-----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, CFlB5j9HYJMMqlkMaCT2hsr37oU/0Aa0Wy8QN4TuyBQf6Vu9G/bbM8DJ61qID5xU nvXPZUZvwGcDqveKYxrdbg== 0000950152-97-008019.txt : 19971117 0000950152-97-008019.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950152-97-008019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWK CORP CENTRAL INDEX KEY: 0000849240 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341610236 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18433 FILM NUMBER: 97718538 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114-2301 BUSINESS PHONE: 2167367216 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 HAWK GROUP, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 333-18433 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 (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: 1,443,978 Class B Non-Voting Common Stock, $0.01 par value: None (0) 1 2
INDEX 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 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25
2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 (UNAUDITED) (NOTE) ----------- ------ ASSETS Current assets: Cash and cash equivalents $ 3,629 $ 25,774 Accounts receivable, less allowance of $216 and $182, respectively 24,962 16,783 Inventories 22,567 20,864 Deferred income taxes 1,983 2,432 Other current assets 1,703 935 -------- -------- Total current assets 54,844 66,788 Property, plant and equipment: Land 1,218 1,080 Buildings and improvements 10,283 7,615 Machinery and equipment 57,012 45,766 Furniture and fixtures 1,988 1,611 Construction in progress 808 2,825 -------- -------- 71,309 58,897 Less accumulated depreciation 19,346 14,755 -------- -------- Total property, plant and equipment 51,963 44,142 Other assets: Intangible assets 56,569 39,939 Net assets held for sale 3,604 3,604 Shareholder notes 1,675 1,838 Other 2,260 2,130 -------- -------- Total other assets 64,108 47,511 -------- -------- Total assets $170,915 $158,441 ======== ========
3 4 HAWK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (NOTE) ----------- ------ Current liabilities: Accounts payable $ 11,878 $ 8,194 Accrued compensation 7,206 6,775 Other accrued expenses 4,342 2,405 Current portion of long-term debt 822 714 ------------ ------------ Total current liabilities 24,248 18,088 Long-term liabilities: Long-term debt 130,474 128,469 Deferred income taxes 6,283 4,090 Other 2,058 2,004 ------------ ------------ Total long-term liabilities 138,815 134,563 Detachable stock warrants, subject to put option 9,300 4,600 Shareholders' equity (deficit): Series A preferred stock, $.01 par value and an aggregate liquidation value of $1,375,000, plus any accrued and unpaid dividends, with 10% cumulative dividend (2,625 shares authorized, 1,375 shares issued and outstanding); Series B preferred stock, $.01 par value and an aggregate liquidation value of $702,000, plus any accrued and unpaid dividends, with 9% cumulative dividend (702 shares authorized, issued and outstanding); Series C preferred stock, $.01 par value and an aggregate liquidation value of $1,190,000, plus any accrued and unpaid dividends with 10% cumulative dividend (1,190 shares authorized, issued and outstanding) 1 1 Class A common stock, $.01 par value; 2,200,000 shares authorized, 1,443,978 issued and outstanding 14 14 Class B common stock, $.01 par value, 375,000 shares authorized, none issued or outstanding Additional paid-in capital 1,964 1,964 Retained earnings (deficit) (2,653) (974) Other equity adjustments (774) 185 ------------- ------------ Total shareholders' equity (deficit) (1,448) 1,190 Total liabilities and shareholders' equity (deficit) $ 170,915 $ 158,441 ============ ============
Note: The balance sheet at December 31, 1996 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 condensed consolidated financial statements. 4 5 HAWK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ ------------------ ------------------ Net sales $ 116,362 $ 93,672 $ 39,381 $ 30,749 Cost of sales 82,940 69,023 28,895 22,674 -------------- ---------------- --------------- ------------- Gross profit 33,422 24,649 10,486 8,075 Selling, technical and administrative expenses 14,241 11,612 4,794 3,957 Amortization of intangibles 2,575 2,408 949 825 Plant consolidation expense 50 3,749 50 1,610 -------------- ---------------- --------------- ------------- Total expenses 16,866 17,769 5,793 6,392 Income from operations 16,556 6,880 4,693 1,683 Interest expense 10,639 7,321 3,580 2,347 Other expense, net 122 55 92 45 -------------- ---------------- --------------- ------------- Income (loss) before income taxes 5,795 (496) 1,021 (709) Income taxes 2,534 863 545 441 -------------- ---------------- --------------- ------------- Net income (loss) $ 3,261 $ (1,359) $ 476 $ (1,150) ============== ================= =============== ============== Preferred stock dividend requirements $ (240) $ (170) $ (80) $ (7) Net income (loss) applicable to common shareholders $ 3,021 $ (1,529) $ 396 $ (1,157) Net income (loss) per share applicable to common shareholders $ 1.72 $ (.87) $ .22 $ (.66) Number of shares used to compute per share data 1,760,946 1,760,946 1,760,946 1,760,946
