10-Q 1 l89585ae10-q.txt HAWK CORPORATION 10-Q/QTR END 6-30-01 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _________ TO _________. COMMISSION FILE NUMBER 001-13797 HAWK CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 34-1608156 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 861-3553 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of the date of this report, the Registrant had the following number of shares of common stock outstanding: Class A Common Stock, $0.01 par value: 8,552,920 Class B Common Stock, $0.01 par value: None (0) 1 2
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28
2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 3,238 $ 4,010 Accounts receivable, less allowance of $364 and $372, respectively 32,266 29,602 Inventories 29,365 31,864 Deferred income taxes 1,365 1,113 Other current assets 2,417 2,976 ----------- ----------- Total current assets 68,651 69,565 Property, plant and equipment: Land 1,603 1,603 Buildings and improvements 18,374 18,240 Machinery and equipment 92,683 89,330 Furniture and fixtures 6,309 5,584 Construction in progress 3,069 3,316 ----------- ----------- 122,038 118,073 Less accumulated depreciation 52,786 47,672 ----------- ----------- Total property, plant and equipment 69,252 70,401 Other assets: Intangible assets 68,917 70,713 Shareholder notes 1,010 1,010 Other 4,037 3,696 ----------- ----------- Total other assets 73,964 75,419 ----------- ----------- Total assets $ 211,867 $ 215,385 =========== =========
3 4 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 2001 2000 (UNAUDITED) (SEE NOTE) ----------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,558 $ 11,579 Accrued compensation 6,090 7,791 Other accrued expenses 6,253 6,446 Current portion of long-term debt 6,941 7,273 ----------- --------- Total current liabilities 32,842 33,089 Long-term liabilities: Long-term debt 94,547 96,661 Deferred income taxes 11,612 11,554 Other 2,087 2,092 ----------- --------- Total long-term liabilities 108,246 110,307 Minority interest 114 300 Shareholders' equity: Series D preferred stock, $.01 par value; an aggregate liquidation value of $1,530, plus any accrued and unpaid dividends with 9.8% cumulative dividend (1,530 shares authorized, issued and outstanding) 1 1 Class A common stock, $.01 par value; 75,000,000 shares authorized, 9,187,750 issued and 8,552,920 and 8,548,520 outstanding, respectively 92 92 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 54,627 54,631 Retained earnings 23,473 24,109 Accumulated other comprehensive loss (2,824) (2,409) Treasury stock, at cost (4,704) (4,735) ----------- --------- Total shareholders' equity 70,665 71,689 ----------- --------- Total liabilities and shareholders' equity $ 211,867 $ 215,385 =========== =========
Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 101,200 $ 109,007 $ 47,419 $ 53,837 Cost of sales 77,046 79,106 37,085 38,879 ----------- ----------- ----------- ----------- Gross profit 24,154 29,901 10,334 14,958 Selling, technical and administrative expenses 17,031 15,948 8,359 8,233 Restructuring costs 1,000 892 Amortization of intangibles 2,265 2,051 1,134 1,026 ----------- ----------- ----------- ----------- Total expenses 20,296 17,999 10,385 9,259 Income (loss) from operations 3,858 11,902 (51) 5,699 Interest expense 4,834 4,545 2,391 2,256 Interest income (103) (104) (61) (64) Other expense, net 430 155 411 66 ----------- ----------- ----------- ----------- (Loss) income before income taxes (1,303) 7,306 (2,792) 3,441 Income tax (benefit) expense (557) 3,232 (1,286) 1,531 ------------ ----------- ------------ ----------- Net (loss) income before minority interest (746) 4,074 (1,506) 1,910 Minority interest (184) (87) ------------ ----------- ------------ ----------- Net (loss) income $ (562) $ 4,074 $ (1,419) $ 1,910 ============ ============ ============= ============ Earnings per share: Basic (loss) earnings per share $ (.07) $ .47 $ (.17) $ .22 ============ ============ ============= ============ Diluted (loss) earnings per share $ (.07) $ .47 $ (.17) $ .22 ============ ============ ============= ============
See notes to consolidated financial statements. 5 6 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2001 2000 ---- ---- Cash flows from operating activities: Net (loss) income $ (562) $ 4,074 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,905 7,362 Deferred income taxes (151) 90 Loss on sale of fixed assets 416 Undistributed loss - minority interest (184) Changes in operating assets and liabilities, net: Accounts receivable (3,347) (3,158) Inventories 2,008 (270) Other assets (282) 1,482 Accounts payable 2,283 2,470 Other liabilities (1,214) 2,274 ------------ ----------- Net cash provided by operating activities 6,456 14,740 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 69 Purchases of property, plant and equipment (4,830) (5,587) ------------ ------------ Net cash used in investing activities (4,830) (5,518) Cash flows from financing activities: Payments on short-term debt (587) Proceeds from long-term debt 16,239 8,391 Payments on long-term debt (18,436) (16,990) Payments of preferred stock dividends (75) (76) ------------ ------------ Net cash used in financing activities (2,272) (9,262) ------------ ------------ Net decrease in cash and cash equivalents (646) (40) Effect of exchange rate changes on cash (126) (87) Cash and cash equivalents at the beginning of the period 4,010 3,993 ----------- ----------- Cash and cash equivalents at the end of the period $ 3,238 $ 3,866 =========== ============
See notes to consolidated financial statements. 6 7 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto in the Form 10-K for Hawk Corporation (the "Company") for the year ended December 31, 2000. The Company, through its business segments, designs, engineers, manufactures and markets specialized components used in a variety of aerospace, industrial and commercial applications. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Beginning in December 2000, the financial statements also include the Company's 67% ownership interest in Net Shape Technologies LLC. All significant intercompany accounts and transactions have been eliminated in the accompanying financial statements. In the fourth quarter of 2000, the Company changed its accounting policy to reflect in its consolidated statement of income all shipping and handling costs as cost of sales and related shipping revenue in net sales. All prior periods have been changed to conform to current year presentation. NOTE 2 - COMPREHENSIVE INCOME Comprehensive income is as follows:
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net (loss) income $ (562) $ 4,074 $ (1,419) $ 1,910 Foreign currency translation (loss) income (415) (640) 90 (218) ---------- ---------- ---------- ----------- Comprehensive (loss) income $ (977) $ 3,434 $ (1,329) $ 1,692 ========== ========= ============ ============
NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The major components of inventories are as follows:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- Raw materials and work-in-process $20,786 $22,645 Finished products 11,386 11,724 Inventory reserves (2,807) (2,505) ------- ------- $29,365 $31,864 ======= =======
7 8 NOTE 4 - EARNINGS PER SHARE Basic and diluted earnings per share are computed as follows:
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 -------- -------- --------- -------- Numerator: Net (loss) income $ (562) $ 4,074 $ (1,419) $ 1,910 Preferred stock dividends (75) (76) (37) (38) -------- -------- --------- -------- Numerator for basic earnings per share-income available to common shareholders $ (637) $ 3,998 $ (1,456) $ 1,872 ======== ======= ========= ======== Effect of dilutive securities: Interest on convertible note, net of tax 41 18 -------- -------- --------- -------- Numerator for diluted earnings per share-income available to common shareholders after assumed conversion $ (637) $ 4,039 $(1,456) $ 1,890 ======== ======== ========= ======== Denominator: Denominator for basic (loss) earnings per share- weighted average shares 8,552 8,548 8,553 8,549 Effect of dilutive securities: Employee stock options* 11 27 Convertible notes 112 100 -------- -------- --------- -------- Denominator for diluted (loss) earnings per share- adjusted weighted average shares after assumed conversions 8,552 8,671 8,553 8,676 ======== ======== ========= ======== Basic (loss) earnings per share $ (.07) $ .47 $ (.17) $ .22 ======== ======== ========= ======== Diluted (loss) earnings per share $ (.07) $ .47 $ (.17) $ .22 ======== ======== ========= ========
* As a result of the Company's net loss for the three and six month periods ended June 30, 2001 all options to purchase shares of Common Stock and all notes convertible into shares of Common Stock were excluded from the computation of diluted earnings per share since they were anti-dilutive. The number of options and converted shares excluded from the earnings per share calculation, using the treasury stock method, were 93 and 105 for the three and six month periods ended June 30, 2001, respectively. 8 9 NOTE 5 - BUSINESS SEGMENTS The Company operates in four primary business segments: friction products, powder metal, performance automotive and motors. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on fundamental differences in their operations. The friction products segment engineers, manufactures and markets specialized components used in a variety of aerospace, industrial and commercial applications. The Company, through this segment, is a worldwide supplier of friction components for brakes, clutches and transmissions. The powder metal segment engineers, manufactures and markets specialized components used primarily in industrial applications. The Company, through this segment, targets three areas of the powder metal component marketplace: high precision components that are used in fluid power applications, large structural powder metal parts used in construction, agricultural and truck applications, and smaller, high volume parts. The performance automotive segment engineers, manufactures and markets high performance friction material for use in racing car brakes in addition to premium branded clutch and drive train components. The Company, through this segment, targets leading teams in the NASCAR racing series, as well as high-performance street vehicles and other road race and oval track competition cars. The motor segment engineers, manufactures and markets die-cast aluminum rotors for use in small electric motors. The Company, through this segment, targets a wide variety of applications such as business equipment, small household appliances and exhaust fans. 9 10 The information by segment is as follows:
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues from external customers: Friction Products $ 54,666 $ 59,392 $ 26,345 $ 29,241 Powder Metal 32,268 39,591 14,422 19,687 Performance Automotive 9,902 5,273 4,499 2,618 Motor 4,364 4,751 2,153 2,291 --------- --------- --------- --------- Consolidated $ 101,200 $ 109,007 $ 47,419 $ 53,837 ========= ========= ========= ========= Depreciation and amortization: Friction Products $ 4,447 $ 4,440 $ 2,233 $ 2,203 Powder Metal 2,422 2,224 1,223 1,128 Performance Automotive 546 336 276 189 Motor 490 362 262 189 --------- --------- --------- --------- Consolidated $ 7,905 $ 7,362 $ 3,994 $ 3,709 ========= ========= ========= ========= Operating Income (loss): Friction Products $ 4,712 $ 5,757 $ 1,475 $ 3,268 Powder Metal 467 5,398 (635) 2,203 Performance Automotive 45 985 30 431 Motor (1,366) (238) (921) (203) --------- --------- --------- --------- Consolidated $ 3,858 $ 11,902 $ (51) $ 5,699 ========= ========= ========= =========
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. As amended, SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective hedge that offsets certain exposures. The Company periodically enters into interest rate swap agreements to moderate exposure to interest rate changes and to lower the overall cost of borrowing. During the first quarter ended March 31, 2001, the Company entered into an interest rate swap agreement that effectively converts a portion of its floating rate debt to a fixed rate of 5.34% on $10.0 million notional amount on its variable-rate debt maturing in 2003. Although this financial instrument did not meet the hedge accounting criteria of SFAS 133, it continues to be effective in achieving the risk management objectives for which it was intended. The change in the fair value of the interest rate swap resulted in a charge of $0.2 million as other expense in the second quarter of 2001. 10 11 In June 2001, the Financial Accounting Standards Board ("FASB") unanimously approved the issuance of two statements, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and amends APB No. 16, "Business Combinations." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment only approach. The Company will cease the amortization of goodwill that was recorded in past business combinations on December 31, 2001, as required by SFAS No. 142. The Company is still evaluating how the adoption of these pronouncements will impact the financial statements. NOTE 7 - SUPPLEMENTAL GUARANTOR INFORMATION Each of the Company's Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal, premium, if any, and interest with respect to the 10.25% Senior Notes due December 1, 2003 (the "Senior Notes"). The Guarantor Subsidiaries are direct or indirect wholly owned subsidiaries of the Company. The following supplemental unaudited consolidating condensed financial statements present (in thousands): 1. Consolidating condensed balance sheets as of June 30, 2001 and December 31, 2000, consolidating condensed statements of income for the three and six month periods ended June 30, 2001 and 2000 and consolidating condensed statements of cash flows for the six months ended June 30, 2001 and 2000. 2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada, Italy, Mexico and China) with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. 11 12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
JUNE 30, 2001 --------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 458 $ 408 $ 2,372 $ 3,238 Accounts receivable, net 24,648 7,618 32,266 Inventories, net 23,803 5,816 $ (254) 29,365 Deferred income taxes 1,199 166 1,365 Other current assets 356 1,226 835 2,417 --------------------------------------------------------------------------- Total current assets 2,013 50,085 16,807 (254) 68,651 Investment in subsidiaries 794 1,765 (2,559) Intercompany advances, net 157,266 7,652 (6,970) (157,948) Property, plant and equipment 23 60,084 9,145 69,252 Intangible assets 203 68,714 68,917 Other 1,010 4,087 960 (1,010) 5,047 --------------------------------------------------------------------------- Total assets $ 161,309 $ 192,387 $ 19,942 $ (161,771) $ 211,867 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,400 $ 3,158 $ 13,558 Accrued compensation $ 5 4,934 1,151 6,090 Other accrued expenses (417) 5,475 1,286 $ (91) 6,253 Current portion of long-term debt 5,000 1,605 336 6,941 --------------------------------------------------------------------------- Total current liabilities 4,588 22,414 5,931 (91) 32,842 Long-term liabilities: Long-term debt 86,150 4,939 3,458 94,547 Deferred income taxes 11,128 484 11,612 Other 948 1,139 2,087 Intercompany advances, net 1,280 149,916 7,165 $ (158,361) --------------------------------------------------------------------------- Total long-term liabilities 98,558 155,803 12,246 (158,361) 108,246 --------------------------------------------------------------------------- Total liabilities 103,146 178,217 18,177 (158,452) 141,088 Minority interest 114 114 Shareholders' equity 58,163 14,056 1,765 (3,319) 70,665 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 161,309 $ 192,387 $ 19,942 $ (161,771) $ 211,867 ===========================================================================
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2000 --------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 553 $ 1,027 $ 2,430 $ 4,010 Accounts receivable, net 22,785 6,817 29,602 Inventories, net 25,792 6,072 31,864 Deferred income taxes 1,199 (86) 1,113 Other current assets 967 1,363 646 2,976 --------------------------------------------------------------------------- Total current assets 2,719 50,967 15,879 69,565 Investment in subsidiaries 794 3,168 $ (3,962) Intercompany advances, net 160,192 5,784 (5,084) (160,892) Property, plant and equipment 26 61,219 9,156 70,401 Intangible assets 207 70,506 70,713 Other 1,010 3,931 775 (1,010) 4,706 --------------------------------------------------------------------------- Total assets $ 164,948 $ 195,575 $ 20,726 $ (165,864) $ 215,385 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,313 $ 3,266 $ 11,579 Accrued compensation $ 5 6,854 932 7,791 Other accrued expenses 633 5,047 766 6,446 Current portion of long-term debt 5,000 1,901 372 7,273 --------------------------------------------------------------------------- Total current liabilities 5,638 22,115 5,336 33,089 Long-term liabilities: Long-term debt 90,645 5,574 442 96,661 Deferred income taxes 11,128 426 11,554 Other 937 1,155 2,092 Intercompany advances, net 1,197 149,909 10,199 $ (161,305) --------------------------------------------------------------------------- Total long-term liabilities 102,970 156,420 12,222 (161,305) 110,307 --------------------------------------------------------------------------- Total liabilities 108,608 178,535 17,558 (161,305) 143,396 Minority interest 300 300 Shareholders' equity 56,340 16,740 3,168 (4,559) 71,689 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 164,948 $ 195,575 $ 20,726 $ (165,864) $ 215,385 ===========================================================================
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net sales $ 88,345 $ 12,855 $ 101,200 Cost of sales 65,658 11,388 77,046 ------------------------------------------------------------------------- Gross profit 22,687 1,467 24,154 Expenses: Selling, technical and administrative expenses $ (258) 15,077 2,212 17,031 Restructuring costs 1,000 1,000 Amortization of intangible assets 9 2,256 2,265 ------------------------------------------------------------------------- Total expenses (249) 18,333 2,212 20,296 ------------------------------------------------------------------------- Income (loss) from operations 249 4,354 (745) 3,858 Interest (income) expense, net (1,836) 6,149 418 4,731 Income (loss) from equity investees (2,431) (1,306) $ 3,737 Other expense (income) 276 224 (70) 430 ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (622) (3,325) (1,093) 3,737 (1,303) Income tax (benefit) expense (60) (710) 213 (557) Minority interest (184) (184) ------------------------------------------------------------------------- NET LOSS $ (562) $ (2,431) $ (1,306) $ 3,737 $ (562) =========================================================================
