<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1997
Commission file number 333-18433
HAWK CORPORATION
----------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1608156
- ----------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
200 Public Square, Suite 30-5000, Cleveland, Ohio 44114
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 861-3553
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (for for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of the date of
this report, the Registrant had the following number of shares of common stock
outstanding:
Class A Common Stock, $0.01 par value: 1,443,978
Class B Non-Voting Common Stock, $0.01 par value: None (0)
1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION.......................................................3
Item 1. Financial Statements (Unaudited).........................3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........17
PART II OTHER INFORMATION..........................................................22
Item 1. Legal Proceedings.......................................22
Item 2. Changes in Securities...................................22
Item 6. Exhibits and Reports on Form 8-K........................22
SIGNATURES.........................................................................23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ - ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,635 $ 25,774
Accounts receivable, less allowance of $178 and
$182, respectively 22,788 16,783
Inventories 23,180 20,864
Deferred income taxes 2,483 2,432
Other current assets 1,255 935
--------- --------
Total current assets 60,341 66,788
PROPERTY, PLANT AND EQUIPMENT:
Land 1,195 1,080
Buildings and improvements 7,990 7,615
Machinery and equipment 49,083 45,766
Furniture and fixtures 1,785 1,611
Construction in progress 3,658 2,825
--------- --------
63,711 58,897
Less accumulated depreciation 16,291 14,755
--------- --------
Total property, plant and equipment 47,420 44,142
OTHER ASSETS:
Intangible assets 47,512 39,939
Net assets held for sale 3,604 3,604
Shareholder notes 1,775 1,838
Other 1,720 2,130
------ --------
Total other assets 54,611 47,511
-------- --------
TOTAL ASSETS $162,372 $158,441
======== ========
</TABLE>
3
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 9,572 $ 8,194
Accrued compensation 4,252 6,775
Other accrued expenses 4,947 2,405
Current portion of long-term debt 793 714
-------- --------
Total current liabilities 19,564 18,088
LONG-TERM LIABILITIES:
Long-term debt 130,352 128,469
Deferred income taxes 4,716 4,090
Other 2,004 2,004
--------- --------
Total long-term liabilities 137,072 134,563
DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION 4,600 4,600
SHAREHOLDERS' EQUITY:
Series A preferred stock, $.01 par value and an
aggregate liquidation value of $1,375,000, plus
any accrued or unpaid dividends, with 10%
cumulative dividend (2,625 shares authorized,
1,375 shares issued and outstanding); Series B
preferred stock, $.01 par value and an aggregate
liquidation value of $702,000, plus any accrued
or unpaid dividends, with 9% cumulative dividend
(702 shares authorized, issued and outstanding);
Series C preferred stock, $.01 par value and an
aggregate liquidation value of $1,190,000, plus
any accrued or unpaid dividends with 10%
cumulative dividend (1,190 shares authorized,
issued and outstanding) 1 1
Class A common stock, $.01 par value; 2,200,000
shares authorized, 1,443,978 issued and outstanding 14 14
Class B common stock, $.01 par value, 375,000 shares
authorized, none issued or outstanding
Additional paid-in capital 1,964 1,964
Accumulated deficit (175) (974)
Other equity adjustments (668) 185
-------- --------
Total shareholders' equity 1,136 1,190
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $162,372 $158,441
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. See notes to
consolidated financial statements.
