-----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, E/HYFlYbWpWanLR1qmnMz4nQ6mdJHJUS237lQhyT072oJsxmvr44xLvk5FFRRtb7 JwiFOu+AIV83MhLi0/I2tg== 0000950152-99-002794.txt : 19990402 0000950152-99-002794.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002794 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-13797 FILM NUMBER: 99579990 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-K405 1 HAWK CORPORATION ANNUAL REPORT FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 001-13797 HAWK CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 34-1608156 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 861-3553 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ Series B 10.25% Senior Notes due 2003 New York Stock Exchange Class A Common Stock, par value $.01 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 17, 1999, the registrant had 8,693,900 shares of Class A Common Stock, net of treasury shares and 0 shares of Class B non-voting Common Stock outstanding. As of that date, the aggregate market value of the voting stock of the registrant held by non-affiliates was $41,638,715 (based upon the closing price of $7.688 per share of Class A Common Stock on the New York Stock Exchange on March 17, 1999). For purposes of this calculation, the registrant deems the 3,277,834 shares of Class A Common Stock held by all of its Directors and executive officers to be the shares of Class A Common Stock held by affiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1998 ("1998 Annual Report") are incorporated by reference into Parts I, II and IV of this report. Portions of the registrant's definitive Proxy Statement ("Proxy Statement") to be used in connection with its Annual Meeting of Stockholders to be held on May 10, 1999 are incorporated by reference into Part III of this Form 10-K. As used in this Form 10-K, the terms "Company," "Hawk" and "Registrant" mean Hawk Corporation and its consolidated subsidiaries, taken as a whole, unless the context indicates otherwise. Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 1998. 2 PART I ITEM 1. BUSINESS. Hawk Corporation ("Hawk" or the "Company"), founded in 1989, is a holding company, the principal assets of which consist of the capital stock of its manufacturing subsidiaries, Friction Products Co. ("FPC"), S.K. Wellman Corp. ("SKW"), Helsel, Inc. ("Helsel"), Sinterloy Corporation ("Sinterloy"), Clearfield Powdered Metals, Inc. ("Clearfield"), Hutchinson Products Corporation ("Hutchinson") and Logan Metal Stampings, Inc. ("Logan"). Through its subsidiaries, Hawk operates primarily in two reportable segments: Friction Products ("Friction") and Powder Metal ("PM"). The Company's friction products are made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers. Friction products are the replacement elements used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. Friction products manufactured by the Company include friction linings for use in brakes, transmissions and clutches in aerospace, construction, agricultural, truck and specialty vehicle markets. The Company's powder metal components are made from formulations of composite powder metal alloys. The PM segment manufactures a variety of components for use in fluid power, truck, lawn and garden, construction, agriculture, home appliance, automotive and office equipment markets. In addition, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. RECENT DEVELOPMENT On February 26, 1999, the Company completed its acquisition of Allegheny Powder Metallurgy, Inc. ("Allegheny"), a Falls Creek, Pennsylvania, manufacturer of powder metal components. Allegheny had net sales of $17.4 million in 1998, and the acquisition is expected to be accretive to earnings in 1999. The Company used its available cash and funds available under its credit facility to complete the transaction. BUSINESS STRATEGY The Company's business strategy includes the following principal elements: -- FOCUS ON HIGH-MARGIN, SPECIALTY APPLICATIONS. The Company operates primarily in aerospace, industrial and commercial markets that require sophisticated engineering and production techniques. In developing new applications, as well as in evaluating acquisitions, the Company seeks to compete in markets requiring such engineering expertise and technical capability, rather than in markets in which the primary competitive factor is price. The Company believes margins for its products in these markets are higher than in other manufacturing markets that use standardized products. The Company's gross margins in 1998 and 1997 were 32.1% and 28.5%, respectively. -- NEW PRODUCT INTRODUCTION. A key part of the Company's strategy is the introduction of new products, which incorporate improved performance characteristics or reduced costs in response to customer needs. Because friction products are the consumable, or wear, component of brake, clutch and transmission systems, the introduction of new friction products in conjunction with a new system provides the Company with the opportunity to supply the aftermarket for the life of the system. For example, the ability to service the aftermarket for a particular braking system will likely provide the Company with a stable market for its friction products for the life of the product, which can be 30 years or more. The Company also seeks to grow by applying its existing products and technologies to new specialized applications where its products have a performance or technological advantage. -- PURSUIT OF STRATEGIC ACQUISITIONS. Many of the markets in which the Company competes are fragmented, providing the Company with attractive acquisition opportunities. The Company will continue to seek to acquire complementary businesses with leading market positions that will enable it to expand its product offerings, technical capabilities and customer base. Historically, the Company has been able to achieve significant cost reductions through the integration of its acquisitions. -- EXPANDING INTERNATIONAL SALES. To take advantage of worldwide growth in its end user markets, the Company expanded its international presence through the acquisition of SKW in 1995, which resulted in the addition of manufacturing facilities in Italy and Canada and a worldwide distribution network. The Company continues to expand its European operations to meet strong demand in established markets throughout Europe. The Company also believes that further opportunities to expand sales exist in emerging economies. Sales from the Company's international facilities have grown from $8.1 million in 1995 to $22.0 million in 1998. 2 3 -- LEVERAGING CUSTOMER RELATIONSHIPS. The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company's commitment to quality, service and just-in-time delivery enables it to build and maintain strong and stable customer relationships. The Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years. The Company believes that strong relationships with its customers provide it with significant competitive advantages in obtaining and securing new business opportunities. ACQUISITIONS On June 8, 1998, the Company purchased the capital stock of Clearfield Powder Metals Inc. The acquisition of Clearfield further expanded the Company's powder metals component business into the lawn and garden, home appliance, power hand tool, and truck markets. On January 2, 1997, the Company purchased the capital stock of Hutchinson Foundry Products Company. The Hutchinson acquisition furthered the Company's strategy of acquiring complementary businesses and expanded the Company's product offerings, technical capabilities and customer base. Hutchinson designs and manufactures die-cast aluminum rotors. The Company believes that Hutchinson is one of the largest independent domestic suppliers of these rotors, which are used in subfractional (less than 1/20 horsepower) electric motors for use in business equipment, appliances and exhaust fans. The Company also believes Hutchinson has growth opportunities arising from the trend by original equipment motor manufacturers to outsource production of rotors. Additionally, Hutchinson manufactures extruded aluminum fan spacers used in commercial diesel engines for heavy trucks and off-road equipment and precision metal castings used in hand power tools and gasoline pumping units. On August 1, 1997, the Company acquired substantially all of the assets of Sinterloy, Inc. The acquisition of Sinterloy expanded the Company's powder metal components business primarily into the business equipment market. Sinterloy's ability to manufacture high volume small to medium sized powder metal components complements the Company's other powder metal businesses, which generally produce lower volume, higher precision components. Both the friction product and powder metal component industries are fragmented and are undergoing consolidation due in part to the additional resources needed (1) to perform the research and development necessary to satisfy customers' increasingly stringent quality and performance criteria, and (2) to meet just-in-time delivery requirements. As a result, the Company believes that it can continue to make strategic acquisitions that may include other friction product and powder metal component manufacturers. To effect its acquisition strategy, the Company engages in discussions, from time to time, with other manufacturers in friction products, powder metal component and other complementary businesses. At this time, the Company has no outstanding commitments or agreements regarding any future acquisitions. PRODUCTS AND MARKETS The Company focuses on supplying components to the aerospace, industrial and commercial markets that require sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. Through acquisitions and product line expansions, the Company has diversified its end markets, which diversification, the Company believes, has reduced its economic exposure to the cyclicality of any particular industry. FRICTION PRODUCTS - ----------------- The Company's Friction segment manufactures products made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers. Friction products are the replacement elements used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. For example, the friction brake linings in aircraft braking systems slow and stop airplanes when landing or taxiing. Friction products manufactured by the Company also include friction linings for use in automatic and power shift transmissions, clutch facings that serve as the main contact point between an engine and a transmission, and brake linings for use in other types of braking systems. The Company's friction products are custom-designed to meet the performance requirements of a specific application and must meet temperature, pressure, component life and noise level criteria. The engineering required in designing a friction material for a specific application dictates a balance between the component life cycle and the performance application of the friction material in, for example, stopping or starting movement. Friction products are consumed through customary use in a brake, clutch or transmission system and require regular replacement. Because the friction material is the consumable, or wear, component of such systems, new 3 4 friction product introduction in conjunction with a new system provides the Company with the opportunity to supply the aftermarket with that friction product for the life of the system. The principal markets served by the Company's Friction segment include manufacturers of aircraft brakes, truck clutches, heavy-duty construction and agricultural vehicle brakes, clutches and transmissions, as well as manufacturers of motorcycle, snowmobile and performance racing brakes. Based upon net sales, the Company believes that it is among the top three worldwide manufacturers of friction products used in aerospace and industrial applications. The Company estimates that aftermarket sales of friction products have comprised approximately 50% of the Company's net friction product sales in recent years. The Company believes that its stable aftermarket sales component enables the Company to reduce its exposure to adverse economic cycles. AEROSPACE. The Company believes it is the only independent supplier of friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the MD DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The Company believes it is also the largest supplier of friction materials to the general aviation (non-commercial, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. Each aircraft braking system, including the friction materials supplied by the Company, must meet stringent Federal Aviation Administration ("FAA") criteria and certification requirements. New model development and FAA testing for the Company's aircraft braking system customers generally begins two to five years prior to full scale production of new braking systems. If the Company and its aircraft brake system manufacturing partner are successful in obtaining the rights to supply a particular model of aircraft, the Company will typically supply its friction products to that model's aircraft braking system for as long as the model continues to fly because it is generally too expensive to redesign a braking system and meet FAA requirements. Moreover, FAA maintenance requirements mandate that brake linings be changed after a specified number of take-offs and landings, which the Company expects to result in a continued and steady market for its aerospace friction products. The Company's friction products for commercial aerospace applications are primarily used on "single-aisle" aircraft that are flown on shorter routes, resulting in more takeoffs and landings than larger aircraft. The Company believes its friction products provide an attractive combination of performance and cost effectiveness in these applications. According to Boeing's 1998 Current Market Outlook, approximately 9,000 of the 12,300 airplanes in the world fleet are single-aisle commercial aircraft. The report also forecasts single-aisle to increase by over 3,500 to 12,500 by the end of 2007. The Boeing report also states that world airline traffic is projected to increase 5% per year over the next ten years. The Company expects that continued growth in world airline traffic, combined with the increasing number of single-aisle aircraft, will cause demand for the Company's aerospace friction products to remain strong. For example, Boeing is utilizing the Company's friction material on its new 737NG (New Generation) series aircraft. CONSTRUCTION/AGRICULTURAL/TRUCKS. The Company supplies a variety of friction products for use in brakes, clutches and transmissions on construction and agricultural equipment and trucks. These components are designed to precise tolerances and permit brakes to stop or slow a moving vehicle and the clutch or transmission systems to engage or disengage. The Company believes it is a leading supplier to original equipment manufacturers and to the aftermarket. The Company believes that its trademark, Velvetouch(R), is well known in the aftermarket for these components. As with the Company's aerospace friction products, new friction product introduction in conjunction with a new brake, clutch or transmission system provides the Company with the opportunity to supply the aftermarket with the friction product for the life of the system. -- CONSTRUCTION EQUIPMENT. The Company supplies friction products such as transmission discs, clutch facings and brake linings to manufacturers of construction equipment, including Caterpillar. The Company believes it is the second largest domestic supplier of these types of friction products. Replacement components for construction equipment are sold through manufacturers such as Caterpillar, as well as various aftermarket distributors. -- AGRICULTURAL EQUIPMENT. The Company supplies friction products such as clutch facings, transmission discs and brake linings for manufacturers of agricultural equipment, including John Deere and New Holland. The Company believes it is the second largest domestic supplier of such friction products. Replacement components for agricultural equipment are sold through original equipment manufacturers as well as various aftermarket distributors. -- MEDIUM AND HEAVY TRUCKS. The Company supplies friction products for clutch facings used in medium and heavy trucks to original equipment manufacturers, such as Eaton. The Company believes it is the leading domestic supplier of replacement friction products used in these applications. Replacement components are sold through the Company's original equipment manufacturers and various aftermarket distributors. SPECIALTY. The Company supplies friction products for use in other specialty applications, such as brake pads for Harley-Davidson motorcycles, AM General Humvees and Bombardier, Polaris Industries and Arctic Cat snowmobiles. The Company believes that these markets are experiencing significant growth and the Company will continue to increase its market share with its combination of superior quality and longer product life. Under the "Hawk Brake" tradename, the Company also supplies high performance friction material for use in racing car brakes. The Company's high performance brake pad for race cars can operate in 4 5 temperatures of over 1,100 degrees Fahrenheit. The Company believes that this performance racing material may have additional applications such as braking systems for passenger and school buses, police cars and commercial delivery vehicles. POWDER METAL COMPONENTS - ----------------------- The Company's PM segment is a leading supplier of powder metal components consisting primarily of pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings for applications ranging from lawn and garden tractors to industrial equipment. Since Hawk's founding in 1989, it has participated in the growing powder metal parts and products industry with a focus on the North American industrial market, which the Metal Powder Industries Federation ("MPIF"), an industry trade group, estimates had sales of over $1.0 billion in 1997. According to MPIF, the value of iron powder shipments in North America increased by over 10% per year from 1991 to 1997, and North American powder manufacturers are anticipating an average annual growth rate of almost 6% per year for the next ten years. FLUID POWER, INDUSTRIAL AND OTHER APPLICATIONS. The Company manufactures a variety of components made from powder metals for use in (1) fluid power applications, such as pumps and other hydraulic mechanisms, (2) transmissions, other drive mechanisms and anti-lock braking systems used in trucks and off-road and lawn and garden equipment, (3) gears and other components for use in home appliances and office equipment and (4) components used in automotive applications. The Company believes that the market for powder metal components will continue to grow as the Company's core powder metal technology benefits from advances that permit production of powder metal components with increased design flexibility, greater densities and closer tolerances that provide improved strength, hardness and durability for demanding applications, and enable the Company's powder metal components to be substituted for wrought steel or iron components produced with forging, casting or stamping technologies. Powder metal components can often be produced at a lower cost per unit than products manufactured with forging, casting or stamping technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste. The Company believes that the current trend of substituting powder metal components for forged, cast or stamped components in industrial applications will continue for the foreseeable future, providing the Company with increased product and market opportunities. As of February 26, 1999 with the acquisition of Allegheny, the Company's PM segment operates in five facilities, each targeting an important aspect of the market place: -- HIGH PRECISION. Helsel's pressing and finishing capabilities enable it to specialize in tight tolerance fluid power components such as pump elements and gears. In addition, the Company believes that Helsel's machining capabilities provide it with a competitive advantage by giving it the ability to supply a completed part to its customers, typically without any subcontracted precision machining. The Company believes that Helsel's growth will be driven by existing customers' new design requirements and new product applications primarily for pumps, motors and transmissions. -- LARGE SIZE CAPABILITY. The FPC PM segment operation has the capability to make structural powder metal components that are among the largest used in North America. The Company expects its sales of larger powder metal components to continue to grow as the Company creates new designs for existing customers and benefits from market growth, primarily in current construction, agricultural and truck applications. For example, the Company believes that sales of its powder metal components used in anti-lock braking systems will benefit as domestic trucks comply with the U.S. Department of Transportation's regulations requiring the installation of anti-lock braking systems on new trucks. -- HIGH VOLUME. Sinterloy, Clearfield and Allegheny target smaller, high volume parts where they can utilize their efficient pressing and sintering capabilities to their best advantage. Sinterloy's primary market has been powder metal components for the business equipment market. Clearfield's market focus has been primarily to the lawn and garden, home appliance, power hand tool, and truck markets. Allegheny's market focus has been primarily the lawn and garden and automotive markets. The Company believes that the high volume capabilities of Sinterloy, Clearfield and Allegheny will provide the Company with cross-selling opportunities from the Company's other PM facilities. DIE-CAST ALUMINUM ROTORS - ------------------------ The Company believes that Hutchinson is the largest independent U.S. manufacturer of die-cast aluminum rotors for use in subfractional electric motors. These motors are used in a wide variety of applications such as business equipment, small household appliances and exhaust fans. Hawk accounts for Hutchinson in its other segment category. Hutchinson does not meet the quantitative threshold for creating its own reportable segment. 5 6 The Company estimates that approximately 50% of all rotors in the subfractional motor market are made internally by motor manufacturers such as Emerson and General Electric. However, the Company believes Hutchinson has growth opportunities arising from the trend by original equipment motor manufacturers to outsource their production of rotors. The Company is currently exploring the possibility of expanding its rotor manufacturing capabilities into Mexico, where a large portion of subfractional motors are manufactured. OTHER - ----- In addition to providing metal stampings for the Friction segment, the Company's Logan subsidiary also sells transmission plates and other components to the automotive and trucking industries. The Company accounts for this portion of Logan's business in the other segment. BUSINESS SEGMENT INFORMATION (in thousands)