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 ---------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------------- Net sales $ 97,579 $ 11,428 $ 109,007 Cost of sales $ 285 69,557 9,264 79,106 ---------------------------------------------------------------------------- Gross profit (285) 28,022 2,164 29,901 Expenses: Selling, technical and administrative expenses 144 13,798 2,006 15,948 Amortization of intangible assets 5 2,046 2,051 ---------------------------------------------------------------------------- Total expenses 149 15,844 2,006 17,999 ---------------------------------------------------------------------------- (Loss) income from operations (434) 12,178 158 11,902 Interest (income) expense, net (1,893) 6,014 320 4,441 Income (loss) from equity investees 3,179 (455) $ (2,724) Other expense 101 54 155 ---------------------------------------------------------------------------- Income (loss) before income taxes 4,638 5,608 (216) (2,724) 7,306 Income tax expense 564 2,429 239 3,232 ---------------------------------------------------------------------------- NET INCOME (LOSS) $ 4,074 $ 3,179 $ (455) $ (2,724) $ 4,074 ============================================================================
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net sales $ 41,252 $ 6,167 $ 47,419 Cost of sales 31,296 5,789 37,085 ------------------------------------------------------------------------- Gross profit 9,956 378 10,334 Expenses: Selling, technical and administrative expenses $ 154 7,111 1,094 8,359 Restructuring costs 892 892 Amortization of intangible assets 6 1,128 1,134 ------------------------------------------------------------------------- Total expenses 160 9,131 1,094 10,385 ------------------------------------------------------------------------- (Loss) income from operations (160) 825 (716) (51) Interest (income) expense, net (911) 3,017 224 2,330 Income (loss) from equity investees (2,218) (889) $ 3,107 Other expense 276 63 72 411 ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (1,743) (3,144) (1,012) 3,107 (2,792) Income tax (benefit) expense (324) (839) (123) (1,286) Minority interest (87) (87) ------------------------------------------------------------------------- NET LOSS $ (1,419) $ (2,218) $ (889) $ 3,107 $ (1,419) =========================================================================
16 17 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2000 ------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------- Net sales $ 47,817 $ 6,020 $ 53,837 Cost of sales $ 120 33,843 4,916 38,879 ------------------------------------------------------------------------------- Gross profit (120) 13,974 1,104 14,958 Expenses: Selling, technical and administrative expenses 24 7,118 1,091 8,233 Amortization of intangible assets 3 1,023 1,026 ------------------------------------------------------------------------------- Total expenses 27 8,141 1,091 9,259 ------------------------------------------------------------------------------- Income (loss) from operations (147) 5,833 13 5,699 Interest (income) expense, net (964) 2,980 176 2,192 Income (loss) from equity investees 1,407 (224) $ (1,183) Other (income) expense (1) 104 (37) 66 ------------------------------------------------------------------------------- Income (loss) before income taxes 2,225 2,525 (126) (1,183) 3,441 Income tax expense 315 1,118 98 1,531 ------------------------------------------------------------------------------- NET INCOME (LOSS) $ 1,910 $ 1,407 $ (224) $ (1,183) $ 1,910 ===============================================================================
17 18 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by operating activities $ 4,474 $ 4,163 $ (2,181) $ 6,456 Cash flows from investing activities: Purchase of property, plant and equipment (3,860) (970) (4,830) -------------------------------------------------------------------------- Net cash used in investing activities (3,860) (970) (4,830) Cash flows from financing activities: Proceeds from long-term debt 12,281 560 3,398 16,239 Payments on long-term debt (16,775) (1,482) (179) (18,436) Payments of preferred stock dividends (75) (75) -------------------------------------------------------------------------- Net cash (used in) provided by financing activities (4,569) (922) 3,219 (2,272) Net (decrease) increase in cash and cash equivalents (95) (619) 68 (646) Effect of exchange rate changes on cash (126) (126) -------------------------------------------------------------------------- Cash and cash equivalents, at beginning of period 553 1,027 2,430 4,010 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 458 $ 408 $ 2,372 $ 0 $ 3,238 ==========================================================================
18 19 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 -------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- Net cash provided by operating activities $ 7,771 $ 6,193 $ 776 $ 14,740 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 69 69 Purchase of property, plant and equipment (5,377) (210) (5,587) -------------------------------------------------------------------------- Net cash used in investing activities (5,308) (210) (5,518) Cash flows from financing activities: Payments on short-term debt (587) (587) Proceeds from long-term debt 7,867 524 8,391 Payments on long-term debt (15,318) (1,486) (186) (16,990) Payments of preferred stock dividends (76) (76) -------------------------------------------------------------------------- Net cash used in financing activities (7,527) (962) (773) (9,262) Net increase (decrease) in cash and cash equivalents 244 (77) (207) (40) Effect of exchange rate changes on cash (87) (87) -------------------------------------------------------------------------- Cash and cash equivalents, at beginning of period 1,691 193 2,109 3,993 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,935 $ 116 $ 1,815 $ 0 $ 3,866 ==========================================================================