4
<PAGE> 5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------------------------------
<S> <C> <C>
Net sales $ 36,884 $ 31,422
Cost of sales 26,368 23,056
----------- -----------
Gross profit 10,516 8,366
Selling, technical and administrative expenses 4,554 3,669
Amortization of intangibles 829 651
Plant consolidation expense 600
----------- -----------
Total expenses 5,383 4,920
----------- -----------
Income from operations 5,133 3,446
Interest expense 3,679 2,513
Other (income) expense, net (250) 5
----------- -----------
Income before income taxes 1,704 928
Income taxes 806 416
----------- -----------
Net income $ 898 $ 512
=========== ===========
Preferred stock dividend requirements $ (80) $ (81)
=========== ===========
Net income applicable to common shareholders $ 818 $ 431
=========== ===========
Net income per share applicable to
common shareholders $ .46 $ .24
=========== ===========
Number of shares used to compute per
share data 1,760,946 1,760,946
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 898 $ 512
Adjustments to reconcile net income
to net cash used in
operating activities:
Depreciation and amortization 2,427 2,057
Accretion of discount on debt 163 163
Changes in operating assets and liabilities:
Accounts receivable (5,097) (2,831)
Inventories (1,871) (1,158)
Other assets (953) 442
Accounts payable 859 810
Other liabilities 44 (3,564)
-------- --------
Net cash used in operating activities (3,530) (3,569)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Hutchinson (10,368) 0
Purchases of property, plant and equipment (1,194) (2,919)
Payments received on shareholder notes 63 96
-------- --------
Net cash used in investing activities (11,499) (2,823)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt 14,898
Payments on long-term debt (325) (8,317)
Deferred financing costs 227 0
Payments of preferred stock dividends (80) (81)
Other 68 (649)
-------- --------
Net cash (used in) provided by financing activities (110) 5,851
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,139) (541)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,774 771
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,635 $ 230
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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 three-month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Form S-4
(Registration No. 333-18433) for Hawk Corporation (the "Company") for the year
ended December 31, 1996.
Net income per share is based on the weighted average number of common shares
and common share equivalents (warrants) outstanding during the respective
periods. Earnings available to common shareholders includes an adjustment for
preferred stock dividends paid during the respective periods
The Company operates in one principal business segment, the design, engineering,
manufacturing and marketing of friction products and precision-engineered
components for aerospace, industrial and other specialty applications.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and also include, effective January 2, 1997, the
accounts of Hutchinson Products Corporation. (See Note 3). All significant
inter-company accounts and transactions have been eliminated in the accompanying
financial statements.
2. Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The major components of inventories are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Raw materials and work-in-process $ 19,186 $ 17,239
Finished products 4,666 4,226
Inventory reserves (672) (601)
---------------- --------------
$ 23,180 $ 20,864
================ =============
</TABLE>
7
<PAGE> 8
3. Acquisitions
------------
Effective January 2, 1997, the Company acquired all of the outstanding capital
stock of Houghton Acquisition Corporation and merged it into the newly formed
Hutchinson Products Corporation (Hutchinson) for (1) $10.4 million in cash; (2)
$1.5 million in 8.0% two-year convertible notes; and (3) contingent payments to
be made by the Company if Hutchinson meets certain earnings targets. The
acquisition has been accounted for as a purchase. The excess of the purchase
price over the estimated fair value of the capital stock acquired in the amount
of $7.7 million is being amortized over 30 years and is included in intangible
assets. The results of operations of Hutchinson are included in the Company's
consolidated statements of income since the date of acquisition. Hutchinson's
principal business is the production and sale of rotors for use in small
horsepower motors and, to a lesser extent, the machining and sale of aluminum
extrusions and castings, principally fan spacers used by engine manufacturers
and gas nozzles used in gasoline pumping units.
The proforma unaudited consolidated results of operations for the three months
ended March 31, 1996 give effect to the above acquisition as though it had
occurred on January 1, 1996 and include certain adjustments, such as additional
amortization expense as a result of goodwill and deferred financing costs,
increased depreciation expense as a result of the write-up of certain machinery
and equipment to its fair value and increased interest expense related to debt
incurred for the acquisition.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
--------------------
(In Thousands)
<S> <C>
Net sales $ 2,155
==================
Net income $ 137
==================
</TABLE>
Proforma net sales and net income are not necessarily indicative of the net
sales and net income that would have occurred had the acquisition been made at
the beginning of the respective year or the results which may occur in the
future.
4. Long-Term Debt
--------------
In November 1996, the Company issued $100,000,000 in Senior Notes due on
December 1, 2003, unless previously redeemed, at the Company's option, in
accordance with the terms of the Notes. Interest is payable semi-annually on
June 1 and December 1 of each year commencing June 1, 1997, at a fixed rate of
10.25%. Substantially all of the Senior Notes were exchanged for the Exchange
Notes on April 21, 1997. The terms of the Exchange Notes are identical in all
material respects to the terms of the Senior Notes, except that the Exchange
Notes are freely transferable with certain limited exceptions by their holders.
