its precision components and motor components to original equipment
manufacturers through independent sales representatives. Sales to customers in
the Company's performance automotive segment are sold directly to race teams and
distributors throughout the United States.
COMPETITION
The principal segments in which the Company operates 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. 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
9
<PAGE>
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 increasingly competes with companies using forging, casting or
stamping technologies. Powder metal components can often be produced at a lower
cost per unit than products manufactured with forging, casting or stamping
technologies due to the elimination of, or substantial reduction in, secondary
machining, lower material costs and the virtual elimination of raw material
waste. As a result, powder metal components are increasingly being substituted
for metal parts manufactured using more traditional technologies.
SUPPLY AND PRICE OF RAW MATERIALS
The principal raw materials used by the Company are copper, steel and iron
powders, aluminum ingot 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.
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 14.1 percent and 13.7 percent of the Company's consolidated net
sales in 2001 and 2000, respectively. 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.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Manufacturers like 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,
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.
INTELLECTUAL PROPERTY MATTERS
Hawk(R), Wellman Friction Products(R), Velvetouch(R), Fibertuff(R),
Feramic(R), Velvetouch Feramic(R), Velvetouch Organik(R) and Velvetouch
Metalik(R), Hawk Brake(R) and Hawk Performance(R), Hawk Motors(R) and Hawk
Rotors(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 segment and is registered in 26 countries.
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.
10
<PAGE>
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.
PERSONNEL
At December 31, 2001, the Company had approximately 1,190 domestic
employees and 360 international employees. Approximately 180 employees at the
Company's Brook Park, Ohio plant are covered under a collective bargaining
agreement with the Paper, Allied Industrial, Chemical and Energy Workers
International Union (PACE) expiring in October 2004; approximately 55 employees
at the Company's Akron, Ohio facility are covered under a collective bargaining
agreement with the United Automobile Workers expiring in July 2003;
approximately 190 employees at the Company's Orzinuovi, Italy plant are
represented by a national mechanics union under an agreement that expires in
December 2002 and by a local union under an agreement that expires in December
2004; and approximately 60 hourly employees at the Company's Alton, Illinois
facility are covered under a collective bargaining agreement with the
International Association of Machinists and Aerospace Workers expiring in June
2004. The Company has experienced no strikes and believes its relations with its
employees and their unions to be good.
ITEM 2. PROPERTIES
Hawk's world headquarters is located in Cleveland, Ohio. The Company
maintains manufacturing and research and development facilities at 16 locations
in 5 countries. The Company is a lessee under operating leases for some of its
properties and equipment. Hawk's principal research facility is located in
Solon, Ohio. In addition, research is also performed in a number of the
operating divisions' facilities. The Company believes that substantially all of
its property and equipment is maintained in good condition, adequately insured
and suitable for its present and intended use.
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 Ronald E. Weinberg, the Chairman and CEO of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising from the
ordinary course of business. In the Company's opinion the outcome of existing
litigation will not have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock has been traded on the New York Stock
Exchange since the Company's initial public offering on May 12, 1998 under the
symbol "HWK." The following table sets forth for the fiscal periods indicated
the high and low prices of the Common Stock as reported on the New York Stock
Exchange.
QUARTERLY STOCK PRICES
<Table>
<Caption>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C> <C>
2001
March 31, 2001....................................... $7.25 $5.31
June 30, 2001........................................ $7.20 $5.37
September 30, 2001................................... $6.29 $3.95
December 31, 2001.................................... $4.20 $2.65
2000
March 31, 2000....................................... $6.63 $4.38
June 30, 2000........................................ $7.88 $5.13
September 30, 2000................................... $8.50 $6.81
December 31, 2000.................................... $6.94 $5.00
</Table>
The closing sale price for the common stock on December 31, 2001 was $3.60
Shareholders of record as of March 15, 2002 numbered 84. The Company
estimates that an additional 1,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
The Company has never declared or paid, and does not intend to declare or
pay, any cash dividends for the foreseeable future and intends to retain
earnings for the future operation and expansion of the Company's business.
Currently, the Company's senior note indenture prohibits the payment of cash
dividends on the Class A Common Stock.
The Company did not sell any unregistered Class A Common Stock in the
fourth quarter of 2001.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
YEARS ENDING DECEMBER 31, 2001 2000 1999 1998 1997
- ------------------------- ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................... $184.4 $202.3 $187.6 $182.3 $160.7
Gross profit...................................... 40.0 54.9 48.8 57.7 45.9
Restructuring costs............................... 1.1 -- -- -- --
Income from operations............................ 3.6 19.5 18.6 32.8 22.1
(Loss) Income before income taxes and
extraordinary charge............................ (6.2) 10.1 10.0 21.9 6.6
Extraordinary charge(1)........................... -- -- -- 3.1 --
Net (loss) income................................. $ (4.3) $ 5.8 $ 6.3 $ 9.1 $ 2.9
(LOSS) EARNINGS PER SHARE:
Basic:
(Loss) earnings before extraordinary charges.... $ (.52) $ .66 $ .71 $ 1.59 $ .55
Extraordinary charge............................ -- -- -- (.41) --
------ ------ ------ ------ ------
(Loss) basic earnings per share................. $ (.52) $ .66 $ .71 $ 1.18 $ .55
------ ------ ------ ------ ------
Diluted:
(Loss) earnings before extraordinary charge..... $ (.52) $ .66 $ .71 $ 1.51 $ .45
Extraordinary charge............................ -- -- -- (.39) --
------ ------ ------ ------ ------
(Loss) diluted earnings per share............... $ (.52) $ .66 $ .71 $ 1.12 $ .45
------ ------ ------ ------ ------
OTHER DATA:
Depreciation...................................... $ 11.4 $ 10.8 $ 9.9 $ 8.0 $ 7.1
Amortization...................................... $ 4.5 $ 4.2 $ 3.8 $ 3.5 $ 3.4
Capital expenditures (including capital leases)... $ 9.1 $ 10.5 $ 10.2 $ 15.2 $ 9.6
</Table>
<Table>
<Caption>
DECEMBER 31, 2001 2000 1999 1998 1997
- ------------ ------ ------ ------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 3.1 $ 4.0 $ 4.0 $14.3 $ 4.4
Working capital.................................... 31.5 36.5 33.5 39.9 28.8
Property plant and equipment, net.................. 67.4 70.4 70.2 64.3 52.5
Total assets....................................... 204.1 215.4 209.6 203.4 173.1
Total long-term debt............................... 97.8 103.9 105.4 102.5 132.1
Shareholders' equity (deficit)..................... 66.4 71.7 66.5 64.4 (2.2)
</Table>
- ---------------
(1) Reflects premium paid on partial redemption of Senior Notes and write-off of
deferred financing costs in conjunction with the Company's initial public
offering, net of $2.3 million in income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis may contain forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, which
may cause actual results to differ materially from those expressed in the
forward-looking statements.
RESULTS OF OPERATIONS
Through its subsidiaries, the Company operates primarily in four reportable
segments: friction products, precision powder metal components, performance
automotive and motor components. The Company's results of operations are
affected by a variety of factors, including but not limited to, general economic
conditions, customer demand for the Company's products, competition, raw
material pricing and availability, labor relations
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<PAGE>
with the Company's personnel and political conditions in the country in which
the Company operates. The Company sells a wide range of products, which have a
corresponding range of gross margins. The Company's consolidated gross margin is
affected by product mix, selling prices, material and labor costs as well as the
ability of the Company to absorb its overhead costs as a result of fluctuations
in demand.
In 2001, the Company experienced a 174 percent decrease in net income over
the prior year. This decrease was attributable primarily to sales volume
declines in most of the end-markets served by the Company's friction and
precision component divisions, the Company's inability to fully absorb all of
its fixed costs, increased depreciation and amortization costs, restructuring
charges taken by the Company in the second quarter to realign its business
operations to current economic conditions, the continuing start-up expenditures
at the Company's Mexico and China facilities, increased interest expense and
charges to settle litigation in the Company's performance automotive segment. In
addition, the Company's effective tax rate decreased in 2001 to a benefit of 30
percent from tax expense of 43 percent in 2000, primarily due to the losses the
Company experienced in 2001.
The Company expects 2002 to be a challenging year in most of the markets it
serves. It expects to see continuing softness in the first half of the year with
more favorable market conditions developing during the second half of 2002. As
the effects of September 11 continue to be felt, the Company expects that the
aerospace market, which is served by its friction products segment will
experience a soft operating environment for the full year of 2002. The Company
expects sales to improve as the airline traffic increases throughout the year,
but for the entire year 2002 to remain approximately 10 to 20 percent below 2001
levels. In response to the weak global business environment, and the anticipated
delay in recovery of the Company's end markets until later in 2002, the Company
is continuing to search for additional opportunities to reduce costs across its
various operating segments. Additionally, the Company expects to benefit from
new product introductions throughout its operating segments and the achievement
of operating production levels at its facilities in Mexico and China during
2002. As a result of the expected improvement in the economic conditions as well
as the continued impact of the Company's cost cutting efforts, the Company
continues to expect its earnings before interest, taxes, depreciation and
amortization (EBITDA) margin in 2002 to be approximately 20% higher than the
EBITDA margin reported in 2001.
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies, including the assumptions
and judgments underlying them are more fully described in "Note B -- Significant
Accounting Policies" to the accompanying consolidated financial statements
beginning on page 28 of this Form 10-K. Some of the Company's accounting
policies require the application of significant judgment by management in the
preparation of the Company's financial statements. In applying these policies,
the Company's management uses its best judgment to determine the underlying
assumptions that are used in calculating the estimates that affect the reported
values on its financial statements. Management bases its estimates and
assumptions on historical experience and other factors that the Company
considers relevant. Hawk's significant accounting policies include the
following:
- Revenue Recognition. The Company's revenue recognition policy is to
recognize revenues when products are shipped and title has transferred.
The Company maintains an allowance for trade accounts receivable for
which collection on specific customer accounts is doubtful. In
determining collectibility, management reviews available customer
financial statement information, credit rating reports as well as other
external documents and public filings. When it is deemed probable that a
specific customer account is uncollectible, that balance is included in
the reserve calculation set by the Company. Actual results could differ
from these estimates.
- Foreign Currency Translation and Transactions. Assets and liabilities of
the Company's foreign operations are translated using year-end exchange
rates and revenues and expenses are translated using exchange rates as
determined throughout the year. Gains or losses resulting from
translation are included in a separate component of shareholder's equity.
Gains or losses resulting from foreign currency transactions are
translated to local currency at the rates of exchange prevailing at the
dates of the transactions. Accounts receivable or payable in foreign
currencies, other than the subsidiary's local currency, are translated at
the rates of exchange prevailing at the balance sheet date. The effect of
the transaction's gain or loss in included in other income (expense) in
the Company's statement of operations.
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<PAGE>
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Consolidated net sales for 2001 were $184.4 million, a decrease
of $17.9 million or 9 percent from the same period in 2000. The decline in net
sales, primarily a result of the prolonged weakness in the industrial markets
served by the Company, has resulted in a difficult operating environment in most
of the Company's reporting segments. The terrorist attacks on September 11,
2001, in particular, had a significant negative impact on the Company's aircraft
friction business.
- Friction Segment. Net sales in the friction segment, the Company's
largest, were $100.4 million in 2001, a decrease of 11 percent compared
to 2000. The major markets served by this segment all experienced weak
operating conditions in 2001. The Company experienced declines in heavy
truck, agriculture, construction and specialty friction for the full year
2001 as a result of the soft operating conditions in the United States
and Europe. Net sales in the aerospace market showed a decline for the
year, most notably in the fourth quarter, of 2001, as a result of the
events of September 11. Although the Company expects most of the markets
served by this division to remain soft in 2002, the Company expects the
aerospace market will experience volume declines of approximately 10 to
20 percent compared to 2001, as a result of the decline in air travel.
- Precision Component Segment. Net sales in the precision components
segment were $58.3 million, a decrease of 19 percent compared to 2000.
The decrease in net sales was primarily attributable to the continuing
softness in the general industrial segments of the domestic economy. The
Company experienced sales weakness in nearly all of the markets served by
this segment, including, heavy truck, lawn and garden, pump and motor,
appliance and office equipment. While net sales in the segment were down
as a result of the general softness of economic operating environment,
the Company feels the sales declines were further exacerbated by negative
inventory realignments by its customers in the last half of 2001.
- Performance Automotive. Net sales in the Company's performance
automotive segment were $16.7 million an increase of 78 percent compared
to net sales of $9.4 million in 2000. The increase in revenues was
primarily attributable to the acquisition of Tex Racing in November 2000.
Additionally, net sales in this segment benefited from the continued
popularity of racing, particularly in the NASCAR and CART RACING SERIES,
both served by the Company.
- Motor Segment. Net sales in the Company's motor segment were $9.0
million, an increase of 7 percent from the same period in 2000. All of
the sales growth in the motor segment came from the Company's new rotor
manufacturing facility in Monterrey, Mexico, which began shipments during
the year. This facility is expected to service the growing motor
manufacturing base in that region. Net sales from the Company's Alton,
Illinois facility were flat in 2001 as a result of the soft economic
conditions experienced in the United States.
Gross Profit. Gross profit decreased $14.9 million to $40.0 million during
2001, a 27 percent decrease compared to gross profit of $54.9 million in 2000.
The gross profit margin decreased to 22 percent of net sales in 2001 from 27
percent of net sales in the comparable period in 2000. Each of the Company's
segments experienced decreased margins primarily as a result of the
deteriorating economic conditions experienced in 2001.
- Friction Segment. The Company's friction segment reported gross profit
of $24.5 million or 24 percent of net sales in 2001 compared to $29.7
million or 26 percent of net sales in 2000. The decline in the Company's
gross profit margin was the result of lower sales volumes, product mix
and the inability of the Company to absorb all of the fixed costs of its
manufacturing facilities as a result of the deteriorated economic
conditions experienced in 2001; especially the impact of the reduction in
sales to the aircraft market in the fourth quarter as a result of the
events of September 11. The Company also continued to support its
start-up facility in China during 2001. Although the facility began
shipments in 2001, it operated at negative margins for the full year.
- Precision Components Segment. Gross profit in the precision components
segment was $11.5 million or 20 percent of net sales in 2001 compared to
$19.4 million or 27 percent of net sales in 2000. The sharp
15
<PAGE>
decline in this segment's margins was primarily the result of the severe
economic downturn experienced by this segment and the resulting volume
declines and the inability of the Company to cover all of the unabsorbed
fixed charges generated by the segment. The Company also provided
operating support to its start-up metal injection molding company, Net
Shape, which was acquired in December 2000. The Company anticipates that
the start-up costs will continue into 2002, although at reduced levels
from 2001.
- Performance Automotive Segment. The Company's performance automotive
segment reported gross profit of $4.3 million or 26 percent of net sales
in 2001 compared to $4.0 million or 43 percent of net sales in 2000. The
decline in gross profit was primarily the result of manufacturing
inefficiencies and inventory realignments at the Company's performance
clutch manufacturing facility.
- Motor Segment. The Company reported a gross margin loss in the motor
segment for 2001. The loss was $0.3 million compared to a gross profit of
$1.8 million in 2000. The negative gross margin was primarily the result
of the Company's continued support of its start-up rotor manufacturing
facility in Mexico during 2001. The Company expects to continue to
support this facility in 2002. However, as the facility moves to full
production, this support is expected to decline in the latter half of
2002. Additionally, as a result of softness in the domestic motor
business in 2001, the Company's domestic margin declined in 2001 as it
was unable to absorb all of the fixed costs.
Selling, Technical and Administrative Expenses. Selling, technical and
administrative ("ST&A") expenses decreased $0.5 million, or 2 percent, to $30.8
million in 2001 from $31.3 million during 2000. As a percentage of net sales,
ST&A increased to 17 percent in 2001 from 15 percent in 2000. The increase in
ST&A expenses as a percent of net sales, resulted primarily from sales volume
reductions, continuing start-up expenditures incurred by the Company at its
Mexican rotor manufacturing and Chinese friction material facilities, personnel
costs associated the Company's long-term sales and growth initiatives and
charges to settle litigation in the Company's performance automotive segment.
The Company spent $3.9 million, or 2 percent of its net sales on product
research and development compared to $3.5 million in 2000.
Restructuring costs. In June 2001, the Company announced a restructuring
program to adjust its near-term business plan to reflect the current economic
slowdown. This restructuring initiative included a workforce reduction at its
domestic facilities and other charges. As a result of this restructuring
initiative, the Company recorded an expense of $1.1 million in 2001. The
restructuring program included a reduction of approximately 160 employees,
including salary and production personnel, primarily at the Company's domestic
locations.
Income from Operations. Income from operations decreased $15.9 million or
82 percent to $3.6 million in 2001 from $19.5 million in 2000. Income from
operations as a percentage of net sales decreased to 2 percent in 2001 from 10
percent in 2000. The decline was primarily the result of the sales volume
declines due to the economic slowdown affecting the Company's markets,
continuing support of the Company's start-up operations, charges to settle
litigation in the Company's performance automotive segment, increased
depreciation expense and the restructuring charge taken by the Company in the
second quarter of 2001.
As a result of the items discussed above, results from operations at the
Company's segments were as follows:
- The friction segment's income from operations decreased $3.4 million or
28 percent to $8.6 million in 2001 from $12.0 million in 2000.
- Income from operations at the precision components segment was $0.3
million in 2001, a decrease of $8.1 million or 96 percent compared to
$8.4 million in 2000.
- The performance automotive segment reported a loss from operations of
$1.9 million, a decrease of $2.3 million in 2001 compared to 2000.
- The loss from operations in the motor segment increased to $3.4 million
in 2001 from $1.3 million in 2000.
Other (Expense) Income. Other expense was $0.5 million in 2001, the same
as reported in 2000. The expense in 2001 consisted primarily of an expense to
reflect the fair value of the Company's interest rate swap
16
<PAGE>
agreement and foreign currency transaction losses incurred by the Company
primarily through its Italian facility. Additional information regarding the
Company's interest rate swap agreement is contained in "Note B -- Significant
Accounting Policies," in the accompanying consolidated financial statements on
page 28 of this Form 10-K.
Interest Expense. Interest expense increased $0.5 million, or 6 percent,
to $9.5 million in 2001 from $9.0 million in 2000. The increase is primarily
attributable to increased borrowings by the Company during the year, partially
offset by lower interest rates.
Income Taxes. The provision for income taxes decreased $6.2 million to a
benefit of $1.8 million in 2001 from a tax expense of $4.4 million in 2000
primarily because of the losses the Company incurred in 2001. The Company's
effective tax benefit for the year ended is 30 percent compared to a tax
provision of 43 percent in 2000. The primary factors affecting the Company's
effective tax rate in 2001 are nondeductible goodwill amortization and required
state and local tax provisions. An analysis of changes in income taxes and the
effective tax rate of the Company is contained in "Note J -- Income Taxes", in
the accompanying consolidated financial statements on page 38 of this Form 10-K.
Net (Loss) Income. As a result of the factors noted above, the Company
reported a net loss of $4.3 million in 2001, compared to net income of $5.8
million in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Consolidated net sales for 2000 were $202.3 million, an
increase of $14.7 million or 8 percent over 1999. The increase in net sales came
primarily from the Company's precision components and performance automotive
segments. The net sales increase was attributable to the acquisition of
Allegheny in March 1999, Quarter Master in November 1999 and Tex Racing in
November 2000. Net sales in 2000 from these acquisitions represented $9.4
million, or 64 percent, of the total net sales increase reported during 2000.
Net sales in the friction segment were $112.5 million in 2000, a decrease of 2
percent compared to 1999. Net sales increases in the construction and specialty
markets served by the friction segment were offset by declines in the truck,
non-performance automotive and agriculture markets, and to a lesser extent, the
aerospace market. In the Company's precision components segment, net sales
increased to $72.0 million, or 18 percent, from 1999. The increase was the
result of the acquisition of Allegheny and strength in the fluid power,
appliance and lawn and garden markets served by the Company. This increase was
offset by the continued reduction in volumes from a customer that moved its
production offshore.
Gross Profit. Gross profit increased $6.2 million to $54.9 million during
2000, a 13 percent increase compared to gross profit of $48.8 million in 1999.
The gross profit margin increased to 27 percent in 2000 from 26 percent in the
comparable period in 1999. The increase in margins was led by the friction
segment, primarily as a result of product mix benefits and cost reduction
programs initiated in 1999. In the precision components segment, while the
Company benefited from volume increases from the acquisition of Allegheny, the
softness in the agriculture and heavy truck markets served by this segment, the
loss of a customer and changes in the product-mix caused a reduction in margins
achieved by the Company during 1999. Gross profit margins in the Company's
performance automotive segment remained flat in 2000 when compared to 1999 while
the gross profit margin in the Company's motor segment declined in 2000
primarily as a result of the startup costs associated with the Company's new
Mexican facility.
Selling, Technical and Administrative Expenses. ST&A expenses increased
$4.9 million, or 19 percent, from $26.4 million during 1999 to $31.3 million in
2000. As a percentage of net sales, ST&A increased to 16 percent in 2000 from 14
percent in 1999. The increase in ST&A expenses as a percent of net sales,
resulted primarily from expenditures incurred by the Company's entry into Mexico
and China, personnel costs associated the Company's growth initiatives and
increased depreciation expense. The Company spent $3.5 million, or 2 percent of
its net sales on product research and development compared to $3.2 million in
1999.
Income from Operations. Income from operations increased $0.9 million, or
5 percent, from $18.6 million in 1999 to $19.5 million in 2000. Income from
operations as a percentage of net sales decreased to 10 percent in 2000 from 10
percent in 1999.
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<PAGE>
Other (Expense) Income. Other expense was $0.5 million in 2000, an
increase of $0.9 million, from income of $0.4 million reported in 1999. The
expense reported in 2000 was primarily the result of foreign currency
transaction losses incurred by the Company at its Italian facility. In addition,
the Company reported income in 1999 as the result of the receipt of a contingent
receivable.
Interest Expense. Interest expense decreased $0.4 million, or 4 percent,
to $9.0 million in 2000 from $9.4 million in 1999. The decrease is attributable
to lower debt levels during 2000 compared with 1999.
Income Taxes. The provision for income taxes increased $0.7 million to
$4.4 million in 2000 from $3.7 million in 1999 primarily because of the increase
in the Company's effective tax rate during 2000 as a result of higher tax rates
at the Company's foreign operations. In 1999, the Company benefited from state
investment and job creation tax credits. The increase in the state and local
effective tax rate and the impact of foreign taxes is outlined in "Note
J -- Income Taxes", in the accompanying consolidated financial statements
starting on page 38 of this Form 10-K, on the lines captioned "State and local
tax, net of federal tax benefit," and "Adjustment to worldwide tax accrual and
other, net," respectively.
Net Income. As a result of the factors noted above, net income was $5.8
million in 2000, a decrease of 8 percent, compared to net income of $6.3 million
reported in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for funding the Company's day-to-day working capital requirements and (3) to pay
interest on, and to repay principal of, indebtedness. The Company's primary
source of funds for conducting its business activities and servicing its
indebtedness has been cash generated from operations.
The Company's senior notes, with an outstanding balance of $65.0 million at
December 31, 2001, bear interest at 10.25% per annum and mature December 1,
2003. The senior notes are general unsecured senior obligations of the Company
and are fully and unconditionally guaranteed, on a joint and several basis, by
all domestic wholly-owned subsidiaries of the Company. The Company has the
option to redeem the senior notes in whole or in part during the twelve months
beginning December 1, 2001 at 102.563%, and beginning December 1, 2002 at 100.0%
together with any interest accrued and unpaid to the redemption date. Upon a
change of control as defined in the senior note indenture, each holder of the
senior notes will have the right to require the Company to repurchase all or any
part of such holder's senior notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest to the date
of purchase.
The senior note indenture permits the Company and its subsidiaries to incur
additional indebtedness without limitation, provided that it continues to meet a
cash flow coverage ratio. Because of the Company's performance in 2001, the
Company does not currently meet the prescribed ratio. The failure to meet the
ratio does not constitute a default under the senior note indenture. Rather, the
senior note indenture continues to permit certain other types of indebtedness
which are now subject to certain limitations. The Company's senior indebtedness,
which is secured by liens on all of the assets and the assets of the
subsidiaries, is permitted. The Company does not believe that its operations
will be materially impacted by the limitation(s) on indebtedness.
