-----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, VHFC4EHyMwqeQmwdWRXd2z34oBdtFwwv0pMWna78S+Ls1zPP6leOBew33EnBKk/U 08mn+KrJhcSbvGdNIfVEMw== 0000950152-99-009002.txt : 19991115 0000950152-99-009002.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950152-99-009002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWK CORP CENTRAL INDEX KEY: 0000849240 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341608156 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13797 FILM NUMBER: 99750587 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQ STE 30-5000 STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2168613553 MAIL ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: STE 29-2500 CITY: CLEVELAND STATE: OH ZIP: 44114-2301 FORMER COMPANY: FORMER CONFORMED NAME: HAWK GROUP OF COMPANIES INC DATE OF NAME CHANGE: 19950417 10-Q 1 HAWK CORPORATION 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD SEPTEMBER 30, 1999 [ ] 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 (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: 8,540,920 Class B Common Stock, $0.01 par value: None (0) 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 25 Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities and Use of Proceeds 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27 2 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) HAWK CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 (UNAUDITED) (NOTE) ----------- ------ ASSETS Current assets: Cash and cash equivalents $ 2,935 $ 14,317 Accounts receivable, less allowance of $340 and $400, respectively 30,724 25,056 Inventories 25,701 25,139 Deferred income taxes 1,748 1,837 Other current assets 3,787 5,003 ----------- ----------- Total current assets 64,895 71,352 Property, plant and equipment: Land 1,542 1,229 Buildings and improvements 14,229 13,698 Machinery and equipment 80,594 70,532 Furniture and fixtures 3,337 3,147 Construction in progress 6,270 4,636 ----------- ----------- 105,972 93,242 Less accumulated depreciation 35,863 28,923 ----------- ----------- Total property, plant and equipment 70,109 64,319 Other assets: Intangible assets 65,923 60,604 Net assets held for sale - 3,604 Shareholder notes 1,010 1,010 Other 2,876 2,557 ----------- ----------- Total other assets 69,809 67,775 ----------- ----------- Total assets $ 204,813 $ 203,446 =========== =========
3 4 HAWK CORPORATION CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 (UNAUDITED) (NOTE) ----------- ------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,463 $ 10,590 Short-term borrowings 1,020 1,019 Accrued compensation 6,399 8,766 Other accrued expenses 7,027 4,944 Current portion of long-term debt 7,177 6,181 ----------- ----------- Total current liabilities 33,086 31,500 Long-term liabilities: Long-term debt 94,280 96,366 Deferred income taxes 9,165 9,251 Other 1,895 1,914 ----------- ----------- Total long-term liabilities 105,340 107,531 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 8,540,920 outstanding 92 92 Class B common stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding Additional paid-in capital 54,645 54,645 Retained earnings 17,875 12,310 Accumulated other comprehensive loss (1,435) (640) Treasury stock, at cost (4,791) (1,993) ------------ ------------ Total shareholders' equity 66,387 64,415 Total liabilities and shareholders' equity $ 204,813 $ 203,446 =========== =========
Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4 5 HAWK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 140,781 $ 140,120 $ 45,626 $ 43,401 Cost of sales 103,264 94,985 34,938 29,607 ----------- ----------- ----------- ----------- Gross profit 37,517 45,135 10,688 13,794 Selling, technical and administrative expenses 19,597 17,213 6,548 5,632 Amortization of intangibles 2,816 2,648 957 880 ----------- ----------- ----------- ----------- Total expenses 22,413 19,861 7,505 6,512 Income from operations 15,104 25,274 3,183 7,282 Interest expense 7,095 9,531 2,296 2,406 Interest income (399) (741) (266) (250) Other (income) expense, net (780) 19 (451) 2 ------------ ----------- ------------ ----------- Income before income taxes and extraordinary charge 9,188 16,465 1,604 5,124 Income taxes 3,512 7,003 369 2,176 ----------- ----------- ----------- ----------- Income before extraordinary charge 5,676 9,462 1,235 2,948 Extraordinary charge - 3,079 - - ----------- ----------- ----------- ----------- Net income $ 5,676 $ 6,383 $ 1,235 $ 2,948 =========== ============ ============ ============ Earnings per share: Basic: Earnings before extraordinary charge $ .64 $ 1.32 $ .14 $ .32 Extraordinary charge - (.44) - - ----------- ----------- ----------- ----------- Basic earnings per share $ .64 $ .88 $ .14 $ .32 =========== ============ ============ ============ Diluted: Earnings before extraordinary charge $ .63 $ 1.23 $ .14 $ .32 Extraordinary charge - (.41) - - ----------- ----------- ----------- ----------- Diluted earnings per share $ .63 $ .82 $ .14 $ .32 =========== ============ ============ ============
