<PAGE> 1
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, 1999
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. [ ]
As of March 17, 2000, the registrant had 8,548,520 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 $29,736,326 (based upon the
closing price of $5.625 per share of Class A Common Stock on the New York Stock
Exchange on March 17, 2000). For purposes of this calculation, the registrant
deems the 3,262,062 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, 1999 ("1999 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 16, 2000 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, 1999.
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PART I
ITEM 1. BUSINESS.
Hawk Corporation, founded in 1989, is a holding company, the principal
assets of which consist of the capital stock of its manufacturing subsidiaries,
Friction Products Co., S.K. Wellman Corp. Helsel, Inc., Sinterloy Corporation,
Clearfield Powdered Metals, Inc., Allegheny Powder Metallurgy, Inc., Hutchinson
Products LLC, Quarter Master Industries, Inc. and Logan Metal Stampings, Inc.
Through its subsidiaries, Hawk operates primarily in two reportable segments:
Friction and Powder Metal. The Company's friction products are made from
proprietary formulations of composite materials that primarily consist of metal
powders, synthetic and natural fibers. Friction products are the replacement
elements used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. Friction products
manufactured by the Company include friction components for use in brakes,
transmissions and clutches in aerospace, construction, agricultural, truck and
specialty vehicle markets. The Company's Powder metal components are made from
formulations of composite powder metal alloys. The powder metal segment
manufactures a variety of components for use in fluid power, truck, lawn and
garden, construction, agriculture, home appliance, automotive and office
equipment markets. In 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.
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
1999 and 1998 were 26.5% and 32.1%, 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
aircraft 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 made two acquisitions in 1999.
Allegheny, acquired in March 1999, continues the strategic expansion
into the powder metal components business, and Quarter Master acquired
in November 1999, enabled the Company to expand in high performance
markets and apply its friction material expertise to clutch system
design. 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.
- - Expanding International Sales. Through S. K. Wellman, which has,
manufacturing facilities in Italy and Canada and a worldwide
distribution network, the Company continues to expand its international
operations in established markets throughout Europe, Asia and North
America. The Company also believes that further opportunities to expand
sales exist in emerging economies. In 1999, the Company established a
rotor manufacturing facility in Monterrey, Mexico. This facility will
service the motor manufacturers located in Mexico and Latin America.
This facility began production in early 2000. Also in 1999, the Company
began planning for a friction manufacturing facility to be located in
Suzhou, China. This facility, which is projected to open in late 2000,
will primarily service aftermarket friction customers on a worldwide
basis. Sales from the Company's international facilities have grown
from $8.1 million in 1995 when S. K. Wellman was acquired to $21.2
million in 1999.
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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. The
Company or its predecessors have had relationships with a number of its
customers, which date back to the 1940's. The Company believes that
strong relationships with its customers provide it with significant
competitive advantages in obtaining and securing new business
opportunities.
ACQUISITIONS
On February 26, 1999, the Company purchased the capital stock of
Allegheny. The acquisition of Allegheny continued the Company's strategic
expansion into the powder metal component business. The major markets served by
Allegheny include lawn and garden, automotive, industrial motors and power hand
tools.
On October 29, 1999, the Company purchased substantially all the assets
of Quarter Master. Quarter Master manufactures premium branded clutch assemblies
for high performance automotive racing, including National Association for Stock
Car Auto Racing (NASCAR) and Indy Racing League (IRL). In addition to clutch
assemblies, Quarter Master manufactures and sells other precision engineered
components, including gears, bearings, driveshafts, bellhousings and starters.
The Company believes that Quarter Master's expertise in the design and
manufacture of clutch systems will provide the Company with a platform for
future growth in several of its key markets. This acquisition continued the
Company's strategy of expanding its market position in high performance
products. The Company believes that the acquisition gives it the opportunity to
combine its friction material expertise with clutch system design.
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. The Company believes this
diversification, has reduced its economic exposure to the cyclical effects of
any particular industry.
FRICTION PRODUCTS
The Company's Friction segment manufactures products made from
proprietary formulations of composite materials that primarily consist of metal
powders, synthetic and natural fibers. Friction products are the replacement
elements used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. For example, the
friction brake components in aircraft braking systems slow and stop airplanes
when landing or taxiing. Friction products manufactured by the Company also
include friction components 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 components for use in many 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 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, and 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.
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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 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 components 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 1999 Current
Market Outlook, approximately 9,200 of the 12,600 airplanes in the world fleet
are single-aisle commercial aircraft. The report also forecasts single-aisle to
increase by approximately 4,800 to 14,000 by the end of 2008. The Boeing report
also states that world airline passenger traffic is projected to increase 4.7%
per year over the next ten years. The report also projects that world airline
cargo traffic will increase 6.0% during the same period. 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 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 components 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 components to
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.
Performance Group. 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 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.
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POWDER METAL COMPONENTS
The Company's Powder metal 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 products industry with a focus
on the North American industrial market, which the Metal Powder Industries
Federation, an industry trade group, estimates had sales of over $5.0 billion in
1999. According to the Federation, the value of iron powder shipments in North
America increased by over 5% in 1998 compared to 1997, to an industry record of
511,000 tons.
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.
The Company's Powder metal 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 Powder metal segment operation, at the
Friction Products Co. facility, 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 powder metal
facilities.
DIE-CAST ALUMINUM ROTORS
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.
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. In 1999, the Company
expanded its rotor manufacturing capabilities into Mexico, where a large portion
of subfractional motors are manufactured. Production at this facility began in
February, 2000.
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OTHER
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. Additionally, Quarter Master
manufactures premium branded clutch assemblies for the high performance
automotive racing market. The Company also accounts for both Logan and Quarter
Master in the other segment category, as they do not meet the quantitative
threshold for creating their own reportable segment.
BUSINESS SEGMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1999 1998 1997
---- ---- ----
Revenues
<S> <C> <C> <C>
Friction $ 100,260 $ 109,624 $ 107,679
Powder metal 68,326 53,483 31,360
Other 18,770 19,024 20,047
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Consolidated $ 187,356 $ 182,131 $ 159,086
Operating Income
Friction $ 8,554 $ 18,313 $ 13,236
Powder metal 11,003 13,359 7,193
Other (993) 1,146 1,644
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Consolidated $ 18,564 $ 32,818 $ 22,073
DECEMBER 31
------------------------
1999 1998
--------- ---------
Total Assets
Friction $ 107,304 $ 99,302
Powder metal 71,816 53,034
Other 30,500 51,110
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Consolidated $ 209,620 $ 203,446
========= =========
</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. 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.
- - Secondary machining/treatment: If required by customer specifications,
a sintered 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, drilled or treated with a corrosion resistant coating, such as
oil.
<PAGE> 7
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 components, which are currently
being installed on many of the braking systems of the 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. The
Company or its predecessors has had relationships with many of its customers
which date back to the 1940's, 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 the
Company's commitment to customer service and satisfaction, the Company's is
preferred supplier to many of the world's leading original equipment
manufacturers, including Aircraft Braking Systems, BFGoodrich Aerospace,
Caterpillar, Eaton, John Deere, Case, New Holland, Hydro-Gear and
Sauer-Sundstrand.
The Company's top five customers accounted for 27.6% of the Company's
consolidated net sales in 1999 and 32.7% of the Company's consolidated net sales
in 1998.