YEAR ENDED DECEMBER 31 ------------------------------------------- 1998 1997 1996 ---- ---- ---- Revenues from External Customers Friction $109,624 $ 107,679 $ 94,039 PM 53,483 31,360 20,685 Other 19,024 20,047 9,273 -------- --------- -------- Consolidated $182,131 $ 159,086 $123,997 Operating Income Friction $ 18,313 $ 13,236 $ 6,877 PM 13,359 7,193 3,272 Other 1,146 1,644 (338) -------- --------- -------- Consolidated $ 32,818 $ 22,073 $ 9,811 DECEMBER 31 -------------------------- 1998 1997 ---- ---- Total Assets Friction $115,141 $ 111,333 PM 53,034 37,244 Other 35,271 24,509 -------- --------- Consolidated $203,446 $ 173,086
MANUFACTURING The manufacturing processes for most of the Company's friction products and powder metal components are essentially similar. In general, both use composite metal alloys in powder form to make high quality powder metal components. The basic manufacturing steps, consisting of blending/compounding, molding/compacting, sintering (or bonding) and secondary machining/treatment, are as follows: -- BLENDING/COMPOUNDING: Composite metal alloys in powder form are blended with lubricants and other additives according to scientific formulas, many of which are proprietary to the Company. The formulas are designed to produce precise performance characteristics necessary for a customer's particular application, and the Company often works together with its customers to develop new formulas that will produce materials with greater energy absorption characteristics, durability and strength. -- MOLDING/COMPACTING: At room temperature, a specific amount of a powder alloy is compacted under pressure into a desired shape. The Company's molding presses are capable of producing pressures of up to 3,000 tons. The Company believes that it has some of the largest presses in the powder metal industry, enabling it to produce large, complex components. -- SINTERING: After compacting, molded parts are heated in furnaces to specific temperatures, enabling metal powders to metallurgically bond, harden and strengthen the molded parts while retaining their desired shape. For friction materials, the friction composite part is also bonded directly to a steel plate or core, creating a strong continuous metallic part. 6 7 -- SECONDARY MACHINING/TREATMENT: If required by customer specifications, a molded part undergoes additional processing. These processing operations are generally necessary to attain increased hardness or strength, tighter dimensional tolerances or corrosion resistance. To achieve these specifications, parts are heat-treated, precision coined, ground or drilled or treated with a corrosion resistant coating, such as oil. Certain of the Company's friction products, which are primarily used in oil-cooled brakes and power shift transmissions, do not require all of the foregoing steps. For example, molded composite friction materials are molded under high temperatures and cured in electronically-controlled ovens and then bonded to a steel plate or core with a resin-based polymer. Cellulose composite friction materials are blended and formed into continuous sheets and then stamped into precise shapes by computer-controlled die cutting machines. Like molded composite friction materials, cellulose composite friction materials are then bonded to a steel plate or core with a resin-based polymer. The Company's die-cast aluminum rotors are produced in a three-step process. Steel stamped disks forming the laminations of the rotors are first skewed (stacked) and then loaded into dies into which molten aluminum is injected to create the rotors. The rotor castings created in the dies are then machined to produce finished rotors. These rotors are manufactured in a variety of sizes and shapes to customers' design specifications. QUALITY CONTROL. Throughout its design and manufacturing process, the Company focuses on quality control. For product design, each Company manufacturing facility uses state-of-the-art testing equipment to replicate virtually any application required by the Company's customers. This equipment is essential to the Company's ability to manufacture components that meet stringent customer specifications. To ensure that tight tolerances have been met and that the requisite quality is inherent in its finished products, the Company uses statistical process controls, a variety of electronic measuring equipment and computer-controlled testing machinery. The Company has also established programs within each of its facilities to detect and prevent potential quality problems. TECHNOLOGY The Company believes that it is an industry leader in the development of systems, processes and technologies which enable it to manufacture friction products with numerous performance advantages, such as greater wear resistance, increased stopping power, lower noise and smoother engagement. The Company's expertise is evidenced by its aircraft brake linings, which are currently being installed on many of the braking systems of the newly designed Boeing 737-NG series of aircraft. The Company maintains an extensive library of proprietary friction product formulas that serve as starting points for new product development. Each formula has a specific set of ingredients and processes to generate repeatability in production. Some formulas may have as many as 15 different components. A slight change in a mixture can produce significantly different performance characteristics. The Company uses a variety of technologies and materials in developing and producing its products, such as graphitic and cellulose composites. The Company believes its expertise in the development and production of products using these different technologies and materials gives it a competitive advantage over other friction product manufacturers, which typically have expertise in only one or two types of friction material. The Company also believes that its powder metal components business is able to produce a wide range of products from small precise components to large structural parts. The Company has presses that produce some of the largest powder metal parts in the world, and its powder metal technology permits the manufacture of complex components with specific performance characteristics and close dimensional tolerances that would be impractical to produce using conventional metalworking processes. CUSTOMERS The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company's working relationship with its customers on development and design, and the Company's commitment to quality, service and just-in-time delivery have enabled it to build and maintain strong and stable customer relationships. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years, and the Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. Management believes the Company's relationships with its customers are good. The Company's recent acquisitions have broadened product lines, increased its technological capabilities and will further enhance its customer relationships and expand its preferred supplier status. As a result of its commitment to customer service and satisfaction, the Company has received numerous preferred supplier awards from its leading customers, including Aircraft Braking Systems, BFGoodrich Aerospace, Caterpillar, John Deere and New Holland. 7 8 The Company's top five customers accounted for 32.7% of the Company's consolidated net sales in 1998 and 33.8% of the Company's consolidated net sales in 1997. MARKETING AND SALES The Company markets its products globally through 14 product managers, who operate from the Company's facilities in the United States, Italy and Canada and a sales office in the United Kingdom. The Company's product managers and sales force work directly with the Company's engineers who provide the technical expertise necessary for the development and design of new products and for the improvement of the performance of existing products. The Company's friction products are sold both directly to original equipment manufacturers and to the aftermarket through its original equipment customers and a network of distributors and representatives throughout the world. The Company's marketing and sales of its powder metal components and die-cast aluminum rotors are directed by 8 product managers. The Company also sells its powder metal components and rotors to original equipment manufacturers through independent sales representatives. COMPETITION The principal segments in which the Company competes are competitive and fragmented, with many small manufacturers and only a few manufacturers that generate sales in excess of $50 million. The larger competitors may have financial and other resources substantially greater than those of the Company. The Company competes for new business principally at the beginning of the development of new applications and at the redesign of existing applications by its customers. For example, new model development for the Company's aircraft braking system customers generally begins two to five years prior to full scale production of new braking systems. Product redesign initiatives by customers typically involve long lead times as well. Although the Company has been successful in the past in obtaining this new business, there is no assurance that the Company will continue to obtain such business in the future. The Company also competes with manufacturers using different technologies, such as carbon composite ("carbon-carbon") friction materials for aircraft braking systems. Carbon-carbon braking systems are significantly lighter than the metallic aircraft braking systems for which the Company supplies friction materials, but are more expensive. The carbon-carbon brakes are typically used on wide-body aircraft, such as the Boeing 747 and military aircraft, where the advantages in reduced weight justify the additional expense. In addition, as the Company's core powder metal technology improves, enabling its components to be substituted for wrought steel or iron components, the Company also increasingly competes with companies using forging, casting or stamping technologies. Powder metal components can often be produced at a lower cost per unit than products manufactured with forging, casting or stamping technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste. As a result, powder metal components are increasingly being substituted for metal parts manufactured using more traditional technologies. SUPPLY AND PRICE OF RAW MATERIALS The principal raw materials used by the Company are copper, steel and iron powder and custom-fabricated cellulose sheet. The Company has no long-term supply agreements with any of its major suppliers. However, the Company has generally been able to obtain sufficient supplies of raw materials for its operations, and changes in prices of such supplies over the past few years have not had a significant effect on its operations. GOVERNMENT REGULATION The Company's sales to manufacturers of aircraft braking systems represented 16.5% and 18.0% of the Company's consolidated net sales in 1998 and 1997, respectively. Each aircraft braking system, including the friction products supplied by the Company, must meet stringent FAA criteria and testing requirements. The Company has been able to meet these requirements in the past and continuously reviews FAA compliance procedures to help ensure continued and future compliance. 8 9 ENVIRONMENTAL, HEALTH AND SAFETY MATTERS Manufacturers such as the Company are subject to stringent environmental standards imposed by federal, state, local and foreign environmental laws and regulations, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Certain of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants. Compliance with environmental laws also may require the acquisition of permits or other authorizations for certain activities and compliance with various standards or procedural requirements. The Company is also subject to the federal Occupational Safety and Health Act and similar foreign and state laws. The nature of the Company's operations, the long history of industrial uses at some of its current or former facilities, and the operations of predecessor owners or operators of certain of the businesses expose the Company to risk of liabilities or claims with respect to environmental and worker health and safety matters. The Company reviews its procedures and policies for compliance with environmental and health and safety laws and regulations and believes that it is in substantial compliance with all such material laws and regulations applicable to its operations. The costs of compliance with environmental, health and safety requirements have not been material to the Company. INTELLECTUAL PROPERTY MATTERS Wellman Friction Products(R), Velvetouch(R), Fibertuff(R), Feramic(R), Velvetouch Feramic(R), Velvetouch Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are among the federally registered trademarks of the Company. Velvetouch(R) is the Company's principal trademark for use in the Friction segment aftermarket and is registered in 26 countries. Although the Company maintains patents related to its business, the Company does not believe that its competitive position is dependent on patent protection or that its operations are dependent on any individual patent. To protect its intellectual property, the Company relies on a combination of internal procedures, confidentiality agreements, patents, trademarks, trade secrets law and common law, including the law of unfair competition. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use any of its intellectual property. PERSONNEL At December 31, 1998, the Company had approximately 1,180 domestic employees and 199 international employees, consisting of 125 management, supervisory and administrative personnel, 102 engineering, quality control and laboratory personnel, 47 sales and marketing personnel and 1,105 manufacturing personnel. Approximately 270 employees at the Company's Brook Park, Ohio plant are covered under a collective bargaining agreement with the Paper, Allied Industrial, Chemical and Energy Workers International Union (PACE) expiring in October 2000; approximately 90 employees at the Company's Akron, Ohio facility are covered under a collective bargaining agreement with the United Automobile Workers expiring in July 2000; and approximately 189 employees at the Company's Orzinuovi, Italy plant are represented by a national mechanics union under an agreement that expired in December 1998 and by a local union under an agreement that expires in December 2000. The union and the Italian government are currently negotiating the national contract. At this time, the Company expects the agreement to be ratified without any work stoppages. Approximately 60 hourly employees at the Company's Alton, Illinois facility are covered under a collective bargaining agreement with the International Association of Machinists and Aerospace Workers expiring in June 2001. The Company has experienced no strikes and believes its relations with its employees and their unions to be good. 9 10 ITEM 2. PROPERTIES. The Company's material operations are conducted through the following facilities, all of which are owned, except as noted:
LOCATION SQ. FT. SEGMENT PRINCIPAL FUNCTIONS -------- ------- ------- ------------------- Medina, Ohio................... 148,000 Friction / PM Manufacturing of friction products and powder metal components, sales and marketing, research and development, product engineering, and administration Brook Park, Ohio............... 111,000 Friction Manufacturing of friction products, sales and marketing, research and development, product engineering, and administration Orzinuovi, Italy............... 97,000 Friction Manufacturing of friction products, international sales and marketing, research and development, and administration Concord, Ontario, Canada (1)... 15,000 Friction Manufacturing of friction products, distribution and warehousing Solon, Ohio (2) ............... 58,000 Friction Research and development Campbellsburg, Indiana......... 75,000 PM Manufacturing of powder metal components, sales and marketing, product engineering, customer service and support, and administration Solon Mills, Illinois (1)...... 42,000 PM Manufacturing of powder metal components, sales and marketing, customer service and support Clearfield, Pennsylvania....... 40,000 PM Manufacturing of powder metal components, sales and marketing, product engineering, customer service and support and warehousing Alton, Illinois................ 37,000 Other Manufacturing of die-cast aluminum rotors, sales and marketing, customer service and support, and administration Akron, Ohio.................... 81,000 Other Manufacturing of metal stampings Cleveland, Ohio (3)............ 6,200 Principal executive offices
(1) Leased. (2) Approximately 20,000 square feet of the Solon facility is leased to a third party. (3) Leased. The Company is party to an expense sharing arrangement under which the Company shares the expenses of its corporate headquarters located in Cleveland with a company owned by Ronald E. Weinberg, the Chairman of the Executive Committee of the Company. In June 1996, the Company closed its manufacturing facility in LaVergne, Tennessee that it acquired in the SKW acquisition and consolidated its operations with existing Company facilities. The Company has placed the LaVergne facility on the market for sale and does not anticipate incurring any material gain or loss as a result of the sale. The Company's Italian facility is subject to certain security interests granted to its lenders. The Company believes that substantially all of its property and equipment is in good condition, adequately insured and suitable for their present and intended use. Several of the Company's facilities are operating at or near capacity. With its capital 10 11 expansion program, the Company believes that it will have sufficient capacity to accommodate its needs through 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ITEM 3. 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. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Hawk Corporation Class A Common Stock is traded on the New York Stock Exchange under the symbol "HWK." The stock price and dividend information in the table is presented beginning as of May 12, 1998, the date of the Company's initial public offering.
