<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD __________ TO __________.
COMMISSION FILE NUMBER 001-13797
HAWK CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1608156
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
200 Public Square, Suite 30-5000, Cleveland, Ohio 44114
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 861-3553
--------------
Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of the date of this report,
the Registrant had the following number of shares of common stock outstanding:
Class A Common Stock, $0.01 par value: 8,693,900
Class B Common Stock, $0.01 par value: None (0)
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,942 $ 14,317
Accounts receivable, less allowance of $325 and $400, respectively 30,978 25,056
Inventories 27,740 25,139
Deferred income taxes 1,736 1,837
Other current assets 2,806 5,003
-------- --------
Total current assets 65,202 71,352
Property, plant and equipment:
Land 1,476 1,229
Buildings and improvements 14,103 13,698
Machinery and equipment 76,759 70,532
Furniture and fixtures 3,274 3,147
Construction in progress 7,445 4,636
-------- --------
103,057 93,242
Less accumulated depreciation 33,261 28,923
-------- --------
Total property, plant and equipment 69,796 64,319
Other assets:
Intangible assets 66,875 60,604
Net assets held for sale 1,806 3,604
Shareholder notes 1,010 1,010
Other 2,680 2,557
-------- --------
Total other assets 72,371 67,775
-------- --------
Total assets $207,369 $203,446
======== ========
</TABLE>
3
<PAGE> 4
<TABLE>
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,659 $ 10,590
Short-term borrowings 803 1,019
Accrued compensation 6,119 8,766
Other accrued expenses 5,924 4,944
Current portion of long-term debt 6,660 6,181
-------- --------
Total current liabilities 31,165 31,500
Long-term liabilities:
Long-term debt 99,107 96,366
Deferred income taxes 9,145 9,251
Other 1,825 1,914
-------- --------
Total long-term liabilities 110,077 107,531
Shareholders' equity:
Series D preferred stock, $.01 par value;
an aggregate liquidation value of $1,530, plus
any accrued and unpaid dividends with 9.8% cumulative
dividend (1,530 shares authorized, issued and outstanding) 1 1
Class A common stock, $.01 par value; 75,000,000 shares
authorized, 9,187,750 issued and 8,693,900 outstanding 92 92
Class B common stock, $.01 par value, 10,000,000 shares
authorized, none issued or outstanding
Additional paid-in capital 54,645 54,645
Retained earnings 16,677 12,310
Accumulated other comprehensive loss (1,728) (640)
Treasury stock, at cost (3,560) (1,993)
-------- --------
Total shareholders' equity 66,127 64,415
Total liabilities and shareholders' equity $207,369 $203,446
======== ========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $95,155 $96,719 $48,092 $46,741
Cost of sales 68,326 65,378 35,343 31,591
------- ------- ------- -------
Gross profit 26,829 31,341 12,749 15,150
Selling, technical and
administrative expenses 13,049 11,580 6,608 5,877
Amortization of intangibles 1,859 1,769 960 870
------- ------- ------- -------
Total expenses 14,908 13,349 7,568 6,747
Income from operations 11,921 17,992 5,181 8,403
Interest expense 4,799 7,125 2,429 3,191
Interest income (133) (491) (13) (381)
Other (income) expense, net (329) 17 (300) 13
------- ------- ------- -------
Income before income taxes
and extraordinary charge 7,584 11,341 3,065 5,580
Income taxes 3,143 4,827 1,276 2,379
------- ------- ------- -------
Income before extraordinary charge 4,441 6,514 1,789 3,201
Extraordinary charge -- 3,079 -- 3,079
------- ------- ------- -------
Net income $ 4,441 $ 3,435 $ 1,789 $ 122
======= ======= ======= =======
Earnings per share:
Basic:
Earnings before
extraordinary charge $ .50 $ 1.07 $ .20 $ .43
Extraordinary charge -- (.52) -- (.43)
------- ------- ------- -------
Basic earnings per share $ .50 $ .55 $ .20 $ .00
======= ======= ======= =======
Diluted:
Earnings before
extraordinary charge $ .50 $ .95 $ .20 $ .41
Extraordinary charge -- (.46) -- (.41)
------- ------- ------- -------
Diluted earnings per share $ .50 $ .49 $ .20 $ .00
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
<TABLE>
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,441 $ 3,435
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,691 5,467
Accretion of discount on debt 238
Deferred income taxes 24
Extraordinary charge, net of income taxes 3,079
Gain on sale of property, plant and equipment (274)
Changes in operating assets and liabilities, net:
Accounts receivable (3,968) (1,929)
Inventories (1,484) (305)
Other assets 1,953 69
Accounts payable 147 2,638
Other liabilities (1,041) (689)
-------- --------
Net cash provided by operating activities 6,489 12,003
Cash flows from investing activities:
Business acquisitions (14,500) (9,000)
Proceeds from sale of property, plant and equipment 2,052
Purchases of property, plant and equipment (4,398) (7,983)
Payments received on shareholder notes 665
-------- --------
Net cash used in investing activities (16,846) (16,318)
Cash flows from financing activities:
Payments on short-term debt (104) (697)
Proceeds from borrowings on long-term debt 19,444 35,000
Payments on long-term debt (19,717) (66,964)
Net proceeds from issuance of common stock 53,168
Deferred financing costs (850)
Payments of preferred stock dividend (74) (181)
Repurchase of common stock (1,567)
Prepayment premium on early retirement of debt (3,588)
-------- --------
Net cash (used in) provided by financing activities (2,018) 15,888
-------- --------
Net (decrease) increase in cash and cash equivalents (12,375) 11,573
Cash and cash equivalents at the beginning of the period 14,317 4,388
-------- --------
Cash and cash equivalents at the end of the period $ 1,942 $ 15,961
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included by reference in the Form 10-K for Hawk
Corporation (the "Company") for the year ended December 31, 1998.