See notes to condensed consolidated financial statements. 5 6 HAWK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ 3,261 $ (1,359) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,166 6,688 Accretion of discount on debt 487 488 Deferred income taxes 2,343 Minority interest Extraordinary item, net of tax Changes in operating assets and liabilities, net of acquired assets: Accounts receivable (5,319) (1,208) Inventories (865) (241) Other assets (925) (1,126) Accounts payable 2,800 350 Other liabilities 1,248 (805) ------------ ------------ Net cash provided by operating activities $ 10,196 $ 2,787 Cash flows from investing activities Purchase of Hutchinson Foundry Products Company (10,639) Purchase of Sinterloy, Inc. (15,449) Purchases of property, plant and equipment (4,798) (7,669) Loans to shareholders Payments received on shareholder notes 163 162 ------------ ------------ Net cash used in investing activities (30,723) (7,507) Cash flows from financing activities Proceeds from borrowings on long-term debt 5,317 Payments on long-term debt (783) Deferred financing costs (565) 417 Payments of preferred stock dividends (240) (170) Other (30) 279 ------------- ------------ Net cash (used in) provided by financing activities (1,618) 5,843 ------------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (22,145) 1,123 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,774 771 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,629 $ 1,894 ============ ============
See notes to condensed consolidated financial statements. 6 7 HAWK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 three and nine-month periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Form S-4 (Registration No. 333-18433) for Hawk Corporation (the "Company") for the year ended December 31, 1996. Net income per share is based on the weighted average number of common shares and common share equivalents (warrants) outstanding during the respective periods. Earnings available to common shareholders includes an adjustment for preferred stock dividends paid during the respective periods. The Company designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and also include, effective January 2, 1997, the accounts of Hutchinson Products Corporation and effective August 1, 1997, the accounts of Sinterloy Corporation (See Note 3). All significant inter-company accounts and transactions have been eliminated in the accompanying financial statements. NOTE 2 - 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 (dollars in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- Raw materials and work-in-process $ 19,007 $ 17,239 Finished products 4,465 4,226 Inventory reserves (905) (601) ----------- ---------- $ 22,567 $ 20,864 ========== ==========
7 8 NOTE 3 - ACQUISITIONS Effective January 2, 1997, the Company acquired all of the outstanding capital stock of Houghton Acquisition Corporation and merged it into the newly formed Hutchinson Products Corporation (Hutchinson) for (1) $10.6 million in cash; (2) $1.5 million in 8.0% two-year convertible notes; and (3) contingent payments to be made by the Company if Hutchinson meets certain earnings targets. The acquisition has been accounted for as a purchase. The excess of the purchase price over the estimated fair value of the capital stock acquired in the amount of $7.7 million is being amortized over 30 years and is included in intangible assets. The results of operations of Hutchinson are included in the Company's consolidated statements of income since the date of acquisition. Hutchinson's principal business is the production and sale of die cast aluminum rotors which are used in subfractional electric motors and, to a lesser extent, the manufacture and sale of extruded aluminum fan spacers used in commercial diesel engines and precision metal castings used in hand power tools and gasoline pumping units. On August 1, 1997 the Company, through a wholly owned subsidiary, acquired substantially all of the assets (except cash) and assumed certain liabilities of Sinterloy, Inc. for $15.4 million in cash, subject to a dollar for dollar adjustment based on the adjusted net equity position of Sinterloy at closing compared to the net equity position