The Exchange Notes are fully and unconditionally guaranteed on a joint and
several basis by each of the direct or
8
<PAGE> 9
indirect wholly-owned domestic subsidiaries of the Company (Guarantor
Subsidiaries). (See Note 7).
5. Contingencies
-------------
The Company has wage continuation agreements with two of its
officers/shareholders. In the event the officer/shareholder dies or becomes
permanently disabled while employed by the Company, each agreement provides for
payments to be made annually to the officer/shareholder's spouse based on a
compensation formula, until the spouse's death.
6. Recently Issued Accounting Pronouncements
-----------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The overall
objective of SFAS is to simplify the calculation of earnings per share (EPS) and
achieve comparability with international accounting standards. SFAS No. 128 is
effective in the fourth quarter ended December 31, 1997 for the Company.
Subsequent to the effective date, all prior period EPS amounts are required to
be restated to conform to the provisions of Statement 128. The adoption of SFAS
No. 128 is not anticipated to have a material effect on the Company's financial
statements or results of operations.
7. Supplemental Guarantor Information
----------------------------------
As discussed in Note 4, each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis the obligation to pay
principal, premium, if any and interest with respect to the Notes. The Guarantor
Subsidiaries are direct, wholly-owned subsidiaries of the Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
1. Consolidating condensed balance sheets as of March 31, 1997 and
December 31, 1996, consolidating condensed statements of income
for the three months ended March 31, 1997 and 1996 and
consolidating condensed statements of cash flows for the three
months ended March 31, 1997 and 1996.
2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
subsidiaries in Canada and Italy) with their investments in
subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented. The Revolving Credit Facility contains covenants that, among
other things, would prohibit
9
<PAGE> 10
the payment of any dividends to the Company by the subsidiaries of the Company
(including Guarantor Subsidiaries) in the event of a default under the terms
of the Revolving Credit Facility.
10
<PAGE> 11
Supplemental Consolidating Condensed Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $10,577 $ 3 $ 55 $ 10,635
Accounts receivable, net 238 16,712 5,976 $ (138) 22,788
Inventories, net 18,716 4,464 23,180
Deferred income taxes 1,390 1,093 2,483
Other current assets 67 445 743 1,255
--------------------------------------------------------------------------------
Total current assets 12,272 36,969 11,238 (138) 60,341
Other Assets:
- -------------
Investment in subsidiaries 780 5,640 (6,420)
Inter-company advances, net 126,390 7,587 38 (134,015)
Property, plant and
equipment 42,112 5,308 47,420
Intangible assets 244 47,268 47,512
Other 1,675 5,403 21 7,099
--------------------------------------------------------------------------------
Total other assets 129,089 108,010 5,367 (140,435) 102,031
--------------------------------------------------------------------------------
TOTAL ASSETS $ 141,361 $ 144,979 $ 16,605 $ (140,573) $ 162,372
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 6,689 $ 2,883 $ 9,572
Accrued compensation $ 64 3,371 817 4,252
Other accrued expenses 756 4,096 95 4,947
Current portion of
long-term debt 368 425 793
--------------------------------------------------------------------------------
Total current liabilities 820 14,524 4,220 19,564
Long-term Liabilities:
Long-term debt 126,538 3,814 130,352
Deferred income taxes 4,090 350 276 4,716
Other 972 1,032 2,004
Inter-company advances, net 2,986 126,510 5,437 $ (134,933)
--------------------------------------------------------------------------------
Total long-term liabilities 133,614 131,646 6,745 (134,933) 137,072
--------------------------------------------------------------------------------
Total liabilities 134,434 146,170 10,965 (134,933) 156,636
Detachable stock warrants,
subject to put option 4,600 4,600
Shareholders' equity (deficit) 2,327 (1,191) 5,640 (5,640) 1,136
--------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 141,361 $ 144,979 $ 16,605 $ (140,573) $ 162,372
================================================================================
</TABLE>
11
<PAGE> 12
Supplemental Consolidating Condensed Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 25,187 $ 5 $ 582 $ 25,774
Accounts receivable, net 189 10,884 5,710 16,783
Inventories, net 16,120 4,744 20,864
Deferred income taxes 1,390 1,042 2,432
Other current assets 67 373 495 935
----------------------------------------------------------------------------
Total current assets 26,833 28,424 11,531 66,788
Other Assets:
Investment in subsidiaries 775 6,457 $ (7,232)
Inter-company advances, net 108,607 19,543 (128,150)
Property, plant and
equipment 38,394 5,748 44,142
Intangible assets 504 39,435 39,939
Other 1,838 5,318 416 7,572
----------------------------------------------------------------------------
Total other assets 111,724 109,147 6,164 (135,382) 91,653
----------------------------------------------------------------------------
Total Assets $ 138,557 $137,571 $ 17,695 $ (135,382) $ 158,441
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ (157) $ 5,167 $ 3,184 $ 8,194
Accrued compensation 100 5,856 819 6,775
Other accrued expenses (719) 2,728 396 2,405
Current portion of long-term debt 289 425 714