The Company, through its business segments, designs, engineers, manufactures and
markets specialized components used in a variety of aerospace, industrial and
other commercial applications.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and also include, effective June 1, 1998 and
February 26, 1999, the accounts of Clearfield Powdered Metals, Inc.
("Clearfield") and Allegheny Powder Metallurgy, Inc. ("Allegheny"),
respectively. All significant inter-company accounts and transactions have been
eliminated in the accompanying financial statements.
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and measured at
fair value. The Company does not anticipate that the adoption of the statement
will have a significant effect on its results of operations or financial
position. The Company expects to adopt the new statement effective January 1,
2001.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,441 $3,435 $1,789 $122
Foreign currency translation (1,088) (138) (329) 120
-------- ------ ------ ----
Comprehensive income $ 3,353 $3,297 $1,460 $242
======== ====== ====== ====
</TABLE>
7
<PAGE> 8
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The major components of inventories are as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials and work-in-process $20,710 $20,230
Finished products 8,455 6,334
Inventory reserves (1,425) (1,425)
------- -------
$27,740 $25,139
======= =======
</TABLE>
NOTE 5 - LONG-TERM DEBT
In May 1998, the Company entered into a $35,000 Term Loan Facility, with $1,250
maturing quarterly, beginning September 30, 1998 with the remaining principal of
$12,500 due on March 31, 2003. Additionally, in May 1998, the Company executed a
$50,000 Revolving Credit Facility that matures March 31, 2003. The Company has
$3,208 outstanding under the Revolving Credit Facility as of June 30, 1999.
Concurrent with the Company's Initial Public Offering ("IPO") in May 1998, the
Company redeemed $35,000 of its then outstanding $100,000 10.25% Senior Notes
due December 1, 2003 (the "Senior Notes") (See Note 6.) The Senior Notes, Term
Loan and Revolving Credit Facility are fully and unconditionally guaranteed on a
joint and several basis by each of the direct or indirect wholly-owned domestic
subsidiaries of the Company ("Guarantor Subsidiaries"). (See Note 10.)
NOTE 6 - SHAREHOLDERS' EQUITY
In May 1998, the Company completed its IPO of 3,500,000 shares of common stock
at an offering price to the public of $17.00 per share.
NOTE 7 -STOCK REPURCHASE PROGRAM
In December 1998, the Board of Directors approved a program to repurchase the
Company's common stock on the open market at prevailing prices. The repurchase
will primarily be funded from operating cash flows and the shares will initially
be held as treasury stock. The Company did not repurchase any shares of its
common stock during the three-month period ended June 30, 1999. Year-to-date,
the Company has purchased 214,000 shares at an average price of $7.27 per share.
