-----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, SwWC5zfiZ/3VRza6dy+wiqmgPek9xvbDagajVA4rBXk8ee1LdEIrTCYAwPNWBQ5U YhiCaBkxTFnXogQ5rwZSVw== 0000950152-01-505863.txt : 20020410 0000950152-01-505863.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950152-01-505863 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1788869 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 l90940ae10-q.txt HAWK CORPORATION 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 SEPTEMBER 30, 2001 [ ] 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: 8,552,920 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 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 28
2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 3,421 $ 4,010 Accounts receivable, less allowance of $502 and $372, respectively 29,821 29,602 Inventories 28,893 31,864 Deferred income taxes 1,377 1,113 Other current assets 2,374 2,976 ----------- ----------- Total current assets 65,886 69,565 Property, plant and equipment: Land 1,603 1,603 Buildings and improvements 18,807 18,240 Machinery and equipment 94,934 89,330 Furniture and fixtures 6,873 5,584 Construction in progress 2,727 3,316 ----------- ----------- 124,944 118,073 Less accumulated depreciation 55,775 47,672 ----------- ----------- Total property, plant and equipment 69,169 70,401 Other assets: Intangible assets 67,780 70,713 Shareholder notes 1,010 1,010 Other 4,335 3,696 ----------- ----------- Total other assets 73,125 75,419 ----------- ----------- Total assets $ 208,180 $ 215,385 =========== =========
3 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,358 $ 11,579 Accrued compensation 4,883 7,791 Other accrued expenses 6,292 6,446 Current portion of long-term debt 6,869 7,273 ----------- ----------- Total current liabilities 31,402 33,089 Long-term liabilities: Long-term debt 93,035 96,661 Deferred income taxes 11,738 11,554 Other 2,209 2,392 ----------- ----------- Total long-term liabilities 106,982 110,607 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 A common stock, $.01 par value; 75,000,000 shares authorized, 9,187,750 issued and 8,552,920 and 8,548,520 outstanding, respectively 92 92 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 54,627 54,631 Retained earnings 22,481 24,109 Accumulated other comprehensive loss (2,701) (2,409) Treasury stock, at cost (4,704) (4,735) ------------ ------------ Total shareholders' equity 69,796 71,689 ----------- ----------- Total liabilities and shareholders' equity $ 208,180 $ 215,385 =========== =========
Note: The balance sheet at December 31, 2000 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)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 143,408 $ 156,868 $ 42,208 $ 47,861 Cost of sales 110,550 113,605 33,504 34,499 ----------- ----------- ----------- ----------- Gross profit 32,858 43,263 8,704 13,362 Selling, technical and administrative expenses 23,047 23,511 6,016 7,563 Restructuring costs 1,000 Amortization of intangibles 3,406 3,075 1,141 1,024 ----------- ----------- ----------- ----------- Total expenses 27,453 26,586 7,157 8,587 Income from operations 5,405 16,677 1,547 4,775 Interest expense 7,186 6,775 2,352 2,230 Interest income (158) (171) (55) (67) Other expense, net 737 441 307 286 ----------- ----------- ----------- ----------- (Loss) income before income taxes (2,360) 9,632 (1,057) 2,326 Income taxes (541) 4,065 16 833 ------------ ----------- ----------- ----------- Net (loss) income before minority interest (1,819) 5,567 (1,073) 1,493 Minority interest (304) (120) ------------ ----------- ------------ ----------- Net (loss) income $ (1,515) $ 5,567 $ (953) $ 1,493 ============ ============ ============= ============ Earnings per share: Basic (loss) earnings per share $ (.19) $ .64 $ (.12) $ .17 ============ ============ ============= ============ Diluted (loss) earnings per share $ (.19) $ .64 $ (.12) $ .17 ============ ============ ============= ============
See notes to consolidated financial statements. 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ---- ---- Cash flows from operating activities: Net (loss) income $ (1,515) $ 5,567 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,928 10,974 Deferred income taxes (58) 171 Loss on sale of fixed assets 416 Minority interest (307) Changes in operating assets and liabilities, net: Accounts receivable (497) (1,750) Inventories 2,773 (1,436) Other assets (532) 814 Accounts payable 1,905 866 Other liabilities (2,425) 3,497 ------------ ----------- Net cash provided by operating activities 11,272 19,119 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 69 Purchases of property, plant and equipment (7,440) (8,331) ------------ ------------ Net cash used in investing activities (7,440) (8,262) Cash flows from financing activities: Payments on short-term debt (760) Proceeds from long-term debt 30,316 10,982 Payments on long-term debt (34,344) (20,065) Payments of preferred stock dividends (112) (114) ------------ ------------ Net cash used in financing activities (4,140) (9,957) ------------ ------------ Effect of exchange rate changes on cash (281) (184) Net decrease in cash and cash equivalents (589) 716 Cash and cash equivalents at the beginning of the period 4,010 3,993 ----------- ----------- Cash and cash equivalents at the end of the period $ 3,421 $ 4,709 =========== ============
See notes to consolidated financial statements. 6 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 (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 September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. 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 in December 2000, the financial statements also include the Company's 67% ownership interest in Net Shape Technologies LLC. All significant intercompany accounts and transactions have been eliminated in the accompanying financial statements. In the fourth quarter of 2000, the Company changed its accounting policy to reflect in its consolidated statement of income 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. NOTE 2 - COMPREHENSIVE INCOME (LOSS) Comprehensive (Loss) income is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net (loss) income $ (1,515) $ 5,567 $ (953) $ 1,493 Foreign currency translation (loss) income (292) (922) 123 (281) ---------- ----------- ---------- ----------- Comprehensive (loss) income $ (1,807) $ 4,645 $ (830) $ 1,212 ========== ========= ============ ============
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:
SEPTEMBER 30, DECEMBER 31, 2001 2000 ---- ---- Raw materials and work-in-process $22,093 $22,645 Finished products 9,692 11,724 Inventory reserves (2,892) (2,505) ------- ------- $28,893 $31,864 ======= =======
7 NOTE 4 - EARNINGS PER SHARE Basic and diluted earnings per share are computed as follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---- ---- ---- ---- Numerator: Net (loss) income $ (1,515) $ 5,567 $ (953) $ 1,493 Preferred stock dividends (113) (114) (38) (38) -------- --------- -------- ---------- Numerator for basic earnings per share-(loss) income available to common shareholders $ (1,628) $ 5,453 $ (991) $ 1,455 ========= ======== ======== ======== Effect of dilutive securities: Interest on convertible note, net of tax* 56 18 --------- -------- -------- -------- Numerator for diluted earnings per share-(loss) income available to common shareholders after assumed conversion $ (1,628) $ 5,509 $ (991) $ 1,473 --------- -------- -------- -------- Denominator: Denominator for basic (loss) earnings per share- weighted average shares 8,552 8,548 8,553 8,549 Effect of dilutive securities: Employee stock options* 21 51 Convertible notes* 108 100 --------- -------- -------- -------- Denominator for diluted (loss) earnings per share- adjusted weighted average shares after assumed conversions 8,552 8,677 8,553 8,700 ========= ======== ======== ======== Basic (loss) earnings per share $ (.19) $ .64 $ (.12) $ .17 ========= ======== ======== ======== Diluted (loss) earnings per share $ (.19) $ .63 $ (.12) $ .17 ========= ======== ======== ========
* As a result of the Company's net loss for the three and nine month periods ended September 30, 2001 all options to purchase shares of Common Stock and all notes convertible into shares of Common Stock were excluded from the computation of diluted earnings per share since the effect of such conversion would have been anti-dilutive. 8 NOTE 5 - BUSINESS SEGMENTS The Company operates in four primary business segments: friction products, 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 powder metal 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 structural powder metal parts used in construction, agricultural and truck applications, and smaller, high volume parts used in a variety of applications. 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 small electric motors. The Company, through this segment, targets a wide variety of applications such as business equipment, small household appliances and exhaust fans. 9 The information by segment is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues from external customers: Friction Products $ 77,741 $ 86,921 $ 23,075 $ 27,529 Powder Metal 45,268 56,149 13,000 16,558 Performance Automotive 13,712 7,045 3,810 1,772 Motor 6,687 6,753 2,323 2,002 --------- --------- -------- -------- Consolidated $ 143,408 $ 156,868 $ 42,208 $ 47,861 ========= ========= ======== ======== Depreciation and amortization: Friction Products $ 6,712 $ 6,583 $ 2,265 $ 2,143 Powder Metal 3,636 3,335 1,214 1,111 Performance Automotive 819 498 273 162 Motor 761 558 271 196 --- --- --- --- Consolidated $ 11,928 $ 10,974 $ 4,023 $ 3,612 ========= ========= ======== ======== Operating Income (loss): Friction Products $ 7,807 $ 9,158 $ 3,095 $ 3,401 Powder Metal 335 7,179 (132) 1,781 Performance Automotive (283) 866 (328) (119) Motor (2,454) (526) (1,088) (288) ------- --------- -------- -------- Consolidated $ 5,405 $ 16,677 $ 1,547 $ 4,775 ======= ========= ======== ========
