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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 001-13797
HAWK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1608156
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 861-3553
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Series B 10.25% Senior Notes due 2003 New York Stock Exchange
Class A Common Stock, par value $.01 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 17, 1999, the registrant had 8,693,900 shares of Class A
Common Stock, net of treasury shares and 0 shares of Class B non-voting Common
Stock outstanding. As of that date, the aggregate market value of the voting
stock of the registrant held by non-affiliates was $41,638,715 (based upon the
closing price of $7.688 per share of Class A Common Stock on the New York Stock
Exchange on March 17, 1999). For purposes of this calculation, the registrant
deems the 3,277,834 shares of Class A Common Stock held by all of its Directors
and executive officers to be the shares of Class A Common Stock held by
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1998 ("1998 Annual Report") are incorporated by reference into
Parts I, II and IV of this report.
Portions of the registrant's definitive Proxy Statement ("Proxy
Statement") to be used in connection with its Annual Meeting of Stockholders to
be held on May 10, 1999 are incorporated by reference into Part III of this Form
10-K.
As used in this Form 10-K, the terms "Company," "Hawk" and "Registrant"
mean Hawk Corporation and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise. Except as otherwise stated, the
information contained in this Form 10-K is as of December 31, 1998.
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PART I
ITEM 1. BUSINESS.
Hawk Corporation ("Hawk" or the "Company"), founded in 1989,
is a holding company, the principal assets of which consist of the capital stock
of its manufacturing subsidiaries, Friction Products Co. ("FPC"), S.K. Wellman
Corp. ("SKW"), Helsel, Inc. ("Helsel"), Sinterloy Corporation ("Sinterloy"),
Clearfield Powdered Metals, Inc. ("Clearfield"), Hutchinson Products Corporation
("Hutchinson") and Logan Metal Stampings, Inc. ("Logan"). Through its
subsidiaries, Hawk operates primarily in two reportable segments: Friction
Products ("Friction") and Powder Metal ("PM"). The Company's friction products
are made from proprietary formulations of composite materials that primarily
consist of metal powders and synthetic and natural fibers. Friction products are
the replacement elements used in brakes, clutches and transmissions to absorb
vehicular energy and dissipate it through heat and normal mechanical wear.
Friction products manufactured by the Company include friction linings for use
in brakes, transmissions and clutches in aerospace, construction, agricultural,
truck and specialty vehicle markets. The Company's powder metal components are
made from formulations of composite powder metal alloys. The PM segment
manufactures a variety of components for use in fluid power, truck, lawn and
garden, construction, agriculture, home appliance, automotive and office
equipment markets. In addition, the Company designs and manufactures die-cast
aluminum rotors for small electric motors used in appliances, business equipment
and exhaust fans. The Company focuses on manufacturing products requiring
sophisticated engineering and production techniques for applications in markets
in which it has achieved a significant market share.
RECENT DEVELOPMENT
On February 26, 1999, the Company completed its acquisition of
Allegheny Powder Metallurgy, Inc. ("Allegheny"), a Falls Creek, Pennsylvania,
manufacturer of powder metal components. Allegheny had net sales of $17.4
million in 1998, and the acquisition is expected to be accretive to earnings in
1999. The Company used its available cash and funds available under its credit
facility to complete the transaction.
BUSINESS STRATEGY
The Company's business strategy includes the following principal
elements:
-- FOCUS ON HIGH-MARGIN, SPECIALTY APPLICATIONS. The Company operates
primarily in aerospace, industrial and commercial markets that require
sophisticated engineering and production techniques. In developing new
applications, as well as in evaluating acquisitions, the Company seeks
to compete in markets requiring such engineering expertise and
technical capability, rather than in markets in which the primary
competitive factor is price. The Company believes margins for its
products in these markets are higher than in other manufacturing
markets that use standardized products. The Company's gross margins in
1998 and 1997 were 32.1% and 28.5%, respectively.
-- NEW PRODUCT INTRODUCTION. A key part of the Company's strategy is the
introduction of new products, which incorporate improved performance
characteristics or reduced costs in response to customer needs. Because
friction products are the consumable, or wear, component of brake,
clutch and transmission systems, the introduction of new friction
products in conjunction with a new system provides the Company with the
opportunity to supply the aftermarket for the life of the system. For
example, the ability to service the aftermarket for a particular
braking system will likely provide the Company with a stable market for
its friction products for the life of the product, which can be 30
years or more. The Company also seeks to grow by applying its existing
products and technologies to new specialized applications where its
products have a performance or technological advantage.
-- PURSUIT OF STRATEGIC ACQUISITIONS. Many of the markets in which the
Company competes are fragmented, providing the Company with attractive
acquisition opportunities. The Company will continue to seek to acquire
complementary businesses with leading market positions that will enable
it to expand its product offerings, technical capabilities and customer
base. Historically, the Company has been able to achieve significant
cost reductions through the integration of its acquisitions.
-- EXPANDING INTERNATIONAL SALES. To take advantage of worldwide growth in
its end user markets, the Company expanded its international presence
through the acquisition of SKW in 1995, which resulted in the addition
of manufacturing facilities in Italy and Canada and a worldwide
distribution network. The Company continues to expand its European
operations to meet strong demand in established markets throughout
Europe. The Company also believes that further opportunities to expand
sales exist in emerging economies. Sales from the Company's
international facilities have grown from $8.1 million in 1995 to $22.0
million in 1998.
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-- LEVERAGING CUSTOMER RELATIONSHIPS. The Company's engineers work closely
with customers to develop and design new products and improve the
performance of existing products. The Company's commitment to quality,
service and just-in-time delivery enables it to build and maintain
strong and stable customer relationships. The Company believes that
more than 80% of its sales are from products and materials for which it
is the sole source provider for specific customer applications. Each of
the Company's ten largest customers have been customers of the Company
or its predecessors for more than ten years. The Company believes that
strong relationships with its customers provide it with significant
competitive advantages in obtaining and securing new business
opportunities.
ACQUISITIONS
On June 8, 1998, the Company purchased the capital stock of Clearfield
Powder Metals Inc. The acquisition of Clearfield further expanded the Company's
powder metals component business into the lawn and garden, home appliance, power
hand tool, and truck markets.
On January 2, 1997, the Company purchased the capital stock of
Hutchinson Foundry Products Company. The Hutchinson acquisition furthered the
Company's strategy of acquiring complementary businesses and expanded the
Company's product offerings, technical capabilities and customer base.
Hutchinson designs and manufactures die-cast aluminum rotors. The Company
believes that Hutchinson is one of the largest independent domestic suppliers of
these rotors, which are used in subfractional (less than 1/20 horsepower)
electric motors for use in business equipment, appliances and exhaust fans. The
Company also believes Hutchinson has growth opportunities arising from the trend
by original equipment motor manufacturers to outsource production of rotors.
Additionally, Hutchinson manufactures extruded aluminum fan spacers used in
commercial diesel engines for heavy trucks and off-road equipment and precision
metal castings used in hand power tools and gasoline pumping units.
On August 1, 1997, the Company acquired substantially all of the assets
of Sinterloy, Inc. The acquisition of Sinterloy expanded the Company's powder
metal components business primarily into the business equipment market.
Sinterloy's ability to manufacture high volume small to medium sized powder
metal components complements the Company's other powder metal businesses, which
generally produce lower volume, higher precision components.
Both the friction product and powder metal component industries are
fragmented and are undergoing consolidation due in part to the additional
resources needed (1) to perform the research and development necessary to
satisfy customers' increasingly stringent quality and performance criteria, and
(2) to meet just-in-time delivery requirements. As a result, the Company
believes that it can continue to make strategic acquisitions that may include
other friction product and powder metal component manufacturers. To effect its
acquisition strategy, the Company engages in discussions, from time to time,
with other manufacturers in friction products, powder metal component and other
complementary businesses. At this time, the Company has no outstanding
commitments or agreements regarding any future acquisitions.
PRODUCTS AND MARKETS
The Company focuses on supplying components to the aerospace,
industrial and commercial markets that require sophisticated engineering and
production techniques for applications in markets in which it has achieved a
significant market share. Through acquisitions and product line expansions, the
Company has diversified its end markets, which diversification, the Company
believes, has reduced its economic exposure to the cyclicality of any particular
industry.
FRICTION PRODUCTS
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The Company's Friction segment manufactures products made from
proprietary formulations of composite materials that primarily consist of metal
powders and synthetic and natural fibers. Friction products are the replacement
elements used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. For example, the
friction brake linings in aircraft braking systems slow and stop airplanes when
landing or taxiing. Friction products manufactured by the Company also include
friction linings for use in automatic and power shift transmissions, clutch
facings that serve as the main contact point between an engine and a
transmission, and brake linings for use in other types of braking systems.
The Company's friction products are custom-designed to meet the
performance requirements of a specific application and must meet temperature,
pressure, component life and noise level criteria. The engineering required in
designing a friction material for a specific application dictates a balance
between the component life cycle and the performance application of the friction
material in, for example, stopping or starting movement. Friction products are
consumed through customary use in a brake, clutch or transmission system and
require regular replacement. Because the friction material is the consumable, or
wear, component of such systems, new
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friction product introduction in conjunction with a new system provides the
Company with the opportunity to supply the aftermarket with that friction
product for the life of the system.
The principal markets served by the Company's Friction segment include
manufacturers of aircraft brakes, truck clutches, heavy-duty construction and
agricultural vehicle brakes, clutches and transmissions, as well as
manufacturers of motorcycle, snowmobile and performance racing brakes. Based
upon net sales, the Company believes that it is among the top three worldwide
manufacturers of friction products used in aerospace and industrial
applications. The Company estimates that aftermarket sales of friction products
have comprised approximately 50% of the Company's net friction product sales in
recent years. The Company believes that its stable aftermarket sales component
enables the Company to reduce its exposure to adverse economic cycles.
AEROSPACE. The Company believes it is the only independent supplier of
friction materials to the manufacturers of braking systems for the Boeing 727,
737 and 757, the MD DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The
Company believes it is also the largest supplier of friction materials to the
general aviation (non-commercial, non-military) market, supplying friction
materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and
Fokker. Each aircraft braking system, including the friction materials supplied
by the Company, must meet stringent Federal Aviation Administration ("FAA")
criteria and certification requirements. New model development and FAA testing
for the Company's aircraft braking system customers generally begins two to five
years prior to full scale production of new braking systems. If the Company and
its aircraft brake system manufacturing partner are successful in obtaining the
rights to supply a particular model of aircraft, the Company will typically
supply its friction products to that model's aircraft braking system for as long
as the model continues to fly because it is generally too expensive to redesign
a braking system and meet FAA requirements. Moreover, FAA maintenance
requirements mandate that brake linings be changed after a specified number of
take-offs and landings, which the Company expects to result in a continued and
steady market for its aerospace friction products.
The Company's friction products for commercial aerospace applications
are primarily used on "single-aisle" aircraft that are flown on shorter routes,
resulting in more takeoffs and landings than larger aircraft. The Company
believes its friction products provide an attractive combination of performance
and cost effectiveness in these applications. According to Boeing's 1998 Current
Market Outlook, approximately 9,000 of the 12,300 airplanes in the world fleet
are single-aisle commercial aircraft. The report also forecasts single-aisle to
increase by over 3,500 to 12,500 by the end of 2007. The Boeing report also
states that world airline traffic is projected to increase 5% per year over the
next ten years. The Company expects that continued growth in world airline
traffic, combined with the increasing number of single-aisle aircraft, will
cause demand for the Company's aerospace friction products to remain strong. For
example, Boeing is utilizing the Company's friction material on its new 737NG
(New Generation) series aircraft.
CONSTRUCTION/AGRICULTURAL/TRUCKS. The Company supplies a variety of
friction products for use in brakes, clutches and transmissions on construction
and agricultural equipment and trucks. These components are designed to precise
tolerances and permit brakes to stop or slow a moving vehicle and the clutch or
transmission systems to engage or disengage. The Company believes it is a
leading supplier to original equipment manufacturers and to the aftermarket. The
Company believes that its trademark, Velvetouch(R), is well known in the
aftermarket for these components. As with the Company's aerospace friction
products, new friction product introduction in conjunction with a new brake,
clutch or transmission system provides the Company with the opportunity to
supply the aftermarket with the friction product for the life of the system.
-- CONSTRUCTION EQUIPMENT. The Company supplies friction products such as
transmission discs, clutch facings and brake linings to manufacturers
of construction equipment, including Caterpillar. The Company believes
it is the second largest domestic supplier of these types of friction
products. Replacement components for construction equipment are sold
through manufacturers such as Caterpillar, as well as various
aftermarket distributors.
-- AGRICULTURAL EQUIPMENT. The Company supplies friction products such as
clutch facings, transmission discs and brake linings for manufacturers
of agricultural equipment, including John Deere and New Holland. The
Company believes it is the second largest domestic supplier of such
friction products. Replacement components for agricultural equipment
are sold through original equipment manufacturers as well as various
aftermarket distributors.
-- MEDIUM AND HEAVY TRUCKS. The Company supplies friction products for
clutch facings used in medium and heavy trucks to original equipment
manufacturers, such as Eaton. The Company believes it is the leading
domestic supplier of replacement friction products used in these
applications. Replacement components are sold through the Company's
original equipment manufacturers and various aftermarket distributors.
SPECIALTY. The Company supplies friction products for use in other
specialty applications, such as brake pads for Harley-Davidson motorcycles, AM
General Humvees and Bombardier, Polaris Industries and Arctic Cat snowmobiles.
The Company believes that these markets are experiencing significant growth and
the Company will continue to increase its market share with its combination of
superior quality and longer product life. Under the "Hawk Brake" tradename, the
Company also supplies high performance friction material for use in racing car
brakes. The Company's high performance brake pad for race cars can operate in
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temperatures of over 1,100 degrees Fahrenheit. The Company believes that this
performance racing material may have additional applications such as braking
systems for passenger and school buses, police cars and commercial delivery
vehicles.
POWDER METAL COMPONENTS
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The Company's PM segment is a leading supplier of powder metal
components consisting primarily of pump, motor and transmission elements, gears,
pistons and anti-lock brake sensor rings for applications ranging from lawn and
garden tractors to industrial equipment. Since Hawk's founding in 1989, it has
participated in the growing powder metal parts and products industry with a
focus on the North American industrial market, which the Metal Powder Industries
Federation ("MPIF"), an industry trade group, estimates had sales of over $1.0
billion in 1997. According to MPIF, the value of iron powder shipments in North
America increased by over 10% per year from 1991 to 1997, and North American
powder manufacturers are anticipating an average annual growth rate of almost 6%
per year for the next ten years.
FLUID POWER, INDUSTRIAL AND OTHER APPLICATIONS. The Company
manufactures a variety of components made from powder metals for use in (1)
fluid power applications, such as pumps and other hydraulic mechanisms, (2)
transmissions, other drive mechanisms and anti-lock braking systems used in
trucks and off-road and lawn and garden equipment, (3) gears and other
components for use in home appliances and office equipment and (4) components
used in automotive applications. The Company believes that the market for powder
metal components will continue to grow as the Company's core powder metal
technology benefits from advances that permit production of powder metal
components with increased design flexibility, greater densities and closer
tolerances that provide improved strength, hardness and durability for demanding
applications, and enable the Company's powder metal components to be substituted
for wrought steel or iron components produced with forging, casting or stamping
technologies. Powder metal components can often be produced at a lower cost per
unit than products manufactured with forging, casting or stamping technologies
due to the elimination of, or substantial reduction in, secondary machining,
lower material costs and the virtual elimination of raw material waste. The
Company believes that the current trend of substituting powder metal components
for forged, cast or stamped components in industrial applications will continue
for the foreseeable future, providing the Company with increased product and
market opportunities.