8
<PAGE> 9
NOTE 8 - EARNINGS PER SHARE
Basic and dilutive earnings per share is computed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income available to common shareholders:
Income before extraordinary item $4,441 $6,514 $1,789 $3,201
Less: Preferred stock dividends (74) (181) (37) (101)
------ ------ ------ ------
Income before extraordinary item attributable
to common shareholders 4,367 6,333 1,752 3,100
====== ====== ====== ======
Net income 4,441 3,435 1,789 122
Less: Preferred stock dividends (74) (181) (37) (101)
------ ------ ------ ------
Net income attributable to common shareholders 4,367 3,254 1,752 21
====== ====== ====== ======
Weighted average shares:
Basic:
Basic weighted average shares 8,734 5,914 8,694 7,150
Diluted:
Basic from above 8,734 5,914 8,694 7,150
Effect of warrant conversion 741 461
Effect of note conversion and options 89 14 133 29
------ ------ ------ ------
Diluted weighted average shares 8,823 6,669 8,827 7,640
====== ====== ====== ======
Earnings per share:
Basic:
Earnings before extraordinary charge $ .50 $ 1.07 $ .20 $ .43
Extraordinary charge (.52) (.43)
------ ------ ------ ------
Basic earnings per share $ .50 $ .55 $ .20 $ .00
====== ====== ====== ======
Diluted:
Earnings before extraordinary charge $ .50 $ .95 $ .20 $ .41
Extraordinary charge (.46) (.41)
------ ------ ------ ------
Diluted earnings per share $ .50 $ .49 $ .20 $ .00
====== ====== ====== ======
</TABLE>
9
<PAGE> 10
NOTE 9 - BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement establishes standards for reporting and descriptive information about
operating segments. The Company adopted SFAS No. 131, effective December 31,
1998. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of the segment information.
The Company operates in two primary business segments: friction products and
powder metal. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately based on
fundamental differences in their operations.
The friction products segment engineers, manufactures and markets specialized
components, used in a variety of aerospace, industrial and commercial
applications. The Company, through this segment, is a worldwide supplier of
friction components for brakes, clutches and transmissions.
The powder metal segment engineers, manufactures and markets specialized
components, used primarily in industrial applications. The Company, through this
segment, targets three areas of the powder metal component marketplace: high
precision components that are used in fluid power applications, large structural
powder metal parts used in construction, agricultural and truck applications,
and smaller, high volume parts.
The other segment consists of corporate and operating segments, which do not
meet the quantitative thresholds for determining reportable segments. The
operating segments include the manufacturing of die-cast aluminum rotors and a
stamping operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from External Customers:
Friction Products $51,014 $60,098 $24,960 $28,907
Powder Metal 34,597 26,419 18,409 12,909
Other 9,544 10,202 4,723 4,925
------- ------- ------- -------
Consolidated $95,155 $96,719 $48,092 $46,741
Depreciation and Amortization:
Friction Products $ 3,952 $ 3,561 $ 1,929 $ 1,782
Powder Metal 2,228 1,395 1,210 729
Other 511 510 253 249
------- ------- ------- -------
Consolidated $ 6,691 $ 5,466 $ 3,392 $ 2,760
Operating Income:
Friction Products $ 5,393 $ 9,655 $ 2,527 $ 4,862
Powder Metal 6,557 7,574 2,913 3,255
Other (29) 763 (259) 286
------- ------- ------- -------
Consolidated $11,921 $17,992 $ 5,181 $ 8,403
</TABLE>
10
<PAGE> 11
June 30, December 31,
1999 1998
-------- ------------
Total Assets:
Friction Products $116,628 $115,141
Powder Metal 71,272 53,034
Other 19,469 35,271
-------- --------
Consolidated $207,369 $203,446
<PAGE> 12
NOTE 10 - SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note 5, each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the Senior Notes. The
Guarantor Subsidiaries are direct or indirect, wholly-owned subsidiaries of the
Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
1. Consolidating condensed balance sheets as of June 30, 1999 and
December 31, 1998, consolidating condensed statements of
income for the three and six month periods ended June 30, 1999
and 1998 and consolidating condensed statements of cash flows
for the six months ended June 30, 1999 and 1998.
2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries (consisting of the
Company's subsidiaries in Canada, Italy and Mexico) with their
investments in subsidiaries accounted for using the equity
method.
3. Elimination entries necessary to consolidate the Parent and
all of its subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Senior Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented.
