-----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, RMJi+1W2IiIjZG/UIvjyJdyP9H4Cp5T1F8APvGNmy9W/SSC+H9qUtImnMaZiR02H //QsFGGhg4AHOc8hduATqA== 0000950152-02-004358.txt : 20020515 0000950152-02-004358.hdr.sgml : 20020515 20020515171208 ACCESSION NUMBER: 0000950152-02-004358 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13797 FILM NUMBER: 02653668 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-Q 1 l93885ae10-q.txt HAWK CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _________ TO ________. COMMISSION FILE NUMBER 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 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 861-3553 -------------- (Registrant's telephone number, including area code) 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of the date of this report, the Registrant had the following number of shares of common stock outstanding: Class A Common Stock, $0.01 par value: 8,557,240 Class B Common Stock, $0.01 par value: None (0) 1 Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2002 2001 (UNAUDITED) (SEE NOTE) ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 2,412 $ 3,084 Accounts receivable, less allowance of $480 and $455, respectively 32,708 25,773 Inventories 29,598 29,152 Deferred income taxes 1,199 1,200 Other current assets 5,206 4,638 ----------- ----------- Total current assets 71,123 63,847 Property, plant and equipment: Land 1,608 1,608 Buildings and improvements 18,781 18,657 Machinery and equipment 96,839 96,688 Furniture and fixtures 7,593 7,168 Construction in progress 2,267 1,450 ----------- ----------- 127,088 125,571 Less accumulated depreciation 60,771 58,208 ----------- ----------- Total property, plant and equipment 66,317 67,363 Other assets: Goodwill 53,877 53,877 Other intangible assets 12,472 12,828 Shareholder notes 1,010 1,010 Other 5,196 5,180 ----------- ----------- Total other assets 72,555 72,895 ----------- ----------- Total assets $ 209,995 $ 204,105 =========== =========
3 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2002 2001 (UNAUDITED) (SEE NOTE) ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,214 $ 13,432 Accrued compensation 4,722 5,233 Other accrued expenses 9,202 6,832 Current portion of long-term debt 32,153 6,862 ----------- ----------- Total current liabilities 61,291 32,359 Long-term liabilities: Long-term debt 68,841 90,957 Deferred income taxes 10,976 10,978 Other 3,389 3,374 ----------- ----------- Total long-term liabilities 83,206 105,309 Shareholders' equity: Series D preferred stock, $.01 par value; an aggregate liquidation value of $1,530, plus any accrued and 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 8,557,240 and 8,552,920 outstanding, respectively 92 92 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding - - Additional paid-in capital 54,619 54,626 Retained earnings 18,988 19,623 Accumulated other comprehensive loss - Foreign currency translation (2,952) (2,623) Minimum pension liability (578) (578) Treasury stock, at cost (4,672) (4,704) ------------ ------------ Total shareholders' equity 65,498 66,437 ------------ ------------ Total liabilities and shareholders' equity $ 209,995 $ 204,105 =========== =========
Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4 HAWK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 2002 2001 ---- ----- Net sales $ 49,804 $ 53,781 Cost of sales 39,025 39,961 ------------ ------------ Gross profit 10,779 13,820 Selling, technical and administrative expenses 9,198 8,780 Amortization of intangibles 356 1,131 ------------ ------------ Total expenses 9,554 9,911 Income from operations 1,225 3,909 Interest expense (2,298) (2,443) Interest income 63 42 Other (expense) income, net (202) 78 ------------- ------------ (Loss) income before income taxes (1,212) 1,586 Income tax (benefit) provision (612) 729 ------------- ------------ Net (loss) income $ (600) $ 857 ============= ============ (Loss) earnings per share: Basic (loss) earnings per share: $ (.07) $ .10 ============ ============ Diluted (loss) earnings per share: $ (.07) $ . 10 ============ ============
See notes to consolidated financial statements. 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH, 2002 2001 ---- ---- Cash flows from operating activities: Net (loss) income $ (600) $ 857 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 3,093 3,911 Deferred income taxes (81) Changes in operating assets and liabilities, net: Accounts receivable (7,067) (5,667) Inventories (565) 13 Other assets (185) (26) Accounts payable 1,847 2,553 Other liabilities 1,557 (382) ----------- ------------ Net cash (used in) provided by operating activities (1,920) 1,178 Cash flows from investing activities: Purchases of property, plant and equipment (1,931) (2,840) ------------ ------------ Net cash used in investing activities (1,931) (2,840) Cash flows from financing activities: Proceeds from borrowings on debt 15,838 13,733 Payments on debt (12,569) (12,781) Payments of preferred stock dividend (38) (37) ------------ ------------ Net cash provided by financing activities 3,231 915 Net decrease in cash and cash equivalents (620) (747) Effect of exchange rate changes on cash (52) (109) Cash and cash equivalents at the beginning of the period 3,084 4,010 ----------- ----------- Cash and cash equivalents at the end of the period $ 2,412 $ 3,154 =========== ============
See notes to consolidated financial statements. 6 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto in the Form 10-K for Hawk Corporation (the "Company") for the year ended December 31, 2001. The Company, through its business segments, designs, engineers, manufactures and markets specialized components used in a variety of aerospace, industrial and commercial applications. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Beginning February 28, 2002, the financial statements also include the Company's 100% ownership interest in Net Shape Technologies LLC (Net Shape). Prior to that date, the Company owned a majority interest in Net Shape. All significant intercompany accounts and transactions have been eliminated in the accompanying financial statements. Certain amounts have been reclassified in 2001 to conform to 2002 presentation. NOTE 2 - COMPREHENSIVE (LOSS) INCOME Comprehensive (loss) income is as follows: THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Net (loss) income $ (600) $ 857 Foreign currency translation (329) (505) ------- -------- Comprehensive (loss) income $ (929) $ 352 ======= ======== 7 NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The major components of inventories are as follows: MARCH 31, DECEMBER 31, 2002 2001 ---- ---- Raw materials and work-in-process $20,723 $19,360 Finished products 11,596 12,542 Inventory reserves (2,721) (2,750) ---------- ---------- $29,598 $29,152 ======= ======= NOTE 4 - (LOSS) EARNINGS PER SHARE Basic and diluted (loss) earnings per share are computed as follows:
THREE MONTHS ENDED MARCH 31, 2002 2001 ------------------------ Numerator: Net (loss) income $ (600) $ 857 Preferred stock dividends (38) (37) ------ --------- Numerator for basic and diluted earnings per share- (Loss) income available to common shareholders $ (638) $ 820 ======= ========= Denominator: Denominator for basic earnings per share- Weighted average shares 8,555 8,550 Effect of dilutive securities: Stock options - 19 ------- --------- Denominator for diluted earnings per share- Adjusted weighted-average shares and assumed conversions 8,555 8,569 ======= ========= Basic (loss) earnings per share $ (.07) $ .10 ======= ========= Diluted (loss) earnings per share $ (.07) $ .10 ======= =========
For the quarter ended March 31, 2002 outstanding stock options were not included in the computation of diluted earnings per share since would have resulted in an anti-dilutive effect. 8 NOTE 5 - BUSINESS SEGMENTS The Company operates in four primary business segments: friction products, precision components, 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 component segment engineers, manufactures and markets specialized 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 powder metal parts primarily used in construction, agricultural and truck applications, and smaller high-volume parts used in lawn and garden, appliance, automotive, business equipment and a variety of other applications. The performance automotive segment engineers, manufactures and markets high performance friction material for use in premium branded clutch and drive train components. The Company, through this segment, targets leading teams in the NASCAR and CART racing series, as well as high-performance street vehicles and other road race and oval track competition cars. An operating unit formerly associated with the Company's performance automotive segment was reclassified as of January 1, 2002 to the Company's friction products segment as a result of changes in the internal operating responsibility of that unit. All prior periods have been reclassified to reflect this change. The motor segment engineers, manufactures and markets die-cast aluminum rotors for use in the subfractional electric motors and integral horsepower custom motors and generators. The Company, through this segment, targets a wide variety of applications such as business equipment, small household appliances and HVAC systems. The Company also designs and produces integral horsepower custom motors and generators. 9 The information by segment is as follows: THREE MONTHS ENDED MARCH 31, 2002 2001 -------------------------------- Net Sales to external customers: Friction products $ 26,033 $ 29,563 Precision components 17,206 17,846 Performance automotive 3,895 4,161 Motor 2,670 2,211 -------------------------------- Consolidated $ 49,804 $ 53,781 ================================ Gross Profit: Friction products $ 6,036 $ 7,761 Precision components 3,127 4,446 Performance automotive 1,413 1,404 Motor 203 209 -------------------------------- Consolidated $ 10,779 $ 13,820 ================================ Depreciation and amortization: Friction products $ 1,908 $ 2,306 Precision components 944 1,194 Performance automotive 203 183 Motor 38 228 -------------------------------- Consolidated $ 3,093 $ 3,911 ================================ Operating income (loss): Friction products $ 772 $ 2,871 Precision components 121 1,102 Performance automotive 824 381 Motor (492) (445) -------------------------------- Consolidated $ 1,225 $ 3,909 ================================ NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 (FAS 133) "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138 (FAS 138). As amended, FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, 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 Company periodically enters into interest-rate swap agreements to moderate exposure to interest-rate changes and to lower the overall cost of borrowing. During the quarter ended March 31, 2001, the Company entered into an interest-rate swap agreement that effectively converts a portion of its floating rate debt to a fixed rate of 5.34% on $10,000 notional amount on its variable-rate debt maturing in 2003. Although this financial instrument did not meet the hedge accounting criteria of FAS 133, it continues to be effective in achieving the risk management objectives for which it was intended. The change in the fair value of the interest rate swap did not have a material impact on the Company's financial position or results of operations for the first quarter of 2002. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" (FAS 141) and No. 142 "Goodwill and Other Intangible Assets" (FAS 142). These statements eliminate the pooling of interest method of accounting for business 10 combinations subsequent to June 30, 2001 and eliminate the amortization of goodwill for all fiscal years beginning after December 15, 2001. The Company adopted FAS 141 and FAS 142 with respect to new goodwill as of July 1, 2001 and adopted FAS 142 with respect to existing goodwill as of January 1, 2002, the first day of it 2002 fiscal year. The adoption of FAS 141 has not impacted the Company's financial condition or results of operations. In accordance with FAS 142, existing goodwill was amortized through fiscal 2001. Upon adoption of FAS 142, the Company stopped amortizing existing goodwill. The Company is currently in the process of performing the first step of the prescribed transitional goodwill impairment test with respect to existing goodwill. The first step of the transitional goodwill impairment test involves a comparison of the fair value of a reporting unit, as defined under FAS 142, with its carrying amount. If the carrying amount exceeds the fair value of any reporting unit, the Company will perform the second and final step of the transitional goodwill impairment test, which will be used to measure the amount of any impairment loss. The Company has not yet determined what the effect of these tests will be on its financial position or results of operations. As of March 31, 2002, the Company has recognized no impairment of goodwill. The completion of the transitional goodwill impairment test is required to be completed by June 30, 2002. There can be no assurance that future goodwill impairments will not occur. The pro forma effect of applying FAS 142 to the quarter ended March 31, 2001 would have been to decrease amortization expense by approximately $775 and would result in basic and diluted earnings per share of $0.15. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 supersedes FASB No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, FAS 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset (group) to be disposed of other than by sale (e.g. abandoned) be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to classify an asset (group) as "held for sale." FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 144 did not have a material impact on the Company's consolidated financial condition or results of operations. NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS The components of goodwill and other intangible assets and the related accumulated amortization are as follows: AS OF MARCH 31, 2002 ----------------------------------- ACCUMULATED GROSS AMORTIZATION NET ----------------------------------- Goodwill $ 67,808 $ 13,931 $ 53,877 Other intangible assets subject to amortization: Product certifications 20,820 9,724 11,096 Deferred financing 4,693 3,746 947 Other intangible assets 3,013 2,584 429 ----------------------------------- Subtotal 28,526 16,054 12,472 ----------------------------------- Total $ 96,334 $ 29,985 $ 66,349 =================================== A summary of the Company's net goodwill for the periods ended March 31, 2002 and December 31, 2001 by reportable operating segment is as follows: Friction products $ 11,100 Precision components 28,039 Performance automotive 8,392 Motor 6,346 -------- Consolidated $ 53,877 ======== The Company estimates its amortization expense for the next five years to be as follows: 2002-$1,422; 2003-$1,257; 2004-$789; 2005-$789; 2006-$776. NOTE 8 - SUPPLEMENTAL GUARANTOR INFORMATION Each of the Company's 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 10.25% Senior Notes due December 1, 2003. The Guarantor Subsidiaries are direct or indirect wholly owned subsidiaries of the Company. The following supplemental unaudited consolidating condensed financial statements present (in thousands): 1. Consolidating condensed balance sheets as of March 31, 2002 and December 31, 2001, consolidating condensed statements of operations for the three month periods ended March 31, 2002 and 2001 and consolidating condensed statements of cash flows for the three months ended March 31, 2002 and 2001. 11 2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's non-U.S. subsidiaries) with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries of the Senior Notes are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 2002 --------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 720 $ 108 $ 1,584 $ 2,412 Accounts receivable, net 25,196 7,512 32,708 Inventories, net 22,502 7,096 29,598 Deferred income taxes 1,111 88 1,199 Other current assets 2,841 1,516 849 5,206 --------------------------------------------------------------------------- Total current assets 4,672 49,322 17,129 71,123 Investment in subsidiaries 794 (1,911) $ 1,117 Inter-company advances, net 160,428 15,826 (14,245) (162,009) Property, plant and equipment, net 16 57,413 8,888 66,317 Intangible assets 199 66,150 66,349 Other 1,010 5,198 1,008 (1,010) 6,206 --------------------------------------------------------------------------- TOTAL ASSETS $ 167,119 $ 191,998 $ 12,780 $ (161,902) $ 209,995 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,623 $ 3,591 $ 15,214 Accrued compensation $ 318 3,506 898 4,722 Other accrued expenses 3,495 4,450 1,257 9,202 Current portion of long-term debt 26,000 2,722 3,431 32,153 --------------------------------------------------------------------------- Total current liabilities 29,813 22,301 9,177 61,291 Long-term liabilities: Long-term debt 65,000 3,499 342 68,841 Deferred income taxes 10,894 82 10,976 Other 2,157 1,232 3,389 Inter-company advances, net 1,130 157,434 3,858 $ (162,422) --------------------------------------------------------------------------- Total long-term liabilities 77,024 163,090 5,514 (162,422) 83,206 --------------------------------------------------------------------------- Total liabilities 106,837 185,391 14,691 (162,422) 144,497 Shareholders' equity (deficit) 60,282 6,607 (1,911) 520 65,498 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $167,119 $ 191,998 $ 12,780 $ (161,902) $ 209,995 ===========================================================================
12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
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, net 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 ===========================================================================
13 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------- Net sales $ 42,756 $ 7,048 $ 49,804 Cost of sales 32,800 6,225 39,025 ------------------------------------------------------------------------- Gross profit 9,956 823 10,779 Expenses: Selling, technical and administrative expenses $ 400 7,725 1,073 9,198 Amortization of intangible assets 2 354 356 ------------------------------------------------------------------------- Total expenses 402 8,079 1,073 9,554 ------------------------------------------------------------------------- (Loss) income from operations (402) 1,877 (250) 1,225 Interest income (expense), net 911 (2,938) (208) (2,235) Income (loss) from equity investees (1,192) (581) $ 1,773 Other income (expense), net (177) 20 (45) (202) ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (860) (1,622) (503) 1,773 (1,212) Income tax (benefit) provision (260) (430) 78 (612) ------------------------------------------------------------------------- NET (LOSS) INCOME $ (600) $ (1,192) $ (581) $ 1,773 $ (600) =========================================================================
14 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------- Net sales $ 47,093 $ 6,688 $ 53,781 Cost of sales 34,362 5,599 39,961 ------------------------------------------------------------------------- Gross profit 12,731 1,089 13,820 Expenses: Selling, technical and administrative expenses $ (412) 8,074 1,118 8,780 Amortization of intangible assets 3 1,128 1,131 ------------------------------------------------------------------------- Total expenses (409) 9,202 1,118 9,911 ------------------------------------------------------------------------- Income from operations 409 3,529 (29) 3,909 Interest income (expense), net 925 (3,132) (194) (2,401) Income (loss) from equity investees (213) (417) $ 630 Other income (expense), net (64) 142 78 ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest 1,121 (84) (81) 630 1,586 Income taxes 264 129 336 729 ------------------------------------------------------------------------- NET INCOME (LOSS) $ 857 $ (213) $ (417) $ 630 $ 857 =========================================================================