<PAGE> 8
MARKETING AND SALES
The Company markets its friction products globally through 18 product
management and sales professionals, who operate from the Company's facilities in
the United States, Italy, and Canada and sales offices in the United Kingdom and
China. 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 12 product management and sales
professionals. 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 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 powders 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.
<PAGE> 9
GOVERNMENT REGULATION
The Company's sales to manufacturers of aircraft braking systems
represented 15.1% and 16.5% of the Company's consolidated net sales in 1999 and
1998, 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.
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, 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.
PERSONNEL
At December 31, 1999, the Company had approximately 1,320 domestic
employees and 210 international employees, consisting of 225 management,
supervisory and administrative personnel, 106 engineering, quality control and
laboratory personnel, 37 sales and marketing personnel and 1,162 manufacturing
personnel.
Approximately 240 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 75 employees at the Company's Akron, Ohio facility
are covered under a collective bargaining agreement with the United Automobile
Workers expiring in July 2000; approximately 190 employees at the Company's
Orzinuovi, Italy plant are represented by a national mechanics union under an
agreement that expires in December 2000 and by a local union under an agreement
that also expires in December 2000; and 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.
<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................... 177,300 Friction / Powder metal 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, customer service and
support, and administration
Orzinuovi, Italy (1)........... 97,000 Friction Manufacturing of friction products,
international sales and marketing, research
and development, and administration
Concord, Ontario, Canada (2)... 15,000 Friction Manufacturing of friction products,
distribution and warehousing
Solon, Ohio (2) ............... 38,000 Friction Research and development
Campbellsburg, Indiana......... 75,000 Powder metal Manufacturing of powder metal components,
sales and marketing, product engineering,
customer service and support, and
administration
Solon Mills, Illinois (2)...... 42,000 Powder metal Manufacturing of powder metal components,
sales and marketing, customer service and
support
Clearfield, Pennsylvania....... 53,800 Powder metal Manufacturing of powder metal components,
sales and marketing, product engineering,
customer service and support and warehousing
Falls Creek, Pennsylvania...... 52,000 Powder metal Manufacturing of powder metal components,
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
Lake Zurich, Illinois (2)...... 24,000 Other Manufacturing of high performance clutches,
sales and marketing, product engineering,
customer service and support, and
administration
Akron, Ohio.................... 81,000 Other Manufacturing of metal stampings
Monterrey, Mexico (2).......... 41,000 Other Manufacturing of die-cast aluminum rotors,
sales and marketing, customer service and
support, and administration
Cleveland, Ohio (3)............ 6,200 Principal executive offices
</TABLE>
(1) The Company's Italian facility is subject to certain security interests
granted to its lenders.
(2) Leased.
10
<PAGE> 11
(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
Co-Chairman and Co-CEO of the Company.
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 powder metal facilities are
operating at or near capacity. With its capital 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.
The Company's Class A common stock has been traded on the New York
Stock Exchange since the Company's initial public offering on May 12, 1998 under
the symbol "HWK." The following table sets forth for the fiscal periods
indicated the high and low prices of the Common Stock as reported on the New
York Stock Exchange.
QUARTERLY STOCK PRICES
- ----------------------
QUARTER ENDED HIGH LOW
------------- ---- ---
1999
March 31, 1999 $ 8.750 $ 6.500
June 30, 1999 $ 11.750 $ 7.438
September 30, 1999 $ 9.063 $ 5.250
December 31, 1999 $ 6.188 $ 3.813
1998
June 30, 1998 $ 19.500 $ 17.313
September 30, 1998 $ 18.188 $ 8.750
December 31, 1998 $ 12.500 $ 6.250
The closing sale price for the common stock on December 31, 1999 was
$5.813
Shareholders of record as of March 17, 2000 numbered 83. The Company
estimates that an additional 1,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
The Company has never declared or paid, and does not intend to declare
or pay, any cash dividends for the foreseeable future and intends to retain
earnings for the future operation and expansion of the Company's business. In
addition, the Company's senior note indenture and its credit facility prohibit
the payment of cash dividends on the Class A common stock except upon compliance
with certain conditions.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is set forth on page 12 of the
1999 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 13 through
17 of the 1999 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 caption "Forward-Looking
Statements" contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on Page 17 of the 1999 Annual Report which
is incorporated herein by reference.
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 16 of the
1999 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
34 of the 1999 Annual Report under the captions entitled "Consolidated Balance
Sheets," "Consolidated Statements of Income," "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, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 14, 2000
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 2000 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 28, 2000.
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 1999 Annual Report are incorporated by
reference in Item 8. The Report of Independent Auditors is set
forth on page 13 of this Form 10-K.
(i) Consolidated Balance Sheets at December 31, 1999 and
1998 (page 18 of the 1999 Annual Report)
(ii) Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 (page 19 of the 1999
Annual Report)
(iii) Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended December 31, 1999, 1998
and 1997 (page 20 of the 1999 Annual Report)
(iv) Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 (page 21 of
the 1999 Annual Report)
(v) Notes to Consolidated Financial Statements for the
years ended December 31, 1999, 1998 and 1997 (pages
22 through 34 of the 1999 Annual Report)
(2) Consolidated Financial Statement Schedules
All consolidated financial schedules are omitted because they
are inapplicable, not required by the instructions or the
information is included in the consolidated financial
statements or notes thereto.
14
<PAGE> 15
(b) Reports on Form 8-K:
None.
(c) Exhibits:
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 The Company's Amended and Restated By-laws (Incorporated by
reference to the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission (Reg. No.
001-13797))
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))
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))
15
<PAGE> 16
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
(Incorporated by reference to the Company's Form 10-K for the
year ended December 31, 1998 as filed with the Securities and
Exchange Commission)
10.8 Form of the Promissory Notes, each dated June 30, 1995, issued
by of Norman C. Harbert and Ronald E. Weinberg 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))
10.9 Letter agreement, dated October 1, 1996, amending the
Promissory Notes, dated June 30, 1995, issued by each of
Norman C. Harbert and Ronald E. Weinberg 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))
10.10 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))
10.11 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)
10.12 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)
10.13 Hawk Corporation 1997 Stock Option Plan (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))
13* Portions of the 1999 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
16
<PAGE> 17
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 30, 2000
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>
/s/ Norman C. Harbert Co-Chairman of the Board, Co-Chief March 30, 2000
- ------------------------------- Executive Officer and Director
Norman C. Harbert (principal executive officer)
/s/ Ronald E. Weinberg Co-Chairman of the Board, Co-Chief March 30, 2000
- ------------------------------- Executive Officer, Treasurer and
Ronald E. Weinberg Director
(principal financial officer)
/s/ Thomas A. Gilbride Vice President - Finance March 30, 2000
- ------------------------------- (principal accounting officer)
Thomas A. Gilbride
/s/ Byron S. Krantz Secretary and Director March 30, 2000
- -------------------------------
Byron S. Krantz
/s/ Paul R. Bishop Director March 30, 2000
- -------------------------------
Paul R. Bishop
/s/ Dan T. Moore, III Director March 30, 2000
- -------------------------------
Dan T. Moore, III
/s/ William J. O'Neill, Jr. Director March 30, 2000
- -------------------------------
William J. O'Neill, Jr.