11
<PAGE> 13
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<CAPTION>
JUNE 30, 1999
-----------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 252 $ 149 $ 1,541 $ 1,942
Accounts receivable, net 24,369 6,609 30,978
Inventories, net 23,132 4,608 27,740
Deferred income taxes 1,388 348 1,736
Other current assets 1,639 627 540 2,806
-------- -------- ------- --------- --------
Total current assets 3,279 48,277 13,646 65,202
Investment in subsidiaries 792 5,597 $ (6,389)
Inter-company advances, net 157,891 223 708 (158,822)
Property, plant and equipment 62,821 6,975 69,796
Intangible assets 219 66,656 66,875
Other 1,010 5,089 510 (1,113) 5,496
-------- -------- ------- --------- --------
Total assets $163,191 $188,633 $21,839 $(166,324) $207,369
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,913 $ 2,746 $ 11,659
Short term borrowings 803 803
Accrued compensation $ 8 4,958 1,153 6,119
Other accrued expenses 2,255 3,299 370 5,924
Current portion of long-term debt 5,000 1,218 442 6,660
-------- -------- ------- --------- --------
Total current liabilities 7,263 18,388 5,514 31,165
Long-term liabilities:
Long-term debt 93,208 4,844 1,055 99,107
Deferred income taxes 8,150 417 578 9,145
Other 734 1,091 1,825
Inter-company advances, net 1,127 150,804 8,004 $(159,935)
-------- -------- ------- --------- --------
Total long-term liabilities 102,485 156,799 10,728 (159,935) 110,077
-------- -------- ------- --------- --------
Total liabilities 109,748 175,187 16,242 (159,935) 141,242
Shareholders' equity 53,443 13,476 5,597 (6,389) 66,127
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity $163,191 $188,663 $21,839 $(166,324) $207,369
======== ======== ======= ========= ========
</TABLE>
12
<PAGE> 14
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
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
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>
13
<PAGE> 15
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $84,581 $10,574 $95,155
Cost of sales 59,242 9,084 68,326
------- ------- ------- ------- -------
Gross profit 25,339 26,829
Selling, technical and
administrative expenses $ (125) 11,862 1,312 13,049
Amortization of intangibles 4 1,855 1,859
------- ------- ------- ------- -------
Total expenses (121) 13,717 1,312 14,908
Income from operations 121 11,622 178 11,921
Interest (income) expense, net (1,928) 6,374 220 4,666
Income (loss) from equity investees 3,183 (116) $(3,067)
Other (income) expense, net (29) (281) (19) (329)
------- ------- ------- ------- -------
Income before income taxes 5,261 5,413 (23) (3,067) 7,584
Income taxes 820 2,230 93 3,143
------- ------- ------- ------- -------
Net income (loss) $ 4,441 $ 3,183 $ (116) $(3,067) $ 4,441
======= ======= ======= ======= =======
</TABLE>
14
<PAGE> 16
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $84,911 $11,808 $96,719
Cost of sales 55,762 9,616 65,378
------ ------- ------- ------- -------
Gross profit 29,149 2,192 31,341
Selling, technical and
administrative expenses $ 40 10,198 1,342 11,580
Amortization of intangibles 4 1,765 -- 1,769
------ ------- ------- ------- -------
Total expenses 44 11,963 1,342 13,349
Income (loss) from operations (44) 17,186 850 17,992
Interest (income) expense, net (359) 6,725 268 6,634
Income from equity investees 5,277 393 $(5,670)
Other (income) expense, net (70) 73 14 17
------ ------- ------- ------- -------
Income before extraordinary charge
and income taxes 5,662 10,781 568 (5,670) 11,341
Income taxes 164 4,488 175 4,827
------ ------- ------- ------- -------
Income before extraordinary charge 5,498 6,293 393 (5,670) 6,514
Extraordinary charge 2,063 1,016 - 3,079
------ ------- ------- ------- -------
Net income $3,435 $ 5,277 $ 393 $(5,670) $ 3,435
====== ======= ======= ======= =======
</TABLE>
15
<PAGE> 17
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $42,634 $5,458 $48,092
Cost of sales 30,726 4,617 35,343
------ ------- ------ ------- -------
Gross profit 11,908 841 12,749
Selling, technical and
administrative expenses 5,927 681 6,608
Amortization of intangibles $ 4 956 960
------ ------- ------ ------- -------
Total expenses 4 6,883 681 7,568
Income (loss) from operations (4) 5,025 160 5,181
Interest (income) expense, net (908) 3,218 106 2,416
Income from equity investees 1,207 10 $(1,217)
Other income, net (29) (261) (10) (300)
------ ------- ------ ------- -------
Income before income taxes 2,140 2,078 64 (1,217) 3,065
Income taxes 351 871 54 1,276
------ ------- ------ ------- -------
Net income $1,789 $ 1,207 $ 10 $(1,217) $ 1,789
====== ======= ====== ======= =======
</TABLE>
16
<PAGE> 18
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $40,668 $6,073 $46,741
Cost of sales 26,678 4,913 31,591
------ ------- ------ ------- -------
Gross profit 13,990 1,160 15,150
Selling, technical and
administrative expenses $ 40 5,141 696 5,877
Amortization of intangibles 2 868 870
------ ------- ------ ------- -------
Total expenses 42 6,009 696 6,747
Income (loss) from operations (42) 7,981 464 8,403
Interest (income) expense, net (347) 3,011 146 2,810
Income from equity investees 1,991 180 $(2,171)
Other (income) expense, net (42) 57 (2) 13
------ ------- ------ ------- -------
Income before extraordinary
charge and income taxes 2,338 5,093 320 (2,171) 5,580
Income taxes 153 2,086 140 2,379