19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Management's discussion and analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, which may cause actual results to differ materially from those expressed in the forward-looking statements. GENERAL Hawk operates in four primary reportable segments: friction products, powder metal, performance automotive and motor components. The Company's friction products are made from proprietary formulations of composite materials that primarily consist of metal powders, synthetic and natural fibers. Friction products are the replacement elements used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. Friction products manufactured by the Company include friction components for use in brakes, transmissions and clutches in aerospace, construction, agriculture, truck and specialty vehicle markets. The Company's powder metal components are made from formulations of composite powder metal alloys. The powder metal segment manufactures a variety of components for use in fluid power, truck, lawn and garden, construction, agriculture, home appliance, automotive and office equipment markets. In its performance automotive segment, the Company manufactures brakes, clutches and gearboxes for the performance automotive markets. Through its motor segment, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. As of June 30, 2001, Hawk has approximately 1,500 employees and 16 manufacturing sites in five countries. RECENT EVENTS In June 2001, the Company announced the implementation of a cost cutting initiative program to bring its labor, overhead and other variable costs more in line with current business conditions. The cost cutting initiatives announced by the Company include a workforce reduction of approximately 150 employees, or 12 percent of Hawk's workforce, including salary and production personnel, elimination of non-strategic outside service personnel and contracts and cuts in discretionary spending on a worldwide basis. In the second quarter of 2001, the Company recorded a restructuring expense of $0.9 million to expense severance related charges relating to the workforce reduction. On July 31, 2001, the Company executed an amended credit agreement, which decreased the aggregate commitment provided by the Company's revolving credit facility from $50.0 million to $30.0 million, subject to a borrowing base formula. Pursuant to the amended credit agreement, the credit facility is due in May 2003 and bears interest, at the Company's discretion, at either the prime rate or at the London Interbank Offering Rate (LIBOR) plus a margin. The margin over LIBOR, ranging from 150 to 325 basis points, is determined based on the achievement of certain financial ratios. The amended credit agreement is secured by substantially all of the Company's assets. The amended credit agreement contains restrictive covenants, which, among other things, require maintenance of certain financial ratios. See LIQUIDITY AND CAPITAL RESOURCES. 20 21 SECOND QUARTER 2001 COMPARED TO SECOND QUARTER 2000 Net Sales. Net sales decreased $6.4 million, or 11.9 percent, to $47.4 million in the second quarter of 2001 from $53.8 million in the comparable quarter of 2000. The net sales decrease was primarily attributable to declining economic conditions primarily in the Company's powder metal and friction products segments. The decline was partially offset by an increase in net sales in the Company's performance automotive segment as a result of new sales initiatives in the motorsports market and the acquisition of Tex Racing Enterprises, Inc. in November 2000. Net sales in the Company's friction products segment declined $2.9 million, or 9.9 percent, to $26.3 million from $29.2 million in the comparable quarter of 2000. The net sales decrease in this segment reflected soft demand in the heavy truck, agriculture and construction markets served by the Company. These decreases were offset by higher demand in sales to the aerospace and specialty friction markets for the quarter. The powder metal segment reported net sales of $14.4 million in the second quarter of 2001 compared to $19.7 million in the first quarter of 2000, a decline of $5.3 million, or 26.9 percent. The net sales decrease in this segment was primarily the result of softness in the heavy truck, appliance, lawn and garden, appliance and fluid power markets served by the Company. Net sales in the Company's performance automotive segment increased $1.9 million, or 73.1 percent, to $4.5 million in the second quarter of 2001 compared to $2.6 million in the comparable quarter of 2000. The acquisition of Tex Racing in November of 2000 was the primary reason for the net sales increase in this segment for the quarter. In addition, this segment benefited from new sales initiatives directed to the motorsports market during the quarter. Net sales in the Company's motor segment decreased $0.1 million, or 4.3 percent, to $2.2 million in the second quarter of 2001 compared to $2.3 million from the first quarter of 2000. Net sales declines in the segment were the result of continuing soft economic conditions in the domestic motor markets served by the Company. Net sales from the Company's Mexican facility, which began in the first quarter of 2001, partially offset the decline from the Company's domestic operations. Gross Profit. Gross profit decreased $4.7 million, or 31.3 percent, to $10.3 million in the second quarter of 2001 from $15.0 million in the comparable quarter of 2000. Gross profit from the Company's friction products segment decreased in the second quarter of 2001 compared to the prior year period, primarily from net sales declines in certain markets served by the segment and the effects of product mix. The Company's powder metal segment gross profit declined in the second quarter of 2001, primarily as a result of volume declines in most of the markets served by the segment and the effects of product mix and start-up losses at Net Shape Technologies LLC. The performance automotive segment gross profit declined during the second quarter of 2001 compared to the prior year period primarily as a result of product mix effects from the acquisition of Tex Racing. The motor segment incurred margin losses during the second quarter of 2001 primarily due to the continuing start up expenses at the Company's facility in Mexico and lower sales volumes from the Company's domestic facility. As a result of these factors, the gross profit margin decreased to 21.7 percent in the second quarter of 2001 from 27.9 percent in the comparable quarter of 2000. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $0.2 million, or 2.4 percent, to $8.4 million in the second quarter of 2001 from $8.2 million in the comparable period of 2000. The increase in ST&A expenses is primarily attributable to the acquisition of Tex Racing and expenditures associated with the Company's investment in Net Shape in December 2000. Partially offsetting this increase were reductions in compensation expense throughout the Company. As a percent of net sales, ST&A expenses increased to 17.7 percent of net sales in the second quarter of 2001 from 15.2 percent in the comparable quarter of 2000. The increase in ST&A 21 22 expenses as a percentage of net sales is primarily due to the lower sales volumes experienced by the Company during the quarter and expenditures associated with the Company's investment in Net Shape. Restructuring Costs. During the second quarter of 2001, the Company recorded an expense of $0.9 million to support its recently announced cost cutting initiatives. The costs incurred during the quarter represent corporate-wide severance costs. Income from Operations. Income from operations decreased by $5.8 million to a loss of $0.1 million in the second quarter of 2001 from income of $5.7 million in the comparable quarter of 2000. Interest Expense. Interest expense increased $0.1 million, or 4.3 percent, to $2.4 million in the second quarter of 2001 from $2.3 million in the comparable quarter of 2000. The increase is attributable to higher debt levels during the quarter. Other (Expense) Income. Other expense was $0.4 million in the second quarter of 2001. The expense in the second quarter of 2001 consisted of an expense to mark to market the Company's interest rate swap agreement, an amendment fee in connection with the Company's recent loan amendment and foreign currency transaction losses incurred by the Company at its Italian facility. Income Taxes. The Company's effective tax rate for the second quarter of 2001 was 46.1 percent compared with a tax rate of 44.5 percent in the comparable quarter of 2000. The increase in the effective tax rate is primarily due to non-deductible items, including amortization, for federal tax purposes. Net Income (Loss). As a result of the factors discussed above, net income decreased $3.3 million to a net loss of $1.4 million in the second quarter of 2001 from net income of $1.9 million in the comparable quarter of 2000. FIRST SIX MONTHS OF 2001 COMPARED TO FIRST SIX MONTHS OF 2000 Net Sales. Consolidated net sales during the first six months of 2001 were $101.2 million, a decrease of $7.8 million, or 7.2 percent, from $109.0 million in the comparable period of 2000. The decrease was primarily attributable to continuing economic softness primarily in the Company's powder metal and friction segments. The decline was partially offset by an increase in net sales in the Company's performance automotive segment primarily as a result of the acquisition of Tex Racing in November of 2000. Net sales in the Company's friction products segment declined $4.7 million, or 7.9 percent, to $54.7 million in the first six months of 2001 from $59.4 million in the comparable period of 2000. The net sales decrease in this segment reflected continuing soft demand in the heavy truck, agriculture and construction markets served by the Company. These decreases were partially offset by higher demand in sales to the aerospace and specialty friction markets during the six month period ended June 30, 2001. The powder metal segment reported net sales of $32.3 million in the first six months of 2001 compared to $39.6 million in the comparable period of 2000, a decline of $7.3 million, or 18.4 percent. The net sales decrease in this segment was primarily the result of softness in the heavy truck, appliance, lawn and garden, appliance and fluid power markets served by the Company. Net sales in the Company's performance automotive segment increased $4.6 million, or 86.8 percent, to $9.9 million in the first six months of 2001 compared to $5.3 million in the comparable period of 2000. The acquisition of Tex Racing in November of 2000 was the primary reason for the net sales increase in this segment for the period. Additionally, the Company experienced sales increases in this segment from new sales initiatives directed to the motorsports market during the quarter. 22 23 Net sales in the Company's motor segment decreased $0.4 million, or 8.3 percent, to $4.4 million in the first six month period of 2001 compared to $4.8 million from the comparable period of 2000. Net sales declines in the segment were the result of continuing soft economic conditions in the domestic motor markets served by the Company, partially offset by sales from the Company's Mexican facility, which began shipments in the first quarter of 2001. Gross Profit. Gross profit decreased $5.7 million to $24.2 million during the first six months of 2001, a 19.1 percent decrease compared to gross profit of $29.9 million in the comparable six month period of 2000. The gross profit margin decreased to 23.9 percent during the six month period ended June 30, 2001 from 27.4 percent in the comparable period in 2000. In the friction products segment, even though the Company experienced volume declines, gross profit improved in the six month period ended June 30, 2001 compared to the comparable period of 2000, primarily as a result of the operating efficiencies initiated within this division beginning in 2000. The decrease in margins in the powder metal segment was primarily the result of net sales volume declines, the effect of product mix, underabsorption of fixed costs primarily as a result of the lower volumes and start up expenditures associated with the Company's investment in Net Shape. Gross profit margins in the Company's performance automotive segment declined primarily as a result of product mix issues while the gross profit margin in the Company's motor segment declined in the first six months of 2001 as compared to the first six months of 2000 primarily as a result of volume declines at the segment's domestic location and the continuing startup costs associated with the Company's Mexican facility. Selling, Technical and Administrative Expenses. ST&A expenses increased $1.1 million, or 6.9 percent, to $17.0 million during the first six months of 2001 from $15.9 million in comparable six month period of 2000. As a percentage of net sales, ST&A increased to 16.8 percent of sales in 2001 from 14.6 percent of sales in 2000. The increase in ST&A expenses as a percent of sales, resulted primarily from sales volume declines and expenditures associated with the Company's investment in Net Shape. Restructuring Costs. As stated above, the Company incurred $1.0 million of restructuring costs during the first six months of 2001 as part of its cost reduction initiative announced in June 2001. Income from Operations. Income from operations decreased $8.0 million, or 67.2 percent, to $3.9 million in the six month period ended June 30, 2001 compared to $11.9 million in the comparable period of 2000. Income from operations