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