As of December 31, 2001, the senior note indenture prohibits the payment of
cash dividends on the Company's Class A Common Stock. The senior note indenture
also contains other covenants limiting the Company's ability and its
subsidiaries to, among other things, make certain other restricted payments,
make certain investments, permit liens, incur dividend and other payment
restrictions affecting subsidiaries, enter into consolidation, merger,
conveyance, lease or transfer transactions, make asset sales, enter into
transactions with affiliates or engage in unrelated lines of business. These
covenants are subject to certain exceptions and qualifications. The senior note
indenture considers non-compliance with the limitations events of default. In
addition to non-payment of interest and principal amounts, the senior note
indenture also considers default with respect to other indebtedness in excess of
$5.0 million an event of default. In the event of a default, the principal and
interest could be accelerated upon written notice by 25% or more of the holders
of the senior notes. As of December 31, 2001, the Company was in compliance with
these covenants.
In addition, the Company has available a bank credit facility which may be
used for general corporate purposes. At December 31, 2001, the facility was
comprised of a $30.0 million revolving credit component and a
18
<PAGE>
$17.5 million amortizing term loan subject to a borrowing base formula. The term
loan has quarterly maturities of $1.25 million and the facility has a maturity
date of March 31, 2003. As of December 31, 2001, the Company had $8.3 million
outstanding under the revolving credit component of the facility. On March 25,
2002, the Company amended the credit facility reducing the revolving credit
component of the facility to $25.0 million, modifying the terms of financial
covenants as of December 31, 2001 and for future reporting periods and
increasing the margin over the base interest rates. The interest rates on the
credit facility range from 250 to 450 basis points over the Eurodollar rate, or
alternatively, 125 to 325 basis points over the prime rate based on certain
quarterly performance criteria. The credit facility is collateralized by a
security interest in the accounts receivable, inventory, equipment and real
estate and other assets of the Company and its subsidiaries, and the Company has
pledged the stock of all of its U.S. subsidiaries and certain stock of its
foreign subsidiaries as collateral. Restrictive terms of the credit facility
require that the Company maintain specified financial ratios, including
leverage, interest coverage and fixed charge ratios, and comply with other loan
covenants. Based on the amended credit facility, the Company was in compliance
with the financial covenants as of December 31, 2001. As of December 31, 2001,
the Company had approximately $6.2 million available for future borrowings under
its credit facility, as amended.
Net cash provided by operating activities was $14.5 million in 2001
compared to $21.6 million in 2000. Cash provided by operations in 2001 was
primarily attributable to non-cash charges of depreciation and amortization
partially offset by the loss experienced in 2001. Cash provided by operations in
2000 was the result of net income and the non-cash charges of depreciation and
amortization. Net working capital was $31.5 million at year-end 2001 compared to
$36.5 million at year-end 2000.
Net cash used in investing activities was $9.1 million in 2001 and $16.9
million in 2000. The cash used in investing activities in 2001 consisted of
purchases of property, plant and equipment. The cash used in investing
activities in 2000 consisted primarily of $6.5 million for the acquisitions of
Tex Racing and Net Shape and $10.5 million for the purchase of property, plant
and equipment. In order to achieve long-term growth prospects and enhance
product quality, the Company has planned for its capital spending program in
2002 to be approximately $12.0 million.
Net cash used in financing activities was $6.2 million in 2001 and $4.6
million in 2000, both primarily for the payment of long-term debt.
The Company believes that if it is able to improve its working capital,
through the active management of its working capital assets, along with its
available cash, anticipated cash flow from operations, and availability under
its credit facility, the Company will be able to fund its operations for at
least the next twelve'months. However, should the Company not achieve its
working capital initiatives, its operations and its capital expenditures program
may be adversely impacted, including the ability to borrow under its credit
facility. The Company is in the process of outlining the appropriate steps to
ensure that the Company has adequate sources of cash to meet its working capital
needs for at least the next twelve months. While looking to further reduce
operating expenses which are not critical to meeting the Company's business
objectives, the Company is pursuing strategic financing alternatives, including
the restructuring or refinancing of its current debt and bank facilities both of
which are due during 2003. There can be no assurance that the Company will be
able to restructure or refinance its current facilities. Nor can there be any
assurance that if the Company is able to restructure or refinance its current
facilities that the new terms will be as favorable to the Company as its
existing facilities. If the Company is unable to restructure or refinance its
debt and bank facilities, the Company's financial position will be materially
and adversely effected.
NET OPERATING LOSS CARRYBACKS
As of December 31, 2001, the Company had U.S. net operating loss carrybacks
of approximately $2.4 million available for refund.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new
19
<PAGE>
markets, to identify and acquire complementary businesses and to attract new
sources of financing, are forward-looking statements that involve risks and
uncertainties. In addition to statements which are forward-looking by reason of
context, the words "believe," "expect," "anticipate," "intend," "designed,"
"goal," "objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
- the ability of the Company to continue to meet the terms of its debt and
bank credit facilities which contain a number of significant financial
covenants and other restrictions, including its bank credit which the
Company had to amend two times in 2001 and once in 2002;
- the willingness of the Company's banks to further amend the bank credit
facility, if necessary;
- the ability of the Company to restructure or refinance its debt and bank
credit facilities, both of which mature in 2003;
- the effect of the Company's debt service requirements on funds available
for operations and future business opportunities and the Company's
vulnerability to adverse general economic and industry conditions and
competition;
- the continuing impact of the terrorist attacks that occurred on September
11, 2001 on the Company's aircraft brake business;
- the ability of the Company to utilize all of its manufacturing capacity
in light of softness in the end-markets served by the Company;
- continuing start-up costs at the Company's facilities in Mexico and
China, as well as the start-up operations at Net Shape;
- the effect of competition by manufacturers using new or different
technologies;
- the effect on the Company's international operations of 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 ability of the Company to negotiate new agreements, as they expire,
with its unions representing certain of its employees, on terms favorable
to the Company or without experiencing work stoppages;
- the effect of any interruption in the Company's supply of raw materials
or a substantial increase in the price of any of the raw materials;
- the continuity of business relationships with major customers; and
- the ability of the Company's products to meet stringent Federal Aviation
Administration criteria and testing requirements.
These risks and others that are detailed in this Form 10-K must be
considered by any investor or potential investor in the Company.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 141, "Business Combinations," (FAS 141) which was
required to be adopted July 1, 2001. FAS 141 requires the purchase method of
accounting for all business combinations initiated after June 30, 2001. The
application of FAS 141 has had no impact on the financial statements in 2001.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(FAS 142), which requires goodwill and intangible assets with indefinite useful
lives to no longer be amortized but to be tested for impairment at least
annually. Intangible assets that have finite lives will continue to be amortized
over their estimated useful lives. The amortization and non-amortization
provisions of FAS 142 will be applied to all goodwill and intangible assets
20
<PAGE>
acquired after June 30, 2001. Effective January 1, 2002, the Company is required
to apply all other provisions of FAS 142. The Company currently expects a $3.1
million (without giving effect to taxes) reduction in amortization expense for
2002, as a result of the non-amortization of assets with indefinite taxes. The
Company is currently evaluating the potential impact with regard to the
impairment of goodwill and other intangible assets, if any, that the adoption of
FAS 142 will have on its results of operations and financial position.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which is effective for fiscal periods
beginning after December 15, 2001 and interim periods within those fiscal years.
FAS 144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed. The Company is currently evaluating the potential impact,
if any, the adoption of FAS 144 will have on our financial position and results
of operation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Sensitivity. At December 31, 2001, approximately 26 percent,
or $25.8 million, of the Company's debt obligations bear interest at a variable
rate. To mitigate the risk associated with interest rate fluctuations, in
January 2001, the Company entered into an interest rate swap essentially
converting $10.0 million notional amount of its variable rate debt to a fixed
base rate of 5.34 percent. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss. The Company's primary interest rate risk exposure results from floating
rate debt. If interest rates were to increase 100 basis points (1.0%) from
December 31, 2001 rates, and assuming no changes in debt from December 31, 2001
levels, the additional annual interest expense to the Company would be
approximately $0.2 million.
The following table presents total contractual obligations and other
commercial commitments of the Company as of December 31, 2001 (in millions):
<Table>
<Caption>
TOTAL 2002 THEREAFTER
-------- ------ 2003 - 2006 ----------
<S> <C> <C> <C> <C>
Contractual Cash Obligations
Revolver.......................................... $ 8.3 -- $ 8.3 --
Term loan......................................... 17.5 $ 5.0 12.5 --
Senior notes...................................... 65.0 -- 65.0 --
Capital lease and other obligations............... 7.0 1.9 4.6 $0.5
Operating leases.................................. 6.9 1.9 4.6 0.4
-------- ------ ------- ----
Total contractual cash obligations.................. $ 104.7 $ 8.8 $ 95.0 $0.9
======== ====== ======= ====
Other Commercial Commitments
Stand-by letters of credit........................ $ 1.3 $ 1.3 -- --
</Table>
Foreign Currency Exchange Risk. The majority of the Company's receipts and
expenditures are contracted in U.S. dollars, and the Company does not consider
the market risk exposure relating to currency exchange to be material at this
time. The Company currently does not hedge its foreign currency exposure and,
therefore, has not entered into any forward foreign exchange contracts to hedge
foreign currency transactions. The Company has operations outside the United
States with foreign-currency denominated assets and liabilities, primarily
denominated in Italian lira, Canadian dollars, Mexican pesos and Chinese
renminbi. Because the Company has foreign-currency denominated assets and
liabilities, financial exposure may result, primarily from the timing of
transactions and the movement of exchange rates. The unhedged foreign currency
balance sheet exposures as of December 31, 2001 are not expected to result in a
significant impact on earnings or cash flows.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk
Corporation and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hawk Corporation and subsidiaries at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 25, 2002
22
<PAGE>
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31
--------------------
2001 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,084 $ 4,010
Accounts receivable, less allowance of $455 in 2001 and
$372 in 2000........................................... 25,773 29,602
Inventories:
Raw materials and work-in-process...................... 19,360 20,140
Finished products...................................... 9,792 11,724
-------- --------
29,152 31,864
Deferred income taxes..................................... 1,200 1,113
Other current assets...................................... 4,638 2,976
-------- --------
Total current assets........................................ 63,847 69,565
Property, plant and equipment:
Land and improvements..................................... 1,608 1,603
Buildings and improvements................................ 18,657 18,240
Machinery and equipment................................... 96,688 89,330
Furniture and fixtures.................................... 7,168 5,584
Construction in progress.................................. 1,450 3,316
-------- --------
125,571 118,073
Less accumulated depreciation and amortization............ 58,208 47,672
-------- --------
Total property, plant and equipment......................... 67,363 70,401
Other assets:
Intangible assets......................................... 66,705 70,713
Shareholder notes......................................... 1,010 1,010
Other..................................................... 5,180 3,696
-------- --------
Total other assets.......................................... 72,895 75,419
-------- --------
Total assets................................................ $204,105 $215,385
======== ========
</Table>
See notes to consolidated financial statements.
23
<PAGE>
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31
--------------------
2001 2000
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,432 $ 11,579
Accrued compensation...................................... 5,233 7,791
Other accrued expenses.................................... 6,832 6,446
Current portion of long-term debt......................... 6,862 7,273
-------- --------
Total current liabilities................................... 32,359 33,089
Long-term liabilities:
Long-term debt............................................ 90,957 96,661
Deferred income taxes..................................... 10,978 11,554
Other..................................................... 3,374 2,392
-------- --------
Total long-term liabilities................................. 105,309 110,607
Shareholders' equity:
Series D preferred stock, $.01 par value; an aggregate
liquidation value of $1,530, plus any unpaid dividends
with 9.8% cumulative dividend (1,530 shares authorized,
issued and outstanding)................................ 1 1
Class E preferred stock, $.01 par value; 100,000 shares
authorized; none issued or outstanding................. -- --
Class A common stock, $.01 par value; 75,000,000 shares
authorized; 9,187,750 issued; and 8,552,920 and
8,548,520 outstanding in 2001 and 2000, respectively... 92 92
Class B common stock, $.01 par value; 10,000,000 shares
authorized; none issued or outstanding................. -- --
Additional paid-in capital................................ 54,626 54,631
Retained earnings......................................... 19,623 24,109
Accumulated other comprehensive loss...................... (3,201) (2,409)
Treasury stock, at cost, 634,830 and 639,230 shares in
2001 and 2000, respectively............................ (4,704) (4,735)
-------- --------
Total shareholders' equity.................................. 66,437 71,689
-------- --------
Total liabilities and shareholders' equity.................. $204,105 $215,385
======== ========
</Table>
See notes to consolidated financial statements.
24
<PAGE>
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $184,388 $202,329 $187,638
Cost of sales............................................... 144,409 147,387 138,879
-------- -------- --------
Gross profit................................................ 39,979 54,942 48,759
Operating Expenses:
Selling, technical and administrative expenses............ 30,804 31,318 26,366
Restructuring costs....................................... 1,055 -- --
Amortization of intangibles............................... 4,548 4,161 3,829
-------- -------- --------
Total operating expenses.................................... 36,407 35,479 30,195
-------- -------- --------
Income from operations...................................... 3,572 19,463 18,564
Interest expense............................................ (9,469) (9,016) (9,409)
Interest income............................................. 233 218 431
Other (expense) income, net................................. (530) (535) 405
-------- -------- --------
(Loss) income before income taxes........................... (6,194) 10,130 9,991
Income tax (benefit) provision.............................. (1,858) 4,360 3,662
-------- -------- --------
Net (loss) income........................................... $ (4,336) $ 5,770 $ 6,329
======== ======== ========
Earnings per share:
Basic (loss) earnings per share........................... $ (.52) $ .66 $ .71
======== ======== ========
Diluted (loss) earnings per share......................... $ (.52) $ .66 $ .71
======== ======== ========
</Table>
See notes to consolidated financial statements.
25
<PAGE>
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE LOSS
-----------------------
ADDITIONAL FOREIGN MINIMUM
PREFERRED COMMON PAID-IN RETAINED CURRENCY PENSION TREASURY
STOCK STOCK CAPITAL EARNINGS TRANSLATION LIABILITY STOCK TOTAL
--------- ------ ---------- -------- ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999....... $1 $92 $54,645 $12,310 $ (640) $ -- $(1,993) $64,415
Net income..................... 6,329 6,329
Other comprehensive income:
Foreign currency
translation................ (1,309) (1,309)
-------
Total comprehensive income..... 5,020
Preferred stock dividend....... (148) (148)
Repurchase of common stock..... (2,798) (2,798)
-- --- ------- ------- ------- ----- ------- -------
Balance at December 31, 1999..... 1 92 54,645 18,491 (1,949) -- (4,791) 66,489
Net income..................... 5,770 5,770
Other comprehensive income:
Minimum pension liability
(net of tax)............... (83) (83)
Foreign currency
translation................ (377) (377)
-------
Total comprehensive income..... 5,310
Preferred stock dividend....... (152) (152)
Issuance of common stock from
treasury as compensation..... (14) 56 42
-- --- ------- ------- ------- ----- ------- -------
Balance at December 31, 2000..... 1 92 54,631 24,109 (2,326) (83) (4,735) 71,689
Net loss....................... (4,336) (4,336)
Other comprehensive loss:
Minimum pension liability
(net of tax)............... (495) (495)
Foreign currency
translation................ (297) (297)
-------
Total comprehensive loss....... (5,128)
Preferred stock dividend....... (150) (150)
Issuance of common stock from
treasury as compensation..... (5) 31 26
-- --- ------- ------- ------- ----- ------- -------
Balance at December 31, 2001..... $1 $92 $54,626 $19,623 $(2,623) $(578) $(4,704) $66,437
== === ======= ======= ======= ===== ======= =======
</Table>
See notes to consolidated financial statements.
26
<PAGE>
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................... $ (4,336) $ 5,770 $ 6,329
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................. 15,929 14,976 13,673
Deferred income taxes..................................... (637) 1,650 1,440
Loss on fixed assets...................................... 399 216 518
Changes in operating assets and liabilities, net of
acquired assets:
Accounts receivable.................................... 3,495 590 (2,690)
Inventories............................................ 2,453 (3,622) 121
Other assets........................................... (3,156) 57 581
Accounts payable....................................... 2,006 (205) (67)
Other liabilities...................................... (1,683) 2,132 (159)
-------- -------- --------
Net cash provided by operating activities................... 14,470 21,564 19,746
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisitions....................................... - (6,510) (19,350)
Purchases of property, plant and equipment.................. (9,096) (10,489) (10,134)
Proceeds from sale of assets................................ - 69 3,682
-------- -------- --------
Net cash used in investing activities....................... (9,096) (16,930) (25,802)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term debt................................. -- (808) --
Proceeds from long-term debt................................ 40,457 30,217 38,022
Payments on long-term debt.................................. (46,520) (33,886) (39,701)
Payments of preferred stock dividends....................... (150) (152) (148)
Repurchase of common stock.................................. - - (2,798)
-------- -------- --------
Net cash used in financing activities....................... (6,213) (4,629) (4,625)
Effect of exchange rate changes on cash..................... (87) 12 357
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (926) 17 (10,324)
Cash and cash equivalents at beginning of year.............. 4,010 3,993 14,317
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,084 $ 4,010 $ 3,993
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest.................................. $ 8,940 $ 9,045 $ 9,403
======== ======== ========
Cash payments for income taxes.............................. $ 871 $ 3,685 $ 2,596
======== ======== ========
Noncash investing and financing activities:
Equipment purchased with capital leases and notes
payable................................................ $ 422 $ 24 $ 85
======== ======== ========
Issuance of common stock from treasury.................... $ 26 $ 42 $ --
======== ======== ========
</Table>
See notes to consolidated financial statements.
27
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A. BASIS OF PRESENTATION
Hawk Corporation (the Company) designs, engineers, manufactures and markets
specialized components used in a wide variety of aerospace, industrial and
commercial applications.
The consolidated financial statements of the Company include its wholly
owned subsidiaries. Beginning in December 2000, the financial statements also
include the Company's majority ownership interest in Net Shape Technologies, LLC
(NetShape). All significant intercompany accounts and transactions have been
eliminated in the accompanying financial statements. Certain amounts have been
reclassified in 2000 and 1999 to conform with the 2001 presentation.
In the fourth quarter of 2000, the Company adopted Emerging Issues Task
Force Issue 00-10 "Accounting for Shipping and Handling Fees and Costs," and
changed its accounting policy to reflect in its consolidated statement of
operations all shipping and handling costs as cost of sales and related shipping
revenue in net sales. All prior periods have been changed to conform to current
year presentation.
B. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with 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 uses the straight-line method
of depreciation for financial reporting purposes. Buildings and improvements are
depreciated over periods ranging from 15 to 33 years. Machinery and equipment is
depreciated over periods ranging from 4 to 12 years. Furniture and fixtures are
depreciated over periods ranging from 3 to 10 years. Accelerated methods of
depreciation are used for federal income tax purposes. The Company's
depreciation expense was $11,381 in 2001, $10,815 in 2000 and $9,844 in 1999.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over periods
ranging from 5 to 40 years (See Note D). The Company evaluates the
recoverability of long-lived assets (under 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") and the related estimated remaining
lives at each balance sheet date. The Company would record an impairment charge
or change in the useful life whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, determined using
undiscounted cash flows and measured using discounted cash flows (generally, at
the subsidiary level), or the useful life has changed.
28
<PAGE>
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 from transactions are included in results of operations.
Gains and losses resulting from translation are included in accumulated
other comprehensive loss, a component of shareholders' equity.
REVENUE RECOGNITION
In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," which became effective in 2000, revenue
from the sale of the Company's products is recognized upon shipment to the
customer and when title has transferred. Substantially all of the Company's
revenues are derived from fixed price purchase orders. Costs and related
expenses to manufacture the products are recorded as costs of sales when the
related revenue is recognized. The Company establishes bad debt reserves based
on historical experience and believes that collections of revenues, net of the
bad debt reserves, is reasonably assured.
SIGNIFICANT CONCENTRATIONS
The Company provides credit, in the normal course of its business, to
original equipment and aftermarket 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.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development costs are expensed as incurred. The
Company's expenditures for product research and development and engineering were
approximately $3,893 in 2001, $3,533 in 2000 and $3,229 in 1999.
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
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents -- The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximate fair
value.
Long-Term Debt (including Current Portion) -- The fair values of the
Company's publicly traded debentures, shown in the following table, are based on
quoted market prices. The fair values of the Company's non-traded debt, also
shown in the following table, are estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
29
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31
------------------------------------------
2001 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Publicly traded debt................................ $65,000 $62,156 $65,000 $61,100
Non-traded debts (including capital leases)......... $32,819 $32,819 $38,934 $38,934
</Table>
Interest Rate Swap -- The Company enters into interest rate swaps primarily
to hedge against interest rate risks. These agreements generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. Counterparties to this agreement
are major financial institutions. During the first quarter of 2001, the Company
entered into an interest rate swap agreement to moderate exposure to interest
rate changes. Under this agreement, the Company effectively converted a portion
of its floating rate debt to a fixed rate of 5.34% on $10,000 notional amount.
Although this financial instrument did not meet the hedge accounting criteria of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," it
continues to be effective in achieving the risk management objectives for which
it was intended. The carrying value and the fair value of the interest rate swap
at December 31, 2001 is $400 (liability). The change in the fair value is
reflected in the Consolidated Statement of Operations in other (expense) income,
net.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, as amended by
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133, as amended, requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value and recognize changes in the fair value of
derivatives in earnings in the period of change unless the derivative qualifies
as an effective hedge that offsets certain exposures. The adoption of SFAS No.
133 Statement did not have a material effect in 2001.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives. SFAS No. 142 requires that these assets be
reviewed for impairment at least annually. Intangible assets with finite lives
will continue to be amortized over their useful lives. Additionally, SFAS No.
142 requires that goodwill included in the carrying value of equity method
investments no longer be amortized.
The Company will test goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of impairment, if any. The Company
expects to perform the first of the required impairment test of goodwill and
indefinite lived intangible assets as of January 1, 2002 in the first or second
quarter of 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in 2002. The Company has not yet determined what the effect
of these tests will be on the earnings and financial position of the Company.
30
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. BUSINESS ACQUISITIONS
In March 1999, the Company acquired all of the outstanding stock of
Allegheny Powder Metallurgy, Inc. (Allegheny) for $14,500 in cash and $2,000 in
notes payable to the selling shareholders. The acquisition was accounted for as
a purchase. The excess of the purchase price over the estimated fair value of
the net assets acquired of $8,110 is currently being amortized over 30 years and
is included in intangible assets. The results of operations of Allegheny are
included in the Company's consolidated statements of operations since the date
of acquisition.
In November 1999, the Company acquired substantially all of the assets
(except cash) and assumed certain liabilities of Quarter Master Industries, Inc.
(Quarter Master) for $4,850 in cash and a $1,000 note payable to the selling
shareholder. The purchase price also includes future contingent payments based
on earnings. The Company does not anticipate these contingent payments to be
material. The acquisition was accounted for as a purchase. The excess of the
purchase price over the estimated fair value of the net assets acquired of
$4,240 is currently being amortized over 15 years and is included in intangible
assets. The results of operations of Quarter Master are included in the
Company's consolidated statements of operations since the date of acquisition.
In November 2000, the Company acquired all of the outstanding stock of Tex
Racing Enterprises, Inc. (Tex Racing) for $6,030 in cash and a $1,500 note
payable to the selling shareholder. The purchase price also includes future
contingent payments based on earnings. The Company does not anticipate these
contingent payments to be material. The acquisition was accounted for as a
purchase. The excess of the purchase price over the estimated fair value of the
net assets acquired of $4,700 is currently being amortized over 15 years and is
included in intangible assets. The results of operations of Tex Racing are
included in the Company's consolidated statements of operations since the date
of acquisition.
In December 2000, the Company acquired a majority of Net Shape membership
interests for $480 in cash. The acquisition was accounted for as a purchase. The
excess of the purchase price over the estimated fair value of net assets
acquired in the amount of $742 is currently being amortized over 10 years and is
included in intangible assets. The results of operations of Net Shape are
included in the Company's consolidated statements of operations since the date
of acquisition.
The following unaudited pro forma consolidated results of operations for
2000 give effect to the Allegheny, Quarter Master, Tex Racing and Net Shape
acquisitions as though they had occurred on January 1, 2000 and include certain
adjustments, such as additional goodwill amortization expense.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31
2000
-----------
<S> <C>
Net sales................................................... $209,435
========
Net income.................................................. $ 5,658
========
Income per share -- basic................................... $ .64
========
Income per share -- diluted................................. $ .64
========
</Table>
Pro forma net sales and net income are not necessarily indicative of the
net sales and net income that would have occurred had the acquisitions been made
at the beginning of 2000 or the results that may occur in the future.
