-----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, MSCxHcAkhti2Ywoyqb1uZV1H2LRFpSO0fhSx+lDKTACd4ssqI2iOOj+SgyFA6hgE KRASjPBUDKTq6kbE6lCqww== 0000950152-98-004181.txt : 19980508 0000950152-98-004181.hdr.sgml : 19980508 ACCESSION NUMBER: 0000950152-98-004181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980507 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: 341608156 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18433 FILM NUMBER: 98612627 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQ STE 30-5000 STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2168613553 MAIL ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114-2301 FORMER COMPANY: FORMER CONFORMED NAME: HAWK GROUP OF COMPANIES INC DATE OF NAME CHANGE: 19950417 10-Q 1 HAWK GROUP FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ 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 (or 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: 4,663,957 Class B Non-Voting Common Stock, $0.01 par value: None (0) 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 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997 (UNAUDITED) (NOTE) ----------- ------ ASSETS Current assets: Cash and cash equivalents $ 6,592 $ 4,388 Accounts receivable, less allowance of $382 & $321, respectively 30,092 25,746 Inventories 22,131 22,083 Deferred income taxes 2,822 2,833 Other current assets 1,721 1,375 ----------- ----------- Total current assets 63,358 56,425 Property, plant & equipment: Land 1,199 1,218 Buildings and improvements 10,875 10,877 Machinery and equipment 58,086 57,104 Furniture and fixtures 2,524 2,326 Construction in progress 4,207 1,914 ----------- ----------- 76,891 73,439 Less accumulated depreciation 22,674 20,959 ----------- ----------- Total property, plant and equipment 54,217 52,480 Other assets: Intangible assets 55,775 56,539 Net assets held for sale 3,604 3,604 Shareholder notes 1,673 1,675 Other 2,219 2,363 ----------- ----------- Total other assets 63,271 64,181 Total assets $ 180,846 $173,086 =========== ========
3 4 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, 1998 DECEMBER 31, 1997 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (NOTE) ----------- ------ Current liabilities: Accounts payable $ 14,085 $ 10,369 Short term borrowings 1,775 1,744 Accrued compensation 5,556 8,069 Other accrued expenses 10,043 5,494 Current portion of long-term debt 1,399 1,955 ------------ ------------ Total current liabilities 32,858 27,631 Long-term liabilities: Long-term debt 129,776 130,193 Deferred income taxes 6,302 6,322 Other 1,806 1,811 ------------ ------------ Total long-term liabilities 137,884 138,326 Detachable stock warrants, subject to put option 9,300 9,300 Shareholders' equity (deficit): Preferred stock 1 1 Class A common stock, $.01 par value; 75,000,000 shares authorized, 4,663,957 issued and outstanding 47 14 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 1,931 1,964 Retained earnings (deficit) 113 (3,120) Accumulated other comprehensive income (loss) (1,288) (1,030) ------------ ------------- Total shareholders' equity (deficit) 804 (2,171) Total liabilities and shareholders' equity (deficit) $ 180,846 $ 173,086 ============ ============ Note: The balance sheet at December 31, 1997 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 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 1998 1997 ---- ----- Net sales $ 49,978 $ 36,884 Cost of sales 33,787 26,368 ------------ ------------ Gross profit 16,191 10,516 Selling, technical and administrative expenses 5,703 4,554 Amortization of intangibles 899 829 ------------ ------------ Total expenses 6,602 5,383 Income from operations 9,589 5,133 Interest expense 3,824 3,679 Other (income) expense, net 4 (250) ------------ ------------- Income before income taxes 5,761 1,704 Income taxes 2,448 806 ------------ ------------ Net income $ 3,313 $ 898 ============ ============ Earnings per share: Basic earnings per share: $ .69 $ .18 =========== ============ Diluted earnings per share: $ .57 $ .14 =========== ============ See notes to consolidated financial statements.
5 6 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------------------ 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 3,313 $ 898 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,638 2,427 Accretion of discount on debt 163 163 Changes in operating assets and liabilities, net: Accounts receivable (4,555) (5,097) Inventories (154) (1,871) Other assets (367) (953) Accounts payable 3,800 859 Other liabilities 2,101 44 ------------ ------------ Net cash provided by (used in) operating activities 6,939 (3,530) Cash flows from investing activities: Purchase of Hutchinson (10,368) Purchases of property, plant and equipment (3,658) (1,194) Payments received on shareholder notes 2 63 ------------ ------------ Net cash used in investing activities (3,656) (11,499) Cash flows from financing activities: Proceeds from borrowings on short-term debt 87 Payments on long-term debt (1,086) (325) Deferred financing costs 227 Payments of preferred stock dividends (80) (80) Other 68 ------------ ------------ Net cash used in financing activities (1,079) (110) Net increase (decrease) in cash and cash equivalents 2,204 (15,139) Cash and cash equivalents at beginning of period 4,388 25,774 ------------ ------------ Cash and cash equivalents at end of period $ 6,592 $ 10,635 ============ ============ See notes to consolidated financial statements.