/s/ Jack Kemp Director March 30, 2000
- -------------------------------
Jack Kemp
</TABLE>
17
<PAGE> 1
Exhibit 13
(Information from pages 12 through 34 of the Company's 1999 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 1999 1998 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $187.4 $182.1 $159.1 $124.0 $ 84.6
Cost of sales 137.8 123.7 113.7 91.9 61.1
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 49.6 58.4 45.4 32.1 23.5
Income from operations 18.6 32.8 22.1 9.8 10.0
Income (loss) before income taxes, minority
interest and extraordinary charge 10.0 21.9 6.6 (1.1) 2.8
Income taxes 3.7 9.7 3.7 0.8 1.6
Minority interest -- -- -- -- 0.4
Income (loss) before extraordinary charge 6.3 12.2 2.9 (1.9) 0.8
Extraordinary charge (1) -- 3.1 -- 1.2 --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6.3 $ 9.1 $ 2.9 $ (3.1) $ 0.8
Preferred stock dividend requirements (0.1) (0.3) (0.3) (0.2) (0.3)
Income (loss) before extraordinary item
applicable to common shareholders $ 6.2 $ 11.9 $ 2.6 $ (2.1) $ 0.5
Net income (loss) applicable to
common shareholders $ 6.2 $ 8.8 $ 2.6 $ (3.3) $ 0.5
Earnings (loss) per share:
Basic:
Earnings (loss) before extraordinary charge $ .71 $ 1.59 $ .55 $ (.45) $ .11
Extraordinary charge -- (.41) -- (.26) --
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .71 $ 1.18 $ .55 $ (.71) $ .11
- -----------------------------------------------------------------------------------------------------------------------------
Diluted:
Earnings (loss) before extraordinary charge $ .71 $ 1.51 $ .45 $ (.45) $ .09
Extraordinary charge -- (.39) -- (.26) --
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ .71 $ 1.12 $ .45 $ (.71) $ .09
- -----------------------------------------------------------------------------------------------------------------------------
Other Data:
Depreciation and amortization $ 13.7 $ 11.5 $10.5 $ 8.4 $ 5.5
Capital expenditures (including capital leases) $ 10.2 $ 15.2 $ 9.6 $ 10.3 $ 3.8
</TABLE>
<TABLE>
<CAPTION>
(In Millions)
December 31, 1999 1998 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 4.0 $ 14.3 $ 4.4 $ 25.8 $ 0.8
Working capital 33.5 39.9 28.8 48.7 15.6
Property, plant and equipment, net 70.2 64.3 52.5 44.1 39.5
Total assets 209.6 203.4 173.1 158.4 127.4
Total long-term debt 105.4 102.5 132.1 129.2 94.9
Shareholders' equity (deficit) 66.5 64.4 (2.2) 1.2 3.9
- -----------------------------------------------------------------------------------------------------------------------------
</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 million in income taxes in 1998 and write-off of
deferred financing costs, net of $0.8 million in income taxes in 1996.
12
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS > > HAWK CORPORATION
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 and
powder metal. The Company's friction products are made from proprietary
formulations of composite materials that primarily consist of metal powders,
synthetic and natural fibers.
Friction products are the replacement elements used in brakes, clutches and
transmissions to absorb vehicular energy and dissipate it through heat and
normal mechanical wear. Friction products manufactured by the Company include
friction 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 powder metal segment manufactures a variety of components for use in
fluid power, truck, lawn and garden, construction, agriculture, home appliance,
automotive and office equipment markets.
<TABLE>
<CAPTION>
(In Millions)
YEAR ENDED DECEMBER 31, 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
Net sales $187.4 $182.1 $159.1
Cost of sales 137.8 123.7 113.7
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 49.6 58.4 45.4
Income from operations 18.6 32.8 22.1
Income before income taxes and extraordinary charge 10.0 21.9 6.6
Income taxes 3.7 9.7 3.7
Income before extraordinary charge 6.3 12.2 2.9
Extraordinary charge -- 3.1 --
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6.3 $ 9.1 $ 2.9
- -----------------------------------------------------------------------------------------------------------------------------
NET SALES BY SEGMENT:
Friction Products $100.3 $109.6 $107.7
Powder Metal 68.3 53.5 31.4
Other 18.8 19.0 20.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $187.4 $182.1 $159.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
In 1999, Hawk Corporation experienced a 30.8 percent decrease in net income from
the prior year. This decrease was primarily attributable to weakness in the
agricultural and construction markets served by the Company's friction and
powder metal divisions. This market softness contributed to reduced sales of
higher-margin friction and powder metal products and under-utilization of
manufacturing capacity, primarily in the friction segment, which resulted in
lower operating margins. In addition, the Company incurred start-up expenditures
in 1999 for its expansion into Mexico and China.
The Company is anticipating slight growth for 2000, as growth in the
industrial markets served by the Company is expected to be near 1999 levels.
Additionally, the Company expects sales to the agricultural and construction
markets to continue to be soft throughout 2000.
13
<PAGE> 3
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Consolidated sales for 1999 were $187.4 million, an increase of $5.3
million, or 2.9 percent, over 1998. The increase in sales was attributed to the
powder metal segment, with 1999 sales levels exceeding 1998 by $14.8 million, or
27.7 percent. The sales increase was primarily the result of the acquisitions of
Clearfield Powdered Metals, Inc. in June 1998 and Allegheny Powder Metallurgy,
Inc. in March 1999. Sales in 1999 from the Clearfield and Allegheny acquisitions
represent a $21.3 million increase over 1998 sales contributed by Clearfield
during the six months of 1998 that it was owned by Hawk. This increase
represents 143.9 percent of the total increase in the 1999 powder metal segment
sales. The Company experienced soft demand in the agricultural market served by
the powder metal segment, as well as the loss of a powder metal customer at the
Company's Sinterloy facility that moved its production offshore during 1999.
Sales in the friction segment were $100.3 million in 1999, a decrease of 8.5
percent compared to 1998. Sales increases in the truck and specialty markets
served by the friction segment were offset by declines in the agricultural and
mining and forestry components of the construction markets and, to a lesser
extent, the aerospace market.
GROSS PROFIT. Gross profit decreased $8.8 million to $49.6 million during 1999,
a 15.1 percent decrease compared to gross profit of $58.4 million in 1998. The
gross profit margin decreased to 26.5 percent in 1999 from 32.1 percent in 1998.
The decrease in margins occurred in both the friction and powder metal segments,
primarily as a result of sales weaknesses in the agricultural and construction
markets and, to a lesser extent, the aerospace market. This softness contributed
to reduced sales of higher-margin friction and powder metal products and
under-utilization of manufacturing capacity, primarily in the friction segment.
Higher depreciation costs incurred by the Company primarily as a result of
capital expenditures in the friction segment also led to a decrease in the gross
profit margin. In the powder metal segment, while the Company benefited from
volume increases from the acquisitions of Clearfield and Allegheny, the softness
in the agricultural and construction markets, the loss of the customer and
changes in the product mix caused a reduction in margins achieved by the Company
during 1999.
SELLING, TECHNICAL AND ADMINISTRATIVE EXPENSES. Selling, technical and
administrative (ST&A) expenses increased $5.2 million, or 23.6 percent, from
$22.0 million in 1998 to $27.2 million in 1999. As a percentage of net sales,
ST&A increased to 14.5 percent of sales in 1999 from 12.1 percent of sales in
1998. The increase in ST&A expenses as a percent of sales resulted primarily
from expenditures incurred by the Company's entry into Mexico and China and
personnel costs associated with the strategic changes at the Company's friction
segment. In 1999, the Company spent $3.6 million, or 1.9 percent of its net
sales, on product research and development costs compared to $3.2 million in
1998.