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. As amended, SFAS 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. During the first quarter of 2001, the Company entered into an interest rate swap agreement to moderate exposure to interest rate changes and to lower the overall cost of borrowing. Under this agreement, the Company effectively converted a portion of its floating rate debt to a fixed rate of 5.34% on $10.0 million notional amount on its variable-rate debt maturing in 2003. Although this financial instrument did not meet the hedge accounting criteria of SFAS 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 resulted in a charge of $0.2 million as other expense in the third quarter of 2001 and $0.4 million for the nine months ended September 30, 2001. 10 In June 2001, the Financial Accounting Standards Board ("FASB") unanimously approved the issuance of two statements, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and amends APB No. 16, "Business Combinations." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment only approach. The Company will cease the amortization of goodwill that was recorded in past business combinations on December 31, 2001, as required by SFAS No. 142. The Company is still evaluating how the adoption of these pronouncements will impact the financial statements. NOTE 7 - 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 "Senior Notes"). 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 September 30, 2001 and December 31, 2000, consolidating condensed statements of income for the three and nine month periods ended September 30, 2001 and 2000 and consolidating condensed statements of cash flows for the nine months ended September 30, 2001 and 2000. 2. 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. 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 are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. 11 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001 --------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 855 $ 230 $ 2,336 $ 3,421 Accounts receivable, net 23,184 6,637 29,821 Inventories, net 22,661 6,486 $ (254) 28,893 Deferred income taxes 1,199 178 1,377 Other current assets 527 1,088 759 2,374 --------------------------------------------------------------------------- Total current assets 2,581 47,163 16,396 (254) 65,886 Investment in subsidiaries 794 523 (1,317) Intercompany advances, net 157,544 8,413 (7,727) (158,230) Property, plant and equipment 20 59,689 9,460 69,169 Intangible assets 201 67,579 67,780 Other 1,010 4,364 981 (1,010) 5,345 --------------------------------------------------------------------------- Total assets $ 162,150 $ 187,731 $ 19,110 $ (160,811) $ 208,180 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,689 $ 2,669 $ 13,358 Accrued compensation $ 35 3,957 891 4,883 Other accrued expenses 1,498 4,177 708 $ (91) 6,292 Current portion of long-term debt 5,000 1,509 360 6,869 --------------------------------------------------------------------------- Total current liabilities 6,533 20,332 4,628 (91) 31,402 Long-term liabilities: Long-term debt 84,625 4,786 3,624 93,035 Deferred income taxes 11,128 610 11,738 Other 946 1,263 2,209 Intercompany advances, net 1,314 148,867 8,462 $ (158,643) --------------------------------------------------------------------------- Total long-term liabilities 97,067 154,599 13,959 (158,643) 106,982 --------------------------------------------------------------------------- Total liabilities 103,600 174,931 18,587 (158,734) 138,384 Shareholders' equity 58,550 12,800 523 (2,077) 69,796 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 162,150 $ 187,731 $ 19,110 $ (160,811) $ 208,180 ===========================================================================
12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
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, net 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) Intercompany 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 Intercompany 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 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 ===========================================================================
13 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------- Net sales $ 125,473 $ 17,935 $ 143,408 Cost of sales 93,998 16,552 110,550 ------------------------------------------------------------------------- Gross profit 31,475 1,383 32,858 Expenses: Selling, technical and administrative expenses $ (306) 20,235 3,118 23,047 Restructuring costs 1,000 1,000 Amortization of intangible assets 15 3,391 3,406 ------------------------------------------------------------------------- Total expenses (291) 24,626 3,118 27,453 ------------------------------------------------------------------------- Income (loss) from operations 291 6,849 (1,735) 5,405 Interest (income) expense, net (2,753) 9,122 659 7,028 Income (loss) from equity investees (3,809) (2,458) $ 6,267 Other expense (income) 544 227 (34) 737 ------------------------------------------------------------------------- (Loss) income before income taxes and minority interest (1,309) (4,958) (2,360) 6,267 (2,360) Income taxes 206 (845) 98 (541) Minority interest (304) (304) ------------------------------------------------------------------------- NET LOSS $ (1,515) $ (3,809) $ (2,458) $ 6,267 $ (1,515) =========================================================================
14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 ---------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------- Net sales $ 140,343 $ 16,525 $ 156,868 Cost of sales $ 285 99,845 13,475 113,605 --------- --------------------------------------------------------- Gross profit (285) 40,498 3,050 43,263 Expenses: Selling, technical and administrative expenses 88 20,459 2,964 23,511 Amortization of intangible assets 6 3,069 3,075 --------- --------------------------------------------------------- Total expenses 94 23,528 2,964 26,586 --------- --------------------------------------------------------- Income (loss) from operations (379) 16,970 86 16,677 Interest (income) expense, net (2,860) 8,971 493 6,604 Income (loss) from equity investees 3,891 (793) $ (3,098) Other expense 370 71 441 --------- --------------------------------------------------------- Income (loss) before income taxes 6,372 6,836 (478) (3,098) 9,632 Income taxes 805 2,945 315 4,065 --------- --------------------------------------------------------- NET INCOME (LOSS) $ 5,567 $ 3,891 $ (793) $ (3,098) $ 5,567 ========= =========================================================
15 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------- Net sales $ 37,128 $ 5,080 $ 42,208 Cost of sales 28,340 5,164 33,504 ------------------------------------------------------------------------- Gross profit 8,788 (84) 8,704 Expenses: Selling, technical and administrative expenses $ (48) 5,158 906 6,016 Amortization of intangible assets 6 1,135 1,141 ------------------------------------------------------------------------- Total expenses (42) 6,293 906 7,157 ------------------------------------------------------------------------- (Loss) income from operations 42 2,495 (990) 1,547 Interest (income) expense, net (917) 2,973 241 2,297 Income (loss) from equity investees (1,378) (1,152) $ 2,530 Other expense 268 3 36 307 ------------------------------------------------------------------------- (Loss) income before income taxes and minority interest (687) (1,633) (1,267) 2,530 (1,057) Income taxes 266 (135) (115) 16 Minority interest (120) (120) ------------------------------------------------------------------------- NET LOSS $ (953) $ (1,378) $ (1,152) $ 2,530 $ (953) =========================================================================
16 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------- Net sales $ 42,764 $ 5,097 $ 47,861 Cost of sales 30,288 4,211 34,499 ------------------------------------------------------------------------- Gross profit 12,476 886 13,362 Expenses: Selling, technical and administrative expenses $ (56) 6,661 998 7,563 Amortization of intangible assets 1 1,023 1,024 ------------------------------------------------------------------------- Total expenses (55) 7,684 958 8,587 ------------------------------------------------------------------------- Income (loss) from operations 55 4,792 (72) 4,775 Interest (income) expense, net (967) 2,957 173 2,163 Income (loss) from equity investees 712 (338) $ (374) Other expense 269 17 286 ------------------------------------------------------------------------- Income (loss) before income taxes 1,734 1,228 (262) (374) 2,326 Income taxes 241 516 76 833 ------------------------------------------------------------------------- NET INCOME (LOSS) $ 1,493 $ 712 $ (338) $ (374) $ 1,493 =========================================================================
17 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by operating activities $ 6,434 $ 6,770 $ (1,932) $ 11,272 Cash flows from investing activities: Purchase of property, plant and equipment (6,426) (1,014) (7,440) -------------------------------------------------------------------------- Net cash used in investIng activities (6,426) (1,014) (7,440) Cash flows from financing activities: Proceeds from long-term debt 26,075 848 3,393 30,316 Payments on long-term debt (32,095) (1,989) (260) (34,344) Payments of preferred stock dividends (112) (112) -------------------------------------------------------------------------- Net cash (used in) provided by financing activities (6,132) (1,141) 3,133 (4,140) Effect of exchange rate changes on cash (281) (281) Net (decrease) increase in cash and cash equivalents 302 (797) (94) (589) -------------------------------------------------------------------------- Cash and cash equivalents, at beginning of period 553 1,027 2,430 4,010 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 855 $ 230 $ 2,336 $ 0 $ 3,421 ==========================================================================
18 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by operating activities $ 8,837 $ 7,054 $ 3,228 $ 19,119 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 69 69 Purchase of property, plant and equipment (6,326) (2,005) (8,331) -------------------------------------------------------------------------- Net cash used in investIng activities (6,257) (2,005) (8,262) Cash flows from financing activities: Payments on short-term debt (760) (760) Proceeds from borrowings of long-term debt 10,208 774 10,982 Payments on long-term debt (18,125) (1,662) (278) (20,065) Payment of preferred stock dividend (114) (114) -------------------------------------------------------------------------- Net cash used in financing activities (8,031) (888) (1,038) (9,957) Effect of exchange rate changes on cash (184) (184) Net increase (decrease) in cash and cash equivalents 806 (91) 1 716 Cash and cash equivalents, at beginning of period 1,691 193 2,109 3,993 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 2,497 $ 102 $ 2,110 $ 4,709 ==========================================================================