of Sinterloy at December 31, 1996. As of September 30, 1997, the closing adjustment has not been determined. The results of operations of Sinterloy Corporation (Sinterloy) are included in the Company's consolidated statements of income since the date of acquisition. Sinterloy's principal business is the production of powder metal components used primarily in the business equipment market. The following pro forma unaudited consolidated results of operations for the period ended September 30, 1996 give effect to the above acquisitions as though they had occurred on January 1, 1996 and include certain adjustments, such as additional amortization expense as a result of goodwill and deferred financing costs, increased depreciation expense as a result of the write-up of certain machinery and equipment to its fair value and increased interest expense related to debt incurred for the acquisition.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 ------------------ ------------------ (IN THOUSANDS) Net sales $ 35,803 $ 108,834 =========== =========== Net loss $ 866 $ 506 =========== ===========
Pro forma net sales and net loss are not necessarily indicative of the net sales and net loss that would have occurred had the acquisition been made at the beginning of the year or the results which may occur in the future. 8 9 NOTE 4 - LONG-TERM DEBT In November 1996, the Company issued $100,000,000 in Senior Notes due on December 1, 2003, unless previously redeemed, at the Company's option, in accordance with the terms of the Notes. Interest is payable semi-annually on June 1 and December 1 of each year commencing June 1, 1997, at a fixed rate of 10.25%. Substantially all of the Senior Notes were exchanged for the Exchange Notes on April 21, 1997. The terms of the Exchange Notes are identical in all material respects to the terms of the Senior Notes, except that the Exchange Notes are freely transferable with certain limited exceptions by their holders. The Exchange Notes are fully and unconditionally guaranteed on a joint and several basis by each of the direct or indirect wholly-owned domestic subsidiaries of the Company (Guarantor Subsidiaries). The Exchange Notes and the Senior Notes are hereinafter collectively referred to as the "Senior Notes." (See Note 8). NOTE 5 - DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION On June 30, 1995, the Company issued $30.0 million aggregate principal amount of 12% senior subordinated notes with detachable warrants to purchase Class B Common Stock. The holders of the warrants have the right to put the warrants back to the Company for cash, at prices based on the carrying value of the Company at the date of put as determined by an independent third party beginning in the year 2001. For financial reporting purposes, the carrying value of the warrants, including the put option, was adjusted to $9.3 million as of September 30, 1997 ($4.6 million as of December 31, 1996), based upon management's assumptions applied to discounted projected future earnings of the Company. The increase in the carrying value of the detachable stock warrants at September 30, 1997 was reported as a charge to retained earnings as of that date. NOTE 6 - CONTINGENCIES The Company has wage continuation agreements with two of its officers/shareholders. In the event the officer/shareholder dies or becomes permanently disabled while employed by the Company, each agreement provides for payments to be made annually to the officer/shareholder's spouse based on a compensation formula, until the spouse's death. NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The overall objective of SFAS is to simplify the calculation of earnings per share (EPS) and achieve comparability with international accounting standards. SFAS No. 128 is effective in the fourth quarter ended December 31, 1997 for the Company. Subsequent to the effective date, all prior period EPS amounts are required to be restated to conform to the provisions of Statement 128. The adoption of SFAS No. 128 is not anticipated to have a material effect on the Company's financial statements or results of operations. NOTE 8 - SUPPLEMENTAL GUARANTOR INFORMATION As discussed in Note 4, each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal, premium, if any, and interest with respect to the Notes. The Guarantor Subsidiaries are direct, wholly-owned subsidiaries of the Company. The following supplemental unaudited consolidating condensed financial statements present (in thousands): 9 10 1. Consolidating condensed balance sheets as of September 30, 1997 and December 31, 1996, consolidating condensed statements of income for the three and nine-month periods ended September 30, 1997 and 1996 and consolidating condensed statements of cash flows for the nine months ended September 30, 1997 and 1996. 2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada and Italy) with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries of the Notes are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The Revolving Credit Facility contains covenants that, among other things, would prohibit the payment of any dividends to the Company by the subsidiaries of the Company (including Guarantor Subsidiaries) in the event of a default under the terms of the Revolving Credit Facility. 10 11