See notes to consolidated financial statements. 5 6 HAWK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 5,676 $ 6,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,133 8,314 Accretion of discount on debt 238 Deferred income taxes 23 Extraordinary charge, net of income taxes 3,079 Gain on sale of property, plant and equipment (95) Changes in operating assets and liabilities, net: Accounts receivable (3,470) 132 Inventories 672 (940) Other assets 741 89 Accounts payable (124) 542 Other liabilities 292 1,969 ----------- ----------- Net cash provided by operating activities 13,848 19,806 Cash flows from investing activities: Purchase of marketable securities (4,130) Business acquisitions (14,500) (9,100) Proceeds from sale of property, plant and equipment 3,648 Purchases of property, plant and equipment (6,873) (11,127) Payments received on shareholder notes 665 ----------- ----------- Net cash used in investing activities (17,725) (23,692) Cash flows from financing activities: Payments on short-term debt (636) Proceeds from borrowings on short-term debt 91 Proceeds from borrowings on long-term debt 26,051 35,000 Payments on long-term debt (30,738) (69,544) Net proceeds from issuance of common stock 52,772 Deferred financing costs (850) Payments of preferred stock dividend (111) (219) Repurchase of common stock (2,798) Prepayment premium on early retirement of debt (3,588) ----------- ------------ Net cash (used in) provided by financing activities (7,505) 12,935 ------------ ----------- Net (decrease) increase in cash and cash equivalents (11,382) 9,049 Cash and cash equivalents at the beginning of the period 14,317 4,388 ----------- ----------- Cash and cash equivalents at the end of the period $ 2,935 $ 13,437 =========== ============
See notes to consolidated financial statements. 6 7 HAWK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1999 (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 September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included by reference in the Form 10-K for Hawk Corporation (the "Company") for the year ended December 31, 1998. The Company, through its business segments, designs, engineers, manufactures and markets specialized components used in a variety of aerospace, industrial and other commercial applications. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and also include, effective June 1, 1998, the accounts of Clearfield Powdered Metals, Inc. ("Clearfield") and effective February 26, 1999, the accounts of Allegheny Powder Metallurgy, Inc. ("Allegheny"). All significant inter-company accounts and transactions have been eliminated in the accompanying financial statements. NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In May 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, 2001. NOTE 3 - COMPREHENSIVE INCOME Comprehensive income is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net income $ 5,676 $ 6,383 $ 1,235 $ 2,948 Marketable securities (75) (75) Foreign currency translation (795) 444 293 582 --------- --------- ----------- ----------- Comprehensive income $ 4,881 $ 6,752 $ 1,528 $ 3,455 ========= ========= =========== ===========
7 8 NOTE 4 - INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The major components of inventories are as follows:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- Raw materials and work-in-process $19,326 $20,230 Finished products 7,775 6,334 Inventory reserves (1,400) (1,425) --------- --------- $25,701 $25,139 ======= =======
NOTE 5 - LONG-TERM DEBT In May 1998, the Company entered into a $35,000 Term Loan Facility, with $1,250 maturing quarterly, beginning September 30, 1998 with the remaining principal of $12,500 due on March 31, 2003. Additionally, in May 1998, the Company executed a $50,000 Revolving Credit Facility that matures March 31, 2003. The Company has $500 outstanding under the Revolving Credit Facility as of September 30, 1999. Concurrent with the Company's Initial Public Offering ("IPO") in May 1998, the Company redeemed $35,000 of its then outstanding $100,000 10.25% Senior Notes due December 1, 2003 (the "Senior Notes") (See Note 6.) The Senior Notes, Term Loan and Revolving Credit Facility are fully and unconditionally guaranteed on a joint and several basis by each of the direct or indirect wholly-owned domestic subsidiaries of the Company ("Guarantor Subsidiaries"). (See Note 10.) NOTE 6 - SHAREHOLDERS' EQUITY In May 1998, the Company completed its IPO of 3,500,000 shares of common stock at an offering price to the public of $17.00 per share. NOTE 7 -STOCK REPURCHASE PROGRAM In December 1998, the Board of Directors approved a program to repurchase the Company's common stock on the open market at prevailing prices. The repurchase was primarily funded from operating cash flows and the shares are being held as treasury stock. The Company repurchased 153,300 shares of its common stock during the three-month period ended September 30, 1999. From January 1, 1999 to September 30, 1999, the Company purchased 367,300 shares at an average price of $7.57 per share. 