31
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. INTANGIBLE ASSETS
The components of intangible assets and related amortization periods are as
follows:
<Table>
<Caption>
DECEMBER 31
------------------
2001 2000
------- -------
<S> <C> <C>
Product certifications (19 to 40 years)..................... $20,820 $20,820
Goodwill (10 to 40 years)................................... 67,808 67,380
Deferred financing costs (5 to 7 years)..................... 4,693 4,693
Proprietary formulations and patents (10 to 15 years)....... 1,858 1,858
Other....................................................... 1,155 1,043
------- -------
96,334 95,794
Accumulated amortization.................................... (29,629) (25,081)
------- -------
$66,705 $70,713
======= =======
</Table>
Product certifications were acquired and valued based on the acquired
company's position as a certified supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
E. FINANCING ARRANGEMENTS
<Table>
<Caption>
DECEMBER 31
-----------------
2001 2000
------- -------
<S> <C> <C>
Senior Notes................................................ $65,000 $65,000
Term Loan................................................... 17,500 22,500
Revolver.................................................... 8,337 8,145
Other....................................................... 6,982 8,289
------- -------
97,819 103,934
Less current portion........................................ 6,862 7,273
------- -------
$90,957 $96,661
======= =======
</Table>
In November 1996, the Company issued $100,000 in Senior Notes (Senior
Notes) due on December 1, 2003, of which $65,000 is outstanding at December 31,
2001. In accordance with the terms of the Senior Notes agreement, the Company
has the option to redeem the Senior Notes prior to the due date. 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%. In March 1997, the Senior Notes were exchanged
for notes registered with the Securities and Exchange Commission. The Senior
Notes are fully and unconditionally guaranteed on a joint and several basis by
each of the direct and indirect wholly owned domestic subsidiaries of the
Company (Guarantor Subsidiaries) (See Note N).
In May 1998, the Company entered into a $35,000 term loan facility and a
$50,000 revolving credit facility (the Credit Facility). The term loan has
quarterly maturities of $1,250 beginning September 30, 1998 with the remaining
principal of $12,500 due on March 31, 2003. The revolving credit facility
matures March 31, 2003. As of December 31, 2001, the Company was paying an
average rate of 6.4% on its Credit Facility outstanding compared to an average
rate of 8.7% at December 31, 2000.
On March 25, 2002, the Company amended the Credit Facility reducing the
revolving credit component of the facility to $25,000, modifying the terms of
financial covenants as of December 31, 2001 and future reporting periods and
increasing the margin over the base interest rates. The interest rates on the
credit facility range from 250 to 450 basis points over the Eurodollar rate, or
alternatively, 125 to 325 basis points over the prime rate based
32
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on certain quarterly performance criteria. The Company is required to pay a
facility fee of 0.50% on the commitment amount of the Credit Facility. The
Credit Facility is collateralized by a security interest in the accounts
receivable, inventory, equipment and real estate and other assets of the Company
and its domestic subsidiaries, and the Company has pledged the stock of all of
its U.S. subsidiaries and certain stock of its foreign subsidiaries as
collateral. Restrictive terms of the credit facility require that the Company
maintain specified financial ratios and comply with the loan covenants. Based on
the amended Credit Facility, the Company was in compliance with the financial
covenants as of December 31, 2001.
As of December 31, 2001, the Company has approximately $6,200 available for
future borrowings under its Credit Facility, as amended.
The Company has stand-by Letters of Credit totaling $1,262. There are no
outstanding balances at December 31, 2001.
Aggregate principal payments due on long-term debt as of December 31, 2001
are as follows: 2002 -- $6,862; 2003 -- $88,215; 2004 -- $1,325; 2005 -- $826;
2006 -- $118; and thereafter -- $473.
F. SHAREHOLDERS' EQUITY
Dividends on the Series D preferred stock are cumulative at a rate of 9.8%.
Each share of Series D preferred stock is (1) entitled to a liquidation
preference equal to $1,000 per share plus any accrued or unpaid dividends, (2)
not entitled to vote, except in certain circumstances, and (3) redeemable in
whole, at the option of the Company, for $1 per share plus all accrued dividends
to the date of redemption. The Company also has 100,000 authorized shares of
$.01 par value, Series E preferred stock, of which no shares are issued or
outstanding. Each share of Series E preferred stock is (1) not redeemable and is
entitled to dividends in the amount of 1,000 times the per share dividend
received by the holders of common stock, (2) entitled to 1,000 votes per share,
and (3) entitled to a liquidation right of 1,000 times the aggregate amount
distributed per share to the holder of common stock.
On November 13, 1997, the Board of Directors declared a dividend of one
Series E preferred share purchase right (a Right) for each outstanding share of
common stock. The dividend was payable to the shareholders 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 at a price of $70 per one
one-thousandth share of a Series E preferred stock, subject to adjustment.
G. EMPLOYEE STOCK OPTION PLAN
The Company grants stock options to certain employees under various plans,
to purchase shares of Class A common stock. During 2001, 2000 and 1999, the
Company granted stock options to purchase an aggregate of 701,594, 328,878 and
147,400 shares, respectively, at exercise prices representing the closing market
price of the Company's stock at the date of grant. The options vest ratably over
specific defined periods. Canceled options are available for future issuance
under the provisions of the stock option plans.
33
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the stock option activity for the years
ended December 31, 2001, 2000 and 1999:
<Table>
<Caption>
2001 2000 1999
-------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year......................... 766,267 $10.51 472,600 $13.78 340,200 $16.50
Granted........................... 701,594 3.64 328,878 6.11 147,400 7.47
Exercised......................... - - - - - -
Canceled.......................... (143,215) 10.45 (35,211) 13.16 (15,000) 13.83
--------- ------ ------- ------ ------- ------
Options outstanding at end of
year............................ 1,324,646 $ 6.73 766,267 $10.51 472,600 $13.78
Exercisable at the end of the
year............................ 242,169 $12.36 159,300 $14.91 65,340 $16.62
Weighted average fair value of
options granted during the
year............................ $ 2.56 $ 4.00 $ 4.13
Shares available for future
grant........................... 75,354 633,733 227,400
</Table>
Exercise prices for options outstanding as of December 31, 2001 ranged from
$3.00 to $18.70. A summary of the options by range of exercise prices is as
follows:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
----------------------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
- -------------------------------- ------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$3.00 to $6.00.................. 850,246 $ 3.96 9.5 30,709 $ 5.49
$6.01 to $12.00................. 263,700 $ 7.30 8.0 82,640 $ 7.42
$12.01 to $18.70................ 210,700 $17.17 5.7 128,820 $17.17
</Table>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. Accordingly, no compensation expense has been reflected in the
accompanying consolidated financial statements related to the stock options
issued pursuant to these plans. If the Company had elected to recognize
compensation expense based on the fair value at the grant dates for awards
consistent with the method prescribed by SFAS No. 123, net income and net income
per share would have been changed to the pro forma amounts indicated below:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-------------------------
2001 2000 1999
------- ------ ------
<S> <C> <C> <C>
Net (loss) income:
As reported.............................................. $(4,336) $5,770 $6,329
Pro forma................................................ (5,158) 4,975 5,469
(Loss) earnings per share (basic and diluted):
As reported.............................................. (.52) .66 .71
Pro forma................................................ (.62) .58 .63
</Table>
34
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the options granted used to compute pro forma net (loss)
income and (loss) earnings per share disclosures is the estimated present value
at the grant date using the Black-Scholes option-pricing model with the
following assumptions:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield........................................... 0% 0% 0%
Expected volatility...................................... 58.4% 57.8% 48.8%
Risk free interest rate.................................. 5.00% 5.25% 6.5%
Expected average holding period.......................... 7 YEARS 7 years 7 years
</Table>
H. EMPLOYEE BENEFITS
The Company has several defined benefit pension plans that 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 the Employee Retirement Income Security Act of 1974.
35
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the defined benefit pension plans are as follows:
<Table>
<Caption>
DECEMBER 31
-----------------
2001 2000
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.............. $15,003 $12,530
Service cost......................................... 550 508
Interest cost........................................ 1,148 1,019
Actuarial losses..................................... 1,609 1,601
Plan amendments...................................... -- 220
Foreign currency exchange rate charges............... (41) (25)
Benefits paid.......................................... (741) (850)
------- -------
Benefit obligation at end of year...................... $17,528 $15,003
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year......... $19,449 $20,270
Actual return on plan assets........................... (190) (398)
Foreign currency exchange rate charges................. (67) (45)
Company contributions.................................. 948 472
Benefits paid.......................................... (741) (850)
------- -------
Fair value of plan assets at end of year.................... $19,399 $19,449
======= =======
Funded status of the plans.................................. $ 1,871 $ 4,446
Unrecognized net actuarial losses (gains)................... 1,484 (1,882)
Unrecognized prior service cost............................. 500 576
------- -------
Net prepaid benefit cost.................................... $ 3,855 $ 3,140
======= =======
Amounts recognized in the balance sheet consist of the
following:
Prepaid benefit cost................................. $ 3,855 $ 3,140
Accrued benefit liability............................ (1,400) (393)
Intangible asset..................................... 454 253
Cumulative other comprehensive loss.................. 946 140
------- -------
Net amount recognized....................................... $ 3,855 $ 3,140
======= =======
</Table>
Amounts applicable to the Company's underfunded pension plans at December
31, 2001 and 2000 are as follows:
<Table>
<Caption>
DECEMBER 31
---------------
2001 2000
------ ------
<S> <C> <C>
Projected benefit obligation................................ $4,877 $4,303
Accumulated benefit obligation.............................. 4,877 4,269
Fair value of plan assets................................... 4,120 4,139
Amounts recognized as accrued benefit liabilities........... 1,400 393
Amounts recognized as intangible asset...................... 454 253
</Table>
36
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Components of net periodic pension cost:
Service cost........................................... $ 550 $ 508 $ 613
Interest cost.......................................... 1,148 1,019 920
Expected return on plan assets......................... (1,585) (1,455) (1,498)
Amortization of prior service cost..................... 76 67 60
Recognized net actuarial loss (gain)................... 10 (26) 58
------- ------- -------
$ 199 $ 113 $ 153
======= ======= =======
</Table>
The plans' assets are primarily invested in fixed income and equity
securities. In addition, one of the Company's defined benefit plans also
contains investments in the Company's stock. As of December 31, 2001 60,000
shares of the Company's stock were held by the defined benefit plan at a cost of
$717. The market value of such investment as of December 31, 2001 was $216.
The following assumptions were used in accounting for the defined benefit
plans:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Used to compute the projected benefit obligation as of
December 31:
Weighted average discount rate......................... 7.25% 7.5% 8.0%
Annual salary increase................................. 3.0% 3.0% 3.0%
Weighted average expected long-term rate of return on
plan assets for the year ended December 31............ 9.0% 9.5% 9.5%
</Table>
The Company also sponsors several defined contribution plans which provide
voluntary employee contributions and, in certain plans, matching and
discretionary employer contributions. Expenses associated with these plans were
approximately $581 in 2001, $1,444 in 2000 and $1,263 in 1999. In 2001, the
Company made no discretionary employer contributions.
I. LEASE OBLIGATIONS
The Company has capital lease commitments for buildings and equipment.
Future minimum annual rentals are: 2002 -- $300; 2003 -- $218; 2004 -- $206;
2005 -- $151; 2006 -- $35; and thereafter -- $0. Amount representing interest is
$130. Total capital lease obligations are included in other long-term debt.
Amortization of assets recorded under capital leases is included with
depreciation expense.
The Company leases certain office and warehouse facilities and equipment
under operating leases. Rental expense was approximately $2,131 in 2001, $1,828
in 2000 and $1,127 in 1999. Future noncancelable minimum lease commitments under
these agreements that have an original or existing term in excess of one year as
of December 31, 2001 are as follows: 2002 -- $1,864; 2003 -- $1,550;
2004 -- $1,437; 2005 -- $1,054; 2006 -- $502; and thereafter -- $474.
37
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. INCOME TAXES
The (benefit) provision for income taxes consists of the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-------------------------
2001 2000 1999
------- ------ ------
<S> <C> <C> <C>
Current:
Federal.................................................. $(2,792) $2,020 $1,771
State and local.......................................... (26) 171 113
Foreign.................................................. 297 527 251
------- ------ ------
(2,521) 2,718 2,135
Deferred:
Federal.................................................. 1,118 1,468 1,259
State and local.......................................... 62 119 138
Foreign.................................................. (517) 55 130
------- ------ ------
663 1,642 1,527
------- ------ ------
Total income tax (benefit) provision....................... $(1,858) $4,360 $3,662
======= ====== ======
</Table>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31 are as follows:
<Table>
<Caption>
2001 2000
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued vacation.......................................... $ 529 $ 530
Other accruals............................................ 836 639
Foreign capital leases.................................... 1,278 1,304
Foreign net operating loss carryforwards.................. 496 --
Inventory................................................. 472 871
------- -------
Total deferred tax assets................................... 3,611 3,344
Deferred tax liabilities:
Tax over book depreciation and amortization............... 11,381 11,384
Employee benefits......................................... 373 687
Foreign leased property................................... 1,627 1,666
Other..................................................... 8 48
------- -------
Total deferred tax liabilities.............................. 13,389 13,785
------- -------
Net deferred tax liabilities................................ $ 9,778 $10,441
======= =======
</Table>
38
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The (benefit) provision for income taxes differs from the amounts computed
by applying the federal statutory rate as follows:
<Table>
<Caption>
DECEMBER 31
---------------------
2001 2000 1999
----- ---- ----
<S> <C> <C> <C>
Income tax (benefit) expense at federal statutory rate...... (35.0)% 35.0% 35.0%
State and local tax, net of federal tax benefit............. 0.4 1.8 1.6
Nondeductible goodwill amortization......................... 6.2 3.9 4.0
Adjustment to worldwide tax accrual and other, net.......... (1.6) 2.3 (3.9)
----- ---- ----
Provision for income taxes.................................. (30.0)% 43.0% 36.7%
===== ==== ====
</Table>
The increase in the Company's effective tax rate from 1999 to 2000 was
primarily attributable to the increase in higher tax rate foreign earnings
relative to the domestic earnings taxed at the federal statutory rate. The
adjustment to worldwide tax accrual and other, net component of the income tax
rate reconciliation includes adjustments to tax accruals as a result of the
resolution of certain tax contingencies during the periods presented.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $6,500 at December 31, 2001. These earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided. The Company cannot determine in any
practical manner the amount of income tax liability that would result had such
earnings actually been repatriated. 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.
K. (LOSS) EARNINGS PER SHARE
Basic and diluted (loss) earnings per share are computed as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-------------------------
2001 2000 1999
------- ------ ------
<S> <C> <C> <C>
(Loss) income available to common shareholders:
Net (loss) income........................................ $(4,336) $5,770 $6,329
Less: Preferred stock dividends.......................... 150 152 148
------- ------ ------
Net (loss) income attributable to common shareholders...... $(4,486) $5,618 $6,181
======= ====== ======
Weighted average shares (in thousands):
Basic weighted average shares......................... 8,552 8,548 8,657
======= ====== ======
Diluted:
Basic from above...................................... 8,552 8,548 8,657
Effect of stock options............................... -- 21 --
------- ------ ------
Diluted weighted average shares............................ 8,552 8,569 8,657
======= ====== ======
(Loss) earnings per share:
Basic (loss) earnings per share.......................... $ (.52) $ .66 $ .71
======= ====== ======
Diluted (loss) earnings per share........................ $ (.52) $ .66 $ .71
======= ====== ======
</Table>
Stock options outstanding were not included in the computation of diluted
earnings per share for 2001 and 1999, since it would have resulted in an
anti-dilutive effect.
39
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. RELATED PARTIES
In July 1995, certain shareholders of the Company issued interest-bearing
notes to the Company in the amount of $2,000, enabling them to repay certain
indebtedness incurred by them with respect to an acquisition. The notes are due
and payable on December 31, 2005 and bear interest at the prime rate. The
balance outstanding at December 31, 2001 and 2000 is $1,010.
M. BUSINESS SEGMENTS
During 2000, as a result of recent acquisitions, the Company changed its
segment reporting structure to match management's internal reporting of
businesses operations. Significant changes include the segregation of the
performance automotive and motor businesses.
The Company now operates in four primary business segments: friction
products, precision components (formerly powder metal), performance automotive
and motors. The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately based on
fundamental differences in their operations.
The friction products segment engineers, manufactures and markets
specialized components, used in a variety of aerospace, industrial and
commercial applications. The Company, through this segment, is a worldwide
supplier of friction components for brakes, clutches and transmissions.
The precision components segment engineers, manufactures and markets
specialized powder metal components, used primarily in industrial applications.
The Company, through this segment, targets three areas of the powder metal
component marketplace: high precision components that are used in fluid power
applications, large structural powder metal parts used in construction,
agricultural and truck applications, and smaller high-volume parts.
The performance automotive segment engineers, manufactures and markets high
performance friction material for use in racing car brakes in addition to
premium branded clutch and drive train components. The Company, through this
segment, targets leading teams in the NASCAR racing series, as well as
high-performance street vehicles and other road race and oval track competition
cars.
The motor segment engineers, manufactures and markets die-cast aluminum
rotors for use in subfractional electric motors. The Company, through this
segment, targets a wide variety of application such as business equipment, small
household appliances and HVAC systems.
The information by segment is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Net Sales to external customers:
Friction products.................................. $100,407 $112,521 $114,620
Precision components............................... 58,272 72,019 61,063
Performance automotive............................. 16,687 9,358 3,324
Motor.............................................. 9,022 8,431 8,631
-------- -------- --------
Consolidated......................................... $184,388 $202,329 $187,638
======== ======== ========
Depreciation and amortization:
Friction products.................................. $ 8,928 $ 8,975 $ 8,661
Precision components............................... 4,886 4,525 4,080
Performance automotive............................. 1,090 708 281
Motor.............................................. 1,025 768 651
-------- -------- --------
Consolidated......................................... $ 15,929 $ 14,976 $ 13,673
======== ======== ========
</Table>
40
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Gross profit (loss):
Friction products.................................. $ 24,431 $ 29,705 $ 27,213
Precision components............................... 11,495 19,360 17,806
Performance automotive............................. 4,322 4,052 1,442
Motor.............................................. (269) 1,825 2,298
-------- -------- --------
Consolidated......................................... $ 39,979 $ 54,942 $ 48,759
======== ======== ========
Operating income (loss):
Friction products.................................. $ 8,612 $ 11,954 $ 10,022
Precision components............................... 312 8,419 8,737
Performance automotive............................. (1,941) 356 155
Motor.............................................. (3,411) (1,266) (350)
-------- -------- --------
Consolidated......................................... $ 3,572 $ 19,463 $ 18,564
======== ======== ========
Capital expenditures: (including capital leases):
Friction products.................................. $ 3,734 $ 3,731 $ 5,205
Precision components............................... 2,882 4,416 3,015
Performance automotive............................. 1,437 411 423
Motor.............................................. 1,043 1,955 1,576
-------- -------- --------
Consolidated......................................... $ 9,096 $ 10,513 $ 10,219
======== ======== ========
</Table>
<Table>
<Caption>
DECEMBER 31
--------------------
2001 2000
-------- --------
<S> <C> <C>
Total assets:
Friction products......................................... $ 99,163 $110,242
Precision components...................................... 69,002 72,603
Performance automotive.................................... 19,565 17,226
Motor..................................................... 16,375 15,314
-------- --------
Consolidated................................................ $204,105 $215,385
======== ========
</Table>
Geographic information for the years ended December 31, 2001, 2000 and 1999
is as follows:
<Table>
<Caption>
2001 2000 1999
---------------------------------- ---------------------------------- ----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......... $160,810 $23,578 $184,388 $180,632 $21,697 $202,329 $166,429 $21,209 $187,638
Income (loss) from
operations...... 6,980 (3,408) 3,572 19,499 (36) 19,463 18,131 433 18,564
Net (loss)
income.......... (211) (4,125) (4,336) 7,274 (1,504) 5,770 6,916 (587) 6,329
Total assets...... 186,532 17,573 204,105 194,659 20,726 215,385 187,363 22,257 209,620
</Table>
The Company has foreign operations in Canada, Italy, Mexico and China.
N. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note E, each of the Guarantor Subsidiaries 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.
41
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following supplemental consolidating condensed financial statements
present:
Consolidating condensed balance sheets as of December 31, 2001 and
December 31, 2000, consolidating condensed statements of operations for
the years ended December 31, 2001, 2000 and 1999 and consolidating
condensed statements of cash flows for the years ended December 31,
2001, 2000 and 1999.
Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries consisting of the Company's subsidiaries in
Canada, Italy, Mexico and China with their investments in subsidiaries
accounted for using the equity method.
Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors. Therefore, separate financial
statements and other disclosures concerning the Guarantor Subsidiaries are not
presented.