------ ------- ------ ------- -------
Income before extraordinary charge 2,185 3,007 180 (2,171) 3,201
Extraordinary charge 2,063 1,016 3,079
------ ------- ------ ------- -------
Net income $ 122 $ 1,991 $ 180 $(2,171) $ 122
====== ======= ====== ======= =======
</TABLE>
17
<PAGE> 19
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 2,807 $ 2,627 $1,055 $ 6,489
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (3,936) (462) (4,398)
Sales of property, plant and
equipment 2,052 2,052
-------- ------- ------ -------- --------
Net cash used in
investing activities (14,500) (1,884) (462) (16,846)
Cash flows from financing activities:
Payments on short-term borrowings (104) (104)
Proceeds from borrowings on
long-term debt 19,444 19,444
Payments on long-term debt (18,736) (640) (341) (19,717)
Payment of preferred
stock dividend (74) (74)
Repurchase of common stock (1,567) (1,567)
-------- ------- ------ -------- --------
Net cash used in
financing activities (933) (640) (445) (2,018)
-------- ------- ------ -------- --------
Net (decrease) increase in cash and
cash equivalents (12,626) 103 148 (12,375)
Cash and cash equivalents
at beginning of period 12,878 46 1,393 14,317
-------- ------- ------ -------- --------
Cash and cash equivalents
at end of period $ 252 $ 149 $1,541 $ 1,942
======== ======= ====== ======== ========
</TABLE>
18
<PAGE> 20
<TABLE>
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 731 $ 8,938 $ 2,334 $ 12,003
Cash flows from investing activities
Business acquisitions (9,000) (9,000)
Purchase of property, plant and
equipment (6,815) (1,168) (7,983)
Payments received on shareholder
loans 665 665
-------- ------- ------- -------- --------
Net cash used in investing activities (8,335) (6,815) (1,168) (16,318)
Cash flows from financing activities:
Payments on short-term debt (697) (697)
Proceeds from borrowings on
long-term debt 35,000 35,000
Net proceeds from issuance
of common stock 53,168 53,168
Payments on long-term debt (65,000) (1,662) (302) (66,964)
Deferred financing costs (850) (850)
Payment of preferred stock dividend (165) (16) (181)
Payments on early retirement of debt (3,588) (3,588)
-------- ------- ------- -------- --------
Net cash provided by (used in)
financing activities 19,415 (2,528) (999) 15,888
-------- ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents 11,811 (405) 167 11,573
Cash and cash equivalents
at beginning of period 3,103 469 816 4,388
-------- ------- ------- -------- --------
Cash and cash equivalents
at end of period $ 14,914 $ 64 $ 983 $ 15,961
======== ======= ======= ======== ========
</TABLE>
19
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing
elsewhere in this report.
GENERAL
Hawk operates primarily in two reportable segments: Friction Products
("Friction") and Powder Metal ("PM"). The Company's friction products are made
from proprietary formulations of composite materials that primarily consist of
metal powders and synthetic natural fibers. Friction products, which represented
54% of the Company's sales in the first six months of 1999, are the replacement
elements used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. Friction products
manufactured by the Company include friction linings for use in brakes,
transmissions and clutches in aerospace, construction equipment, agricultural,
truck and specialty vehicle markets. The Company's powder metal components are
made from formulations of composite powder metal alloys. The PM segment, which
represented 36% of Company sales in the first six months of 1999, manufactures a
variety of components for use in fluid power, truck, lawn and garden,
construction, agriculture, home appliance, automotive and office equipment
markets. In addition, the Company designs and manufactures die-cast aluminum
rotors for small electric motors used in appliances, business machines and
exhaust fans.
The Company is anticipating slight growth in revenues for 1999 as growth in
certain of the industrial markets served by the Company are expected to slow
from the pace achieved in 1998. In particular, the Company expects sales to the
agricultural and mining and forestry components of its construction markets,
which were soft in the first half of 1999, to remain under pressure for the
remainder of 1999. Sales will also be adversely affected for the balance of 1999
by the significant reduction in sales from a customer in the PM segment, which
has moved the majority of its production and sourcing offshore. The acquisition
of Allegheny in February 1999 will contribute to net sales in 1999.
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Net Sales. Net sales increased $1.4 million, or 3.0%, to $48.1 million in the
second quarter of 1999 from $46.7 million in the comparable quarter of 1998. The
sales increase was primarily attributable to the acquisition of Clearfield in
June 1998 and Allegheny in February 1999. The sales increase from these
acquisitions was offset by the continued softness in the agricultural and
construction markets served by the Company and the shift to offshore production
of major product lines by one of the Company's powder metal customers. Sales in
the Company's PM segment increased $5.5 million, or 42.6%, to $18.4 million in
the second quarter of 1999 from $12.9 million in the comparable quarter of 1998.