19 ITEM 2. 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. GENERAL Hawk operates in four primary reportable segments: friction products, powder metal, performance automotive and motor components. The Company's friction products are 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. 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 powder metal components are made from formulations of composite powder metal alloys. The powder metal 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 small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. As of September 30, 2001, Hawk has approximately 1,575 employees and 16 manufacturing sites in five countries. RECENT EVENTS On November 9, 2001, the Company executed an amended credit agreement with its bank group which modified the terms of the financial covenants and security interests as of September 30, 2001 and for future reporting periods under the Company's credit facility due May 2003. Pursuant to the amended credit agreement, the credit facility bears interest, at the Company's discretion, at either the prime rate plus a margin or at the Eurodollar rate plus a margin. The margin over prime, ranging from 100 to 225 basis points and the margin over the Eurodollar rate, ranging from 225 to 350 basis points, is determined based on certain quarterly performance criteria and the achievement of certain financial ratios. The amended credit agreement is secured by substantially all of the Company's assets and a pledge of the stock of all its U.S. subsidiaries and certain stock of its foreign subsidiaries. The amended credit agreement contains restrictive covenants, which, among other things, require maintenance of financial ratios and other loan covenants. See Liquidity and Capital Resources for a more complete description of the amended credit facility. As a result of the terrorist attacks in the United States on September 11, the Company expects sales to the aircraft market will be down in the fourth quarter of 2001 and for the full year of 2002 by approximately 10 to 25 percent from current levels. THIRD QUARTER 2001 COMPARED TO THIRD QUARTER 2000 Net Sales. Net sales decreased $5.7 million, or 11.9 percent, to $42.2 million in the third quarter of 2001 from $47.9 million in the comparable quarter of 2000. The net sales decrease was primarily attributable to declining economic conditions across almost all the end markets served by the Company's friction products and powder metal segments. The decline was partially offset by an increase in net sales in the Company's performance automotive segment as a result of new sales initiatives in the motorsports market and the acquisition of Tex Racing Enterprises, Inc. in November 2000. 20 Net sales in the Company's friction products segment declined $4.4 million, or 16.0 percent, to $23.1 million from $27.5 million in the comparable quarter of 2000. The net sales decrease in this segment during the quarter reflected soft demand in the heavy truck, agriculture, construction and aircraft markets served by the Company. The decrease was partially offset by higher sales to the specialty friction markets during the quarter. During the third quarter, the Company began to see a general softening in the aircraft market served by this segment. The Company expects sales in this market will be down in the fourth quarter of 2001 and for the full year of 2002 as a result of the events of September 11. The powder metal segment reported net sales of $13.0 million in the third quarter of 2001 compared to $16.6 million in the comparable quarter of 2000, a decline of $3.6 million, or 21.7 percent. The net sales decrease in this segment was primarily the result of softness in the heavy truck, appliance, lawn and garden, appliance and fluid power markets served by the Company. Net sales in the Company's performance automotive segment increased $2.0 million, or 111.1 percent, to $3.8 million in the third quarter of 2001 compared to $1.8 million in the comparable quarter of 2000. The sales by Tex Racing, which was acquired in November 2000, accounted for almost all of the net sales increase in this segment for the quarter. Net sales in the Company's motor segment increased $0.3 million, or 15.0 percent, to $2.3 million in the third quarter of 2001 compared to $2.0 million from the comparable quarter of 2000. Net sales increases in the segment were the result of sales increases from the Company's start-up facility in Mexico. These increases were partially offset by soft economic conditions in the domestic motor markets served by the Company. Gross Profit. Gross profit decreased $4.7 million, or 35.1 percent, to $8.7 million in the third quarter of 2001 from $13.4 million in the comparable quarter of 2000. Gross profit from the Company's friction products segment decreased in the third quarter of 2001 compared to the prior year period, primarily from net sales declines in almost all markets served by the segment and the effects of product mix. The Company's friction segment was able to partially offset the effect of the sales declines on its gross profit by cost reduction programs initiated during the quarter. The Company's powder metal segment gross profit declined in the third quarter of 2001, primarily as a result of volume declines in most of the markets served by the segment, the effects of product mix, under absorption of fixed costs as a result of the lower sales volumes and start-up losses at Net Shape Technologies LLC, the Company's start-up venture in metal injection molding. The performance automotive segment gross profit declined during the third quarter of 2001 compared to the prior year period primarily as a result of product mix issues. The motor segment incurred margin losses during the third quarter of 2001 primarily due to the continuing start up expenses at the Company's facility in Mexico and lower sales volumes from the Company's domestic facility. As a result of these factors, the gross profit margin decreased to 20.6 percent in the third quarter of 2001 from 28.0 percent in the comparable quarter of 2000. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses decreased $1.6 million, or 21.0 percent, to $6.0 million in the third quarter of 2001 from $7.6 million in the comparable period of 2000. The decline in ST&A expenses is primarily attributable to the cost reduction initiatives announced by the Company in June 2001 and further reduction of payroll and employee benefit costs of $1.7 million realized by the Company during the quarter in response to continued negative economic conditions. Partially offsetting this expense reduction were expenses relating to the continuing support of the Company's new operations in Mexico and China as well as expenditures associated with the Company's investment in Net Shape Technologies. As a percent of net sales, ST&A expenses decreased to 14.2 percent of net sales in the third quarter of 2001 from 15.9 percent in the comparable quarter of 2000. Income from Operations. Income from operations decreased by $3.3 million to $1.5 million in the third quarter of 2001 from $4.8 million in the comparable quarter of 2000. Income from operations as a percentage of net sales decreased to 3.6 percent in the third quarter of 2001 from 10.0 percent in the comparable period of 2000. 21 Interest Expense. Interest expense increased $0.2 million, or 9.1 percent, to $2.4 million in the third quarter of 2001 from $2.2 million in the comparable quarter of 2000. The increase is attributable to higher debt levels and borrowing rates during the quarter. Other (Expense) Income. Other expense was $0.3 million in the third quarter of 2001. The expense in the third quarter of 2001 consisted primarily of an expense to reflect the fair value of the Company's interest rate swap agreement and foreign currency transaction losses incurred by the Company through its Italian facility. Income Taxes. The Company's recorded a provision for income taxes in the third quarter of 2001 primarily as a result of certain non-deductible expense items, including amortization, for federal and state tax purposes. Net Income (Loss). As a result of the factors discussed above, net income decreased $2.5 million to a net loss of $1.0 million in the third quarter of 2001 from net income of $1.5 million in the comparable quarter of 2000. FIRST NINE MONTHS OF 2001 COMPARED TO FIRST NINE MONTHS OF 2000 Net Sales. Consolidated net sales during the first nine months of 2001 were $143.4 million, a decrease of $13.5 million, or 8.6 percent, from $156.9 million in the comparable period of 2000. The decrease was attributable to continuing economic softness primarily in the Company's friction products and powder metal segments. The decline was partially offset by an increase in net sales in the Company's performance automotive segment primarily as a result of the acquisition of Tex Racing in November 2000. Net sales in the Company's friction products segment declined $9.2 million, or 10.6 percent, to $77.7 million in the first nine months of 2001 from $86.9 million in the comparable period of 2000. The net sales decrease in this segment reflected continuing soft demand in the heavy truck, agriculture and construction markets served by the Company. These decreases were partially offset by higher sales demand to the aerospace and specialty friction markets during the nine month period ended September 30, 2001. The powder metal segment reported net sales of $45.3 million in the first nine months of 2001 compared to $56.1 million in the comparable period of 2000, a decline of $10.8 million, or 19.3 percent. The net sales decrease in this segment was primarily the result of softness in the heavy truck, appliance, lawn and garden, appliance and fluid power markets served by the Company. Net sales in the Company's performance automotive segment increased $6.7 million, or 95.7 percent, to $13.7 million in the first nine months of 2001 compared to $7.0 million in the comparable period of 2000. The acquisition of Tex Racing in November 2000 was the primary reason for the net sales increase in this segment for the period. Net sales in the Company's motor segment declined $0.1 million, or 1.5 percent, to $6.7 million in the first nine month period of 2001 compared to $6.8 million from the comparable period of 2000. Net sales declines in the segment were the result of continuing soft economic conditions in the domestic motor markets served by the Company, partially offset by sales from the Company's Mexican facility, which began customer shipments during the first quarter of 2001. Gross Profit. Gross profit decreased $10.4 million to $32.9 million during the first nine months of 2001, a 24.0 percent decrease compared to gross profit of $43.3 million in the comparable nine month period of 2000. The gross profit margin decreased to 22.9 percent of sales during the nine month period ended September 30, 2001 from 27.6 percent of sales in the comparable period in 2000. The decrease in margins was primarily the result of net sales volume declines, the effect of product mix, underabsorption of fixed costs as a result of the lower sales volumes and continuing start up expenditures at the Company's facilities in Mexico and China and its investment in Net Shape. 