Quarterly Stock Prices and Dividends QUARTER HIGH LOW DIVIDEND ------- ---- --- -------- 1998 2nd $ 19.500 $ 17.313 $ 0.00 3rd $ 18.188 $ 8.750 $ 0.00 4th $ 12.500 $ 6.250 $ 0.00
Shareholders of record as of March 17, 1999 numbered 57. The Company estimates that an additional 900 shareholders own stock held for their accounts at brokerage firms and financial institutions. The Company does not intend to declare or pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company's business. In addition, the Company's 10.25% Senior Notes due 2003 and its credit facility prohibit the payment of cash dividends on the Class A common stock except upon compliance with certain conditions. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is set forth on page 13 of the 1998 Annual Report under the caption entitled "Financial Summary", which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is set forth on pages 14 through 18 of the 1998 Annual Report under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation," which is incorporated herein by reference. Any investor or potential investor must consider the risks that are set forth under the sub caption "Forward-Looking Statements" contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Page 18 of the 1998 Annual Report which is incorporated herein by reference. 11 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is set forth under the sub caption "Market Risk Disclosures" contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 17 of the 1998 Annual Report which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is set forth on pages 18 through 33 of the 1998 Annual Report under the captions entitled "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Shareholders' Equity (Deficit)," "Consolidated Statements of Consolidated Cash Flows," and "Notes to Consolidated Financial Statements," which is incorporated herein is incorporated by reference. The Report of Independent Auditors is set forth on Page 13 of this Form 10-K. 12 13 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Hawk Corporation We have audited the accompanying consolidated balance sheets of Hawk Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawk Corporation and subsidiaries at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Cleveland, Ohio March 1, 1999 13 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated herein by reference to the Registrant's definitive Proxy Statement relating to its 1999 Annual Meeting of Stockholders (the "Proxy Statement"), under the captions "Board of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." This Proxy Statement will be filed with the SEC prior to April 30, 1999. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is contained under the caption "Executive Compensation and Other Information" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is contained under the caption "Principal Stockholders" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements The following consolidated financial statements of the Company included in the 1998 Annual Report are incorporated by reference in Item 8. The Report of Independent Auditors is set forth on page 13 of this report. (i) Consolidated Balance Sheets at December 31, 1998 and 1997 (page 19 of the 1998 Annual Report) (ii) Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (page 20 of the 1998 Annual Report) (iii) Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996 (page 21 of the 1998 Annual Report) (iv) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (page 22 of the 1998 Annual Report) (v) Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 (pages 23 through 34 of the 1998 Annual Report) 14 15 (b) Reports on Form 8-K: None. (c) Exhibits: 2.1 Stock Purchase Agreement, dated November 7, 1996, among the Company, Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation setting forth the terms of the Hutchinson acquisition (omitting certain exhibits and schedules setting forth the forms of opinions of counsel, relating to the purchase price adjustment mechanism and relating to the business of Houghton Acquisition Corporation d.b.a. Hutchinson Foundry Products Company, which the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 2.2 Asset Purchase Agreement, dated as of July 10, 1997, by and among the Company, Sinterloy, Inc. and Robert G. Sierks setting forth the terms of the Sinterloy acquisition (omitting the exhibits and schedules setting forth the form of various ancillary documents and relating to the business of Sinterloy, which the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Form 8-K as filed with the Securities and Exchange Commission (Reg. No.333-18433)) 3.1 Form of the Company's Second Amended and Restated Certificate of Incorporation (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535) 3.2 Form of the Company's Amended and Restated By-laws (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.1 Form of Rights Agreement between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.2 Indenture, dated as of November 27, 1996, by and among the Company, Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Hutchinson Products Corporation, and Bank One Trust Company, NA, as Trustee (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.5 Stockholders' Voting Agreement, effective as of November 27, 1996, by and among the Company, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.6 Letter agreement, dated January 5, 1998, amending the Stockholders' Voting Agreement, effective as of November 27, 1996, by and among the Company, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.7 Form of the Warrant Certificates, each dated June 30, 1995, issued by the Company in favor of each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P., and registered under the name CIG & Co. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 15 16 10.1 Employment Agreement, dated as of November 1, 1996, between the Company and Norman C. Harbert (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.2 Form of Amended and Restated Wage Continuation Agreement between the Company and Norman C. Harbert (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.3 Employment Agreement, dated as of November 1, 1996, between the Company and Ronald E. Weinberg (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.4 Employment Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.5 Consulting Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.6 Letter agreement, dated as of June 1997, amending the Employment Agreement and the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.7* Letter agreement, dated as of March 26, 1998, amending the Employment Agreement and the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel 10.8 Employment Agreement, dated January 2, 1997, between the Company and Timothy J. Houghton (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.9 Promissory Note, dated July 1, 1994, in the principal amount of $500,000, issued by the Company to Helco, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.10 Form of the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.11 Letter agreement, dated October 1, 1996, amending the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.12 Form of Convertible Promissory Note, dated January 2, 1997, in the aggregate principal amount of $1.5 million, issued by the Company to each of Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.13 Form of the Senior Subordinated Note and Warrant Purchase Agreements, each dated as of June 30, 1995, between the Company and each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (omitting certain annexes relating to the business of the Company and certain exhibits setting forth the form of various ancillary documents, including the form of Subordinated Notes included as Exhibit 10.24 thereto, the form of the Warrant Agreement included as Exhibit 10.25 thereto and the form of Subordinated Guarantee included as Exhibit 10.26 thereto, which omitted annexes and schedule the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.14 First Amendment to Note and Warrant Purchase Agreement, dated as of November 27, 1996, among the Company, Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.15 Form of the 12% Senior Subordinated Notes due June 30, 2005, each dated June 30, 1995, issued by the Company 16 17 to each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P., and registered under the name CIG & Co. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.16 Warrant Agreement, dated as of June 30, 1996, among the Company, Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (omitting the attachment setting forth the form of Warrant Certificate included as Exhibit 4.14 thereto) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.17 Form of Subordinated Guarantee Agreements, each dated as of June 30, 1995, made by each of Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and S.K. Wellman Acquisition, Inc. (n.k.a. S.K. Wellman Corp.) in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.18 Form of the First Amendment to Subordinated Guarantee Agreement, each dated as of November 27, 1996, made by each of Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and S.K. Wellman Corp in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.19 Form of Subordinated Guarantee Agreements, each dated as of November 27, 1996, made by each of Wellman Friction Products U.K. Corp. and Hutchinson Products Corporation in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.20 Credit Agreement, dated as of May 1, 1998, among the Company and KeyBank National Association, as Swing Line Lender, Administrative Agent and as Syndication Agent (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended June 30,1998 as filed with the Securities and Exchange Commission) 10.21 Subsidiary Guaranty, dated as of May 1, 1998, among the subsidiaries of the Company, as guarantors, and KeyBank National Association, as Administrative Agent (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended June 30,1998 as filed with the Securities and Exchange Commission) 13* Portions of the 1998 Annual Report to Shareholders incorporated herein by reference 21.1* Subsidiaries of the Registrant 23.1* Consent of Ernst & Young LLP 27* Financial Data Schedule -------------------------- * Filed herewith 17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Hawk Corporation By: /s/ THOMAS A. GILBRIDE -------------------------------- Thomas A. Gilbride Vice President - Finance Date March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- Chairman of the Board, Chief March 31, 1999 /s/ NORMAN C. HARBERT Executive Officer and Director - ------------------------------- (principal executive officer) Norman C. Harbert /s/ RONALD E. WEINBERG Chairman - Executive Committee, March 31, 1999 - ------------------------------- Treasurer and Director Ronald E. Weinberg (principal financial officer) /s/ THOMAS A. GILBRIDE Vice President - Finance March 31, 1999 - ------------------------------- (principal accounting officer) Thomas A. Gilbride /s/ BYRON S. KRANTZ Secretary and Director March 31, 1999 - ------------------------------- Byron S. Krantz /s/ PAUL R. BISHOP Director March 31, 1999 - ------------------------------- Paul R. Bishop /s/ DAN T. MOORE, III Director March 31, 1999 - ------------------------------- Dan T. Moore, III /s/ WILLIAM J. O'NEILL, JR. Director March 31, 1999 - ------------------------------- William J. O'Neill, Jr.