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,073 $ 247 $ 1,764 $ 3,084
Accounts receivable, net....... 160 18,828 6,785 25,773
Inventories.................... 42 22,566 6,544 29,152
Deferred income taxes.......... 1,111 89 1,200
Other current assets........... 2,976 1,143 519 4,638
-------- -------- ------- --------- --------
Total current assets............. 5,362 42,784 15,701 63,847
Investment in subsidiaries....... 794 (1,080) 286
Inter-company advances, net...... 153,455 9,447 (8,555) (154,347)
Property, plant and equipment.... 18 58,026 9,319 67,363
Intangible assets................ 199 66,506 66,705
Other............................ 1,010 5,082 1,108 (1,010) 6,190
-------- -------- ------- --------- --------
Total assets..................... $160,838 $180,765 $17,573 $(155,071) $204,105
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable............... $ 10,292 $ 3,140 $ 13,432
Accrued compensation........... $ (18) 4,440 811 5,233
Other accrued expenses......... 1,449 4,345 1,038 6,832
Current portion of long-term
debt........................ 5,000 1,669 193 6,862
-------- -------- ------- --------- --------
Total current liabilities........ 6,431 20,746 5,182 32,359
Long-term liabilities:
Long-term debt................. 82,450 4,765 3,742 90,957
Deferred income taxes.......... 10,894 84 10,978
Other.......................... 2,154 1,220 3,374
Inter-company advances, net.... 1,350 144,786 8,425 (154,561)
-------- -------- ------- --------- --------
Total long-term liabilities...... 94,694 151,705 13,471 (154,561) 105,309
-------- -------- ------- --------- --------
Total liabilities................ 101,125 172,451 18,653 (154,561) 137,668
Shareholders' equity............. 59,713 8,314 (1,080) (510) 66,437
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity........... $160,838 $180,765 $17,573 $(155,071) $204,105
======== ======== ======= ========= ========
</Table>
42
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2000
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 553 $ 1,027 $ 2,430 $ 4,010
Accounts receivable, net....... 22,785 6,817 29,602
Inventories.................... 25,792 6,072 31,864
Deferred income taxes.......... 1,199 (86) 1,113
Other current assets........... 967 1,363 646 2,976
-------- -------- ------- --------- --------
Total current assets............. 2,719 50,967 15,879 69,565
Investment in subsidiaries....... 794 3,168 $ (3,962)
Inter-company advances, net...... 160,192 5,784 (5,084) (160,892)
Property, plant and equipment.... 26 61,219 9,156 70,401
Intangible assets................ 207 70,506 70,713
Other............................ 1,010 3,931 775 (1,010) 4,706
-------- -------- ------- --------- --------
Total assets..................... $164,948 $195,575 $20,726 $(165,864) $215,385
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable............... $ 8,313 $ 3,266 $ 11,579
Accrued compensation........... $ 5 6,854 932 7,791
Other accrued expenses......... 633 5,047 766 6,446
Current portion of long-term
debt........................ 5,000 1,901 372 7,273
-------- -------- ------- --------- --------
Total current liabilities........ 5,638 22,115 5,336 33,089
Long-term liabilities:
Long-term debt................. 90,645 5,574 442 96,661
Deferred income taxes.......... 11,128 426 11,554
Other.......................... 1,237 1,155 2,392
Inter-company advances, net.... 1,197 149,909 10,199 $(161,305)
-------- -------- ------- --------- --------
Total long-term liabilities...... 102,970 156,720 12,222 (161,305) 110,607
-------- -------- ------- --------- --------
Total liabilities................ 108,608 178,835 17,558 (161,305) 143,696
Minority interest Shareholders'
equity......................... 56,340 16,740 3,168 (4,559) 71,689
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity........... $164,948 $195,575 $20,726 $(165,864) $215,385
======== ======== ======= ========= ========
</Table>
43
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $160,810 $23,578 $184,388
Cost of sales...................... 122,070 22,339 144,409
------- -------- ------- ------- --------
Gross profit....................... 38,740 1,239 39,979
Expenses:
Selling, technical and
administrative expenses....... $ (545) 27,757 4,647 31,859
Amortization of intangible
assets........................ 9 4,539 4,548
------- -------- ------- ------- --------
Total expenses..................... (536) 32,296 4,647 36,407
------- -------- ------- ------- --------
Income (loss) from operations...... 536 6,444 (3,408) 3,572
Interest (income) expense, net..... (3,686) 12,050 872 9,236
Income (loss) from equity
investees........................ (7,520) (4,125) $11,645
Other (income) expense............. 579 (114) 65 530
------- -------- ------- ------- --------
Income (loss) before income
taxes............................ (3,877) (9,617) (4,345) 11,645 (6,194)
Income tax (benefit) provision..... 459 (2,097) (220) (1,858)
------- -------- ------- ------- --------
Net income (loss).................. $(4,336) $ (7,520) $(4,125) $11,645 $ (4,336)
======= ======== ======= ======= ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $180,632 $21,697 $202,329
Cost of sales...................... $ 285 129,265 17,837 147,387
------- -------- ------- ------- --------
Gross profit....................... (285) 51,367 3,860 54,942
Expenses:
Selling, technical and
administrative expenses....... (274) 27,696 3,896 31,318
Amortization of intangible
assets........................ 9 4,152 4,161
------- -------- ------- ------- --------
Total expenses..................... (265) 31,848 3,896 35,479
------- -------- ------- ------- --------
Income from operations............. (20) 19,519 (36) 19,463
Interest (income) expense, net..... (3,803) 11,947 654 8,798
Income (loss) from equity
investees........................ 2,898 (1,504) $(1,394)
Other (income) expense............. 394 141 535
------- -------- ------- ------- --------
Income (loss) before income
taxes............................ 6,681 5,674 (831) (1,394) 10,130
Income taxes....................... 911 2,776 673 4,360
------- -------- ------- ------- --------
Net income (loss).................. $ 5,770 $ 2,898 $(1,504) $(1,394) $ 5,770
======= ======== ======= ======= ========
</Table>
44
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $166,429 $21,209 $187,638
Cost of sales...................... $ (165) 121,163 17,881 138,879
------- -------- ------- ------- --------
Gross profit....................... 165 45,266 3,328 48,759
Expenses:
Selling, technical and
administrative expenses....... (283) 23,754 2,895 26,366
Amortization of intangible
assets........................ 8 3,821 3,829
------- -------- ------- ------- --------
Total expenses..................... (275) 27,575 2,895 30,195
------- -------- ------- ------- --------
Income from operations............. 440 17,691 433 18,564
Interest (income) expense, net..... (3,782) 12,220 540 8,978
Income (loss) from equity
investees........................ 3,688 (587) $(3,101)
Other (income) expense............. (4) (500) 99 (405)
------- -------- ------- ------- --------
Income (loss) before income
taxes............................ 7,914 5,384 (206) (3,101) 9,991
Income taxes....................... 1,585 1,696 381 3,662
------- -------- ------- ------- --------
Net income (loss).................. $ 6,329 $ 3,688 $ (587) $(3,101) $ 6,329
======= ======== ======= ======= ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............ $ 8,865 $ 7,445 $ (1,840) $14,470
Cash flows from investing
activities:
Purchases of property, plant and
equipment.................... (7,183) (1,913) (9,096)
-------- ------- -------- ------- -------
Net cash used in investing
activities...................... (7,183) (1,913) (9,096)
Cash flows from financing
activities:
Proceeds from long-term debt.... 35,820 1,126 3,511 40,457
Payments on long-term debt...... (44,015) (2,168) (337) (46,520)
Payment of preferred stock
dividends.................... (150) (150)
-------- ------- -------- ------- -------
Net cash (used in) provided by
financing activities............ (8,345) (1,042) 3,174 (6,213)
Effect of exchange rate changes
on cash...................... (87) (87)
-------- ------- -------- ------- -------
Net (decrease) increase in cash
and cash equivalents............ 520 (780) (666) (926)
Cash and cash equivalents, at
beginning of period............. 553 1,027 2,430 4,010
-------- ------- -------- ------- -------
Cash and cash equivalents, at end
of period....................... $ 1,073 $ 247 $ 1,764 $ -- $ 3,084
======== ======= ======== ======= =======
</Table>
45
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities...................... $ 7,330 $ 9,976 $ 4,258 $ 21,564
Cash flows from investing
activities:
Business acquisitions........... (6,510) (6,510)
Purchases of property, plant and
equipment.................... (7,747) (2,742) (10,489)
Proceeds from sale of assets.... 69 69
-------- ------- ------- ------- --------
Net cash used in investing
activities...................... (6,510) (7,678) (2,742) (16,930)
Cash flows from financing
activities:
Payments on short-term debt..... (808) (808)
Proceeds from long-term debt.... 29,443 774 30,217
Payments on long-term debt...... (31,249) (2,238) (399) (33,886)
Payment of preferred stock
dividends.................... (152) (152)
-------- ------- ------- ------- --------
Net cash used in financing
activities...................... (1,958) (1,464) (1,207) (4,629)
Effect of exchange rate changes
on cash...................... 12 12
-------- ------- ------- ------- --------
Net (decrease) increase in cash
and cash equivalents............ (1,138) 834 321 17
Cash and cash equivalents, at
beginning of period............. 1,691 193 2,109 3,993
-------- ------- ------- ------- --------
Cash and cash equivalents, at end
of period....................... $ 553 $ 1,027 $ 2,430 $ -- $ 4,010
======== ======= ======= ======= ========
</Table>
46
<PAGE>
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities...................... $ 11,158 $ 4,886 $ 3,702 $ 19,746
Cash flows from investing
activities:
Business acquisitions........... (19,350) (19,350)
Purchases of property, plant and
equipment.................... (7,953) (2,181) (10,134)
Proceeds from sale of assets.... 3,682 3,682
-------- ------- ------- --- --------
Net cash used in investing
activities...................... (19,350) (4,271) (2,181) (25,802)
Cash flows from financing
activities:
Proceeds from long-term debt.... 37,897 125 38,022
Payments on long-term debt...... (37,946) (1,147) (608) (39,701)
Payment of preferred stock
dividends.................... (148) (148)
Repurchase of common stock...... (2,798) (2,798)
-------- ------- ------- --- --------
Net cash used in financing
activities...................... (2,995) (1,022) (608) (4,625)
Effect of exchange rate changes
on cash...................... 554 (197) 357
-------- ------- ------- --- --------
Net (decrease) increase in cash
and cash equivalents............ (11,187) 147 716 (10,324)
Cash and cash equivalents, at
beginning of period............. 12,878 46 1,393 14,317
-------- ------- ------- --- --------
Cash and cash equivalents, at end
of period....................... $ 1,691 $ 193 $ 2,109 $-- $ 3,993
======== ======= ======= === ========
</Table>
O. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001 2000 2000 2000 2000
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $53,781 $47,419 $42,208 $40,980 $55,170 $53,837 $47,861 $45,461
Gross profit......... 13,820 10,334 8,704 7,121 14,943 14,958 13,362 11,679
Net income (loss).... 857 (1,419) (953) (2,821) 2,164 1,910 1,493 203
Basic earnings (loss)
per share.......... $ .10 $ (.17) $ (.12) $ (.33) $ .25 $ .22 $ .17 $ .02
Diluted earnings
(loss) per share... $ .10 $ (.17) $ (.12) $ (.33) $ .25 $ 22 $ .17 $ .02
</Table>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the Registrant's definitive Proxy Statement relating to its 2002 Annual Meeting
of Stockholders (the "Proxy Statement"), under the captions "Board of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance." This Proxy Statement will be filed with the SEC prior to
April 30, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under the caption
"Executive Compensation and Other Information" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is contained under the caption
"Principal Stockholders" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Company are included
in Item 8:
(i) Consolidated Balance Sheets at December 31, 2001 and 2000
(ii) Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999
(iii) Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2001, 2000 and 1999
(iv) Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
(v) Notes to Consolidated Financial Statements for the years ended
December 31, 2001, 2000 and 1999
All consolidated financial schedules are omitted because they are
inapplicable, not required by the instructions or the information is included in
the consolidated financial statements or notes thereto.
48
<PAGE>
(b) Reports on Form 8-K:
None.
(c) Exhibits:
<Table>
<C> <S>
3.1 Form of the Company's Second Amended and Restated
Certificate of Incorporation (Incorporated by reference to
the Company's Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission (Reg.
No.333-40535))
3.2 The Company's Amended and Restated By-laws (Incorporated by
reference to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission (Reg. No.
001-13797))
4.1 Form of Rights Agreement between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
4.2 Indenture, dated as of November 27, 1996, by and among the
Company, 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 (Incorporated by reference to the
Company's Registration Statement on Form S-4 as filed with
the Securities and Exchange Commission (Reg. No. 333-18433))
4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form
S-4 as filed with the Securities and Exchange
Commission(Reg. No. 333-18433))
4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated
by reference to the Company's Registration Statement on Form
S-4 as filed with the Securities and Exchange
Commission(Reg. No. 333-18433))
4.5 Stockholders' Voting Agreement, effective as of November
27,1996, by and among the Company, 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 (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg.
No.333-18433))
4.6 Letter agreement, dated January 5, 1998, amending the
Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, 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 (Incorporated by reference
to the Company's Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission (Reg. No.
333-40535))
10.1 Employment Agreement, dated as of November 1, 1996, between
the Company and Norman C. Harbert (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
10.2 Form of Amended and Restated Wage Continuation Agreement
between the Company and Norman C. Harbert (Incorporated by
reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission
(Reg. No. 333-40535))
10.3 Employment Agreement, dated as of November 1, 1996, between
the Company and Ronald E. Weinberg (Incorporated by
reference to the Company's Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission
(Reg. No. 333-18433))
10.4 Amendment No. 1 to the Employment Agreement, dated as of
October 24, 2000, between the Company and Norman C. Harbert
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended March 31, 2001 as filed with the
Securities and Exchange Commission)
10.5 Amendment No. 1 to the Employment Agreement, dated as of
October 24, 2000, between the Company and Ronald E. Weinberg
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended March 31, 2001 as filed with the
Securities and Exchange Commission)
10.6* Amended and Restated Employment Agreement, dated as of
December 31, 2001, by and among the Company, Friction
Products Co. and Ronald E. Weinberg
</Table>
49
<PAGE>
<Table>
<C> <S>
10.7* Amended and Restated Employment Agreement, dated as of
December 31, 2001, by and among the Company, Friction
Products Co. and Norman C. Harbert
10.8* Amended and Restated Wage Continuation Agreement, dated as
of December 31, 2001, by and among the Company, Friction
Products Co. and Norman C. Harbert
10.9* Consultant Agreement, dated as of December 31, 2001, by and
among the Company, Friction Products Co. and Norman C.
Harbert
10.10 Letter agreement, dated as of March 26, 1998, amending the
Employment Agreement and the Consulting Agreement, each
dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel
(Incorporated by reference to the Company's Form 10-K for
the year ended December 31, 1998 as filed with the
Securities and Exchange Commission)
10.11 Form of the Promissory Notes, each dated June 30, 1995,
issued by of Norman C. Harbert and Ronald E. Weinberg to the
Company (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.12 Letter agreement, dated October 1, 1996, amending the
Promissory Notes, dated June 30, 1995, issued by each of
Norman C. Harbert and Ronald E. Weinberg to the Company
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.13 Credit Agreement, dated as of May 1, 1998, among the Company
and KeyBank National Association, as Swing Line Lender,
Administrative Agent and as Syndication Agent (Incorporated
by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 as filed with the Securities and
Exchange Commission)
10.14 Subsidiary Guaranty, dated as of May 1, 1998, among the
subsidiaries of the Company, as guarantors, and KeyBank
National Association, as Administrative Agent (Incorporated
by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 as filed with the Securities and
Exchange Commission)
10.15 Amendment No. 1, dated as of November 22, 2000 to Credit
Agreement among the Company and KeyBank National
Association, as Lender, the Swing Line Lender, a Letter of
Credit Issuer and as the Syndication Agent and the
Administrative Agent
10.16 Hawk Corporation 1997 Stock Option Plan (Incorporated by
reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission
(Reg. No. 333-40535))
10.17 Hawk Corporation 2000 Long Term Incentive Plan
10.18 Hawk Corporation Annual Incentive Compensation Plan
10.19 Amendment No. 2 to Credit Agreement, dated as of July 31,
2001, by and among the Company, the Lenders identified
therein and KeyBank National Association, a national banking
association, as the Administrative Agent under the Credit
Agreement (Incorporated by reference to the Company's Form
10-Q for the quarterly period ended June 30, 2001 as filed
with the Securities and Exchange Commission)
10.20 Form of Security Agreement, dated as of August 10, 2001, by
and between KeyBank National Association, the Company and
each of the following subsidiaries of the Company: Allegheny
Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc.,
Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc.,
Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings,
Inc., Net Shape Technologies LLC, Quarter Master Industries,
Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc.,
Sinterloy Corporation, Tex Racing Enterprises, Inc. and
Wellman Friction Products U.K. Corp (Incorporated by
reference to the Company's Form 10-Q for the quarterly
period ended June 30, 2001 as filed with the Securities and
Exchange Commission)
</Table>
50
<PAGE>
<Table>
<C> <S>
10.21 Form of Pledge Agreement, dated as of August 10, 2001, by
and between KeyBank National Association, the Company and
each of the following subsidiaries of the Company: Allegheny
Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc.,
Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc.,
Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings,
Inc., Net Shape Technologies LLC, Quarter Master Industries,
Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc.,
Sinterloy Corporation, Tex Racing Enterprises, Inc. and
Wellman Friction Products U.K. Corp (Incorporated by
reference to the Company's Form 10-Q for the quarterly
period ended June 30, 2001 as filed with the Securities and
Exchange Commission)
10.22 Form of Intellectual Property Security Agreement, dated as
of August 10, 2001, by and between the Company and each of
the following subsidiaries of the Company: Allegheny Powder
Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction
Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel,
Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net
Shape Technologies LLC, Quarter Master Industries, Inc.,
S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy
Corporation, Tex Racing Enterprises, Inc. and Wellman
Friction Products U.K. Corp. (Incorporated by reference to
the Company's Form 10-Q for the quarterly period ended June
30, 2001 as filed with the Securities and Exchange
Commission)
10.23 Form of Guaranty Agreement of Payment of Obligations, dated
as of August 10, 2001, by and between KeyBank National
Association and each of the following subsidiaries of the
Company: Allegheny Powder Metallurgy, Inc., Clearfield
Powdered Metals, Inc., Friction Products Co., Hawk Brake,
Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan
Metal Stampings, Inc., Net Shape Technologies LLC, Quarter
Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman
Holdings, Inc., Sinterloy Corporation, Tex Racing
Enterprises, Inc. and Wellman Friction Products U.K. Corp.
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended June 30, 2001 as filed with the
Securities and Exchange Commission)
10.24 Form of Open Ended Ohio Mortgage, executed as of August 10,
2001, in favor of KeyBank National Association by each of
the following subsidiaries of the Company: Friction Products
Co., Logan Metal Stampings, Inc. and S.K. Wellman Corp.
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended June 30, 2001 as filed with the
Securities and Exchange Commission)
10.25 Form of Open Ended Pennsylvania Mortgage, executed as of
August 10, 2001, in favor of KeyBank National Association by
each of the following subsidiaries of the Company: Allegheny
Powder Metallurgy, Inc. and Clearfield Powdered Metals, Inc.
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended June 30, 2001 as filed with the
Securities and Exchange Commission)
10.26 Form of Mortgage, Assignment of Leases and Rents and Fixture
Filing, executed as of August 10, 2001, in favor of KeyBank
National Association by each of the following subsidiaries
of the Company: Hawk Motors, Inc. and Helsel, Inc.
(Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended June 30, 2001 as filed with the
Securities and Exchange Commission)
10.27 Common Stock Selling Plan of Thomas A. Gilbride pursuant
Rule 10b5-1 of the Securities Exchange Act of 1934, as
amended, effective as of June 6, 2001 (Incorporated by
reference to the Company's Form 10-Q for the quarterly
period ended June 30, 2001 as filed with the Securities and
Exchange Commission)
10.28 Amendment No. 3 to Credit Agreement, dated as of November 9,
2001, by and among the Company, the Lenders identified
therein and KeyBank National Association, a national banking
association, as the Administrative Agent under the Credit
Agreement (Incorporated by reference to the Company's Form
10-Q for the quarterly period ended September 30, 2001 as
filed with the Securities and Exchange Commission)
</Table>
51
<PAGE>
<Table>
<S> <C>
10.29 Form of Pledge Agreement, dated as of November 9, 2001, by and between KeyBank National Association, the
Company and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc.,
Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc.,
Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries,
Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises,
Inc. and Wellman Friction Products U.K. Corp (Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended September 30, 2001 as filed with the Securities and Exchange Commission)
10.30* Amendment No. 4 to Credit Agreement, dated as of March 25, 2002, by and among the Company, the Lenders
identified therein and KeyBank National Association, a national banking association, as the
Administrative Agent under the Credit Agreement (Incorporated by reference to the Company's Form 10-K for
the period ended December 31, 2001 as filed with the Securities and Exchange Commission)
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
</Table>
- ---------------
* Filed herewith
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HAWK CORPORATION
BY: /s/ THOMAS A. GILBRIDE
------------------------------------
Thomas A. Gilbride
Vice President -- Finance and
Treasurer
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RONALD E. WEINBERG Chairman of the Board, Chief April 1, 2002
------------------------------------------ Executive Officer and Director
Ronald E. Weinberg (principal executive officer)
/s/ NORMAN C. HARBERT Senior Chairman of the Board, Founder April 1, 2002
------------------------------------------ and Director
Norman C. Harbert
/s/ JEFFERY H. BERLIN President, Chief Operating Officer April 1, 2002
------------------------------------------ and Director
Jeffery H. Berlin
/s/ THOMAS A. GILBRIDE Vice President - Finance and April 1, 2002
------------------------------------------ Treasurer (principal financial and
Thomas A. Gilbride accounting officer)
/s/ BYRON S. KRANTZ Secretary and Director April 1, 2002
------------------------------------------
Byron S. Krantz
/s/ PAUL R. BISHOP Director April 1, 2002
------------------------------------------
Paul R. Bishop
/s/ JACK KEMP Director April 1, 2002
------------------------------------------
Jack Kemp
/s/ DAN T. MOORE, III Director April 1, 2002
------------------------------------------
Dan T. Moore, III
/s/ WILLIAM J. O'NEILL, JR. Director April 1, 2002
------------------------------------------
William J. O'Neill, Jr.
</Table>
53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>3
<FILENAME>l92278aex10-6.txt
<DESCRIPTION>EXHIBIT 10.6
<TEXT>
<PAGE>
Exhibit 10.6
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is
made and entered into as of this 31st day of December, 2001, by and among HAWK
CORPORATION, a Delaware corporation ("Hawk"), Friction Products Co., an Ohio
corporation (together with Hawk, "Employer") and RONALD E. WEINBERG
("Employee").
RECITALS
A. The parties are also parties to the employment agreement dated
November 1, 1996 (the "Original Agreement") and Amendment No. 1 to the Original
Agreement dated October 24, 2000 (together with the Original Agreement, the
"Amended Original Agreement");
B. The parties desire to further amend the Amended Original Agreement
in accordance with the terms set forth in this Agreement; and
C. For simplicity, the parties are amending and restating the Amended
Original Agreement, all as set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and the promises and
agreements contained herein and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, and intending to be
legally bound, Employer and Employee amend and restate the Amended Original
Agreement, as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee agrees to
be employed by Employer for a period commencing on the date hereof and
terminating on June 30, 2007. Such period, together with the period of any
extension or renewal upon the mutual agreement of Employer and Employee, of such
employment is herein referred to as the "Employment Period."
2. COMPENSATION AND BENEFITS. Provided that Employee's employment
hereunder is not terminated in accordance with this Agreement, during the
Employment Period Employee shall receive as compensation:
<PAGE>
(a) Salary: Salary at the annual rate of $418,625, payable not less
frequently than semi-monthly (as adjusted from time to time), reduced commencing
October 1, 2006, or such other date as defined benefit plan payments commence,
by any payments made to Employee under any non-contributory defined benefit plan
maintained by Employer ("Defined Benefit Payments").
(b) Employee Benefit Programs: Employee shall have the right to
participate, subject to any applicable eligibility requirements, in all
corporate employee benefit programs offered to executive employees by Employer
and any other plans made available by Employer in the future to its executives
and key management employees, including, if any, Employer's 401(k) plan, health
and life insurance programs and non-contributory defined benefit plans.
(c) Executive Bonus Plan: During each year of the Employment Period,
Employee shall receive a bonus pursuant to the Annual Incentive Compensation
Plan presently in effect, based on 1.75% of Hawk's earnings before interest,
taxes, depreciation and amortization ("EBITDA") (excluding EBITDA derived from
businesses acquired after the date hereof by Employer or it affiliates (i) for
businesses acquired on terms that did not contain an earn-out or other similar
contingent payment obligation, prior to the completion of the first full fiscal
year after the acquisition and (ii) for businesses acquired on terms that did
contain an earn-out or other similar contingent payment obligation, until the
expiration of the earn-out or similar contingent payment period); provided
however, that Employer's compensation committee (the "Compensation Committee"),
with its current membership of Byron S. Krantz and Paul R. Bishop, (a) shall
modify the said bonus commencing with the bonus payment in 2002 to the extent
that as soon as reasonably practicable, the bonus paid shall be $100,000 more
than the bonus payable to Norman C. Harbert ("Harbert"), and (b) may amend or
modify said bonus payments and the formula for calculating said bonus payments,
in its sole discretion; provided
-2-
<PAGE>
further, that if the current membership of the Compensation Committee changes in
any way, said bonus payments and the formula for calculating said bonus payments
cannot be amended, modified or terminated except as in (a) above provided
without Employee's written consent.
(c) Business Expenses: Employer shall promptly reimburse Employee
for all reasonable and necessary business expenses incurred by Employee on
behalf of Employer and its parent, wholly-owned subsidiaries or affiliated
entities during the Employment Period. Employee shall submit to Employer
appropriate expense reports that detail such expenses and includes copies of
receipts where appropriate.
(d) Automobile Expenses: Employee shall be entitled to receive a car
allowance in the amount determined by the Compensation Committee (regardless of
its membership), but not less than the amount presently paid, payable
semi-monthly. Employer shall provide property and liability insurance on
Employee's automobile and reimburse Employee for the reasonable maintenance and
repair costs incurred with respect to Employee's automobile.
(e) Insurance: For the Employment Period (and any renewal thereof),
Employer shall continue to maintain and pay the premiums on the insurance
policies issued by Massachusetts Mutual Life (Policy Numbers 71395270 and
6251966), or such other similar policies as may be agreed by Employee. Such
insurance policies shall continue to be subject to the applicable split-dollar
agreements between Employer and Employee.
3. ADJUSTMENTS TO COMPENSATION.
(a) The Board of Directors of Employer ("Board"), or the
Compensation Committee, will review Employee's Base Wages no less than annually
at which time it will determine increases, if any, to Employee's Base Wages.
Base Wages cannot be reduced except by mutual agreement between Employer and
Employee.
-3-
<PAGE>
(b) Employee hereby authorizes Employer to withhold and withdraw
from amounts payable to Employee under this Agreement all applicable amounts
required by federal, state and local laws.
4. DUTIES. Employee shall, during the Employment Period, serve as the
Chairman of the Board and Chief Executive Officer of Employer or in any other
capacity as the Board may request and Employee shall mutually agree to serve
from time to time. During the Employment Period, Employee shall perform such
duties and responsibilities as are customarily assigned to the Chairman of the
Board and Chief Executive Officer, including overseeing the management,
operating strategies and profitability of the business. Employee shall not be
required to devote substantially all of his time and efforts to the business and
affairs of Employer so long as Employee substantially performs the duties and
functions provided for herein to the best of his ability and skill in such a
manner as to promote the best interests of Employer. Employee further agrees to
serve as a director on the boards of directors of Employer's subsidiaries or
affiliated entities and in one or more executive offices of any of Employer's
subsidiaries or affiliated entities.
