-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GCEKuRxJU3ERr62gmeJQNTybzScUJsQoMr6MozqXcVhYpf7xkSP6F1dDoP14SOmQ b6xNkMlKsC73HdLo2LRZfA== 0000950152-02-002664.txt : 20020415 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 10-K 1 l92278ae10-k.txt HAWK CORPORATION 10-K/YEAR ENDED 12-31-2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 861-3553 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED - ------------------- ------------------------------------ Series B 10.25% Senior Notes due 2003 New York Stock Exchange Class A Common Stock, par value $.01 New York Stock Exchange
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - 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 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 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 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.
YEAR ENDED DECEMBER 31 ------------------------ 2001 2000 1999 ------ ------ ------ 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 ====== ====== ======
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YEAR ENDED DECEMBER 31 ------------------------ 2001 2000 1999 ------ ------ ------ 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 ====== ====== ======
DECEMBER 31 --------------- 2001 2000 ------ ------ 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 ====== ======
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 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 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 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 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. 11 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
QUARTER ENDED HIGH LOW ------------- ----- ----- 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
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. 12 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDING DECEMBER 31, 2001 2000 1999 1998 1997 - ------------------------- ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) 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
DECEMBER 31, 2001 2000 1999 1998 1997 - ------------ ------ ------ ------ ----- ------ (IN MILLIONS) 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)
- --------------- (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 13 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. 14 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 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 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. 17 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 $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 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 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):
TOTAL 2002 THEREAFTER -------- ------ 2003 - 2006 ---------- 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 -- --
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 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 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 -------------------- 2001 2000 -------- -------- 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 ======== ========
See notes to consolidated financial statements. 23 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31 -------------------- 2001 2000 -------- -------- 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 ======== ========
See notes to consolidated financial statements. 24 HAWK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 -------- -------- -------- 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 ======== ======== ========
See notes to consolidated financial statements. 25 HAWK CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED OTHER COMPREHENSIVE LOSS ----------------------- ADDITIONAL FOREIGN MINIMUM PREFERRED COMMON PAID-IN RETAINED CURRENCY PENSION TREASURY STOCK STOCK CAPITAL EARNINGS TRANSLATION LIABILITY STOCK TOTAL --------- ------ ---------- -------- ----------- --------- -------- ------- 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 == === ======= ======= ======= ===== ======= =======
See notes to consolidated financial statements. 26 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 -------- -------- -------- 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 $ -- ======== ======== ========
See notes to consolidated financial statements. 27 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 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 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31 ------------------------------------------ 2001 2000 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- 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
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 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.
YEAR ENDED DECEMBER 31 2000 ----------- Net sales................................................... $209,435 ======== Net income.................................................. $ 5,658 ======== Income per share -- basic................................... $ .64 ======== Income per share -- diluted................................. $ .64 ========
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 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) D. INTANGIBLE ASSETS The components of intangible assets and related amortization periods are as follows:
DECEMBER 31 ------------------ 2001 2000 ------- ------- 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 ======= =======
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
DECEMBER 31 ----------------- 2001 2000 ------- ------- 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 ======= =======
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 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 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:
2001 2000 1999 -------------------- ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- ------- -------- ------- -------- 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
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:
OUTSTANDING EXERCISABLE ----------------------------------- ------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE - -------------------------------- ------- -------- ------------ ------- -------- $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
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:
YEAR ENDED DECEMBER 31 ------------------------- 2001 2000 1999 ------- ------ ------ 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
34 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:
YEAR ENDED DECEMBER 31 --------------------------- 2001 2000 1999 ------- ------- ------- 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
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 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the defined benefit pension plans are as follows:
DECEMBER 31 ----------------- 2001 2000 ------- ------- 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 ======= =======
Amounts applicable to the Company's underfunded pension plans at December 31, 2001 and 2000 are as follows:
DECEMBER 31 --------------- 2001 2000 ------ ------ 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
36 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31 --------------------------- 2001 2000 1999 ------- ------- ------- 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 ======= ======= =======
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:
2001 2000 1999 ---- ---- ---- 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%
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 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) J. INCOME TAXES The (benefit) provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31 ------------------------- 2001 2000 1999 ------- ------ ------ 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 ======= ====== ======
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:
2001 2000 ------- ------- 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 ======= =======
38 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:
DECEMBER 31 --------------------- 2001 2000 1999 ----- ---- ---- 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% ===== ==== ====
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:
YEAR ENDED DECEMBER 31 ------------------------- 2001 2000 1999 ------- ------ ------ (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 ======= ====== ======
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 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:
YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 -------- -------- -------- 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 ======== ======== ========
40 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 -------- -------- -------- 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 ======== ======== ========
DECEMBER 31 -------------------- 2001 2000 -------- -------- 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 ======== ========
Geographic information for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ---------------------------------- ---------------------------------- ---------------------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- (IN THOUSANDS) 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
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 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.
DECEMBER 31, 2001 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======== ======= ========= ========
42 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======== ======= ========= ========
43 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2001 -------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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) ======= ======== ======= ======= ========
YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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 ======= ======== ======= ======= ========
44 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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 ======= ======== ======= ======= ========
YEAR ENDED DECEMBER 31, 2001 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======= ======== ======= =======
45 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2000 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======= ======= ======= ========
46 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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 ======== ======= ======= === ========
O. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2001 2001 2001 2001 2000 2000 2000 2000 --------- -------- ------------- ------------ --------- -------- ------------- ------------ 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
47 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 (b) Reports on Form 8-K: None. (c) Exhibits: 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
49 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)
50 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)
51 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
- --------------- * Filed herewith 52 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.
SIGNATURE TITLE DATE --------- ----- ---- /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.
53 EX-10.6 3 l92278aex10-6.txt EXHIBIT 10.6 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: (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- 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- (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- (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- 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- 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- 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- 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- 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 -10- 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 -11- 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- (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 -13- 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- 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 -15- 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. -16- 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 -17- EX-10.7 4 l92278aex10-7.txt EXHIBIT 10.7 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." 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 -2- 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. -3- 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- 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; -5- (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 -6- 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 -7- 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. -8- (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. -9- 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. -10- 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- 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- 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- (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- (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- 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- 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- 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- EX-10.8 5 l92278aex10-8.txt EXHIBIT 10.8 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; 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 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 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 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 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 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 EX-10.9 6 l92278aex10-9.txt EXHIBIT 10.9 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: 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- 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- 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- 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- 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- 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- 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- 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- EX-10.30 7 l92278aex10-30.txt EXHIBIT 10.30 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 --------------------- ================================================================================ ================================================================================ 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 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 "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:
- ---------------------------- -------------------- -------------- ----------------- ----------------- ----------------- 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 - ---------------------------- -------------------- -------------- ----------------- ----------------- ----------------- 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 - ---------------------------- -------------------- -------------- ----------------- ----------------- -----------------
"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 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 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 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 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 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 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 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
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 - ------------------------ --------------------- --------------------- ----------------- -------------------- -------------------- 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 - ------------------------ --------------------- --------------------- ----------------- -------------------- --------------------
A-1 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 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 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 EX-21.1 8 l92278aex21-1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENT OF PARENT SUBSIDIARIES ORGANIZATION OWNERSHIP - ------ -------------------------- -------------------------- ---------- 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%
27 EX-23.1 9 l92278aex23-1.txt EXHIBIT 23.1 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 -----END PRIVACY-ENHANCED MESSAGE-----