15 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (3,865) $ 1,661 $ 284 $ (1,920) Cash flows from investing activities: Purchase of property, plant and equipment (1,830) . (101) (1,931) -------------------------------------------------------------------------- Net cash used in investing activities (1,830) (101) (1,931) Cash flows from financing activities: Proceeds from debt 15,505 333 15,838 Payments on debt (11,955) (545) (69) (12,569) Payment of preferred stock dividend (38) (38) -------------------------------------------------------------------------- Net cash provided by (used in) financing activities 3,512 (212) (69) 3,231 Net (decrease) increase in cash and cash equivalents (353) (381) 114 (620) Effect of currency rate changes 242 (294) (52) -------------------------------------------------------------------------- Cash and cash equivalents at beginning of period $ 1,073 $ 247 $ 1,764 $ 3,084 -------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 720 $ 108 $ 1,584 $ 2,412 ==========================================================================
16 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by operating activities $ 2,207 $ 1,922 $ (2,951) $ 1,178 Cash flows from investing activities: Purchase of property, plant and equipment (2,242) (598) (2,840) -------------------------------------------------------------------------- Net cash used in investing activities (2,242) (598) (2,840) Cash flows from financing activities: Proceeds from long-term debt 10,190 3,543 13,733 Payments on long-term debt (12,085) (534) (162) (12,781) Payment of preferred stock dividend (37) (37) -------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,932) (534) 3,381 915 Net decrease in cash and cash equivalents 275 (854) (168) (747) Effect of currency rate changes (109) (109) -------------------------------------------------------------------------- Cash and cash equivalents at beginning of period $ 553 $ 1,027 $ 2,430 $ 4,010 -------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 828 $ 173 $ 2,153 $ 3,154 ==========================================================================
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report. GENERAL Hawk operates in four primary reportable segments: friction products, precision components, performance automotive and motors. 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 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 engineered, manufactured and marketed 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 targets three specific areas of the powder metal marketplace: - High precision components specializing in tight tolerance fluid power components; - Large powder metal components, primarily used in construction, agriculture and truck applications; and - Smaller, higher volume parts, utilizing efficient pressing and sintering capabilities, primarily for lawn and garden, appliance, automotive and business equipment markets. In its performance automotive segment, the Company engineers, manufactures and markets high performance premium branded clutch and drive train components for the performance automotive markets. The Company, through this segment, targets 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. Through its motor segment, the Company designs and manufactures die-cast aluminum rotors for fractional and subfractional horsepower electric motors for use in a wide variety of applications, including appliances, business equipment, pumps and HVAC equipment. The Company also designs and produces integral horsepower custom motors and generators. As of March 31, 2002 Hawk had approximately 1,550 employees and 16 manufacturing sites in five countries. SIGNIFICANT ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, income taxes, financing operations, pensions and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual 18 results may differ from these estimates under different assumptions or conditions. Hawk's significant accounting policies include the following: Revenue Recognition and Credit Risk. 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 period-end exchange rates and revenues and expenses are translated using average exchange rates as determined throughout the period. 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 (expense) income in the Company's statement of operations. FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001 Net Sales. Consolidated net sales for the first quarter of 2002 were $49.8 million, a decrease of $4.0 million or 7 percent from the comparable period in 2001. The decline in net sales was primarily the result of the continuing weakness in the industrial markets served by the Company. - Friction Segment. Net sales in the friction segment during the first quarter of 2002, were $26.0 million, a decrease of 12 percent compared to 2001. The major markets served by this segment all experienced weak operating conditions during the quarter when compared to the first quarter of 2001. Net sales to the aerospace market declined 27 percent during the first quarter of 2002 compared to the same period in 2001, primarily as a result of the events of September 11. The Company also experienced declines in heavy truck, agriculture, construction and specialty friction as a result of the soft operating conditions in the United States and Europe. The Company continues to expect that most of the markets served by this segment will remain soft in 2002. Volumes in the aerospace market for all of 2002 are expected to decline approximately 10 to 20 percent compared to 2001, as a result of the decline in air travel following September 11. - Precision Component Segment. Net sales in the precision components segment for the first quarter of 2002 were $17.2 million, a decrease of $0.6 million, or 3 percent compared to 2001. The decrease in net sales was primarily attributable to decreased sales to customers in the lawn and garden, truck and business equipment markets, as a result of the continuing softness in the general industrial segments of the domestic economy. - Performance Automotive. Net sales in the Company's performance automotive segment during the first quarter of 2002 were $3.9 million, a decrease of 7 percent compared to net sales of $4.2 million in 2001. The decrease in net sales was primarily attributable to the decline in purchases as a result of reduced inventory commitments by race teams primarily in the NASCAR and CART racing series, the Company's primary customer base. - Motor Segment. Net sales in the Company's motor segment during the first quarter of 2002 were $2.7 million, an increase of $0.5 million, or 23 percent from the same period in 2001. All of the sales growth in the motor segment came from the Company's new rotor manufacturing facility in Monterrey, Mexico. Net sales from the Company's Alton, Illinois facility were down slightly during the first quarter of 2002. 