INCOME FROM OPERATIONS. Income from operations decreased $14.2 million, or 43.3
percent, from $32.8 million in 1998 to $18.6 million in 1999. Income from
operations as a percentage of net sales decreased to 9.9 percent in 1999 from
18.0 percent in 1998. The decline reflected the impact of the sales weakness,
product mix, facility utilization, personnel costs and start-up costs incurred
for global expansion.
INTEREST EXPENSE. Interest expense decreased $2.5 million, or 21.0 percent, to
$9.4 million in 1999 from $11.9 million in 1998. The decrease is attributable to
lower debt levels, a result of the repayment of debt from the proceeds of the
Company's IPO in the second quarter of 1998 and, to a lesser extent, lower
interest rates incurred by the Company during 1999 compared with 1998.
INCOME TAXES. The provision for income taxes decreased $6.0 million to $3.7
million in 1999 from $9.7 million in 1998, primarily because of the decrease in
pre-tax income. The Company also experienced a decline in its effective tax rate
in 1999 to 36.7 percent from 44.8 percent in 1998, due primarily to state
investment and job creation tax credits received by the Company during the year.
An analysis of changes in income taxes and the effective tax rate of the Company
is presented in the accompanying consolidated financial statements.
14
<PAGE> 4
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 101/4 percent Senior Notes due 2003
(Senior Notes) and the write-off of deferred financing costs associated with the
redemption of all $30.0 million of the Company's 12 percent Senior Subordinated
Notes (Senior Subordinated Notes). The Company incurred no extraordinary charges
in 1999.
NET INCOME. As a result of the factors noted above, net income was $6.3 million
in 1999, a decrease of 30.8 percent, compared to net income of $9.1 million
reported in 1998.
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
powder metal 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 powder metal 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 powder metal segment sales. The Company experienced strong
demand in all of its major powder metal 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 1997. The
increase in margins occurred in both the friction and powder metal 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 powder metal segment,
the Company benefited from both favorable product mix and volume increases
experienced by the powder metal manufacturing facilities.
SELLING, TECHNICAL AND ADMINISTRATIVE EXPENSES. 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 was attributable
to lower debt levels from the repayment of debt with proceeds from the Company's
IPO. 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 was 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 was reported in the Company's cost of sales. An analysis of changes in
income taxes and the effective tax rate of the Company is presented in the
accompanying consolidated financial statements.
15
<PAGE> 5
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 Senior Notes and the write-off of
deferred financing costs associated with the redemption of all $30.0 million of
the Company's 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.
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 funding the Company's day-to-day working capital requirements, (3) for
making additional strategic acquisitions of complementary businesses and (4) to
pay interest on, and to repay principal of, indebtedness. These requirements
have been, and will continue to be, financed through a combination of cash flow
from operations and borrowings under the Company's $50.0 million revolving
credit facility. As of December 31, 1999, the Company had cash and cash
equivalents of $4.0 million.
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 Company acquired 367,300
shares in 1999 and 281,800 shares in 1998 under the program.
Net cash provided by operating activities was $19.7 million in 1999
compared to $23.9 million in 1998. Cash provided by operations is primarily
attributable to net income and non-cash charges of depreciation and
amortization. Net working capital was $33.5 million at December 31, 1999
compared with $39.9 million at December 31, 1998.
Net cash used in investing activities was $25.8 million in 1999 and $22.6
million in 1998. The cash used in investing activities in 1999 consisted
primarily of $19.4 million for the acquisition of Allegheny and Quarter Master
Industries, Inc. and $10.1 million for the purchase of property, plant and
equipment. During 1999, the Company received cash of $3.7 million from the sale
of idle office and manufacturing facilities. In 1998, cash used in investing
activities consisted of $9.1 million attributable to the acquisition of
Clearfield and $14.1 million for the purchase of property, plant and equipment.
In order to achieve long-term growth prospects and enhance product quality,
capital spending in 2000 is anticipated to be approximately $15.8 million.
Net cash used in financing activities was $4.6 million in 1999, primarily
from the repurchase of common stock and the payment of long-term debt. In 1998,
net cash provided by financing activities was $8.5 million primarily from the
IPO and term loan proceeds. These proceeds of $87.7 million were used primarily
to repay debt of $71.8 million and repurchase $2.0 million of the Company's
common stock.
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.
16
<PAGE> 6
INTEREST RATE SENSITIVITY. Approximately 31 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, 1999, the notional amount of $27.5 million was equal to the amount of debt
outstanding under the related obligation. 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, 1999,
the Company would have had to pay approximately $0.3 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, 1999 are not expected to result in a significant
impact on earnings or cash flows.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and uncertainties.
In addition to statements which are forward-looking by reason of context, the
words "believe," "expect," "anticipate," "intend," "designed," "goal,"
"objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
- - the effect of the Company's debt service requirements on funds available for
operations and future business opportunities and the Company's vulnerability
to adverse general economic and industry conditions and competition;
- - the ability of the Company to continue to meet the terms of its credit
facilities, which contain a number of significant financial covenants and
other restrictions;
- - the ability of the Company to utilize all of its manufacturing capacity in
light of softness in end markets served by the Company;
- - the effect of any future acquisitions by the Company on its indebtedness and
on the funds available for operations and future business opportunities;
- - the effect of competition by manufacturers using new or different
technologies;
- - the effect on the Company's international operations of unexpected changes in
regulatory requirements, export restrictions, currency controls, tariffs and
other trade barriers, difficulties in staffing and managing foreign
operations, political and economic instability, fluctuations in currency
exchange rates, difficulty in accounts receivable collection and potentially
adverse tax consequences;
- - the ability of the Company to successfully integrate its international
expansion to Mexico and China, as well as Quarter Master or any other 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; 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.