18 19 EXHIBIT INDEX 2.1 Stock Purchase Agreement, dated November 7, 1996, among the Company, Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation setting forth the terms of the Hutchinson acquisition (omitting certain exhibits and schedules setting forth the forms of opinions of counsel, relating to the purchase price adjustment mechanism and relating to the business of Houghton Acquisition Corporation d.b.a. Hutchinson Foundry Products Company, which the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 2.2 Asset Purchase Agreement, dated as of July 10, 1997, by and among the Company, Sinterloy, Inc. and Robert G. Sierks setting forth the terms of the Sinterloy acquisition (omitting the exhibits and schedules setting forth the form of various ancillary documents and relating to the business of Sinterloy, which the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Form 8-K as filed with the Securities and Exchange Commission (Reg. No.333-18433)) 3.1 Form of the Company's Second Amended and Restated Certificate of Incorporation (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535) 3.2 Form of the Company's Amended and Restated By-laws (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.1 Form of Rights Agreement between the Company and Continental Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.2 Indenture, dated as of November 27, 1996, by and among the Company, Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Hutchinson Products Corporation, and Bank One Trust Company, NA, as Trustee (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.5 Stockholders' Voting Agreement, effective as of November 27, 1996, by and among the Company, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 4.6 Letter agreement, dated January 5, 1998, amending the Stockholders' Voting Agreement, effective as of November 27, 1996, by and among the Company, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 4.7 Form of the Warrant Certificates, each dated June 30, 1995, issued by the Company in favor of each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P., and registered under the name CIG & Co. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.1 Employment Agreement, dated as of November 1, 1996, between the Company and Norman C. Harbert (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 19 20 10.2 Form of Amended and Restated Wage Continuation Agreement between the Company and Norman C. Harbert (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.3 Employment Agreement, dated as of November 1, 1996, between the Company and Ronald E. Weinberg (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 33-18433)) 10.4 Employment Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.5 Consulting Agreement, dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.6 Letter agreement, dated as of June 1997, amending the Employment Agreement and the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.7* Letter agreement, dated as of March 26, 1998, amending the Employment Agreement and the Consulting Agreement, each dated July 1, 1994, between Helsel, Inc. and Jess F. Helsel 10.8 Employment Agreement, dated January 2, 1997, between the Company and Timothy J. Houghton (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.9 Promissory Note, dated July 1, 1994, in the principal amount of $500,000, issued by the Company to Helco, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.10 Form of the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.11 Letter agreement, dated October 1, 1996, amending the Promissory Notes, each dated June 30, 1995, issued by each of Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and Douglas D. Wilson to the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.12 Form of Convertible Promissory Note, dated January 2, 1997, in the aggregate principal amount of $1.5 million, issued by the Company to each of Timothy Houghton, CFB Venture Fund II, L.P., MorAmerica Capital Corporation, Community Investment Partners II, L.P. and St. Louis Community Foundation (Incorporated by reference to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535)) 10.13 Form of the Senior Subordinated Note and Warrant Purchase Agreements, each dated as of June 30, 1995, between the Company and each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (omitting certain annexes relating to the business of the Company and certain exhibits setting forth the form of various ancillary documents, including the form of Subordinated Notes included as Exhibit 10.24 thereto, the form of the Warrant Agreement included as Exhibit 10.25 thereto and the form of Subordinated Guarantee included as Exhibit 10.26 thereto, which omitted annexes and schedule the Company undertakes to furnish supplementally to the Commission upon request) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.14 First Amendment to Note and Warrant Purchase Agreement, dated as of November 27, 1996, among the Company, Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 20 21 10.15 Form of the 12% Senior Subordinated Notes due June 30, 2005, each dated June 30, 1995, issued by the Company to each of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P., and registered under the name CIG & Co. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.16 Warrant Agreement, dated as of June 30, 1996, among the Company, Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (omitting the attachment setting forth the form of Warrant Certificate included as Exhibit 4.14 thereto) (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.17 Form of Subordinated Guarantee Agreements, each dated as of June 30, 1995, made by each of Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and S.K. Wellman Acquisition, Inc. (n.k.a. S.K. Wellman Corp.) in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.18 Form of the First Amendment to Subordinated Guarantee Agreement, each dated as of November 27, 1996, made by each of Friction Products Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and S.K. Wellman Corp in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.19 Form of Subordinated Guarantee Agreements, each dated as of November 27, 1996, made by each of Wellman Friction Products U.K. Corp. and Hutchinson Products Corporation in favor of Connecticut General Life Insurance Company and CIGNA Mezzanine Partners III, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-18433)) 10.20 Credit Agreement, dated as of May 1, 1998, among the Company and KeyBank National Association, as Swing Line Lender, Administrative Agent and as Syndication Agent (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended June 30,1998 as filed with the Securities and Exchange Commission) 10.21 Subsidiary Guaranty, dated as of May 1, 1998, among the subsidiaries of the Company, as guarantors, and KeyBank National Association, as Administrative Agent (Incorporated by reference to the Company's Form 10-Q for the quarterly period ended June 30,1998 as filed with the Securities and Exchange Commission) 13* Portions of the 1998 Annual Report to Shareholders incorporated herein by reference 21.1* Subsidiaries of the Registrant 23.1* Consent of Ernst & Young LLP 27* Financial Data Schedule ----------------------- Filed herewith 21 EX-10.7 2 EXHIBIT 10.7 1 Exhibit 10.7 March 26, 1998 Mr. Jess F. Helsel Aka J.F. Helsel Box 477, RFD No. 3 Salem, Indiana 47167 RE:AGREEMENTS Dear Jess: This will confirm the agreements we have reached concerning the continuing relationship between you and Helsel, Inc. As you know, there is an existing "Employment Agreement" between you and Helsel, Inc., a Delaware corporation (Buyer"), which was entered into at the time of the Buyer's acquisition of Helsel, Inc., an Indiana corporation (the "Company"). That Employment Agreement was dated July 1, 1994. There is also a "Consulting Agreement" of the same date between the same parties, pursuant to which you were engaged as a consultant for a period of four years, commencing on the date of termination of the Employment Agreement. There is also an agreement signed on August 13, 1997 extending your Employment Period for one year through June 30, 1998. We have reached agreement on several changes. First, with respect to the Employment Agreement, the "Employment Period" (as defined therein) will be extended, for a period of six months, from July 1, 1998 through December 31, 1998. Your Base Salary will be adjusted to the rate of $160,000 per year effective on the pay period beginning March 30, 1998. The Annual Bonus for this extension will be computed in the manner described in Section 2(b) of the Employment Agreement, except that it will be an amount equal to ten percent (10%) of the amount by which Buyer's earnings before interest, income taxes, depreciation, and amortization for the calendar year ending December 31, 1998 exceed $7,000,000. In addition, where the Employment Agreement describes your position as President of Buyer and sets forth your duties in that position, and later refers to your term as President and otherwise refers to you as President, we have agreed that Woodrow Haddix will become President on March 26, 1998 and therefore your title and duties will change and that your primary efforts will be to assist in the transition in whatever ways may be necessary and appropriate, including introducing the Mr. Haddix to customers, orienting him to the company, etc. You will also have continuing involvement with Buyers acquisition and integration projects such as the 2 HELSEL, INC. Mr. Jess. F. Helsel March 26, 1998 Page 2 current Sinterloy integration and several potential acquisitions. In addition, we would expect to utilize your talents in whatever ways may be beneficial to the company during the balance of the year. Upon Mr. Haddix's appointment as President, you will become Chairman of Helsel, Inc. with continuing reporting responsibility to Hawk Corporation's Executive Vice President. Except as set forth in this letter, each and every other term of the Employment Agreement shall remain in full force and effect through December 31, 1998. We have also agreed to some changes to the Consulting Agreement. First, the "Consulting Period" (as defined therein) shall consist of a period of four years commencing on January 1, 1999 and terminating at the close of business on December 31, 2002. The rate of compensation shall be the same as set forth in paragraph 4 of the Consulting Agreement, except that the first payment shall be due with the first quarter ending March 31, 1999. Each and every other term of the Consulting Agreement shall remain in full force and effect. I trust that the foregoing accurately sets forth the changes to which we have agreed. If so, please acknowledge your agreement by signing and dating the attached copy of this letter, and then return it to me at your earliest convenience. Sincerely, /s/ Jeffery H. Berlin ---------------------------- Jeffrey H. Berlin AGREED AND ACKNOWLEDGED: /S/ Jess F. Helsel - ------------------ Jess F. Helsel March 26, 1998 EX-13 3 EXHIBIT 13 1 Exhibit 13 (Information from pages 13 through 35 of the Company's 1998 Annual Report to Shareholders) FINANCIAL SUMMARY HAWK CORPORATION The selected financial data has been derived from, and should be read in conjunction with, the related audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included in this Annual Report.
(In Millions, Except Per Share Data) FOR THE YEAR 1994 1995 1996 1997 1998 ================================================================================================================== INCOME STATEMENT DATA: Net sales $ 41.4 $ 84.6 $124.0 $159.1 $182.1 Cost of sales 26.8 61.1 91.9 113.7 123.7 - ------------------------------------------------------------------------------------------------------------------ Gross profit 14.6 23.5 32.1 45.4 58.4 Income from operations 7.4 10.0 9.8 22.1 32.8 Income (loss) before income taxes, minority interest and extraordinary charge 4.3 2.8 (1.1) 6.6 21.9 Income taxes 1.8 1.6 0.8 3.7 9.7 Minority interest 0.2 0.4 -- -- -- Income (loss) before extraordinary charge 2.3 0.8 (1.9) 2.9 12.2 Extraordinary charge (1) -- -- 1.2 -- 3.1 - ------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 2.3 $ 0.8 $ (3.1) $ 2.9 $ 9.1 Preferred stock dividend requirements (0.3) (0.3) (0.2) (0.3) (0.3) Income (loss) before extraordinary item applicable to common shareholders $ 2.0 $ 0.5 $ (2.1) $ 2.6 $ 11.9 Net income (loss) applicable to common shareholders $ 2.0 $ 0.5 $ (3.3) $ 2.6 $ 8.8 Earnings (loss) per share: Basic: Earnings (loss) before extraordinary charge $ .66 $ .11 $ (.45) $ .55 $ 1.59 Extraordinary charge -- -- (.26) -- (.41) - ------------------------------------------------------------------------------------------------------------------ Basic earnings (loss) per share $ .66 $ .11 $ (.71) $ .55 $ 1.18 ================================================================================================================== Diluted: Earnings (loss) before extraordinary charge $ .54 $ .09 $ (.45) $ .45 $ 1.51 Extraordinary charge -- -- (.26) -- (.39) - ------------------------------------------------------------------------------------------------------------------ Diluted earnings (loss) per share $ .54 $ .09 $ (.71) $ .45 $ 1.12 ================================================================================================================== OTHER DATA: Depreciation and amortization $ 2.5 $ 5.5 $ 8.4 $ 10.5 $ 11.5 Capital expenditures (including capital leases) 1.9 3.8 10.3 9.6 15.2 (In Millions) DECEMBER 31 1994 1995 1996 1997 1998 ================================================================================================================== BALANCE SHEET DATA: Cash and cash equivalents $ 0.7 $ 0.8 $ 25.8 $ 4.4 $ 14.3 Working capital (deficit) (4.1) 15.6 48.7 28.8 39.9 Property, plant and equipment, net 10.2 39.5 44.1 52.5 64.3 Total assets 43.6 127.4 158.4 173.1 203.4 Total long-term debt 26.7 94.9 129.2 132.1 102.5 Shareholders' equity (deficit) 5.9 3.9 1.2 (2.2) 64.4
(1)Reflects premium paid on partial redemption of Senior Notes and write-off of deferred financing costs in conjunction with the Company's initial public offering, net of $2.3 in income taxes in 1998 and write-off of deferred financing costs, net of $0.8 in income taxes in 1996. [13 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Management's discussion and analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, which may cause actual results to differ materially from those expressed in the forward-looking statements. Hawk operates primarily in two reportable segments: Friction Products ("Friction") and Powder Metal ("PM"). The Company's friction products are made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers. Friction products are the replacement elements used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. Friction products manufactured by the Company include friction linings for use in brakes, transmissions and clutches in aerospace, construction, agricultural, truck and specialty vehicle markets. The Company's powder metal components are made from formulations of composite powder metal alloys. The PM segment manufactures a variety of components for use in fluid power, truck, lawn and garden, construction, agriculture, home appliance, automotive and office equipment markets.
(Millions of Dollars) Year Ended December 31 1998 1997 1996 ========================================================================== Net sales $ 182.1 $ 159.1 $ 124.0 Cost of sales 123.7 113.7 91.9 - -------------------------------------------------------------------------- Gross profit 58.4 45.4 32.1 Income from operations 32.8 22.1 9.8 Income (loss) before income taxes and extraordinary charge 21.9 6.6 (1.1) Income taxes 9.7 3.7 .8 Income (loss) before extraordinary charge 12.2 2.9 (1.9) Extraordinary charge 3.1 -- 1.2 - -------------------------------------------------------------------------- NET INCOME (LOSS) $ 9.1 $ 2.9 $ (3.1) - -------------------------------------------------------------------------- NET SALES BY SEGMENT: Friction Products $ 109.6 $ 107.7 $ 94.0 Powder Metal 53.5 31.4 20.7 Other 19.0 20.0 9.3 - -------------------------------------------------------------------------- Total $ 182.1 $ 159.1 $ 124.0 ==========================================================================
RESULTS OF OPERATIONS In 1998, Hawk Corporation experienced a 213.8 percent increase in net income over the prior year. This increase is primarily attributable to strong growth in PM segment sales, which increased 70.4 percent from 1997 levels primarily due to the acquisition of Sinterloy in August 1997 and Clearfield in June 1998. Sales gains in most of the markets served by the Company's Friction segment were offset by a softening of sales to the agricultural markets. The Company is anticipating slight growth for 1999 as growth in the industrial markets served by the Company is expected to slow from the pace achieved in 1998. Additionally, the Company expects sales to the agricultural market to continue to be soft throughout 1999. Sales will also be adversely affected by the loss of a customer in the PM segment, which is expected to move the majority of its production and sourcing offshore during 1999. The acquisition of Allegheny Powder Metallurgy, Inc. ("Allegheny") in February 1999 will contribute to net sales in 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net Sales. Consolidated sales for 1998 were $182.1 million, an increase of $23.0 million or 14.5 percent over 1997. The largest increase in sales came from the PM segment, with 1998 sales exceeding 1997 sales by $22.1 million, or 70.4 percent. The sales increase was primarily attributable to the acquisition of Sinterloy in August 1997 and Clearfield in June 1998 as well as sales gains in the Company's other PM businesses. Sales in 1998 from the Sinterloy and Clearfield acquisitions represent a $16.8 million increase over 1997 sales contributed by Sinterloy. This increase represents 76.0 percent of the total increase in the 1998 PM segment sales. 