8 9 NOTE 8 - EARNINGS PER SHARE Basic and dilutive earnings per share is computed as follows:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------- -------- ------- -------- Income available to common shareholders: Income before extraordinary item $ 5,676 $ 9,462 $ 1,235 $ 2,948 Less: Preferred stock dividends (111) (219) (37) (38) -------- -------- ------- -------- Income before extraordinary item attributable to common shareholders 5,565 9,243 1,198 2,910 ======== ======== ======= ======== Net income 5,676 6,383 1,235 2,948 Less: Preferred stock dividends (111) (219) (37) (38) -------- -------- ------ -------- Net income attributable to common shareholders 5,565 6,164 1,198 2,910 ======== ======== ======= ======== Weighted average shares: Basic: Basic weighted average shares 8,696 7,017 8,621 9,188 Diluted: Basic from above 8,696 7,017 8,621 9,188 Effect of warrant conversion 492 Effect of note conversion and options 101 15 125 29 -------- -------- ------- -------- Diluted weighted average shares 8,797 7,524 8,746 9,217 ======== ======== ======= ======== Earnings per share: Basic: Earnings before extraordinary charge $ . 64 $ 1.32 $ . 14 $ .32 Extraordinary charge - (.44) - - --------- -------- -------- -------- Basic earnings per share $ .64 $ .88 $ .14 $ .32 ======== ======== ======= ======== Diluted: Earnings before extraordinary charge $ .63 $ 1.23 $ . 14 $ .32 Extraordinary charge - (.41) - - -------- --------- ------- -------- Diluted earnings per share $ .63 $ .82 $ .14 $ .32 ======== ======== ======= ========
9 10 NOTE 9 - 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:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues from External Customers: Friction Products $ 75,762 $ 85,538 $ 24,748 $ 25,440 Powder Metal 50,921 39,799 16,324 13,380 Other 14,098 14,783 4,554 4,581 -------- -------- -------- -------- Consolidated $ 140,781 $ 140,120 $ 45,626 $ 43,401 Depreciation and Amortization: Friction Products $ 5,950 $ 5,340 $ 1,998 $ 1,779 Powder Metal 3,422 2,229 1,194 834 Other 761 745 250 235 -------- -------- -------- -------- Consolidated $ 10,133 $ 8,314 $ 3,442 $ 2,848 Operating Income: Friction Products $ 6,771 $ 13,995 $ 1,380 $ 4,340 Powder Metal 8,657 10,379 2,098 2,805 Other (324) 900 (295) 137 -------- -------- -------- -------- Consolidated $ 15,104 $ 25,274 $ 3,183 $ 7,282
10 11
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- Total Assets: Friction Products $ 113,872 $ 115,141 Powder Metal 71,020 53,034 Other 19,921 35,271 ----------- ----------- Consolidated $ 204,813 $ 203,446
NOTE 10 - SUPPLEMENTAL GUARANTOR INFORMATION As discussed in Note 5, each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal, premium, if any, and interest with respect to the Senior Notes. The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company. The following supplemental unaudited consolidating condensed financial statements present (in thousands): 1. Consolidating condensed balance sheets as of September 30, 1999 and December 31, 1998, consolidating condensed statements of income for the three and nine month periods ended September 30, 1999 and 1998 and consolidating condensed statements of cash flows for the nine months ended September 30, 1999 and 1998. 2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Company's non-U.S. subsidiaries) with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries of the Senior Notes are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. 11 12 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999 -------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 536 $ 641 $ 1,758 $ 2,935 Accounts receivable, net 24,072 6,652 30,724 Inventories, net 20,750 4,951 25,701 Deferred income taxes 1,388 360 1,748 Other current assets 1,671 1,647 469 3,787 ----------- --------- ----------- ---------- ----------- Total current assets 3,595 47,110 14,190 64,895 Investment in subsidiaries 792 5,750 $ (6,542) Inter-company advances, net 154,322 4,040 460 (158,822) Property, plant and equipment 63,109 7,000 70,109 Intangible assets 217 65,706 65,923 Other 1,010 3,375 511 (1,010) 3,886 ----------- --------- ----------- ---------- ----------- Total assets $ 159,936 $ 189,090 $ 22,161 $ (166,374) $ 204,813 =========== ========= =========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,862 $ 2,601 $ 11,463 Short term borrowings 1,020 1,020 Accrued compensation $ 8 5,363 1,028 6,399 Other accrued expenses 3,628 3,074 325 7,027 Current portion of long-term debt 5,000 1,745 432 7,177 ----------- --------- ----------- ---------- ----------- Total current liabilities 8,636 19,044 5,406 33,086 Long-term liabilities: Long-term debt 89,250 3,994 1,036 94,280 Deferred income taxes 8,150 417 598 9,165 Other 734 1,161 1,895 Inter-company advances, net 1,127 150,495 8,210 $ (159,832) ----------- --------- ----------- -------- ----------- Total long-term liabilities 98,527 155,640 11,005 (159,832) 105,340 ----------- --------- ----------- -------- ----------- Total liabilities 107,163 174,684 16,411 (159,832) 138,426 Shareholders' equity 52,773 14,406 5,750 (6,542) 66,387 ----------- --------- ----------- --------- ----------- Total liabilities and shareholders' equity $ 159,936 $ 189,090 $ 22,161 $ (166,374) $ 204,813 =========== ========= =========== ========== ===========