22 Selling, Technical and Administrative Expenses. ST&A expenses decreased $0.5 million, or 2.1 percent, to $23.0 million during the first nine months of 2001 from $23.5 million in comparable nine month period of 2000. As a percentage of net sales, ST&A increased to 16.0 percent of sales in 2001 from 15.0 percent of sales in 2000. The increase in ST&A expenses as a percent of sales, resulted primarily from sales volume declines and expenditures associated with the Company's investment in Net Shape. The increase was partially offset by the cost cutting initiatives implemented by the Company during the period. Restructuring Costs. The Company incurred $1.0 million of restructuring costs during the first nine months, primarily in the second quarter, of 2001 as part of its cost reduction initiative announced in June 2001. The costs incurred were primarily attributable to employee related severance costs during the period. Income from Operations. Income from operations decreased $11.3 million, or 67.7 percent, to $5.4 million in the nine month period ended September 30, 2001 compared to $16.7 million in the comparable period of 2000. Income from operations as a percentage of net sales decreased to 3.8 percent in 2001 from 10.6 percent in 2000. Interest Expense. Interest expense increased $0.4 million, or 5.9 percent, to $7.2 million in the first nine months of 2001 from $6.8 million in the comparable period of 2000. The increase is attributable to higher debt levels and borrowing rates during 2001 compared with 2000. Other (Expense) Income. Other expense was $0.7 million during the first nine months of 2001 compared to $0.4 million during the comparable period of 2000. The expense incurred in 2001 was from the mark to market valuation adjustments associated with the Company's interest rate swap agreement and foreign currency transaction losses incurred by the Company through its Italian facility. The expense reported in 2000 was primarily the result of foreign currency transaction losses incurred by the Company through its Italian facility. Income Taxes. The credit for income taxes was $0.5 million during the first nine months of 2001 compared to a provision for income taxes of $4.1 million in the comparable period of 2000 as a result of the loss incurred by the Company during the current year to date period offset by non-deductible expense items, including amortization, for federal and state tax purposes. As a result of the nondeductible expenses, the Company's effective tax benefit for the nine month period ended September 30, 2001 was 22.9 percent compared to an effective tax rate of 42.2 percent in the comparable period of 2000. Minority Interest. The Company reported a benefit of $0.3 million for the nine month period ended September 30, 2001 for the portion of the loss incurred by Net Shape which is not owned by the Company. In December 2000, the Company purchased a 66.7 percent interest in Net Shape. Net Income (Loss). As a result of the factors noted above, net income decreased to a loss of $1.5 million for the nine month period ended September 30, 2001 compared to net income of $5.6 million for the comparable period of 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations. In addition, the Company has available a credit facility which may be used for general corporate purposes. The facility is currently comprised of a $30.0 million revolving credit component and a $18.8 million amortizing term loan subject to a borrowing base formula. As of September 30, 2001, the Company had $10.2 million outstanding under the revolving credit component of the facility. On November 9, 2001, the Company amended the credit agreement modifying the terms of financial covenants and security interests as of September 30, 2001 and for future reporting periods and increasing the margin over the base interest rates. The interest rates on the credit facility range from 225 to 350 basis points over the Eurodollar rate, or alternatively, 100 to 225 basis points over the prime rate based on certain quarterly performance criteria. As of September 30, 2001, the Company was paying an average 23 rate of 6.72% on its credit facility outstandings compared to an average rate of 6.38% at September 30, 2000. Under the amended agreement, 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 pledge 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 other loan covenants. Based on the amended credit agreement, the Company was in compliance with the financial covenants as of September 30, 2001. As of September 30, 2001, the Company had approximately $13.8 million available for future borrowings under its credit facility. Net cash provided by operating activities was $11.3 million and $19.1 million for the nine month period ended September 30, 2001 and 2000, respectively. The decline in cash from operations was caused primarily by the reduction in net income during the period. Net cash used in investing activities was $7.4 million and $8.3 million for the nine month period ended September 30, 2001 and 2000, respectively, for the purchase of property, plant and equipment. Net cash used in financing activities was $4.1 million and $10.0 million for the nine month period ended September 30, 2001and 2000, respectively, primarily for the payment of outstanding debt. 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, (3) for making additional strategic acquisitions of complementary businesses, and (4) to pay interest on, and to repay principal of, indebtedness. The Company believes that cash flow from operating activities, borrowings under the revolver and access to capital markets will be sufficient to satisfy its working capital, capital expenditures and debt requirements and to finance continued internal growth for the next twelve months. 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 effect of the Company's debt service requirements on funds available for operations and future business opportunities; - the Company's vulnerability to adverse general economic and industry conditions and competition, which continues to be a significant factor as most of the Company's major end markets, including aircraft, agriculture, construction and truck, remain soft; - the ability of the Company to continue to meet the terms of its credit facilities which contain a number of significant financial covenants and other restrictions; 24 - the ability of the Company to utilize all of its manufacturing capacity in light of softness in most of the major end-markets served by the Company; - the effect of a change in product mix on the Company, including the expected further weakness in the aircraft market; - the effect of any future acquisitions by the Company on its indebtedness and on the funds available for operations and future business opportunities; - 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 successfully integrate acquisitions into the Company's existing businesses; - 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-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. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially and adversely 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. The Company's market risk exposure relates primarily to interest rates, where the Company uses interest rate swaps to hedge interest rates on long-term debt. The Company does not engage in activities using complex or highly leveraged instruments. At September 30, 2001, the Company's variable rate long-term debt totaled approximately $28.1 million. The Company had outstanding an interest rate swap, essentially converting $10.0 million notional amount of its variable rate debt to a fixed rate of 5.34 percent. Foreign Currency Exchange Risk. 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 June 30, 2001 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 26 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. 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. -------- * filed herewith (b) Reports on Form 8-K: None 27 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: November 14, 2001 HAWK CORPORATION By: /s/ Ronald E. Weinberg --------------------------- Ronald E. Weinberg, Co-Chairman and Co-CEO By: /s/ Thomas A. Gilbride --------------------------- Thomas A. Gilbride, Vice President- Finance (Chief Accounting Officer) 28 EX-10.28 3 l90940aex10-28.txt EXHIBIT 10.28 Exhibit 10.28 AMENDMENT NO. 3 TO CREDIT AGREEMENT THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT is dated as of November 9, 2001 (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, ETC. 1.1. Section 1.1 of the Credit Agreement is hereby amended to delete the definitions of "Applicable Eurodollar Margin", "Borrowing Base", "Consolidated EBIT", "Consolidated Net Worth", "Maximum Available Revolving Commitment" and "Pricing Grid Table" therefrom and to insert in place thereof, respectively, the following: "Applicable Eurodollar Margin" shall mean: (a) for any date prior to November 9, 2001, as such margin shall have been determined in accordance with section 2.8(h) of this Agreement as in effect prior to November 9, 2001; (b) from November 9, 2001 through March 31, 2002, (i) three hundred (300) basis points for General Revolving Loans, and (ii) three hundred fifty (350) basis points for Term Loans; and (c) commencing with the fiscal quarter of the Borrower ended December 31, 2001, 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 1 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. "Borrowing Base" shall mean an amount not in excess of (a) the sum of (i) eighty-five percent (85%) of the amount due and owing on Eligible Accounts Receivable, plus (ii) the lesser of (A) sixty percent (60%) of the aggregate of the cost or market value (whichever is lower) of Eligible Inventory, or (B) Eighteen Million Dollars ($18,000,000), minus (b) the aggregate principal amount of all Term Loans then outstanding. "Consolidated EBIT" shall mean, for any period, Consolidated Net Income for such period; plus (a) the sum of the amounts for such period included in determining such Consolidated Net Income of (i) Consolidated Interest Expense, (ii) Consolidated Income Tax Expense, (iii) amortization or write-off of deferred financing costs and charges for prepayment penalties on prepayment of Indebtedness (all of which amounts do not in the aggregate exceed in the 1998 fiscal year a maximum of $5,500,000 on a pre-tax basis), and (iv) extraordinary and other non-recurring non-cash losses and charges; less (b) gains on sales of assets and other extraordinary gains and other non-recurring non-cash gains; all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP; provided, however, that in computing Consolidated Net Income for purposes of this definition, there shall be excluded therefrom (A) any non-cash gains or losses recorded in accordance with SFAS 133, Accounting for Derivatives, (B) the effects of any non-cash gains or losses as a result of foreign currency translation adjustments, (C) non-cash charges associated with the write-off of goodwill in accordance with SFAS 142, all as determined for the Borrower and its Subsidiaries on a consolidated basis and in accordance with GAAP, (D) the income, (or loss) of any entity (other than Subsidiaries of the Borrower) in which the Borrower or any of its Subsidiaries has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Subsidiaries during such period, and (E) the income of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary. 2 "Consolidated Net Worth" shall mean at any time for the determination thereof all amounts that, in conformity with GAAP, would be included under the caption "total stockholders' equity" (or any like caption) on a consolidated balance sheet of the Borrower as at such date; provided, however, that the calculation of Consolidated Net Worth shall exclude (a) any amounts in respect of Redeemable Stock and (b) non-cash charges associated with the write-off of goodwill in accordance with SFAS 142. "Maximum Available Revolving Commitment" shall mean at any time an amount equal to the lesser of (a) the Total General Revolving Commitment, or (b) (i) the Borrowing Base plus (ii) the Alternate Currency Outstandings. "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 4.00 to 1.00 300 basis points 175 basis 350 basis points 225 basis points 50 basis points points Greater than 3.50 to 1.00 275 basis points 150 basis 325 basis points 200 basis points 50 basis points but less than 4.00 to 1.00 points Greater than 3.00 to 1.00 250 basis points 125 basis 300 basis points 175 basis points 50 basis points but less than or equal to points 3.50 to 1.00 Greater than 2.50 to 1.00 225 basis points 100 basis 275 basis points 150 basis points 50 basis points but less than or equal to points 3.00 to 1.00 Greater than 2.00 to 1.00 200 basis points 75 basis 250 basis points 125 basis points 50 basis points but less than or equal to points 2.50 to 1.00 Less than or equal to 2.00 187.5 basis points 50 basis 225 basis points 100 basis points 37.5 basis to 1.00 points points