6 7 HAWK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K for Hawk Corporation (the "Company") for the year ended December 31, 1997. 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 August 1, 1997, the accounts of Sinterloy Corporation. (See Note 4). All significant inter-company accounts and transactions have been eliminated in the accompanying financial statements. NOTE 2 - COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company adopted SFAS No. 130 in the first quarter of 1998. The principal difference between net income as historically reported in the consolidated statements of income and comprehensive income is foreign currency translation recorded in shareholders' equity. Comprehensive income is as follows:
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 ---- ---- Net income $ 3,313 $ 898 Foreign currency translation (258) (854) ---------- ---------- Comprehensive income $ 3,055 $ 44 ========== ==========
7 8 NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The major components of inventories are as follows:
MARCH 31, DECEMBER 31, 1998 1997 ---- ---- Raw materials and work-in-process $ 19,435 $ 18,690 Finished products 4,169 4,722 Inventory reserves (1,473) (1,329) ---------- ---------- $ 22,131 $ 22,083 ========== ==========
NOTE 4 - ACQUISITIONS On August 1, 1997 the Company, through a wholly owned subsidiary, acquired substantially all the assets (except cash) and assumed certain liabilities of Sinterloy, Inc. for $16,400 in cash. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of the assets less the assumed liabilities in the amount of $11,400 is being amortized over 30 years and is included in intangible assets. The results of operations of Sinterloy are included in the Company's consolidated statements of income since the date of acquisition. The following proforma unaudited consolidated results of operations for the three months ended March 31, 1997 give effect to the above acquisition as though it had occurred on January 1, 1997 and include certain adjustments, such as additional amortization expense as a result of goodwill, 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 MARCH 31, 1997 -------------- Net sales $40,684 ======= Net income $ 1,662 ======= Basic earnings per share $ .34 ======= Diluted earnings per share $ .28 =======
Proforma net sales, net income and earnings per share are not necessarily indicative of the net sales, net income and earnings per share that would have occurred had the acquisition been made at the beginning of the respective year or the results which may occur in the future. 8 9 NOTE 5 - LONG-TERM DEBT In November 1996, the Company issued $100,000 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 10). NOTE 6 - DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION For financial reporting purposes at June 30, 1995, the fair value of the warrants, including the put option, was estimated to be $4,600 and classified as detachable stock warrant, subject to put option on the accompanying balance sheets. The resulting discount is being amortized over the life of the debt as non-cash, imputed interest. The discount is based on an effective interest rate of 14.2%. Adjustments to the carrying value of the detachable stock warrants are determined by management based on revisions to the estimated present value of the future fair market value of the Company, with a corresponding charge or credit to retained earnings. At March 31, 1998 and at December 31, 1997, the carrying value of the warrants, including the put option, was $9,300. NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required in 1998. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits. This statement does not change the recognition of measurement of pension and postretirement benefits plans, but standardizes disclosure requirements for pensions and other postretirement benefits, eliminates certain disclosures and requires certain additional information. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. NOTE 8 - INCREASE IN AUTHORIZED SHARES AND STOCK SPLIT On January 12, 1998, the Company amended its Certificate of Incorporation to increase the authorized shares of Class A and Class B Common Stock to 75,000,000 and 10,000,000 respectively. In addition, on January 12, 1998, the board of directors declared a 3.2299-for-one split of the Company's Class A and 9 10 Class B Common Stock in the form of a stock dividend distributed to the holders of record on January 12, 1998. Accordingly all number of the common shares and per share data have been restated to reflect the stock split. The par value of the additional shares of common stock to be issued in connection with the stock split has been credited to common stock and a like amount charged to additional paid in capital in the first quarter of 1998. NOTE 9 - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the previously reported primary and fully-diluted earnings per share with basic earnings per share and diluted earnings per share. As required, the Company adopted SFAS No. 128 in the fourth quarter of 1997. Prior amounts have been restated to comply with SFAS No. 128 and give effect to the stock split discussed in Note 8. Basic and dilutive earnings per share is computed as follows:
THREE MONTHS ENDED MARCH 31, -------------------------------- 1997 1998 -------------------------------- Net income $ 898 $ 3,313 Less: Preferred stock dividends 80 80 -------------------------------- Net income attributable to common shareholders $ 818 $ 3,233 ================================ Weighted average shares: Basic: Basic weighted average shares 4,664 4,664 ================================ Diluted: Basic from above 4,664 4,664 Effect of warrant conversion 1,024 1,024 -------------------------------- Diluted weighted average shares 5,688 5,688 ================================ Earnings per share: Basic earnings per share $ .18 $ .69 ================================ Diluted earnings per share $ .14 $ .57 ================================
10 11 NOTE 10 - SUPPLEMENTAL GUARANTOR INFORMATION As discussed in Note 5, each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis the obligation to pay principal, premium, if any, and interest with respect to the Senior Notes. The Guarantor Subsidiaries are direct, wholly-owned subsidiaries of the Company. The following supplemental unaudited consolidating condensed financial statements present: 1. Consolidating condensed balance sheets as of March 31, 1998 and December 31, 1997, consolidating condensed statements of income for the three months ended March 31, 1998 and 1997 and consolidating condensed statements of cash flows for the three months ended March 31, 1998 and 1997. 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 Senior Notes are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The Company's 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. 11 12
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED) MARCH 31, 1998 --------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents 5,625 130 837 6,592 Accounts receivable, net 639 22,856 7,015 (418) 30,092 Inventories, net 17,826 4,305 22,131 Deferred income taxes 2,435 387 2,822 Other current assets 229 620 915 (43) 1,721 ----------- ----------- ----------- ------------ ----------- Total current assets 8,928 41,432 13,459 (461) 63,358 Other assets: Investment in subsidiaries 790 5,329 (6,119) Inter-company advances, net 137,778 1,442 (14) (139,206) Property, plant and equipment 47,697 6,520 54,217 Intangible assets 229 55,546 55,775 Other 1,673 7,150 448 (1,775) 7,496 ----------- ----------- ----------- ------------ ----------- Total assets $ 149,398 $ 158,596 $ 20,413 $ (147,561) $ 180,846 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 581 $ 11,074 $ 2,848 $ (418) $ 14,085 Short term borrowings 1,775 1,775 Accrued compensation 64 4,549 943 5,556 Other accrued expenses 6,122 3,680 345 (104) 10,043 Current portion of long-term debt 906 493 1,399 ----------- ----------- ----------- ----------- ----------- Total current liabilities 6,767 20,209 6,404 (522) 32,858 Long-term liabilities: Long-term debt 127,188 1,456 1,132 129,776 Deferred income taxes 5,888 414 6,302 Other 776 1,030 1,806 Inter-company advances, net 3,040 131,776 6,104 (140,920) ----------- ----------- ----------- ------------ ----------- Total long-term liabilities 136,116 134,008 8,680 (140,920) 137,884 Total liabilities 142,883 154,217 15,084 (141,442) 170,742 Detachable stock warrants, subject to put option 9,300 9,300 Shareholders' equity (deficit) (2,785) 4,379 5,329 (6,119) 804 ------------ ----------- ----------- ------------ ----------- Total liabilities and shareholders' equity $ 149,398 $ 158,596 $ 20,413 $ (147,561) $ 180,846 =========== =========== =========== =========== ===========
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997 --------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,103 $ 469 $ 816 $ 4,388 Accounts receivable, net 77 19,402 6,656 $ (389) 25,746 Inventories, net 17,455 4,628 22,083 Deferred income taxes 890 1,545 398 2,833 Other current assets 142 560 734 (61) 1,375 ----------- ----------- ----------- ------------ ----------- Total current assets 4,212 39,431 13,232 (450) 56,425 Other assets: Investment in subsidiaries 790 4,971 (5,761) Inter-company advances, net 132,490 1,300 11 (133,801) Property, plant and equipment 46,115 6,365 52,480 Intangible assets 231 56,308 56,539 Other 1,675 7,297 445 (1,775) 7,642 ----------- ----------- ----------- ------------ ----------- Total assets $ 139,398 $ 155,422 $ 20,053 $ (141,787) $ 173,086 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 7,490 $ 3,213 $ (334) $ 10,369 Short term borrowings 1,744 1,744 Accrued compensation $ 64 7,189 816 8,069 Other accrued expenses (3,219) 8,582 247 (116) 5,494 Current portion of long-term debt 1,432 523 1,955 ----------- ----------- ----------- ----------- ----------- Total current liabilities (3,155) 24,693 6,543 (450) 27,631 Long-term liabilities: Long-term debt 127,025 2,001 1,167 130,193 Deferred income taxes 5,665 223 434 6,322 Other 780 1,031 1,811 Inter-company advances, net 2,986 126,683 5,907 (135,576) ----------- ----------- ----------- ----------- ----------- Total long-term liabilities 135,676 129,687 8,539 (135,576) 138,326 ----------- ----------- ----------- ----------- ----------- Total liabilities 132,521 154,380 15,082 (136,026) 165,957 Detachable stock warrants, subject to put option 9,300 9,300 Shareholders' equity (deficit) (2,423) 1,042 4,971 (5,761) (2,171) ------------ ----------- ----------- ------------ ------------ Total liabilities and shareholders' equity $ 139,398 $ 155,422 $ 20,053 $ (141,787) $ 173,086 =========== =========== =========== =========== ===========