14] 3 The Company experienced strong demand in all of its major PM product lines during 1998, including the lawn and garden, fluid power, truck and office equipment markets. Sales in the Friction segment were $109.6 million in 1998, an increase of 1.8 percent over 1997. Sales increases in the aerospace, construction and specialty markets served by the Friction segment were offset by declines in the agricultural market. Gross Profit. Gross profit increased $13.0 million to $58.4 million during 1998, a 28.6 percent increase over gross profit of $45.4 million in 1997. The gross profit margin increased to 32.1 percent in 1998 from 28.5 percent in the comparable period in 1997. The increase in margins occurred in both the Friction and PM segments. In the Friction segment, the Company benefited from favorable product mix and efficiencies realized from the capital expenditure and the friction facility consolidation programs undertaken by the Company. In the PM segment, the Company benefited from both favorable product mix and volume increases experienced by the PM manufacturing facilities. Selling, Technical and Administrative Expenses. Selling, technical and administrative ("ST&A") expenses increased $2.1 million, or 10.6 percent, from $19.9 million during 1997 to $22.0 million in 1998. As a percentage of net sales, ST&A declined to 12.1 percent of sales in 1998 from 12.5 percent of sales in 1997. The decline in ST&A expenses resulted from sales volume increases in 1998 without a corresponding increase in costs incurred by the Company. The Company spent $3.2 million or 1.8 percent of its net sales on product research and development costs compared to $3.1 million in 1997. Income from Operations. Income from operations increased $10.7 million, or 48.4 percent, from $22.1 million in 1997 to $32.8 million in 1998. Income from operations as a percentage of net sales increased to 18.0 percent in 1998 from 13.9 percent in 1997, reflecting the full benefits achieved from the consolidation of facilities, the acquisitions of Sinterloy and Clearfield, increased sales and favorable product mix. Interest Expense. Interest expense decreased $3.4 million, or 22.2 percent, to $11.9 million in 1998 from $15.3 million in 1997. The decrease is attributable to lower debt levels from the repayment of debt with proceeds from the Company's initial public offering. The Company also benefited from lower interest rates on its debt during the year. Income Taxes. The provision for income taxes increased $6.0 million to $9.7 million in 1998 from $3.7 million in 1997 because of the increase in pre-tax income. The decrease in the Company's effective tax rate in 1998 is due primarily to a change in Italian tax law, which required taxes previously paid on income to be paid on wages. Accordingly, the expense for this portion of the tax is reported in the Company's cost of sales. An analysis of changes in income taxes and the effective tax rate of the Company are presented in the accompanying consolidated financial statements. Extraordinary Charge. In 1998, the Company recorded an extraordinary charge of $3.1 million (net of $2.3 million of taxes) in prepayment premiums with the repayment of $35.0 million of the Company's 10 1/4% Senior Notes due 2003 (the "Senior Notes") and the write-off of deferred financing costs associated with the redemption of all of the $30.0 million of the Company's 12% Senior Subordinated Notes (the "Senior Subordinated Notes"). Net Income. As a result of the factors noted above, net income was $9.1 million in 1998, an increase of 213.8 percent, compared to net income of $2.9 million reported in 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales. Worldwide sales in 1997 exceeded $150 million for the first time in the Company's history, 28.3 percent above 1996. Net sales increased by $35.1 million to $159.1 million in 1997 from $124.0 million in 1996. The sales increase was attributable to the acquisitions of Hutchinson and Sinterloy and strong customer demand in all of the Company's product lines. Sales attributable to Hutchinson, which was acquired in January 1997, and Sinterloy, which was acquired in August 1997, were $11.3 million and $5.1 million, respectively, for 1997, or 46.7 percent of the net sales increase. Sales in the Friction segment increased by $13.7 million, or 14.6 percent, to $107.7 million in 1997 from $94.0 million in 1996. This increase was attributable to strength in the aerospace, construction, agriculture and truck markets served by the Company. 15] 4 MANAGEMENT'S DISCUSSION AND ANALYSIS HAWK CORPORATION Sales in the Company's PM segment increased by $10.7 million, or 51.7 percent, to $31.4 million in 1997 from $20.7 million in 1996. The Sinterloy acquisition accounted for 47.7 percent of the total increase in powder metal sales in 1997. Gross Profit. Gross profit increased $13.3 million to $45.4 million during 1997, a 41.4 percent increase over gross profit of $32.1 million during 1996. The gross profit margin increased to 28.5 percent during 1997 from 25.9 percent during 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, acquisitions of higher margin businesses in 1997, increased sales and favorable product mix. Selling, Technical and Administrative Expenses. ST&A expenses increased $4.4 million, or 28.4 percent, from $15.5 million during 1996 to $19.9 million during 1997. As a percentage of net sales, ST&A remained constant at 12.5 percent during 1997 and 1996. To enhance existing product lines, the Company spent $3.1 million in 1997 on product research and development, 19.2 percent above 1996 levels of $2.6 million. Income from Operations. Income from operations increased $12.3 million, or 125.5 percent, from $9.8 million in 1996 to $22.1 million in 1997. Income from operations as a percentage of net sales increased to 13.9 percent in 1997 from 7.9 percent in 1996, reflecting the benefits achieved from the consolidation of facilities, reduced plant consolidation expenses, acquisition of businesses in 1997, increased sales and favorable product mixes. Interest Expense. Interest expense increased $4.0 million, or 35.4 percent, to $15.3 million in 1997 from $11.3 million 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. Expenses from Canceled Public Offering. During the fourth quarter 1997, the Company recognized a one-time charge of $0.9 million for professional services incurred in connection with the cancellation of an initial public offering of its common stock. Income Taxes. The provision for income taxes increased $2.9 million to $3.7 million in 1997 (56.1 percent of pre-tax income) from $0.8 million in 1996, reflecting the increase in pre-tax income. An analysis of changes in income taxes and the effective tax rate of the Company are presented in the accompanying consolidated financial statements. Net Income (Loss). As a result of the factors noted above, net income was $2.9 million in 1997 compared to a loss of $3.1 million in 1996. LIQUIDITY AND CAPITAL RESOURCES The primary financing requirements of the Company are (1) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product development, (2) for making additional strategic acquisitions of complementary businesses, (3) for funding the Company's day-to-day working capital requirements and (4) to pay interest on, and to repay principal of, indebtedness. These requirements have been, and will continue to be, financed through a combination of cash flow from operations, borrowings under the Company's credit facility and the remaining proceeds from the May 1998 initial public offering of common stock. In May 1998, the Company received net proceeds of $54.5 million from an initial public offering of 3,500,000 shares of its common stock. Additionally, in May 1998, the Company entered into a new credit facility and received net proceeds of $35.0 million. The proceeds from the stock offering and credit facility were used primarily to: (1) repay a portion of the Senior Notes and redeem all of the Senior Subordinated Notes, which aggregated $65.0 million, plus accrued interest and prepayment premium and (2) redeem preferred stock of $1.7 million. In December 1998, the Board of Directors authorized a program to repurchase up to $5.0 million of the Company's common stock. The amount and timing of the share purchases will depend on market conditions, share price and other factors. In 1998, 281,800 shares were acquired under the program. Net cash provided by operating activities was $24.1 million in 1998 compared to $14.0 million in 1997. The increase in net income of $6.2 million and non-cash charges of $1.0 million, in addition to an improved working capital position at December 31, 1998, accounted for the increased 16] 5 operating cash flow. Net working capital was $39.9 million at year-end 1998 compared to $28.8 million at year-end 1997. Net cash used in investing activities was $22.6 million and $35.2 million in 1998 and 1997, respectively. The cash used in investing activities in 1998 consisted primarily of $9.1 million for business acquisitions and $14.1 million for the purchase of property, plant and equipment. In 1997, cash used in investing activities consisted of $27.1 million attributable to the acquisitions of Hutchinson and Sinterloy and $8.3 million for the purchase of property, plant and equipment. In order to achieve long-term growth prospects and enhance product quality, capital spending in 1999 is anticipated to be approximately $11.0 million. Net cash provided by financing activities was $8.5 million in 1998, primarily from the common stock offering and term loan proceeds. Proceeds of $87.7 million were used primarily to repay debt of $71.8 million and repurchase $2.0 million of its common stock. In 1997, net cash used in financing activities was $0.1 million primarily for payment of capital lease obligations and preferred stock dividends. The Company believes that cash flow from operating activities, borrowings under its credit facility and access to capital markets will be sufficient to satisfy its working capital, capital expenditure and debt requirements and to finance continued growth through acquisitions for the next twelve months. Market Risk Disclosures. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. Approximately 31.7 percent of the Company's long-term debt obligations bear interest at a variable rate. In order to mitigate the risk associated with interest rate fluctuations, in June 1998, the Company entered into an interest rate swap with a notional amount of $35.0 million. At December 31, 1998, the notional amount was $32.5 million. The notional amount is used to calculate the contractual cash flow to be exchanged and does not represent exposure to credit loss. If this agreement were settled at December 31, 1998, the Company would pay approximately $0.6 million. Foreign Currency Exchange Risk. The Company currently does not hedge its foreign currency exposure and, therefore, has not entered into any forward foreign exchange contracts to hedge foreign currency transactions. The Company has operations outside the United States with foreign-currency denominated assets and liabilities, primarily denominated in Italian lira and Canadian dollars. Because the Company has foreign-currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The unhedged foreign currency balance sheet exposures as of December 31, 1998 are not expected to result in a significant impact on earnings or cash flows. YEAR 2000 READINESS Since 1998, the Company has been addressing Year 2000 readiness for both information technology and non-information technology systems with a corporate-wide initiative led by the Company's Manager of Information Technology. 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 plan. The Company is primarily using its own employees to achieve readiness in most of its manufacturing and operating systems. The Company is also using outside expertise to insure that specific systems are made Year 2000 ready. The Company's manufacturing facilities use minimal Year 2000 dependent non-information technology systems. The Company's investigation of these systems has not revealed any Year 2000 issues which cannot be addressed with supplier provided software upgrades. The Company is continuing to investigate any non-information technology systems for Year 2000 related problems. Each of the Company's operating units, in coordination with the Manager of Information Technology, has identified and communicated with the Company's key suppliers, distributors and customers about their Year 2000 readiness plans and progress. To date, a majority of the Company's material suppliers, distributors and customers have provided the Company with positive statements of Year 2000 readiness. 17] 6 MANAGEMENT'S DISCUSSION AND ANALYSIS HAWK CORPORATION The Company expects to have only limited expenditures related to Year 2000 issues, consisting principally of personnel costs incurred in the ordinary course of business. The Company expects that the costs of software and hardware replacements to make all of its technology systems Year 2000 compliant will be less than $0.3 million. The Company is in the process of developing a strategy to address issues which may result from any Year 2000 failures. These plans will likely result in some expenditures, including increased inventory to assure adequate levels of supply. The exact costs are not determinable at this time. A worst-case scenario could result in system failures, causing the disruption of operations, which would prohibit the Company from engaging in normal business activities and could result in a material adverse effect on the Company's business and results of operations. In 1998, the Company began to implement a replacement of its manufacturing and accounting software and hardware systems, which are Year 2000 compliant, in its Friction segment. As of December 31, 1998, the implementation was completed at its domestic friction locations, and it is expected to be completed at its foreign friction location in mid to late 1999. Implementation dates and costs of the Company's Year 2000 readiness program are subject to change based on new circumstances that may arise or new information becoming available that may change the Company's underlying assumptions or requirements. Because the Company's Year 2000 readiness program is not yet fully implemented, there can be no assurance that the Company will not incur material costs beyond those currently estimated by the Company. FORWARD-LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence in its prospects and strategies and its expectations about growth of existing markets and its ability to expand into new markets, to identify and acquire complementary businesses and to attract new sources of financing, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to: - - the effect of the Company's debt service requirements on funds available for operations and future business opportunities and the Company's vulnerability to adverse general economic and industry conditions and competition; - - the ability of the Company to continue to meet the terms of its credit facilities which contain a number of significant financial covenants and other restrictions; - - the effect of any future acquisitions by the Company on its indebtedness and on the funds available for operations and future business opportunities; - - the effect of competition by manufacturers using new or different technologies; - - the effect on the Company's international operations of unexpected changes in regulatory requirements, export restrictions, currency controls, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political and economic instability, fluctuations in currency exchange rates, difficulty in accounts receivable collection and potentially adverse tax consequences; - - the ability of the Company to successfully integrate the operations of Allegheny, or any future acquisitions, into the Company's existing businesses; - - the ability of the Company to negotiate new agreements, as they expire, with its unions representing certain of its employees, on terms favorable to the Company or without experiencing work stoppages; - - the effect of any interruption in the Company's supply of raw materials or a substantial increase in the price of any of the raw materials; - - the continuity of business relationships with major customers; - - changes in market conditions in the end-markets served by the Company, such as the softening experienced in the agricultural market; - - the effect of product mix on margins; and - - the ability of the Company's products to meet stringent Federal Aviation Administration criteria and testing requirements. These risks and others that are detailed in this Annual Report and in the Company's Form 10-K must be considered by any investor or potential investor in the Company. 18] 7 CONSOLIDATED BALANCE SHEETS HAWK CORPORATION
(Dollars in Thousands) December 31 1998 1997 =========================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 14,317 $ 4,388 Accounts receivable, less allowance of $400 in 1998 and $321 in 1997 25,056 25,746 Inventories: Raw materials and work-in-process 18,805 17,362 Finished products 6,334 4,721 - ----------------------------------------------------------------------------------------------------------- 25,139 22,083 Deferred income taxes 1,837 2,833 Other current assets 5,003 1,375 - ----------------------------------------------------------------------------------------------------------- Total current assets 71,352 56,425 Property, plant and equipment: Land 1,229 1,218 Buildings and improvements 13,698 10,877 Machinery and equipment 70,532 57,104 Furniture and fixtures 3,147 2,326 Construction in progress 4,636 1,914 - ----------------------------------------------------------------------------------------------------------- 93,242 73,439 Less accumulated depreciation 28,923 20,959 - ----------------------------------------------------------------------------------------------------------- Total property, plant and equipment 64,319 52,480 Other assets: Intangible assets 60,604 56,539 Net assets held for sale 3,604 3,604 Shareholder notes 1,010 1,675 Other 2,557 2,363 - ----------------------------------------------------------------------------------------------------------- Total other assets 67,775 64,181 TOTAL ASSETS $ 203,446 $ 173,086 =========================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 10,590 $ 10,369 Short-term borrowings 1,019 1,744 Accrued compensation 8,766 8,069 Other accrued expenses 4,944 5,494 Current portion of long-term debt 6,181 1,955 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 31,500 27,631 Long-term liabilities: Long-term debt 96,366 130,193 Deferred income taxes 9,251 6,322 Other 1,914 1,811 - ----------------------------------------------------------------------------------------------------------- Total long-term liabilities 107,531 138,326 Detachable stock warrants, subject to put option 9,300 Shareholders' equity (deficit): Preferred stock 1 Series D preferred stock, $.01 par value; an aggregate liquidation value of $1,530, plus any unpaid dividends with 9.8% cumulative dividend (1,530 shares authorized, issued and outstanding) 1 Class A common stock, $.01 par value; 75,000,000 shares authorized; 9,187,750 issued and 8,905,950 outstanding in 1998; 4,663,957 issued and outstanding in 1997 92 14 Class B common stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding Additional paid-in capital 54,645 1,964 Retained earnings (deficit) 12,310 (3,120) Accumulated other comprehensive loss (640) (1,030) Treasury stock, at cost, 281,800 shares (1,993) - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) 64,415 (2,171) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 203,446 $ 173,086 ===========================================================================================================
See notes to consolidated financial statements. [19 8 CONSOLIDATED STATEMENTS OF OPERATIONS HAWK CORPORATION