----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES (776) 14,040 4,824 18,088
Long-term Liabilities:
Long-term debt 126,375 1,290 804 128,469
Deferred income taxes 2,729 1,057 304 4,090
Other 1,272 732 2,004
Inter-company advances, net 3,532 120,819 4,574 $ (128,925)
----------------------------------------------------------------------------
Total long-term liabilities 132,636 124,438 6,414 (128,925) 134,563
----------------------------------------------------------------------------
Total liabilities 131,860 138,478 11,238 (128,925) 152,651
Detachable stock warrants,
subject to put option 4,600 4,600
Shareholders' equity (deficit) 2,097 (907) 6,457 (6,457) 1,190
----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $138,557 $ 137,571 $ 17,695 $ (135,382) $ 158,441
===========================================================================
</TABLE>
12
<PAGE> 13
Supplemental Consolidating Condensed Income Statement (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 32,821 $ 5,012 $ (949) $ 36,884
Cost of sales 23,201 4,116 (949) 26,368
------------------------------------------------------------------------------
Gross profit 9,620 896 10,516
Expenses:
Selling, technical and
administrative expenses 4,044 510 4,554
Amortization of intangible assets $ 2 827 829
------------------------------------------------------------------------------
Total expenses 2 4,871 510 5,383
------------------------------------------------------------------------------
Income (loss) from operations (2) 4,749 386 5,133
Interest expense, net 162 3,421 96 3,679
Income from equity investees 832 109 (941)
Other (income) expense, net (274) (139) 163 (250)
------------------------------------------------------------------------------
Income before income taxes 942 1,576 127 (941) 1,704
Income taxes 44 744 18 806
------------------------------------------------------------------------------
NET INCOME $ 898 $ 832 $ 109 $ (941) $ 898
==============================================================================
</TABLE>
13
<PAGE> 14
Supplemental Consolidating Condensed Income Statement (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
-----------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 36 $ 26,804 $ 5,169 $ (587) $ 31,422
Cost of sales 19,661 3,946 (551) 23,056
-----------------------------------------------------------------------------
Gross profit 36 7,143 1,223 (36) 8,366
Expenses:
Selling, technical and
administrative expenses (40) 3,281 464 (36) 3,669
Amortization of intangible assets 650 1 651
Plant consolidation expense 600 600
-----------------------------------------------------------------------------
Total expenses (40) 4,531 465 (36) 4,920
-----------------------------------------------------------------------------
Income from operations 76 2,612 758 3,446
Interest (income) expense, net (66) 2,523 56 2,513
Income from equity investees 794 421 (1,215)
Other expense, net 3 2 5
-----------------------------------------------------------------------------
Income before income taxes 933 508 702 (1,215) 928
Income taxes (credit) 135 281 416
-----------------------------------------------------------------------------
NET INCOME $ 933 $ 373 $ 421 $ (1,215) $ 512
=============================================================================
</TABLE>
14
<PAGE> 15
Supplemental Consolidating Condensed Statement
of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (4,225) $ 519 $ 176 $ (3,530)
Cash flows from investing activities:
Purchase of Houghton Acquisition
Corporation (10,368) (10,368)
Purchase of property, plant and
equipment (648) (546) (1,194)
Payments on shareholder loans 63 63
------------------------------------------------------------------------------
Net cash used in investing activities (10,305) (648) (546) (11,499)
Cash flows from financing activities:
Payments on long-term debt (168) (157) (325)
Deferred financing costs 227 227
Payment of preferred stock dividend (80) (80)
Other 68 68
------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (80) 127 (157) (110)
-------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (14,610) (2) (527) (15,139)
Cash and cash equivalents
at beginning of period 25,187 5 582 25,774
-----------------------------------------------------------------------------
Cash and Cash Equivalents
at end of period $ 10,577 $ 3 $ 55 $ 10,635
==============================================================================
</TABLE>
15
<PAGE> 16
Supplemental Consolidating Condensed Statements
of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
-------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (6,405) $ 2,829 $ 7 $ (3,569)
Cash flows from investing activities:
Purchase of property, plant and
equipment (2,644) (275) (2,919)
Other 96 96
-------------------------------------------------------------------------------
Net cash used in investing activities (2,548) (275) (2,823)
Cash flows from financing activities:
Proceeds from borrowings of
long-term debt 14,608 290 14,898
Payments on long-term debt (8,300) (17) (8,317)
Payment of preferred stock dividend (81) (81)
Other (649) (649)
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,227 (359) (17) 5,851
-------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (178) (78) (285) (541)
Cash and cash equivalents
at beginning of period 408 78 285 771
-------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 230 $ 0 $ 0 $ 230
===============================================================================
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing
elsewhere in this report.