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 -------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ Net sales $ 44,243 $ 5,735 $ 49,978 Cost of sales 29,084 4,703 33,787 ----------- ----------- ----------- Gross profit 15,159 1,032 16,191 Expenses: Selling, technical and administrative expenses 5,057 646 5,703 Amortization of intangible assets $ 2 897 899 ----------- ----------- ----------- ----------- ----------- Total expenses 2 5,954 646 6,602 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations (2) 9,205 386 9,589 Interest expense 162 3,604 122 $ (64) 3,824 Income from equity investees 3,286 213 (3,499) Other (income) expense, net (202) 126 16 64 4 ------------ ----------- ----------- ----------- ----------- Income before income taxes 3,324 5,688 248 (3,499) 5,761 Income taxes 11 2,402 35 2,448 ----------- ----------- ----------- ----------- ----------- Net income $ 3,313 $ 3,286 $ 213 $ (3,499) $ 3,313 =========== =========== =========== =========== ===========
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 --------------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 32,821 $ 5,012 $ (949) $ 36,884 Cost of sales 23,201 4,116 (949) 26,368 ----------- ----------- ----------- ----------- ----------- Gross profit 9,620 896 10,516 Expenses: Selling, technical and administrative expenses 4,044 510 4,554 Amortization of intangible assets $ 2 827 829 ----------- ----------- ----------- ----------- ----------- Total expenses 2 4,871 510 5,383 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations (2) 4,749 386 5,133 Interest expense, net 162 3,421 96 3,679 Income from equity investees 832 109 (941) Other (income) expense, net (274) (139) 163 (250) ----------- ----------- ----------- ----------- ----------- Income before income taxes 942 1,576 127 (941) 1,704 Income taxes 44 744 18 806 ----------- ----------- ----------- ----------- ----------- Net income $ 898 $ 832 $ 109 $ (941) $ 898 =========== =========== =========== =========== ===========
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 --------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------ ------------ ------------- ------------ Net cash provided by operating activities $ 2,600 $ 3,751 $ 588 $ 6,939 Cash flows from investing activities: Purchase of property, plant and equipment (3,019) (639) (3,658) Other 2 2 ------------ ----------- ----------- ------------ Net cash provided by (used in) investing activities 2 (3,019) (639) (3,656) Cash flows from financing activities: Proceeds from borrowings of short-term debt 87 87 Payments on long-term debt (1,071) (15) (1,086) Payment of preferred stock dividend (80) (80) ------------ ----------- ----------- ------------ Net cash (used in) provided by financing activities (80) (1,071) 72 (1,079) Net increase (decrease) in cash and cash equivalents 2,522 (339) 21 2,204 Cash and cash equivalents at beginning of period 3,103 469 816 4,388 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of the period $ 5,625 $ 130 $ 837 $ 6,592 =========== =========== =========== ===========
16 17 SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 ---------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------ ------------ ------------ ------------ Net cash (used in) provided by operating activities $ (4,225) $ 519 $ 176 $ (3,530) Cash flows from investing activities: Purchase of Hutchinson (10,368) (10,368) Purchase of property, plant and equipment (648) (546) (1,194) Payments on shareholder loans 63 63 ----------- ----------- ----------- ----------- Net cash used in investing activities (10,305) (648) (546) (11,499) Cash flows from financing activities: Payments on long-term debt (168) (157) (325) Deferred financing costs 227 227 Payment of preferred stock dividend (80) (80) Other 68 68 ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (80) 127 (157) (110) ------------ ----------- ------------ ------------ Net decrease in cash and cash equivalents (14,610) (2) (527) (15,139) Cash and cash equivalents at beginning of period 25,187 5 582 25,774 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 10,577 $ 3 $ 55 $ 10,635 =========== =========== =========== ===========
NOTE 11 - CONTINGENCIES At December 31, 1997, the Company had 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. In January 1998, one of the agreements was terminated. 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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 62.4% of Company sales in the first three months of 1998. 