1.2. Section 1.1 of the Credit Agreement is hereby amended to delete the definition of "Interest Coverage Period" therefrom. 1.3. Section 1.1 of the Credit Agreement is hereby amended to add the following new definitions thereto: "Account" shall mean an account, as defined in Chapter 1309 of the Ohio Revised Code as in effect from time to time. "Account Debtor" shall mean any Person obligated to pay all or any part of any Account in any manner and includes (without limitation) any guarantor thereof. 3 "Adjusted Interest Coverage Ratio" shall mean, for the most recently completed four fiscal quarters of the Borrower, the ratio of (a) Consolidated EBITDA to (b) Consolidated Interest Expense. "Applicable Prime Rate Margin" shall mean: (a) for any date prior to November 9, 2001, 0 basis points; (b) from November 9, 2001 through March 31, 2002, (i) one hundred seventy-five (175) basis points for General Revolving Loans, and (ii) two hundred twenty-five (225) basis points for Term Loans; and (c) commencing with the fiscal quarter of the Borrower ended December 31, 2001, 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. "Borrowing Base Certificate" shall mean a certificate, substantially in the form of the attached Annex VIII. "Eligible Account Receivable" shall mean an Account of the Borrower or any of its Subsidiaries (other than a Foreign Subsidiary) to the extent arising out of completed sales by Borrower or any of its Subsidiaries (other than a Foreign Subsidiary) in accordance with the terms and conditions of all purchase orders, contracts and other documents relating thereto, which, at all times until it is collected in full, continuously meets the following requirements: (a) to the extent not subject to any claim for credit, allowance or adjustment by the Account Debtor or any set-off or counterclaim; (b) arose in the ordinary course of business of the Borrower or any of its Subsidiaries from the performance (fully completed) of services or bona fide sale of goods that have been shipped to the Account Debtor, and not more than 90 days from the due date as specified in the invoice relating to such account receivable have elapsed with respect to such account receivable; (c) is not due 4 from any Account Debtor with respect to which the Borrower of any of its Subsidiaries has received any notice or has any knowledge of insolvency, bankruptcy or financial impairment; (d) is not subject to an assignment, pledge, claim, mortgage, lien, or security interest of any type except that granted to or in favor of the Administrative Agent and the Lenders; (e) does not relate to any goods rejected or returned, or acceptance of which has been revoked or refused; (f) is not the subject of any instrument or chattel paper offered in payment thereof; (g) has not been determined by the Administrative Agent, in its sole discretion, to be unsatisfactory in any respect; (h) is not a Government Account Receivable, unless the security interest of the Administrative Agent and the Lenders in such Government Account Receivable is filed in accordance with the Federal Assignment of Claims Act; (i) is not an account receivable due from any Affiliate, shareholder or employee of the Borrower or any of its Subsidiaries; (j) is not a Foreign Account Receivable; (k) is not evidenced by a promissory note or any other negotiable instrument; (l) is not an account receivable owed to the Borrower or any of its Subsidiaries by an Account Debtor that has failed to pay more than 50% of its currently outstanding accounts receivable within 90 days from the due date thereof as specified in the invoice with respect to such accounts receivable; and (m) is an Account in which the Administrative Agent, for the benefit of the Lenders, has a valid and enforceable first security interest. "Eligible Inventory" shall mean all Inventory of the Borrower or any of its Subsidiaries in which the Administrative Agent, for the benefit of the Lenders, has a valid and enforceable first security interest, except Inventory that is (a) located outside of the United States, (b) in the possession of a bailee or a third party, (c) damaged, defective, or obsolete, (d) held by the Borrower or any of its Subsidiaries or a third party on consignment, or (e) determined by the Administrative Agent, in its sole discretion, to be unsatisfactory in any respect. "Foreign Account Receivable" shall mean any Account that arises out of contracts with or orders from an Account Debtor that is not a resident of the United States. "Government Account Receivable" shall mean any Account that arises out of contracts with or orders from the United States or any of its departments, agencies or instrumentalities. "Inventory" shall mean inventory, as defined in Chapter 1309 of the Ohio Revised Code as in effect from time to time. "Required Supermajority Lenders" shall mean the holders of at least 75% of the aggregate amount of the Commitments (other than the Swing Line Revolving Commitment), or, if there shall be any borrowing hereunder, the holders of at least 75% of the aggregate amount outstanding under the Notes (other than the Swing Line Revolving Note). 1.4. Section 2A of the Credit Agreement is hereby amended so that all references therein to Eligible Subsidiary shall be deemed to be references only to S.K. Wellman S.p.A. The Borrower, the Administrative Agent and the Lenders agree that, effective as of the date of this Amendment, no other Foreign Subsidiary of the Borrower shall become an Eligible Subsidiary. 5 Concurrently with the execution and delivery of this Amendment, each Eligible Subsidiary (other than S.K. Wellman S.p.A.) shall have delivered to the Administrative Agent an Election to Terminate and shall in no event be able to request an Alternative Currency Advance regardless of whether or not such Eligible Subsidiary shall have delivered to the Administrative Agent an Election to Terminate. 1.5. Section 2.8 of the Credit Agreement is hereby amended to delete subpart (a) therefrom and to insert in place thereof the following: (a) Interest on Prime Rate Loans. The unpaid principal amount of each Loan that is a Prime Rate Loan shall bear interest from the date of Borrowing thereof until maturity (whether by acceleration or otherwise) at a fluctuating rate per annum that shall at all times be equal to the Prime Rate in effect from time to time plus the Applicable Prime Rate Margin. 1.6. Section 5.3 of the Credit Agreement is hereby amended to add the following new subpart (f) thereto: (f) Mandatory Prepayment Event. (i) In addition to any prepayment required pursuant to subparts (a) through (d) above, if the Borrower or any Subsidiary shall effect a Mandatory Prepayment Event (which Mandatory Prepayment Event shall only be permitted in accordance with the terms of this Agreement), then, unless otherwise agreed to in writing by the Required Supermajority Lenders, the Prepayment Proceeds of such Mandatory Prepayment Event shall be paid, on the date of such Mandatory Prepayment Event, by the Borrower (or the applicable Subsidiary) to the Administrative Agent to be applied, first, on a pro rata basis to the outstanding principal balance of the Term Loans (to be applied on a pro rata basis to the Scheduled Repayments thereof in the inverse order of maturity), and, second, to the outstanding principal balance of the Revolving Loans (or, if there shall be no Revolving Loans outstanding or if the outstanding Revolving Loans shall have been paid in full, then, first, to the outstanding principal balance of the Swing Line Revolving Loans, second, to the outstanding principal balance of the Alternate Currency Outstandings, and, third, to the Stated Amount of the Letter of Credit Outstandings to be held and applied by the Administrative Agent as security for the reimbursement obligations in respect thereof), with the Total General Revolving Commitments being permanently reduced by the amount of such Prepayment Proceeds, whether or not there shall be any Revolving Credit Exposure. (ii) As used in this section 5.3(f), "Mandatory Prepayment Event" shall mean the receipt by the Borrower or any Subsidiary of (i) any funds, in excess of the aggregate amount of $250,000 for any single casualty event from (A) insurance losses, returns or unearned premiums under any policy of insurance, (B) any condemnation, eminent domain or other proceeding relating to the Real Property, or (C) any litigation, settlement or other legal proceeding; (ii) the proceeds of a public or private offering of equity or debt securities (other than pursuant to section 9.4(c) (i) or (ii)) by the Borrower or any 6 Subsidiary; or (iii) the proceeds of any Significant Asset Disposition; "Prepayment Proceeds" shall mean the proceeds of any Mandatory Prepayment Event minus taxes, fees and expenses actually paid in connection with such Mandatory Prepayment Event; and "Significant Asset Disposition" shall mean the sale, lease, transfer or other disposition of assets (other than a sale in the ordinary course of business or other than a sale, lease transfer or other disposition permitted pursuant to section 9.2(a)) by the Borrower or any Subsidiary for which the aggregate fair market value or book value, whichever is greater, of the assets sold, leased, transferred or otherwise disposed of shall be greater than or equal to $250,000. 1.7. Section 8.1 of the Credit Agreement is hereby amended to add the following new subsection (j) thereto: (j) Borrowing Base Certificate. Within 30 days after the end of each 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 a Authorized Officer of Borrower; 1.8. Section 8.15 of the Credit Agreement is hereby amended to delete subsection (d) therefrom and to insert in place thereof the following: (d) On or before November 30, 2001, or such later date as may be agreed to in writing by the Administrative Agent, the Borrower and each Guarantor of Payment (as applicable) shall deliver to the Administrative Agent, a landlord's waiver, in form and substance satisfactory to the Administrative Agent, for each leased location at which the Borrower or such Guarantor of Payment maintains assets (other than locations owned by the Borrower or a Guarantor of Payment). 