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1997 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ASSETS - ------ Current assets: Cash and cash equivalents $ 3,540 $ 40 $ 49 $ 3,629 Accounts receivable, net 67 18,703 6,576 $ (384) 24,962 Inventories, net 17,801 4,766 22,567 Deferred income taxes 890 1,093 1,983 Other current assets 142 614 947 1,703 ----------- ----------- ----------- ----------- ----------- Total current assets 4,639 38,251 12,338 (384) 54,844 Other assets: Investment in subsidiaries 790 5,765 (6,555) Inter-company advances, net 132,535 1,463 9 (134,007) Property, plant and equipment 46,385 5,578 51,963 Intangible assets 233 56,336 56,569 Other 1,675 7,180 459 (1,775) 7,539 ----------- ----------- ----------- ------------ ----------- Total other assets 135,233 117,129 6,046 (142,337) 116,071 ----------- ----------- ----------- ------------ ----------- Total assets $ 139,872 $ 155,380 $ 18,384 $ (142,721) $ 170,915 =========== =========== =========== ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 7,982 $ 3,896 $ 11,878 Accrued compensation $ 64 6,278 864 7,206 Other accrued expenses (2,586) 7,242 70 $ (384) 4,342 Current portion of long-term debt 402 420 822 -------------- ----------- ----------- ----------- ----------- Total current liabilities (2,522) 21,904 5,250 (384) 24,248 Long-term liabilities: Long-term debt 126,862 3,612 130,474 Deferred income taxes 5,596 350 337 6,283 Other 484 1,574 2,058 Inter-company advances, net 2,986 127,338 5,458 (135,782) ----------- ----------- ----------- ------------ ------------ Total long-term liabilities 135,444 131,784 7,369 (135,782) 138,815 ----------- ----------- ----------- ------------ ----------- Total liabilities 132,922 153,688 12,619 (136,166) 163,063 Detachable stock warrants, subject to put option 9,300 9,300 Shareholders' equity (deficit) (2,350) 1,692 5,765 (6,555) (1,448) ------------ ----------- ----------- ------------ ------------ Total liabilities and shareholders' equity (deficit) $ 139,872 $ 155,380 $ 18,384 $ (142,721) $ 170,915 =========== =========== =========== ============ ===========
11 12
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED) DECEMBER 31, 1996 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 25,187 $ 5 $ 582 $ 25,774 Accounts receivable, net 189 10,884 5,710 16,783 Inventories, net 16,120 4,744 20,864 Deferred income taxes 1,390 1,042 2,432 Other current assets 67 373 495 935 ----------- ----------- ----------- ----------- ----------- Total current assets 26,833 28,424 11,531 66,788 Other assets: Investment in subsidiaries 775 6,457 $ (7,232) Inter-company advances, net 108,607 19,543 (128,150) Property, plant and equipment 38,394 5,748 44,142 Intangible assets 504 39,435 39,939 Other 1,838 5,318 416 7,572 ----------- ----------- ----------- ----------- ----------- Total other assets 111,724 109,147 6,164 (135,382) 91,653 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- Total assets $ 138,557 $ 137,571 $ 17,695 $ (135,382) $ 158,441 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ (157) $ 5,167 $ 3,184 $ 8,194 Accrued compensation 100 5,856 819 6,775 Other accrued expenses (719) 2,728 396 2,405 Current portion of long-term debt 289 425 714 ----------- ----------- ----------- ----------- ----------- Total current liabilities (776) 14,040 4,824 18,088 Long-term liabilities: Long-term debt 126,375 1,290 804 128,469 Deferred income taxes 2,729 1,057 304 4,090 Other 1,272 732 2,004 Inter-company advances, net 3,532 120,819 4,574 $ (128,925) ----------- ----------- ----------- ----------- Total long-term liabilities 132,636 124,438 6,414 (128,925) 134,563 ----------- ----------- ----------- ------------ ----------- Total liabilities 131,860 138,478 11,238 (128,925) 152,651 Detachable stock warrants, subject to put option 4,600 4,600 Shareholders' equity (deficit) 2,097 (907) 6,457 (6,457) 1,190 ----------- ------------ ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- Total liabilities and shareholders' equity $ 138,557 $ 137,571 $ 17,695 $ (135,382) $ 158,441 =========== =========== =========== =========== ===========