17
<PAGE> 7
CONSOLIDATED BALANCE SHEETS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(in Thousands, Except Share Data)
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,993 $ 14,317
Accounts receivable, less allowance of $408 in 1999 and $400 in 1998 29,745 25,056
Inventories:
Raw materials and work-in-process 17,809 18,805
Finished products 9,310 6,334
- --------------------------------------------------------------------------------------------------------------------
27,119 25,139
Deferred income taxes 1,747 1,837
Other current assets 3,599 5,003
- --------------------------------------------------------------------------------------------------------------------
Total current assets 66,203 71,352
Property, plant and equipment:
Land 1,504 1,229
Buildings and improvements 16,067 13,698
Machinery and equipment 81,953 70,532
Furniture and fixtures 4,915 3,147
Construction in progress 3,710 4,636
- --------------------------------------------------------------------------------------------------------------------
108,149 93,242
Less accumulated depreciation 37,964 28,923
- --------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 70,185 64,319
Other assets:
Intangible assets 69,177 60,604
Net assets held for sale -- 3,604
Shareholder notes 1,010 1,010
Other 3,045 2,557
- --------------------------------------------------------------------------------------------------------------------
Total other assets 73,232 67,775
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 209,620 $ 203,446
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 11,414 $ 10,590
Short-term borrowings 872 1,019
Accrued compensation 6,944 8,766
Other accrued expenses 6,271 4,944
Current portion of long-term debt 7,160 6,181
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 32,661 31,500
Long-term liabilities:
Long-term debt 98,244 96,366
Deferred income taxes 10,559 9,251
Other 1,667 1,914
- --------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 110,470 107,531
Shareholders' equity:
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 1
Class A common stock, $.01 par value; 75,000,000 shares authorized;
9,187,750 issued; and 8,540,920 and 8,905,950 outstanding
in 1999 and 1998, respectively 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 18,491 12,310
Accumulated other comprehensive loss (1,949) (640)
Treasury stock, at cost, 646,830 and 281,800 shares
in 1999 and 1998, respectively (4,791) (1,993)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 66,489 64,415
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 209,620 $ 203,446
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME > > HAWK CORPORATION
<TABLE>
<CAPTION>
(in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 187,356 $ 182,131 $ 159,086
Cost of sales 137,737 123,761 113,650
- --------------------------------------------------------------------------------------------------------
Gross profit 49,619 58,370 45,436
Expenses:
Selling, technical and administrative expenses 27,226 22,020 19,916
Amortization of intangibles 3,829 3,532 3,397
Plant consolidation expense -- -- 50
- --------------------------------------------------------------------------------------------------------
Total expenses 31,055 25,552 23,363
- --------------------------------------------------------------------------------------------------------
Income from operations 18,564 32,818 22,073
Interest expense (9,409) (11,883) (15,307)
Interest income 431 999 690
Expenses from canceled public offering -- -- (889)
Other income (expense), net 405 (31) (14)
- --------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 9,991 21,903 6,553
Income taxes 3,662 9,690 3,679
- --------------------------------------------------------------------------------------------------------
Income before extraordinary charge 6,329 12,213 2,874
Extraordinary charge-- net of taxes of $2,276 -- 3,079 --
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 6,329 $ 9,134 $ 2,874
- --------------------------------------------------------------------------------------------------------
Earnings per share:
Basic:
Earnings before extraordinary charge $ .71 $ 1.59 $ .55
Extraordinary charge -- (.41) --
- --------------------------------------------------------------------------------------------------------
Basic earnings per share $ .71 $ 1.18 $ .55
- --------------------------------------------------------------------------------------------------------
Diluted:
Earnings before extraordinary charge $ .71 $ 1.51 $ .45
Extraordinary charge -- (.39) --
- --------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .71 $ 1.12 $ .45
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 9
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT) > > HAWK CORPORATION
<TABLE>
<CAPTION>
(in Thousands)
Accumulated
Additional Retained Other Common
Preferred Common Paid-in Earnings Comprehensive Stock in
Stock Stock Capital (Deficit) Income (Loss) Treasury Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $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
Net income 6,329 6,329
Other comprehensive income:
Foreign currency translation (1,309) (1,309)
------
Total comprehensive income 5,020
Preferred stock dividend (148) (148)
Repurchase of common stock (2,798) (2,798)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $1 $92 $54,645 $18,491 $(1,949) $(4,791) $66,489
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In Thousands)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,329 $ 9,134 $ 2,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,673 11,496 10,497
Accretion of discount on debt -- 238 650
Deferred income taxes 1,440 3,161 1,660
Extraordinary Charge, net of tax -- 3,079 --
Loss on fixed assets 518 346 154
Changes in operating assets and liabilities,
net of acquired assets:
Accounts receivable (2,690) 2,546 (6,947)
Inventories 121 (1,821) (963)
Other assets 581 (3,636) (621)
Accounts payable (67) (817) 1,971
Other liabilities (159) 210 4,627
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,746 23,936 13,902
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities -- (4,130) --
Sale of marketable securities -- 4,040 --
Business acquisitions (19,350) (9,100) (27,058)
Purchases of property, plant and equipment (10,134) (14,084) (8,337)
Proceeds from sale of assets 3,682 -- --
Payments received on shareholder notes -- 665 163
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,802) (22,609) (35,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term debt -- (805) --
Proceeds from short-term debt -- -- 1,744
Proceeds from long-term debt 38,022 35,000 1,224
Payments on long-term debt (39,701) (71,795) (2,226)
Deferred financing costs -- (850) (565)
Payments of preferred stock dividends (148) (257) (320)
Net proceeds from issuance of common stock -- 52,749 --
Prepayment premium on early retirement of debt -- (3,588) --
Repurchase of common stock (2,798) (1,993) --
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (4,625) 8,461 (143)
Effect of exchange rate changes on cash 357 141 87
- -------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (10,324) 9,929 (21,386)
Cash and cash equivalents at beginning of year 14,317 4,388 25,774
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,993 $ 14,317 $ 4,388
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $ 9,403 $ 12,179 $ 14,265
- -------------------------------------------------------------------------------------------------------
Cash payments for income taxes $ 2,596 $ 6,310 $ 2,187
- -------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Equipment purchased with capital leases $ 85 $ 1,149 $ 1,306
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
1
BASIS OF PRESENTATION
The consolidated financial statements of Hawk Corporation and its wholly owned
subsidiaries also include, effective January 1997, the accounts of Hutchinson
Products LLC (Hutchinson); effective August 1997, the accounts of Sinterloy
Corporation (Sinterloy); effective June 1998, the accounts of Clearfield
Powdered Metals, Inc. (Clearfield); effective March 1999, the accounts of
Allegheny Powder Metallurgy, Inc. (Allegheny); and, effective November 1999, the
accounts of Quarter Master Industries, Inc. (Quarter Master) (collectively, the
Company). See Note 3. All significant intercompany accounts and transactions
have been eliminated in the accompanying financial statements. Certain amounts
have been reclassified in 1997 and 1998 to conform with the 1999 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. 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 5 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 aftermarket 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.
The Company has approximately 500 employees covered under collective
bargaining agreements, which have various expiration dates throughout the second
half of 2000.
PRODUCT RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred. The Company's expenditures for product development and engineering
were approximately $3,605,000 in 1999, $3,155,000 in 1998 and $3,136,000 in
1997.
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 analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
22
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Publicly traded debt $65,000 $61,100 $65,000 $67,275
Non-traded debts
(including capital
leases) $40,404 $40,404 $37,547 $37,547
- ---------------------------------------------------------------------------------
</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 value for the Company's off balance-sheet instrument, shown in the
following table, is based on pricing models or formulas using current
assumptions for comparable instruments.
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------
<S> <C>
Fair value $ 281
Notional amount $27,500
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, 2001.
3
BUSINESS ACQUISITIONS
Effective January 1997, Hutchinson acquired all of the outstanding capital stock
of Hutchinson Foundry Products Company for $10,600,000 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 $7,600,000 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 1997, Sinterloy acquired substantially all of the assets
(except cash) and assumed certain liabilities of Sinterloy, Inc., for
$16,400,000 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 $11,400,000 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 1998, Clearfield acquired all the outstanding capital stock
of Clearfield Powdered Metals, Inc. for $9,100,000 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 $8,300,000 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.
Effective March 1999, Allegheny acquired all of the outstanding stock of
Allegheny Powder Metallurgy, Inc. for $14,500,000 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 $8,110,000 is being amortized over 30 years and is included in
intangible assets. The results of operations of Allegheny are included in the
Company's consolidated statements of operations since the date of acquisition.
Effective November 1999, Quarter Master acquired substantially all of the
assets (except cash) and assumed certain liabilities of Quarter Master
Industries, Inc. for $4,850,000 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 assets less the assumed liabilities in the amount of
$4,240,000 is being amortized over 15 years and is included in intangible
assets. The results of operations of Quarter Master 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 Clearfield, Allegheny and Quarter Master acquisitions as though
they had occurred on January 1, 1998 and include certain adjustments, such as
additional amortization expense as a result of goodwill.