As of February 26, 1999 with the acquisition of Allegheny, the
Company's PM segment operates in five facilities, each targeting an important
aspect of the market place:
-- HIGH PRECISION. Helsel's pressing and finishing capabilities enable it
to specialize in tight tolerance fluid power components such as pump
elements and gears. In addition, the Company believes that Helsel's
machining capabilities provide it with a competitive advantage by
giving it the ability to supply a completed part to its customers,
typically without any subcontracted precision machining. The Company
believes that Helsel's growth will be driven by existing customers' new
design requirements and new product applications primarily for pumps,
motors and transmissions.
-- LARGE SIZE CAPABILITY. The FPC PM segment operation has the capability
to make structural powder metal components that are among the largest
used in North America. The Company expects its sales of larger powder
metal components to continue to grow as the Company creates new designs
for existing customers and benefits from market growth, primarily in
current construction, agricultural and truck applications. For example,
the Company believes that sales of its powder metal components used in
anti-lock braking systems will benefit as domestic trucks comply with
the U.S. Department of Transportation's regulations requiring the
installation of anti-lock braking systems on new trucks.
-- HIGH VOLUME. Sinterloy, Clearfield and Allegheny target smaller, high
volume parts where they can utilize their efficient pressing and
sintering capabilities to their best advantage. Sinterloy's primary
market has been powder metal components for the business equipment
market. Clearfield's market focus has been primarily to the lawn and
garden, home appliance, power hand tool, and truck markets. Allegheny's
market focus has been primarily the lawn and garden and automotive
markets. The Company believes that the high volume capabilities of
Sinterloy, Clearfield and Allegheny will provide the Company with
cross-selling opportunities from the Company's other PM facilities.
DIE-CAST ALUMINUM ROTORS
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The Company believes that Hutchinson is the largest independent U.S.
manufacturer of die-cast aluminum rotors for use in subfractional electric
motors. These motors are used in a wide variety of applications such as business
equipment, small household appliances and exhaust fans. Hawk accounts for
Hutchinson in its other segment category. Hutchinson does not meet the
quantitative threshold for creating its own reportable segment.
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The Company estimates that approximately 50% of all rotors in the
subfractional motor market are made internally by motor manufacturers such as
Emerson and General Electric. However, the Company believes Hutchinson has
growth opportunities arising from the trend by original equipment motor
manufacturers to outsource their production of rotors. The Company is currently
exploring the possibility of expanding its rotor manufacturing capabilities into
Mexico, where a large portion of subfractional motors are manufactured.
OTHER
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In addition to providing metal stampings for the Friction segment, the
Company's Logan subsidiary also sells transmission plates and other components
to the automotive and trucking industries. The Company accounts for this portion
of Logan's business in the other segment.
BUSINESS SEGMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
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Revenues from External Customers
<S> <C> <C> <C>
Friction $109,624 $ 107,679 $ 94,039
PM 53,483 31,360 20,685
Other 19,024 20,047 9,273
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Consolidated $182,131 $ 159,086 $123,997
Operating Income
Friction $ 18,313 $ 13,236 $ 6,877
PM 13,359 7,193 3,272
Other 1,146 1,644 (338)
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Consolidated $ 32,818 $ 22,073 $ 9,811
DECEMBER 31
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1998 1997
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Total Assets
Friction $115,141 $ 111,333
PM 53,034 37,244
Other 35,271 24,509
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Consolidated $203,446 $ 173,086
</TABLE>
MANUFACTURING
The manufacturing processes for most of the Company's friction products
and powder metal components are essentially similar. In general, both use
composite metal alloys in powder form to make high quality powder metal
components. The basic manufacturing steps, consisting of blending/compounding,
molding/compacting, sintering (or bonding) and secondary machining/treatment,
are as follows:
-- BLENDING/COMPOUNDING: Composite metal alloys in powder form are blended
with lubricants and other additives according to scientific formulas,
many of which are proprietary to the Company. The formulas are designed
to produce precise performance characteristics necessary for a
customer's particular application, and the Company often works together
with its customers to develop new formulas that will produce materials
with greater energy absorption characteristics, durability and
strength.
-- MOLDING/COMPACTING: At room temperature, a specific amount of a powder
alloy is compacted under pressure into a desired shape. The Company's
molding presses are capable of producing pressures of up to 3,000 tons.
The Company believes that it has some of the largest presses in the
powder metal industry, enabling it to produce large, complex
components.
-- SINTERING: After compacting, molded parts are heated in furnaces to
specific temperatures, enabling metal powders to metallurgically bond,
harden and strengthen the molded parts while retaining their desired
shape. For friction materials, the friction composite part is also
bonded directly to a steel plate or core, creating a strong continuous
metallic part.
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-- SECONDARY MACHINING/TREATMENT: If required by customer specifications,
a molded part undergoes additional processing. These processing
operations are generally necessary to attain increased hardness or
strength, tighter dimensional tolerances or corrosion resistance. To
achieve these specifications, parts are heat-treated, precision coined,
ground or drilled or treated with a corrosion resistant coating, such
as oil.
Certain of the Company's friction products, which are primarily used in
oil-cooled brakes and power shift transmissions, do not require all of the
foregoing steps. For example, molded composite friction materials are molded
under high temperatures and cured in electronically-controlled ovens and then
bonded to a steel plate or core with a resin-based polymer. Cellulose composite
friction materials are blended and formed into continuous sheets and then
stamped into precise shapes by computer-controlled die cutting machines. Like
molded composite friction materials, cellulose composite friction materials are
then bonded to a steel plate or core with a resin-based polymer.
The Company's die-cast aluminum rotors are produced in a three-step
process. Steel stamped disks forming the laminations of the rotors are first
skewed (stacked) and then loaded into dies into which molten aluminum is
injected to create the rotors. The rotor castings created in the dies are then
machined to produce finished rotors. These rotors are manufactured in a variety
of sizes and shapes to customers' design specifications.
QUALITY CONTROL. Throughout its design and manufacturing process, the
Company focuses on quality control. For product design, each Company
manufacturing facility uses state-of-the-art testing equipment to replicate
virtually any application required by the Company's customers. This equipment is
essential to the Company's ability to manufacture components that meet stringent
customer specifications. To ensure that tight tolerances have been met and that
the requisite quality is inherent in its finished products, the Company uses
statistical process controls, a variety of electronic measuring equipment and
computer-controlled testing machinery. The Company has also established programs
within each of its facilities to detect and prevent potential quality problems.
TECHNOLOGY
The Company believes that it is an industry leader in the development
of systems, processes and technologies which enable it to manufacture friction
products with numerous performance advantages, such as greater wear resistance,
increased stopping power, lower noise and smoother engagement. The Company's
expertise is evidenced by its aircraft brake linings, which are currently being
installed on many of the braking systems of the newly designed Boeing 737-NG
series of aircraft.
The Company maintains an extensive library of proprietary friction
product formulas that serve as starting points for new product development. Each
formula has a specific set of ingredients and processes to generate
repeatability in production. Some formulas may have as many as 15 different
components. A slight change in a mixture can produce significantly different
performance characteristics. The Company uses a variety of technologies and
materials in developing and producing its products, such as graphitic and
cellulose composites. The Company believes its expertise in the development and
production of products using these different technologies and materials gives it
a competitive advantage over other friction product manufacturers, which
typically have expertise in only one or two types of friction material.
The Company also believes that its powder metal components business is
able to produce a wide range of products from small precise components to large
structural parts. The Company has presses that produce some of the largest
powder metal parts in the world, and its powder metal technology permits the
manufacture of complex components with specific performance characteristics and
close dimensional tolerances that would be impractical to produce using
conventional metalworking processes.
CUSTOMERS
The Company's engineers work closely with customers to develop and
design new products and improve the performance of existing products. The
Company's working relationship with its customers on development and design, and
the Company's commitment to quality, service and just-in-time delivery have
enabled it to build and maintain strong and stable customer relationships. Each
of the Company's ten largest customers have been customers of the Company or its
predecessors for more than ten years, and the Company believes that more than
80% of its sales are from products and materials for which it is the sole source
provider for specific customer applications. Management believes the Company's
relationships with its customers are good.
The Company's recent acquisitions have broadened product lines,
increased its technological capabilities and will further enhance its customer
relationships and expand its preferred supplier status. As a result of its
commitment to customer service and satisfaction, the Company has received
numerous preferred supplier awards from its leading customers, including
Aircraft Braking Systems, BFGoodrich Aerospace, Caterpillar, John Deere and New
Holland.
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The Company's top five customers accounted for 32.7% of the Company's
consolidated net sales in 1998 and 33.8% of the Company's consolidated net sales
in 1997.
MARKETING AND SALES
The Company markets its products globally through 14 product managers,
who operate from the Company's facilities in the United States, Italy and Canada
and a sales office in the United Kingdom. The Company's product managers and
sales force work directly with the Company's engineers who provide the technical
expertise necessary for the development and design of new products and for the
improvement of the performance of existing products.
The Company's friction products are sold both directly to original
equipment manufacturers and to the aftermarket through its original equipment
customers and a network of distributors and representatives throughout the
world.
The Company's marketing and sales of its powder metal components and
die-cast aluminum rotors are directed by 8 product managers. The Company also
sells its powder metal components and rotors to original equipment manufacturers
through independent sales representatives.
COMPETITION
The principal segments in which the Company competes are competitive
and fragmented, with many small manufacturers and only a few manufacturers that
generate sales in excess of $50 million. The larger competitors may have
financial and other resources substantially greater than those of the Company.
The Company competes for new business principally at the beginning of the
development of new applications and at the redesign of existing applications by
its customers. For example, new model development for the Company's aircraft
braking system customers generally begins two to five years prior to full scale
production of new braking systems. Product redesign initiatives by customers
typically involve long lead times as well. Although the Company has been
successful in the past in obtaining this new business, there is no assurance
that the Company will continue to obtain such business in the future. The
Company also competes with manufacturers using different technologies, such as
carbon composite ("carbon-carbon") friction materials for aircraft braking
systems. Carbon-carbon braking systems are significantly lighter than the
metallic aircraft braking systems for which the Company supplies friction
materials, but are more expensive. The carbon-carbon brakes are typically used
on wide-body aircraft, such as the Boeing 747 and military aircraft, where the
advantages in reduced weight justify the additional expense. In addition, as the
Company's core powder metal technology improves, enabling its components to be
substituted for wrought steel or iron components, the Company also increasingly
competes with companies using forging, casting or stamping technologies. Powder
metal components can often be produced at a lower cost per unit than products
manufactured with forging, casting or stamping technologies due to the
elimination of, or substantial reduction in, secondary machining, lower material
costs and the virtual elimination of raw material waste. As a result, powder
metal components are increasingly being substituted for metal parts manufactured
using more traditional technologies.
SUPPLY AND PRICE OF RAW MATERIALS
The principal raw materials used by the Company are copper, steel and
iron powder and custom-fabricated cellulose sheet. The Company has no long-term
supply agreements with any of its major suppliers. However, the Company has
generally been able to obtain sufficient supplies of raw materials for its
operations, and changes in prices of such supplies over the past few years have
not had a significant effect on its operations.
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 16.5% and 18.0% of the Company's consolidated net sales in 1998 and
1997, respectively. Each aircraft braking system, including the friction
products supplied by the Company, must meet stringent FAA criteria and testing
requirements. The Company has been able to meet these requirements in the past
and continuously reviews FAA compliance procedures to help ensure continued and
future compliance.
8
<PAGE> 9
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Manufacturers such as the Company are subject to stringent
environmental standards imposed by federal, state, local and foreign
environmental laws and regulations, including those related to air emissions,
wastewater discharges and chemical and hazardous waste management and disposal.
Certain of these environmental laws hold owners or operators of land or
businesses liable for their own and for previous owners' or operators' releases
of hazardous or toxic substances, materials or wastes, pollutants or
contaminants. Compliance with environmental laws also may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The Company is
also subject to the federal Occupational Safety and Health Act and similar
foreign and state laws. The nature of the Company's operations, the long history
of industrial uses at some of its current or former facilities, and the
operations of predecessor owners or operators of certain of the businesses
expose the Company to risk of liabilities or claims with respect to
environmental and worker health and safety matters. The Company reviews its
procedures and policies for compliance with environmental and health and safety
laws and regulations and believes that it is in substantial compliance with all
such material laws and regulations applicable to its operations. The costs of
compliance with environmental, health and safety requirements have not been
material to the Company.
INTELLECTUAL PROPERTY MATTERS
Wellman Friction Products(R), Velvetouch(R), Fibertuff(R), Feramic(R),
Velvetouch Feramic(R), Velvetouch Ceramic(R), Velvetouch Organik(R) and
Velvetouch Metalik(R) are among the federally registered trademarks of the
Company. Velvetouch(R) is the Company's principal trademark for use in the
Friction segment aftermarket and is registered in 26 countries.
Although the Company maintains patents related to its business, the
Company does not believe that its competitive position is dependent on patent
protection or that its operations are dependent on any individual patent.
To protect its intellectual property, the Company relies on a
combination of internal procedures, confidentiality agreements, patents,
trademarks, trade secrets law and common law, including the law of unfair
competition. The Company is not aware of any pending claims of infringement or
other challenges to the Company's right to use any of its intellectual property.
PERSONNEL
At December 31, 1998, the Company had approximately 1,180 domestic
employees and 199 international employees, consisting of 125 management,
supervisory and administrative personnel, 102 engineering, quality control and
laboratory personnel, 47 sales and marketing personnel and 1,105 manufacturing
personnel.
Approximately 270 employees at the Company's Brook Park, Ohio plant are
covered under a collective bargaining agreement with the Paper, Allied
Industrial, Chemical and Energy Workers International Union (PACE) expiring in
October 2000; approximately 90 employees at the Company's Akron, Ohio facility
are covered under a collective bargaining agreement with the United Automobile
Workers expiring in July 2000; and approximately 189 employees at the Company's
Orzinuovi, Italy plant are represented by a national mechanics union under an
agreement that expired in December 1998 and by a local union under an agreement
that expires in December 2000. The union and the Italian government are
currently negotiating the national contract. At this time, the Company expects
the agreement to be ratified without any work stoppages. Approximately 60 hourly
employees at the Company's Alton, Illinois facility are covered under a
collective bargaining agreement with the International Association of Machinists
and Aerospace Workers expiring in June 2001. The Company has experienced no
strikes and believes its relations with its employees and their unions to be
good.
9
<PAGE> 10
ITEM 2. PROPERTIES.