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 101,113 $ 15,249 $ 116,362 Cost of sales 70,609 12,331 82,940 ----------- ----------- ----------- ----------- ----------- Gross profit 30,504 2,918 33,422 Selling, technical and administrative expenses 12,053 2,188 14,241 Amortization of intangibles $ 8 2,528 39 2,575 Plant consolidation expense 50 50 ----------- ----------- ----------- ----------- ----------- Total expenses 8 14,631 2,227 16,866 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations (8) 15,873 691 16,556 Interest expense 487 9,830 322 10,639 Income from equity investees 3,173 285 $ (3,458) Other (income) expense, net (635) 757 122 ------------ ----------- ----------- ----------- ----------- Income before income taxes 3,313 5,571 369 (3,458) 5,795 Income taxes 52 2,398 84 2,534 ----------- ----------- ----------- ----------- ----------- Net income $ 3,261 $ 3,173 $ 285 $ (3,458) $ 3,261 =========== =========== =========== ============ ===========
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 79,001 $ 14,671 $ 93,672 Cost of sales 57,902 11,121 69,023 ----------- ----------- ----------- ----------- ----------- Gross profit 21,099 3,550 24,649 Selling, technical and administrative expenses 10,498 1,114 11,612 Amortization of intangibles 2,408 2,408 Plant consolidation expense 3,749 3,749 ----------- ----------- ----------- ----------- ----------- Total expenses 16,655 1,114 17,769 Income from operations 4,444 2,436 6,880 Interest expense $ 198 6,588 256 $ 279 7,321 Income (loss) from equity investees (1,161) 633 528 Other (income) expense, net (148) 482 (279) 55 ----------- ------------ ----------- ------------ ----------- Income (loss) before income taxes (1,359) (1,363) 1,698 528 (496) Income taxes (credit) (202) 1,065 863 ----------- ------------ ----------- ----------- ----------- Net income (loss) $ (1,359) $ (1,161) $ 633 $ 528 $ (1,359) ============ ============ =========== =========== ============
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 34,610 $ 4,771 $ 39,381 Cost of sales 24,972 3,923 28,895 ----------- ----------- ----------- ----------- ----------- Gross profit 9,638 848 10,486 Selling, technical and administrative expenses 3,987 807 4,794 Amortization of intangibles $ 3 937 9 949 Plant consolidation expense 50 50 ----------- ----------- ----------- ----------- ----------- Total expenses 3 4,974 816 5,793 Income (loss) from operations (3) 4,664 32 4,693 Interest expense 161 3,302 117 3,580 Income (loss) from equity investees 469 (58) $ (411) Other (income) expense, net (169) 320 (59) 92 ------------ ----------- ------------ ----------- ----------- Income (loss) before income taxes 474 984 (26) (411) 1,021 Income taxes (credit) (2) 515 32 545 ------------ ----------- ----------- ----------- ----------- Net income (loss) $ 476 $ 469 $ (58) $ (411) $ 476 =========== =========== ============ ============ ===========
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 26,447 $ 4,302 $ 30,749 Cost of sales 19,395 3,279 22,674 ----------- ----------- ----------- ----------- ----------- Gross profit 7,052 1,023 8,075 Selling, technical and administrative expenses 3,798 159 3,957 Amortization of intangibles 826 (1) 825 Plant consolidation expense 1,610 1,610 ----------- ----------- ----------- ----------- ----------- Total expenses 6,234 158 6,392 Income from operations 818 865 1,683 Interest expense $ 420 1,531 117 $ 279 2,347 Loss from equity investees (753) (226) 979 Other (income) expense, net (23) (135) 482 (279) 45 ------------ ------------ ----------- ------------ ----------- Income (loss) before income taxes (1,150) (804) 266 979 (709) Income taxes (credit) (51) 492 441 ----------- ------------ ----------- ----------- ----------- Net loss $ (1,150) $ (753) $ (226) $ 979 $ (1,150) ============ ============ ============ =========== ============
16 17 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 6,299 $ 3,640 $ 257 $ 10,196 Cash flows from investing activities: Purchase of Hutchinson Foundry Products Company (10,639) (10,639) Purchase of Sinterloy, Inc. (15,449) (15,449) Purchase of property, plant and equipment (4,603) (195) (4,798) Payments received on shareholder loans 163 163 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (25,925) (4,603) (195) (30,723) Cash flows from financing activities: (Payments) proceeds on long-term debt (1,751) 1,591 (623) (783) Deferred financing costs (565) (565) Payment of preferred stock dividend (240) (240) Other (30) (28) 28 (30) ----------- ------------ ----------- ----------- ------------ Net cash (used in) provided by financing activities (2,021) 998 (595) (1,618) ------------ ----------- ------------ ----------- ------------ Net (decrease) increase in cash and cash equivalents (21,647) 35 (533) (22,145) Cash and cash equivalents at beginning of period 25,187 5 582 25,774 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 3,540 $ 40 $ 49 $ 3,629 =========== =========== =========== =========== ===========