12 13 SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998 --------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR 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 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 ============ ========== ========= =========== ==========
13 14 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 125,272 $ 15,509 $ 140,781 Cost of sales 90,195 13,069 103,264 ----------- ----------- ----------- ----------- ----------- Gross profit 35,077 2,440 37,517 Selling, technical and administrative expenses $ (65) 17,439 2,223 19,597 Amortization of intangibles 7 2,807 2 2,816 ----------- ----------- ----------- ----------- ----------- Total expenses (58) 20,246 2,225 22,413 Income from operations 58 14,831 215 15,104 Interest (income) expense, net (2,850) 9,215 331 6,696 Income (loss) from equity investees 3,820 (225) $ (3,595) Other (income) expense, net (4) (821) 45 (780) ------------ ------------ ----------- ----------- ------------ Income before income taxes 6,732 6,212 (161) (3,595) 9,188 Income taxes 1,056 2,392 64 3,512 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 5,676 $ 3,820 $ (225) $ (3,595) $ 5,676 =========== ============ ============= ============ ============
14 15 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 123,494 $ 16,626 $ 140,120 Cost of sales 81,467 13,518 94,985 ----------- ----------- ----------- ----------- ----------- Gross profit 42,027 3,108 45,135 Selling, technical and administrative expenses $ 7 15,260 1,946 17,213 Amortization of intangibles 7 2,641 2,648 ----------- ----------- ----------- ----------- ----------- Total expenses 14 17,901 1,946 19,861 Income (loss) from operations (14) 24,126 1,162 25,274 Interest (income) expense (609) 9,016 383 8,790 Income from equity investees 8,118 468 $ (8,586) Other (income) expense, net (17) 36 19 ----------- ----------- ----------- ----------- ----------- Income before extraordinary item and income taxes 8,713 15,595 743 (8,586) 16,465 Income taxes 267 6,461 275 7,003 Income before extraordinary item 8,446 9,134 468 (8,586) 9,462 Extraordinary items 2,063 1,016 3,079 ----------- ----------- ----------- ----------- ----------- Net income $ 6,383 $ 8,118 $ 468 $ (8,586) $ 6,383 =========== =========== =========== ============ ===========
15 16 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 40,691 $ 4,935 $ 45,626 Cost of sales 30,953 3,985 34,938 ----------- ----------- ----------- ----------- ----------- Gross profit 9,738 950 10,688 Selling, technical and administrative expenses 60 5,577 911 6,548 Amortization of intangibles $ 3 952 2 957 ----------- ----------- ----------- ----------- ----------- Total expenses 63 6,529 913 7,505 Income (loss) from operations (63) 3,209 37 3,183 Interest (income) expense, net (922) 2,841 111 2,030 Income from equity investees 637 (109) $ (528) Other expense (income), net 25 (540) 64 (451) ----------- ------------ ----------- ----------- ------------ Income before income taxes 1,471 799 (138) (528) 1,604 Income taxes 236 162 (29) 369 ----------- ----------- ------------ ----------- ----------- Net income (loss) $ 1,235 $ 637 $ (109) $ (528) $ 1,235 =========== ============ ============= ============ ============
16 17 SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net sales $ 38,583 $ 4,818 $ 43,401 Cost of sales 25,705 3,902 29,607 ----------- ----------- ----------- ----------- ----------- Gross profit 12,878 916 13,794 Selling, technical and administrative expenses $ (33) 5,061 604 5,632 Amortization of intangibles 3 877 880 ----------- ----------- ----------- ----------- ----------- Total expenses (30) 5,938 604 6,512 Income from operations 30 6,940 312 7,282 Interest (income) expense, net (250) 2,291 115 2,156 Income from equity investees 2,841 75 $ (2,916) Other expense (income), net 70 (90) 22 2 ----------- ------------ ----------- ----------- ----------- Income before income taxes 3,051 4,814 175 (2,916) 5,124 Income taxes 103 1,973 100 2,176 ----------- ----------- ----------- ----------- ----------- Net income $ 2,948 $ 2,841 $ 75 $ (2,916) $ 2,948 =========== ============ ============ ============ ============
17 18 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------------------------------------------------------- COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 8,317 $ 4,220 $ 1,311 $ 13,848 Cash flows from investing activities: Business acquisitions (14,500) (14,500) Purchase of property, plant and equipment (6,312) (561) (6,873) Sales of property, plant and equipment 3,648 3,648 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (14,500) (2,664) (561) (17,725) Cash flows from financing activities: Payments on short-term borrowings 91 91 Proceeds from borrowings on long-term debt 26,051 26,051 Payments on long-term debt (29,301) (961) (476) (30,738) Payment of preferred stock dividend (111) (111) Repurchase of common stock (2,798) (2,798) ------------ ----------- ----------- ----------- ------------ Net cash used in financing activities (6,159) (961) (385) (7,505) ------------ ------------ ------------ ----------- ------------ Net (decrease) increase in cash and cash equivalents (12,342) 595 365 (11,382) Cash and cash equivalents at beginning of period 12,878 46 1,393 14,317 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 536 $ 641 $ 1,758 $ 2,935 =========== ============ ============ =========== ============