as a percentage of net sales decreased to 3.9 percent in 2001 from 10.9 percent in 2000. Interest Expense. Interest expense increased $0.3 million, or 6.7 percent, to $4.8 million in the first six months of 2001 from $4.5 million in the comparable period of 2000. The increase is attributable to higher debt levels during 2001 compared with 2000. Other (Expense) Income. Other expense was $0.4 million during the first six months of 2001 compared to $0.2 million during the comparable period of 2000. The expense incurred in 2001 was from the mark to market adjustment associated with the Company's interest rate swap agreement, the amendment fee in conjunction with the Company's recently signed loan amendment and foreign currency transaction losses incurred by the Company at its Italian facility The expense reported in 2000 was primarily the result of foreign currency transaction losses incurred by the Company at its Italian facility. Income Taxes. The credit for income taxes was $0.6 million during the first six months of 2001 compared to a provision for income taxes of $3.2 million in the comparable period of 2000 as a result of the loss incurred by the Company during the current year to date period. The Company's effective tax rate for the six month period ended June 30, 2001 was 42.7 percent compared to an effective tax rate of 44.2 percent in the comparable period of 2000. 23 24 Minority Interest. The Company reported a benefit of $0.2 million for the six month period ended June 30, 2001 for the portion of the loss incurred by Net Shape which is not owned by the Company. In December 2000, the Company purchased a 66.7 percent interest in Net Shape. Net Income (Loss). As a result of the factors noted above, net income decreased to a loss of $0.6 million for the six month period ended June 30, 2001 compared to net income of $4.1 million for the comparable period of 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations. In addition, the Company has available a credit facility which may be used for general corporate purposes. The facility is currently comprised of a $30.0 million revolving component and a $20.0 million term loan. On July 31, 2001, the Company amended the credit facility, reducing the amount available under the revolving component from $50.0 million to $30.0 million, subject to a borrowing base formula. As of June 30, 2001, the Company had $10.2 million outstanding under its revolving credit facility. The interest rates on the credit facility range from 150 basis points over LIBOR to 325 basis points over LIBOR based on certain quarterly performance criteria. The Company is currently paying a rate of 325 basis points over LIBOR on its credit facility outstandings. The credit facility is collateralized by a security interest in the accounts receivable, inventory, equipment and real estate of the Company and is subsidiaries. Restrictive terms of the credit facility require that the Company maintain specified financial ratios and comply with certain other loan covenants. Based on the amended credit agreement, the Company was in compliance of the financial covenants as of June 30, 2001. As of June 30, 2001, the Company had approximately $14.8 million available for future borrowings under its credit facility, after giving effect to the July 31, 2001 amendment. Net cash provided by operating activities was $6.5 million and $14.7 million for the six month period ended June 30, 2001 and 2000, respectively. The decline in cash from operations was caused primarily by the reduction in net income and an increase in working capital assets during the period. 24 25 Net cash used in investing activities was $4.8 million and $5.5 million for the six month period ended June 30, 2001 and 2000, respectively. The cash used in investing activities during the six month periods ended June 30, 2001 and 2000 was for the purchase of property, plant and equipment. Net cash used in financing activities was $2.3 million and $9.3 million for the six month period ended June 30, 2001 and 2000, respectively, primarily for the payment of outstanding debt. The primary financing requirements of the Company are (1) for capital expenditures for maintenance, replacement and acquisitions of equipment, expansion of capacity, productivity improvements and product development, (2) for funding the Company's day-to-day working capital requirements, (3) for making additional strategic acquisitions of complementary businesses, and (4) to pay interest on, and to repay principal of, indebtedness. As of June 30, 2001, the Company was in compliance with the terms of its indebtedness. The Company believes that cash flow from operating activities, borrowings under the revolver and access to capital markets will be sufficient to satisfy its working capital, capital expenditures and debt requirements and to finance continued internal growth for the next twelve months. FORWARD LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence in its prospects and strategies and its expectations about growth of existing markets and its ability to expand into new markets, to identify and acquire complementary businesses and to attract new sources of financing, are forward-looking statements that involve risks and uncertainties. In addition to statements which are forward-looking by reason of context, the words "believe," "expect," "anticipate," "intend," "designed," "goal," "objective," "optimistic," "will" and other similar expressions identify forward-looking statements. In light of the risks and uncertainties inherent in all future projections, the inclusion of the forward-looking statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Many factors could cause the Company's actual results to differ materially and adversely from those in the forward-looking statements, including the following: - the effect of the Company's debt service requirements on funds available for operations and future business opportunities 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 ability of the Company to utilize all of its manufacturing capacity in light of softness in some end-markets served by the Company; - the effect of any future acquisitions by the Company on its indebtedness and on the funds available for operations and future business opportunities; - the effect of competition by manufacturers using new or different technologies; - the effect on the Company's international operations of unexpected changes