19 Gross Profit. Gross profit decreased $3.0 million to $10.8 million during the first quarter of 2002, a 22 percent decrease compared to gross profit of $13.8 million in the comparable period of 2001. The gross profit margin decreased to 22 percent of net sales in the first quarter of 2002 from 26 percent of net sales in the comparable period in 2001. Each of the Company's segments, with the exception of the performance automotive segment, experienced decreased margins primarily as a result of lower sales volumes and changes in product mix, especially as a result of the reduction in sales to the aerospace market during the quarter. - Friction Segment. The Company's friction segment reported gross profit of $6.0 million or 23 percent of net sales in the first quarter of 2002 compared to $7.8 million or 26 percent of net sales in the first quarter of 2001. 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. The Company also continued to support its start-up facility in China during first quarter of 2002. Although the facility was shipping product during the quarter, it experienced negative operating margins as it was unable to absorb all of the costs incurred to bring the facility into production status. - Precision Components Segment. Gross profit in the precision components segment during the first quarter of 2002 was $3.1 million or 18 percent of net sales in first quarter of 2002 compared to $4.4 million or 25 percent of net sales in 2001. The decline in this segment's margins was primarily the result of volume declines in the end markets served by this segment and the inability of the Company to completely absorb all of the fixed manufacturing costs associated with this segment. - Performance Automotive Segment. The Company's performance automotive segment reported gross profit of $1.4 million or 36 percent of net sales in the first quarter of 2002 compared to $1.4 million or 33 percent of net sales in 2001. The increase in gross profit margin was primarily the result of manufacturing efficiencies and cost reductions implemented by the segment. - Motor Segment. The Company's motor segment reported a gross margin of $0.2 million or 7 percent of net sales during the first quarter of 2002 compared to $0.2 million or 9 percent of net sales in 2001. The decline in gross margin was primarily the result of the Company's continued support of its start-up rotor manufacturing facility in Mexico. Additionally, as a result of continuing softness in the domestic motor business in the first quarter of 2002, the Company's domestic margin declined in the first quarter of 2002 as it was unable to absorb all of its fixed manufacturing costs. Selling, Technical and Administrative Expenses. ST&A expenses increased $0.4 million, or 5 percent, to $9.2 million in the first quarter of 2002 from $8.8 million in the comparable period of 2001. The increase in ST&A expenses is primarily attributable to legal expenses related to litigation involving a former employee incurred in the Company's performance automotive segment and personnel costs associated with the Company's long-term sales and growth initiatives. The litigation was settled in the fourth quarter of 2001. Additionally, during the first quarter of 2001, the Company benefited from income received as a result of the termination of insurance policies. Amortization of Intangibles. Amortization of intangibles decreased by $0.8 million during the first quarter of 2002 as a result of the implementation by the Company of FAS 142 on January 1, 2002. Upon adoption of FAS 142, the Company stopped amortizing existing goodwill. Income from Operations. Income from operations decreased $2.7 million or 69 percent to $1.2 million in the first quarter of 2002 from $3.9 million in 2001. Income from operations as a percentage of net sales decreased to 2 percent in 2002 from 7 percent in 2001. The decline was primarily the result of the sales volume declines due to the economic slowdown that continued to impact the Company's markets. 20 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 $2.1 million or 72 percent to $0.8 million in the first quarter of 2002 from $2.9 million in the comparable period in 2001. - Income from operations in the precision components segment was $0.1 million in the first quarter of 2002, a decrease of $1.0 million or 91 percent compared to $1.1 million in the comparable period in 2001. - Income from operations at the performance automotive segment was $0.8 million in the first quarter of 2002, an increase of $0.4 million or 100 percent compared to $0.4 million in the comparable period in 2001. - The loss from operations in the motor segment increased to $0.5 million in the first quarter of 2002 from $0.4 million in the comparable period in 2001. Interest Expense. Interest expense decreased $0.1 million, or 4 percent, to $2.3 million in the first quarter of 2002 from $2.4 million in 2001. The decrease is primarily attributable to lower borrowing costs partially offset by increased borrowing levels incurred by the Company during the quarter. Other (Expense) Income. Other expense was $0.2 million in the first quarter of 2002. The expense in the first quarter of 2002 consisted primarily of fees paid by the Company to effect the amendment of the bank credit facility, partially offset by income recorded from a mark to market adjustment from the Company's swap agreement. Income Taxes. The Company's recorded a credit for income taxes in the first quarter of 2002 as a result of losses incurred during the quarter. Net (Loss) Income. As a result of the factors noted above, the Company reported a net loss of $0.6 million in the first quarter of 2002, compared to net income of $0.8 million in 2001. 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 and borrowings under its bank credit facility. The Company's senior notes, which had an outstanding balance of $65.0 million at March 31, 2002, 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% 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. As of March 31, 2002, the Company did not 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 subject to certain limitations. The Company's bank credit facility, 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 on indebtedness arising under the senior note indenture. 