5. LIMITATIONS ON AUTHORITY.
(a) Notwithstanding anything else herein contained, Employee shall
adhere to the written limitations on authority as issued from time to time by
the Board. Nothing contained herein shall be deemed to restrict the power of the
Board to limit the authority of Employee. Any violation of the terms of this
Section 5(a) shall be deemed to be a material violation of a provision of this
Employment Agreement.
(b) Notwithstanding anything else herein contained, subject to
Section 15, the parties agree that any of the matters set forth below shall be
determined by Employee and Harbert jointly:
-4-
<PAGE>
(i) The (A) evaluation of key management employees together with
salary reviews, and (B) increases in compensation of key management
employees;
(ii) The entering into and/or execution of contracts,
agreements, joint ventures and other commitments which would have a
material effect on the business, financial condition and affairs,
properties, assets, obligations, and operation of Employer;
(iii) The formulation of the annual budget and business plan of
Employer;
(iv) The formulation of the business goals of Employer;
(v) The merger, consolidation, combination, liquidation, or sale
of all or substantially all the assets or stock of Employer or any
of its affiliates that are material to Employer as whole and the
acquisition or purchase of all or substantially all the assets or
stock of another company or entity;
(vi) The purchase or sale by Employer or any of its subsidiaries
of any asset from or to any person, firm or corporation related to
or controlled by either Employee or Harbert; and
(vii) Any other matter which would have a material effect on the
business, operations, financial condition or affairs, assets or
properties of Employer.
6. DEATH OF EMPLOYEE. In the event Employee should die during the
Employment Period and:
(a) at the time of Employee's death, Employee has a wife, then: (i)
Employer shall pay to Employee's wife the amount of bonus which Employee would
have received under Section 2(c) hereof for the year of Employee's death which
shall be prorated for the portion of
-5-
<PAGE>
the year ending upon the date of death; and (ii) Employer shall continue to
provide and/or pay for the existing health care coverage to Employee's wife to
the maximum extent allowable in all respects under applicable law; PROVIDED,
HOWEVER, that when Employee's surviving spouse attains the age of sixty-five
(65) years, Medicare shall be the primary provider of medical coverage and the
existing health care coverage shall be the secondary payor; and provided
FURTHER, HOWEVER, that the combined benefits of Medicare and the Medicare
supplemental policy shall be substantially the same as then available under the
Employer's existing health care coverage for active employees; or
(b) at the time of Employee's death, Employee has no wife, then
Employer shall: (i) for a period of two (2) years, continue to pay Employee's
Base Wages at the same monthly rate earned by Employee immediately prior to his
death to Employee's beneficiaries or estate; and (ii) pay to Employee's
beneficiaries or his estate, the amount of bonus which the Employee would have
received under Section 2(c) hereof for the year of Employee's death which shall
be prorated for the portion of the year ending upon the date of death.
7. DISABILITY OF EMPLOYEE.
(a) In the event that Employee becomes "mentally or physically
disabled" (as hereinafter defined) during the Employment Period, Employer shall
continue to pay Employee's Base Wages to Employee for the remainder of the year
after the onset of such disability, at the same monthly rate earned by Employee
immediately prior to his disability. The amount of the bonus which Employee is
to receive under Section 2(c) hereof for the year of the onset of the disability
shall be determined and paid as if Employee has not been disabled. After the
year of the onset of the disability and until the end of the Employment Period
(which for purposes of this sentence shall be June 30, 2007), Employer shall
provide the following to Employee; disability wage continuation payments, for
the remainder of Employee's life, equal to, on an annual basis,
-6-
<PAGE>
sixty percent (60%) of the average annual Employee's Base Wages (exclusive of
any reduction for Defined Benefit Payments) for the previous three consecutive
years of employment prior to the year of the onset of the disability with
Employer, less applicable withholding taxes, payable not less frequently than
semi-monthly ("Disability Wage Continuation Payments") and (ii) annual bonus
payments, for the remainder of Employee's life, equal to sixty percent (60%) of
Employee's average annual bonus payment for the previous three consecutive years
of employment with the Employer (as such bonus is determined in accordance with
Section 2(c)), less applicable withholding taxes ("Bonus Continuation
Payments"); provided that the Disability Wage Continuation Payments and Bonus
Continuation Payments shall be reduced by the amount of any insurance payments
made to Employee or his spouse under any insurance plans provided and paid for
by Employer or any of its subsidiaries or affiliates and any Defined Benefit
Payments made to Employee or his spouse. If Employee shall die prior to June 30,
2007, but after Employee becomes mentally or physically disabled, then the
provisions of Section 6 hereof shall apply.
(b) For purposes of this Agreement, Employee shall become "mentally or
physically disabled" as of the time the Board shall find, on the basis of
medical evidence satisfactory to the Board, in its sole discretion, that as a
result of a mental or physical condition Employee is unable to substantially
perform his normal duties of employment hereunder or is prevented from engaging
in substantially the same level of performance as he engaged in prior to the
onset of such condition, and that such disability is likely to continue for a
substantial period of time. Employee shall submit to an examination by a
physician, selected at the discretion of the Board and paid for by the Employer,
as is necessary to obtain the medical evidence needed by the Board to determine
whether Employee has become "mentally or physically disabled." Employee hereby
waives the confidentiality of the results or conclusions of such medical
-7-
<PAGE>
examination and shall take such action as is necessary to disclose the results
or conclusions of such examination to the Board. In the event Employee fails to
submit to such examination or to take the necessary action to disclose the
results of the examination, Employee shall be deemed to be "mentally or
physically disabled."
8. TERMINATION.
(a) Employer may terminate Employee's employment hereunder at any
time for cause, which shall be deemed to include the following: (i) Employee's
engaging in fraud, misappropriation of funds, embezzlement or like conduct
committed against Employer; or (ii) Employee's conviction of a felony.
(b) Employee's employment hereunder may be terminated by Employer in
the event of Employee's voluntarily leaving the employ of Employer.
(c) If Employer terminates the employment of Employee for cause
pursuant to Section 8(a), then Employer shall not be obligated to make any
further payments to Employee under this Agreement or otherwise (including,
without limitation, any accrued and unpaid bonuses and severance benefits),
except for amounts of any earned and unpaid Base Wages. If Employer terminates
Employee's employment pursuant to Section 8(b) hereof, then Employer and/or its
successor (whether direct or indirect, by purchase, merger, consolidation, by
operation of law or otherwise), shall be obligated to continue to pay Employee
the Base Wages through the date that Employee voluntarily leaves the employ of
Employer; provided, however, that Employee shall not be entitled to any bonus
payments. If Employer terminates Employee's employment for any reason other than
for cause as set forth in Section 8(a) hereof, then Employer and/or its
successor (whether direct or indirect, by purchase, merger, consolidation, by
operation of law or otherwise), shall be obligated to continue to pay Employee
the Base Wages for the remainder of the Employment Period and any bonuses he
would have earned if still
-8-
<PAGE>
employed through the end of the Employment Period, and shall be further
obligated to continue to provide and/or pay for the existing health care
coverage to Employee for the remainder of the Employment Period.
(d) In the event that Employee's employment with Employer is
terminated by Employer or by Employee, the parties agree that the provisions of
Sections 8(c), 9, 10, 11, 12, 13, 14, 17, 18, 21, 24 and 25 hereof shall survive
such termination and continue in full force and effect.
9. NON-COMPETITION. Employee recognizes and acknowledges that the
business of Employer is the manufacture, marketing and development of friction
materials, metal stampings, powder metals, metal injection moldings, rotors,
electric motors, performance racing products and businesses related thereto.
Employee agrees that within the United States, Canada, Italy, Mexico and China
and any other location in which the Employer engaged in all or part of the
above-described business at any time during the Employment Period, and for two
(2) years from and after the date of the termination of Employee's employment
hereunder (the "Restricted Period"), Employee shall not, in any manner, directly
or indirectly on behalf of himself or any other person, firm, business or
corporation;
(a) Establish, operate or engage in, financially or otherwise, as an
owner, partner, shareholder, officer, director, licensor, licensee, principal,
agent, employee, trustee, consultant or in any other relationship or capacity,
the business of the Employer;
(b) Request or instigate any account or customer of Employer or its
subsidiaries or affiliates to withdraw, diminish, curtail or cancel any of its
business with Employer or its subsidiaries or affiliates; or
(c) Hire, solicit, or encourage to either leave the employment of or
cease working with Employer or
-9-
<PAGE>
its subsidiaries or affiliates (i) any current employee of Employer or its
subsidiaries or affiliates, or (ii) any employee who has left the employment of
or ceased working with Employer or its subsidiaries or affiliates within one (1)
year of the date of termination of such employee's employment with Employer.
In the event of Employee's breach of any provision of this Section, the
running of the Restricted Period shall be automatically tolled (i.e., no part of
the Restricted Period shall expire) from and after the date of the first such
breach.
10. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that
confidential information, including, without limitation, information, knowledge
or data: (i) of a business nature such as, but not limited to, information about
cost, price, rates, profits, purchasing, suppliers, advertising, customers,
sales, marketing, promotion, compensation, employment, personnel, including
information regarding present and prospective customers and the business affairs
and financial condition of Employer; (ii) of a technical nature such as, but not
limited to, methods, know-how, processes and research; (iii) pertaining to
future developments such as, but not limited to, research and development
projects and future marketing, advertising or promotion; and (iv) pertaining to
trade secrets of Employer; and including all other matters which Employer treats
as confidential (the items described above being hereafter collectively referred
to as "Confidential Information"), are valuable, special and unique assets of
Employer. During and after the Restricted Period, Employee shall keep secret and
retain in strictest confidence, shall not use for the benefit of himself or
others except in connection with the business and affairs of Employer, any and
all Confidential Information learned or obtained by Employee before or after the
date of this Agreement, and shall not disclose such Confidential Information to
anyone outside of Employer either during or after employment by Employer, except
as required in the course of performing duties of his employment with Employer,
without the express written consent of Employer or as required by
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<PAGE>
law. For the purposes of the above disclosure exception, it is expressly
recognized that, during the Employment Period, Employee's duties include,
without limitation, providing certain information about the Company to bankers,
investors, the press, governmental agencies, and other members of the financial
community in general, and such dissemination of information will not constitute
a violation of this Section 10.
11. PROPERTY OF EMPLOYER. Employee agrees to deliver promptly to the
Employer all manuals, letters, notes, notebooks, reports, computer programs and
files, memoranda, customer and supplier lists and all other materials relating
in any way to the business of Employer and in any way obtained by Employee
during the period of his employment with the Employer which are in his
possession or under his control, and all copies thereof, (i) upon termination of
Employee's employment with Employer, or (ii) at any other time at Employer's
request. Employee further agrees that he will not make or retain any copies of
any of the foregoing and that he will so represent to Employer upon termination
of his employment hereunder.
12. RIGHTS AND REMEDIES UPON BREACH. Both parties recognize that the
rights and obligations set forth in this Agreement are special, unique and of
extraordinary character. If Employee breaches, or threatens to commit a breach
of, any of the provisions of Sections 9 through 11 hereof (hereinafter referred
to as the "Restrictive Covenants"), then Employer shall have the right and
remedy to injunctive relief, which right and remedy shall be in addition to, and
not in lieu of, any other rights and remedies available to Employer pursuant to
this Agreement, any applicable law or in equity. The right and remedy to have
the Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to Employer and that money
damages will not provide adequate remedy to Employer. As to the covenants
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<PAGE>
contained in Section 9 hereof, specific performance shall be for a period of
time equal to the unexpired portion of the Restricted Period, giving full effect
to the tolling provision of Section 9 hereof, and beginning on the earlier of
the date on which the court's order becomes final and nonappealable or the date
on which all appeals have been exhausted.
13. DISCLOSURE. Employer may notify anyone employing Employee or
evidencing an intention to employ Employee as to the existence and provisions of
this Agreement and of the Restrictive Covenants.
14. INDEMNIFICATION.
(a) Employer shall indemnify Employee (and his legal representative
or other successors) to the fullest extent provided by the articles or
certificate of incorporation and by-laws or code of regulations (or other
governing document) of Employer and any wholly-owned subsidiary, as may be
amended or restated from time to time.
(b) Employee shall indemnify Employer against any and all losses
incurred by Employer as a result of Employee's acts of willful misconduct or
fraud.
15. DISPUTE RESOLUTION.
(a) Should any matter to be determined in accordance with Section
5(b) not be jointly agreed to at any time, Employee agrees to mediation and, if
necessary, to submission to the Board of Directors of Employer, of such matter
in accordance with the following provisions.
(b) In the event Employee invokes the provisions of this Section
15, he will give Harbert a written statement setting forth any differences he
has with Harbert under Section 5(b) referencing this Section 15 and specifically
invoking the procedure provided for in this Agreement. Within seven days,
Harbert must give a written statement responding to and raising any other matter
concerning Section 5(b) in dispute.
-12-
<PAGE>
(c) Employee and Harbert will meet within seven days after receipt
of such responding statement with Byron S. Krantz at such time and place as he
determines, who will serve as a mediator in an attempt to negotiate a solution
of all differences covered by the notice and response.
(d) If the Employee and Harbert do not resolve all differences
covered within the statement and response, they will, within twenty-one (21)
days from receipt of the responding statement, jointly call a special meeting of
the Board of Directors of Employer to be held in person no later than fourteen
(14) days after notice. The statement and response shall accompany the notice
and the determination by the Board of Directors of Employer of the matter(s)
shall be final and binding on Employee, Harbert and the Company.
16. ASSIGNMENT. This Agreement is a personal services contract and it
is expressly agreed that the rights and interests of Employee hereunder may not
be sold, transferred, assigned, pledged or hypothecated (other than by will or
the laws of descent and distribution).
17. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their heirs, representatives and permitted
successors and assigns.
18. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid,
illegal, or unenforceable provision had never been contained herein.
19. BLUE-PENCILING. If at any time it shall be determined that any of
the provisions of this Agreement are unreasonable as to time or area, or both,
by any court of
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<PAGE>
competent jurisdiction, Employer shall be entitled to enforce such provision for
such period of time and within such area as may be determined to be reasonable
by such court.
20. REPRESENTATIONS OF EMPLOYEE. Employee represents and warrants, on
behalf of himself, his immediate family and any person, firm or corporation in
which he has a substantial interest, that:
(a) They are not indebted to Employer in any amount whatsoever;
(b) They do not, and will not during the Restricted Period, have
any direct or indirect ownership interest in any entity with which Employer has
a business relationship or competes with Employer; provided, however, that the
ownership of, or investments in, at no time exceeding 5% of the issued and
outstanding capital stock of an entity with annual revenues in excess of $20
million shall not constitute a breach of this representation and warranty;
(c) They are not and will not become, during the Employment Period,
directly or indirectly, interested in any material contract with Employer (other
than this Agreement); and
(d) The execution of this Agreement or his employment by Employer
will not breach any agreement or covenant entered into by him that is currently
in effect.
Excluded from the foregoing representations and warranties are (i) any
and all transactions relating to that certain Shareholder Note, dated June 30,
1995 in favor of Employer as amended by a Letter Agreement, dated October 1,
1996, and (ii) transactions disclosed to the Board done on terms at least as
favorable to the Company as those which it could otherwise have obtained from
unrelated third parties.
21. CONFLICTS OF INTEREST. In the event that Employee engages in or
contemplates engagement in a transaction which does affect or could affect the
business of Employer, Employee agrees to immediately disclose in writing to the
Board all material information relating to same. Additionally, in the event that
Employer engages in or
-14-
<PAGE>
contemplates engagement in a transaction in which Employee has a financial or
personal interest, Employee shall, immediately upon his learning of said
engagement or contemplated engagement, disclose in writing to the Board all
material information relating to said interest.
22. ACKNOWLEDGMENT. Employee acknowledges that: (i) he has carefully
read all of the terms of this Agreement, and that such terms have been fully
explained to him; (ii) he understands the consequences of each and every term of
this Agreement; (iii) he has had sufficient time and an opportunity to consult
with his own legal advisor prior to signing this Agreement; (iv) he had other
employment opportunities at the time he entered into this Agreement; (v) he
specifically understands that by signing this Agreement he is giving up certain
rights he may have otherwise had, and that he is agreeing to limit his freedom
to engage in certain employment during and after the termination of this
Agreement; and (vi) the limitations to his right to compete contained in this
Agreement represent reasonable limitations as to scope, duration and
geographical area, and that such limitations are reasonably related to
protection which the Employer reasonably requires.
23. NOTICES. All notices, requests, demands or other communications
hereunder shall be sent by registered or certified mail to:
Employer: Board of Directors
Hawk Corporation
200 Public Square, Suite 30-5000
Cleveland, Ohio 44114-2301
Copy to: Byron S. Krantz, Esq.
Kohrman Jackson & Krantz P.L.L.
One Cleveland Center
1375 East Ninth Street, 20th Floor
Cleveland, Ohio 44114
Employee: Ronald E. Weinberg
928 Chestnut Run
Gates Mills, Ohio 44040
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<PAGE>
24. CAPTIONS. The captions in this Agreement are included for
convenience only and shall not in any way affect the interpretation or
construction of any provision hereof.
25. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with the laws of the State of Ohio.
26. SUBMISSION TO JURISDICTION. Employer may enforce any claim arising
out of or relating to this Agreement, or arising from or related to the
employment relationship existing in connection with this Agreement in any state
or federal court having subject matter jurisdiction and located in Cleveland,
Ohio. For the purpose of any action or proceeding instituted with respect to any
such claim, Employee hereby irrevocably submits to the jurisdiction of such
courts and irrevocably consents to the service of process out of said courts by
mailing a copy thereof, by registered mail, postage prepaid, to Employee and
agrees that such service, to the fullest extent permitted by law, (i) shall be
deemed in every respect effective service of process upon him in any such suit,
action or proceeding, and (ii) shall be taken and held to be valid personal
service upon and personal delivery to him. Nothing herein contained shall affect
the right of Employer to serve process in any other manner permitted by law or
preclude Employer from bringing an action or proceeding in respect hereof in any
other country, state or place having jurisdiction over such action. Employee
irrevocably waives, to the fullest extent permitted by law, any objection which
he has or may have to the laying of the venue of any such suit, action or
proceeding brought in any such court located in Cleveland, Ohio, and any claim
that any such suit, action or proceeding brought in such a court has been
brought in an inconvenient forum.
27. WAIVER OF BREACH. The waiver by either party of a breach of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
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<PAGE>
28. AMENDMENT. This Agreement may be amended only in a writing executed
by both parties hereto.
29. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and this Agreement supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether written or
oral, of the parties hereto relating to the transactions contemplated by this
Agreement, including without limitation the Amended Original Agreement. No
course of conduct or dealing between the parties shall be deemed to amend this
Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand as of
the date first written above.
"EMPLOYER" "EMPLOYEE"
HAWK CORPORATION and
FRICTION PRODUCTS CO.
By: /s/ Norman C. Harbert /s/ Ronald E. Weinberg
------------------------------- -----------------------------
Norman C. Harbert Ronald E. Weinberg
Its: Senior Chairman and Founder
Attested to:
By: /s/ Byron S. Krantz
-------------------------------
Byron S. Krantz
Its: Secretary
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>4
<FILENAME>l92278aex10-7.txt
<DESCRIPTION>EXHIBIT 10.7
<TEXT>
<PAGE>
Exhibit 10.7
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is
made and entered into as of this 31st day of December, 2001, by and among HAWK
CORPORATION, a Delaware corporation ("Hawk"), Friction Products Co., an Ohio
corporation (together with Hawk, "Employer") and NORMAN C. HARBERT ("Employee").
RECITALS
A. The parties are also parties to the employment agreement dated
November 1, 1996 (the "Original Agreement") and Amendment No. 1 to the Original
Agreement dated October 24, 2000 (together with the Original Agreement, the
"Amended Original Agreement");
B. The parties desire to further amend the Amended Original Agreement
in accordance with the terms set forth in this Agreement; and
C. For simplicity, the parties are amending and restating the Amended
Original Agreement, all as set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and the promises and
agreements contained herein and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, and intending to be
legally bound, Employer and Employee amend and restate the Amended Original
Agreement, as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee agrees to
be employed by Employer for a period commencing on the date hereof and
terminating on June 30, 2007. Such period, together with the period of any
extension or renewal upon the mutual agreement of Employer and Employee, of such
employment is herein referred to as the "Employment Period."
<PAGE>
2. COMPENSATION AND BENEFITS. Provided that Employee's employment
hereunder is not terminated in accordance with this Agreement, during the
Employment Period Employee shall receive as compensation:
(a) Salary: Salary at the annual rate of $418,625, payable not less
frequently than semi-monthly (as adjusted from time to time, "Base Wages"),
reduced commencing July 1, 2002 by any payments made to Employee under any
non-contributory defined benefit plan maintained by Employer ("Defined Benefit
Payments").
(b) Employee Benefit Programs: Employee shall have the right to
participate, subject to any applicable eligibility requirements, in all
corporate employee benefit programs offered to executive employees by Employer
and any other plans made available by Employer in the future to its executives
and key management employees, including, if any, Employer's 401(k) plan, health
and life insurance programs and non-contributory defined benefit plans.
(c) Executive Bonus Plan: During each year of the Employment Period,
Employee shall receive a bonus pursuant to the Annual Incentive Compensation
Plan presently in effect, based on 1.75% of Hawk's earnings before interest,
taxes, depreciation and amortization ("EBITDA") (excluding EBITDA derived from
businesses acquired after the date hereof by Employer or its affiliates (i) for
businesses acquired on terms that did not contain an earn-out or other similar
contingent payment obligation, prior to the completion of the first full fiscal
year after the acquisition and (ii) for businesses acquired on terms that did
contain an earn-out or other similar contingent payment obligation, until the
expiration of the earn-out or similar contingent payment period); provided,
however, that Employer's compensation committee (the "Compensation Committee"),
with its current membership of Byron S. Krantz and Paul R. Bishop, (a) shall
modify the said bonus commencing with the bonus payment in 2002 to the extent
that as soon as reasonably
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<PAGE>
practicable, the bonus paid shall be $100,000 less than the bonus payable to
Ronald E. Weinberg ("Weinberg"), and (b) may amend or modify said bonus payments
and the formula for calculating said bonus payments, in its sole discretion;
provided further, that if the current membership of the Compensation Committee
changes in any way, said bonus payments and the formula for calculating said
bonus payments cannot be amended, modified or terminated except as in (a) above
provided without Employee's written consent.
(d) Business Expenses: Employer shall promptly reimburse Employee
for all reasonable and necessary business expenses incurred by Employee on
behalf of Employer and its parent, wholly-owned subsidiaries or affiliated
entities during the Employment Period. Employee shall submit to Employer
appropriate expense reports that detail such expenses and includes copies of
receipts where appropriate.
(e) Automobile Expenses: Employee shall be entitled to receive a car
allowance in the amount determined by the Compensation Committee (regardless of
its membership), but not less than the amount presently paid, payable
semi-monthly. Employer shall provide property and liability insurance on
Employee's automobile and reimburse Employee for the reasonable maintenance and
repair costs incurred with respect to Employee's automobile.
(f) Insurance: For the Employment Period and any renewal thereof,
Employer shall continue to maintain and pay the premiums on the insurance
policies issued by Massachusetts Mutual Life (Policy Numbers 71396950 and
6160812), or such other similar policies as may be agreed by Employee. Such
insurance policies shall continue to be subject to the applicable split-dollar
agreements between Employer and Employee.
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<PAGE>
3. ADJUSTMENTS TO COMPENSATION.
(a) The Board of Directors of Employer ("Board"), or the
Compensation Committee, will review Employee's Base Wages no less than annually
at which time it will determine increases, if any, to Employee's Base Wages.
Base Wages cannot be reduced except by mutual agreement between Employer and
Employee.
(b) Employee hereby authorizes Employer to withhold and withdraw
from amounts payable to Employee under this Agreement all applicable amounts
required by federal, state and local laws.
4. DUTIES. Employee shall, during the Employment Period, serve as the
Senior Chairman of the Board or in any capacity as the Board may request and
Employee shall mutually agree to serve from time to time and in such capacity
Employee's title shall be Senior Chairman and Founder. During the Employment
Period, Employee shall perform such duties and responsibilities as are
customarily assigned to the Senior Chairman and Founder and shall chair
Employer's annual stockholder meeting. Employee shall be required to devote the
time and efforts to the business and affairs of Employer as is necessary to
discharge his duties and Employee may (i) serve on the boards of directors of
other companies and on the boards of trustees of charitable organizations, and
(ii) devote a portion of his time and efforts to the making and management of
personal investments, in each case for so long as Employee continues to
substantially perform his duties and functions hereunder to the best of his
ability and skill in such a manner as to promote the best interests of Employer.