Sales in the PM segment, exclusive of Clearfield and Allegheny, decreased $1.3
million, or 10.9%, to $10.6 million in the second quarter of 1999 from $11.9
million in the comparable quarter of 1998. The decrease was attributable to a
customer of the Company's Sinterloy facility shifting production of its office
equipment product division overseas and softness in the agriculture market
served by one of the Company's PM facilities. Sales in the Friction segment,
which continue to be affected by decreased demand in agriculture, mining and
forestry markets, decreased $3.9 million, or 13.5%, to $25.0 million in the
second quarter of 1999 from $28.9 million in the comparable quarter of 1998.
Demand in the agricultural markets remains weak as the farm sector continues to
feel the impact of depressed commodity prices. Sales to the mining and forestry
markets have declined as a result of the economic downturn affecting Asia and
South America.
Gross Profit. Gross profit decreased $2.5 million, or 16.4%, to $12.7 million in
the second quarter of 1999 from $15.2 million in the comparable quarter of 1998.
The decrease is primarily attributable to the lower absorption of overhead as a
result of the sales volume decreases, to product mix, and to increased
depreciation as a result of the Company's
20
<PAGE> 22
capital expansion program begun in 1998. As a result of these factors, the gross
profit margin decreased to 26.4% in the second quarter of 1999 from 32.6% in the
comparable period of 1998.
Selling Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$0.7 million, or 11.9%, to $6.6 million in the second quarter of 1999 from $5.9
million in the comparable period of 1998. The acquisitions of Clearfield and
Allegheny represented 154.4% of the total increase in ST&A during the second
quarter of 1999. As a percent of sales, ST&A expenses increased to 13.7% of
sales in the second quarter of 1999 from 12.6% in the comparable quarter of
1998. This increase was due primarily to the sales volume declines experienced
by the Company and the addition of the ST&A expenses of Clearfield and
Allegheny.
Income from Operations. Income from operations decreased by $3.2 million, or
38.1%, to $5.2 million in the second quarter of 1999 from $8.4 million in the
comparable quarter of 1998. Income from operations as a percent of net sales
decreased to 10.8% in the second quarter of 1999 from 18.0% in the comparable
quarter of 1998, reflecting decreased sales activity, product mix, gross margin
deterioration and increased amortization expense. Operating income from the
Company's Friction segment decreased $2.4 million, or 49.0%, to $2.5 million in
the second quarter of 1999 from $4.9 million in the comparable quarter of 1998.
This decline was primarily driven by the sales volume declines in the
agriculture, mining and forestry markets. Operating income from the Company's PM
segment decreased $0.4 million, or 12.1%, to $2.9 million in the second quarter
of 1999 from $3.3 million in the comparable quarter of 1998. The decline in this
segment was caused by the loss of production to an offshore site and a shift to
lower margin products during the quarter. This decline was partially offset by
the contribution of operating income from Clearfield and Allegheny.
Interest Expense. Interest expense decreased $0.8 million, or 25.0%, to $2.4
million in the second quarter of 1999 from $3.2 million in the comparable
quarter of 1998. The decrease is attributable primarily to lower debt levels.
Income Taxes. The provision for income taxes decreased to $1.3 million in the
second quarter of 1999 from $2.4 million in the comparable quarter of 1998,
reflecting the decrease in pre-tax income as well as a decrease in the Company's
effective tax rate to 41.6% in the second quarter of 1999 from 42.6% in the
comparable quarter of 1998.
Extraordinary Charge. In May 1998, the Company incurred an extraordinary loss of
$3.1 million (net of tax) as a result of the repurchase of $35.0 million of the
Senior Notes and the retirement of all of its outstanding Senior Subordinated
Notes.
Net Income. As a result of the factors discussed above, net income increased
$1.7 million, or 700.0% to $1.8 million in the second quarter of 1999 from $0.1
million in the comparable period of 1998.
FIRST SIX MONTHS OF 1999 COMPARED TO FIRST SIX MONTHS OF 1998
Net Sales. Net sales decreased by $1.5 million, or 1.6%, to $95.2 million during
the first six months of 1999 from $96.7 million during the first six months of
1998. The sales decrease in the period was attributable to the softness in the
agricultural and construction markets served by the Company and the shift to
offshore production of major product lines by one of the Company's powder metal
customers. Sales in the Friction segment decreased 15.1% to $51.0 million for
the six months ended June 1999 from $60.1 million in the comparable period of
1998. Sales in the Company's PM segment increased 31.1% to $34.6 million for the
first six months of 1999 from $26.4 million in the comparable period of 1998.
Exclusive of Clearfield and Allegheny, sales of powder metal products decreased
by 14.6%.