17 18 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities $ (4,920) $ 4,640 $ 3,067 $ 2,2787 Cash flows from investing activities: Purchase of property, plant and equipment (6,053) (1,616) (7,669) Payments received on shareholder notes 162 162 --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities 162 (6,053) (1,616) (7,507) Cash flows from financing activities: Proceeds (payments) from borrowings of long-term debt 5,935 274 (892) 5,317 Payment of preferred stock dividend (170) (170) Deferred financing costs 55 362 417 Other 279 279 --------- --------- --------- --------- --------- Net cash provided by (used in) 5,820 915 (892) 5,843 financing activities --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 1,062 (498) 599 1,123 Cash and cash equivalents at beginning of period 408 46 317 771 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ 1,470 $ (452) $ 876 $ 1,894 ========= ========= ========= ========= =========
18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's condensed consolidated financial statements and notes thereto appearing elsewhere in this report. GENERAL Hawk designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The Company is a leading worldwide supplier of friction products for brakes, clutches and transmissions used in aerospace, industrial and specialty applications. Friction products represented 68.9% of Company sales in the first nine months of 1997. Hawk is also a leading supplier of powder metal components for industrial applications, including pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings. In addition, the Company designs and manufactures die cast aluminum rotors for small electric motors used in business machines, appliances and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets where it has achieved a significant market share. Since its formation in 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base. All these acquisitions were accounted for under the purchase method of accounting, with the purchase price allocated to the estimated fair market value of the assets acquired and liabilities assumed. In the acquisitions, any excess of the purchase price paid over the estimated fair value of the net assets acquired was allocated to goodwill, which resulted in approximately $40.1 million of goodwill reflected on the September 30, 1997 balance sheet. The annual amortization of goodwill will result in non-cash charges to future operations of approximately $1.5 million per year (of which the majority of such amortization is deductible for tax purposes) based on amortization periods ranging from 15 to 40 years. THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996 Net Sales - --------- Net sales increased by $8.6 million, or 28.1%, from $30.8 million during the 1996 third quarter to $39.4 million in the third quarter of 1997. The net sales increase was attributable to the acquisitions of Hutchinson, and, to a lesser extent, Sinterloy and strong customer demand in all of the Company's products lines. Gross Profit - ------------ Gross profit increased $2.4 million to $10.5 million in the third quarter of 1997, a 29.9% increase over gross profit of $8.1 million in the comparable quarter of 1996. The gross profit margin increased to 26.6% in the third quarter of 1997 from 26.3% during the comparable period in 1996. The increase was attributable to cost savings resulting from the consolidation of one of the Company's manufacturing facilities during 1996 into existing Company facilities, as well as a favorable product mix. This was partially offset by short term capacity constraints at the Company's friction products facilities. 19 20 Selling, Technical and Administrative Expenses - ---------------------------------------------- Selling, technical and administrative ("ST&A") expenses increased $0.8 million, or 20.0%, to $4.8 million in the third quarter of 1997 compared to $4.0 million in the comparable quarter of 1996. As a percentage of net sales, ST&A expenses decreased to 12.2% of sales in the third quarter of 1997 from 12.9% in the comparable quarter of 1996, primarily as a result of increased sales volumes covering additional administrative overhead and personnel costs. Income from Operations - ---------------------- Income from operations increased by $3.0 million, or 178.8%, from $1.7 million in the third quarter of 1996 to $4.7 million in the third quarter of 1997. Income