1.9. Section 8.15 of the Credit Agreement is hereby amended to add the following new subsection (e) thereto: (e) On or before November 30, 2001, or such later date as may be agreed to in writing by the Administrative Agent, the Borrower shall have delivered to the Administrative Agent title examinations and commitments, in form and detail satisfactory to the Administrative Agent, issued by a title insurance company acceptable to the Administrative Agent with respect to the Mortgaged Property. 1.10. Section 9.2 of the Credit Agreement is hereby amended to delete subsection (b) therefrom and to insert in place thereof the following: (b) Permitted Acquisitions. Prior to November 9, 2001, the Borrower or any Subsidiary shall be permitted to make Acquisitions in accordance with the terms of this subpart (b) as in effect prior to November 9, 2001, and on or after November 9, 2001, neither the Borrower nor any of its Subsidiaries shall make any Acquisition without the prior written consent of the Administrative Agent and the Required Lenders. 7 1.11. Section 9.4(c)(A) of the Credit Agreement is hereby amended to delete "$9,500,000" therefrom and to insert in place thereof "$8,500,000". 1.12. Section 9.4 of the Credit Agreement is hereby amended to delete subsection (f) therefrom and to insert in place thereof the following: (f) Additional Unsecured Debt and Guaranty Obligations: additional unsecured Indebtedness of the Borrower (including additional unsecured Guaranty Obligations of the Borrower) incurred by the Borrower on or before November 9, 2001, in an aggregate principal amount outstanding at any time not to exceed $4,000,000 (including any refinancing, extension or renewal of such Indebtedness so long as the principal amount thereof shall not be increased), provided that at the time of incurrence thereof, and after giving effect thereto, (i) the Borrower would be in compliance with section 9.8; and (ii) no Event of Default shall have occurred and be continuing or would result therefrom. 1.13. 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) 5.35 to 1.00 on March 31, 2002 through June 29, 2002, (vii) 5.10 to 1.00 on June 30, 2002 through September 29, 2002, (viii) 4.65 to 1.00 on September 30, 2002 through December 30, 2002, and (ix) 4.25 to 1.00 on December 31, 2002 and thereafter. 1.14. Section 9.5 of the Credit Agreement is hereby amended to delete subpart (k) and subpart (iv) that appears immediately following subpart (k) and to insert in place thereof the following: (k) to the extent not permitted by the foregoing clauses, (i) loans and advances by the Borrower or by any Subsidiary of the Borrower to, or other investments in, any Subsidiary of the Borrower which is (A) a Subsidiary Guarantor, (B) a Wholly-Owned Subsidiary, and (C) not a Foreign Subsidiary, and (ii) loans and advances to, and investments in, any Foreign Subsidiary, made after March 31, 1998, provided that the cumulative aggregate amount thereof which are so made and outstanding at any time shall not exceed an aggregate of $13,000,000, taking into account the repayment of any loans or advances to such Foreign Subsidiaries; 1.15. 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 8 June 29, 2001, and (ii) 1.20 to 1.00 on June 30, 2001 through September 29, 2001, and (b) 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) 1.85 to 1.00 on March 31, 2002 through June 29, 2002, (iv) 2.05 to 1.00 on June 30, 2002 through September 29, 2002, (v) 2.20 to 1.00 on September 30, 2002 through December 30, 2002, and (vi) 2.45 to 1.00 on December 31, 2002 and thereafter. 1.16. Section 9 of the Credit Agreement is hereby amended to delete Section 9.11 therefrom and to insert in place thereof the following: 9.11. Prepayments and Refinancings of Other Debt. The Borrower shall not, and shall not permit any of its Subsidiaries to, make (or give any notice in respect thereof) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including, without limitation, by way of depositing with the trustee with respect thereto money or securities before due for the purpose of paying when due) or exchange of, or refinance or refund, any Indebtedness of the Borrower or its Subsidiaries that has an outstanding principal balance (or Capitalized Lease Obligation, in the case of a Capital Lease) greater than $1,000,000 (other than (a) the Obligations and intercompany loans and advances among the Borrower and its Subsidiaries, and (b) any Indebtedness incurred pursuant to this Agreement). 1.17. The Credit Agreement is hereby amended to add a new Annex VIII thereto in the form of Annex VIII attached hereto. 1.18. Pursuant to Section 8.16 of the Credit Agreement, the Administrative Agent has requested, and the Borrower hereby agrees, that, concurrently with the execution of this Amendment, the Borrower and each Guarantor of Payment shall execute and deliver to the Administrative Agent a Pledge Agreement, dated as of the date hereof, pledging all of the stock or other equity interest of each Subsidiary (other than a Foreign Subsidiary) of the Borrower or such Guarantor of Payment. 1.19. The Borrower hereby agrees that the failure of the Borrower to deliver any item required pursuant to, or otherwise fail to satisfy the terms of, section 8.15(d) of the Credit Agreement, section 8.15(e) of the Credit Agreement or Section 4 of this Amendment, within the time period specified in such sections, shall constitute an Event of Default and, at the Administrative Agent's sole option, all outstanding amounts of principal and all accrued but unpaid interest thereon shall bear interest at the default rate of interest specified in section 2.8(d) of the Credit Agreement (the "Default Rate") unless and until the Borrower shall have satisfied, in the opinion of the Administrative Agent, the requirements of such sections. 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 9 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. 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 and each Guarantor of Payment shall execute and deliver to the Administrative Agent a Pledge Agreement, in form and substance satisfactory to the Administrative Agent, pursuant to which the Borrower and each such Guarantor of Payment shall pledge all of the stock or other equity interest of each Subsidiary (other than a Foreign Subsidiary) of the Borrower or such Guarantor of Payment, together with the stock certificates pledged thereunder and accompanying stock transfer powers; (c) the Borrower shall deliver to the Administrative Agent such examinations and reports, in form and detail satisfactory to the Administrative Agent, with respect to the Mortgaged Property, issued by a title company satisfactory to the Administrative Agent, that shows each Mortgage to be a valid first priority Lien on such Mortgaged Property, free and clear of all defects and encumbrances except such matters of record as permitted pursuant to the Credit Agreement; 10 (d) the Borrower shall deliver to the Administrative Agent evidence of insurance on ACORD 27 form, and otherwise satisfactory to the Administrative Agent, of adequate personal property and liability insurance of each Credit Party, with the Administrative Agent, on behalf of the Lenders, listed as mortgagee, loss payee and additional insured; (e) the Borrower shall provide to the Administrative Agent and the Lenders an officer's certificate certifying the names of the officers of the Borrower and each Guarantor of Payment authorized to sign this Amendment and the Security Documents that are being executed on the date hereof to which the Borrower or such Guarantor of Payment is a party, 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 or such Guarantor of Payment, evidencing approval of the execution and delivery of this Amendment and the Security Documents to which the Borrower or such Guarantor of Payment is a party; (f) the Borrower shall provide to the Administrative Agent and the Lenders such opinions of counsel for the Borrower and each Guarantor of Payment, in form and substance satisfactory to the Administrative Agent and the Lenders, as the Administrative Agent and the Lenders may deem necessary or appropriate; (g) pursuant to Section 1.5 of this Amendment, the Borrower shall cause each Eligible Subsidiary (other than S.K. Wellman S.p.A.) to deliver to the Administrative Agent an Election to Terminate; (h) the Borrower shall pay to the Administrative Agent, for the pro rata benefit of the Lenders, an amendment fee in the amount of Fifty Thousand Dollars ($50,000); (i) with respect to each parcel of the Mortgaged Property, evidence to the satisfaction of the Administrative Agent that no portion of any Mortgaged Real Property is located in a Special Flood Hazard Area or is otherwise classified as Class A or Class BX on the Flood Maps maintained by the Federal Emergency Management Agency; (j) 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 (k) 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. 11 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 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.] 12 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:___________________________ Name:_________________________ Title: _________________________ KEYBANK NATIONAL ASSOCIATION, as the Administrative Agent and as a Lender By:____________________________ Name: _________________________ Title: __________________________ NATIONAL CITY BANK By:____________________________ Name:_________________________ Title:__________________________ LASALLE BANK NATIONAL ASSOCIATION By:____________________________ Name:_________________________ Title:__________________________ Signature Page 1 of 2 COMERICA BANK By:____________________________ Name:_________________________ Title:__________________________ BANK ONE, N.A. By:___________________________ Name:_________________________ Title:__________________________ HARRIS TRUST AND SAVINGS BANK By:____________________________ Name:_________________________ Title:__________________________ Signature Page 2 of 2 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. Eligible Inventory $________________* *cannot exceed inventory cap of $18,000,000) A-1 B. AVAILABILITY 1. Borrowing Base $________________ (the sum of 1d. and 2d. above) 2. Revolving Credit Exposure $________________ 3. Aggregate principal amount of Term $________________ Loans outstanding 4. Availability $_________________ (1 minus 2 and 3 above) 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-2 GUARANTOR ACKNOWLEDGMENT Each of the undersigned consents and agrees to and acknowledges the terms of the foregoing Amendment No. 3 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. WELLMAN FRICTION PRODUCTS U.K. CORP. CLEARFIELD POWDERED METALS, INC. ALLEGHENY POWDER METALLURGY, INC. QUARTER MASTER INDUSTRIES, INC. HAWK MIM, INC. TEX RACING ENTERPRISES, INC. NET SHAPE TECHNOLOGIES LLC By:__________________________________ Name: _______________________________ _____________ of each of the foregoing companies 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. 