23
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 194,685 $ 208,466
- -------------------------------------------------------------------------
Net income $ 7,311 $ 11,154
- -------------------------------------------------------------------------
Income per share - basic $ .83 $ 1.44
- -------------------------------------------------------------------------
Income per share - diluted $ .83 $ 1.37
- -------------------------------------------------------------------------
</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.
4
INTANGIBLE ASSETS
The components of intangible assets and related amortization periods are as
follows:
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Product certifications (19 to 40 years) $ 20,820 $ 20,820
Goodwill (15 to 40 years) 61,895 49,545
Deferred financing costs (5 to 7 years) 4,693 4,693
Proprietary formulations and patents
(10 to 15 years) 1,858 1,806
Other 831 831
- -------------------------------------------------------------------------------
90,097 77,695
Accumulated amortization (20,920) (17,091)
- -------------------------------------------------------------------------------
$ 69,177 $ 60,604
- -------------------------------------------------------------------------------
</TABLE>
Product certifications were acquired and valued based on the acquired
company's position as a certified supplier of friction materials to the major
manufacturers of commercial aircraft brakes.
5
FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Term Loan $ 27,500 $ 32,500
Senior Notes 65,000 65,000
Revolver 4,951 --
Other 7,953 5,047
- ------------------------------------------------------------
105,404 102,547
Less current portion 7,160 6,181
- ------------------------------------------------------------
$ 98,244 $ 96,366
- ------------------------------------------------------------
</TABLE>
In connection with the IPO in May 1998, the Company retired all of its
outstanding $30,000,000 Senior Subordinated Notes, and incurred an extraordinary
charge of $427,000 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. 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 $9,300,000 warrants
(on the 1997 balance sheet), 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 $100,000,000 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 $35,000,000 of the then outstanding
$100,000,000 Senior Notes, and incurred extraordinary charges of $1,340,000 and
$3,588,000 relating to the write-off of previously capitalized deferred
financing costs and a prepayment premium on the early retirement of debt,
respectively. The remaining $65,000,000 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 $35,000,000 unsecured term loan
facility and a $50,000,000 unsecured revolving credit facility. The term loan
has quarterly maturities of $1,250,000, beginning September 30, 1998, with the
remaining principal of $12,500,000 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. At December 31, 1999, the rate on
the term loan facility and the revolving credit facility was 7.4% and 7.0%,
respectively. The term loan and revolving credit facility require the Company to
maintain certain conditions with respect to net worth and interest coverage
ratio as defined in the agreement.
Aggregate principal payments due on long-term debt as of December 31, 1999
are as follows: 2000 - $7,160,000; 2001 - $7,089,000; 2002 - $6,064,000; 2003 -
$84,112,000; 2004 - $641,000; and thereafter - $338,000.
The Company's short-term borrowings represent advances under unsecured
lines of credit. The average borrowing rate was 5.8% at December 31, 1999.
Unused amounts under these lines total approximately $1,520,000 at December 31,
1999.
24
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
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 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 $1,000 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 shareholders 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. No
options were granted in 1997. During 1999 and 1998, the Company granted stock
options to purchase an aggregate of 147,400 and 343,200 shares, respectively, 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 have been
included in the calculation of diluted earnings per share for the year ended
December 31, 1999, as their inclusion would result in anti-dilution.
The following table summarizes the stock option activity for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 340,200 $16.50 -- $ --
Granted 147,400 7.47 343,200 16.52
Exercised -- -- -- --
Canceled (15,000) 13.83 (3,000) 17.00
Options outstanding at end of year 472,600 13.78 340,200 16.50
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at the end of the year 65,340 $16.62 -- $ --
Weighted average fair value of options granted during the year $4.13 $8.92
Shares available for future grant 227,400 359,800
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
Exercise prices for options outstanding as of December 31, 1999 ranged from
$6.75 to $18.70. A summary of the options by range of exercise prices is as
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Price Options Price Life (years) Options Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.75 to $9.35 166,200 $ 7.62 9.4 3,900 $ 8.75
$9.35 to $18.70 306,400 $17.12 8.0 61,440 $17.12
- -------------------------------------------------------------------------------------------------------------------------------
</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>
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $6,329 $9,134
Pro forma $4,942 $8,276
Earnings per share (diluted):
As reported $ .71 $ 1.12
Pro forma $ .57 $ 1.01
- -------------------------------------------------------------
</TABLE>
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, 1999 1998
- --------------------------------------------------------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 48.8% 35.0%
Risk-free interest rate 6.5% 5.8%
Expected average holding period 7 years 7 years
- --------------------------------------------------------------
</TABLE>
8
EMPLOYEE BENEFITS
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>
(In thousands)
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 13,360 $ 11,059
Service cost 613 449
Interest cost 920 905
Actuarial (gains) losses (1,605) 1,491
Plan amendments -- 140
Foreign currency exchange
rate charges 37 (56)
Benefits paid (795) (628)
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 12,530 $ 13,360
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 15,930 $ 13,960
Actual return on plan assets 4,410 2,117
Foreign currency exchange
rate charges 66 (106)
Company contributions 659 587
Benefits paid (795) (628)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS
AT END OF YEAR $ 20,270 $ 15,930
- --------------------------------------------------------------------------------
Funded status of the plan $ 7,740 $ 2,570
Unrecognized net actuarial gains (5,362) (714)
Unrecognized prior service cost 423 409
- --------------------------------------------------------------------------------
NET PREPAID BENEFIT COST $ 2,801 $ 2,265
- --------------------------------------------------------------------------------
Amounts recognized in the balance
sheet consist of the following:
Prepaid benefit cost $ 2,802 $ 2,210
Accrued benefit liability (1) (208)
Intangible asset -- 263
- --------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 2,801 $ 2,265
- --------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
All of the Company's pension plans are fully funded at December 31, 1999.
Amounts applicable to the Company's underfunded pension plans at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, 1998
- ------------------------------------------------------------------
<S> <C>
Projected benefit obligation $2,936
Accumulated benefit obligation 2,936
Fair value of plan assets 2,734
Amounts recognized as accrued
benefit liabilities 202
Amounts recognized as
intangible asset 263
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic
pension cost:
Service cost $ 613 $ 449 $ 404
Interest cost 920 905 744
Expected return on
plan assets (1,498) (1,257) (1,043)
Amortization of prior
service cost 60 51 4
Recognized net
actuarial loss 58 (3) 26
- ------------------------------------------------------------------
$ 153 $ 145 $ 135
- ------------------------------------------------------------------
</TABLE>
The plans' 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, 1999, 60,000 shares of
the Company's stock had been purchased at a cost of $717,000. The market value
as of December 31, 1999 was $349,000.
The following assumptions were used in accounting for the defined benefit
plans:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Used to compute the
projected benefit obligation
as of December 31:
Weighted average
discount rate 8.0% 7.0% 7.9%
Annual salary increase 3.0% 3.0% 3.0%
Weighted average expected
long-term rate of return
on plan assets for the year
ended December 31 9.5% 9.5% 9.5%
- ---------------------------------------------------------------
</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 $1,263,000 in 1999, $844,000 in 1998 and $786,000 in 1997.