The Company's material operations are conducted through the following
facilities, all of which are owned, except as noted:
<TABLE>
<CAPTION>
LOCATION SQ. FT. SEGMENT PRINCIPAL FUNCTIONS
-------- ------- ------- -------------------
<S> <C> <C> <C>
Medina, Ohio................... 148,000 Friction / PM Manufacturing of friction products and powder
metal components, sales and marketing,
research and development, product engineering,
and administration
Brook Park, Ohio............... 111,000 Friction Manufacturing of friction products, sales and
marketing, research and development, product
engineering, and administration
Orzinuovi, Italy............... 97,000 Friction Manufacturing of friction products,
international sales and marketing, research
and development, and administration
Concord, Ontario, Canada (1)... 15,000 Friction Manufacturing of friction products,
distribution and warehousing
Solon, Ohio (2) ............... 58,000 Friction Research and development
Campbellsburg, Indiana......... 75,000 PM Manufacturing of powder metal components,
sales and marketing, product engineering,
customer service and support, and
administration
Solon Mills, Illinois (1)...... 42,000 PM Manufacturing of powder metal components,
sales and marketing, customer service and
support
Clearfield, Pennsylvania....... 40,000 PM Manufacturing of powder metal components, sales
and marketing, product engineering, customer
service and support and warehousing
Alton, Illinois................ 37,000 Other Manufacturing of die-cast aluminum rotors,
sales and marketing, customer service and
support, and administration
Akron, Ohio.................... 81,000 Other Manufacturing of metal stampings
Cleveland, Ohio (3)............ 6,200 Principal executive offices
</TABLE>
(1) Leased.
(2) Approximately 20,000 square feet of the Solon facility is leased to a third
party.
(3) Leased. The Company is party to an expense sharing arrangement under which
the Company shares the expenses of its corporate headquarters located in
Cleveland with a company owned by Ronald E. Weinberg, the Chairman of the
Executive Committee of the Company.
In June 1996, the Company closed its manufacturing facility in
LaVergne, Tennessee that it acquired in the SKW acquisition and consolidated its
operations with existing Company facilities. The Company has placed the LaVergne
facility on the market for sale and does not anticipate incurring any material
gain or loss as a result of the sale.
The Company's Italian facility is subject to certain security interests
granted to its lenders.
The Company believes that substantially all of its property and
equipment is in good condition, adequately insured and suitable for their
present and intended use. Several of the Company's facilities are operating at
or near capacity. With its capital
10
<PAGE> 11
expansion program, the Company believes that it will have sufficient capacity to
accommodate its needs through 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in lawsuits that arise in the ordinary course
of its business. In the Company's opinion, the outcome of these matters will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Hawk Corporation Class A Common Stock is traded on the New York Stock
Exchange under the symbol "HWK." The stock price and dividend information in the
table is presented beginning as of May 12, 1998, the date of the Company's
initial public offering.
<TABLE>
<CAPTION>
Quarterly Stock Prices and Dividends
QUARTER HIGH LOW DIVIDEND
------- ---- --- --------
<S> <C> <C> <C> <C>
1998
2nd $ 19.500 $ 17.313 $ 0.00
3rd $ 18.188 $ 8.750 $ 0.00
4th $ 12.500 $ 6.250 $ 0.00
</TABLE>
Shareholders of record as of March 17, 1999 numbered 57. The Company
estimates that an additional 900 shareholders own stock held for their accounts
at brokerage firms and financial institutions.
The Company does not intend to declare or pay any cash dividends for
the foreseeable future and intends to retain earnings, if any, for the future
operation and expansion of the Company's business. In addition, the Company's
10.25% Senior Notes due 2003 and its credit facility prohibit the payment of
cash dividends on the Class A common stock except upon compliance with certain
conditions.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is set forth on page 13 of the
1998 Annual Report under the caption entitled "Financial Summary", which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is set forth on pages 14 through
18 of the 1998 Annual Report under the caption entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operation," which is
incorporated herein by reference. Any investor or potential investor must
consider the risks that are set forth under the sub caption "Forward-Looking
Statements" contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on Page 18 of the 1998 Annual Report which
is incorporated herein by reference.
11
<PAGE> 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth under the sub
caption "Market Risk Disclosures" contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 17 of the
1998 Annual Report which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth on pages 18 through
33 of the 1998 Annual Report under the captions entitled "Consolidated Balance
Sheets," "Consolidated Statements of Operations," "Consolidated Statements of
Shareholders' Equity (Deficit)," "Consolidated Statements of Consolidated Cash
Flows," and "Notes to Consolidated Financial Statements," which is incorporated
herein is incorporated by reference. The Report of Independent Auditors is set
forth on Page 13 of this Form 10-K.
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk Corporation
and subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hawk Corporation
and subsidiaries at December 31, 1998 and 1997 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 1, 1999
13
<PAGE> 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated herein by reference
to the Registrant's definitive Proxy Statement relating to its 1999 Annual
Meeting of Stockholders (the "Proxy Statement"), under the captions "Board of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance." This Proxy Statement will be filed with the SEC prior to
April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is contained under the caption
"Executive Compensation and Other Information" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is contained under the caption
"Principal Stockholders" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is contained under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following consolidated financial statements of the Company
included in the 1998 Annual Report are incorporated by
reference in Item 8. The Report of Independent Auditors is set
forth on page 13 of this report.
(i) Consolidated Balance Sheets at December 31, 1998 and 1997
(page 19 of the 1998 Annual Report)
(ii) Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 (page 20 of the 1998
Annual Report)
(iii) Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996
(page 21 of the 1998 Annual Report)
(iv) Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 (page 22 of the 1998
Annual Report)
(v) Notes to Consolidated Financial Statements for the years
ended December 31, 1998, 1997 and 1996 (pages 23 through
34 of the 1998 Annual Report)
14
<PAGE> 15
(b) Reports on Form 8-K:
None.
(c) Exhibits:
2.1 Stock Purchase Agreement, dated November 7, 1996, among the
Company, Timothy Houghton, CFB Venture Fund II, L.P.,
MorAmerica Capital Corporation, Community Investment Partners
II, L.P. and St. Louis Community Foundation setting forth the
terms of the Hutchinson acquisition (omitting certain exhibits
and schedules setting forth the forms of opinions of counsel,
relating to the purchase price adjustment mechanism and
relating to the business of Houghton Acquisition Corporation
d.b.a. Hutchinson Foundry Products Company, which the Company
undertakes to furnish supplementally to the Commission upon
request) (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
2.2 Asset Purchase Agreement, dated as of July 10, 1997, by and
among the Company, Sinterloy, Inc. and Robert G. Sierks
setting forth the terms of the Sinterloy acquisition (omitting
the exhibits and schedules setting forth the form of various
ancillary documents and relating to the business of Sinterloy,
which the Company undertakes to furnish supplementally to the
Commission upon request) (Incorporated by reference to the
Company's Form 8-K as filed with the Securities and Exchange
Commission (Reg. No.333-18433))
3.1 Form of the Company's Second Amended and Restated Certificate
of Incorporation (Incorporated by reference to the Company's
Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No.
333-40535)
3.2 Form of the Company's Amended and Restated By-laws
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
4.1 Form of Rights Agreement between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent (Incorporated
by reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission (Reg.
No. 333-40535))
4.2 Indenture, dated as of November 27, 1996, by and among the
Company, Friction Products Co., Hawk Brake, Inc., Logan Metal
Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc.,
S.K. Wellman Corp., Wellman Friction Products U.K. Corp.,
Hutchinson Products Corporation, and Bank One Trust Company,
NA, as Trustee (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.5 Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.6 Letter agreement, dated January 5, 1998, amending the
Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No. 333-40535))
4.7 Form of the Warrant Certificates, each dated June 30, 1995,
issued by the Company in favor of each of Connecticut General
Life Insurance Company and CIGNA Mezzanine Partners III, L.P.,
and registered under the name CIG & Co. (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
15
<PAGE> 16
10.1 Employment Agreement, dated as of November 1, 1996, between
the Company and Norman C. Harbert (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
10.2 Form of Amended and Restated Wage Continuation Agreement
between the Company and Norman C. Harbert (Incorporated by
reference to the Company's Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (Reg. No.
333-40535))
10.3 Employment Agreement, dated as of November 1, 1996, between
the Company and Ronald E. Weinberg (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
10.4 Employment Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No.
333-18433))
10.5 Consulting Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No.
333-18433))
10.6 Letter agreement, dated as of June 1997, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
10.7* Letter agreement, dated as of March 26, 1998, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
10.8 Employment Agreement, dated January 2, 1997, between the
Company and Timothy J. Houghton (Incorporated by reference to
the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Reg. No. 333-40535))
10.9 Promissory Note, dated July 1, 1994, in the principal amount
of $500,000, issued by the Company to Helco, Inc.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.10 Form of the Promissory Notes, each dated June 30, 1995, issued
by each of Norman C. Harbert, Ronald E. Weinberg, Byron S.
Krantz and Douglas D. Wilson to the Company (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
10.11 Letter agreement, dated October 1, 1996, amending the
Promissory Notes, each dated June 30, 1995, issued by each of
Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and
Douglas D. Wilson to the Company (Incorporated by reference to
the Company's Registration Statement on Form S-4 as filed with
the Securities and Exchange Commission (Reg. No. 333-18433))
10.12 Form of Convertible Promissory Note, dated January 2, 1997, in
the aggregate principal amount of $1.5 million, issued by the
Company to each of Timothy Houghton, CFB Venture Fund II,
L.P., MorAmerica Capital Corporation, Community Investment
Partners II, L.P. and St. Louis Community Foundation
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No.
333-40535))
10.13 Form of the Senior Subordinated Note and Warrant Purchase
Agreements, each dated as of June 30, 1995, between the
Company and each of Connecticut General Life Insurance Company
and CIGNA Mezzanine Partners III, L.P. (omitting certain
annexes relating to the business of the Company and certain
exhibits setting forth the form of various ancillary
documents, including the form of Subordinated Notes included
as Exhibit 10.24 thereto, the form of the Warrant Agreement
included as Exhibit 10.25 thereto and the form of Subordinated
Guarantee included as Exhibit 10.26 thereto, which omitted
annexes and schedule the Company undertakes to furnish
supplementally to the Commission upon request) (Incorporated
by reference to the Company's Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission (Reg.
No. 333-18433))
10.14 First Amendment to Note and Warrant Purchase Agreement, dated
as of November 27, 1996, among the Company, Connecticut
General Life Insurance Company and CIGNA Mezzanine Partners
III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No.
333-18433))
10.15 Form of the 12% Senior Subordinated Notes due June 30, 2005,
each dated June 30, 1995, issued by the Company
16
<PAGE> 17
to each of Connecticut General Life Insurance Company
and CIGNA Mezzanine Partners III, L.P., and registered under
the name CIG & Co. (Incorporated by reference to the
Company's Registration Statement on Form S-4 as filed with
the Securities and Exchange Commission (Reg. No. 333-18433))
10.16 Warrant Agreement, dated as of June 30, 1996, among the
Company, Connecticut General Life Insurance Company and CIGNA
Mezzanine Partners III, L.P. (omitting the attachment setting
forth the form of Warrant Certificate included as Exhibit 4.14
thereto) (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.17 Form of Subordinated Guarantee Agreements, each dated as of
June 30, 1995, made by each of Friction Products Co., Hawk
Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K.
Wellman Holdings, Inc. and S.K. Wellman Acquisition, Inc.
(n.k.a. S.K. Wellman Corp.) in favor of Connecticut General
Life Insurance Company and CIGNA Mezzanine Partners III, L.P.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.18 Form of the First Amendment to Subordinated Guarantee
Agreement, each dated as of November 27, 1996, made by each of
Friction Products Co., Hawk Brake, Inc., Logan Metal
Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and
S.K. Wellman Corp in favor of Connecticut General Life
Insurance Company and CIGNA Mezzanine Partners III, L.P.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.19 Form of Subordinated Guarantee Agreements, each dated as of
November 27, 1996, made by each of Wellman Friction Products
U.K. Corp. and Hutchinson Products Corporation in favor of
Connecticut General Life Insurance Company and CIGNA Mezzanine
Partners III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.20 Credit Agreement, dated as of May 1, 1998, among the Company
and KeyBank National Association, as Swing Line Lender,
Administrative Agent and as Syndication Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
10.21 Subsidiary Guaranty, dated as of May 1, 1998, among the
subsidiaries of the Company, as guarantors, and KeyBank
National Association, as Administrative Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
13* Portions of the 1998 Annual Report to Shareholders
incorporated herein by reference
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
27* Financial Data Schedule
--------------------------
* Filed herewith
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hawk Corporation
By: /s/ THOMAS A. GILBRIDE
--------------------------------
Thomas A. Gilbride
Vice President - Finance
Date March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Chairman of the Board, Chief March 31, 1999
/s/ NORMAN C. HARBERT Executive Officer and Director
- ------------------------------- (principal executive officer)
Norman C. Harbert
/s/ RONALD E. WEINBERG Chairman - Executive Committee, March 31, 1999
- ------------------------------- Treasurer and Director
Ronald E. Weinberg (principal financial officer)
/s/ THOMAS A. GILBRIDE Vice President - Finance March 31, 1999
- ------------------------------- (principal accounting officer)
Thomas A. Gilbride
/s/ BYRON S. KRANTZ Secretary and Director March 31, 1999
- -------------------------------
Byron S. Krantz
/s/ PAUL R. BISHOP Director March 31, 1999
- -------------------------------
Paul R. Bishop
/s/ DAN T. MOORE, III Director March 31, 1999
- -------------------------------
Dan T. Moore, III
/s/ WILLIAM J. O'NEILL, JR. Director March 31, 1999
- -------------------------------
William J. O'Neill, Jr.
</TABLE>
18
<PAGE> 19
EXHIBIT INDEX
2.1 Stock Purchase Agreement, dated November 7, 1996, among the
Company, Timothy Houghton, CFB Venture Fund II, L.P.,
MorAmerica Capital Corporation, Community Investment Partners
II, L.P. and St. Louis Community Foundation setting forth the
terms of the Hutchinson acquisition (omitting certain exhibits
and schedules setting forth the forms of opinions of counsel,
relating to the purchase price adjustment mechanism and
relating to the business of Houghton Acquisition Corporation
d.b.a. Hutchinson Foundry Products Company, which the Company
undertakes to furnish supplementally to the Commission upon
request) (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
2.2 Asset Purchase Agreement, dated as of July 10, 1997, by and
among the Company, Sinterloy, Inc. and Robert G. Sierks
setting forth the terms of the Sinterloy acquisition (omitting
the exhibits and schedules setting forth the form of various
ancillary documents and relating to the business of Sinterloy,
which the Company undertakes to furnish supplementally to the
Commission upon request) (Incorporated by reference to the
Company's Form 8-K as filed with the Securities and Exchange
Commission (Reg. No.333-18433))
3.1 Form of the Company's Second Amended and Restated Certificate
of Incorporation (Incorporated by reference to the Company's
Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No.
333-40535)
3.2 Form of the Company's Amended and Restated By-laws
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
4.1 Form of Rights Agreement between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent (Incorporated
by reference to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission (Reg.
No. 333-40535))
4.2 Indenture, dated as of November 27, 1996, by and among the
Company, Friction Products Co., Hawk Brake, Inc., Logan Metal
Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc.,
S.K. Wellman Corp., Wellman Friction Products U.K. Corp.,
Hutchinson Products Corporation, and Bank One Trust Company,
NA, as Trustee (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.3 Form of 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.4 Form of Series B 10 1/4% Senior Note due 2003 (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
4.5 Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
4.6 Letter agreement, dated January 5, 1998, amending the
Stockholders' Voting Agreement, effective as of November 27,
1996, by and among the Company, Norman C. Harbert, the Harbert
Family Limited Partnership, Ronald E. Weinberg, the Weinberg
Family Limited Partnership, Byron S. Krantz and the Krantz
Family Limited Partnership (Incorporated by reference to the
Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission (Reg. No. 333-40535))
4.7 Form of the Warrant Certificates, each dated June 30, 1995,
issued by the Company in favor of each of Connecticut General
Life Insurance Company and CIGNA Mezzanine Partners III, L.P.,
and registered under the name CIG & Co. (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
10.1 Employment Agreement, dated as of November 1, 1996, between
the Company and Norman C. Harbert (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
333-18433))
19
<PAGE> 20
10.2 Form of Amended and Restated Wage Continuation Agreement
between the Company and Norman C. Harbert (Incorporated by
reference to the Company's Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (Reg. No.