Employee further agrees to serve as a director on the boards of directors of
Employer's subsidiaries or affiliated entities and in one or more executive
offices of any of Employer's subsidiaries or affiliated entities.
-4-
<PAGE>
5. LIMITATIONS ON AUTHORITY.
(a) Notwithstanding anything else herein contained, Employee shall
adhere to the written limitations on authority as issued from time to time by
the Board. Nothing contained herein shall be deemed to restrict the power of the
Board to limit the authority of Employee. Any violation of the terms of this
Section 5(a) shall be deemed to be a material violation of a provision of this
Employment Agreement.
(b) Notwithstanding anything else herein contained, subject to
Section 15, the parties agree that any of the matters set forth below shall be
determined by Employee and Weinberg jointly:
(i) The (A) evaluation of key management employees together with
salary reviews, and (B) increases in compensation of key management
employees;
(ii) The entering into and/or execution of contracts,
agreements, joint ventures and other commitments which would have a
material effect on the business, financial condition and affairs,
properties, assets, obligations, and operation of Employer;
(iii) The formulation of the annual budget and business plan of
Employer;
(iv) The formulation of the business goals of Employer;
(v) The merger, consolidation, combination, liquidation, or sale
of all or substantially all the assets or stock of Employer or any
of its affiliates that are material to Employer as a whole and the
acquisition or purchase of all or substantially all the assets or
stock of another company or entity;
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<PAGE>
(vi) The purchase or sale by Employer or any of its subsidiaries
of any asset from or to any person, firm or corporation related to
or controlled by either Employee or Weinberg; and
(vii) Any other matter which would have a material effect on the
business, operations, financial condition or affairs, assets or
properties of Employer.
6. DEATH OF EMPLOYEE. In the event Employee should die during the
Employment Period and:
(a) at the time of Employee's death, Employee has a wife, then: (i)
payments shall be made pursuant to and in accordance with the Amended and
Restated Wage Continuation Agreement between Employer and Employee dated as of
the date hereof, as further amended or restated from time to time (the "Wage
Continuation Agreement"), which is herein incorporated by reference; (ii)
Employer shall pay to Employee's wife the amount of bonus which Employee would
have received under Section 2(c) hereof for the year of Employee's death which
shall be prorated for the portion of the year ending upon the date of death; and
(iii) Employer shall continue to provide and/or pay for the existing health care
coverage to Employee's wife to the maximum extent allowable in all respects
under applicable law; PROVIDED, HOWEVER, that when Employee's surviving spouse
attains the age of sixty-five (65) years, Medicare shall be the primary provider
of medical coverage and the existing health care coverage shall be the secondary
payor; and provided FURTHER, HOWEVER, that the combined benefits of Medicare and
the Medicare supplemental policy shall be substantially the same as then
available under the Employer's existing health care coverage for active
employees; or
(b) at the time of Employee's death, Employee has no wife, then
Employer shall: (i) for a period of two (2) years, continue to pay Employee's
Base Wages at the same monthly rate
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<PAGE>
earned by Employee immediately prior to his death to Employee's beneficiaries or
estate; and (ii) pay to Employee's beneficiaries or his estate, the amount of
bonus which the Employee would have received under Section 2(c) hereof for the
year of Employee's death which shall be prorated for the portion of the year
ending upon the date of death.
7. DISABILITY OF EMPLOYEE.
(a) In the event that Employee becomes "mentally or physically
disabled" (as hereinafter defined) during the Employment Period, Employer shall
continue to pay Employee's Base Wages to Employee for the remainder of the year
after the onset of such disability, at the same monthly rate earned by Employee
immediately prior to his disability. The amount of the bonus which Employee is
to receive under Section 2(c) hereof for the year of the onset of the disability
shall be determined and paid as if Employee had not been disabled. After the
year of the onset of the disability and until the end of the Employment Period
(which for purposes of this sentence shall be June 30, 2007), Employer shall
provide the following to Employee: disability wage continuation payments, for
the remainder of Employee's life, equal to, on an annual basis, sixty percent
(60%) of the average annual Employee's Base Wages (exclusive of any reduction
for Defined Benefit Payments) for the previous three consecutive years of
employment prior to the year of the onset of the disability with the Employer,
less applicable withholding taxes, payable not less frequently than semi-monthly
("Disability Wage Continuation Payments") and (ii) annual bonus payments, for
the remainder of Employee's life, equal to sixty percent (60%) of Employee's
average annual bonus payment for the previous three consecutive years of
employment with the Employer (as such bonus is determined in accordance with
Section 2(c)), less applicable withholding taxes ("Bonus Continuation
Payments"); provided that the Disability Wage Continuation Payments and Bonus
Continuation Payments shall be reduced by the amount of any insurance payments
made to Employee or his spouse under any insurance plans provided and paid for
by Employer or any of its subsidiaries or affiliates and any Defined Benefit
Payments made to
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<PAGE>
Employee or his spouse. If Employee shall die prior to June 30, 2007, but after
Employee becomes mentally or physically disabled, then the provisions of Section
6 hereof shall apply.
(b) For purposes of this Agreement, Employee shall become "mentally
or physically disabled" as of the time the Board shall find, on the basis of
medical evidence satisfactory to the Board, in its sole discretion, that as a
result of a mental or physical condition Employee is unable to substantially
perform his normal duties of employment hereunder or is prevented from engaging
in substantially the same level of performance as he engaged in prior to the
onset of such condition, and that such disability is likely to continue for a
substantial period of time. Employee shall submit to an examination by a
physician, selected at the discretion of the Board and paid for by the Employer,
as is necessary to obtain the medical evidence needed by the Board to determine
whether Employee has become "mentally or physically disabled." Employee hereby
waives the confidentiality of the results or conclusions of such medical
examination and shall take such action as is necessary to disclose the results
or conclusions of such examination to the Board. In the event Employee fails to
submit to such examination or to take the necessary action to disclose the
results of the examination, Employee shall be deemed to be "mentally or
physically disabled."
8. TERMINATION.
(a) Employer may terminate Employee's employment hereunder at any
time for cause, which shall be deemed to include the following: (i) Employee's
engaging in fraud, misappropriation of funds, embezzlement or like conduct
committed against Employer; or (ii) Employee's conviction of a felony.
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<PAGE>
(b) Employee's employment hereunder may be terminated by Employer in
the event of Employee's voluntarily leaving the employ of Employer.
(c) If Employer terminates the employment of Employee for cause
pursuant to Section 8(a), then Employer shall not be obligated to make any
further payments to Employee under this Agreement or otherwise (including,
without limitation, any accrued and unpaid bonuses and severance benefits),
except for amounts of any earned and unpaid Base Wages. If Employer terminates
Employee's employment pursuant to Section 8(b) hereof, then Employer and/or its
successor (whether direct or indirect, by purchase, merger, consolidation, by
operation of law or otherwise), shall be obligated to continue to pay Employee
the Base Wages through the date that Employee voluntarily leaves the employ of
Employer; provided, however, that Employee shall not be entitled to any bonus
payments. If Employer terminates Employee's employment for any reason other than
for cause as set forth in Section 8(a) hereof, then Employer and/or its
successor (whether direct or indirect, by purchase, merger, consolidation, by
operation of law or otherwise), shall be obligated to continue to pay Employee
the Base Wages for the remainder of the Employment Period and any bonuses he
would have earned if still employed through the end of the Employment Period,
and shall be further obligated to continue to provide and/or pay for the
existing health care coverage to Employee for the remainder of the Employment
Period.
(d) In the event that Employee's employment with Employer is terminated
by Employer or by Employee, the parties agree that the provisions of Sections
8(c), 9, 10, 11, 12, 13, 14, 17, 18, 21, 24 and 25 hereof shall survive such
termination and continue in full force and effect.
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<PAGE>
9. NON-COMPETITION. Employee recognizes and acknowledges that the
business of Employer is the manufacture, marketing and development of friction
materials, metal stampings, powder metals, metal injection moldings, rotors,
electric motors, performance racing products and businesses related thereto.
Employee agrees that within the United States, Canada, Italy, Mexico and China
and any other location in which the Employer engaged in all or part of the
above-described business at any time during the Employment Period, and for two
(2) years from and after the date of the termination of Employee's employment
hereunder (the "Restricted Period"), Employee shall not, in any manner, directly
or indirectly on behalf of himself or any other person, firm, business or
corporation;
(a) Establish, operate or engage in, financially or otherwise, as an
owner, partner, shareholder, officer, director, licensor, licensee, principal,
agent, employee, trustee, consultant or in any other relationship or capacity,
the business of the Employer;
(b) Request or instigate any account or customer of Employer or its
subsidiaries or affiliates to withdraw, diminish, curtail or cancel any of its
business with Employer or its subsidiaries or affiliates; or
(c) Hire, solicit, or encourage to either leave the employment of or
cease working with Employer or its subsidiaries or affiliates (i) any current
employee of Employer or itits subsidiaries or affiliates (i) any current
employee of Employer or its subsidiaries or affiliates, or (ii) any employee who
has left the employment of or ceased working with Employer or its subsidiaries
or affiliates within one (1) year of the date of termination of such employee's
employment with Employer.
In the event of Employee's breach of any provision of this Section, the
running of the Restricted Period shall be automatically tolled (i.e., no part of
the Restricted Period shall expire) from and after the date of the first such
breach.
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<PAGE>
10. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that
confidential information, including, without limitation, information, knowledge
or data: (i) of a business nature such as, but not limited to, information about
cost, price, rates, profits, purchasing, suppliers, advertising, customers,
sales, marketing, promotion, compensation, employment, personnel, including
information regarding present and prospective customers and the business affairs
and financial condition of Employer; (ii) of a technical nature such as, but not
limited to, methods, know-how, processes and research; (iii) pertaining to
future developments such as, but not limited to, research and development
projects and future marketing, advertising or promotion; and (iv) pertaining to
trade secrets of Employer; and including all other matters which Employer treats
as confidential (the items described above being hereafter collectively referred
to as "Confidential Information"), are valuable, special and unique assets of
Employer. During and after the Restricted Period, Employee shall keep secret and
retain in strictest confidence, shall not use for the benefit of himself or
others except in connection with the business and affairs of Employer, any and
all Confidential Information learned or obtained by Employee before or after the
date of this Agreement, and shall not disclose such Confidential Information to
anyone outside of Employer either during or after employment by Employer, except
as required in the course of performing duties of his employment with Employer,
without the express written consent of Employer or as required by law. For the
purposes of the above disclosure exception, it is expressly recognized that,
during the Employment Period, Employee's duties include, without limitation,
providing certain information about the Company to bankers, investors, the
press, governmental agencies, and other members of the financial community in
general, and such dissemination of information will not constitute a violation
of this Section 10.
-11-
<PAGE>
11. PROPERTY OF EMPLOYER. Employee agrees to deliver promptly to the
Employer all manuals, letters, notes, notebooks, reports, computer programs and
files, memoranda, customer and supplier lists and all other materials relating
in any way to the business of Employer and in any way obtained by Employee
during the period of his employment with the Employer which are in his
possession or under his control, and all copies thereof, (i) upon termination of
Employee's employment with Employer, or (ii) at any other time at Employer's
request. Employee further agrees that he will not make or retain any copies of
any of the foregoing and that he will so represent to Employer upon termination
of his employment hereunder.
12. RIGHTS AND REMEDIES UPON BREACH. Both parties recognize that the
rights and obligations set forth in this Agreement are special, unique and of
extraordinary character. If Employee breaches, or threatens to commit a breach
of, any of the provisions of Sections 9 through 11 hereof (hereinafter referred
to as the "Restrictive Covenants"), then Employer shall have the right and
remedy to injunctive relief, which right and remedy shall be in addition to, and
not in lieu of, any other rights and remedies available to Employer pursuant to
this Agreement, any applicable law or in equity. The right and remedy to have
the Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to Employer and that money
damages will not provide adequate remedy to Employer. As to the covenants
contained in Section 9 hereof, specific performance shall be for a period of
time equal to the unexpired portion of the Restricted Period, giving full effect
to the tolling provision of Section 9 hereof, and beginning on the earlier of
the date on which the court's order becomes final and nonappealable or the date
on which all appeals have been exhausted.
-12-
<PAGE>
13. DISCLOSURE. Employer may notify anyone employing Employee or
evidencing an intention to employ Employee as to the existence and provisions of
this Agreement and of the Restrictive Covenants.
14. INDEMNIFICATION.
(a) Employer shall indemnify Employee (and his legal representative
or other successors) to the fullest extent provided by the articles or
certificate of incorporation and by-laws or code of regulations (or other
governing document) of Employer and any wholly-owned subsidiary, as may be
amended or restated from time to time.
(b) Employee shall indemnify Employer against any and all losses
incurred by Employer as a result of Employee's acts of willful misconduct or
fraud.
15. DISPUTE RESOLUTION.
(a) Should any matter to be determined in accordance with Section
5(b) not be jointly agreed to at any time, Employee agrees to mediation and, if
necessary, to submission to the Board of Directors of Employer, of such matter
in accordance with the following provisions.
(b) In the event Employee invokes the provisions of this Section
15, he will give Weinberg a written statement setting forth any differences he
has with Weinberg under Section 5(b) referencing this Section 15 and
specifically invoking the procedure provided for in this Agreement. Within seven
days, Weinberg must give a written statement responding to and raising any other
matter concerning Section 5(b) in dispute.
(c) Employee and Weinberg will meet within seven days after receipt
of such responding statement with Byron S. Krantz at such time and place as he
determines, who will serve as a mediator in an attempt to negotiate a solution
of all differences covered by the notice and response.
-13-
<PAGE>
(d) If the Employee and Weinberg do not resolve all differences
covered within the statement and response, they will, within twenty-one (21)
days from receipt of the responding statement, jointly call a special meeting of
the Board of Directors of Employer to be held in person no later than fourteen
(14) days after notice. The statement and response shall accompany the notice
and the determination by the Board of Directors of Employer of the matter(s)
shall be final and binding on Employee, Weinberg and the Company.
16. ASSIGNMENT. This Agreement is a personal services contract and it
is expressly agreed that the rights and interests of Employee hereunder may not
be sold, transferred, assigned, pledged or hypothecated (other than by will or
the laws of descent and distribution).
17. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their heirs, representatives and permitted
successors and assigns.
18. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid,
illegal, or unenforceable provision had never been contained herein.
19. BLUE-PENCILLING. If at any time it shall be determined that any of
the provisions of this Agreement are unreasonable as to time or area, or both,
by any court of competent jurisdiction, Employer shall be entitled to enforce
such provision for such period of time and within such area as may be determined
to be reasonable by such court.
20. REPRESENTATIONS OF EMPLOYEE. Employee represents and warrants, on
behalf of himself, his immediate family and any person, firm or corporation in
which he has a substantial interest, that:
-14-
<PAGE>
(a) They are not indebted to Employer in any amount whatsoever;
(b) They do not, and will not during the Restricted Period, have
any direct or indirect ownership interest in any entity with which Employer has
a business relationship or competes with Employer; provided, however, that the
ownership of, or investments in, at no time exceeding 5% of the issued and
outstanding capital stock of an entity with annual revenues in excess of $20
million shall not constitute a breach of this representation and warranty;
(c) They are not and will not become, during the Employment Period,
directly or indirectly, interested in any material contract with Employer (other
than this Agreement); and
(d) The execution of this Agreement or his employment by Employer
will not breach any agreement or covenant entered into by him that is currently
in effect.
Excluded from the foregoing representations and warranties are (i) any
and all transactions relating to that certain Shareholder Note, dated June 30,
1995 in favor of Employer as amended by a Letter Agreement, dated October 1,
1996, and (ii) transactions disclosed to the Board done on terms at least as
favorable to the Company as those which it could otherwise have obtained from
unrelated third parties.
21. CONFLICTS OF INTEREST. In the event that Employee engages in or
contemplates engagement in a transaction which does affect or could affect the
business of Employer, Employee agrees to immediately disclose in writing to the
Board all material information relating to same. Additionally, in the event that
Employer engages in or contemplates engagement in a transaction in which
Employee has a financial or personal interest, Employee shall, immediately upon
his learning of said engagement or contemplated engagement, disclose in writing
to the Board all material information relating to said interest.
-15-
<PAGE>
22. ACKNOWLEDGMENT. Employee acknowledges that: (i) he has carefully
read all of the terms of this Agreement, and that such terms have been fully
explained to him; (ii) he understands the consequences of each and every term of
this Agreement; (iii) he has had sufficient time and an opportunity to consult
with his own legal advisor prior to signing this Agreement; (iv) he had other
employment opportunities at the time he entered into this Agreement; (v) he
specifically understands that by signing this Agreement he is giving up certain
rights he may have otherwise had, and that he is agreeing to limit his freedom
to engage in certain employment during and after the termination of this
Agreement; and (vi) the limitations to his right to compete contained in this
Agreement represent reasonable limitations as to scope, duration and
geographical area, and that such limitations are reasonably related to
protection which the Employer reasonably requires.
23. NOTICES. All notices, requests, demands or other communications
hereunder shall be sent by registered or certified mail to:
Employer: Board of Directors
Hawk Corporation
200 Public Square, Suite 30-5000
Cleveland, Ohio 44114-2301
Copy to: Byron S. Krantz, Esq.
Kohrman Jackson & Krantz P.L.L.
One Cleveland Center
1375 East Ninth Street, 20th Floor
Cleveland, Ohio 44114
Employee: Norman C. Harbert
P.O. Box 127
Hiram, OH 44234
24. CAPTIONS. The captions in this Agreement are included for
convenience only and shall not in any way affect the interpretation or
construction of any provision hereof.
25. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Ohio.
-16-
<PAGE>
26. SUBMISSION TO JURISDICTION. Employer may enforce any claim arising
out of or relating to this Agreement, or arising from or related to the
employment relationship existing in connection with this Agreement in any state
or federal court having subject matter jurisdiction and located in Cleveland,
Ohio. For the purpose of any action or proceeding instituted with respect to any
such claim, Employee hereby irrevocably submits to the jurisdiction of such
courts and irrevocably consents to the service of process out of said courts by
mailing a copy thereof, by registered mail, postage prepaid, to Employee and
agrees that such service, to the fullest extent permitted by law, (i) shall be
deemed in every respect effective service of process upon him in any such suit,
action or proceeding, and (ii) shall be taken and held to be valid personal
service upon and personal delivery to him. Nothing herein contained shall affect
the right of Employer to serve process in any other manner permitted by law or
preclude Employer from bringing an action or proceeding in respect hereof in any
other country, state or place having jurisdiction over such action. Employee
irrevocably waives, to the fullest extent permitted by law, any objection which
he has or may have to the laying of the venue of any such suit, action or
proceeding brought in any such court located in Cleveland, Ohio, and any claim
that any such suit, action or proceeding brought in such a court has been
brought in an inconvenient forum.
27. WAIVER OF BREACH. The waiver by either party of a breach of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
28. AMENDMENT. This Agreement may be amended only in a writing executed
by both parties hereto.
29. ENTIRE AGREEMENT. This Agreement, the Wage Continuation Agreement
and the Consultant Agreement between Employer and Employee, dated the date
hereof (the "Consultant Agreement"), constitute the entire agreement between the
parties and this Agreement supersedes all
-17-
<PAGE>
prior and contemporaneous agreements, understandings, negotiations and
discussions, whether written or oral, of the parties hereto relating to the
transactions contemplated by this Agreement, the Wage Continuation Agreement and
the Consultant Agreement, including without limitation the Amended Original
Agreement. No course of conduct or dealing between the parties shall be deemed
to amend this Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand as of
the date first written above.
"EMPLOYER" "EMPLOYEE"
HAWK CORPORATION
By: /s/ Ronald E. Weinberg /s/ Norman C. Harbert
------------------------------- ---------------------------------
Ronald E. Weinberg Norman C. Harbert
Its: Chief Executive Officer
Attested to:
By: /s/ Byron S. Krantz
-------------------------------
Byron S. Krantz
Its: Secretary
-18-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>5
<FILENAME>l92278aex10-8.txt
<DESCRIPTION>EXHIBIT 10.8
<TEXT>
<PAGE>
Exhibit 10.8
AMENDED AND RESTATED
WAGE CONTINUATION AGREEMENT OF
HAWK CORPORATION
THIS AGREEMENT is made and entered into as of this 31st day of
December, 2001, by and among Hawk Corporation, a Delaware corporation ("Hawk"),
Friction Products Co. (together with Hawk, the "Corporation"), and Norman C.
Harbert, individually (hereinafter referred to as the "Employee").
WHEREAS, the Employee is employed by the Corporation;
WHEREAS, the Corporation recognizes the valuable services heretofore
performed for it by the Employee and wishes to encourage his continued
employment by providing this additional compensation for the Employee's services
to the Corporation;
WHEREAS, the Employee has no present intention to retire;
WHEREAS, the Employee wishes to be assured that the spouse of the
Employee at the time of his death (the "Spouse") will be entitled to a certain
minimum amount of compensation for the lifetime of the Spouse after his death;
WHEREAS, the parties entered into a Wage Continuation Agreement dated
June 30, 1995, as amended and restated in its entirety as of January 23, 1998,
which set forth the terms and conditions upon which the Corporation would pay
additional compensation to the Spouse after the Employee's death and the
Corporation and the Employee both desire to again amend and restate such
Agreement in its entirety;
WHEREAS, the Corporation has purchased insurance which provides that
Employee's designee shall receive certain insurance proceeds (the "Insurance
Benefit") upon Employee's death;
WHEREAS, Employee has designated a certain trust (the "Trust") for the
primary benefit of the Spouse as the recipient of the Insurance Benefit;
<PAGE>
WHEREAS, Employee intends that the trustee (the "Trustee") of the Trust
utilize the Insurance Benefit to purchase a monthly annuity from an "A" rated
(or comparably rated) financial institution payable to the Spouse (or certain
other beneficiaries upon the Spouse's death) for the longer of the life of the
Spouse or ten (10) years (the "Monthly Spousal Annuity"), unless the Trustee
determines not to purchase the Monthly Spousal Annuity as provided in the Trust;
and
WHEREAS, the parties hereto wish to provide terms and conditions upon
which the Corporation would supplement the Monthly Spousal Annuity after the
Employee's death;
NOW THEREFORE, in consideration of the premises and of the mutual
promises herein contained, the parties hereto agree as follows:
1. CONSIDERATION.
(a) In consideration of the Employee remaining in its employ, the
Corporation agrees that, (i) in the event of death of the Employee while the
Employee is in the active employ of the Corporation under the Amended and
Restated Employment Agreement by and between the Corporation and the Employee
dated as of December 31, 2001 (the "Employment Agreement") or while the Employee
is serving as an active consultant under the Consultant Agreement by and among
the Corporation and the Employee dated as of December 31, 2001 (the "Consultant
Agreement"), (ii) in the event of death of the Employee at any time after he had
been receiving "Disability Wage Continuation Payments" (as such term is defined
in the Employment Agreement), or (iii) if Employee is no longer acting as a
consultant to the Corporation under the Consultant Agreement because Employee is
mentally or physically disabled (as defined below), the Corporation shall pay to
the Spouse a monthly payment equal to the Tentative Payment Amount divided by
sixty
2
<PAGE>
percent (60%) (the "Wage Continuation Payment") less any applicable withholding
taxes. The term "Tentative Payment Amount" shall equal Twelve Thousand Five
Hundred Dollars ($12,500) less the After-Tax Monthly Spousal Annuity and in no
event shall be less than zero; the term "After-Tax Monthly Spousal Annuity"
shall mean the Monthly Spousal Annuity less Taxes Payable; and the term "Taxes
Payable" shall mean the portion of the Monthly Spousal Annuity subject to
federal income taxes multiplied by forty percent (40%); provided further that
the foregoing monthly payment shall be reduced (but not below zero) by the
amount of any disability insurance payments made to Employee or his spouse under
any insurance plans provided and paid for by the Corporation or any of its
affiliates and any payments made to Employee or his spouse under any
non-contributory defined benefit plan maintained by the Corporation or any of
its affiliates. The phrase "mentally or physically disabled" shall have the
meaning ascribed to it in the Employment Agreement. If the Trustee makes a
determination not to purchase the Monthly Spousal Annuity upon the death of the
Employee while the Spouse is living or if the Employee designates someone other
than the Spouse directly or indirectly through the Trust as the beneficiary of
the Insurance Benefit, the Monthly Spousal Annuity will be deemed to equal the
monthly annuity amount that could otherwise have been purchased by the Trustee
for the Spouse if such a determination had not been made. The Wage Continuation
Payment shall be payable to the Spouse in equal monthly installments commencing
with the first day of the first month following the month of the Employee's
death and shall continue monthly until the death of the Spouse.