GENERAL
Hawk designs, engineers, manufactures and markets friction products (75.6% of
sales in the first quarter of 1997) and precision-engineered components (24.4%).
The Company is a leading worldwide supplier of friction products for brakes,
clutches and transmissions used in aerospace, industrial and specialty
applications. The Company is also a leading supplier of precision engineered
components primarily made from powder metals, including pump elements, gears,
transmission plates, pistons and anti-lock brake sensor rings, used in
industrial applications. The Company focuses on manufacturing products requiring
sophisticated engineering and production techniques for applications in
aerospace and specialty industrial markets where it has achieved a major market
position.
Since 1989, Hawk has pursued a strategic plan of fostering growth by making
complementary acquisitions and broadening its customer base. All of Hawk's
acquisitions, including the acquisition of Hutchinson which was closed on
January 2, 1997, were accounted for under the purchase method of accounting,
with the purchase price allocated to the estimated fair market value of the
assets acquired and liabilities assumed. In the acquisitions, any excess of the
purchase price paid over the estimated fair value of the net assets acquired
was allocated to goodwill, which resulted in approximately $29.7 million of
goodwill reflected on the March 31, 1997 balance sheet. The annual amortization
of goodwill will result in non-cash charges to future operations of
approximately $1.5 million per year (of which the majority of such amortization
is deductible for tax purposes) based on amortization periods ranging from 15
to 40 years.
ACQUISITION
On January 2, 1997 the Company acquired all of the outstanding capital stock of
Hutchinson for (1) $10.4 million in cash; (2) $1.5 million in 8.0% two-year
convertible notes; and (3) contingent payments to be made by the Company if
Hutchinson meets certain earnings targets. The cash portion of the purchase
price was funded with the Company's existing cash balances.
17
<PAGE> 18
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Net Sales
- ---------
Net Sales increased $5.5 million or 17.4% to $36.9 million in the first quarter
of 1997 from $31.4 million in the comparable quarter of 1996.
The increase in net sales reflects the impact of the Hutchinson acquisition, as
well as increased sales in friction products and, to a lesser extent,
precision-engineered components. Sales of friction products increased $2.3
million or 9.8% to $25.8 million in the first quarter of 1997 from $23.5 million
in the comparable quarter of 1996. The growth was driven by strong demand in the
aerospace, construction and agricultural markets. Sales of precision engineered
components, exclusive of Hutchinson, increased $0.6 million or 11.1% to $6.0
million in the first quarter of 1997 from $5.4 million in the comparable quarter
of 1996. The increase was primarily attributable to the addition of a new
customer in the truck market, as well as increased demand in the fluid power
markets served by the Company.
Gross Profit
- ------------
Gross profit increased $2.1 million or 25.7% to $10.5 million in the first
quarter of 1997 from $8.4 million in the comparable quarter of 1996. The gross
profit margin increased to 28.5% in the first quarter of 1997 from 26.6% in the
comparable period in 1996. The increase is primarily attributable to cost
savings, as a result of the closing of one of the Company's manufacturing
facilities during 1996 and the consolidation of its operations into an existing
Company facility and increased sales from the Company's higher margin aerospace
friction products.