(Dollars in Thousands, Except Per Share Data) Year Ended December 31 1998 1997 1996 =================================================================================================== Net sales $ 182,131 $ 159,086 $ 123,997 Cost of sales 123,761 113,650 91,884 Gross profit 58,370 45,436 32,113 Expenses: Selling, technical and administrative expenses 22,020 19,916 15,468 Amortization of intangibles 3,532 3,397 2,806 Plant consolidation expense 50 4,028 - ---------------------------------------------------------------------------------------------------- Total expenses 25,552 23,363 22,302 Income from operations 32,818 22,073 9,811 Interest expense (11,883) (15,307) (11,270) Interest income 999 690 540 Expenses from canceled public offering (889) Other expense, net (31) (14) (174) - ---------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary charge 21,903 6,553 (1,093) Income taxes 9,690 3,679 789 - ---------------------------------------------------------------------------------------------------- Income (loss) before extraordinary charge 12,213 2,874 (1,882) Extraordinary charge--net of taxes of $2,276 in 1998 and $798 in 1996 3,079 1,196 - ---------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 9,134 $ 2,874 $ (3,078) =================================================================================================== Earnings (loss) per share: Basic: Earnings (loss) before extraordinary charge $ 1.59 $ .55 $ (.45) Extraordinary charge (.41) (.26) - ---------------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ 1.18 $ .55 $ (.71) =================================================================================================== Diluted: Earnings (loss) before extraordinary charge $ 1.51 $ .45 $ (.45) Extraordinary charge (.39) (.26) - ---------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ 1.12 $ .45 $ (.71) ===================================================================================================
See notes to consolidated financial statements. 20] 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) HAWK CORPORATION
Preferred Common Accumulated Stock Stock Additional Retained Other Common $.01 $.01 Paid-in Earnings Comprehensive Stock in (Dollars in Thousands) Par Value Par Value Capital (Deficit) Income (Loss) Treasury Total ================================================================================================================== Balance at January 1, 1996 $1 $14 $1,724 $2,330 $(121) $ 3,948 Net loss (3,078) (3,078) Other comprehensive income: Minimum pension liability (9) (9) Foreign currency translation 315 315 ------- Total comprehensive income (loss) (2,772) Merger of Hawk Holding Corp. and Hawk 240 240 Preferred stock dividend (226) (226) - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 1 14 1,964 (974) 185 1,190 Net income 2,874 2,874 Other comprehensive income: Minimum pension liability 337 337 Foreign currency translation (1,552) (1,552) ------- Total comprehensive income 1,659 Preferred stock dividend (320) (320) Adjustment to carrying value of detachable warrant (4,700) (4,700) - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 1 14 1,964 (3,120) (1,030) (2,171) Net income 9,134 9,134 Other comprehensive income: Foreign currency translation 390 390 ------- Total comprehensive income 9,524 Stock split 33 (33) Issuance of common stock in connection with initial public offering, net of issuance costs 35 54,450 54,485 Conversion of detachable warrants in connection with initial public offering 10 6,553 6,563 Preferred stock redemption (1,736) (1,736) Preferred stock dividend (257) (257) Repurchase of common stock $(1,993) (1,993) - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $1 $92 $54,645 $12,310 $(640) $(1,993) $64,415 ==================================================================================================================
See notes to consolidated financial statements. [21 10 CONSOLIDATED STATEMENTS OF CASH FLOWS HAWK CORPORATION
(Dollars in Thousands) YEAR ENDED DECEMBER 31 1998 1997 1996 =============================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 9,134 $ 2,874 $(3,078) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 11,496 10,497 8,418 Accretion of discount on debt 238 650 650 Deferred income taxes 3,161 1,660 352 Extraordinary charge, net of tax 3,079 1,196 Changes in operating assets and liabilities, net of acquired assets: Accounts receivable 2,546 (6,947) 524 Inventories (1,821) (963) (759) Other assets (3,636) (621) 4 Accounts payable (817) 1,971 (294) Other liabilities 697 4,868 (1,147) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 24,077 13,989 5,866 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of marketable securities (4,130) Sale of marketable securities 4,040 Business acquisitions (9,100) (27,058) Purchases of property, plant and equipment (14,084) (8,337) (8,275) Payments received on shareholder notes 665 163 162 - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (22,609) (35,232) (8,113) CASH FLOWS FROM FINANCING ACTIVITIES Payments on short-term debt (805) Proceeds from short-term debt 1,744 Proceeds from long-term debt 35,000 1,224 181,373 Payments on long-term debt (71,795) (2,226) (149,765) Deferred financing costs (850) (565) (4,678) Payments of preferred stock dividends (257) (320) (226) Net proceeds from issuance of common stock 52,749 Prepayment premium on early retirement of debt (3,588) Repurchase of common stock (1,993) Other 546 - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 8,461 (143) 27,250 Net increase (decrease) in cash and cash equivalents 9,929 (21,386) 25,003 Cash and cash equivalents at beginning of year 4,388 25,774 771 - ----------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $14,317 $ 4,388 $25,774 =============================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest $12,179 $14,265 $11,024 Cash payments for income taxes $ 6,310 $ 2,187 $ 1,153 Noncash investing and financing activities: Equipment purchased with capital leases $ 1,149 $ 1,306 $ 2,019 ===============================================================================================
22] 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION 1] BASIS OF PRESENTATION The consolidated financial statements of Hawk Corporation and its wholly owned subsidiaries also include, effective January 2, 1997, the accounts of Hutchinson Products Corporation (Hutchinson); effective August 1, 1997, the accounts of Sinterloy Corporation (Sinterloy); and, effective June 1, 1998, the accounts of Clearfield Powdered Metals, Inc. (Clearfield) (collectively, the Company). See Note 3. All significant intercompany accounts and transactions have been eliminated in the accompanying financial statements. Certain 1996 and 1997 amounts have been reclassified to conform with the 1998 presentation. The Company, through its business segments, designs, engineers, manufactures and markets specialized components, used in a wide variety of aerospace, industrial and commercial applications. In May 1998, the Company completed an initial public offering ("IPO") of 3,500,000 shares of common stock at an offering price to the public of $17.00 per share. See Note 6. 2] SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The Company principally uses either the straight-line or the unit method of depreciation for financial reporting purposes based on annual rates sufficient to amortize the cost of the assets over their estimated useful lives (3 to 40 years). Accelerated methods of depreciation are used for federal income tax purposes. INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method over periods ranging from 3 to 40 years. The ongoing value and remaining useful life of intangible assets are subject to periodic evaluation, and the Company currently expects the carrying amounts to be fully recoverable. If events and circumstances indicate that intangible assets might be impaired, an undiscounted cash flows methodology would be used to determine whether an impairment loss should be recognized. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at weighted average exchange rates. Gains and losses from transactions are included in results of operations. Gains and losses resulting from translation are included in accumulated other comprehensive loss, a component of shareholders' equity. REVENUE RECOGNITION Revenue from the sale of the Company's products is recognized upon shipment to the customer. Costs and related expenses to manufacture the products are recorded as costs of sales when the related revenue is recognized. SIGNIFICANT CONCENTRATIONS The Company provides credit, in the normal course of its business, to original equipment and after-market manufacturers. The Company's customers are not concentrated in any specific geographic region. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses, which, when realized, have been within the range of management's expectations. PRODUCT RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. The Company's expenditures for product development and engineering were approximately $3,155 in 1998, $3,136 in 1997 and $2,639 in 1996. INCOME TAXES The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities in the balance sheet. The liability method requires that deferred income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial reporting bases of assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair value. Long-Term Debt (Including Current Portion) The fair values of the Company's publicly traded debentures, shown in the following table, are based on quoted market prices. The fair values of the Company's non-traded debt, also shown in the following table, are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. [23 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION
DECEMBER 31 1998 1997 ============================================================================ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------------------------------------------------- Publicly traded debt $ 65,000 $ 67,275 $100,000 $107,500 Non-traded debts (including capital leases) $ 37,547 $ 37,547 $ 32,148 $ 32,148 - ----------------------------------------------------------------------------
Interest Rate Swap The Company has entered into an interest rate swap primarily to hedge against interest rate risks. This agreement generally involves the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Counterparties to this agreement are major financial institutions. Management believes the risk of incurring losses related to credit risk is remote. The fair values for the Company's off balance-sheet instruments, shown in the following table, are based on pricing models or formulas using current assumptions for comparable instruments.
DECEMBER 31 1998 ============================================== Fair value $ (580) Notional amount $ 32,500 Number of agreements outstanding 1 - ----------------------------------------------
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires all derivatives to be recognized as either assets or liabilities in the balance sheet and measured at fair value. The Company does not anticipate that the adoption of the statement will have a significant effect on its results of operations or financial position. The Company expects to adopt the new statement effective January 1, 2000. In 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Cost for Computer Software Developed or Obtained for Internal Use. The SOP requires the Company to capitalize costs incurred in connection with developing or obtaining internal-use software. The Company adopted SOP 98-1 in 1998. The adoption did not have a material impact to the Company. In April 1998, the Accounting Standards Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities, which requires the expensing of start-up activities as incurred. The Company adopted SOP 98-5 in 1998. The adoption did not have a material impact to the Company. 3] BUSINESS ACQUISITIONS Effective January 2, 1997, the Company acquired all of the outstanding capital stock of Hutchinson Foundry Products Company for (1) $10,600 in cash; (2) $1,500 in 8% two-year convertible notes; and (3) contingent payments to be made by the Company if certain earnings targets are met. The acquisition was 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 $7,600 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 operations since the date of acquisition. Effective August 1, 1997, the Company acquired substantially all of 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 operations since the date of acquisition. Effective June 1, 1998, the Company acquired all the outstanding capital stock of Clearfield Powdered Metals, Inc. for $9,100 in cash and other consideration. The acquisition was 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 $8,300 is being amortized over 30 years and is included in intangible assets. The results of operations of Clearfield are included in the Company's consolidated statements of operations since the date of acquisition. The following unaudited pro forma consolidated results of operations give effect to the Sinterloy and Clearfield acquisitions as though they had occurred on January 1, 1997 and include certain adjustments, such as additional amortization expense as a result of goodwill and increased interest expense related to debt incurred for the acquisitions.
YEAR ENDED DECEMBER 31 1998 1997 ==================================================== Net sales $187,215 $178,346 - ---------------------------------------------------- Net income $ 9,457 $ 5,139 - ---------------------------------------------------- Income per share-basic $ 1.22 $ 1.03 - ---------------------------------------------------- Income per share-diluted $ 1.16 $ .85 - ----------------------------------------------------
Pro forma net sales and net income are not necessarily indicative of the net sales and net income that would have occurred had the acquisitions been made at the beginning of the year or the results that may occur in the future. 24] 13 4] INTANGIBLE ASSETS The components of intangible assets and related amortization periods are as follows:
December 31 1998 1997 ==================================================================== Product certifications (19 to 40 years) $ 20,820 $ 20,820 Goodwill (15 to 40 years) 49,545 41,055 Deferred financing costs (3 to 7 years) 4,693 5,611 Proprietary formulations and patents (10 years) 1,806 1,806 Other 831 806 - -------------------------------------------------------------------- 77,695 70,098 Accumulated amortization (17,091) (13,559) - -------------------------------------------------------------------- $ 60,604 $ 56,539 ====================================================================
Product certifications were acquired and valued based on the Company's position as a certified supplier of friction materials to the major manufacturers of commercial aircraft brakes. 5] FINANCING ARRANGEMENTS
DECEMBER 31 1998 1997 ===================================================== Term Loan $ 32,500 Senior Subordinated Notes $ 27,025 Senior Notes 65,000 100,000 Other 5,047 5,123 - ----------------------------------------------------- 102,547 132,148 Less current portion 6,181 1,955 - ----------------------------------------------------- $ 96,366 $130,193 =====================================================
In connection with the IPO in May 1998, the Company retired all of its outstanding $30,000 Senior Subordinated Notes, and incurred an extraordinary charge of $427 relating to the write-off of previously capitalized deferred financing costs. The Senior Subordinated Notes had detachable warrants to the lender, which terminated upon the closing of the Company's IPO and provided the lender the option to purchase 1,023,793 shares of the Company's common stock at a per share price of $.01. For financial reporting purposes, the carrying value of the warrants, including the put option, was classified as detachable stock warrant, subject to put option on the accompanying balance sheet. The warrant holders exercised the warrants on May 11, 1998 for 1,023,793 shares of the Company's common stock. As a result of the warrant termination, the corresponding carrying value of the warrants, less the par value of the common stock issued, including the put options, was reclassified as an addition to retained earnings. In November 1996, the Company issued $100,000 in Senior Notes ("Senior Notes") due on December 1, 2003, unless previously redeemed at the Company's option, in accordance with the terms of the Senior 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%. In March 1997, the Senior Notes were exchanged for notes registered with the Securities and Exchange Commission. In May 1998, concurrent with the IPO, the Company retired $35,000 of the then outstanding $100,000 Senior Notes and incurred extraordinary charges of $1,340 and $3,588 relating to the write-off of previously capitalized deferred financing costs and a prepayment premium on the early retirement of debt, respectively. The remaining $65,000 Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each of the direct and indirect wholly owned domestic subsidiaries of the Company (Guarantor Subsidiaries). See Note 14. In May 1998, the Company entered into a $35,000 unsecured term loan facility and replaced its previous $25,000 revolving credit facility with a $50,000 unsecured revolving credit facility. The term loan has quarterly maturities of $1,250, beginning September 30, 1998, with the remaining principal of $12,500 due on March 31, 2003. The revolving credit facility matures March 31, 2003. Interest is payable under both facilities, quarterly, at a variable rate based on a Eurodollar Rate, plus a margin, per annum or, at the Company's option, a variable rate based on the lending bank's prime rate. The margin is subject to increase or decrease based on achievement of certain financial covenants by the Company. The term loan and revolving credit facility require the Company to maintain certain conditions with respect to net worth and interest coverage ratios as defined in the agreement. There were no outstanding borrowings under the revolving credit facility at December 31, 1998. Aggregate principal payments due on long-term debt as of December 31, 1998 are as follows: 1999 - $6,181; 2000 - $6,507; 2001 - $6,457; 2002 - $5,451; 2003 - - $77,638; thereafter - $313. The Company's short-term borrowings represent advances under unsecured lines of credit. The average borrowing rate was 8% during 1998. Unused amounts under these lines total approximately $1,251 at December 31, 1998. 6] SHAREHOLDERS' EQUITY 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 9, 1998, the board of directors declared a 3.2299-for-one split of the Company's Class A and Class B common stock effective in the form of a stock dividend to holders of record on January 12, 1998. Accordingly, all numbers of common shares and per share data have been restated to reflect the stock split. In connection with the IPO, the Company redeemed all 1,375 shares of its outstanding, $.01 par value, Series A preferred stock, 351 shares of its outstanding, $.01 par value, Series B preferred stock and 7 shares of its outstanding, $.01 par value, Series C preferred stock. The remaining 351 and 1,182 issued and outstanding shares of Series B and C preferred stock, respectively, were converted into 1,530 shares of $.01 par [25 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION value, Series D preferred stock. Dividends on the Series D preferred stock are cumulative at a rate of 9.8%. Each share of Series D preferred stock is (1) entitled to a liquidation preference equal to $1 per share plus any accrued or unpaid dividends, (2) not entitled to vote, except in certain circumstances, and (3) redeemable in whole, at the option of the Company, for $1 per share plus all accrued dividends to the date of redemption. The Company also has 100,000 authorized shares of $.01 par value, Series E preferred stock, of which no shares are issued or outstanding. Each share of Series E preferred stock is (1) not redeemable and is entitled to dividends in the amount of 1,000 times the per share dividend received by the holders of common stock, (2) entitled to 1,000 votes per share, and (3) entitled to a liquidation right of 1,000 times the aggregate amount distributed per share to the holder of common stock. On November 13, 1997, the board of directors declared a dividend of one Series E preferred share purchase right (a Right) for each outstanding share of common stock. The dividend was payable to the stockholders of record as of January 16, 1998, and with respect to common stock, issued thereafter until the Distribution Date, as defined in the Rights Agreement, and in certain circumstances, with respect to common stock issued after the Distribution Date. Except as set forth in the Rights Agreement, each Right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series E preferred stock at a price of $70 per one one-thousandth share of a Series E preferred stock, subject to adjustment. 7] EMPLOYEE STOCK OPTION PLAN In 1997, the Company established the Hawk Corporation 1997 Stock Option Plan. Under this plan, the Company may grant options to officers and other key employees to purchase an aggregate of 700,000 shares of Class A common stock. During 1998, the Company granted stock options to purchase an aggregate of 343,200 shares at exercise prices representing the fair market values of such shares at the date of grant. The options vest ratably over a five-year period. No options were exercisable at December 31, 1998. The following table summarizes the stock option activity during the one-year period ending December 31, 1998:
================================================================================================================== OPTIONS OPTIONS WEIGHTED OUTSTANDING OUTSTANDING WEIGHTED AVERAGE AT AT AVERAGE REMAINING RANGE OF JANUARY 1, DECEMBER 31, EXERCISE CONTRACTUAL EXERCISE 1998 GRANTED EXERCISED CANCELED 1998 PRICE LIFE PRICES ================================================================================================================== 0 24,500 0 24,500 $ 8.75 9.70 $ 7.48 - $ 9.35 0 318,700 0 3,000 315,700 $17.11 9.10 $16.83 - $18.70 - -------------------------------------------------------------------------------------------- 0 343,200 0 3,000 340,200 $16.50 9.10 - --------------------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been reflected in the accompanying consolidated financial statements related to the stock options issued pursuant to this plan. If the Company had elected to recognize compensation expense based on the fair value at the grant dates for awards under this plan consistent with the method prescribed by SFAS No. 123, net income and net income per share would have been changed to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31 1998 ========================================= Net income: As reported $9,134 Pro forma $8,276 Earnings per share (diluted): As reported $ 1.12 Pro forma $ 1.01 - -----------------------------------------
The weighted average fair value of stock options granted during 1998 was $8.92. The fair value of the options granted used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED DECEMBER 31 1998 ==================================================== Dividend yield 0% Expected volatility 35.0% Risk free interest rate 5.8% Expected average holding period 7 years - ----------------------------------------------------
8] EMPLOYEE BENEFITS In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. This statement does not change the recognition or measurement of pension or postretirement benefit plans, but standardizes disclosure requirements for pensions and other postretirement benefits, eliminates certain disclosures and requires additional information. The Company adopted SFAS No. 132 as of December 31, 1998. Accordingly, all disclosures for prior periods shown have been restated to conform to the disclosure requirements under SFAS No. 132. 26] 15 The Company has several defined benefit pension plans that cover certain employees. Benefits payable are based primarily on compensation and years of service or a fixed annual benefit for each year of service. Certain hourly employees are also covered under collective bargaining agreements. The Company funds the plans in amounts sufficient to satisfy the minimum amounts required under ERISA. The components of the defined benefit pension plans are as follows:
DECEMBER 31 1998 1997 ==================================================================== Change in benefit obligation: Benefit obligation at beginning of year $11,059 $ 9,852 Service cost 449 404 Interest cost 905 745 Actuarial (gains) losses 1,491 75 Business acquisitions 525 Plan amendments 140 Foreign currency exchange rate charges (56) (9) Benefits paid (628) (533) - -------------------------------------------------------------------- BENEFIT OBLIGATION AT END OF YEAR $13,360 $11,059 ==================================================================== Change in plan assets: Fair value of plan assets at beginning of year $13,960 $10,937 Actual return on plan assets 2,117 2,193 Business acquisitions 782 Foreign currency exchange rate charges (106) (21) Company contributions 587 602 Benefits paid (628) (533) - -------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $15,930 $13,960 ==================================================================== Funded status of the plans $ 2,570 $ 2,901 Unrecognized net actuarial gains (714) (1,367) Unrecognized prior service cost 409 320 - -------------------------------------------------------------------- NET PREPAID BENEFIT COST $ 2,265 $ 1,854 ====================================================================
Amounts recognized in the balance sheet consist of the following:
DECEMBER 31 1998 1997 ==================================================== Prepaid benefit cost $ 2,210 $ 1,959 Accrued benefit liability (208) (225) Intangible asset 263 120 - ---------------------------------------------------- Net amount recognized $ 2,265 $ 1,854 ====================================================
Amounts applicable to the Company's underfunded pension plans at December 31 are as follows:
DECEMBER 31 1998 1997 =============================================================== Projected benefit obligation $2,936 $2,373 Accumulated benefit obligation 2,936 2,373 Fair value of plan assets 2,734 2,153 Amounts recognized as accrued benefit liabilities 202 219 Amounts recognized as intangible assets 263 120 - ---------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996 ======================================================================= Components of net periodic pension cost: Service cost $ 449 $ 404 $ 400 Interest cost 905 744 727 Expected return on plan assets (1,257) (1,043) (900) Amortization of prior service cost 51 4 5 Recognized net actuarial loss (3) 26 36 - ----------------------------------------------------------------------- $ 145 $ 135 $ 268 =======================================================================
The plan's assets are primarily invested in fixed income and equity securities. In addition, certain of the defined benefit plans also contain investments in the Company's stock. As of December 31, 1998, 60,000 shares of the Company's stock had been purchased at a cost of $717. The market value as of December 31, 1998 was $503. The following assumptions were used in accounting for the defined benefit plans:
1998 1997 1996 ============================================================================ Used to compute the projected benefit obligation as of December 31: Weighted average discount rate 7.00% 7.90% 7.90% Annual salary increase 3.00 3.00 3.00 Weighted average expected long-term rate of return on plan assets for the year ended December 31 9.50 9.50 9.60 - ----------------------------------------------------------------------------
The Company also sponsors several defined contribution plans which provide voluntary employee contributions and, in certain plans, matching and discretionary employer contributions. Expenses associated with these plans were approximately $844 in 1998, $786 in 1997 and $690 in 1996. 9] LEASE OBLIGATIONS The Company has capital lease commitments for buildings and equipment. Future minimum annual rentals are: 1999 - $1,065; 2000 - $850; 2001 - $784; 2002 - - $444; 2003 - $142; and thereafter - $237. Amount representing interest is $603. Total capital lease obligations are included in other long-term debt. Amortization of assets recorded under capital leases is included with depreciation expense. The Company leases certain office and warehouse facilities and equipment under operating leases. Rental expense was approximately $939 in 1998, $875 in 1997 and $609 in 1996. Future minimum lease commitments under these agreements that have an original or existing term in excess of one year as of December 31, 1998 are as follows: 1999 - $756; 2000 - $591; 2001 - $536; 2002 - $432; 2003 - $137; and thereafter - $163. [27 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION 10] INCOME TAXES The provision for income taxes, including the effect of the extraordinary charge, consists of the following:
YEAR ENDED DECEMBER 31 1998 1997 1996 =================================================================== Current: Federal $ 3,028 $ 1,483 $(1,422) State and local 626 325 129 Foreign 599 211 932 - ------------------------------------------------------------------- 4,253 2,019 (361) Deferred: Federal 2,675 1,266 299 State 287 225 53 Foreign 199 169 - ------------------------------------------------------------------- 3,161 1,660 352 TOTAL INCOME TAXES (CREDIT) $ 7,414 $ 3,679 $ (9) ===================================================================
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1998 1997 ======================================================== Deferred tax assets: Accrued vacation $ 470 $ 403 AMT and net operating loss carryforwards 1,075 Other accruals 1,027 797 Foreign capital leases 1,614 1,741 Other 637 427 - -------------------------------------------------------- Total deferred tax assets 3,748 4,443 Deferred tax liabilities: Tax over book depreciation and amortization 8,569 5,887 Foreign leased property 2,072 1,473 Other 521 572 - -------------------------------------------------------- Total deferred tax liabilities 11,162 7,932 NET DEFERRED TAX LIABILITIES $ 7,414 $ 3,489 ========================================================
The provision for income taxes, including the tax effect of the extraordinary charge, differs from the amounts computed by applying the federal statutory rate as follows:
DECEMBER 31 1998 1997 1996 ===================================================================== Income tax expense (credit) at federal statutory rate 35.0% 34.0% (34.0)% State and local tax, net of federal tax benefit 3.6 5.5 3.9 Nondeductible goodwill amortization 1.8 4.3 3.7 Adjustment to worldwide tax liability and other, net 4.4 12.3 26.4 - --------------------------------------------------------------------- Provision for income taxes 44.8% 56.1% 0.0% =====================================================================
Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, which may be offset by foreign tax credits, and withholding taxes payable to various foreign countries. 11] 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-year amounts have been restated to give effect to the stock split discussed in Note 6. Basic and diluted earnings per share are computed as follows:
YEAR ENDED DECEMBER 31 1998 1997 1996 ======================================================================== Income (loss) available to common shareholders: Income (loss) before extraordinary charge $12,213 $ 2,874 $(1,882) Less: Preferred stock dividends 257 320 226 - ------------------------------------------------------------------------ Income (loss) before extraordinary charge attributable to common shareholders $11,956 $ 2,554 $(2,108) ======================================================================== Net income (loss) $ 9,134 $ 2,874 $(3,078) Less: Preferred stock dividends 257 320 226 - ------------------------------------------------------------------------ Net income (loss) attributable to common shareholders $ 8,877 $ 2,554 $(3,304) ======================================================================== Weighted average shares: Basic: Basic weighted average shares 7,554 4,664 4,664 ======================================================================== Diluted: Basic from above 7,554 4,664 4,664 Effect of warrant conversion 368 1,024 Effect of note conversion and options 19 - ------------------------------------------------------------------------ Diluted weighted average shares 7,941 5,688 4,664 ======================================================================== Earnings (loss) per share: Basic: Earnings (loss) before extraordinary charge $ 1.59 $ .55 $ (.45) Extraordinary charge (.41) (.26) - ------------------------------------------------------------------------ Basic earnings (loss) per share $ 1.18 $ .55 $ (.71) ======================================================================== Diluted: Earnings (loss) before extraordinary charge $ 1.51 $ .45 $ (.45) Extraordinary charge (.39) (.26) - ------------------------------------------------------------------------ Diluted earnings (loss) per share $ 1.12 $ .45 $ (.71) ========================================================================
28] 17 12] RELATED PARTIES In July 1995, certain shareholders of the Company issued interest-bearing notes to the Company in the amount of $2,000, enabling them to repay certain indebtedness incurred by them with respect to an acquisition. The notes are due and payable on July 1, 2002 and bore interest at the prime rate plus 1.25% through September 30, 1996 and at the prime rate thereafter. The balance outstanding at December 31, 1998 is $1,000. 13] BUSINESS SEGMENTS 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 and descriptive information about operating segments. The Company adopted SFAS No. 131, effective December 31, 1998. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of the segment information. The Company operates in two primary business segments: friction products and powder metal. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on fundamental differences in their operations. The friction products segment engineers, manufactures and markets specialized components, used in a variety of aerospace, industrial and commercial applications. The Company, through this segment, is a worldwide supplier of friction components for brakes, clutches and transmissions. The powder metal segment engineers, manufactures and markets specialized components, used primarily in industrial applications. The Company, through this segment, targets three areas of the powder metal component marketplace: high precision components that are used in fluid power applications, large structural powder metal parts used in construction, agricultural and truck applications, and smaller, high-volume parts. The other segment consists of corporate and operating segments, which do not meet the quantitative thresholds for determining reportable segments. The operating segments include the manufacturing of die-cast aluminum rotors and a stamping operation. The information by segment is as follows:
YEAR ENDED DECEMBER 31 1998 1997 1996 ======================================================================= Revenues from external customers: Friction Products $ 109,624 $ 107,679 $ 94,039 Powder Metal 53,483 31,360 20,685 Other 19,024 20,047 9,273 - ----------------------------------------------------------------------- Consolidated $ 182,131 $ 159,086 $ 123,997 Depreciation and amortization: Friction Products $ 7,342 $ 7,184 $ 6,788 Powder Metal 3,160 2,145 1,310 Other 994 1,168 320 - ----------------------------------------------------------------------- Consolidated $ 11,496 $ 10,497 $ 8,418 Operating income: Friction Products $ 18,313 $ 13,236 $ 6,877 Powder Metal 13,359 7,193 3,272 Other 1,146 1,644 (338) - ----------------------------------------------------------------------- Consolidated $ 32,818 $ 22,073 $ 9,811 Extraordinary charge: Friction Products $ 1,939 $ 906 Powder Metal 740 200 Other 400 90 - ----------------------------------------------------------------------- Consolidated $ 3,079 $ 1,196 Capital expenditures: (including capital leases) Friction Products $ 10,817 $ 7,835 $ 6,592 Powder Metal 3,705 1,053 2,936 Other 711 755 766 - ----------------------------------------------------------------------- Consolidated $ 15,233 $ 9,643 $ 10,294 =======================================================================
DECEMBER 31 1998 1997 =============================================== Total assets: Friction Products $115,141 $111,333 Powder Metal 53,034 37,244 Other 35,271 24,509 - ----------------------------------------------- Consolidated $203,446 $173,086 ===============================================
Geographic information for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 -------------------------------------------------------------------------------------------------------- Domestic Foreign Domestic Foreign Domestic Foreign Operations Operations Total Operations Operations Total Operations Operations Total ================================================================================================================================= Net sales $ 160,099 $ 22,032 $182,131 $ 138,124 $ 20,962 $159,086 $ 104,262 $ 19,735 $123,997 Income from operations 31,238 1,580 32,818 21,416 657 22,073 7,326 2,485 9,811 Net income (loss) 8,761 373 9,134 3,079 (205) 2,874 (3,788) 710 (3,078) Total assets 179,879 23,567 203,446 153,033 20,053 173,086 140,746 17,695 158,441 - ---------------------------------------------------------------------------------------------------------------------------------
The Company has foreign operations in Canada and Italy. [29 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION 14] 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 or indirect wholly owned subsidiaries of the Company. The following supplemental consolidating condensed financial statements present: Consolidating condensed balance sheets as of December 31, 1998 and December 31, 1997, consolidating condensed statements of operations for the years ended December 31, 1998, 1997 and 1996 and consolidating condensed statements of cash flows for the years ended December 31, 1998, 1997 and 1996. Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada and Italy acquired in 1995) with their investments in subsidiaries accounted for using the equity method. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.