333-40535))
10.3 Employment Agreement, dated as of November 1, 1996, between
the Company and Ronald E. Weinberg (Incorporated by reference
to the Company's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission (Reg. No.
33-18433))
10.4 Employment Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.5 Consulting Agreement, dated July 1, 1994, between Helsel, Inc.
and Jess F. Helsel (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.6 Letter agreement, dated as of June 1997, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
10.7* Letter agreement, dated as of March 26, 1998, amending the
Employment Agreement and the Consulting Agreement, each dated
July 1, 1994, between Helsel, Inc. and Jess F. Helsel
10.8 Employment Agreement, dated January 2, 1997, between the
Company and Timothy J. Houghton (Incorporated by reference to
the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Reg. No. 333-40535))
10.9 Promissory Note, dated July 1, 1994, in the principal amount
of $500,000, issued by the Company to Helco, Inc.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.10 Form of the Promissory Notes, each dated June 30, 1995, issued
by each of Norman C. Harbert, Ronald E. Weinberg, Byron S.
Krantz and Douglas D. Wilson to the Company (Incorporated by
reference to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (Reg. No.
333-18433))
10.11 Letter agreement, dated October 1, 1996, amending the
Promissory Notes, each dated June 30, 1995, issued by each of
Norman C. Harbert, Ronald E. Weinberg, Byron S. Krantz and
Douglas D. Wilson to the Company (Incorporated by reference to
the Company's Registration Statement on Form S-4 as filed with
the Securities and Exchange Commission (Reg. No. 333-18433))
10.12 Form of Convertible Promissory Note, dated January 2, 1997, in
the aggregate principal amount of $1.5 million, issued by the
Company to each of Timothy Houghton, CFB Venture Fund II,
L.P., MorAmerica Capital Corporation, Community Investment
Partners II, L.P. and St. Louis Community Foundation
(Incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (Reg. No. 333-40535))
10.13 Form of the Senior Subordinated Note and Warrant Purchase
Agreements, each dated as of June 30, 1995, between the
Company and each of Connecticut General Life Insurance Company
and CIGNA Mezzanine Partners III, L.P. (omitting certain
annexes relating to the business of the Company and certain
exhibits setting forth the form of various ancillary
documents, including the form of Subordinated Notes included
as Exhibit 10.24 thereto, the form of the Warrant Agreement
included as Exhibit 10.25 thereto and the form of Subordinated
Guarantee included as Exhibit 10.26 thereto, which omitted
annexes and schedule the Company undertakes to furnish
supplementally to the Commission upon request) (Incorporated
by reference to the Company's Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission (Reg.
No. 333-18433))
10.14 First Amendment to Note and Warrant Purchase Agreement, dated
as of November 27, 1996, among the Company, Connecticut
General Life Insurance Company and CIGNA Mezzanine Partners
III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
20
<PAGE> 21
10.15 Form of the 12% Senior Subordinated Notes due June 30, 2005,
each dated June 30, 1995, issued by the Company to each of
Connecticut General Life Insurance Company and CIGNA Mezzanine
Partners III, L.P., and registered under the name CIG & Co.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.16 Warrant Agreement, dated as of June 30, 1996, among the
Company, Connecticut General Life Insurance Company and CIGNA
Mezzanine Partners III, L.P. (omitting the attachment setting
forth the form of Warrant Certificate included as Exhibit 4.14
thereto) (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.17 Form of Subordinated Guarantee Agreements, each dated as of
June 30, 1995, made by each of Friction Products Co., Hawk
Brake, Inc., Logan Metal Stampings, Inc., Helsel, Inc., S.K.
Wellman Holdings, Inc. and S.K. Wellman Acquisition, Inc.
(n.k.a. S.K. Wellman Corp.) in favor of Connecticut General
Life Insurance Company and CIGNA Mezzanine Partners III, L.P.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.18 Form of the First Amendment to Subordinated Guarantee
Agreement, each dated as of November 27, 1996, made by each of
Friction Products Co., Hawk Brake, Inc., Logan Metal
Stampings, Inc., Helsel, Inc., S.K. Wellman Holdings, Inc. and
S.K. Wellman Corp in favor of Connecticut General Life
Insurance Company and CIGNA Mezzanine Partners III, L.P.
(Incorporated by reference to the Company's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission (Reg. No. 333-18433))
10.19 Form of Subordinated Guarantee Agreements, each dated as of
November 27, 1996, made by each of Wellman Friction Products
U.K. Corp. and Hutchinson Products Corporation in favor of
Connecticut General Life Insurance Company and CIGNA Mezzanine
Partners III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission (Reg. No. 333-18433))
10.20 Credit Agreement, dated as of May 1, 1998, among the Company
and KeyBank National Association, as Swing Line Lender,
Administrative Agent and as Syndication Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
10.21 Subsidiary Guaranty, dated as of May 1, 1998, among the
subsidiaries of the Company, as guarantors, and KeyBank
National Association, as Administrative Agent (Incorporated by
reference to the Company's Form 10-Q for the quarterly period
ended June 30,1998 as filed with the Securities and Exchange
Commission)
13* Portions of the 1998 Annual Report to Shareholders
incorporated herein by reference
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
27* Financial Data Schedule
-----------------------
Filed herewith
21
<PAGE> 1
Exhibit 10.7
March 26, 1998
Mr. Jess F. Helsel
Aka J.F. Helsel
Box 477, RFD No. 3
Salem, Indiana 47167
RE:AGREEMENTS
Dear Jess:
This will confirm the agreements we have reached concerning the
continuing relationship between you and Helsel, Inc.
As you know, there is an existing "Employment Agreement" between you
and Helsel, Inc., a Delaware corporation (Buyer"), which was entered into at the
time of the Buyer's acquisition of Helsel, Inc., an Indiana corporation (the
"Company"). That Employment Agreement was dated July 1, 1994. There is also a
"Consulting Agreement" of the same date between the same parties, pursuant to
which you were engaged as a consultant for a period of four years, commencing on
the date of termination of the Employment Agreement. There is also an agreement
signed on August 13, 1997 extending your Employment Period for one year through
June 30, 1998.
We have reached agreement on several changes. First, with respect to
the Employment Agreement, the "Employment Period" (as defined therein) will be
extended, for a period of six months, from July 1, 1998 through December 31,
1998. Your Base Salary will be adjusted to the rate of $160,000 per year
effective on the pay period beginning March 30, 1998. The Annual Bonus for this
extension will be computed in the manner described in Section 2(b) of the
Employment Agreement, except that it will be an amount equal to ten percent
(10%) of the amount by which Buyer's earnings before interest, income taxes,
depreciation, and amortization for the calendar year ending December 31, 1998
exceed $7,000,000. In addition, where the Employment Agreement describes your
position as President of Buyer and sets forth your duties in that position, and
later refers to your term as President and otherwise refers to you as President,
we have agreed that Woodrow Haddix will become President on March 26, 1998 and
therefore your title and duties will change and that your primary efforts will
be to assist in the transition in whatever ways may be necessary and
appropriate, including introducing the Mr. Haddix to customers, orienting him to
the company, etc. You will also have continuing involvement with Buyers
acquisition and integration projects such as the
<PAGE> 2
HELSEL, INC.
Mr. Jess. F. Helsel
March 26, 1998
Page 2
current Sinterloy integration and several potential acquisitions. In addition,
we would expect to utilize your talents in whatever ways may be beneficial to
the company during the balance of the year. Upon Mr. Haddix's appointment as
President, you will become Chairman of Helsel, Inc. with continuing reporting
responsibility to Hawk Corporation's Executive Vice President. Except as set
forth in this letter, each and every other term of the Employment Agreement
shall remain in full force and effect through December 31, 1998.
We have also agreed to some changes to the Consulting Agreement. First,
the "Consulting Period" (as defined therein) shall consist of a period of four
years commencing on January 1, 1999 and terminating at the close of business on
December 31, 2002. The rate of compensation shall be the same as set forth in
paragraph 4 of the Consulting Agreement, except that the first payment shall be
due with the first quarter ending March 31, 1999. Each and every other term of
the Consulting Agreement shall remain in full force and effect.
I trust that the foregoing accurately sets forth the changes to which
we have agreed. If so, please acknowledge your agreement by signing and dating
the attached copy of this letter, and then return it to me at your earliest
convenience.
Sincerely,
/s/ Jeffery H. Berlin
----------------------------
Jeffrey H. Berlin
AGREED AND ACKNOWLEDGED:
/S/ Jess F. Helsel
- ------------------
Jess F. Helsel
March 26, 1998
<PAGE> 1
Exhibit 13
(Information from pages 13 through 35 of the Company's 1998 Annual Report to
Shareholders)
FINANCIAL SUMMARY
HAWK CORPORATION
The selected financial data has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included in this Annual Report.
<TABLE>
<CAPTION>
(In Millions, Except Per Share Data)
FOR THE YEAR 1994 1995 1996 1997 1998
==================================================================================================================
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 41.4 $ 84.6 $124.0 $159.1 $182.1
Cost of sales 26.8 61.1 91.9 113.7 123.7
- ------------------------------------------------------------------------------------------------------------------
Gross profit 14.6 23.5 32.1 45.4 58.4
Income from operations 7.4 10.0 9.8 22.1 32.8
Income (loss) before income taxes, minority
interest and extraordinary charge 4.3 2.8 (1.1) 6.6 21.9
Income taxes 1.8 1.6 0.8 3.7 9.7
Minority interest 0.2 0.4 -- -- --
Income (loss) before extraordinary charge 2.3 0.8 (1.9) 2.9 12.2
Extraordinary charge (1) -- -- 1.2 -- 3.1
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.3 $ 0.8 $ (3.1) $ 2.9 $ 9.1
Preferred stock dividend requirements (0.3) (0.3) (0.2) (0.3) (0.3)
Income (loss) before extraordinary item applicable
to common shareholders $ 2.0 $ 0.5 $ (2.1) $ 2.6 $ 11.9
Net income (loss) applicable to
common shareholders $ 2.0 $ 0.5 $ (3.3) $ 2.6 $ 8.8
Earnings (loss) per share:
Basic:
Earnings (loss) before extraordinary charge $ .66 $ .11 $ (.45) $ .55 $ 1.59
Extraordinary charge -- -- (.26) -- (.41)
- ------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .66 $ .11 $ (.71) $ .55 $ 1.18
==================================================================================================================
Diluted:
Earnings (loss) before extraordinary charge $ .54 $ .09 $ (.45) $ .45 $ 1.51
Extraordinary charge -- -- (.26) -- (.39)
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ .54 $ .09 $ (.71) $ .45 $ 1.12
==================================================================================================================
OTHER DATA:
Depreciation and amortization $ 2.5 $ 5.5 $ 8.4 $ 10.5 $ 11.5
Capital expenditures (including capital leases) 1.9 3.8 10.3 9.6 15.2
<CAPTION>
(In Millions)
DECEMBER 31 1994 1995 1996 1997 1998
==================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 0.7 $ 0.8 $ 25.8 $ 4.4 $ 14.3
Working capital (deficit) (4.1) 15.6 48.7 28.8 39.9
Property, plant and equipment, net 10.2 39.5 44.1 52.5 64.3
Total assets 43.6 127.4 158.4 173.1 203.4
Total long-term debt 26.7 94.9 129.2 132.1 102.5
Shareholders' equity (deficit) 5.9 3.9 1.2 (2.2) 64.4
</TABLE>
(1)Reflects premium paid on partial redemption of Senior Notes and write-off of
deferred financing costs in conjunction with the Company's initial public
offering, net of $2.3 in income taxes in 1998 and write-off of deferred
financing costs, net of $0.8 in income taxes in 1996.
[13
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis may contain forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, which
may cause actual results to differ materially from those expressed in the
forward-looking statements.
Hawk operates primarily in two reportable segments: Friction Products
("Friction") and Powder Metal ("PM"). The Company's friction products are made
from proprietary formulations of composite materials that primarily consist of
metal powders and synthetic and natural fibers. Friction products are the
replacement elements used in brakes, clutches and transmissions to absorb
vehicular energy and dissipate it through heat and normal mechanical wear.
Friction products manufactured by the Company include friction linings for use
in brakes, transmissions and clutches in aerospace, construction, agricultural,
truck and specialty vehicle markets. The Company's powder metal components are
made from formulations of composite powder metal alloys. The PM segment
manufactures a variety of components for use in fluid power, truck, lawn and
garden, construction, agriculture, home appliance, automotive and office
equipment markets.
<TABLE>
<CAPTION>
(Millions of Dollars)
Year Ended December 31 1998 1997 1996
==========================================================================
<S> <C> <C> <C>
Net sales $ 182.1 $ 159.1 $ 124.0
Cost of sales 123.7 113.7 91.9
- --------------------------------------------------------------------------
Gross profit 58.4 45.4 32.1
Income from operations 32.8 22.1 9.8
Income (loss) before income taxes and
extraordinary charge 21.9 6.6 (1.1)
Income taxes 9.7 3.7 .8
Income (loss) before extraordinary charge 12.2 2.9 (1.9)
Extraordinary charge 3.1 -- 1.2
- --------------------------------------------------------------------------
NET INCOME (LOSS) $ 9.1 $ 2.9 $ (3.1)
- --------------------------------------------------------------------------
NET SALES BY SEGMENT:
Friction Products $ 109.6 $ 107.7 $ 94.0
Powder Metal 53.5 31.4 20.7
Other 19.0 20.0 9.3
- --------------------------------------------------------------------------
Total $ 182.1 $ 159.1 $ 124.0
==========================================================================
</TABLE>
RESULTS OF OPERATIONS
In 1998, Hawk Corporation experienced a 213.8 percent increase in net
income over the prior year. This increase is primarily attributable to strong
growth in PM segment sales, which increased 70.4 percent from 1997 levels
primarily due to the acquisition of Sinterloy in August 1997 and Clearfield in
June 1998. Sales gains in most of the markets served by the Company's Friction
segment were offset by a softening of sales to the agricultural markets.
The Company is anticipating slight growth for 1999 as growth in the
industrial markets served by the Company is expected to slow from the pace
achieved in 1998. Additionally, the Company expects sales to the agricultural
market to continue to be soft throughout 1999. Sales will also be adversely
affected by the loss of a customer in the PM segment, which is expected to move
the majority of its production and sourcing offshore during 1999. The
acquisition of Allegheny Powder Metallurgy, Inc. ("Allegheny") in February 1999
will contribute to net sales in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales.
Consolidated sales for 1998 were $182.1 million, an increase of $23.0
million or 14.5 percent over 1997. The largest increase in sales came from the
PM segment, with 1998 sales exceeding 1997 sales by $22.1 million, or 70.4
percent. The sales increase was primarily attributable to the acquisition of
Sinterloy in August 1997 and Clearfield in June 1998 as well as sales gains in
the Company's other PM businesses. Sales in 1998 from the Sinterloy and
Clearfield acquisitions represent a $16.8 million increase over 1997 sales
contributed by Sinterloy. This increase represents 76.0 percent of the total
increase in the 1998 PM segment sales.