Gross Profit. Gross profit decreased $4.5 million, or 14.4% to $26.8 million
during the first six months of 1999 from $31.3 million during the first six
months of 1998. The gross profit margin decreased to 28.2% during the first six
months of 1999 from 32.4% during the comparable period of 1998. The decrease is
primarily due to the lower
21
<PAGE> 23
absorption of overhead as a result of sales volume decreases, product mix
changes, and a 22.4% increase in depreciation as a result of the Company's
capital expansion program begun in 1998.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$1.4 million, or 12.1%, to $13.0 million during the first six months of 1999
from $11.6 million during the first six months of 1998. The acquisition of
Clearfield and Allegheny represented 123.5% of the total increase in ST&A during
the first six months of 1999. ST&A increased to 13.7% of sales during the first
six months of 1999 from 12.0% during the comparable period of 1998. This
increase was due primarily to the sales volume declines experienced by the
Company and the addition of the ST&A expenses of Clearfield and Allegheny.
Income from Operations. Income from operations decreased by $6.1 million, or
33.9%, to $11.9 million during the first six months of 1999 from $18.0 million
in the comparable six month period of 1998. Income from operations as a percent
of net sales decreased to 12.5% in the first six months of 1999 from 18.6% in
the comparable six month period of 1998, reflecting decreased sales activity,
product mix, gross margin deterioration and increased amortization expense.
Interest Expense. Interest expense decreased $2.3 million, or 32.4%, to $4.8
million in the first six months of 1999 from $7.1 million in the comparable six
month period of 1998. The decrease is attributable to lower debt levels, a
result of the repayment of debt from the proceeds of the Company's IPO during
the second quarter of 1998 and, to a lesser extent, lower interest rates
incurred by the Company.
Income Taxes. The provision for income taxes decreased to $3.1 million in the
first six months of 1999 from $4.8 million in the comparable period of 1998,
reflecting the decrease in pre-tax income. The Company's effective tax rate
during the first six months of 1999 was 41.4% compared to 42.6% in the
comparable six month period of 1998.
Income before Extraordinary Items. As a result of the items discussed above,
income before extraordinary items decreased $2.1 million, or 32.3%, to $4.4
million for the six months ended June 30, 1999 from $6.5 million in the
comparable period of 1998.
Net Income. Net income increased $1.0 million, or 29.4%, to $4.4 million in the
first six months of 1999 from $3.4 million in the comparable period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations. In addition,
the Company has available a $50.0 million revolving credit facility (the
"Revolver") entered into in May 1998, which may be used for general corporate
purposes or to finance future acquisitions. As of June 30, 1999, the Company had
$46.8 million available under the Revolver.
Net cash from operating activities was $6.5 million and $12.0 million for the
six month period ended June 30, 1999 and 1998, respectively. Cash used to
support working capital assets at June 30, 1999 primarily accounted for the
decrease in operating cash flow.
Net cash used in investing activities was $16.8 million and $16.3 million for
the six month period ended June 30, 1999 and 1998, respectively. The cash used
in investing activities during the six month period ended June 30, 1999,
consisted of the $14.5 million for the acquisition of Allegheny and $4.4 million
for the purchases of property, plant and equipment. The Company received $2.1
million from the sale of its research and development facility in Solon, Ohio
during the period ended June 30, 1999. In the comparable period of 1998, cash
used in investing activities consisted of $9.0 million for the acquisition of
Clearfield and $8.0 million for purchases of property, plant and equipment.
22
<PAGE> 24
Net cash used in financing activities was $2.0 million for the six month period
ended June 30, 1999 primarily from the repurchase of $1.6 million of the
Company's common stock and the payment of $0.3 million of outstanding debt. In
the six month period ended June 30, 1998, cash provided by financing activities
was $15.9 million received primarily from the proceeds of the Company's IPO and
proceeds from a new $35.0 million term loan. These proceeds were used to retire
$65.0 million of debt outstanding.
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for making additional strategic acquisitions of complementary businesses, (3)
for funding the Company's day-to-day working capital requirements and (4) to pay
interest on, and to repay principal of, indebtedness. These requirements have
been, and will continue to be, financed through a combination of cash flow from
operations and borrowings under the Company's credit facility.
As of June 30, 1999, the Company was in compliance with the terms of its
indebtedness.
The Company believes that cash flow from operating activities, borrowings under
the Revolver and access to capital markets will be sufficient to satisfy its
working capital, capital expenditures and debt requirements and to finance
continued growth through acquisitions for the next twelve months.
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, have 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.
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 finalizing 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.
23
<PAGE> 25
In 1998, the Company implemented a replacement of its manufacturing and
accounting software and hardware systems, which are Year 2000 compliant, in its
Friction segment. As of June 30, 1999, the implementation was completed at its
domestic friction locations, and is expected to be completed at its foreign
friction location in late 1999. The accounting software and hardware at the
Company's powder metal locations is being made Year 2000 compliant through
software upgrade programs through third party vendors. All upgrades will be
completed by 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.