from operations as a percentage of net sales increased to 11.9% in the third quarter of 1997 from 5.5% in the comparable quarter of 1996, reflecting cost savings from the consolidation of facilities, reduced plant consolidation expenses, increased sales and a more favorable product mix. Interest Expense - ---------------- Interest expense increased $1.2 million, or 52.5%, to $3.6 million in the third quarter of 1997 from $2.3 million in the comparable quarter of 1996. The increase is attributable to higher debt levels, a result of the issuance of the Company's $100.0 million Senior Notes in the fourth quarter of 1996. Income Taxes - ------------ The provision for income taxes increased to $0.5 million in the third quarter of 1997 (53.4% of pre-tax income) from $0.4 million in the comparable quarter of 1996, reflecting the increase in pre-tax income. Net Income - ---------- As a result of the factors noted above, net income was $0.5 million in the third quarter of 1997 compared to a loss of $1.2 million in the third quarter of 1996. FIRST NINE MONTHS OF 1997 COMPARED TO FIRST NINE MONTHS OF 1996 Net Sales - --------- Net sales increased by $22.7 million, or 24.2%, from $93.7 million during the first nine months of 1996 to $116.4 million during the first nine months of 1997. The net sales increase was attributable to the acquisitions of Hutchinson and, to a lesser extent, Sinterloy and strong customer demand in all of the Company's product lines. 20 21 Gross Profit - ------------ Gross profit increased $8.8 million to $33.4 million during the first nine months of 1997, a 35.6% increase over gross profit of $24.6 million during the first nine months of 1996. The gross profit margin increased to 28.7% during the first nine months of 1997 from 26.3% during the comparable period in 1996. The increase was attributable to cost savings, resulting from the consolidation of the Company's facilities described above, as well as favorable product mix. Selling, Technical and Administrative Expenses - ---------------------------------------------- ST&A expenses increased $2.6 million, or 22.6%, from $11.6 million during the first nine months of 1996 to $14.2 million during the first nine months of 1997. As a percentage of net sales, ST&A remained relatively constant at 12.2% during the first nine months of 1997 compared to 12.4% during the comparable period of 1996. Income from Operations - ---------------------- Income from operations increased by $9.7 million, or 140.6%, from $6.9 million in the first nine months of 1996 to $16.6 million in the first nine months of 1997. Income from operations as a percentage of net sales increased to 14.2% in the first nine months of 1997 from 7.3% in the comparable nine month period of 1996, reflecting cost savings from the consolidation of facilities, reduced plant consolidation expenses, increased sales and a more favorable product mix. Interest Expense - ---------------- Interest expense increased $3.3 million, or 45.3%, to $10.6 million in the first nine months of 1997 from $7.3 million in the comparable nine month period in 1996. The increase is attributable to higher debt levels, a result of the issuance of the Senior Notes in the fourth quarter of 1996. Income Taxes - ------------ The provision for income taxes increased $1.6 million to $2.5 million in the first nine months of 1997 (43.7% of pre-tax income) from $0.9 million in the comparable period in 1996, reflecting the increase in pre-tax income. Net Income - ---------- As a result of the factors noted above, net income was $3.3 million in the first nine months of 1997 compared to a loss of $1.4 million in the comparable nine month period of 1996. 21 22 LIQUIDITY AND CAPITAL RESOURCES As a result of the recent acquisitions and the issuance of the Senior Notes, the Company has, and will continue to have, substantial indebtedness. The Company will therefore be required to use a substantial portion of its cash flow from operations for the payment of interest expense on indebtedness. The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under its $25.0 million Revolving Credit Facility (subject to a borrowing base of a portion of the eligible accounts receivable and inventory). As of September 30, 1997, there are no amounts outstanding under the Revolving Credit Facility. As of September 30, 1997 the Company was in compliance with the terms of its indebtedness. Net cash provided by operating activities was $10.2 million for the nine month period ended September 30, 1997 as compared to $2.8 million in the comparable period of 1996. The increase in net income of $4.6 million and non-cash charges in addition to an improved working capital position at September 