18 19 SUPPLEMENTAL CONSOLIDATING CONDENSED CASH FLOW STATEMENT (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ COMBINED COMBINED GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 3,835 $ 12,852 $ 3,119 $ 19,806 Cash flows from investing activities: Purchase of marketable securities (4,130) (4,130) Business acquisitions (9,100) (9,100) Purchase of property, plant and equipment (9,645) (1,482) (11,127) Payments received on shareholder loans 665 665 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (12,565) (9,645) (1,482) (23,692) Cash flows from financing activities: Payments on short term borrowings (636) (636) Proceeds from borrowings on long-term debt 35,000 35,000 Net proceeds from issuance of common stock 52,722 52,772 Payments on long term debt (66,250) (2,779) (515) (69,544) Deferred financing costs (850) (850) Payment of preferred stock dividend (219) (219) Payments on early retirement of debt (3,588) (3,588) ------------ ----------- ----------- ----------- ------------ Net cash provided by financing activities 17,715 (3,629) (1,151) 12,935 ----------- ------------ ------------ ----------- ----------- Net (decrease) increase in cash and cash equivalents 8,985 (422) 486 9,049 Cash and cash equivalents at beginning of period 3,103 469 816 4,388 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 12,088 $ 47 $ 1,302 $ 13,437 =========== ============ ============ =========== ============
19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report. GENERAL 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 natural fibers. Friction products, which represented 54% of the Company's sales in the first nine months of 1999, 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 equipment, agricultural, truck and specialty vehicle markets. The Company's powder metal components are made from formulations of composite powder metal alloys. The PM segment, which represented 36% of Company sales in the first nine months of 1999, 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 machines and exhaust fans. The Company expects sales to the agricultural and mining and forestry components of its construction markets, which were soft in the first nine months of 1999, to remain under pressure for the remainder of 1999 and into 2000. Compared to the fourth quarter of 1998, sales will also be adversely affected in the fourth quarter of 1999 by the significant reduction in sales from a customer in the PM segment, which has moved the majority of its production offshore. RECENT DEVELOPMENT On October 29, 1999, the Company acquired Quarter Master Industries, Inc. ("Quarter Master"), a manufacturer of premium branded clutch assemblies for high performance automotive racing, including National Association for Stock Car Auto Racing (NASCAR) and Indy Racing League (IRL). In addition to clutch assemblies, Quarter Master manufactures and sells other precision engineered components, including gears, bearings, driveshafts, bellhousings and starters. Quarter Master is located in Lake Zurich, Illinois. The transaction was financed using available cash. THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 Net Sales. Net sales increased $2.2 million, or 5.1%, to $45.6 million in the third quarter of 1999 from $43.4 million in the comparable quarter of 1998. The sales increase was attributable to the acquisition of Allegheny in February 1999. The sales increase was offset by the continued softness in the agricultural and construction markets served by the Company and the shift to offshore production of a major product line by one of the Company's powder metal customers at the Company's Sinterloy facility. Sales in the Company's PM segment increased $2.9 million, or 21.6%, to $16.3 million in the third quarter of 1999 from $13.4 million in the comparable quarter of 1998. Sales in the PM segment, exclusive of Allegheny, decreased $0.7 million, or 5.5%, to $12.7 million in the third quarter of 1999 from $13.4 million in the comparable quarter of 1998. The decrease was attributable to a customer of the Company's Sinterloy facility shifting production overseas and softness in the agriculture market served by the Company's PM facilities. Sales in the Friction segment, which continue to be affected by decreased demand in agriculture, mining and forestry markets, decreased $0.7 million, or 2.8%, to $24.7 million in the third quarter of 1999 from $25.4 million in the comparable quarter of 1998. Demand in the agricultural markets remains weak as the farm sector continues to feel 20 21 the impact of depressed commodity prices. Sales to the mining and forestry markets have declined as a result of the economic downturn affecting Asia and South America. Gross Profit. Gross profit decreased $3.1 million, or 22.5%, to $10.7 million in the third quarter of 1999 from $13.8 million in the comparable quarter of 1998. The decrease is primarily attributable to the underutilization of manufacturing capacity as a result of the sales volume decreases in the Friction segment, product mix changes, and a 26.3% increase in depreciation primarily as a result of the Company's capital expansion program begun in 1998. As a result of these factors, the gross profit margin decreased to 23.5% in the third quarter of 1999 from 31.8% in the comparable period of 1998. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $0.9 million, or 16.1%, to $6.5 million in the third quarter of 1999 from $5.6 million in the comparable period of 1998. The acquisition of Allegheny and expenses associated with the opening of the Company's Mexican facility represented 77.8% of the total increase in ST&A during the third quarter of 1999. As a percent of sales, ST&A expenses increased to 14.3% of sales in the third quarter of 1999 from 12.9% in the comparable quarter of 1998. This increase was due primarily to the sales volume declines experienced by the Company in its Friction segment and the addition of the ST&A expenses of Allegheny and Mexico. Income from Operations. Income from operations decreased by $4.1 million, or 56.2%, to $3.2 million in the third quarter of 1999 from $7.3 million in the comparable quarter of 1998. Income from operations as a percent of net sales decreased to 7.0% in the third quarter of 1999 from 16.8% in the comparable quarter of 1998, reflecting decreased sales activity, product mix, gross margin deterioration and increased depreciation expense. Operating income from the Company's Friction segment decreased $2.9 million, or 67.4%, to $1.4 million in the third quarter of 1999 from $4.3 million in the comparable quarter of 1998. This decline was primarily driven by the sales volume declines in the agriculture, mining and forestry markets. Operating income from the Company's PM segment decreased $0.7 million, or 25.0%, to $2.1 million in the third quarter of 1999 from $2.8 million in the comparable quarter of 1998. The decline in this segment was caused by the loss of production to an offshore site and a shift to lower margin products during the quarter. This decline was partially offset by the contribution of operating income from the acquisition of Allegheny. Interest Expense. Interest expense decreased $0.1 million, or 4.2%, to $2.3 million in the third quarter of 1999 from $2.4 million in the comparable quarter of 1998. The decrease is attributable primarily to lower debt levels partially offset by higher interest rates during the quarter. Other (Income) Expense. During the third quarter of 1999, the Company reported other income of $0.5 million. This income resulted from the collection of a contingent receivable relating from the purchase of S. K. Wellman Corp. in 1995, partially offset by a loss on the sale of an unused manufacturing facility in LaVergne, Tennessee during the quarter. Income Taxes. The provision for income taxes decreased to $0.4 million in the third quarter of 1999 from $2.2 million in the comparable quarter of 1998, reflecting the decrease in pre-tax income and the availability of jobs tax and investment tax credits available to the Company. The Company's effective tax rate during the third quarter of 1999 was 23.0% compared to 42.5% in the comparable quarter of 1998. The decrease in the effective rate during the third quarter of 1999 resulted primarily from the Company qualifying for the tax credits. Net Income. As a result of the factors discussed above, net income decreased $1.7 million, or 58.6%, to $1.2 million in the third quarter of 1999 from $2.9 million in the comparable period of 1998. 21 22 FIRST NINE MONTHS OF 1999 COMPARED TO FIRST NINE MONTHS OF 1998 Net Sales. Net sales increased by $0.7 million, or 0.5%, to $140.8 million during the first nine months of 1999 from $140.1 million during the first nine months of 1998. The sales increase during the period was attributable to the acquisitions of Clearfield and Allegheny offset by the softness in the agricultural and construction markets served by the Company and the shift to offshore production of a major product line by one of the Company's powder metal customers at the Company's Sinterloy facility. In addition, sales to the aerospace market in the Friction segment declined 7.0% from record levels in 1998. Sales in the Friction segment decreased 11.4% to $75.8 million for the nine months ended September 1999 from $85.5 million in the comparable period of 1998. Sales in the Company's PM segment increased 27.9% to $50.9 million for the first nine months of 1999 from $39.8 million in the comparable period of 1998. Exclusive of Clearfield and Allegheny, sales of powder metal products decreased by 10.8%. Gross Profit. Gross profit decreased $7.6 million, or 16.9%, to $37.5 million during the first nine months of 1999 from $45.1 million during the first nine months of 1998. The gross profit margin decreased to 26.6% during the first nine months of 1999 from 32.2% during the comparable period of 1998. The decrease was primarily due to the underutilization of manufacturing capacity as a result of sales volume decreases in the Friction segment, product mix changes, and a 28.1% increase in depreciation primarily as a result of the Company's capital expansion program begun in 1998. Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased $2.4 million, or 14.0%, to $19.6 million during the first nine months of 1999 from $17.2 million during the first nine months of 1998. The acquisition of Clearfield and Allegheny was the primary reason for this increase. ST&A increased to 13.9% of sales during the first nine months of 1999 from 12.3% during the comparable period of 1998. This increase was due primarily to the sales volume declines experienced by the Company in its Friction segment and the addition of the ST&A expenses of Clearfield and Allegheny. Income from Operations. Income from operations decreased by $10.2 million, or 40.3%, to $15.1 million during the first nine months of 1999 from $25.3 million in the comparable nine month period of 1998. Income from operations as a percent of net sales decreased to 10.7% in the first nine months of 1999 from 18.1% in the comparable nine month period of 1998, reflecting decreased Friction sales activity, product mix, gross margin deterioration and increased depreciation expense. Operating income from the Company's Friction segment decreased $7.2 million, or 51.4%, to $6.8 million for the first nine months of 1999 from $14.0 million in the comparable nine month period of 1998. This decline was primarily driven by the sales volume declines in the agriculture, mining, forestry and aerospace markets. Operating income from the Company's PM segment decreased $1.7 million, or 16.4%, to $8.7 million in the first nine months of 1999 from $10.4 million in the comparable nine month period of 1998. The decline in this segment was caused by the loss of production to an offshore site and a shift to lower margin products during the quarter. This decline was partially offset by the contribution of operating income from the acquisitions of Clearfield and Allegheny. Interest Expense. Interest expense decreased $2.4 million, or 25.3%, to $7.1 million in the first nine months of 1999 from $9.5 million in the comparable nine month period of 1998. The decrease is attributable to lower debt levels, a result of the repayment of debt from the proceeds of the Company's IPO during the second quarter of 1998 and, to a lesser extent, lower interest rates incurred by the Company in the period compared to the first nine months of 1998. Income Taxes. The provision for income taxes decreased to $3.5 million in the first nine months of 1999 from $7.0 million in the comparable period of 1998, reflecting the decrease in pre-tax income and the availability of jobs tax and investment tax credits available to the Company. The Company's effective tax rate during the first nine months of 1999 was 38.2% compared to 42.5% in the comparable nine month period of 1998. The decrease in the effective rate during the third quarter of 1999 resulted primarily from the Company qualifying for the tax credits. 22 23 Income before Extraordinary Charge. As a result of the items discussed above, income before extraordinary items decreased $3.8 million, or 40.0%, to $5.7 million for the nine months ended September 30, 1999 from $9.5 million in the comparable period of 1998. Extraordinary Charge. During the nine month period ended September 30, 1998, the Company incurred an extraordinary loss of $3.1 million, net of tax, as a result of the repurchase of $35.0 million of Senior Notes and the retirement of all its outstanding Senior Subordinated Notes. Net Income. Net income decreased $0.7 million, or 10.9%, to $5.7 million in the first nine months of 1999 from $6.4 million in the comparable period of 1998. 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 $50.0 million revolving credit facility (the "Revolver") entered into in May 1998, which may be used for general corporate purposes or to finance future acquisitions. As of September 30, 1999, the Company had $49.5 million available under the Revolver. Net cash from operating activities was $13.8 million and $19.8 million for the nine month period ended September 30, 1999 and 1998, respectively. Cash used to support working capital assets at September 30, 1999 primarily accounted for the decrease in operating cash flow. Net cash used in investing activities was $17.7 million and $23.7 million for the nine month period ended September 30, 1999 and 1998, respectively. The cash used in investing activities during the nine month period ended September 30, 1999, consisted of the $14.5 million for the acquisition of Allegheny and $6.9 million for the purchases of property, plant and equipment. The Company received $3.6 million from the sale of an unused manufacturing facility in LaVergne, Tennessee during the nine month period ended September 30, 1999. In the comparable period of 1998, cash used in investing activities consisted of $9.1 million for the acquisition of Clearfield, $11.1 million for purchases of property, plant and equipment and $4.1 million for the purchase of marketable securities. Net cash used in financing activities was $7.5 million for the nine month period ended September 30, 1999 primarily from the repurchase of $2.8 million of the Company's common stock and the payment of $4.7 million of outstanding debt. In the nine month period ended September 30, 1998, cash provided by financing activities was $12.9 million received primarily from the proceeds of the Company's IPO and proceeds from a new $35.0 million term loan. These proceeds were used to retire $65.0 million of debt outstanding. 