21 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 March 31, 2002, 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 March 31, 2002, the facility was comprised of a $25.0 million revolving credit component and a $16.3 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 March 31, 2002, the Company had $13.1 million outstanding under the revolving credit component of the 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 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. The Company was in compliance with the financial covenants as of March 31, 2002. As of March 31, 2002, the Company had approximately $8.2 million available for future borrowings as determined by the borrowing base under its credit facility. Net cash used in operating activities was $1.9 million for the three month period ended March 31, 2002. Net cash provided by operating activities was 1.2 million for the comparable three month period of 2001. The decline in cash from operations was caused primarily by the net loss for the period, reduction in amortization expense and an increase in working capital assets during the quarter. The increase in working capital was caused primarily by the increase in accounts receivables due to increased net sales by the Company during the quarter compared to the fourth quarter of 2001, as well as customary extended payment term programs to the lawn and garden markets in the Company's precision component segment. Customer payments under these programs are due during the second quarter. Net cash used in investing activities was $1.9 million and $2.8 million for the three month period ended March 31, 2002 and 2001, respectively. The cash used in investing activities during the three month periods ended March 31, 2002 and 2001, was for the purchase of property, plant and equipment. Net cash provided by financing activities was $3.2 million and $0.9 million for the three month period ended March 31, 2002 and 2001, respectively, as a result of increased borrowings by the Company. The increase in borrowings during the three month period ended March 31, 2002 was used primarily to support the increase in the Company's working capital assets. 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 believes it is taking appropriate steps, including the reduction of operating expenses which are not critical to meeting the Company's business objectives, to ensure that it has adequate sources of cash to meet its working capital needs for at least the next twelve months. In addition, the Company is pursuing strategic financing alternatives, including modification, extention or refinancing of its senior notes and bank facility both of which are due during 2003. There can be no assurance that the Company will be able to modify, extend or refinance its 22 senior notes and bank facility. Nor can there be any assurance that if the Company is able to modify, extend or refinance its senior notes and bank facility that the new terms will be as favorable to the Company as its existing facilities. If the Company is unable to modify, extend or refinance its senior notes and bank facility, the Company's financial position will be materially and adversely effected. ACCOUNTING CHANGES Refer to Note 6 "Recently Issued Accounting Pronouncements" of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements. 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 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 senior notes and bank facility which contain a number of significant financial covenants and other restrictions; - the ability of the Company to modify, extend or refinance its senior notes and bank facility, 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 impact, if any, as a result of the implementation of any new accounting pronouncements, including but not limited to FAS 142, on the financial condition or results of operations of the Company; - the continuing impact of the terrorist attacks that occurred on September 11, 2001 on the Company's aircraft brake business and the impact of the decline in the aerospace market on the Company's gross margins; - 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 23 - 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-Q and other filings by the Company with the Securities and Exchange Commission must be considered by any investor or potential investor in the Company. ITEM 3. 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 March 31, 2002, approximately 33 percent, or $32.2 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. 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 March 31, 2002 is $0.3 million (liability). The change in the fair value is reflected in the Consolidated Statement of Operations in other (expense) income, net. 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 March 31, 2002 rates, and assuming no changes in debt from March 31, 2002 levels, the additional annual interest expense to the Company would be approximately $0.2 million. The Company does not engage in activities using complex or highly leveraged instruments. 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 March 31, 2002 are not expected to result in a significant impact on earnings or cash flows. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the ordinary course of business. In the Company's opinion, the outcome of these matters is not anticipated to have a material adverse effect on the Company's financial condition, liquidity or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24 Effective February 22, 2002, the Company issued 4,320 shares of its Class A Common Stock to the following individuals as part of their annual compensation for services as directors of the Company: Paul R. Bishop, Jack Kemp and Dan T. Moore, III. Each of these directors received 1,440 shares having a market value of approximately $7,500 at the time of issuance. The shares were issued without registration in an offering not involving any public offering to these three directors as permitted by Section 4(2) of the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.7* Resignation, Appointment and Acceptance Agreement, dated as of April 25, 2002, by and among Bank One Trust Company, N.A., HSBC Bank USA, and Hawk Corporation ------------------- * filed herewith (b) Reports on Form 8-K: None 25 SIGNATURES Pursuant to the requirements 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. Date: May 15, 2002 HAWK CORPORATION By: /s/ RONALD E. WEINBERG ---------------------- Ronald E. Weinberg, Chairman and CEO By: /s/ THOMAS A. GILBRIDE ---------------------- Thomas A. Gilbride, Vice President - Finance and Treasurer (Principal Financial Officer) 26 EX-4.7 3 l93885aex4-7.txt EX-4.7 Exhibit 4.7 RESIGNATION, APPOINTMENT AND ACCEPTANCE AGREEMENT ------------------------------------------------- THIS AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE (this "Agreement"), dated as of April 25, 2002, is made by and among Bank One Trust Company, N.A., a national banking association duly organized under the laws of the United States of America (the "Prior Trustee"), HSBC Bank USA, a banking corporation and trust company duly organized and existing under the laws of the State of New York (the "Successor Trustee"), and Hawk Corporation, a corporation duly organized and existing under the laws of the State of Delaware (the "Issuer"). This instrument shall be governed by and construed in accordance with the laws of the State of Ohio. WHEREAS, the Issuer issued $100,000,000 of 10 1/4% Senior Notes due 2003 under an Indenture dated as of November 27, 1996, between the Issuer and the Prior Trustee (as amended through the date hereof, the "Indenture"), of which Series B 10 1/4% Senior Notes due 2003 in aggregate principal amount