============================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ============================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 12,878 $ 46 $ 1,393 $ 14,317 Accounts receivable, net 18,399 6,657 25,056 Inventories, net 19,707 5,432 25,139 Deferred income taxes 1,388 449 1,837 Other current assets 2,003 2,071 929 5,003 - -------------------------------------------------------------------------------------------------------------- Total current assets 16,269 40,223 14,860 71,352 Investment in subsidiaries 791 6,127 $ (6,918) Inter-company advances, net 143,487 (1,309) (20) (142,158) Property, plant and equipment 56,082 8,237 64,319 Intangible assets 223 60,381 60,604 Other 1,010 6,784 490 (1,113) 7,171 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $161,780 $168,288 $23,567 $(150,189) $203,446 ============================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,189 $ 3,401 $ 10,590 Short-term borrowings 1,019 1,019 Accrued compensation $ 8 7,638 1,120 8,766 Other accrued expenses 1,171 3,384 389 4,944 Current portion of long-term debt 5,000 549 632 6,181 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 6,179 18,760 6,561 31,500 Long-term liabilities: Long-term debt 92,500 2,444 1,422 96,366 Deferred income taxes 8,150 417 684 9,251 Other 740 1,174 1,914 Inter-company advances, net 1,125 134,547 7,599 $(143,271) - -------------------------------------------------------------------------------------------------------------- Total long-term liabilities 101,775 138,148 10,879 (143,271) 107,531 Total liabilities 107,954 156,908 17,440 (143,271) 139,031 Detachable stock warrants, subject to put option Shareholders' equity 53,826 11,380 6,127 (6,918) 64,415 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $161,780 $168,288 $23,567 $(150,189) $203,446 ==============================================================================================================
30] 19
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR DECEMBER 31, 1997 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 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 (DEFICIT) $ 139,398 $ 155,422 $ 20,053 $(141,787) $ 173,086 ==================================================================================================================
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net sales $ 160,099 $ 22,032 $ 182,131 Cost of sales 105,817 17,944 123,761 - ------------------------------------------------------------------------------------------------------------------ Gross profit 54,282 4,088 58,370 Expenses: Selling, technical and administrative expenses $ (113) 19,625 2,508 22,020 Amortization of intangible assets 10 3,522 3,532 - ------------------------------------------------------------------------------------------------------------------ Total expenses (103) 23,147 2,508 25,552 - ------------------------------------------------------------------------------------------------------------------ Income from operations 103 31,135 1,580 32,818 Interest (income) expense, net (2,667) 13,059 492 10,884 Income from equity investees 9,643 373 $ (10,016) Other income (expense), net (95) (19) 83 (31) - ------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary charge 12,318 18,430 1,171 (10,016) 21,903 Income taxes 1,121 7,771 798 9,690 - ------------------------------------------------------------------------------------------------------------------ Income before extraordinary charge 11,197 10,659 373 (10,016) 12,213 Extraordinary charge, net of tax 2,063 1,016 3,079 - ------------------------------------------------------------------------------------------------------------------ NET INCOME $ 9,134 $ 9,643 $ 373 $ (10,016) $ 9,134 ==================================================================================================================
[31 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1997 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net sales $ 138,124 $ 20,962 $ 159,086 Cost of sales 96,390 17,260 113,650 - ------------------------------------------------------------------------------------------------------------------ Gross profit 41,734 3,702 45,436 Expenses: Selling, technical and administrative expenses 16,942 2,974 19,916 Amortization of intangible assets $ 8 3,318 71 3,397 Plant consolidation expense 50 50 - ------------------------------------------------------------------------------------------------------------------ Total expenses 8 20,310 3,045 23,363 - ------------------------------------------------------------------------------------------------------------------ (Loss) income from operations (8) 21,424 657 22,073 Interest expense 650 14,428 484 $ (255) 15,307 Income (loss) from equity investees 3,682 (205) (3,477) Expenses from canceled public offering 889 889 Other income (819) (110) (2) 255 (676) - ------------------------------------------------------------------------------------------------------------------ Income before income taxes 2,954 6,901 175 (3,477) 6,553 Income taxes 80 3,219 380 3,679 - ------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 2,874 $ 3,682 $ (205) $ (3,477) $ 2,874 ==================================================================================================================
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1996 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net sales $ 104,262 $ 19,735 $ 123,997 Cost of sales 76,232 15,652 91,884 - ------------------------------------------------------------------------------------------------------------------ Gross profit 28,030 4,083 32,113 Expenses: Selling, technical and administrative expenses 13,932 1,536 15,468 Amortization of intangible assets 2,744 62 2,806 Plant consolidation expense 4,028 4,028 - ------------------------------------------------------------------------------------------------------------------ Total expenses 20,704 1,598 22,302 - ------------------------------------------------------------------------------------------------------------------ Income from operations 7,326 2,485 9,811 Interest expense $ 650 10,578 369 $ (327) 11,270 (Loss) income from equity investees (2,422) 710 1,712 Other (income) expense (1,190) 24 473 327 (366) - ------------------------------------------------------------------------------------------------------------------ (Loss) income before income taxes and extraordinary charge (1,882) (2,566) 1,643 1,712 (1,093) Income taxes (credit) (144) 933 789 - ------------------------------------------------------------------------------------------------------------------ (Loss) income before extraordinary charge (1,882) (2,422) 710 1,712 (1,882) Extraordinary charge - write-off of deferred financing costs, net of income taxes (1,196) (1,196) - ------------------------------------------------------------------------------------------------------------------ NET (LOSS) INCOME $ (3,078) $ (2,422) $ 710 $ 1,712 $ (3,078) ==================================================================================================================
32] 21
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net cash provided by operating activities $ 3,873 $ 16,392 $ 3,812 $ 24,077 Cash flows from investing activities: Purchase of marketable securities (4,130) (4,130) Sale of marketable securities 4,040 4,040 Business acquisitions (9,100) (9,100) Purchase of property, plant and equipment (12,570) (1,514) (14,084) Payments received on shareholder notes 665 665 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (8,525) (12,570) (1,514) (22,609) Cash flows from financing activities: Payments on short-term debt (805) (805) Proceeds from long-term debt 35,000 35,000 Payments on long-term debt (67,500) (3,379) (916) (71,795) Deferred financing costs (850) (850) Payment of preferred stock dividend (241) (16) (257) Net proceeds from issuance of common stock 52,749 52,749 Prepayment premium on early retirement of debt (3,588) (3,588) Repurchase of common stock (1,993) (1,993) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 14,427 (4,245) (1,721) 8,461 - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 9,775 (423) 577 9,929 Cash and cash equivalents, at beginning of period 3,103 469 816 4,388 - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 12,878 $ 46 $ 1,393 $ 0 $ 14,317 ==================================================================================================================
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1997 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net cash provided by operating activities $ 5,131 $ 8,013 $ 845 $ 13,989 Cash flows from investing activities: Business acquisitions (27,058) (27,058) Purchase of property, plant and equipment (6,618) (1,719) (8,337) Other 163 163 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (26,895) (6,618) (1,719) (35,232) Cash flows from financing activities: Proceeds from short-term debt 1,744 1,744 Proceeds from long-term debt 1,150 74 1,224 Payments on long-term debt (1,150) (366) (710) (2,226) Deferred financing costs (565) (565) Payment of preferred stock dividend (320) (320) - ------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (320) (931) 1,108 (143) - ------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (22,084) 464 234 (21,386) Cash and cash equivalents, at beginning of period 25,187 5 582 25,774 - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 3,103 $ 469 $ 816 $ 0 $ 4,388 ==================================================================================================================
33] 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) HAWK CORPORATION
================================================================================================================== COMBINED COMBINED GUARANTOR NON-GUARANTOR YEAR ENDED DECEMBER 31, 1996 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================== Net cash provided by operating activities $ 96 $ 3,664 $ 2,106 $ 5,866 Cash flows from investing activities: Purchase of property, plant and equipment (6,247) (2,028) (8,275) Other 162 162 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (6,085) (2,028) (8,113) Cash flows from financing activities: Proceeds from borrowings of long-term debt 178,901 1,966 506 181,373 Payments on long-term debt (149,314) (164) (287) (149,765) Deferred financing costs (4,678) (4,678) Payment of preferred stock dividend (226) (226) Other 546 546 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 24,683 2,348 219 27,250 - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 24,779 (73) 297 25,003 Cash and cash equivalents, at beginning of period 408 78 285 771 - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 25,187 $ 5 $ 582 $ 0 $ 25,774 ==================================================================================================================
34] 23 REPORT OF INDEPENDENT AUDITORS HAWK CORPORATION SHAREHOLDERS AND BOARD OF DIRECTORS Hawk Corporation We have audited the accompanying consolidated balance sheets of Hawk Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawk Corporation and subsidiaries at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Cleveland, Ohio March 1, 1999 REPORT OF MANAGEMENT HAWK CORPORATION We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31, 1998, 1997 and 1996. The primary responsibility for the integrity of the financial information rests with management. This information is prepared in accordance with generally accepted accounting principles based upon our best estimates and judgments and giving due consideration to materiality. The Company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our system provides this appropriate balance. Ernst & Young LLP, independent accountants, is retained to audit Hawk's financial statements. Its accompanying report is based on an audit conducted in accordance with generally accepted auditing standards, including a review of the internal control structure and tests of accounting procedures and records. The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The Audit Committee meets periodically with internal auditors, our independent auditors, as well as with Hawk management, to discuss the adequacy of financial controls, the quality of financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Audit Committee at all times. /s/ Norman C. Harbert Norman C. Harbert Chairman, President and Chief Executive Officer /s/ Thomas A. Gilbride Thomas A. Gilbride Vice President, Finance [35 EX-21.1 4 EXHIBIT 21.1 1 Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT JURISDICTION OF PERCENT OF PARENT SUBSIDIARIES ORGANIZATION OWNERSHIP Hawk Corporation Friction Products Co. Ohio 100% Logan Metal Stampings, Inc. Ohio 100% Helsel, Inc. Delaware 100% S.K. Wellman Holdings, Inc. Delaware 100% Hutchinson Products Corporation Delaware 100% Sinterloy Corporation Delaware 100% Clearfield Powdered Metals, Inc. Pennsylvania 100% Hawk International FSC, Corp. Barbados 100% Allegheny Powder Metallurgy, Inc. Pennsylvania 100% Friction Products Co. Hawk Brake, Inc. Ohio 100% S.K. Wellman S.K. Wellman Corp. Delaware 100% Holdings, Inc. Wellman Friction Products U.K. Corp. Delaware 100% S.K. Wellman S.p.A. Italy 95% S.K. Wellman Corp. The S.K. Wellman Company of Canada Limited Canada 100% S.K. Wellman S.p.A. Italy 5%
EX-23.1 5 EXHIBIT 23.1 1 Exhibit 23.1 Consent of the Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-60865) pertaining to the Hawk Corporation 1997 Stock Option Plan and in the Registration Statement (Form S-8 No. 333-68583) pertaining to the Friction Products Co. Profit Sharing Plan; S.K. Wellman Retirement Savings and Profit Sharing Plan; Helsel, Inc. Employee's Retirement Plan; Helsel, Inc. Employee's Savings and Investment Plan; Sinterloy Corporation 401(k) Plan; Hutchinson Products Corporation Employees' 401(k) Plan; and Hawk Corporation 401(k) Savings and Retirement Plan of our report dated March 1, 1999, with respect to the consolidated financial statements of Hawk Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Cleveland, Ohio March 26, 1999 EX-27 6 EXHIBIT 27
5 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 14,317 0 24,456 400 25,139 71,352 93,242 28,923 203,446 31,500 96,366 0 1 92 64,322 203,446 182,131 182,131 123,761 25,552 31 0 11,883 21,903 9,690 12,213 0 3,079 0 9,134 1.18 1.12
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