30, 1997 accounted for the increased operating cash flow. Net cash used in investing activities was $30.7 million and $7.5 million for the nine month periods ending September 30, 1997 and 1996, respectively. The cash used in investing activities in the 1997 period consisted of $26.0 million attributable to the acquisitions of Hutchinson and Sinterloy and $4.8 million for the purchases of property, plant and equipment. In the comparable period of 1996, cash used in investing activities consisted primarily of expenditures for property, plant and equipment. Net cash used in financing activities was $1.6 million for the nine month period ended September 30, 1997 and was used primarily for payment of capital lease obligations. In the comparable nine month period of 1996, net cash provided by financing activities of $5.8 million was primarily attributable to an increase in borrowing under the Company's previous credit facilities. The primary uses of capital by the Company are (1) to pay interest on, and to repay principal of, indebtedness, (2) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product development, and (3) for making additional strategic acquisitions of complementary businesses. The Company believes that cash flow from operating activities and additional funds available under the Revolving Credit Facility will be sufficient to meet its currently anticipated operating and capital expenditure requirements and service its indebtedness for the next 12 months. If the Company cannot generate sufficient cash flow from operating activities or borrow under the Revolving Credit Facility to meet such obligations, then the Company may be required to take certain actions, including refinancing all or a portion of its existing debt, selling assets or obtaining additional financing. There is no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained. 22 23 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 expansion into new markets and growth in existing markets, are forward looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to (1) the Company's substantial leverage, which requires significant cash flows to service debt, reducing funds for operations and other business opportunities and increasing the Company's vulnerability to competition and to adverse general economic and industry conditions; (2) the ability of the Company to continue to meet the terms of the Company's credit facilities which contain a number of significant financial covenants and other restrictions; (3) the Company's reliance on significant customers; (4) supplies and prices of raw materials used by the Company; (5) whether the Company's aerospace friction products will be able to continue to meet stringent Federal Aviation Administration criteria and testing requirements; (6) whether the Company will be able to successfully integrate Sinterloy into its operations; (7) whether the Company will continue to identify suitable new acquisition candidates, obtain financing necessary to complete such acquisitions, acquire businesses on satisfactory terms, enter into any definitive acquisition agreements or, if entered into, that future acquisitions will be successful or will achieve results comparable to the Company's existing business; and (8) the Company's continued expansion into international markets, with all the risks inherent in doing business internationally, including unexpected changes in regulatory requirements, export restrictions, currency controls, tariffs and other trade barriers, potential instability, fluctuations in currency exchange rates and potential adverse tax consequences. Any investor or potential investor in the Company must consider these risks and others that are detailed in the Company's Form S-4 (333-18433). 23 24 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: --------- 27.1 Financial Data Schedule (b) Reports on Form 8-K: 1) The Company filed a report on form 8-K on July 10, 1997 relating to the Company's acquisition of Sinterloy, Inc. 2) The Company filed a report on form 8-K/A on August 1, 1997, relating to the aforementioned acquisition. 24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 1997 HAWK CORPORATION By: /s/ Ronald E. Weinberg -------------------------- Ronald E. Weinberg, Vice-Chairman of the Board and Treasurer By: /s/ Thomas A. Gilbride -------------------------- Thomas A. Gilbride, Vice President- Finance (Chief Accounting Officer)
25 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 3,629 0 24,962 216 22,567 54,844 71,309 19,346 170,915 24,248 130,474 0 1 14 (1,463) 170,915 116,362 116,362 82,940 16,866 122 0 10,639 5,795 2,534 3,261 0 0 0 3,261 1.72 0
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