of $65,000,000 (collectively, the "Notes") are currently issued and outstanding; and WHEREAS, the Prior Trustee currently serves as Indenture Trustee under the Indenture; and WHEREAS, the Indenture provides that, if the Trustee shall resign, the Issuer shall promptly appoint a successor Trustee; and WHEREAS, the Prior Trustee desires to resign as Trustee and the Issuer desires to appoint the Successor Trustee as successor Trustee under the Indenture, and the Successor Trustee desires to serve as successor Trustee and subject to the terms and conditions of the Indenture and this Agreement; and WHEREAS, following the execution and delivery of this instrument, the Successor Trustee will cause the notice required pursuant to the Indenture, a form of which is annexed hereto marked as Exhibit A, to be mailed to the registered Holders of the Notes as required by the Indenture; NOW THEREFORE, in consideration of the mutual covenants and agreement herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. RESIGNATION Section 1.01. RESIGNATION OF THE PRIOR TRUSTEE. The Prior Trustee hereby resigns as the Trustee under the Indenture and related legal documents; such resignation to become effective immediately prior to the opening of business on the Effective Date (as hereinafter defined). Notwithstanding the resignation of the Prior Trustee as the Trustee under the Indenture, the Issuer shall remain obligated to indemnify the Prior Trustee in accordance with Section 7.7 of the Indenture. Section 1.02. NOTICE OF RESIGNATION TO THE ISSUER. The Prior Trustee has given written notice of resignation to the Issuer pursuant to the Indenture, a copy of which is annexed hereto marked as Exhibit B. ARTICLE II. APPOINTMENT OF SUCCESSOR TRUSTEE Section 2.01. APPOINTMENT. The Issuer hereby appoints the Successor Trustee to serve as a successor Trustee, Registrar and Paying Agent under the Indenture with all the authority, rights and powers which are vested in, and all duties and obligations which are binding on, the Trustee under the Indenture and related documents, effective at the opening of business on the first Business Day following the date upon which a fully executed counterpart of this Agreement is delivered to each of the parties hereto (the "Effective Date"). As used herein, "Business Day" means a day on which banks in the city where the principal corporate trust office of the Successor Trustee is located, are not required or authorized to remain closed and on which the New York Stock Exchange is not closed. Section 2.02. ACCEPTANCE. The Successor Trustee is qualified to serve as a successor Trustee under the Indenture and related documents and hereby accepts the appointment by the Issuer and agrees to serve as a successor Trustee under the Indenture and to perform the duties and obligations of the Trustee under the Indenture, effective at the opening of business on the Effective Date. The Successor Trustee shall timely make any and all filings required by the TIA and any related rules or regulations with respect to its succession as the Trustee under the Indenture. Section 2.03. VESTING OF RIGHTS, POWERS AND DUTIES. In accordance with the provisions of the Indenture, all rights, powers and duties of the Trustee under the Indenture shall be vested in and undertaken by the Successor Trustee, effective at the opening of business on the Effective Date. Section 2.04. NOTICE OF SUCCESSION. The Successor Trustee agrees to promptly notify all registered Holders of its appointment as a successor Trustee in accordance with the terms of Sections 7.8 and 11.2 of the Indenture, which notice shall have substantially the same form and content as Exhibit A. The Successor Trustee further agrees to promptly notify The Depository Trust Company and Cede & Co. of its appointment as a successor Trustee, Registrar and Paying Agent under the Indenture. Section 2.05. ASSIGNMENT OF POWERS AND PROPERTY. The Prior Trustee hereby confirms, assigns, transfers and sets over to the Successor Trustee, its successors and assigns in trust under the Indenture, all property, rights, powers, duties, trusts, immunities and obligations of the Prior Trustee as the Trustee under the Indenture and related documents. As of the Effective Date, the Prior Trustee will hold no property under the Indenture. - 2 - Section 2.06. FURTHER ASSURANCES. The Prior Trustee hereby agrees, upon reasonable request of the Successor Trustee, to execute, acknowledge and deliver such further instruments of transfer and further assurances and to do such other things as may reasonably be required for more fully and certainly vesting and confirming in the Successor Trustee all the property, rights, powers, duties, trusts, immunities and obligations of Prior Trustee as the Trustee under the Indenture and related documents. Section 2.07. CONVERSION. The Prior Trustee shall transfer the following items to the Successor Trustee on or prior to the Effective Date: a. Original executed copies of the Indenture, and closing transcripts; b. Registered holder lists (including name, address, tax identification number and detailed holdings for each holder) certified to be accurate by the Prior Trustee; c. Note debt service and loan payment records; d. Trust account statements for a one-year period preceding the Effective Date; e. All securities and moneys held by the Prior Trustee pursuant to the Indenture; f. All Notices sent to Holders and Issuer regarding any current or continuing defaults; g. All unissued Note inventory or DTC FAST held global certificates; and h. Such other documentation as the Successor Trustee may reasonably require in order to transfer the appointment to it. ARTICLE III. MISCELLANEOUS Section 3.01. DEFINITIONS. Terms not otherwise defined in this Agreement shall have the meanings given thereto in the Indenture. Section 3.02. COMPENSATION. The Issuer agrees to pay to the Successor Trustee reasonable compensation for its services in accordance with Section 7.7 of the Indenture. Section 3.03. COUNTERPARTS. This Agreement may be executed in a number of counterparts, each of which shall constitute and original, but such counterparts shall together constitute but one and the same instrument. Section 3.04. PRESERVATION OF RIGHTS. Except as expressly provided herein, nothing contained in this Agreement shall in any way affect the obligations or rights of the Issuer, the Trustee, or any Holder under the Indenture and related documents. - 3 - Section 3.05. SEVERABILITY. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 3.06. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the Prior Trustee, the Successor Trustee, the Issuer and their respective successors and assigns. ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.01. REPRESENTATIONS AND WARRANTIES OF THE PRIOR TRUSTEE. a. The Prior Trustee is a national banking association duly organized and existing under the laws of the United States, is authorized to conduct a general banking business with trust powers and is subject to the supervision of the Comptroller of the Currency of the United States as provided in the National Bank Act. b. The Prior Trustee has the corporate power and authority to enter into this Agreement. Upon execution and delivery, this Agreement shall constitute a valid and binding obligation of the Prior Trustee. c. The Prior Trustee is a duly appointed, authorized and acting trustee, collateral trustee and/or paying agent for the Notes. Such appointment has been administered by the Prior Trustee consistent with the authority granted to it by the Indenture and by applicable law. d. The Prior Trustee retains continued responsibility for its actions or omissions during its term as the Trustee under the Indenture. e. The Prior Trustee represents that $65,000,000 in principal amount of the Notes is currently issued and outstanding. f. The Prior Trustee represents that interest payments on the Notes have been made through December 1, 2001. g. There is no action, suit or proceeding pending or, to the best of the knowledge of the Prior Trustee, threatened against the Prior Trustee before any court or government authority arising out of any action or omission by the Prior Trustee as the Trustee under the Indenture. Section 4.02. REPRESENTATIONS AND WARRANTIES OF THE SUCCESSOR TRUSTEE. a. The Successor Trustee is a banking corporation and trust company duly organized and existing under the laws of the State of New York with trust powers and is subject to the supervision of the Federal Reserve Bank of New York and the New York State Banking Department. - 4 - b. The Successor Trustee has the corporate power and authority to enter into this Agreement. Upon execution and delivery, this Agreement will constitute a valid and binding obligation of the Successor Trustee. c. The Successor Trustee is qualified and eligible to serve as Trustee and Collateral Trustee under the TIA and in accordance with provisions of the Indenture, including but not limited to Section 7.10 of the Indenture. Section 4.03. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Successor Trustee that: a. It is duly organized and validly existing; b. It has not entered into any amendment to the Indenture except as disclosed herein, and the Indenture is in full force and effect; c. No event has occurred and is continuing which is, or after notice or lapse of time would become, an Event of Default under the Indenture; d. The execution and delivery of this Instrument and the consummation of the transactions contemplated hereby do not and will not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default under, any contract, agreement, indenture or other instrument (including, without limitation, its certificate of incorporation and by-laws) to which it is a party or by which it or its property is bound, or any judgment, decree or order of any court or governmental agency or regulatory body or law, rule or regulation applicable to it or its property; e. No covenant or condition contained in the Indenture has been waived by the Company or, to the best of the Company's knowledge by holders of the percentage in aggregate principal amount of the Notes required to effect any such waiver; f. The Notes are validly issued securities of the Company; g. Any conditions precedent relating to the appointment of HSBC Bank USA, as successor Trustee, Registrar and Paying Agent under the Indenture for which the Company is responsible have been complied with by the Company; and h. There is no action, suit or proceeding pending, or to the best of the Company's knowledge, threatened against the Company before any Court or any governmental authority, arising out of any action or omissions by the Company under the Indenture. - 5 - ARTICLE V. NOTICES Section 5.01. NOTICES. All notices, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or by first class United States mail, as follows: a. If to the Prior Trustee: Bank One Trust Company, N.A. Corporate Trust Office 1111 Polaris Parkway, Suite 1K P.O. Box 710181 Columbus, OH 43271-0181 Attention: Jeffrey A. Ayres b. If to the Successor Trustee: HSBC Bank USA 452 Fifth Avenue New York, NY 10018-2706 Attention: Robert A. Conrad c. If to the Issuer: Hawk Corporation 200 Public Square Suite 30-5000 Cleveland, OH 44114 Attention: Chief Executive Officer - 6 - Intending to be legally bound, the parties hereto have executed this Agreement by their duly authorized corporate officers as of the dates provided below. BANK ONE TRUST COMPANY, N.A., as the Prior Trustee By: /s/ Robert H. Major Title: Trust Officer Date: 4/25/2002 HSBC BANK USA, as the Successor Trustee By: /s/ Robert A. Conrad Title: Vice President Date: 4/18/2002 HAWK CORPORATION, as the Issuer By: /s/ Thomas A. Gilbride Title: Vice President - Finance Date: 4/30/2002 - 7 - EXHIBIT A --------- NOTICE TO THE HOLDERS OF HAWK CORPORATION'S SERIES B 10 1/4% SENIOR NOTES DUE 2003 (THE "NOTES") CUSIP NOS.: 420089AA2 AND 420089AC8 NOTE: THIS NOTICE CONTAINS IMPORTANT INFORMATION THAT IS OF INTEREST TO THE REGISTERED AND BENEFICIAL OWNERS OF THE SUBJECT SECURITIES. IF APPLICABLE, ALL DEPOSITORIES, CUSTODIANS, AND OTHER INTERMEDIARIES RECEIVING THIS NOTICE ARE REQUESTED TO EXPEDITE RE-TRANSMITTAL TO BENEFICIAL OWNERS OF THE SECURITIES IN A TIMELY MANNER. HSBC Bank USA, as successor Trustee hereby notifies you of the resignation of Bank One Trust Company, N.A. as Trustee under the Indenture, dated as of November 27, 1996, as amended from time to time, pursuant to which your Notes are issued and are outstanding. Hawk Corporation has appointed HSBC Bank USA, whose Corporate Trust Office is located at 452 Fifth Avenue, New York, New York 10018-2706, as successor Trustee under the Indenture, which appointment has been accepted and became effective By: HSBC BANK USA, as Successor Trustee - 8 - EXHIBIT B --------- Hawk Corporation 200 Public Square Suite 30-5000 Cleveland, OH 44114 Attention: Chief Executive Officer Gentlemen: NOTICE IS HEREBY GIVEN THAT, pursuant to Section 7.8 of the Indenture, dated as of November 27, 1996, as amended from time to time (the "Indenture"), between Hawk Corporation and Bank One Trust Company, N.A. ("Bank One"), Bank One hereby resigns as the Trustee under the Indenture, such resignation to be effective upon the appointment of a successor Trustee pursuant to Section 7.8 of the Indenture and the acceptance of such appointment by such successor Trustee pursuant to Section 7.8 of the Indenture. Would you please acknowledge receipt of this notice by signing two copies and returning them to us. Bank One Trust Company, N.A., as Trustee By /s/ Jeffrey A. Ayres Jeffrey A. Ayres, Director Fiduciary Workout Services - 9 - -----END PRIVACY-ENHANCED MESSAGE-----