14]
<PAGE> 3
The Company experienced strong demand in all of its major PM product lines
during 1998, including the lawn and garden, fluid power, truck and office
equipment markets. Sales in the Friction segment were $109.6 million in 1998, an
increase of 1.8 percent over 1997. Sales increases in the aerospace,
construction and specialty markets served by the Friction segment were offset by
declines in the agricultural market.
Gross Profit.
Gross profit increased $13.0 million to $58.4 million during 1998, a 28.6
percent increase over gross profit of $45.4 million in 1997. The gross profit
margin increased to 32.1 percent in 1998 from 28.5 percent in the comparable
period in 1997. The increase in margins occurred in both the Friction and PM
segments. In the Friction segment, the Company benefited from favorable product
mix and efficiencies realized from the capital expenditure and the friction
facility consolidation programs undertaken by the Company. In the PM segment,
the Company benefited from both favorable product mix and volume increases
experienced by the PM manufacturing facilities.
Selling, Technical and Administrative Expenses.
Selling, technical and administrative ("ST&A") expenses increased $2.1
million, or 10.6 percent, from $19.9 million during 1997 to $22.0 million in
1998. As a percentage of net sales, ST&A declined to 12.1 percent of sales in
1998 from 12.5 percent of sales in 1997. The decline in ST&A expenses resulted
from sales volume increases in 1998 without a corresponding increase in costs
incurred by the Company. The Company spent $3.2 million or 1.8 percent of its
net sales on product research and development costs compared to $3.1 million in
1997.
Income from Operations.
Income from operations increased $10.7 million, or 48.4 percent, from $22.1
million in 1997 to $32.8 million in 1998. Income from operations as a percentage
of net sales increased to 18.0 percent in 1998 from 13.9 percent in 1997,
reflecting the full benefits achieved from the consolidation of facilities, the
acquisitions of Sinterloy and Clearfield, increased sales and favorable product
mix.
Interest Expense.
Interest expense decreased $3.4 million, or 22.2 percent, to $11.9 million
in 1998 from $15.3 million in 1997. The decrease is attributable to lower debt
levels from the repayment of debt with proceeds from the Company's initial
public offering. The Company also benefited from lower interest rates on its
debt during the year.
Income Taxes.
The provision for income taxes increased $6.0 million to $9.7 million in
1998 from $3.7 million in 1997 because of the increase in pre-tax income. The
decrease in the Company's effective tax rate in 1998 is due primarily to a
change in Italian tax law, which required taxes previously paid on income to be
paid on wages. Accordingly, the expense for this portion of the tax is reported
in the Company's cost of sales. An analysis of changes in income taxes and the
effective tax rate of the Company are presented in the accompanying consolidated
financial statements.
Extraordinary Charge.
In 1998, the Company recorded an extraordinary charge of $3.1 million (net
of $2.3 million of taxes) in prepayment premiums with the repayment of $35.0
million of the Company's 10 1/4% Senior Notes due 2003 (the "Senior Notes") and
the write-off of deferred financing costs associated with the redemption of all
of the $30.0 million of the Company's 12% Senior Subordinated Notes (the "Senior
Subordinated Notes").
Net Income.
As a result of the factors noted above, net income was $9.1 million in
1998, an increase of 213.8 percent, compared to net income of $2.9 million
reported in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales.
Worldwide sales in 1997 exceeded $150 million for the first time in the
Company's history, 28.3 percent above 1996. Net sales increased by $35.1 million
to $159.1 million in 1997 from $124.0 million in 1996. The sales increase was
attributable to the acquisitions of Hutchinson and Sinterloy and strong customer
demand in all of the Company's product lines. Sales attributable to Hutchinson,
which was acquired in January 1997, and Sinterloy, which was acquired in August
1997, were $11.3 million and $5.1 million, respectively, for 1997, or 46.7
percent of the net sales increase.
Sales in the Friction segment increased by $13.7 million, or 14.6 percent,
to $107.7 million in 1997 from $94.0 million in 1996. This increase was
attributable to strength in the aerospace, construction, agriculture and truck
markets served by the Company.
15]
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
HAWK CORPORATION
Sales in the Company's PM segment increased by $10.7 million, or 51.7
percent, to $31.4 million in 1997 from $20.7 million in 1996. The Sinterloy
acquisition accounted for 47.7 percent of the total increase in powder metal
sales in 1997.
Gross Profit.
Gross profit increased $13.3 million to $45.4 million during 1997, a 41.4
percent increase over gross profit of $32.1 million during 1996. The gross
profit margin increased to 28.5 percent during 1997 from 25.9 percent during
1996. The increase was attributable to cost savings resulting from the
consolidation of one of the Company's manufacturing facilities during 1996 into
existing Company facilities, acquisitions of higher margin businesses in 1997,
increased sales and favorable product mix.
Selling, Technical and Administrative Expenses.
ST&A expenses increased $4.4 million, or 28.4 percent, from $15.5 million
during 1996 to $19.9 million during 1997. As a percentage of net sales, ST&A
remained constant at 12.5 percent during 1997 and 1996. To enhance existing
product lines, the Company spent $3.1 million in 1997 on product research and
development, 19.2 percent above 1996 levels of $2.6 million.
Income from Operations.
Income from operations increased $12.3 million, or 125.5 percent, from $9.8
million in 1996 to $22.1 million in 1997. Income from operations as a percentage
of net sales increased to 13.9 percent in 1997 from 7.9 percent in 1996,
reflecting the benefits achieved from the consolidation of facilities, reduced
plant consolidation expenses, acquisition of businesses in 1997, increased sales
and favorable product mixes.
Interest Expense.
Interest expense increased $4.0 million, or 35.4 percent, to $15.3 million
in 1997 from $11.3 million in 1996. The increase is attributable to higher debt
levels, a result of the issuance of the Senior Notes in the fourth quarter of
1996.
Expenses from Canceled Public Offering.
During the fourth quarter 1997, the Company recognized a one-time charge of
$0.9 million for professional services incurred in connection with the
cancellation of an initial public offering of its common stock.
Income Taxes.
The provision for income taxes increased $2.9 million to $3.7 million in
1997 (56.1 percent of pre-tax income) from $0.8 million in 1996, reflecting the
increase in pre-tax income. An analysis of changes in income taxes and the
effective tax rate of the Company are presented in the accompanying consolidated
financial statements.
Net Income (Loss).
As a result of the factors noted above, net income was $2.9 million in 1997
compared to a loss of $3.1 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for making additional strategic acquisitions of complementary businesses, (3)
for funding the Company's day-to-day working capital requirements and (4) to pay
interest on, and to repay principal of, indebtedness. These requirements have
been, and will continue to be, financed through a combination of cash flow from
operations, borrowings under the Company's credit facility and the remaining
proceeds from the May 1998 initial public offering of common stock.
In May 1998, the Company received net proceeds of $54.5 million from an
initial public offering of 3,500,000 shares of its common stock. Additionally,
in May 1998, the Company entered into a new credit facility and received net
proceeds of $35.0 million. The proceeds from the stock offering and credit
facility were used primarily to: (1) repay a portion of the Senior Notes and
redeem all of the Senior Subordinated Notes, which aggregated $65.0 million,
plus accrued interest and prepayment premium and (2) redeem preferred stock of
$1.7 million.
In December 1998, the Board of Directors authorized a program to repurchase
up to $5.0 million of the Company's common stock. The amount and timing of the
share purchases will depend on market conditions, share price and other factors.
In 1998, 281,800 shares were acquired under the program.
Net cash provided by operating activities was $24.1 million in 1998
compared to $14.0 million in 1997. The increase in net income of $6.2 million
and non-cash charges of $1.0 million, in addition to an improved working capital
position at December 31, 1998, accounted for the increased
16]
<PAGE> 5
operating cash flow. Net working capital was $39.9 million at year-end 1998
compared to $28.8 million at year-end 1997.
Net cash used in investing activities was $22.6 million and $35.2 million
in 1998 and 1997, respectively. The cash used in investing activities in 1998
consisted primarily of $9.1 million for business acquisitions and $14.1 million
for the purchase of property, plant and equipment. In 1997, cash used in
investing activities consisted of $27.1 million attributable to the acquisitions
of Hutchinson and Sinterloy and $8.3 million for the purchase of property, plant
and equipment. In order to achieve long-term growth prospects and enhance
product quality, capital spending in 1999 is anticipated to be approximately
$11.0 million.
Net cash provided by financing activities was $8.5 million in 1998,
primarily from the common stock offering and term loan proceeds. Proceeds of
$87.7 million were used primarily to repay debt of $71.8 million and repurchase
$2.0 million of its common stock. In 1997, net cash used in financing activities
was $0.1 million primarily for payment of capital lease obligations and
preferred stock dividends.
The Company believes that cash flow from operating activities, borrowings
under its credit facility and access to capital markets will be sufficient to
satisfy its working capital, capital expenditure and debt requirements and to
finance continued growth through acquisitions for the next twelve months.
Market Risk Disclosures.
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Sensitivity.
Approximately 31.7 percent of the Company's long-term debt obligations bear
interest at a variable rate. In order to mitigate the risk associated with
interest rate fluctuations, in June 1998, the Company entered into an interest
rate swap with a notional amount of $35.0 million. At December 31, 1998, the
notional amount was $32.5 million. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss. If this agreement were settled at December 31, 1998, the Company would pay
approximately $0.6 million.
Foreign Currency Exchange Risk.
The Company currently does not hedge its foreign currency exposure and,
therefore, has not entered into any forward foreign exchange contracts to hedge
foreign currency transactions. The Company has operations outside the United
States with foreign-currency denominated assets and liabilities, primarily
denominated in Italian lira and Canadian dollars. Because the Company has
foreign-currency denominated assets and liabilities, financial exposure may
result, primarily from the timing of transactions and the movement of exchange
rates. The unhedged foreign currency balance sheet exposures as of December 31,
1998 are not expected to result in a significant impact on earnings or cash
flows.
YEAR 2000 READINESS
Since 1998, the Company has been addressing Year 2000 readiness for both
information technology and non-information technology systems with a
corporate-wide initiative led by the Company's Manager of Information
Technology. The initiative includes the identification of affected software, the
development of a plan for correcting that software in the most effective manner
and the implementation and monitoring of the plan. The Company is primarily
using its own employees to achieve readiness in most of its manufacturing and
operating systems. The Company is also using outside expertise to insure that
specific systems are made Year 2000 ready.
The Company's manufacturing facilities use minimal Year 2000 dependent
non-information technology systems. The Company's investigation of these systems
has not revealed any Year 2000 issues which cannot be addressed with supplier
provided software upgrades. The Company is continuing to investigate any
non-information technology systems for Year 2000 related problems.
Each of the Company's operating units, in coordination with the Manager of
Information Technology, has identified and communicated with the Company's key
suppliers, distributors and customers about their Year 2000 readiness plans and
progress. To date, a majority of the Company's material suppliers, distributors
and customers have provided the Company with positive statements of Year 2000
readiness.
17]
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
HAWK CORPORATION
The Company expects to have only limited expenditures related to Year 2000
issues, consisting principally of personnel costs incurred in the ordinary
course of business. The Company expects that the costs of software and hardware
replacements to make all of its technology systems Year 2000 compliant will be
less than $0.3 million.
The Company is in the process of developing a strategy to address issues
which may result from any Year 2000 failures. These plans will likely result in
some expenditures, including increased inventory to assure adequate levels of
supply. The exact costs are not determinable at this time. A worst-case scenario
could result in system failures, causing the disruption of operations, which
would prohibit the Company from engaging in normal business activities and could
result in a material adverse effect on the Company's business and results of
operations.
In 1998, the Company began to implement a replacement of its manufacturing
and accounting software and hardware systems, which are Year 2000 compliant, in
its Friction segment. As of December 31, 1998, the implementation was completed
at its domestic friction locations, and it is expected to be completed at its
foreign friction location in mid to late 1999.
Implementation dates and costs of the Company's Year 2000 readiness program
are subject to change based on new circumstances that may arise or new
information becoming available that may change the Company's underlying
assumptions or requirements. Because the Company's Year 2000 readiness program
is not yet fully implemented, there can be no assurance that the Company will
not incur material costs beyond those currently estimated by the Company.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and uncertainties.
These risks and uncertainties include, but are not limited to:
- - the effect of the Company's debt service requirements on funds available
for operations and future business opportunities and the Company's
vulnerability to adverse general economic and industry conditions and
competition;
- - the ability of the Company to continue to meet the terms of its credit
facilities which contain a number of significant financial covenants and
other restrictions;
- - the effect of any future acquisitions by the Company on its indebtedness
and on the funds available for operations and future business
opportunities;
- - the effect of competition by manufacturers using new or different
technologies;
- - the effect on the Company's international operations of unexpected changes
in regulatory requirements, export restrictions, currency controls, tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, political and economic instability, fluctuations in currency
exchange rates, difficulty in accounts receivable collection and
potentially adverse tax consequences;
- - the ability of the Company to successfully integrate the operations of
Allegheny, or any future acquisitions, into the Company's existing
businesses;
- - the ability of the Company to negotiate new agreements, as they expire,
with its unions representing certain of its employees, on terms favorable
to the Company or without experiencing work stoppages;
- - the effect of any interruption in the Company's supply of raw materials or
a substantial increase in the price of any of the raw materials;
- - the continuity of business relationships with major customers;
- - changes in market conditions in the end-markets served by the Company, such
as the softening experienced in the agricultural market;
- - the effect of product mix on margins; and
- - the ability of the Company's products to meet stringent Federal Aviation
Administration criteria and testing requirements.
These risks and others that are detailed in this Annual Report and in the
Company's Form 10-K must be considered by any investor or potential investor in
the Company.