EURO PREPARATIONS
The Company has completed an upgrade of its systems to accommodate the new Euro
currency. The cost of this upgrade was immaterial to the Company's financial
results. Although difficult to predict, any competitive implications and any
impact on existing financial instruments of using the Euro currency are expected
to be immaterial to the Company's results of operations, financial position or
liquidity.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and uncertainties.
In addition to statements which are forward-looking by reason of context, the
words "believe," "expect," "anticipate," "intend," "designed," "goal,"
"objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
o 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;
o 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;
o the effect of any future acquisitions by the Company on its
indebtedness and on the funds available for operations and future
business opportunities;
o the effect of competition by manufacturers using new or different
technologies;
o 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;
o the ability of the Company to successfully integrate future
acquisitions into the Company's existing businesses;
24
<PAGE> 26
o 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;
o 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;
o the continuity of business relationships with major customers;
o changes in market conditions in the end-markets served by the Company,
such as the softening experienced in the agricultural and construction
friction markets;
o the effect of product mix on margins; and
o the ability of the Company's products to meet stringent Federal
Aviation Administration criteria and testing requirements.
Any investor or potential investor in the Company must consider these risks and
others that are detailed in other filings by the Company with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Disclosures. The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual results could
differ materially and adversely from those projected in the forward-looking
statements. The Company is exposed to market risk related to changes in interest
rates and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. In June 1998, the Company entered into an interest
rate swap with a notional amount of $35.0 million. At June 30, 1999, the
notional amount was $30.0 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 June 30, 1999, the Company would pay
approximately $0.2 million.
Foreign Currency Exchange Risk. The Company currently does not hedge its foreign
currency exposure and, therefore, has not entered into any forward foreign
exchange contracts to hedge foreign currency transactions. The Company has
operations outside the United States with foreign-currency denominated assets
and liabilities, primarily denominated in Italian lira 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 June 30, 1999 are not expected to result in a significant impact
on earnings or cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course of
business. In the Company's opinion, the outcome of these matters is not
anticipated to have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
ITEM 4. OTHER INFORMATION
On May 10, 1999, the Company held its 1999 Annual Meeting of Stockholders to act
on proposals to elect Directors and to ratify the appointment of its independent
accountants for 1999.
25
<PAGE> 27
Dan T. Moore, III and Paul R. Bishop were re-elected for a one year term of
office expiring in 2000, with 6,770,304 and 7,006,304 affirmative votes,
respectively (77.9% and 80.6% of the total voting power, respectively). These
candidates had 240,435 and 4,435 votes withheld, respectively.
The proposal to ratify the appointment of Ernst and Young LLP as the Company's
independent accountants for 1999 received 7,007,529 affirmative votes (80.6% of
the total voting power), 1,010 negative votes (0.01% of the total voting power)
and 2,200 abstained votes (0.03% of the total voting power).
Pursuant to the terms of the Company's Series D Preferred Stock, the holders of
the Series D Preferred Stock have the right to elect a majority of the Company's
Board of Directors. The holders of the Series D Preferred Stock are Norman C.
Harbert, Ronald E. Weinberg, Byron S. Krantz, the Harbert Family Limited
Partnership, the Weinberg Family Limited Partnership and the Krantz Family
Limited Partnership. The holders of the Series D Preferred Stock elected Norman
C. Harbert, Ronald E. Weinberg, Byron S. Krantz and William J. O'Neill, Jr. at
the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1999 HAWK CORPORATION
By: /s/ RONALD E. WEINBERG
----------------------
Ronald E. Weinberg,
Co-Chairman and Treasurer
By: /s/ THOMAS A. GILBRIDE
----------------------
Thomas A. Gilbride,
Vice President-Finance (Chief Accounting Officer)
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,942
<SECURITIES> 0
<RECEIVABLES> 31,303
<ALLOWANCES> 325
<INVENTORY> 27,740
<CURRENT-ASSETS> 65,202
<PP&E> 103,057
<DEPRECIATION> 33,261
<TOTAL-ASSETS> 207,369
<CURRENT-LIABILITIES> 31,363
<BONDS> 99,107
0
1
<COMMON> 92
<OTHER-SE> 66,034
<TOTAL-LIABILITY-AND-EQUITY> 207,369
<SALES> 95,155
<TOTAL-REVENUES> 95,155
<CGS> 68,326
<TOTAL-COSTS> 14,908
<OTHER-EXPENSES> (462)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,519
<INCOME-TAX> 1,867
<INCOME-CONTINUING> 2,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,652
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