9
LEASE OBLIGATIONS
The Company has capital lease commitments for buildings and equipment. Future
minimum annual rentals are: 2000 - $787,000; 2001 - $730,000; 2002 - $428,000;
2003 - $133,000; 2004 - $122,000; and thereafter - $81,000. Amount representing
interest is $340,000. 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 $1,127,000 in 1999,
$939,000 in 1998 and $875,000 in 1997. Future minimum lease commitments under
these agreements that have an original or existing term in excess of one year as
of December 31, 1999 are as follows: 2000 - $1,154,000; 2001 - $1,060,000; 2002
- - $918,000; 2003 - $726,000; 2004 - $729,000; and thereafter - $1,397,000.
10
INCOME TAXES
The provision for income taxes, including the effect of the extraordinary charge
in 1998, consists of the following:
<TABLE>
<CAPTION>
(In thousands)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,771 $3,028 $1,483
State and local 113 626 325
Foreign 251 599 211
- --------------------------------------------------------------------------
2,135 4,253 2,019
Deferred:
Federal 1,259 2,675 1,266
State 138 287 225
Foreign 130 199 169
- --------------------------------------------------------------------------
1,527 3,161 1,660
Total income tax provision $3,662 $7,414 $3,679
- --------------------------------------------------------------------------
</TABLE>
27
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
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>
(In thousands)
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued vacation $ 498 $ 470
Other accruals 1,436 1,425
Foreign capital leases 1,398 1,614
Other 672 637
- --------------------------------------------------------------------------------
Total deferred tax assets 4,004 4,146
Deferred tax liabilities:
Tax over book depreciation
and amortization 9,906 8,569
Employee benefits 703 398
Foreign leased property 1,815 2,072
Other 392 521
- --------------------------------------------------------------------------------
Total deferred tax liabilities 12,816 11,560
Net deferred tax liabilities $ 8,812 $ 7,414
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes, including the tax effect of the
extraordinary charge in 1998, differs from the amounts computed by applying the
federal statutory rate as follows:
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at
federal statutory rate 35.0% 35.0% 34.0%
State and local tax, net of
federal tax benefit 1.6 3.6 5.5
Nondeductible goodwill
amortization 4.0 1.8 4.3
Adjustment to worldwide tax
liability and Other, net (3.9) 4.4 12.3
- --------------------------------------------------------------------------------
Provision for income taxes 36.7% 44.8% 56.1%
- --------------------------------------------------------------------------------
</TABLE>
In 1999, the Company reversed income tax accruals as a result of the
resolution of tax contingencies. 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
Basic and diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Income available to
common shareholders:
Income before
extraordinary charge $6,329 $12,213 $2,874
Less: Preferred stock
dividends 148 257 320
- -------------------------------------------------------------
Income before extraordinary
charge attributable to
common shareholders $6,181 $11,956 $2,554
- -------------------------------------------------------------
Net income $6,329 $ 9,134 $2,874
Less: Preferred stock
dividends 148 257 320
- -------------------------------------------------------------
Net income attributable to
common shareholders $6,181 $8,877 $2,554
- -------------------------------------------------------------
Weighted average shares:
Basic:
Basic weighted
average shares 8,657 7,554 4,664
- -------------------------------------------------------------
Diluted:
Basic from above 8,657 7,554 4,664
Effect of warrant
conversion -- 368 1,024
Effect of note
conversion and options -- 19 --
- -------------------------------------------------------------
Diluted weighted
average shares 8,657 7,941 5,688
- -------------------------------------------------------------
Earnings per share:
Basic:
Earnings before
extraordinary charge $ .71 $ 1.59 $ .55
Extraordinary charge -- (.41) --
- -------------------------------------------------------------
Basic earnings per share $ .71 $ 1.18 $ .55
- -------------------------------------------------------------
Diluted:
Earnings before
extraordinary charge $ .71 $ 1.51 $ .45
Extraordinary charge -- (.39) --
- -------------------------------------------------------------
Diluted earnings
per share $ .71 $ 1.12 $ .45
- -------------------------------------------------------------
</TABLE>
Outstanding stock options were not included in the computation of diluted
earnings per share for 1999, since it would have resulted in an anti-dilutive
effect.
28
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
12
RELATED PARTIES
In July 1995, certain shareholders of the Company issued interest-bearing notes
to the Company in the amount of $2,000,000, 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 bear interest at the prime rate. The balance
outstanding at December 31, 1999 is $1,010,000.
13
BUSINESS SEGMENTS
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, that do not
meet the quantitative thresholds for determining reportable segments. The
operating segments include the manufacturing of die-cast aluminum rotors,
driveline racing components and a stamping operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
(In thousands)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from external customers:
Friction Products $ 100,260 $ 109,624 $ 107,679
Powder Metal 68,326 53,483 31,360
Other 18,770 19,024 20,047
- --------------------------------------------------------------------------------
Consolidated $ 187,356 $ 182,131 $ 159,086
Depreciation and
amortization:
Friction Products $ 7,963 $ 7,342 $ 7,184
Powder Metal 4,666 3,160 2,145
Other 1,044 994 1,168
- --------------------------------------------------------------------------------
Consolidated $ 13,673 $ 11,496 $ 10,497
Operating income (loss):
Friction Products $ 8,554 $ 18,313 $ 13,236
Powder Metal 11,003 13,359 7,193
Other (993) 1,146 1,644
- --------------------------------------------------------------------------------
Consolidated $ 18,564 $ 32,818 $ 22,073
Extraordinary charge:
Friction Products -- $ 1,939 --
Powder Metal -- 740 --
Other -- 400 --
- --------------------------------------------------------------------------------
Consolidated -- $ 3,079 --
Capital expenditures:
(including capital leases)
Friction Products $ 5,067 $ 10,817 $ 7,835
Powder Metal 3,486 3,705 1,053
Other 1,666 711 755
- --------------------------------------------------------------------------------
Consolidated $ 10,219 $ 15,233 $ 9,643
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Friction Products $ 107,304 $ 99,302
Powder Metal 71,816 53,034
Other 30,500 51,110
- --------------------------------------------------------------------------------
Consolidated $ 209,620 $ 203,446
- --------------------------------------------------------------------------------
</TABLE>
Geographic information for the years ended December 31, 1999, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
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 $166,155 $21,201 $187,356 $160,099 $22,032 $182,131 $138,124 $20,962 $159,086
Income from operations 18,131 433 18,564 31,238 1,580 32,818 21,416 657 22,073
Net income (loss) 6,916 (587) 6,329 8,761 373 9,134 3,079 (205) 2,874
Total assets 187,363 22,257 209,620 179,879 23,567 203,446 153,033 20,053 173,086
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company currently has foreign operations in Canada, Italy and Mexico.
29
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > 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, 1999 and December
31, 1998, consolidating condensed statements of operations for the years ended
December 31, 1999, 1998 and 1997 and consolidating condensed statements of cash
flows for the years ended December 31, 1999, 1998 and 1997.
Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries (consisting of the Company's subsidiaries in Canada
and Italy and, beginning in 1999, Mexico) 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>
(In thousands) Combined Combined
Guarantor Non-Guarantor
DECEMBER 31, 1999 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,691 $ 193 $ 2,109 $ 3,993
Accounts receivable, net 22,883 6,862 29,745
Inventories, net 21,766 5,353 27,119
Deferred income taxes 1,459 288 1,747
Other current assets 1,327 1,979 293 3,599
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 4,477 46,821 14,905 66,203
Investment in subsidiaries 793 5,065 $ (5,858)
Inter-company advances, net 156,992 997 (904) (157,085)
Property, plant and equipment 62,590 7,595 70,185
Intangible assets 215 68,962 69,177
Other 1,010 3,394 661 (1,010) 4,055
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $163,487 $187,829 $22,257 $(163,953) $209,620
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,084 $ 3,330 $ 11,414
Short-term borrowings 872 872
Accrued compensation $ 9 6,032 903 6,944
Other accrued expenses 1,473 4,388 410 6,271
Current portion of long-term debt 5,000 1,745 415 7,160
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,482 20,249 5,930 32,661
Long-term liabilities:
Long-term debt 92,451 4,934 859 98,244
Deferred income taxes 9,906 653 10,559
Other 522 1,145 1,667
Inter-company advances, net 1,127 148,363 8,605 $(158,095)
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 103,484 153,819 11,262 (158,095) 110,470
Total liabilities 109,966 174,068 17,192 (158,095) 143,131
Shareholders' equity 53,521 13,761 5,065 (5,858) 66,489
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $163,487 $187,829 $22,257 $(163,953) $209,620
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(in thousands) 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
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>
<TABLE>
<CAPTION>
(In thousands) Combined Combined
Guarantor Non-Guarantor
YEAR ENDED DECEMBER 31, 1999 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $166,155 $21,201 $187,356
Cost of sales $ (165) 120,235 17,667 137,737
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 165 45,920 3,534 49,619
Expenses:
Selling, technical and administrative expenses (283) 24,408 3,101 27,226
Amortization of intangible assets 8 3,821 3,829
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses (275) 28,229 3,101 31,055
Income from operations 440 17,691 433 18,564
Interest (income) expense, net (3,782) 12,220 540 8,978
Income (loss) from equity investees 3,688 (587) $ (3,101)
Other (income) expense (4) (500) 99 (405)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,914 5,384 (206) (3,101) 9,991
Income taxes 1,585 1,696 381 3,662
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,329 $ 3,688 $ (587) $ (3,101) $ 6,329
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In thousands) 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>
<TABLE>
<CAPTION>
(In thousands) 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>
32
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In thousands) Combined Combined
Guarantor Non-Guarantor
YEAR ENDED DECEMBER 31, 1999 Parent Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 11,158 $ 4,886 $3,702 $ 19,746
Cash flows from investing activities:
Business acquisitions (19,350) (19,350)
Purchase of property, plant and equipment (7,953) (2,181) (10,134)
Proceeds from sale of assets 3,682 3,682
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,350) (4,271) (2,181) (25,802)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 37,897 125 38,022
Payments on long-term debt (37,946) (1,147) (608) (39,701)
Payment of preferred stock dividend (148) (148)
Repurchase of common stock (2,798) (2,798)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash Used in financing activities (2,995) (1,022) (608) (4,625)
Effect of exchange rate changes on cash 554 (197) 357
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (11,187) 147 716 (10,324)
Cash and cash equivalents, at beginning of period 12,878 46 1,393 14,317
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,691 $ 193 $2,109 $0 $ 3,993
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In thousands) 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 $16,319 $3,744 $ 23,936
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
Effect of exchange rate changes on cash 73 68 141
- -----------------------------------------------------------------------------------------------------------------------------
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>
33
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS > > HAWK CORPORATION
<TABLE>
<CAPTION>
(In thousands) 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 $ 758 $ 13,902
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)
Effect of exchange rate changes on cash 87 87
- -----------------------------------------------------------------------------------------------------------------------------
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>
15
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $47,063 $48,092 $45,626 $46,575 $49,978 $46,741 $43,401 $42,011
Gross profit 14,080 12,749 10,688 12,102 16,191 15,150 13,794 13,235
Income before
extraordinary charge 2,652 1,789 1,235 653 3,313 3,201 2,948 2,751
Net income 2,652 1,789 1,235 653 3,313 122 2,948 2,751
Basic:
Earnings before
extraordinary charge $ .30 $ .20 $ .14 $ .07 $ .69 $ .43 $ .32 $ .30
Extraordinary charge -- -- -- -- -- (.43) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .30 $ .20 $ .14 $ .07 $ .69 $ .0 $ .32 $ .30
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted:
Earnings before
extraordinary charge $ .30 $ .20 $ .14 $ .07 $ .57 $ .41 $ .32 $ .30
Extraordinary charge -- -- -- -- -- (.41) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .30 $ .20 $ .14 $ .07 $ .57 $ .0 $ .32 $ .30
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, the Company recorded an extraordinary charge of $3,079,000 (net of
$2,276,000 of taxes) in prepayment premiums with the repayment of $35,000,000 of
the Company's Senior Notes and the write-off of deferred financing costs
associated with the redemption of all $30,000,000 of the Company's Senior
Subordinated Notes.
34
<PAGE> 24
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, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 14, 2000
REPORT OF MANAGEMENT > > HAWK CORPORATION
We have prepared the accompanying consolidated financial statements and related
information included herein for the years ended December 31, 1999, 1998 and
1997. 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, an independent accounting firm, audits 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
Co-Chairman and Co-Chief Executive Officer
/s/ Thomas A. Gilbride
Thomas A. Gilbride
Vice President, Finance
35
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
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%
Sinterloy Corporation Delaware 100%
Clearfield Powdered Metals, Inc. Pennsylvania 100%
Hawk International FSC, Corp. Barbados 100%
Allegheny Powder Metallurgy, Inc. Pennsylvania 100%
Quarter Master Industries, Inc. Delaware 100%
Friction Products Co. Hawk Brake, Inc. Ohio 100%
Hawk Mauritius, Ltd. Hawk Composites (Suzhou)
Company Limited China 100%
Helsel, Inc. Hutchinson Products LLC Delaware 100%
Hutchinson Products de Mexico,
S. de R.L. de C.V. Mexico 95%
Hutchinson Products Monterrey,
S.A. de C.V. Mexico 95%
Hawk Mauritius, Ltd. Mauritius 100%
Hutchinson Products LLC Hutchinson Products de Mexico,
S. de R.L. de C.V. Mexico 5%
Hutchinson Products Monterrey,
S.A. de C.V. Mexico 5%
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 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. Employees Retirement Plan; Helsel, Inc.
Employee 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 February 14, 2000,
included in this Annual Report (Form 10-K) 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, 1999.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 28, 2000
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,993
<SECURITIES> 0
<RECEIVABLES> 30,153
<ALLOWANCES> 408
<INVENTORY> 27,119
<CURRENT-ASSETS> 66,203
<PP&E> 108,149
<DEPRECIATION> 37,964
<TOTAL-ASSETS> 209,620
<CURRENT-LIABILITIES> 32,661
<BONDS> 98,244
0
1
<COMMON> 92
<OTHER-SE> 66,396
<TOTAL-LIABILITY-AND-EQUITY> 209,620
<SALES> 187,356
<TOTAL-REVENUES> 187,356
<CGS> 137,737
<TOTAL-COSTS> 31,055
<OTHER-EXPENSES> (836)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,409
<INCOME-PRETAX> 9,991
<INCOME-TAX> 3,662
<INCOME-CONTINUING> 6,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,329
<EPS-BASIC> .71
<EPS-DILUTED> .71
</TABLE>