18]
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
HAWK CORPORATION
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31 1998 1997
===========================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,317 $ 4,388
Accounts receivable, less allowance of $400 in 1998 and $321 in 1997 25,056 25,746
Inventories:
Raw materials and work-in-process 18,805 17,362
Finished products 6,334 4,721
- -----------------------------------------------------------------------------------------------------------
25,139 22,083
Deferred income taxes 1,837 2,833
Other current assets 5,003 1,375
- -----------------------------------------------------------------------------------------------------------
Total current assets 71,352 56,425
Property, plant and equipment:
Land 1,229 1,218
Buildings and improvements 13,698 10,877
Machinery and equipment 70,532 57,104
Furniture and fixtures 3,147 2,326
Construction in progress 4,636 1,914
- -----------------------------------------------------------------------------------------------------------
93,242 73,439
Less accumulated depreciation 28,923 20,959
- -----------------------------------------------------------------------------------------------------------
Total property, plant and equipment 64,319 52,480
Other assets:
Intangible assets 60,604 56,539
Net assets held for sale 3,604 3,604
Shareholder notes 1,010 1,675
Other 2,557 2,363
- -----------------------------------------------------------------------------------------------------------
Total other assets 67,775 64,181
TOTAL ASSETS $ 203,446 $ 173,086
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 10,590 $ 10,369
Short-term borrowings 1,019 1,744
Accrued compensation 8,766 8,069
Other accrued expenses 4,944 5,494
Current portion of long-term debt 6,181 1,955
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 31,500 27,631
Long-term liabilities:
Long-term debt 96,366 130,193
Deferred income taxes 9,251 6,322
Other 1,914 1,811
- -----------------------------------------------------------------------------------------------------------
Total long-term liabilities 107,531 138,326
Detachable stock warrants, subject to put option 9,300
Shareholders' equity (deficit):
Preferred stock 1
Series D preferred stock, $.01 par value; an aggregate liquidation value
of $1,530, plus any unpaid dividends with 9.8% cumulative dividend
(1,530 shares authorized, issued and outstanding) 1
Class A common stock, $.01 par value; 75,000,000 shares authorized; 9,187,750
issued and 8,905,950 outstanding in 1998;
4,663,957 issued and outstanding in 1997 92 14
Class B common stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding
Additional paid-in capital 54,645 1,964
Retained earnings (deficit) 12,310 (3,120)
Accumulated other comprehensive loss (640) (1,030)
Treasury stock, at cost, 281,800 shares (1,993)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 64,415 (2,171)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 203,446 $ 173,086
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
[19
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
HAWK CORPORATION
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31 1998 1997 1996
===================================================================================================
<S> <C> <C> <C>
Net sales $ 182,131 $ 159,086 $ 123,997
Cost of sales 123,761 113,650 91,884
Gross profit 58,370 45,436 32,113
Expenses:
Selling, technical and administrative expenses 22,020 19,916 15,468
Amortization of intangibles 3,532 3,397 2,806
Plant consolidation expense 50 4,028
- ----------------------------------------------------------------------------------------------------
Total expenses 25,552 23,363 22,302
Income from operations 32,818 22,073 9,811
Interest expense (11,883) (15,307) (11,270)
Interest income 999 690 540
Expenses from canceled public offering (889)
Other expense, net (31) (14) (174)
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary charge 21,903 6,553 (1,093)
Income taxes 9,690 3,679 789
- ----------------------------------------------------------------------------------------------------
Income (loss) before extraordinary charge 12,213 2,874 (1,882)
Extraordinary charge--net of taxes of $2,276 in 1998
and $798 in 1996 3,079 1,196
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 9,134 $ 2,874 $ (3,078)
===================================================================================================
Earnings (loss) per share:
Basic:
Earnings (loss) before extraordinary charge $ 1.59 $ .55 $ (.45)
Extraordinary charge (.41) (.26)
- ----------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 1.18 $ .55 $ (.71)
===================================================================================================
Diluted:
Earnings (loss) before extraordinary charge $ 1.51 $ .45 $ (.45)
Extraordinary charge (.39) (.26)
- ----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 1.12 $ .45 $ (.71)
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
20]
<PAGE> 9
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
HAWK CORPORATION
<TABLE>
<CAPTION>
Preferred Common Accumulated
Stock Stock Additional Retained Other Common
$.01 $.01 Paid-in Earnings Comprehensive Stock in
(Dollars in Thousands) Par Value Par Value Capital (Deficit) Income (Loss) Treasury Total
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $1 $14 $1,724 $2,330 $(121) $ 3,948
Net loss (3,078) (3,078)
Other comprehensive income:
Minimum pension liability (9) (9)
Foreign currency translation 315 315
-------
Total comprehensive income (loss) (2,772)
Merger of Hawk Holding Corp.
and Hawk 240 240
Preferred stock dividend (226) (226)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 1 14 1,964 (974) 185 1,190
Net income 2,874 2,874
Other comprehensive income:
Minimum pension liability 337 337
Foreign currency translation (1,552) (1,552)
-------
Total comprehensive income 1,659
Preferred stock dividend (320) (320)
Adjustment to carrying value of
detachable warrant (4,700) (4,700)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 1 14 1,964 (3,120) (1,030) (2,171)
Net income 9,134 9,134
Other comprehensive income:
Foreign currency translation 390 390
-------
Total comprehensive income 9,524
Stock split 33 (33)
Issuance of common stock in
connection with initial public
offering, net of issuance costs 35 54,450 54,485
Conversion of detachable warrants
in connection with initial
public offering 10 6,553 6,563
Preferred stock redemption (1,736) (1,736)
Preferred stock dividend (257) (257)
Repurchase of common stock $(1,993) (1,993)
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $1 $92 $54,645 $12,310 $(640) $(1,993) $64,415
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
[21
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
HAWK CORPORATION
<TABLE>
<CAPTION>
(Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 9,134 $ 2,874 $(3,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,496 10,497 8,418
Accretion of discount on debt 238 650 650
Deferred income taxes 3,161 1,660 352
Extraordinary charge, net of tax 3,079 1,196
Changes in operating assets and liabilities,
net of acquired assets:
Accounts receivable 2,546 (6,947) 524
Inventories (1,821) (963) (759)
Other assets (3,636) (621) 4
Accounts payable (817) 1,971 (294)
Other liabilities 697 4,868 (1,147)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,077 13,989 5,866
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (4,130)
Sale of marketable securities 4,040
Business acquisitions (9,100) (27,058)
Purchases of property, plant and equipment (14,084) (8,337) (8,275)
Payments received on shareholder notes 665 163 162
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (22,609) (35,232) (8,113)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term debt (805)
Proceeds from short-term debt 1,744
Proceeds from long-term debt 35,000 1,224 181,373
Payments on long-term debt (71,795) (2,226) (149,765)
Deferred financing costs (850) (565) (4,678)
Payments of preferred stock dividends (257) (320) (226)
Net proceeds from issuance of common stock 52,749
Prepayment premium on early retirement of debt (3,588)
Repurchase of common stock (1,993)
Other 546
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,461 (143) 27,250
Net increase (decrease) in cash and cash equivalents 9,929 (21,386) 25,003
Cash and cash equivalents at beginning of year 4,388 25,774 771
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,317 $ 4,388 $25,774
===============================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $12,179 $14,265 $11,024
Cash payments for income taxes $ 6,310 $ 2,187 $ 1,153
Noncash investing and financing activities:
Equipment purchased with capital leases $ 1,149 $ 1,306 $ 2,019
===============================================================================================
</TABLE>
22]
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
1] BASIS OF PRESENTATION
The consolidated financial statements of Hawk Corporation and its wholly
owned subsidiaries also include, effective January 2, 1997, the accounts of
Hutchinson Products Corporation (Hutchinson); effective August 1, 1997, the
accounts of Sinterloy Corporation (Sinterloy); and, effective June 1, 1998, the
accounts of Clearfield Powdered Metals, Inc. (Clearfield) (collectively, the
Company). See Note 3. All significant intercompany accounts and transactions
have been eliminated in the accompanying financial statements. Certain 1996 and
1997 amounts have been reclassified to conform with the 1998 presentation.
The Company, through its business segments, designs, engineers,
manufactures and markets specialized components, used in a wide variety of
aerospace, industrial and commercial applications.
In May 1998, the Company completed an initial public offering ("IPO") of
3,500,000 shares of common stock at an offering price to the public of $17.00
per share. See Note 6.
2] SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include expenditures
for additions and major improvements. Expenditures for repairs and maintenance
are charged to operations as incurred. The Company principally uses either the
straight-line or the unit method of depreciation for financial reporting
purposes based on annual rates sufficient to amortize the cost of the assets
over their estimated useful lives (3 to 40 years). Accelerated methods of
depreciation are used for federal income tax purposes.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over periods
ranging from 3 to 40 years. The ongoing value and remaining useful life of
intangible assets are subject to periodic evaluation, and the Company currently
expects the carrying amounts to be fully recoverable. If events and
circumstances indicate that intangible assets might be impaired, an undiscounted
cash flows methodology would be used to determine whether an impairment loss
should be recognized.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates. Revenues and expenses
are translated at weighted average exchange rates. Gains and losses from
transactions are included in results of operations. Gains and losses resulting
from translation are included in accumulated other comprehensive loss, a
component of shareholders' equity.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer. Costs and related expenses to manufacture the products are
recorded as costs of sales when the related revenue is recognized.
SIGNIFICANT CONCENTRATIONS
The Company provides credit, in the normal course of its business, to
original equipment and after-market manufacturers. The Company's customers are
not concentrated in any specific geographic region. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses, which, when realized, have been within the range of management's
expectations.
PRODUCT RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company's
expenditures for product development and engineering were approximately $3,155
in 1998, $3,136 in 1997 and $2,639 in 1996.
INCOME TAXES
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate fair value.
Long-Term Debt (Including Current Portion)
The fair values of the Company's publicly traded debentures, shown in the
following table, are based on quoted market prices. The fair values of the
Company's non-traded debt, also shown in the following table, are estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
[23
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
============================================================================
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Publicly traded debt $ 65,000 $ 67,275 $100,000 $107,500
Non-traded debts
(including capital
leases) $ 37,547 $ 37,547 $ 32,148 $ 32,148
- ----------------------------------------------------------------------------
</TABLE>
Interest Rate Swap
The Company has entered into an interest rate swap primarily to hedge
against interest rate risks. This agreement generally involves the exchange of
fixed and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Counterparties to this agreement are major
financial institutions. Management believes the risk of incurring losses related
to credit risk is remote.
The fair values for the Company's off balance-sheet instruments, shown in
the following table, are based on pricing models or formulas using current
assumptions for comparable instruments.
<TABLE>
<CAPTION>
DECEMBER 31 1998
==============================================
<S> <C>
Fair value $ (580)
Notional amount $ 32,500
Number of agreements outstanding 1
- ----------------------------------------------
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Recently
Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and measured at
fair value. The Company does not anticipate that the adoption of the statement
will have a significant effect on its results of operations or financial
position. The Company expects to adopt the new statement effective January 1,
2000.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, Accounting for the Cost for Computer Software Developed or
Obtained for Internal Use. The SOP requires the Company to capitalize costs
incurred in connection with developing or obtaining internal-use software. The
Company adopted SOP 98-1 in 1998. The adoption did not have a material impact to
the Company.
In April 1998, the Accounting Standards Executive Committee issued SOP
98-5, Reporting on the Costs of Start-Up Activities, which requires the
expensing of start-up activities as incurred. The Company adopted SOP 98-5 in
1998. The adoption did not have a material impact to the Company.
3] BUSINESS ACQUISITIONS
Effective January 2, 1997, the Company acquired all of the outstanding
capital stock of Hutchinson Foundry Products Company for (1) $10,600 in cash;
(2) $1,500 in 8% two-year convertible notes; and (3) contingent payments to be
made by the Company if certain earnings targets are met. The acquisition was
accounted for as a purchase. The excess of the purchase price over the estimated
fair value of the capital stock acquired in the amount of $7,600 is being
amortized over 30 years and is included in intangible assets. The results of
operations of Hutchinson are included in the Company's consolidated statements
of operations since the date of acquisition.
Effective August 1, 1997, the Company acquired substantially all of the
assets (except cash) and assumed certain liabilities of Sinterloy, Inc., for
$16,400 in cash. The acquisition was accounted for as a purchase. The excess of
the purchase price over the estimated fair value of the assets less the assumed
liabilities in the amount of $11,400 is being amortized over 30 years and is
included in intangible assets. The results of operations of Sinterloy are
included in the Company's consolidated statements of operations since the date
of acquisition.
Effective June 1, 1998, the Company acquired all the outstanding capital
stock of Clearfield Powdered Metals, Inc. for $9,100 in cash and other
consideration. The acquisition was accounted for as a purchase. The excess of
the purchase price over the estimated fair value of the capital stock acquired
in the amount of $8,300 is being amortized over 30 years and is included in
intangible assets. The results of operations of Clearfield are included in the
Company's consolidated statements of operations since the date of acquisition.
The following unaudited pro forma consolidated results of operations give
effect to the Sinterloy and Clearfield acquisitions as though they had occurred
on January 1, 1997 and include certain adjustments, such as additional
amortization expense as a result of goodwill and increased interest expense
related to debt incurred for the acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
====================================================
<S> <C> <C>
Net sales $187,215 $178,346
- ----------------------------------------------------
Net income $ 9,457 $ 5,139
- ----------------------------------------------------
Income per share-basic $ 1.22 $ 1.03
- ----------------------------------------------------
Income per share-diluted $ 1.16 $ .85
- ----------------------------------------------------
</TABLE>
Pro forma net sales and net income are not necessarily indicative of the
net sales and net income that would have occurred had the acquisitions been made
at the beginning of the year or the results that may occur in the future.
24]
<PAGE> 13
4] INTANGIBLE ASSETS
The components of intangible assets and related amortization periods are as
follows:
<TABLE>
<CAPTION>
December 31 1998 1997
====================================================================
<S> <C> <C>
Product certifications (19 to 40 years) $ 20,820 $ 20,820
Goodwill (15 to 40 years) 49,545 41,055
Deferred financing costs (3 to 7 years) 4,693 5,611
Proprietary formulations
and patents (10 years) 1,806 1,806
Other 831 806
- --------------------------------------------------------------------
77,695 70,098
Accumulated amortization (17,091) (13,559)
- --------------------------------------------------------------------
$ 60,604 $ 56,539
====================================================================
</TABLE>
Product certifications were acquired and valued based on the Company's
position as a certified supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
5] FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
=====================================================
<S> <C> <C>
Term Loan $ 32,500
Senior Subordinated Notes $ 27,025
Senior Notes 65,000 100,000
Other 5,047 5,123
- -----------------------------------------------------
102,547 132,148
Less current portion 6,181 1,955
- -----------------------------------------------------
$ 96,366 $130,193
=====================================================
</TABLE>
In connection with the IPO in May 1998, the Company retired all of its
outstanding $30,000 Senior Subordinated Notes, and incurred an extraordinary
charge of $427 relating to the write-off of previously capitalized deferred
financing costs. The Senior Subordinated Notes had detachable warrants to the
lender, which terminated upon the closing of the Company's IPO and provided the
lender the option to purchase 1,023,793 shares of the Company's common stock at
a per share price of $.01. For financial reporting purposes, the carrying value
of the warrants, including the put option, was classified as detachable stock
warrant, subject to put option on the accompanying balance sheet. The warrant
holders exercised the warrants on May 11, 1998 for 1,023,793 shares of the
Company's common stock. As a result of the warrant termination, the
corresponding carrying value of the warrants, less the par value of the common
stock issued, including the put options, was reclassified as an addition to
retained earnings.
In November 1996, the Company issued $100,000 in Senior Notes ("Senior
Notes") due on December 1, 2003, unless previously redeemed at the Company's
option, in accordance with the terms of the Senior Notes. Interest is payable
semi-annually on June 1 and December 1 of each year commencing June 1, 1997, at
a fixed rate of 10.25%. In March 1997, the Senior Notes were exchanged for notes
registered with the Securities and Exchange Commission. In May 1998, concurrent
with the IPO, the Company retired $35,000 of the then outstanding $100,000
Senior Notes and incurred extraordinary charges of $1,340 and $3,588 relating to
the write-off of previously capitalized deferred financing costs and a
prepayment premium on the early retirement of debt, respectively. The remaining
$65,000 Senior Notes are fully and unconditionally guaranteed on a joint and
several basis by each of the direct and indirect wholly owned domestic
subsidiaries of the Company (Guarantor Subsidiaries). See Note 14.
In May 1998, the Company entered into a $35,000 unsecured term loan
facility and replaced its previous $25,000 revolving credit facility with a
$50,000 unsecured revolving credit facility. The term loan has quarterly
maturities of $1,250, beginning September 30, 1998, with the remaining principal
of $12,500 due on March 31, 2003. The revolving credit facility matures March
31, 2003. Interest is payable under both facilities, quarterly, at a variable
rate based on a Eurodollar Rate, plus a margin, per annum or, at the Company's
option, a variable rate based on the lending bank's prime rate. The margin is
subject to increase or decrease based on achievement of certain financial
covenants by the Company. The term loan and revolving credit facility require
the Company to maintain certain conditions with respect to net worth and
interest coverage ratios as defined in the agreement. There were no outstanding
borrowings under the revolving credit facility at December 31, 1998.