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 appliances, business machines 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 $41.1 million of goodwill reflected on the March 31, 1998 balance sheet. The annual amortization of goodwill will result in non-cash charges to future operations of approximately $1.8 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. Year 2000 Compliance - -------------------- The Company is addressing the Year 2000 compliance issue with a corporate-wide initiative led by the Company's Manager of Information Technology and involving coordinators for each Company location. The initiative includes the identification of affected software, the development of a plan for correcting that software in the most effective manner and the implementation and monitoring of the implemented plan. In most instances, the Company will replace or upgrade older software with new programs or systems which will handle the year 2000 and beyond. Although the timing of these replacements is influenced by Year 2000 compliance, in most instances they will involve capital expenditures that would have occurred in the normal course of business in any event. The Company expects that most of the modifications and replacements will be in place before mid-1999. Given the information available at this time, the Company currently anticipates that the amount that the Company will spend to modify or replace software in order to remediate the Year 2000 issue should not have a material adverse effect on the Company's business, financial conditions or results of operations. 18 19 THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Net Sales. Sales increased by $13.1 million, or 35.5%, to $50.0 million in the first quarter of 1998 from $36.9 million in the comparable quarter of 1997. The sales increase was attributable to the acquisition of Sinterloy in August 1997 and strong customer demand in all of the Company's product lines. Sales attributed to Sinterloy in the first quarter of 1998 were $5.4 million, or 41.2%, of the net sales increase. Sales of friction products increased by $5.4 million, or 21.0%, to $31.2 million in the first quarter of 1998 from $25.8 million in the comparable period of 1997. The Company experienced increased sales activity in all of the markets it serves, led by strength in the aerospace market. Sales in the Company's powder metal lines, exclusive of Sinterloy, increased by $2.2 million, or 36.5%, to $8.2 million in the first three months of 1998 from $6.0 million in the comparable period of 1997. Gross Profit. Gross profit increased by $5.7 million, or 53.9%, to $16.2 million in the first quarter of 1998 from $10.5 million in the comparable period of 1997. The gross profit margin increased to 32.4% in the first quarter of 1998 from 28.5% in the comparable period in 1997. The increase was primarily attributable to continuing benefits from the 1996 plant consolidation, the inclusion of Sinterloy in the 1998 results, increased sales and favorable product mix. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased by $1.1 million, or 25.2%, to $5.7 million in the first quarter of 1998 from $4.6 million in the comparable period of 1997. As a percentage of sales, ST&A expenses decreased to 11.4% in the first quarter of 1998 from 12.3% in the comparable quarter of 1997. This decrease was primarily attributable to the increased revenues achieved in the first quarter of 1998. During the first quarter of 1998, the Company spent $0.8 million on product research and development, an increase of 6.8% from amounts spent in the first quarter of 1997. Income from Operations. Income from operations increased by $4.5 million, or 86.8%, to $9.6 million in the first quarter of 1998, from $5.1 million in the comparable period of 1997. This increase was achieved as a result of the acquisition of Sinterloy, increased sales and favorable product mix. Interest Expense. Interest expense increased $0.1 million, or 3.9%, to $3.8 million in the first quarter of 1998 from $3.7 million in the comparable period in 1997. Income Taxes. The provision for income taxes increased to $2.4 million in the first quarter of 1998 from $0.8 million for the comparable period in 1997, reflecting the increase in pre-tax income for the period. Net Income. As a result of the factors noted above, net income increased by $2.4 million, or 268.9%, to $3.3 million in the first quarter of 1998 from $0.9 million in the comparable quarter of 1997. 19 20 Liquidity and Capital Resources - ------------------------------- As a result of the recent acquisitions by the Company 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. In the first three months of 1998, interest expense was equal to 55.1% of the Company's cash flow from operations. 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 March 31, 1998, there were no amounts outstanding under the Revolving Credit Facility. Concurrently with the closing of the proposed initial public offering of the Class A Common Stock, the Company expects to enter into a new $50.0 million Revolving Credit Facility and terminate the existing Revolving Credit Facility. As of March 31, 1998 the Company was in compliance with the terms of its indebtedness. Net cash provided by operations was $6.9 million for the first quarter of 1998 compared to net cash used of $3.5 million in the comparable period in 1997. This change was primarily a result of increased net income and an improved working capital position as of March 31, 1998. Net cash used in investing activities was $3.7 million and $11.5 million for the quarters ending March 31, 1998 and 1997, respectively. The cash used in investing activities in the first quarter of 1998 was used primarily for purchases of property, plant and equipment. Net cash used in financing activities was $1.1 million and $0.1 million used in financing activities in the first quarter of 1998 was used primarily to repay outstanding principal on notes issued in connection with the acquisition of Hutchinson. 