(b) For purposes of illustrating the operation of paragraph 1(a)
above, assume that the Insurance Benefit paid to the Trust is $981,432, the
Spouse has a life expectancy of 22.5
3
<PAGE>
years for purposes of calculating the tax owed under Section 72 of the Internal
Revenue Code of 1986, as amended, and the Monthly Spousal Annuity equals
$6,006.36. The tax free portion of each monthly payment would equal $3,634.93
($981,432 divided by 22.5 divided by 12). The Taxes Payable would equal $948.57
($6,006.36 less $3,634.93 multiplied by 40%). The After-Tax Monthly Spousal
Annuity would equal $5,057.78 ($6,006.36 less $948.57). The Tentative Payment
Amount would equal $7,442.22 ($12,500 less $5,057.78). The Wage Continuation
Payment would equal $12,403.70 ($7,442.22 divided by 60%).
(c) In the event that, upon the death of the Employee, the Spouse
is not then living, the Corporation shall not be obligated to make any payments
hereunder, and neither the Employee's estate, his heirs or his other
beneficiaries shall have any claim thereto.
2. TERMINATION. This Agreement shall terminate, and the Corporation
shall have no further obligation hereunder in the event that:
A. The employment of the Employee by the Corporation is terminated
or the Employee terminates his Consultant Agreement of even date, in either case
for any reason other than his (i) death or (ii) the Employee becoming mentally
or physically disabled. Nothing contained herein shall be construed to be a
contract of employment for any term of years, nor as conferring upon the
Employee the right to continue in the employ of the Corporation in any capacity.
It is expressly understood by the parties thereto that this Agreement relates
exclusively to salary continuation benefits in return for the Employee's
services and is not intended to be an employment contract.
4
<PAGE>
B Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) becomes, by tender or exchange offer or
otherwise, a beneficial owner, directly or indirectly, of stock of the
Corporation representing fifty percent (50%) or more of the voting power of the
Corporation's then outstanding stock, exclusive of the Series D Preferred Stock
as a result of a transaction approved by vote of the Corporation's Board of
Directors prior to such transaction.
3. PAYMENT. Nothing contained in the Agreement and no action taken
pursuant to its provisions by either party hereto shall create, or be construed
to create, a trust of any kind, or a fiduciary relationship between the
Corporation and the Employee or the Spouse. The payments to the Spouse (other
than payment derived from the Insurance Benefit) shall be made from assets which
shall continue, for all purposes, to be a part of the general assets of the
Corporation, and no person, other than the Corporation, shall have, by virtue of
the provisions of this Agreement, any interest in such assets. To the extent
that any person acquires a right to receive payments from the Corporation under
the provisions hereof, such right shall be no greater than the right of any
unsecured general creditor of the Corporation.
4. INSURANCE. In the event that, in its discretion, the Corporation
purchases an insurance policy or policies (including the policy providing the
Insurance Benefit) insuring the life of the Employee to allow the Corporation to
recover, in whole, or in part, the cost of providing the benefits hereunder,
neither the Employee nor the Spouse shall have any rights whatsoever therein,
except as may be provided in any split-dollar agreement between the Corporation
and the Employer. The Corporation shall be the sole owner and beneficiary
thereof and shall possess and may exercise all
5
<PAGE>
incidents of ownership therein, except as may be provided in any split-dollar
agreement between the Corporation and the Employer.
5. PROHIBITIONS. Neither the Employee nor the Spouse shall have any
power or right to transfer, assign, anticipate, hypothecate or otherwise
encumber any part or all of the amounts payable hereunder, nor shall such
amounts be subject to seizure by any creditor of any such beneficiary, by a
preceding by law or in equity, and no such benefit shall be transferable by
operation of law in the event of bankruptcy, insolvency or death of the Employee
or the Spouse. Any such attempted assignment or transfer shall be void and shall
terminate this Agreement, and the Corporation shall thereupon have no further
liability hereunder.
6. AMENDMENT. This Agreement may not be amended, altered or modified,
except by a written instrument signed by the parties hereto, or their respective
successors or assigns, and may not be otherwise terminated except as provided
herein.
7. BINDING. This Agreement shall be binding upon and inure to the
benefit of the Corporation and its successors and assigns, and the Employee and
his heirs, executors, administrators and the Spouse. Employee may not assign
this Agreement.
8. NOTICE. Any notice, consent or demand required or permitted to be
given under the provisions of the Agreement shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or demand
is mailed to a party hereto, it shall be sent by United States certified mail,
postage prepaid, addressed to such party's last address as shown on the records
of the Corporation.
6
<PAGE>
9. CONSTRUCTION. This Agreement, and the rights of the parties
hereunder, shall be governed by and construed in accordance with the laws of the
State of Delaware.
10. INTEGRATION. This Agreement supersedes all prior arrangements,
understandings, conversations and negotiations between the parties with respect
to the subject matter of this Agreement and shall constitute the entire
agreement between the parties with respect to such matter. Without limiting the
foregoing, the Wage Continuation Agreement dated June 30, 1995, between Employee
and Corporation is hereby terminated.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ATTEST: HAWK CORPORATION AND
FRICTION PRODUCTS CO.
By: /s/ Byron S. Krantz By: /s/ Ronald E. Weinberg
----------------------- -----------------------------------------
Byron S. Krantz Ronald E. Weinberg
Secretary Chief Executive Officer
/s/ Norman C. Harbert
-----------------------------------------
NORMAN C. HARBERT
"Employee"
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>6
<FILENAME>l92278aex10-9.txt
<DESCRIPTION>EXHIBIT 10.9
<TEXT>
<PAGE>
Exhibit 10.9
CONSULTANT AGREEMENT
This CONSULTANT AGREEMENT (this "Agreement"), effective as of December
31, 2001, is made and entered into as of this 31st day of December, 2001, by and
among HAWK CORPORATION, a Delaware corporation ("Hawk"), Friction Products Co.,
an Ohio corporation (together with Hawk, the "Company") and NORMAN C. HARBERT
(the "Consultant").
RECITALS
A. Consultant is Senior Chairman of the Board of Directors of the
Company;
B. Consultant and the Company are parties to an amended and restated
employment agreement dated as of the date hereof (the "Employment Agreement");
C. The Company wants to ensure that Consultant will continue to provide
consultant services to the Company after the expiration of the employment period
provided for in the Employment Agreement;
D. Throughout and following the period that the Consultant serves as a
consultant to the Company, the Company wants Consultant to continue to protect
Confidential Information (as defined in the Employment Agreement) and not to use
his knowledge and experience during the Restricted Period (as hereinafter
defined) to assist a competitor of the Company's business; and
E. The Company and Consultant desire to make provision for the payments
and benefits that Consultant will be entitled to receive from the Company in
consideration for Consultant's obligations and actions under this Agreement;
NOW THEREFORE, in consideration of the premises and the promises and
agreements contained herein and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, and intending to be
legally bound, the Company and Executive agree as follows:
<PAGE>
1. CONSULTING SERVICES. The Company hereby retains the Consultant to
provide consulting services as may be requested by the Company, which services
shall include by way of illustration, but not by way of limitation, (a)
operation, production and management advice regarding, and assistance for, all
of the Company or its affiliates' manufacturing facilities, (b) advice and
participation in the negotiations with respect to acquisitions or divestitures
that the Company or its affiliates may from time to time consider, (c) advice
and participation in the negotiation of contracts, agreements, joint ventures
and other commitments which may have a material effect on the business,
financial condition and affairs, properties, assets, obligations, and operation
of the Company; (d) advice regarding the formulation of the annual budget and
business plan of the Company; (e) advice regarding the issuance by the Company
of any equity securities and (f) advice regarding the refinancing of any of the
Company's debt obligations or the incurrence of any additional debt by the
Company.
2. TERM OF AGREEMENT. This Agreement will begin on the earlier of June
30, 2007 or the termination of the Employment Agreement pursuant to Section 8(b)
thereof and terminate on June 30, 2012; provided that if the term of this
Agreement commences at any time prior to June 30, 2005, this Agreement shall
terminate on the day that is five years after the commencement date, unless
terminated sooner in accordance with the provisions of this Agreement.
3. COMPENSATION. The Consultant shall retain the office he is presently
housed in or its equivalent and Consultant shall be compensated for all work and
services performed under this Agreement, and reimbursed for all reasonable and
necessary expenses incurred in the performance of this Agreement, as follows:
(a) Consultant will be paid (i) sixty percent (60%) of Consultant's
average annual Base Wages (as such term is defined in the Employment Agreement)
(exclusive of any reduction for
-2-
<PAGE>
Defined Benefit Payments as such term is defined in the Employment Agreement)
for the previous three consecutive years of employment with the Company
immediately preceding the commencement date of this Agreement, less applicable
withholding taxes, payable not less frequently than semi-monthly ("Consultant
Payments") and (ii) annual bonus payments equal to sixty percent (60%) of the
Consultant's average annual bonus payment for the previous three consecutive
years of employment with the Company immediately preceding the commencement date
of this Agreement (as such bonus is determined in accordance with Section 2(c)
of the Employment Agreement), less applicable withholding taxes ("Bonus
Continuation Payments"); provided that the Consultant Payments and Bonus
Continuation Payments shall be reduced by the amount of any payments made to the
Consultant or his spouse under any non-contributory defined benefit plan
maintained by the Company; and
(b) The Company will reimburse the Consultant for all reasonable and
necessary expenses actually incurred by Consultant for travel, telephone calls,
and other related expenses in the performance of this Agreement upon
presentation of acceptable documentation for expenses in excess of $25.
4. PERFORMANCE STANDARD. The Consultant shall perform all consulting
services provided hereunder to the satisfaction of the Company as reasonably
requested by Company. Consultant's contact at the Company shall be Ronald E.
Weinberg, Chief Executive Officer of the Company, or his successor or
successors, at the address set out in Paragraph 13, Notices.
5. PERFORMANCE SCHEDULE. The Consultant shall be free at all times to
arrange the time and manner of performance of the consulting services and will
not be expected to maintain a schedule of duties or assignments except as needed
to meet deadlines or schedules established by
-3-
<PAGE>
the Company. The Consultant will work as he may so independently decide. The
Company shall specify milestones, meeting and conference schedules, and due date
for deliverables.
6. DELEGATION AND ASSIGNMENT. The Consultant recognizes that the
Company's primary reason for entering into this Agreement is to benefit from his
personal services and that he is central to the performance of this Agreement.
The Consultant recognizes the important responsibility this places on him and
will seek to ensure that those services are provided in complete fulfillment of
this Agreement. The Consultant may not assign, subcontract or delegate the
performance of the consulting services or other duties under this Agreement
without the prior written consent of the Company, which consent may be withheld
in the Company's sole and absolute discretion.
7. AVAILABILITY. The Consultant will be available on reasonable notice
at all times and will provide up-to-date information regarding his address,
telephone number, and other means of contacting him.
8. INDEPENDENT CONTRACTOR. Both the Company and the Consultant agree
that the Consultant will act as an independent contractor with respect to the
Company in the performance of the Consulting Services and all other duties under
this Agreement. Accordingly, except as otherwise provided, the Consultant
acknowledges that he will not be eligible for any benefits provided by the
Company to its employees. Except as otherwise provided, the Consultant shall be
solely responsible for arranging withholding and payment of all taxes arising
out of the Consultant's activities in accordance with this Agreement, including
without limitation, federal and state income taxes, social security taxes,
unemployment insurance taxes, and any other taxes or business license fees
related to the Consultant's business. Moreover, the Consultant agrees to obtain
all necessary insurance coverage, including, without limitation, liability,
worker's compensation and state
-4-
<PAGE>
disability insurance. The Consultant shall not represent directly or indirectly
that he is an agent or legal representative of the Company, nor shall the
Consultant incur any liabilities or obligations of any kind in the name of or on
behalf of the Company except as specifically authorized in writing by the
Company. The Consultant shall comply with all applicable federal, state, and
local laws, ordinances and regulations.
9. NON-COMPETITION AND CONFIDENTIAL INFORMATION. The provisions of
Sections 9, 10, 11, 12, 13 and 18 of the Employment Agreement shall continue to
apply during the term of this Agreement; provided that the Restricted Period (as
defined in the Employment Agreement) shall expire two years after the date of
the termination of this Agreement.
10. CONFLICTS OF INTEREST. The Consultant agrees to refrain from
accepting or conducting assignments from any person, firm or company during the
term of this Agreement which would conflict with or impair any of this
Agreement. The Consultant agrees promptly to disclose to the Company any
business relationship or other matter that may raise a question concerning a
conflict of interest. Should any such conflict arise, in the reasonable
determination of the Company, this Agreement may be terminated by the Company
without notice or further obligation, except that the Consultant shall be paid,
in accordance with this Agreement; provided that prior to any such termination
the Company must notify Consultant in writing of the conflict and provide
Consultant with thirty (30) days to cure such conflict.
11. DEFAULT. If either party fails to perform any material obligation
under this Agreement or violates any material term or condition of this
Agreement, and such failure or violation is not cured within ten (10) days
following receipt of a default notice from the other party, then the other party
shall have the right to terminate this Agreement upon written notice to the
defaulting party.
-5-
<PAGE>
12. TERMINATION.
(a) Without limiting the provisions of paragraphs 10 and 11, above,
either party may terminate this Agreement at any time by delivering to the other
party at least thirty (30) calendar days prior written notice of termination. In
the case of termination by the Company pursuant to this paragraph or paragraphs
10 or 11, the Company shall pay the Consultant the Consultant Payments and Bonus
Continuation Payments remaining for the duration of the Agreement and any
expenses incurred by Consultant prior to the termination. The Consultant
Payments and Bonus Continuation Payments shall continue to be made in accordance
with the prior payments made to Employee hereunder or under the Employment
Agreement. Notwithstanding the foregoing, termination shall not affect the
Amended and Restated Wage Continuation Agreement of even date ("WCA"). The WCA
shall remain in full force and effect until June 30, 2012, unless otherwise
terminated by the terms of said WCA.
(b) In addition, this Agreement shall terminate, and the Corporation
shall have no further obligation hereunder in the event that:
(i) The Consultant voluntarily terminates this Agreement or
dies;
(ii) The Consultant becomes mentally or physically disabled as
such term is defined in the Employment Agreement; or
(iii) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) becomes, by
tender or exchange offer or otherwise, a beneficial owner,
directly or indirectly, of stock of the Corporation
representing fifty percent (50%) or more of the voting
power of the Corporation's then outstanding stock,
exclusive of the Series D Preferred
-6-
<PAGE>
Stock as a result of a transaction approved by vote
of the Corporation's Board of Directors prior to such
transaction.
13. ASSIGNMENT. This Agreement is a personal services contract and it
is expressly agreed that the rights and interests of Consultant hereunder may
not be sold, transferred, assigned, pledged or hypothecated.
14. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their heirs, representatives and permitted
successors and assigns.
15. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid,
illegal, or unenforceable provision had never been contained herein.
16. NOTICES. All notices, requests, demands or other communications
hereunder shall be sent by registered or certified mail to:
The Company: Board of Directors
Hawk Corporation
200 Public Square, Suite 30-5000
Cleveland, Ohio 44114-2301
Copy to: Byron S. Krantz, Esq.
Kohrman Jackson & Krantz P.L.L.
One Cleveland Center
1375 East Ninth Street, 20th Floor
Cleveland, Ohio 44114-1793
Consultant: Norman C. Harbert
P.O. Box 127
Hiram, OH 44234
-7-
<PAGE>
17. CAPTIONS. The captions in this Agreement are included for
convenience only and shall not in any way affect the interpretation or
construction of any provision hereof.
18. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Ohio.
19. SUBMISSION TO JURISDICTION. The Company may enforce any claim
arising out of or relating to this Agreement, or arising from or related to the
employment relationship existing in connection with this Agreement in any state
or federal court having subject matter jurisdiction and located in Cleveland,
Ohio. For the purpose of any action or proceeding instituted with respect to any
such claim, Consultant hereby irrevocably submits to the jurisdiction of such
courts and irrevocably consents to the service of process out of said courts by
mailing a copy thereof, by registered mail, postage prepaid, to Consultant and
agrees that such service, to the fullest extent permitted by law, (i) shall be
deemed in every respect effective service of process upon him in any such suit,
action or proceeding, and (ii) shall be taken and held to be valid personal
service upon and personal delivery to him. Nothing herein contained shall affect
the right of the Company to serve process in any other manner permitted by law
or preclude the Company from bringing an action or proceeding in respect hereof
in any other country, state or place having jurisdiction over such action.
Consultant irrevocably waives, to the fullest extent permitted by law, any
objection which he has or may have to the laying of the venue of any such suit,
action or proceeding brought in any such court located in Cleveland, Ohio, and
any claim that any such suit, action or proceeding brought in such a court has
been brought in an inconvenient forum.
20. WAIVER OF BREACH. The waiver by either party of a breach of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
-8-
<PAGE>
21. AMENDMENT. This Agreement may be amended only in a writing executed
by both parties hereto.
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and this Agreement supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether written or
oral, of the parties hereto relating to the transactions contemplated by this
Agreement. No course of conduct or dealing between the parties shall be deemed
to amend this Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand as of
the date first written above.
"COMPANY" "CONSULTANT"
Hawk Corporation and Friction Products Co.
By: /s/ Ronald E. Weinberg By: /s/ Norman C. Harbert
------------------------------ -----------------------------
Ronald E. Weinberg Norman C. Harbert
Its: Chief Executive Officer
Attested to:
By: /s/ Byron S. Krantz
------------------------------
Byron S. Krantz
Its: Secretary
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>7
<FILENAME>l92278aex10-30.txt
<DESCRIPTION>EXHIBIT 10.30
<TEXT>
<PAGE>
Exhibit 10.30
================================================================================
================================================================================
CREDIT AGREEMENT
dated as of
May 1, 1998
among
HAWK CORPORATION,
as the Borrower,
THE LENDING INSTITUTIONS NAMED THEREIN,
as Lenders,
and
KEYBANK NATIONAL ASSOCIATION
as the Administrative Agent
---------------------
AMENDMENT NO. 4
to
CREDIT AGREEMENT
dated as of
March 25, 2002
---------------------
================================================================================
================================================================================
<PAGE>
AMENDMENT NO. 4 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 4 TO CREDIT AGREEMENT is dated as of March 25, 2002
(this "Amendment") among the following:
(i) HAWK CORPORATION, a Delaware corporation (the "Borrower");
(ii) the Lenders a party to the Credit Agreement, as
hereinafter defined; and
(iii) KEYBANK NATIONAL ASSOCIATION, a national banking
association, as the Administrative Agent under the Credit Agreement
(the "Administrative Agent").
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Administrative Agent entered into
the Credit Agreement, dated as of May 1, 1998 (as amended and as the same may
from time to time be further amended, restated or otherwise modified, the
"Credit Agreement"; the terms defined therein are used herein as so defined).
(2) The parties hereto desire to modify certain terms and provisions of
the Credit Agreement, all as more fully set forth below.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. AMENDMENTS.
1.1. AMENDMENTS TO DEFINITIONS. Section 1.1 of the Credit Agreement is
hereby amended to delete the definitions of "Alternative Currency", "Applicable
Eurodollar Margin", "Applicable Prime Rate Margin", "Borrowing Base", "Maximum
Available Revolving Commitment", "Pricing Grid Table", and "Total General
Revolving Commitment" therefrom and to insert in place thereof, respectively,
the following:
"Alternative Currency" means Euros or Dollars.
"Applicable Eurodollar Margin" shall mean:
(a) for any date prior to March 26, 2002, as such margin shall
have been determined in accordance with the definition of Applicable
Eurodollar Margin in effect prior to March 26, 2002;
(b) from March 26, 2002 through May 15, 2002, (i) 400 basis
points for General Revolving Loans, and (ii) 450 basis points for Term
Loans; and
(c) commencing with the fiscal quarter of the Borrower ended
March 31, 2002, and continuing with each fiscal quarter thereafter, the
number of basis points determined by the Administrative Agent in
accordance with the Pricing Grid Table, based upon the
<PAGE>
Adjusted Leverage Ratio. Changes in the Applicable Eurodollar Margin
shall become effective on the first day of the month following the
receipt by the Administrative Agent, pursuant to Section 8.1(a) or (b)
of the financial statements of the Borrower.
Notwithstanding the foregoing, unless otherwise agreed by the Required
Lenders and subject to section 2.8(d), during any period when (A) the
Borrower shall have failed to timely deliver its financial statements
referred to in Section 8.1(a) or (b), (B) a Default under Section
10.1(a) shall have occurred and be continuing, or (C) an Event of
Default shall have occurred and be continuing, the Applicable
Eurodollar Margin for all Loans that are Eurodollar Loans shall be the
highest number of basis points indicated therefor in the Pricing Grid
Table, regardless of the Adjusted Leverage Ratio at such time. Any
changes in the Applicable Eurodollar Margin for Loans shall be
determined by the Administrative Agent in accordance with the above
provisions and the Administrative Agent shall promptly provide notice
of such determinations to the Borrower and the Lenders, which
determination by the Administrative Agent shall be conclusive and
binding absent manifest error.
"Applicable Prime Rate Margin" shall mean:
(a) for any date prior to March 26, 2002, as such margin shall
have been determined in accordance with the definition of Applicable
Prime Rate Margin in effect prior to March 26, 2002;
(b) from March 26, 2002 through May 15, 2002, (i) 275 basis
points for General Revolving Loans, and (ii) 325 basis points for Term
Loans; and
(c) commencing with the fiscal quarter of the Borrower ended
March 31, 2002, and continuing with each fiscal quarter thereafter, the
number of basis points determined by the Administrative Agent in
accordance with the Pricing Grid Table, based upon the Adjusted
Leverage Ratio. Changes in the Applicable Prime Rate Margin shall
become effective on the first day of the month following the receipt by
the Administrative Agent, pursuant to Section 8.1(a) or (b) of the
financial statements of the Borrower.
Notwithstanding the foregoing, unless otherwise agreed by the Required
Lenders and subject to section 2.8(d), during any period when (A) the
Borrower shall have failed to timely deliver its financial statements
referred to in Section 8.1(a) or (b), (B) a Default under Section
10.1(a) shall have occurred and be continuing, or (C) an Event of
Default shall have occurred and be continuing, the Applicable Prime
Rate Margin for all Loans that are Prime Rate Loans shall be the
highest number of basis points indicated therefor in the Pricing Grid
Table, regardless of the Adjusted Leverage Ratio at such time. Any
changes in the Applicable Prime Rate Margin for Loans shall be
determined by the Administrative Agent in accordance with the above
provisions and the Administrative Agent shall promptly provide notice
of such determinations to the Borrower and the Lenders, which
determination by the Administrative Agent shall be conclusive and
binding absent manifest error.
2
<PAGE>
"Borrowing Base" shall mean an amount not in excess of (a) the
sum of (i) 85% of the amount due and owing on Eligible Accounts
Receivable, plus (ii) the lesser of (A) 60% of the aggregate of the
cost or market value (whichever is lower) of Eligible Inventory, or (B)
$18,000,000, minus (b) the aggregate principal amount of all Term Loans
then outstanding, plus (c) $5,000,000.
"Maximum Available Revolving Commitment" shall mean at any
time an amount equal to the lesser of (a) the Total General Revolving
Commitment and (b) the Borrowing Base.
"Pricing Grid Table" shall mean the following pricing grid
table:
<TABLE>
<CAPTION>
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
Applicable
Applicable Prime Rate
Eurodollar Margin Margin for Applicable Applicable
for General Eurodollar Prime Rate Applicable
General Revolving Revolving Margin for Margin for Term Facility Fee
Adjusted Leverage Ratio Loans Loans Term Loans Loans Rate
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Greater than 5.50 to 1.00 400 basis points 275 basis 450 basis points 325 basis points 50 basis points
points
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
Greater than 4.75 to 1.00 350 basis points 225 basis 400 basis points 275 basis points 50 basis points
but less than or equal to points
5.50 to 1.00
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
Greater than 4.00 to 1.00 300 basis points 175 basis 350 basis points 225 basis points 50 basis points
but less than or equal to points
4.75 to 1.00
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
Greater than 3.50 to 1.00 275 basis points 150 basis 325 basis points 200 basis points 50 basis points
but less than or equal to points
4.00 to 1.00
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
Less than or equal to 3.50 250 basis points 125 basis 300 basis points 175 basis points 50 basis points
to 1.00 points
- ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
</TABLE>
"Total General Revolving Commitment" shall mean $25,000,000,
or such lesser amount as may be determined pursuant to section 4.2, 4.3
or 10.2 hereof.