in regulatory requirements, export restrictions, currency controls, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political and economic instability, fluctuations in currency exchange rates, difficulty in accounts receivable collection and potentially adverse tax consequences; - the ability of the Company to successfully integrate acquisitions into the Company's existing businesses; - the ability of the Company to negotiate new agreements, as they expire, with its unions representing certain of its employees, on terms favorable to the Company or without experiencing work stoppages; 25 26 - the effect of any interruption in the Company's supply of raw materials or a substantial increase in the price of any of the raw materials; - the continuity of business relationships with major customers; and - the ability of the Company's products to meet stringent Federal Aviation Administration criteria and testing requirements. These risks and others that are detailed in this Form 10-Q and other filings by the Company with the Securities and Exchange Commission must be considered by any investor or potential investor in the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially and adversely from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The Company's market risk exposure relates primarily to interest rates, where the Company will periodically use interest rate swaps to hedge interest rates on long-term debt. The Company does not engage in activities using complex or highly leveraged instruments. At June 30, 2001, the Company's variable rate long-term debt totaled approximately $29.7 million. The Company had outstanding an interest rate swap, essentially converting $10.0 million notional amount of its variable rate debt to a fixed rate of 5.34 percent. Foreign Currency Exchange Risk. The Company currently does not hedge its foreign currency exposure and, therefore, has not entered into any forward foreign exchange contracts to hedge foreign currency transactions. The Company has operations outside the United States with foreign-currency denominated assets and liabilities, primarily denominated in Italian lira, Canadian dollars, Mexican pesos and Chinese renminbi. Because the Company has foreign-currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The unhedged foreign currency balance sheet exposures as of June 30, 2001 are not expected to result in a significant impact on earnings or cash flows. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the ordinary course of business. In the Company's opinion, the outcome of these matters is not anticipated to have a material adverse effect on the Company's financial condition, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 30, 2001, the Company held its 2001 Annual Meeting of Stockholders to act on proposals to elect Directors and to ratify the appointment of its independent accountants for 2001. 26 27 Paul R. Bishop, Jack F. Kemp and Dan T. Moore, III were re-elected for a one year term of office expiring in 2002 with 8,199,606, 7,052,464, and 8,199,606 affirmative votes, respectively. These candidates had 44,571, 1,191,713 and 44,571 votes withheld, respectively. Pursuant to the terms of the Company's Series D Preferred Stock, the holders of the Series D Preferred Stock have the right to elect a majority of the Company's Board of Directors. The holders of the Series D Preferred Stock are Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz, the Harbert Family Limited Partnership, the Weinberg Family Limited Partnership and the Krantz Family Limited Partnership. The holders of the Series D Preferred Stock elected Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and William J. O'Neill, Jr. at the Annual Meeting. The proposal to ratify the appointment of Ernst and Young LLP as the Company's independent accountants for 2001 received 8,243,272 affirmative votes, 110 votes against and 795 abstentions. ITEM 5. OTHER INFORMATION Immediately following the 2001 Annual Meeting of Stockholders, the Board of Directors of the Company increased the size of the Board of Directors to eight members, and appointed Jeffrey H. Berlin to fill the vacancy created by the increase. Mr. Berlin is the President and Chief Operating Officer of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.19* Amendment No. 2 to Credit Agreement, dated as of July 31, 2001, by and among the Company, the Lenders identified therein and KeyBank National Association, a national banking association, as the Administrative Agent under the Credit Agreement. 10.20* Form of Security Agreement, dated as of August 10, 2001, by and between KeyBank National Association, the Company and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K. Corp. 10.21* Form of Pledge Agreement, dated as of August 10, 2001, by and between KeyBank National Association, the Company and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K. Corp. 10.22* Form of Intellectual Property Security Agreement, dated as of August 10, 2001, by and between the Company and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K. Corp. 10.23* Form of Guaranty Agreement of Payment of Obligations, dated as of August 10, 2001, by and between KeyBank National Association and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K. Corp. 10.24* Form of Open Ended Ohio Mortgage, executed as of August 10, 2001, in favor of KeyBank National Association by each of the following subsidiaries of the Company: Friction Products Co., Logan Metal Stampings, Inc. and S.K. Wellman Corp. 10.25* Form of Open Ended Pennsylvania Mortgage, executed as of August 10, 2001, in favor of KeyBank National Association by each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc. and Clearfield Powdered Metals, Inc. 10.26* Form of Mortgage, Assignment of Leases and Rents and Fixture Filing, executed as of August 10, 2001, in favor of KeyBank National Association by each of the following subsidiaries of the Company: Hawk Motors, Inc. and Helsel, Inc. 10.27* Common Stock Selling Plan of Thomas A. Gilbride pursuant Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, effective as of June 6, 2001. ------ * filed herewith 27 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2001 HAWK CORPORATION By: /s/ RONALD E. WEINBERG ---------------------- Ronald E. Weinberg, Co-Chairman and Co-CEO By: /s/ THOMAS A. GILBRIDE ---------------------- Thomas A. Gilbride, Vice President- Finance (Chief Accounting Officer) 28