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) making additional strategic acquisitions of complementary businesses. The Company believes that cash flow from operating activities, funds available from the proposed sale of the Company's Class A Common Stock in an initial public offering, and additional funds available under the existing or proposed new 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, complete its initial public offering or borrow under its existing Revolving Credit Facility or the proposed new 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. 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 20 21 financing and complete its initial public offering, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to: (1) the effect of the Company's debt service requirements on funds available for operations and future business opportunities and the Company's vulnerability to adverse general economic and industry conditions and competition; (2) the effect of any future acquisitions by the Company on its indebtedness and on the funds available for operations and future business opportunities; (3) the effect of competition by manufacturers using new or different technologies; (4) 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; (5) the ability of Company subsidiaries, Hutchinson and S.K. Wellman, to negotiate new agreements with the unions representing certain of their employees, which expire in June 1998 and December 1999, respectively, on terms favorable to the Company or without experiencing work stoppages; (6) 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; (7) the continuity of business relationships with major customers; (8) the effect of product mix on margins; and (9) and the ability of the Company's products to meet stringent Federal Aviation Administration criteria and testing requirements. Any investor or potential investor in the Company must consider these risks and others that are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and the Company's Form S-1, as amended (Registration No. 333-40535). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in lawsuits that arise in the ordinary course of its business. In the Company's opinion, the outcome of these matters will not have a material adverse effect on the Company's business, financial condition, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 9, 1998, the Company held its Annual Meeting of Stockholders. The first matter voted on was the election of Paul R. Bishop, Norman C. Harbert, Byron S. Krantz, Dan T. Moore, III, William J. O'Neill, Jr. and Ronald E. Weinberg as Directors of the Company. Each was re-elected as a Director for a term of one year, each receiving 4,663,957 votes (adjusted for the January 1998 stock split) for election and no votes against or withheld. The second proposal was for the approval of the Company's 1997 Stock Option Plan, which would become effective upon the closing of an initial public offering of the Company's Class A Common Stock. The proposal was approved with 4,663,957 votes in favor of the 1997 Stock Option Plan and no votes against. The 1997 Stock Option Plan, as filed with the Securities and Exchange Commission on 21 22 December 30, 1997 in the Company's Registration Statement on Form S-1 (Registration No. 333-40535), is hereby incorporated by reference. The third proposal was for the approval of the amendment and restatement of the Company's Amended and Restated Certificate of Incorporation (the "Second Amended and Restated Certificate of Incorporation") to increase the number of authorized shares of Class A Common Stock from 2,200,000 to 75,000,000 and Class B Common Stock from 375,000 to 10,000,000 and to make certain other changes that would become effective upon the closing of an initial public offering of the Company's Class A Common Stock. The proposal was approved with 4,663,957 votes in favor of the amendment and restatement and no votes against. The Second Amended and Restated Certificate of Incorporation, as filed with the Securities and Exchange Commission on April 21, 1998 in the Company's Registration Statement on Form S-1 (Registration No. 333-40535), is hereby incorporated by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: -------- 27 Financial Data Schedule (b) Reports on Form 8-K: ------------------- On February 27, 1998, the Company filed a Form 8-K reporting under Item 5 thereof that the Company issued a press release, dated January 26, 1998, announcing that due to unfavorable market conditions, it decided at that time to withdraw its previously announced initial public offering of 5,135,000 shares of Class A Common Stock. On April 21, 1998, the Company announced that it planned to go forward with its initial public offering and filed an amendment to its registration statement on Form S-1 with the Securities and Exchange Commission. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 5, 1998 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) 23 EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 6,592 0 30,474 382 22,131 63,358 76,891 22,674 180,846 32,858 129,776 0 1 47 756 180,846 49,978 49,978 33,787 40,389 4 0 3,824 5,761 2,448 3,313 0 0 0 3,313 .69 .57
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