Selling, Technical and Administrative ("ST&A") Expenses
- -------------------------------------------------------
Selling, technical and administrative expenses increased $0.9 million or 24.1%
to $4.6 million in the first quarter of 1997. As a percentage of sales, ST&A
expenses increased to 12.4% of sales in the first quarter of 1997 compared to
11.7% in the comparable quarter of 1996, primarily as a result of increased
administrative overhead and personnel costs.
Plant Consolidation Expense
- ---------------------------
All costs associated with the closure and consolidation of a manufacturing
facility were incurred in 1996.
Income from Operations
- ----------------------
Income from operations increased by $1.7 million or 49.0% to $5.1 million in the
first quarter of 1997, as compared to the comparable quarter of 1996. Income
from operations as a percent of net sales increased to 13.9% in the first
quarter of 1997 from 11.0% in the
18
<PAGE> 19
comparable quarter of 1996, reflecting changes in cost savings from the closed
facility, product mix and margin improvement.
Interest Expense
- ----------------
Interest expense increased $1.2 million or 46.4% to $3.7 million in the first
quarter of 1997 from the comparable quarter of 1996. The increase is
attributable to higher debt levels as a result of the issuance of Senior Notes
in the fourth quarter of 1996.
Income Taxes
- ------------
The provision for income taxes increased to $0.8 million in the first quarter of
1997 from $0.4 million in the comparable quarter of 1996, reflecting the
increase in pre-tax income.
Net Income
- ----------
As a result of the factors noted above, net income increased $0.4 million to
$0.9 million or 75.4% in the first quarter of 1997 as compared to the first
quarter of 1996.
Liquidity and Capital Resources
- -------------------------------
As a result of the recent acquisitions by the Company and the issuance of the
Senior Notes, the Company has, and will continue to have, substantial
indebtedness. The Company will therefore be required to use a substantial
portion of its cash flow from operations for the payment of interest expense on
indebtedness.
Under the terms of the Senior Notes and the Exchange Notes, the Company is
subject to certain restrictive covenants, including, but not limited to,
covenants imposing limitations on: the incurrence of additional indebtedness;
certain payments, including dividends and investments; the creation of liens;
sales of assets and preferred stock; transactions with interested persons;
payment restrictions affecting subsidiaries; sale-leaseback transactions; and
mergers and consolidations.
Concurrently with the issuance of the Senior Notes, the Company and its domestic
subsidiaries entered into its Revolving Credit Facility, consisting of a
revolving credit loan that equals the lesser of (1) $25.0 million, or (2) the
sum of 85% of eligible accounts receivable and 60% of eligible inventory. The
Revolving Credit Facility is secured by substantially all of the accounts
receivable, inventory and intangibles of the Company and its domestic
subsidiaries. In addition, the Revolving Credit Facility contains financial and
other covenants with respect to the Company and its subsidiaries that, among
other matters, prohibit the payment of any dividends to the Company by the
subsidiaries of the Company in the event of a default under the terms of the
Revolving Credit Facility, restrict the creation of certain liens and require
the maintenance of certain minimum interest coverage. Currently, there are no
amounts outstanding under the Revolving Credit Facility.
19
<PAGE> 20
The Company has outstanding $30.0 million of Senior Subordinated Notes.
Principal payments on these notes are due in equal installments of $10.0 million
on January 31, 2004, and June 30, 2004 and 2005. Interest on the Senior
Subordinated Notes is payable quarterly at 12.0% per annum. The Senior
Subordinated Notes are guaranteed by certain domestic subsidiaries of the
Company. These notes contain certain financial and other covenants and
restrictions, including restrictions on the ability of less than wholly-owned
subsidiaries of the Company, if any, to pay dividends or make other
distributions to the Company.
As of March 31, 1997 the Company was in compliance with the terms of its
indebtedness.
Net cash used in operating activities was $3.5 million for the first quarter of
1997, and $3.6 million for the comparable period in 1996. The $0.1 million
increase in cash provided by operating activities for the 1997 period was
primarily a result of increased net income and depreciation and amortization
charges, offset by increased working capital requirements.