Aggregate principal payments due on long-term debt as of December 31, 1998
are as follows: 1999 - $6,181; 2000 - $6,507; 2001 - $6,457; 2002 - $5,451; 2003
- - $77,638; thereafter - $313.
The Company's short-term borrowings represent advances under unsecured
lines of credit. The average borrowing rate was 8% during 1998. Unused amounts
under these lines total approximately $1,251 at December 31, 1998.
6] SHAREHOLDERS' EQUITY
On January 12, 1998, the Company amended its Certificate of Incorporation
to increase the authorized shares of Class A and Class B common stock to
75,000,000 and 10,000,000, respectively. In addition, on January 9, 1998, the
board of directors declared a 3.2299-for-one split of the Company's Class A and
Class B common stock effective in the form of a stock dividend to holders of
record on January 12, 1998. Accordingly, all numbers of common shares and per
share data have been restated to reflect the stock split.
In connection with the IPO, the Company redeemed all 1,375 shares of its
outstanding, $.01 par value, Series A preferred stock, 351 shares of its
outstanding, $.01 par value, Series B preferred stock and 7 shares of its
outstanding, $.01 par value, Series C preferred stock. The remaining 351 and
1,182 issued and outstanding shares of Series B and C preferred stock,
respectively, were converted into 1,530 shares of $.01 par
[25
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
value, Series D preferred stock. Dividends on the Series D preferred stock are
cumulative at a rate of 9.8%. Each share of Series D preferred stock is (1)
entitled to a liquidation preference equal to $1 per share plus any accrued or
unpaid dividends, (2) not entitled to vote, except in certain circumstances, and
(3) redeemable in whole, at the option of the Company, for $1 per share plus all
accrued dividends to the date of redemption. The Company also has 100,000
authorized shares of $.01 par value, Series E preferred stock, of which no
shares are issued or outstanding. Each share of Series E preferred stock is (1)
not redeemable and is entitled to dividends in the amount of 1,000 times the per
share dividend received by the holders of common stock, (2) entitled to 1,000
votes per share, and (3) entitled to a liquidation right of 1,000 times the
aggregate amount distributed per share to the holder of common stock.
On November 13, 1997, the board of directors declared a dividend of one
Series E preferred share purchase right (a Right) for each outstanding share of
common stock. The dividend was payable to the stockholders of record as of
January 16, 1998, and with respect to common stock, issued thereafter until the
Distribution Date, as defined in the Rights Agreement, and in certain
circumstances, with respect to common stock issued after the Distribution Date.
Except as set forth in the Rights Agreement, each Right, when it becomes
exercisable, entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series E preferred stock at a price of $70 per one
one-thousandth share of a Series E preferred stock, subject to adjustment.
7] EMPLOYEE STOCK OPTION PLAN
In 1997, the Company established the Hawk Corporation 1997 Stock Option
Plan. Under this plan, the Company may grant options to officers and other key
employees to purchase an aggregate of 700,000 shares of Class A common stock.
During 1998, the Company granted stock options to purchase an aggregate of
343,200 shares at exercise prices representing the fair market values of such
shares at the date of grant. The options vest ratably over a five-year period.
No options were exercisable at December 31, 1998.
The following table summarizes the stock option activity during the
one-year period ending December 31, 1998:
<TABLE>
<CAPTION>
==================================================================================================================
OPTIONS OPTIONS WEIGHTED
OUTSTANDING OUTSTANDING WEIGHTED AVERAGE
AT AT AVERAGE REMAINING RANGE OF
JANUARY 1, DECEMBER 31, EXERCISE CONTRACTUAL EXERCISE
1998 GRANTED EXERCISED CANCELED 1998 PRICE LIFE PRICES
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
0 24,500 0 24,500 $ 8.75 9.70 $ 7.48 - $ 9.35
0 318,700 0 3,000 315,700 $17.11 9.10 $16.83 - $18.70
- --------------------------------------------------------------------------------------------
0 343,200 0 3,000 340,200 $16.50 9.10
- --------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, but applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been reflected in the accompanying
consolidated financial statements related to the stock options issued pursuant
to this plan. If the Company had elected to recognize compensation expense based
on the fair value at the grant dates for awards under this plan consistent with
the method prescribed by SFAS No. 123, net income and net income per share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998
=========================================
<S> <C>
Net income:
As reported $9,134
Pro forma $8,276
Earnings per share (diluted):
As reported $ 1.12
Pro forma $ 1.01
- -----------------------------------------
</TABLE>
The weighted average fair value of stock options granted during 1998 was
$8.92. The fair value of the options granted used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998
====================================================
<S> <C>
Dividend yield 0%
Expected volatility 35.0%
Risk free interest rate 5.8%
Expected average holding period 7 years
- ----------------------------------------------------
</TABLE>
8] EMPLOYEE BENEFITS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosures About Pensions and Other Postretirement Benefits.
This statement does not change the recognition or measurement of pension or
postretirement benefit plans, but standardizes disclosure requirements for
pensions and other postretirement benefits, eliminates certain disclosures and
requires additional information. The Company adopted SFAS No. 132 as of December
31, 1998. Accordingly, all disclosures for prior periods shown have been
restated to conform to the disclosure requirements under SFAS No. 132.
26]
<PAGE> 15
The Company has several defined benefit pension plans that cover certain
employees. Benefits payable are based primarily on compensation and years of
service or a fixed annual benefit for each year of service. Certain hourly
employees are also covered under collective bargaining agreements. The Company
funds the plans in amounts sufficient to satisfy the minimum amounts required
under ERISA.
The components of the defined benefit pension plans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
====================================================================
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $11,059 $ 9,852
Service cost 449 404
Interest cost 905 745
Actuarial (gains) losses 1,491 75
Business acquisitions 525
Plan amendments 140
Foreign currency exchange rate charges (56) (9)
Benefits paid (628) (533)
- --------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $13,360 $11,059
====================================================================
Change in plan assets:
Fair value of plan assets at
beginning of year $13,960 $10,937
Actual return on plan assets 2,117 2,193
Business acquisitions 782
Foreign currency exchange rate charges (106) (21)
Company contributions 587 602
Benefits paid (628) (533)
- --------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $15,930 $13,960
====================================================================
Funded status of the plans $ 2,570 $ 2,901
Unrecognized net actuarial gains (714) (1,367)
Unrecognized prior service cost 409 320
- --------------------------------------------------------------------
NET PREPAID BENEFIT COST $ 2,265 $ 1,854
====================================================================
</TABLE>
Amounts recognized in the balance sheet consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
====================================================
<S> <C> <C>
Prepaid benefit cost $ 2,210 $ 1,959
Accrued benefit liability (208) (225)
Intangible asset 263 120
- ----------------------------------------------------
Net amount recognized $ 2,265 $ 1,854
====================================================
</TABLE>
Amounts applicable to the Company's underfunded pension plans at December
31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
===============================================================
<S> <C> <C>
Projected benefit obligation $2,936 $2,373
Accumulated benefit obligation 2,936 2,373
Fair value of plan assets 2,734 2,153
Amounts recognized as accrued
benefit liabilities 202 219
Amounts recognized as intangible assets 263 120
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=======================================================================
<S> <C> <C> <C>
Components of net periodic
pension cost:
Service cost $ 449 $ 404 $ 400
Interest cost 905 744 727
Expected return on
plan assets (1,257) (1,043) (900)
Amortization of prior
service cost 51 4 5
Recognized net actuarial loss (3) 26 36
- -----------------------------------------------------------------------
$ 145 $ 135 $ 268
=======================================================================
</TABLE>
The plan's assets are primarily invested in fixed income and equity
securities. In addition, certain of the defined benefit plans also contain
investments in the Company's stock. As of December 31, 1998, 60,000 shares of
the Company's stock had been purchased at a cost of $717. The market value as of
December 31, 1998 was $503.
The following assumptions were used in accounting for the defined benefit
plans:
<TABLE>
<CAPTION>
1998 1997 1996
============================================================================
<S> <C> <C> <C>
Used to compute the projected
benefit obligation as of
December 31:
Weighted average
discount rate 7.00% 7.90% 7.90%
Annual salary increase 3.00 3.00 3.00
Weighted average expected
long-term rate of return
on plan assets for the year
ended December 31 9.50 9.50 9.60
- ----------------------------------------------------------------------------
</TABLE>
The Company also sponsors several defined contribution plans which provide
voluntary employee contributions and, in certain plans, matching and
discretionary employer contributions. Expenses associated with these plans were
approximately $844 in 1998, $786 in 1997 and $690 in 1996.
9] LEASE OBLIGATIONS
The Company has capital lease commitments for buildings and equipment.
Future minimum annual rentals are: 1999 - $1,065; 2000 - $850; 2001 - $784; 2002
- - $444; 2003 - $142; and thereafter - $237. Amount representing interest is
$603. Total capital lease obligations are included in other long-term debt.
Amortization of assets recorded under capital leases is included with
depreciation expense.
The Company leases certain office and warehouse facilities and equipment
under operating leases. Rental expense was approximately $939 in 1998, $875 in
1997 and $609 in 1996. Future minimum lease commitments under these agreements
that have an original or existing term in excess of one year as of December 31,
1998 are as follows: 1999 - $756; 2000 - $591; 2001 - $536; 2002 - $432; 2003 -
$137; and thereafter - $163.
[27
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
10] INCOME TAXES
The provision for income taxes, including the effect of the extraordinary
charge, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
===================================================================
<S> <C> <C> <C>
Current:
Federal $ 3,028 $ 1,483 $(1,422)
State and local 626 325 129
Foreign 599 211 932
- -------------------------------------------------------------------
4,253 2,019 (361)
Deferred:
Federal 2,675 1,266 299
State 287 225 53
Foreign 199 169
- -------------------------------------------------------------------
3,161 1,660 352
TOTAL INCOME TAXES (CREDIT) $ 7,414 $ 3,679 $ (9)
===================================================================
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
========================================================
<S> <C> <C>
Deferred tax assets:
Accrued vacation $ 470 $ 403
AMT and net operating loss
carryforwards 1,075
Other accruals 1,027 797
Foreign capital leases 1,614 1,741
Other 637 427
- --------------------------------------------------------
Total deferred tax assets 3,748 4,443
Deferred tax liabilities:
Tax over book depreciation
and amortization 8,569 5,887
Foreign leased property 2,072 1,473
Other 521 572
- --------------------------------------------------------
Total deferred tax liabilities 11,162 7,932
NET DEFERRED TAX LIABILITIES $ 7,414 $ 3,489
========================================================
</TABLE>
The provision for income taxes, including the tax effect of the
extraordinary charge, differs from the amounts computed by applying the federal
statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997 1996
=====================================================================
<S> <C> <C> <C>
Income tax expense (credit)
at federal statutory rate 35.0% 34.0% (34.0)%
State and local tax, net of
federal tax benefit 3.6 5.5 3.9
Nondeductible goodwill
amortization 1.8 4.3 3.7
Adjustment to worldwide tax
liability and other, net 4.4 12.3 26.4
- ---------------------------------------------------------------------
Provision for income taxes 44.8% 56.1% 0.0%
=====================================================================
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided. Upon distribution of these earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes, which may be offset by foreign tax credits, and withholding taxes
payable to various foreign countries.
11] EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic earnings per share and diluted
earnings per share. As required, the Company adopted SFAS No. 128 in the fourth
quarter of 1997. Prior-year amounts have been restated to give effect to the
stock split discussed in Note 6.
Basic and diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
========================================================================
<S> <C> <C> <C>
Income (loss) available to
common shareholders:
Income (loss) before
extraordinary charge $12,213 $ 2,874 $(1,882)
Less: Preferred stock
dividends 257 320 226
- ------------------------------------------------------------------------
Income (loss) before
extraordinary charge
attributable to common
shareholders $11,956 $ 2,554 $(2,108)
========================================================================
Net income (loss) $ 9,134 $ 2,874 $(3,078)
Less: Preferred stock dividends 257 320 226
- ------------------------------------------------------------------------
Net income (loss) attributable
to common shareholders $ 8,877 $ 2,554 $(3,304)
========================================================================
Weighted average shares:
Basic:
Basic weighted
average shares 7,554 4,664 4,664
========================================================================
Diluted:
Basic from above 7,554 4,664 4,664
Effect of warrant conversion 368 1,024
Effect of note conversion
and options 19
- ------------------------------------------------------------------------
Diluted weighted
average shares 7,941 5,688 4,664
========================================================================
Earnings (loss) per share:
Basic:
Earnings (loss) before
extraordinary charge $ 1.59 $ .55 $ (.45)
Extraordinary charge (.41) (.26)
- ------------------------------------------------------------------------
Basic earnings (loss)
per share $ 1.18 $ .55 $ (.71)
========================================================================
Diluted:
Earnings (loss) before
extraordinary charge $ 1.51 $ .45 $ (.45)
Extraordinary charge (.39) (.26)
- ------------------------------------------------------------------------
Diluted earnings (loss)
per share $ 1.12 $ .45 $ (.71)
========================================================================
</TABLE>
28]
<PAGE> 17
12] RELATED PARTIES
In July 1995, certain shareholders of the Company issued interest-bearing
notes to the Company in the amount of $2,000, enabling them to repay certain
indebtedness incurred by them with respect to an acquisition. The notes are due
and payable on July 1, 2002 and bore interest at the prime rate plus 1.25%
through September 30, 1996 and at the prime rate thereafter. The balance
outstanding at December 31, 1998 is $1,000.
13] BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement establishes standards for reporting and descriptive information about
operating segments. The Company adopted SFAS No. 131, effective December 31,
1998. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of the segment information.
The Company operates in two primary business segments: friction products
and powder metal. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately based on
fundamental differences in their operations.
The friction products segment engineers, manufactures and markets
specialized components, used in a variety of aerospace, industrial and
commercial applications. The Company, through this segment, is a worldwide
supplier of friction components for brakes, clutches and transmissions.
The powder metal segment engineers, manufactures and markets specialized
components, used primarily in industrial applications. The Company, through this
segment, targets three areas of the powder metal component marketplace: high
precision components that are used in fluid power applications, large structural
powder metal parts used in construction, agricultural and truck applications,
and smaller, high-volume parts.