3 to CREDIT AGREEMENT dated as of November 9, 2001 --------------------- EX-10.29 4 l90940aex10-29.txt EXHIBIT 10.29 Exhibit 10.29 FORM OF PLEDGE AGREEMENT 1. Recitals. HAWK CORPORATION, a Delaware corporation (together with its successors and assigns, "Borrower"), the lending institutions listed on Annex I to the Credit Agreement, as hereinafter defined (collectively, "Lenders" and, individually, each a "Lender"), and KEYBANK NATIONAL ASSOCIATION, as administrative agent for the Lenders ("Administrative Agent"), are parties to the Credit Agreement. [___________________________], a [___________] corporation ("Pledgor"), desires that the Lenders grant the financial accommodations to Borrower as described in the Credit Agreement. Pledgor, a subsidiary of Borrower whose financing is provided by the Loans, as hereinafter defined, and Letters of Credit, as hereinafter defined, deems it to be in the direct pecuniary and business interests of Pledgor that Borrower continue to obtain from the Lenders the Commitment, as defined in the Credit Agreement, and the Loans and Letters of Credit provided for in the Credit Agreement. Pledgor understands that the Lenders are willing to continue to grant the financial accommodations to Borrower pursuant to the Credit Agreement only upon certain terms and conditions, one of which is that Pledgor grant to Administrative Agent, for the benefit of the Lenders, a security interest in and an assignment of the Collateral, as hereinafter defined, and this Pledge Agreement (as the same may from time to time be amended, restated or otherwise modified, this "Agreement") is being executed and delivered in consideration of each financial accommodation granted to Borrower by the Lenders and for other valuable considerations. 2. Definitions. Except as specifically defined herein, capitalized terms used herein that are defined in the Credit Agreement shall have their respective meanings ascribed to them in the Credit Agreement. Unless otherwise defined in this Section 2, terms that are defined in Chapter 1308 or 1309 of the Ohio Revised Code, as in effect from time to time, are used herein as so defined. As used in this Agreement, the following terms shall have the following meanings: 2.1. "Collateral" shall mean, collectively, (a) the Pledged Securities and each addition, if any, thereto and each substitution, if any, therefor, in whole or in part, (b) the certificates representing the Pledged Securities, and (c) the dividends, cash, instruments and other property distributed in respect of and other proceeds of any of the foregoing. 2.2. "Credit Agreement" shall mean the Credit Agreement executed by and among Borrower, the Lenders and Administrative Agent dated as of the 1st day of May, 1998, as amended and as the same may from time to time be further amended, restated or otherwise modified. 2.3. "Event of Default" shall mean an event or condition that constitutes an event of default pursuant to Section 7 hereof. 2.4. "Foreign Subsidiary" shall mean a Subsidiary that is organized outside of the United States. 2.5. "Hedge Agreement" shall mean any currency swap or hedge agreement, interest rate swap, cap, collar or floor agreement, or other interest rate management device entered into by Borrower or any Eligible Subsidiary with Administrative Agent or any of the Lenders, or any of their respective affiliates, in connection with the Obligations. 2.6. "Letter of Credit" shall mean any Letter of Credit, as defined in the Credit Agreement, issued pursuant to the Credit Agreement. 2.7. "Loan" shall mean any Loan, as defined in the Credit Agreement, granted pursuant to the Credit Agreement. 2.8. "Obligations" shall mean, collectively, (a) all Loans and Letters of Credit; (b) all other indebtedness now owing or hereafter incurred by Borrower or any Eligible Subsidiary to Administrative Agent or any Lender pursuant to the Credit Agreement and any Note executed in connection therewith; (c) each renewal, extension, consolidation or refinancing of any of the foregoing, in whole or in part; (d) all interest from time to time accruing on any of the foregoing, and all fees and other amounts payable by Borrower to Administrative Agent or any Lender pursuant to the Credit Agreement; (e) all obligations and liabilities of Borrower now existing or hereafter incurred to Administrative Agent or any Lender under, arising out of, or in connection with any Hedge Agreement; (f) every other liability, now or hereafter owing to Administrative Agent or any Lender by Borrower, Pledgor or any Eligible Subsidiary pursuant to the Credit Agreement or any other Credit Document; and (g) all Related Expenses. 2.9. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, unincorporated organization, corporation, limited liability company, institution, trust, estate, government or other agency or political subdivision thereof or any other entity. 2.10. "Pledged Securities" shall mean all of the shares of stock or other equity interest of each Subsidiary (other than a Foreign Subsidiary) of Pledgor owned by Pledgor, as listed on Exhibit A hereto, and all additional shares of stock or other equity interest of each Subsidiary (other than a Foreign Subsidiary) of Pledgor owned by Pledgor from time to time or acquired by Pledgor in any manner. 2.11. "Related Expenses" shall mean any and all reasonable costs, liabilities and expenses (including, without limitation, losses, damages, penalties, claims, actions, reasonable attorneys' fees, legal expenses, judgments, suits and disbursements) (a) incurred by Administrative Agent or imposed upon or asserted against Administrative Agent or any Lender, in any attempt by Administrative Agent and the Lenders to (i) obtain, preserve, perfect or enforce any security interest evidenced by this Agreement, the Credit Agreement, any Credit Document, or any other document, instrument or agreement executed in connection with any of 2 the foregoing; (ii) obtain payment, performance or observance of any and all of the Obligations; or (iii) maintain, insure, audit, collect, preserve, repossess or dispose of any of the Collateral or any other collateral securing the Obligations, including, without limitation, costs and expenses for appraisals, assessments and audits of Pledgor or any such collateral; or (b) incidental or related to (a) above, including, without limitation, interest thereupon from the date incurred, imposed or asserted until paid. 3. Security Interest. Pledgor hereby grants to Administrative Agent, for the benefit of the Lenders, a security interest in and an assignment of the Collateral as security for the Obligations. For the better protection of Administrative Agent and the Lenders hereunder, Pledgor has executed appropriate transfer powers, in the form of Exhibit B hereto, with respect to the Pledged Securities and, concurrently herewith, is depositing the Pledged Securities and the aforesaid transfer powers with Administrative Agent, for the benefit of the Lenders. Pledgor authorizes Administrative Agent, on behalf of the Lenders, at any time after the occurrence of an Event of Default, to transfer the Pledged Securities into the name of Administrative Agent or Administrative Agent's nominee, but Administrative Agent shall be under no duty to do so. Notwithstanding any provision or inference herein or elsewhere to the contrary, Administrative Agent shall have no right to vote the Pledged Securities at any time unless and until there shall have occurred an Event of Default. 4. Pledgor's Representations and Warranties. Pledgor represents and warrants to Administrative Agent and the Lenders as follows: 4.1. Pledgor is the legal record and beneficial owner of, and has good and marketable title to, the Pledged Securities, and the Pledged Securities are not subject to any pledge, lien, mortgage, hypothecation, security interest, charge, option, warrant or other encumbrance whatsoever, nor to any agreement purporting to grant to any third party a security interest in the property or assets of Pledgor that would include such Pledged Securities, except the security interest created by this Agreement or otherwise securing only Administrative Agent and the Lenders. 4.2. All of the Pledged Securities have been duly authorized and validly issued, and are fully paid and non-assessable. 4.3. Pledgor has full power, authority and legal right to pledge all of the Pledged Securities pursuant to the terms of this Agreement. 4.4. No consent, license, permit, approval or authorization, filing or declaration with any governmental authority, domestic or foreign, and no consent of any other Person, is required to be obtained by Pledgor in connection with the pledge of the Pledged Securities hereunder, that has not been obtained or made, and is not in full force and effect. 4.5. The pledge, assignment and delivery of the Pledged Securities hereunder creates a valid first lien on, and a first perfected security interest in, the Pledged Securities and the proceeds thereof. 3 4.6. The Pledged Securities constitute one hundred percent (100%) of the outstanding capital stock of each Subsidiary (other than a Foreign Subsidiary) of Pledgor. 4.7. Pledgor fully anticipates that the Obligations will be repaid without the necessity of selling the Pledged Securities. 4.8. Pledgor has received consideration that is the reasonable equivalent value of the obligations and liabilities that Pledgor has incurred to Administrative Agent and the Lenders. Pledgor is not insolvent, as defined in any applicable state or federal statute, nor will Pledgor be rendered insolvent by the execution and delivery of this Agreement to Administrative Agent, for the benefit of the Lenders. Pledgor is not engaged or about to engage in any business or transaction for which the assets retained by Pledgor are or will be an unreasonably small amount of capital, taking into consideration the obligations to Administrative Agent and the Lenders incurred hereunder. Pledgor does not intend to incur debts beyond Pledgor 's ability to pay them as they mature. 4.9. If the Pledged Securities are "restricted securities" within the meaning of Rule 144, or any amendment thereof, promulgated under the Securities Act of 1933, as amended (the "Securities Act"), as determined by counsel for Pledgor, Pledgor further represents and warrants that, except as disclosed in writing to Lender, (a) Pledgor has been the beneficial owner of the Pledged Securities for a period of at least two years prior to the date hereof, (b) the full purchase price or other consideration for the Pledged Securities has been paid or given at least two years prior to the date hereof, and (c) Pledgor does not have a short position in or any put or other option to dispose of any securities of the same class as the Pledged Securities or any other securities convertible into securities of such class. 