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. As of September 30, 1999, 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 growth through acquisitions for the next twelve months. 23 24 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 Chief Information Officer. The initiative included 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 primarily used its own employees to achieve readiness in most of its manufacturing and operating systems. The Company has also used 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. In connection with the Company's investigation of these systems, the Company believes that Year 2000 issues related to these systems have been addressed. In 1998, the Company implemented a replacement of its manufacturing and accounting software and hardware systems, which are Year 2000 compliant, in its Friction segment. As of September 30, 1999, the implementation was completed at its domestic friction locations. The accounting software and hardware at the Company's other locations has been made Year 2000 compliant through software upgrade programs by third party vendors. Each of the Company's operating units, in coordination with the Chief Information Officer, has identified and communicated with the Company's key suppliers, distributors and customers about their Year 2000 readiness plans and progress. All of the Company's material suppliers, distributors and customers have provided the Company with positive statements of Year 2000 readiness. The Company has had limited expenditures related to Year 2000 issues, which consisted principally of personnel costs incurred in the ordinary course of business. The Company's costs of software and hardware replacements to make all of its technology systems Year 2000 compliant have been less than $0.3 million. The Company has finalized a strategy to address issues, which may result from any Year 2000 failures. These plans are in place for each Company location and set forth procedures to address and remediate issues that are deemed to be of a critical nature. Expenditures related to the contingency strategy are immaterial to the Company's results of operations, financial position or liquidity. EURO PREPARATIONS The Company has completed an upgrade of its systems to accommodate the new Euro currency. The cost of this upgrade was immaterial to the Company's financial results. Although difficult to predict, any competitive implications and any impact on existing financial instruments of using the Euro currency are expected to be immaterial to the Company's results of operations, financial position or liquidity. 24 25 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 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 Quarter Master 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 and construction friction markets; - - 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. Any investor or potential investor in the Company must consider these risks and others that are detailed in other filings by the Company with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market Risk Disclosures. 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. 25 26 Interest Rate Sensitivity. In June 1998, the Company entered into an interest rate swap with a notional amount of $35.0 million. At September 30, 1999, the notional amount was $28.8 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 September 30, 1999, the Company would pay approximately $0.2 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, Canadian dollars and Mexican pesos. 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 September 30, 1999 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Effective September 2, 1999, the Company issued 320 shares of its Class A Common Stock to Jack Kemp, a newly-elected director of the Company, as part of his annual compensation for services as a director of the Company. The 320 shares had a market value of $2,500 at the time of issuance. The shares were issued without registration as permitted by Section 4(2) of the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K: None 26 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 1999 HAWK CORPORATION By: /s/ RONALD E. WEINBERG ---------------------------- Ronald E. Weinberg, Co-Chairman and Treasurer By: /s/ THOMAS A. GILBRIDE ---------------------------- Thomas A. Gilbride, Vice President- Finance (Chief Accounting Officer) 27 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2,935 0 31,064 340 25,701 64,895 105,972 35,863 204,813 33,086 94,280 0 1 92 66,294 204,813 140,781 140,781 103,264 22,413 (1,179) 0 7,095 9,188 3,512 5,676 0 0 0 5,676 .64 .63
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