The other segment consists of corporate and operating segments, which do
not meet the quantitative thresholds for determining reportable segments. The
operating segments include the manufacturing of die-cast aluminum rotors and a
stamping operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=======================================================================
<S> <C> <C> <C>
Revenues from
external customers:
Friction Products $ 109,624 $ 107,679 $ 94,039
Powder Metal 53,483 31,360 20,685
Other 19,024 20,047 9,273
- -----------------------------------------------------------------------
Consolidated $ 182,131 $ 159,086 $ 123,997
Depreciation and
amortization:
Friction Products $ 7,342 $ 7,184 $ 6,788
Powder Metal 3,160 2,145 1,310
Other 994 1,168 320
- -----------------------------------------------------------------------
Consolidated $ 11,496 $ 10,497 $ 8,418
Operating income:
Friction Products $ 18,313 $ 13,236 $ 6,877
Powder Metal 13,359 7,193 3,272
Other 1,146 1,644 (338)
- -----------------------------------------------------------------------
Consolidated $ 32,818 $ 22,073 $ 9,811
Extraordinary charge:
Friction Products $ 1,939 $ 906
Powder Metal 740 200
Other 400 90
- -----------------------------------------------------------------------
Consolidated $ 3,079 $ 1,196
Capital expenditures:
(including capital leases)
Friction Products $ 10,817 $ 7,835 $ 6,592
Powder Metal 3,705 1,053 2,936
Other 711 755 766
- -----------------------------------------------------------------------
Consolidated $ 15,233 $ 9,643 $ 10,294
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
===============================================
<S> <C> <C>
Total assets:
Friction Products $115,141 $111,333
Powder Metal 53,034 37,244
Other 35,271 24,509
- -----------------------------------------------
Consolidated $203,446 $173,086
===============================================
</TABLE>
Geographic information for the years ended December 31, 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------------------------
Domestic Foreign Domestic Foreign Domestic Foreign
Operations Operations Total Operations Operations Total Operations Operations Total
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 160,099 $ 22,032 $182,131 $ 138,124 $ 20,962 $159,086 $ 104,262 $ 19,735 $123,997
Income from operations 31,238 1,580 32,818 21,416 657 22,073 7,326 2,485 9,811
Net income (loss) 8,761 373 9,134 3,079 (205) 2,874 (3,788) 710 (3,078)
Total assets 179,879 23,567 203,446 153,033 20,053 173,086 140,746 17,695 158,441
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has foreign operations in Canada and Italy.
[29
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
14] SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note 5, each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the Senior Notes. The
Guarantor Subsidiaries are direct or indirect wholly owned subsidiaries of the
Company.
The following supplemental consolidating condensed financial statements
present:
Consolidating condensed balance sheets as of December 31, 1998 and December
31, 1997, consolidating condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and consolidating condensed statements
of cash flows for the years ended December 31, 1998, 1997 and 1996.
Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in
Canada and Italy acquired in 1995) with their investments in subsidiaries
accounted for using the equity method.
Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors. Therefore, separate financial
statements and other disclosures concerning the Guarantor Subsidiaries are not
presented.
<TABLE>
<CAPTION>
==============================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==============================================================================================================
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,878 $ 46 $ 1,393 $ 14,317
Accounts receivable, net 18,399 6,657 25,056
Inventories, net 19,707 5,432 25,139
Deferred income taxes 1,388 449 1,837
Other current assets 2,003 2,071 929 5,003
- --------------------------------------------------------------------------------------------------------------
Total current assets 16,269 40,223 14,860 71,352
Investment in subsidiaries 791 6,127 $ (6,918)
Inter-company advances, net 143,487 (1,309) (20) (142,158)
Property, plant and equipment 56,082 8,237 64,319
Intangible assets 223 60,381 60,604
Other 1,010 6,784 490 (1,113) 7,171
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $161,780 $168,288 $23,567 $(150,189) $203,446
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,189 $ 3,401 $ 10,590
Short-term borrowings 1,019 1,019
Accrued compensation $ 8 7,638 1,120 8,766
Other accrued expenses 1,171 3,384 389 4,944
Current portion of long-term debt 5,000 549 632 6,181
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 6,179 18,760 6,561 31,500
Long-term liabilities:
Long-term debt 92,500 2,444 1,422 96,366
Deferred income taxes 8,150 417 684 9,251
Other 740 1,174 1,914
Inter-company advances, net 1,125 134,547 7,599 $(143,271)
- --------------------------------------------------------------------------------------------------------------
Total long-term liabilities 101,775 138,148 10,879 (143,271) 107,531
Total liabilities 107,954 156,908 17,440 (143,271) 139,031
Detachable stock warrants,
subject to put option
Shareholders' equity 53,826 11,380 6,127 (6,918) 64,415
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $161,780 $168,288 $23,567 $(150,189) $203,446
==============================================================================================================
</TABLE>
30]
<PAGE> 19
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
DECEMBER 31, 1997 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,103 $ 469 $ 816 $ 4,388
Accounts receivable, net 77 19,402 6,656 $ (389) 25,746
Inventories, net 17,455 4,628 22,083
Deferred income taxes 890 1,545 398 2,833
Other current assets 142 560 734 (61) 1,375
- ------------------------------------------------------------------------------------------------------------------
Total current assets 4,212 39,431 13,232 (450) 56,425
Investment in subsidiaries 790 4,971 (5,761)
Inter-company advances, net 132,490 1,300 11 (133,801)
Property, plant and equipment 46,115 6,365 52,480
Intangible assets 231 56,308 56,539
Other 1,675 7,297 445 (1,775) 7,642
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 139,398 $ 155,422 $ 20,053 $(141,787) $ 173,086
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,490 $ 3,213 $ (334) $ 10,369
Short-term borrowings 1,744 1,744
Accrued compensation $ 64 7,189 816 8,069
Other accrued expenses (3,219) 8,582 247 (116) 5,494
Current portion of long-term debt 1,432 523 1,955
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities (3,155) 24,693 6,543 (450) 27,631
Long-term liabilities:
Long-term debt 127,025 2,001 1,167 130,193
Deferred income taxes 5,665 223 434 6,322
Other 780 1,031 1,811
Inter-company advances, net 2,986 126,683 5,907 (135,576)
- ------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 135,676 129,687 8,539 (135,576) 138,326
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 132,521 154,380 15,082 (136,026) 165,957
Detachable stock warrants, subject to put option 9,300 9,300
Shareholders' equity (deficit) (2,423) 1,042 4,971 (5,761) (2,171)
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 139,398 $ 155,422 $ 20,053 $(141,787) $ 173,086
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 160,099 $ 22,032 $ 182,131
Cost of sales 105,817 17,944 123,761
- ------------------------------------------------------------------------------------------------------------------
Gross profit 54,282 4,088 58,370
Expenses:
Selling, technical and administrative expenses $ (113) 19,625 2,508 22,020
Amortization of intangible assets 10 3,522 3,532
- ------------------------------------------------------------------------------------------------------------------
Total expenses (103) 23,147 2,508 25,552
- ------------------------------------------------------------------------------------------------------------------
Income from operations 103 31,135 1,580 32,818
Interest (income) expense, net (2,667) 13,059 492 10,884
Income from equity investees 9,643 373 $ (10,016)
Other income (expense), net (95) (19) 83 (31)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary charge 12,318 18,430 1,171 (10,016) 21,903
Income taxes 1,121 7,771 798 9,690
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 11,197 10,659 373 (10,016) 12,213
Extraordinary charge, net of tax 2,063 1,016 3,079
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,134 $ 9,643 $ 373 $ (10,016) $ 9,134
==================================================================================================================
</TABLE>
[31
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1997 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 138,124 $ 20,962 $ 159,086
Cost of sales 96,390 17,260 113,650
- ------------------------------------------------------------------------------------------------------------------
Gross profit 41,734 3,702 45,436
Expenses:
Selling, technical and administrative expenses 16,942 2,974 19,916
Amortization of intangible assets $ 8 3,318 71 3,397
Plant consolidation expense 50 50
- ------------------------------------------------------------------------------------------------------------------
Total expenses 8 20,310 3,045 23,363
- ------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (8) 21,424 657 22,073
Interest expense 650 14,428 484 $ (255) 15,307
Income (loss) from equity investees 3,682 (205) (3,477)
Expenses from canceled public offering 889 889
Other income (819) (110) (2) 255 (676)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,954 6,901 175 (3,477) 6,553
Income taxes 80 3,219 380 3,679
- ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,874 $ 3,682 $ (205) $ (3,477) $ 2,874
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1996 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 104,262 $ 19,735 $ 123,997
Cost of sales 76,232 15,652 91,884
- ------------------------------------------------------------------------------------------------------------------
Gross profit 28,030 4,083 32,113
Expenses:
Selling, technical and administrative expenses 13,932 1,536 15,468
Amortization of intangible assets 2,744 62 2,806
Plant consolidation expense 4,028 4,028
- ------------------------------------------------------------------------------------------------------------------
Total expenses 20,704 1,598 22,302
- ------------------------------------------------------------------------------------------------------------------
Income from operations 7,326 2,485 9,811
Interest expense $ 650 10,578 369 $ (327) 11,270
(Loss) income from equity investees (2,422) 710 1,712
Other (income) expense (1,190) 24 473 327 (366)
- ------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes
and extraordinary charge (1,882) (2,566) 1,643 1,712 (1,093)
Income taxes (credit) (144) 933 789
- ------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary charge (1,882) (2,422) 710 1,712 (1,882)
Extraordinary charge - write-off of deferred
financing costs, net of income taxes (1,196) (1,196)
- ------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (3,078) $ (2,422) $ 710 $ 1,712 $ (3,078)
==================================================================================================================
</TABLE>
32]
<PAGE> 21
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1998 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 3,873 $ 16,392 $ 3,812 $ 24,077
Cash flows from investing activities:
Purchase of marketable securities (4,130) (4,130)
Sale of marketable securities 4,040 4,040
Business acquisitions (9,100) (9,100)
Purchase of property, plant and equipment (12,570) (1,514) (14,084)
Payments received on shareholder notes 665 665
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,525) (12,570) (1,514) (22,609)
Cash flows from financing activities:
Payments on short-term debt (805) (805)
Proceeds from long-term debt 35,000 35,000
Payments on long-term debt (67,500) (3,379) (916) (71,795)
Deferred financing costs (850) (850)
Payment of preferred stock dividend (241) (16) (257)
Net proceeds from issuance
of common stock 52,749 52,749
Prepayment premium on early
retirement of debt (3,588) (3,588)
Repurchase of common stock (1,993) (1,993)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 14,427 (4,245) (1,721) 8,461
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 9,775 (423) 577 9,929
Cash and cash equivalents,
at beginning of period 3,103 469 816 4,388
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 12,878 $ 46 $ 1,393 $ 0 $ 14,317
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1997 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 5,131 $ 8,013 $ 845 $ 13,989
Cash flows from investing activities:
Business acquisitions (27,058) (27,058)
Purchase of property, plant and equipment (6,618) (1,719) (8,337)
Other 163 163
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,895) (6,618) (1,719) (35,232)
Cash flows from financing activities:
Proceeds from short-term debt 1,744 1,744
Proceeds from long-term debt 1,150 74 1,224
Payments on long-term debt (1,150) (366) (710) (2,226)
Deferred financing costs (565) (565)
Payment of preferred stock dividend (320) (320)
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (320) (931) 1,108 (143)
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (22,084) 464 234 (21,386)
Cash and cash equivalents,
at beginning of period 25,187 5 582 25,774
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 3,103 $ 469 $ 816 $ 0 $ 4,388
==================================================================================================================
</TABLE>
33]
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
HAWK CORPORATION
<TABLE>
<CAPTION>
==================================================================================================================
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1996 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 96 $ 3,664 $ 2,106 $ 5,866
Cash flows from investing activities:
Purchase of property, plant and equipment (6,247) (2,028) (8,275)
Other 162 162
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,085) (2,028) (8,113)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 178,901 1,966 506 181,373
Payments on long-term debt (149,314) (164) (287) (149,765)
Deferred financing costs (4,678) (4,678)
Payment of preferred stock dividend (226) (226)
Other 546 546
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 24,683 2,348 219 27,250
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 24,779 (73) 297 25,003
Cash and cash equivalents,
at beginning of period 408 78 285 771
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 25,187 $ 5 $ 582 $ 0 $ 25,774
==================================================================================================================
</TABLE>
34]
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
HAWK CORPORATION
SHAREHOLDERS AND BOARD OF DIRECTORS
Hawk Corporation
We have audited the accompanying consolidated balance sheets of Hawk
Corporation and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Hawk Corporation and subsidiaries at December 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 1, 1999
REPORT OF MANAGEMENT
HAWK CORPORATION
We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended December 31, 1998, 1997
and 1996. The primary responsibility for the integrity of the financial
information rests with management. This information is prepared in accordance
with generally accepted accounting principles based upon our best estimates and
judgments and giving due consideration to materiality.
The Company maintains accounting and control systems which are designed to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. There are limits inherent in all systems of internal control based
on the recognition that the cost of such systems should not exceed the benefits
to be derived. We believe our system provides this appropriate balance.
Ernst & Young LLP, independent accountants, is retained to audit Hawk's
financial statements. Its accompanying report is based on an audit conducted in
accordance with generally accepted auditing standards, including a review of the
internal control structure and tests of accounting procedures and records.
The Board of Directors pursues its responsibility for these financial
statements through the Audit Committee, composed exclusively of outside
directors. The Audit Committee meets periodically with internal auditors, our
independent auditors, as well as with Hawk management, to discuss the adequacy
of financial controls, the quality of financial reporting and the nature, extent
and results of the audit effort. Both the internal auditors and independent
auditors have private and confidential access to the Audit Committee at all
times.
/s/ Norman C. Harbert
Norman C. Harbert
Chairman, President and Chief Executive Officer
/s/ Thomas A. Gilbride
Thomas A. Gilbride
Vice President, Finance
[35
<PAGE> 1
Exhibit 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENT OF
PARENT SUBSIDIARIES ORGANIZATION OWNERSHIP
<S> <C> <C> <C>
Hawk Corporation Friction Products Co. Ohio 100%
Logan Metal Stampings, Inc. Ohio 100%
Helsel, Inc. Delaware 100%
S.K. Wellman Holdings, Inc. Delaware 100%
Hutchinson Products Corporation Delaware 100%
Sinterloy Corporation Delaware 100%
Clearfield Powdered Metals, Inc. Pennsylvania 100%
Hawk International FSC, Corp. Barbados 100%
Allegheny Powder Metallurgy, Inc. Pennsylvania 100%
Friction Products Co. Hawk Brake, Inc. Ohio 100%
S.K. Wellman S.K. Wellman Corp. Delaware 100%
Holdings, Inc. Wellman Friction Products
U.K. Corp. Delaware 100%
S.K. Wellman S.p.A. Italy 95%
S.K. Wellman Corp. The S.K. Wellman Company
of Canada Limited Canada 100%
S.K. Wellman S.p.A. Italy 5%
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of the Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-60865) pertaining to the Hawk Corporation 1997 Stock Option Plan and
in the Registration Statement (Form S-8 No. 333-68583) pertaining to the
Friction Products Co. Profit Sharing Plan; S.K. Wellman Retirement Savings and
Profit Sharing Plan; Helsel, Inc. Employee's Retirement Plan; Helsel, Inc.
Employee's Savings and Investment Plan; Sinterloy Corporation 401(k) Plan;
Hutchinson Products Corporation Employees' 401(k) Plan; and Hawk Corporation
401(k) Savings and Retirement Plan of our report dated March 1, 1999, with
respect to the consolidated financial statements of Hawk Corporation
incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,317
<SECURITIES> 0
<RECEIVABLES> 24,456
<ALLOWANCES> 400
<INVENTORY> 25,139
<CURRENT-ASSETS> 71,352
<PP&E> 93,242
<DEPRECIATION> 28,923
<TOTAL-ASSETS> 203,446
<CURRENT-LIABILITIES> 31,500
<BONDS> 96,366
0
1
<COMMON> 92
<OTHER-SE> 64,322
<TOTAL-LIABILITY-AND-EQUITY> 203,446
<SALES> 182,131
<TOTAL-REVENUES> 182,131
<CGS> 123,761
<TOTAL-COSTS> 25,552
<OTHER-EXPENSES> 31
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,883
<INCOME-PRETAX> 21,903
<INCOME-TAX> 9,690
<INCOME-CONTINUING> 12,213
<DISCONTINUED> 0
<EXTRAORDINARY> 3,079
<CHANGES> 0
<NET-INCOME> 9,134
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.12
</TABLE>