5. Termination. At such time as the Obligations shall have been irrevocably paid in full, the Commitment, as defined in the Credit Agreement, terminated, and the Credit Agreement terminated and not replaced by any other credit facility with Administrative Agent and the Lenders, Pledgor shall have the right to terminate this Agreement. Upon written request of Pledgor, Administrative Agent shall promptly execute and deliver to Pledgor appropriate releases with respect to the Collateral and return all of the Pledged Securities to Pledgor. 6. Additional Covenants of Pledgor. 6.1. Pledgor covenants and agrees to defend the right, title and security interest of Administrative Agent and the Lenders in and to the Pledged Securities and the proceeds thereof, and to maintain and preserve the lien and security interest provided for by this Agreement against the claim and demands of all Persons, so long as this Agreement shall remain in effect. 6.2. Pledgor covenants and agrees not to sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, or create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Pledged Securities, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement and any security agreement securing only Administrative Agent and the Lenders. 4 6.3. Pledgor covenants and agrees (a) to cooperate, in good faith, with Administrative Agent and the Lenders and to do or cause to be done all such other acts as may be necessary to enforce the rights of Administrative Agent and the Lenders under this Agreement, (b) not to take any action, or to fail to take any action that would be adverse to the interest of Administrative Agent and the Lenders in the Collateral and hereunder, and (c) to make any sale or sales of any portion or all of the Pledged Securities valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales at Pledgor's expense. 7. Events of Default. 7.1. Any of the following shall constitute an Event of Default under this Agreement: (a) an Event of Default, as defined in the Credit Agreement, shall occur under the Credit Agreement; (b) any representation, warranty or statement made by Pledgor in or pursuant to this Agreement or in any other writing received by Administrative Agent or the Lenders in connection with the Obligations shall be false or erroneous in any material respect; or (c) Pledgor shall fail or omit to perform or observe any agreement made by Pledgor in or pursuant to this Agreement or in any other writing received by Administrative Agent or the Lenders pursuant hereto. 7.2. Upon the occurrence of an Event of Default hereunder, and at all times thereafter, Administrative Agent, in its discretion, may sell, assign, transfer and deliver the Collateral, or any part thereof, at any time, or from time to time. No prior notice need be given to Pledgor or to any other Person in the case of any sale of Collateral that Administrative Agent determines to be declining speedily in value or that is customarily sold in any securities exchange, over-the-counter market or other recognized market, but in any other case Administrative Agent shall give Pledgor no fewer than ten (10) days prior notice of either the time and place of any public sale of the Collateral or of the time after which any private sale or other intended disposition thereof is to be made. Pledgor waives advertisement of any such sale and (except to the extent specifically required by the preceding sentence) waives notice of any kind in respect of any such sale. At any such public sale, Administrative Agent or any Lender may purchase the Collateral, or any part thereof, free from any right of redemption, all of which rights Pledgor hereby waives and releases. After deducting all Related Expenses, and after paying all claims, if any, secured by liens having precedence over this Agreement, Administrative Agent may apply the net proceeds of each such sale to or toward the payment of the Obligations, whether or not then due, in such order and by such division as Administrative Agent in its sole discretion may deem advisable. Any excess, to the extent permitted by law, shall be paid to Pledgor, and the obligors on the Obligations shall remain liable for any deficiency. In addition, Administrative Agent shall at all times have the right to obtain new appraisals of Pledgor or the Collateral, the cost of which shall be paid by Pledgor. 8. Attorney-in-Fact. Pledgor hereby authorizes and empowers Administrative Agent, on behalf of the Lenders, to make, constitute and appoint any officer or agent of Administrative Agent as Administrative Agent may select, in its exclusive discretion, as 5 Pledgor's true and lawful attorney-in-fact, with the power to endorse Pledgor's name on all applications, documents, papers and instruments necessary for Administrative Agent to take actions with respect to the Collateral after the occurrence of an Event of Default, including, without limitation, actions necessary for Administrative Agent to assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to any Person. Pledgor ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable for the life of this Agreement. 9. Costs and Expenses. If Pledgor fails to comply with any of its obligations hereunder, Administrative Agent may do so in Pledgor's name or in Administrative Agent's name, but at Pledgor's expense, and Pledgor hereby agrees to reimburse Administrative Agent and the Lenders in full for all expenses, including reasonable attorneys' fees, incurred by Administrative Agent and the Lenders in protecting, defending and maintaining the Collateral. Without limiting the foregoing, any and all reasonable fees, costs and expenses, of whatever kind or nature, including the reasonable attorneys' fees and expenses incurred in connection with the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, maintenance fees, encumbrances or otherwise protecting, maintaining or preserving the Collateral, or in defending or prosecuting any actions or proceedings arising out of or related to the Collateral, shall be borne and paid by Pledgor upon request of Administrative Agent. 10. Notice. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, transmitted, cabled or delivered, if to Pledgor, at the address specified on the signature page of this Agreement, if to any Lender, at its address specified for such Lender on Annex I to the Credit Agreement, and if to Administrative Agent, at the Notice Office, as defined in the Credit Agreement; or at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 11. Interpretation. Each right, power or privilege specified or referred to in this Agreement is in addition to any other rights, powers and privileges that Administrative Agent or the Lenders may have or acquire by operation of law, by other contract or otherwise. No course of dealing in respect of, nor any omission or delay in the exercise of, any right, power or privilege by Administrative Agent and the Lenders shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any further or other exercise thereof or of any other, as each right, power or privilege may be exercised by Administrative Agent and the Lenders either independently or concurrently with other rights, powers and privileges and as often and in such order as Administrative Agent and the Lenders may deem expedient. No waiver or consent granted by Administrative Agent and the Lenders in respect of this Agreement shall be binding upon Administrative Agent and the Lenders unless specifically granted in writing, which writing shall be strictly construed. 12. Assignment and Successors. This Agreement shall not be assigned by Pledgor without the prior written consent of Administrative Agent. This Agreement shall bind the 6 successors and permitted assigns of Pledgor and shall benefit the successors and assigns of Administrative Agent and the Lenders. 13. Severability. If, at any time, one or more provisions of this Agreement is or becomes invalid, illegal or unenforceable in whole or in part, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 14. Governing Law; Submission to Jurisdiction. The provisions of this Agreement and the respective rights and duties of Pledgor and Administrative Agent and the Lenders hereunder shall be governed by and construed in accordance with Ohio law, without regard to principles of conflict of laws. Pledgor hereby irrevocably submits to the non-exclusive jurisdiction of any Ohio state or federal court sitting in Cleveland, Ohio, over any action or proceeding arising out of or relating to this Agreement, the Credit Agreement, any Credit Document, or any other document, instrument or agreement executed in connection with any of the foregoing, and Pledgor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Ohio state or federal court. Pledgor, on behalf of itself and its Subsidiaries, hereby irrevocably waives, to the fullest extent permitted by law, any objection it may now or hereafter have to the laying of venue in any action or proceeding in any such court as well as any right it may now or hereafter have to remove such action or proceeding, once commenced, to another court on the grounds of FORUM NON CONVENIENS or otherwise. Pledgor agrees that a final, nonappealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. 15. Maximum Liability of Pledgor. Anything in this Agreement to the contrary notwithstanding, in no event shall the amount of the Obligations secured by this Agreement exceed the maximum amount that (after giving effect to the incurring of the obligations hereunder and to any rights to contribution of Pledgor from other affiliates of Borrower) would not render the rights to payment of Administrative Agent and the Lenders hereunder void, voidable or avoidable under any applicable fraudulent transfer law. [Remainder of page intentionally left blank.] 7 16. JURY TRIAL WAIVER. PLEDGOR, ADMINISTRATIVE AGENT AND THE LENDERS WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG, PLEDGOR, BORROWER, ANY ELIGIBLE SUBSIDIARY, ADMINISTRATIVE AGENT AND THE LENDERS, OR ANY THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. Executed and delivered at Cleveland, Ohio, as of the ____ day of November, 2001. Address: 200 Public Square [______________________________] Suite 30-5000 Cleveland, Ohio 44114 Attention: Chief Financial Officer By:___________________________ Name:_________________________ Title:________________________ 8 EXHIBIT A PLEDGED SECURITIES Name of Subsidiary Number of Shares Certificate Number - ------------------ ---------------- ------------------ 9 EXHIBIT B FORM OF STOCK TRANSFER POWER FOR VALUE RECEIVED, [__________________________], a [___________] corporation, hereby sells, assigns and transfers unto ___________________ (_______) Shares of the _________________________ Capital Stock of ___________________________________ standing in ___________ name on the books of said corporation and represented by Certificate No. _________ herewith and does hereby irrevocably constitute and appoint ________________ attorney to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. [______________________________] Dated ________________________ By:_______________________________ Name:_____________________________ Title:____________________________ 10 -----END PRIVACY-ENHANCED MESSAGE-----