1.2. AMENDMENT TO CONSOLIDATED EBIT. The definition of
"Consolidated EBIT" in Section 1.1 of the Credit Agreement is hereby amended
to add the following sentence thereto:
In calculating Consolidated Net Income for purposes of determining of
Consolidated EBIT for any period including the fiscal quarter ending
March 31, 2002, (1) the amendment fee payable in connection with
Amendment No. 4 to Credit Agreement, dated as of March 26, 2002, among
the Borrower, the Administrative Agent, and the Lenders (the "Fourth
Amendment"), (2) the legal fees related to the Fourth Amendment, and
(3) the fees and expenses related to the Collateral Audit (excluding
any updates thereto) may be added back to Consolidated Net Income;
provided that any fees and expenses described in subpart (3) above not
added back to Consolidated Net Income for the fiscal quarter ending
March 31,
3
<PAGE>
2002 may be added back to Consolidated Net Income for the fiscal
quarter ending June 30, 2002.
1.3. AMENDMENT TO ADD BI-MONTHLY BORROWING BASE CERTIFICATES.
Section 8.1(j) of the Credit Agreement is hereby amended and restated as
follows:
(j) BORROWING BASE CERTIFICATE. Within 15 days after the
fifteenth day and the last day of each calendar month, and at such
other time as the Administrative Agent may request, (i) a Borrowing
Base Certificate prepared by an Authorized Officer of the Borrower and
(ii) an Accounts aging report and Inventory report, each in form and
substance satisfactory to the Administrative Agent and signed by an
Authorized Officer of the Borrower, provided that the Inventory report
and the Borrowing Base Certificate with respect to Inventory will be
updated only for each certificate that is delivered 15 days after the
last day of each calendar month;
1.4. AMENDMENT TO ADD MONTHLY FINANCIAL STATEMENTS AND COLLATERAL
AUDITS. Section 8.1 of the Credit Agreement is hereby amended to add the
following subsections (k) and (l) thereto:
(k) MONTHLY FINANCIAL STATEMENTS. As soon as available and in
any event within 15 days after the last day of each calendar month, the
unaudited condensed consolidated balance sheets of the Borrower and its
consolidated Subsidiaries as at the end of such monthly period and the
related unaudited condensed consolidated statements of income and of
cash flows for such monthly period, and setting forth, in the case of
such unaudited consolidated statements of income and of cash flows,
comparative figures for the related periods in the prior fiscal year,
and which consolidated financial statements shall be certified on
behalf of the Borrower by the Chief Financial Officer or other
Authorized Officer of the Borrower, subject to changes resulting from
normal year-end audit adjustments.
(l) COLLATERAL AUDITS. On or before April 15, 2002 (or such
later date agreed to in writing by Agent in its sole discretion), an
audit of the Accounts and Inventory of the Borrower and its
Subsidiaries, in scope, form, and detail satisfactory to the
Administrative Agent, performed by a nationally recognized firm (the
"Audit Firm") acceptable to the Administrative Agent (the "Collateral
Audit"), the costs and expenses of which shall be paid by the Borrower.
In addition, on the dates on which the Borrower is required to deliver
financial statements pursuant to subsection (b) hereof, the Borrower
shall cause the Audit Firm to complete quarterly updates to the
Collateral Audit, in each case in form and detail satisfactory to the
Administrative Agent.
1.5. AMENDMENT TO CORRECT PRIORITY DEBT PROVISO. Section 9.4(c) of
the Credit Agreement is hereby amended to delete subparts (A) and (B) therefrom
and to insert in place thereof the following:
provided that (A) at the time of any incurrence thereof after the date
hereof, and after giving effect thereto, the Borrower would be in
compliance with section 9.8, and no Event
4
<PAGE>
of Default shall have occurred and be continuing or would result
therefrom; and (B) the aggregate outstanding principal amount (using
Capitalized Lease Obligations in lieu of principal amount, in the case
of any Capital Lease) of Priority Debt permitted by this clause (c),
exclusive of the guarantees by Subsidiaries of the Borrower of the
Borrower's Senior Notes, shall not exceed an amount equal to the
greater of (x) $8,500,000, or (y) 10% of the Borrower's Consolidated
Net Worth as of the end of the most recent fiscal period for which
financial statements have been delivered to the Lenders hereunder;
1.6. AMENDMENT TO LOANS AND ADVANCES TO, AND INVESTMENTS IN,
FOREIGN SUBSIDIARIES. Section 9.5(k) of the Credit Agreement is hereby amended
to delete the reference to "$13,000,000" therefrom and to insert "$17,000,000"
in place thereof.
1.7. AMENDMENT TO SHARE REPURCHASES BASKET. Section 9.5(o)(ii)(A)
of the Credit Agreement is hereby amended to delete subpart (1) therefrom and to
insert in place thereof the following:
(1) repurchase shares of its outstanding capital stock up to
an aggregate amount of (x) $0.00 for the period from July 1, 2000
through March 25, 2002, and (y) $100,000 on March 26, 2002 and
thereafter.
1.8. AMENDMENT TO CASH DIVIDENDS BASKET. Section 9.6 of the Credit
Agreement is hereby amended to delete subpart (iii) therefrom and to insert in
place thereof the following:
(iii) the aggregate consideration paid by the Borrower and its
Subsidiaries for all purchases, redemptions, retirements, or other
acquisitions of any capital stock of any class of the Borrower is not
in excess of (A) $0.00 for the period from July 1, 2000 through March
25, 2002, and (B) $200,000 on March 26, 2002 and thereafter.
1.9. AMENDMENT TO LEVERAGE RATIO. Section 9 of the Credit Agreement
is hereby amended to delete section 9.8 therefrom and to insert in place thereof
the following:
9.8. LEVERAGE RATIO. The Borrower shall not permit at any time
the Leverage Ratio to exceed (i) 3.80 to 1.00 on the Closing Date
through December 30, 1998, (ii) 3.50 to 1.00 on December 31, 1998
through June 29, 2001, (iii) 4.10 to 1.00 on June 30, 2001 through
September 29, 2001, (iv) 4.30 to 1.00 on September 30, 2001 through
December 30, 2001, (v) 5.00 to 1.00 on December 31, 2001 through March
30, 2002, (vi) 6.90 to 1.00 on March 31, 2002 through June 29, 2002,
(vii) 6.25 to 1.00 on June 30, 2002 through September 29, 2002, (viii)
5.65 to 1.00 on September 30, 2002 through December 30, 2002, and (ix)
4.30 to 1.00 on December 31, 2002 and thereafter.
1.10. AMENDMENT TO INTEREST COVERAGE RATIO. Section 9 of the Credit
Agreement is hereby amended to delete section 9.9 therefrom and to insert in
place thereof the following:
9.9. INTEREST COVERAGE RATIO. The Borrower shall not permit at
any time (a) the Interest Coverage Ratio to be less than (i) 2.00 to
1.00 on the Closing Date through June 29, 2001, and (ii) 1.20 to 1.00
on June 30, 2001 through September 29, 2001, and (b)
5
<PAGE>
the Adjusted Interest Coverage Ratio to be less than (i) 2.40 to 1.00
on September 30, 2001 through December 30, 2001, (ii) 2.10 to 1.00 on
December 31, 2001 through March 30, 2002, (iii) 1.53 to 1.00 on March
31, 2002 through June 29, 2002, (iv) 1.71 to 1.00 on June 30, 2002
through September 29, 2002, (v) 1.80 to 1.00 on September 30, 2002
through December 30, 2002, and (vi) 2.27 to 1.00 on December 31, 2002
and thereafter.
1.11. AMENDMENT TO FIXED CHARGE COVERAGE RATIO. Section 9 of the
Credit Agreement is hereby amended to delete section 9.14 therefrom and to
insert in place thereof the following:
9.14. FIXED CHARGE COVERAGE RATIO. The Borrower shall not
permit at any time the Fixed Charge Coverage Ratio to be less than (a)
1.00 to 1.00 on June 30, 2001 through December 30, 2001, (b) 0.83 to
1.00 on December 31, 2001 through March 30, 2002, (c) 0.72 to 1.00 on
March 31, 2002 through June 29, 2002, (d) 0.68 to 1.00 on June 30, 2002
through September 29, 2002, (e) 0.72 to 1.00 on September 30, 2002
through December 30, 2002, and (f) 0.95 to 1.00 on December 31, 2002
and thereafter.
1.12. AMENDMENT TO REPLACE ANNEX I. The Credit Agreement is hereby
amended to delete ANNEX I therefrom and to insert in place thereof ANNEX I
attached hereto.
1.13. AMENDMENT TO FORM OF BORROWING BASE CERTIFICATE. The Credit
Agreement is hereby amended to delete ANNEX VIII therefrom and to insert in
place thereof ANNEX VIII attached hereto.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants as follows:
2.1. AUTHORIZATION AND VALIDITY OF AMENDMENT. This Amendment has
been duly authorized by all necessary corporate action on the part of the
Borrower, has been duly executed and delivered by a duly authorized officer of
the Borrower, and constitutes the valid and binding agreement of the Borrower,
enforceable against the Borrower in accordance with its terms.
2.2. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Credit Parties contained in the Credit Agreement or in the
other Credit Documents are true and correct in all material respects on and as
of the date hereof, as though made on and as of the date hereof, except to the
extent that such representations and warranties expressly relate to an earlier
specified date, in which case such representations and warranties are hereby
reaffirmed as true and correct in all material respects as of the date when
made.
2.3. NO EVENT OF DEFAULT. No Default or Event of Default exists or
immediately hereafter will begin to exist.
2.4. COMPLIANCE. The Borrower is in full compliance with all
covenants and agreements contained in the Credit Agreement, as amended hereby,
and the other Credit Documents to which it is a party.
6
<PAGE>
2.5. NO CLAIMS. The Borrower is not aware of any claim or offset
against, or defense or counterclaim to, any of its or any Subsidiary's
obligations or liabilities under the Credit Agreement or any other Credit
Document.
SECTION 3. RATIFICATIONS.
Except as expressly modified and superseded by this Amendment, the
terms and provisions of the Credit Agreement are ratified and confirmed and
shall continue in full force and effect.
SECTION 4. CLOSING DELIVERIES.
Concurrently herewith:
(a) the Borrower shall cause each Guarantor of Payment to consent
and agree to and acknowledge the terms of this Amendment;
(b) the Borrower shall provide to the Administrative Agent and the
Lenders an officer's certificate certifying the names of the officers of the
Borrower authorized to sign this Amendment and each Guarantor of Payment
authorized to sign the attached Guarantor Acknowledgment, together with the true
signatures of such officers and certified copies of the resolutions of the board
of directors or executive committee of the Borrower and each Guarantor of
Payment, evidencing approval of the execution and delivery of this Amendment and
the Guarantor Acknowledgment;
(c) the Borrower shall pay to the Administrative Agent, for the
pro rata benefit of each Lender that signs this Amendment on or before 5:00 p.m.
(Cleveland, Ohio time) on March 25, 2002, an amendment fee equal to 62.50 basis
points times such Lender's Commitment;
(d) the Borrower shall pay to the Administrative Agent, the fees
agreed upon by the Borrower and the Administrative Agent and set forth in the
administrative agent fee letter, dated as of the date hereof, executed and
delivered by the Administrative Agent to the Borrower;
(e) the Borrower shall pay all legal fees and expenses of the
Administrative Agent in connection with this Amendment and the documents
executed in connection herewith; and
(f) the Borrower shall provide such other items and shall satisfy
such other conditions as may be reasonably required by the Administrative Agent
and the Lenders.
SECTION 5. MISCELLANEOUS.
5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment shall survive the
execution and delivery of this Amendment, and no investigation by the
Administrative Agent or any Lender or any subsequent Loan or other Credit Event
shall affect the representations and warranties or the right of the
Administrative Agent or any Lender to rely upon them.
7
<PAGE>
5.2. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any
and all other agreements, instruments or documentation now or hereafter executed
and delivered pursuant to the terms of the Credit Agreement as amended hereby,
are hereby amended so that any reference therein to the Credit Agreement shall
mean a reference to the Credit Agreement as amended hereby.
5.3. SEVERABILITY. Any term or provision of this Amendment held by
a court of competent jurisdiction to be invalid or unenforceable shall not
impair or invalidate the remainder of this Amendment and the effect thereof
shall be confined to the term or provision so held to be invalid or
unenforceable.
5.4. APPLICABLE LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Ohio without regard to
conflicts of laws provisions.
5.5. HEADINGS. The headings, captions and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
5.6. ENTIRE AGREEMENT. This Amendment is specifically limited to
the matters expressly set forth herein. This Amendment and all other
instruments, agreements and documentation executed and delivered in connection
with this Amendment embody the final, entire agreement among the parties hereto
with respect to the subject matter hereof and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the matters covered by this Amendment, and may not be
contradicted or varied by evidence of prior, contemporaneous or subsequent oral
agreements or discussions of the parties hereto. There are no oral agreements
among the parties hereto relating to the subject matter hereof or any other
subject matter relating to the Credit Agreement. Except as set forth herein, the
Credit Agreement shall remain in full force and effect and be unaffected hereby.
5.7. WAIVER OF CLAIMS. The Borrower, by signing below, hereby
waives and releases Administrative Agent and each of the Lenders and their
respective directors, officers, employees, attorneys, affiliates and
subsidiaries from any and all claims, offsets, defenses and counterclaims of
which the Borrower is aware, such waiver and release being with full knowledge
and understanding of the circumstances and effect thereof and after having
consulted legal counsel with respect thereto.
5.8. COUNTERPARTS. This Amendment may be executed by the parties
hereto separately in one or more counterparts and by facsimile signature, each
of which when so executed shall be deemed to be an original, but all of which
when taken together shall constitute one and the same agreement.
[Remainder of page intentionally left blank.]
8
<PAGE>
5.9. JURY TRIAL WAIVER. EACH OF THE PARTIES TO THIS AMENDMENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE OTHER CREDIT
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY HERETO
HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
as of the date first above written.
HAWK CORPORATION
By: /s/ Thomas A. Gilbride
--------------------------------------
Name: Thomas A. Gilbride
-----------------------------------
Title: Vice President - Finance
----------------------------------
KEYBANK NATIONAL
ASSOCIATION,
as the Administrative Agent and as a
Lender
By:/s/ Thomas J. Purcell
--------------------------------------
Name: Thomas J. Purcell
-----------------------------------
Title: Senior Vice President
----------------------------------
NATIONAL CITY BANK
By: /s/ Eric R. Giesecke
--------------------------------------
Name: Eric R. Giesecke
-----------------------------------
Title: Assistant Vice President
----------------------------------
LASALLE BANK NATIONAL
ASSOCIATION
By:/s/ Tricia Somoles
--------------------------------------
Name: Tricia Somoles
-----------------------------------
Title: Commercial Loan Officer
----------------------------------
Signature Page 1 of 2
<PAGE>
COMERICA BANK
By: /s/ Dan M. Roman
--------------------------------------
Name: Dan M. Roman
-----------------------------------
Title: First Vice President
----------------------------------
BANK ONE, N.A.
By: /s/James M. Malz
--------------------------------------
Name: James M. Malz
-----------------------------------
Title: First Vice President
----------------------------------
HARRIS TRUST AND SAVINGS
BANK
By: /s/ Thad D. Raschle
--------------------------------------
Name: Thad D. Raschle
-----------------------------------
Title: Vice President
----------------------------------
Signature Page 2 of 2
<PAGE>
<TABLE>
<CAPTION>
ANNEX I
INFORMATION AS TO LENDERS
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
GENERAL REVOLVING GENERAL REVOLVING SWING LINE TERM LOAN NOTICE ADDRESS FOR
NAME OF LENDER FACILITY PERCENTAGE COMMITMENT COMMITMENT COMMITMENT THE LENDERS
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
KeyBank National 26.470588238% $6,617,647.06 $5,000,000.00 $4,632,352.94165 KeyBank National
Association Association
127 Public Square
Cleveland, Ohio
44114
Attn: Large
Corporate Banking
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
LaSalle Bank National 20.588235294% $5,147,058.82 $0.00 $3,602,941.17645 LaSalle Bank
Association National
Association
1300 East Ninth St.
Suite 1000
Cleveland, OH
44114
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
Bank One, N.A. 14.705882352% $3,676,470.59 $0.00 $2,573,529.41160 Bank One, N.A.
600 Superior Ave.
Cleveland, OH
44114
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
Comerica Bank 14.705882352% $3,676,470.59 $0.00 $2,573,529.41160 Comerica Bank
500 Woodward Ave.
Detroit, MI 48226
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
National City Bank 11.764705882% $2,941,176.47 $0.00 $2,058,823.52935 National City Bank
1900 East Ninth St.
Cleveland, OH
44114
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
Harris Trust and 11.764705882% $2,941,176.47 $0.00 $2,058,823.52935 Harris Trust and
Savings Bank Savings Bank
111 West Monroe St.
Tenth Floor West
Chicago, IL 60603
- ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
</TABLE>
A-1
<PAGE>
ANNEX VIII
FORM OF
BORROWING BASE CERTIFICATE
Calculated as of: __________________
Calendar Month Ended:__________________
I, the undersigned and ________________ of Hawk Corporation, a Delaware
corporation (the "Borrower"), do hereby certify pursuant to Credit Agreement,
dated as of May 1, 1998, as amended (the "Credit Agreement"), among Borrower,
the lending institutions listed on ANNEX I thereto (collectively, the
"Lenders"), and KeyBank National Association, as administrative agent for the
Lenders (the "Administrative Agent"), that the following calculations have been
made in accordance with the provisions of the Credit Agreement. All capitalized
terms used herein and not defined herein shall have the meaning given to such
terms in the Credit Agreement.
A. CALCULATIONS
1. ACCOUNTS
a. Domestic Accounts Receivable $____________
b. Ineligible Accounts $____________
c. Eligible Accounts Receivable $____________
(a minus b)
d. 85% of Eligible Accounts Receivable $____________
2. INVENTORY
a. Domestic Inventory $____________
b. Ineligible Inventory $____________
c. Eligible Inventory $____________
(a minus b)
d. 60% of Eligible Inventory $____________*
*cannot exceed inventory
cap of $18,000,000)
3. TOTAL ELIGIBLE ACCOUNTS/INVENTORY $____________
(1d plus 2d)
B. BORROWING BASE
1. Total Eligible Account/Inventory $____________
(A3 above)
2. Aggregate principal amount of $____________
outstanding Term Loans
A-2
<PAGE>
3. Alternative Currency Advances/
Overadvance Amount $5,000,000.00
4. Net Borrowing Base $____________
(1 minus 2 plus 3)
C. AVAILABILITY
1. Net Borrowing Base $____________
(B4 above)
2. Revolving Credit Exposure
a. Outstanding General Revolving Loans $____________
b. Outstanding Swing Line Revolving Loans $____________
c. Dollar Equivalent of outstanding
Alternative Currency Advances $____________
d. Letter of Credit Outstandings $____________
e. Revolving Credit Exposure $____________
(total of a through d above)
3. Availability
The lesser of (a) $25,000,000, or (b) the Net
Borrowing Base minus the Revolving Credit
Exposure $____________
For purposes of inducing the Administrative Agent and the Lenders to
grant Loans and issue Letters of Credit to the Borrower pursuant to the terms of
the Credit Agreement, I hereby certify that this Borrowing Base Certificate and
the information contained herein is true and correct and that no Default or
Event of Default has occurred under the Credit Agreement.
HAWK CORPORATION
By:_________________________
Name: ______________________
Title: _____________________
A-3
<PAGE>
GUARANTOR ACKNOWLEDGMENT
Each of the undersigned consents and agrees to and acknowledges the
terms of the foregoing Amendment No. 4 to Credit Agreement. The undersigned
specifically agrees to the waivers set forth in such agreement, including, but
not limited to, the jury trial waiver. Each of the undersigned further agrees
that the obligations of the undersigned pursuant to the Guaranty of Payment
executed by the undersigned shall remain in full force and effect and be
unaffected hereby.
Each of the undersigned hereby waives and releases the Administrative
Agent and the Lenders and the directors, officers, employees, attorneys,
affiliates and subsidiaries of the Administrative Agent and the Lenders from any
and all claims, offsets, defenses and counterclaims of which the undersigned is
aware, such waiver and release being with full knowledge and understanding of
the circumstances and effect thereof and after having consulted legal counsel
with respect thereto.
FRICTION PRODUCTS CO.
S.K. WELLMAN CORP.
HELSEL, INC.
LOGAN METAL STAMPINGS, INC.
HAWK MOTORS, INC. (fka
Hutchinson Products LLC)
SINTERLOY CORPORATION
HAWK BRAKE, INC.
S.K. WELLMAN HOLDINGS, INC.
ALLEGHENY CLEARFIELD, INC. (fka
Allegheny Powder Metallurgy,
Inc. and successor by merger
to Clearfield Powdered Metals,
Inc.)
QUARTER MASTER INDUSTRIES, INC.
HAWK MIM, INC.
TEX RACING ENTERPRISES, INC.
NET SHAPE TECHNOLOGIES LLC
HAWK PRECISION COMPONENTS
GROUP, INC.
By: /s/Thomas A. Gilbride
-----------------------------
Name: Thomas A. Gilbride
--------------------------
Vice President - Finance of each
of the foregoing companies
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>8
<FILENAME>l92278aex21-1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<Table>
<Caption>
JURISDICTION OF PERCENT OF
PARENT SUBSIDIARIES ORGANIZATION OWNERSHIP
- ------ -------------------------- -------------------------- ----------
<S> <C> <C> <C>
Hawk Corporation Friction Products Co. Ohio 100%
Logan Metal Stampings, Inc. Ohio 100%
S.K. Wellman Holdings, Inc. Delaware 100%
Quarter Master Industries, Inc. Delaware 100%
Tex Racing Enterprises, Inc. Delaware 100%
Hawk Precision Components Group, Inc. Ohio 100%
Hawk Precision Components Helsel, Inc. Delaware 100%
Group, Inc. Sinterloy Corporation Delaware 100%
Allegheny Clearfield, Inc. Pennsylvania 100%
Hawk MIM, Inc. Ohio 100%
Friction Products Co. Hawk Brake, Inc. Ohio 100%
Hawk Mauritius, Ltd. Hawk Composites (Suzhou)
Company Limited China 100%
Hawk MIM, Inc. Net Shape Technologies LLC Delaware 88.9%
Helsel, Inc. Hawk Motors, Inc. Delaware 100%
Hawk Motors de Mexico,
S. de R.L. de C.V. Mexico 95%
Hawk Mauritius, Ltd. Mauritius 100%
Hawk Motors, Inc. Hawk Motors de Mexico,
S. de R.L. de C.V. Mexico 5%
Hawk Motors Monterrey,
S.A. de C.V. Mexico 5%
Hawk Motors de Mexico, Hawk Motors Monterrey,
S. de R.L. de C.V. S.A. de C.V. Mexico 95%
S.K. Wellman S.K. Wellman Corp. Delaware 100%
Holdings, Inc. Wellman Friction Products
U.K. Corp. Delaware 100%
S.K. Wellman S.p.A. Italy 95%
S.K. Wellman Corp. The S.K. Wellman Company
of Canada Limited Canada 100%
S.K. Wellman S.p.A. Italy 5%
</Table>
27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>9
<FILENAME>l92278aex23-1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-60865) pertaining to the Hawk Corporation 1997 Stock Option
Plan, in the Registration Statement (Form S-8 No. 333-68583) pertaining to the
Friction Products Co. Profit Sharing Plan; S.K. Wellman Retirement Savings and
Profit Sharing Plan; Helsel, Inc. Employee's Retirement Plan; Helsel, Inc.
Employee's Savings and Investment Plan; Sinterloy Corporation 401(k) Plan; Hawk
Motors, Inc. (fka Hutchinson Products LLC) Employees' 401(k) Plan; and Hawk
Corporation 401(k) Savings and Retirement Plan and in the Registration
Statement (Form S-8 No. 333-47220) pertaining to the Hawk Corporation 2000 Long
Term Incentive Plan of our report dated March 25, 2002, with respect to the
consolidated financial statements of Hawk Corporation and subsidiaries included
in this Annual Report (Form 10-K) for the year ended December 31, 2001.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 25, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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