Net cash used in investing activities was $11.5 million and $2.8 million for the
quarters ending March 31, 1997 and 1996, respectively. The cash used in
investing activities in the first quarter of 1997 consisted of $10.4 million
attributable to the acquisition of Hutchinson and $1.2 million for the purchases
of property, plant and equipment. In the comparable period of 1996, cash used in
investing activities consisted primarily of $2.9 million of capital
expenditures.
Net cash used in financing activities was $0.1 million for the first quarter of
1997 used primarily for the payment of capital lease obligations of the Company.
The first quarter 1996 net cash provided by financing activities of $5.9 million
was attributable to an increase in borrowings under the Company's previous
credit facilities.
The primary uses of capital by the Company are (1) to pay interest on, and to
repay principal of, indebtedness, (2) for capital expenditures for maintenance,
replacement and acquisitions of equipment, expansion of capacity, productivity
improvements and product development, and (3) making additional strategic
acquisitions of complementary businesses.
The Company believes that cash flow from operating activities, and additional
funds available under the Revolving Credit Facility, will be sufficient to meet
its currently anticipated operating and capital expenditure requirements and
service its indebtedness for the next 12 months.
Forward Looking Statements
- --------------------------
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
expansion into new markets and growth in existing markets, are forward-looking
statements that involve risks and uncertainties. These risks and uncertainties
include, but are not limited to (1) the
20
<PAGE> 21
Company's substantial leverage, which requires significant cash flows to service
debt, reducing funds for operations and other business opportunities and
increasing the Company's vulnerability to competition and to adverse general
economic and industry conditions; (2) the ability of the Company to continue to
meet the terms of the Company's credit documents which contain a number of
significant financial covenants and other restrictions; (3) the Company's
reliance on significant customers; (4) supplies and prices of raw materials used
by the Company; (5) whether the Company's aerospace friction products will be
able to continue to meet stringent Federal Aviation Administration criteria and
testing requirements;(6) whether the Company will be able to successfully
integrate Hutchinson into its operations; and (7) the Company's continued
expansion into international markets, with all the risks inherent in doing
business internationally, including unexpected changes in regulatory
requirements, export restrictions, currency controls, tariffs and other trade
barriers, potential instability, fluctuation in currency exchange rates and
potential adverse tax consequences. Any investor or potential investor in the
Company must consider these risks and others that are detailed in the
Company's Form S-4 (333-18433).
21
<PAGE> 22
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.
On April 21, 1997, the Company and its domestic subsidiaries, Friction Products
Co., Hawk Brake, Inc., Logan Metal Stampings, Inc., S.K. Wellman Holdings, Inc.,
S.K. Wellman Corp., Wellman Friction Products U.K. Corp., Helsel, Inc. and
Hutchinson Products Corporation (together, the "Guarantors"), completed their
offer to exchange (the "Exchange Offer") up to $100,000,000 in aggregate
principal amount of the Company's Exchange Notes for $100,000,000 in aggregate
principal amount of the Company's outstanding Senior Notes. The terms of the
Exchange Notes are identical in all material respects (including principal
amount, interest rate and maturity) to the terms of the Senior Notes for which
they were exchanged pursuant to the Exchange Offer, except that the Exchange
Notes are, with certain limited exceptions described in the Prospectus relating
to the Exchange Offer dated March 20, 1997, freely transferable by the holders
thereof and are not subject to any covenant regarding registration. The Exchange
Notes evidence the same indebtedness as the Senior Notes and are entitled to the
benefits of the Indenture dated as of November 27, 1996, among the Company, the
Guarantors and Bank One Trust Company, NA, as trustee, governing the Senior
Notes and the Exchange Notes.
The Exchange Offer expired in accordance with its terms at 5:00 p.m., New York
City time, on April 21, 1997. Pursuant to the Exchange Offer, $95,555,000 in
aggregate principal amount of Notes were tendered in exchange for the same
aggregate principal amount of Exchange Notes. $4,445,000 in aggregate principal
amount of Senior Notes remain outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
---------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
None.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1997 HAWK CORPORATION
By: /s/ Ronald E. Weinberg
-----------------------
Ronald E.Weinberg, Vice-Chairman of
the Board and Treasurer
By: /s/ Thomas A. Gilbride
----------------------
Thomas A. Gilbride, Vice President-
Finance
(Chief Accounting Officer)
23
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