HAWK CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD TO .

COMMISSION FILE NUMBER 001-13797

HAWK CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 34-1608156
(State of incorporation) (I.R.S. Employer Identification No.)

200 PUBLIC SQUARE, SUITE 30-5000, CLEVELAND, OHIO 44114
(Address of principal executive offices) (Zip Code)

(216) 861-3553
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of August 13, 2003,the Registrant had the following number of shares of
common stock outstanding:

Class A Common Stock, $0.01 par value: 8,571,626

Class B Common Stock, $0.01 par value: None (0)

As used in this Form 10-Q, the terms "Company," "Hawk," "Registrant," "we,"
"us," and "our" 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-Q is as of June 30, 2003.

1

PAGE
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited) 3

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21

Item 3. Quantitative and Qualitative Disclosures about
Market Risk 32

Item 4. Controls and Procedures 32

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 33

Item 4. Submission of Matters to a Vote of Security Holders 33

Item 5. Other Information 33

Item 6. Exhibits and Reports on Form 8-K 34

SIGNATURES 35

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

3

HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.

4

HAWK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

5

HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

See notes to consolidated financial statements.

6

HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
period ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. For further information,
refer to the consolidated financial statements and footnotes thereto in the Form
10-K for Hawk Corporation (Company) for the year ended December 31, 2002.

The Company, through its business segments, designs, engineers, manufactures and
markets specialized components used in a variety of industrial, commercial and
aerospace applications.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the accompanying financial statements.

Certain amounts have been reclassified in 2002 to conform to the 2003
presentation.

NOTE 2 - INTANGIBLE ASSETS

Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142
(SFAS 142) on January 1, 2002, the Company changed its method of accounting for
goodwill and other indefinite-lived intangible assets from an amortization
methodology to an impairment-only methodology. SFAS 142 provided for a six-month
transitional period, from the effective date of adoption, for the Company to
perform an initial assessment of whether goodwill was impaired. The Company
performed the assessment during the second quarter of 2002, by comparing the
fair value of each of its reporting units to their respective carrying values as
of January 1, 2002. The Company, with the assistance of independent valuation
experts, concluded that as of January 1, 2002 certain of its goodwill was
impaired by $21,452 ($17,200 after tax) or $2.01 per basic and diluted share,
and such amount was reflected as a cumulative effect of change in accounting
principle. The following is a summary of the pre-tax impairment charge by
affected business segment:

Friction products $11,100
Performance racing 4,007
Motor 6,345
-------
Total $21,452
=======

The fair value of goodwill was estimated using a combination of a discounted
cash flow valuation model and a market approach comparing the Company's
reporting units to similar peer group companies, as well as acquisitions having
similar characteristics. The discounted cash flow valuation model was based on
future estimated operating cash flows, incorporating a discount rate
commensurate with the risks for each reporting unit and assumptions that were
consistent with the Company's operating plans and estimates used to manage each
of the underlying reporting units. The impairment resulted from the carrying
value exceeding the fair value of certain reporting units, and was primarily due

7

NOTE 2 - INTANGIBLE ASSETS - CON'T

to a shortfall in current and projected sales from levels anticipated at the
time of the respective acquisitions and other costs associated with the
Company's global expansion initiatives, as well as market conditions as of
January 1, 2002.

In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets to be Disposed of" (SFAS 121), management concluded that no asset
impairment charges were deemed necessary in 2001. The Company determined that
the estimated future undiscounted cash flows associated with each unit tested
exceeded the carrying values of their respective long-lived assets.
Consequently, no impairment existed under SFAS 121.

The components of other intangible assets as of June 30, 2003 and December 31,
2002 are as follows:

The Company estimates its amortization expense for its finite-lived intangible
assets for each of the next five years to be $732.

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. The weighted average amortization
period for product certifications and other intangible assets is 29 years and 14
years, respectively.

A summary of the Company's net goodwill at June 30, 2003 and December 31, 2002
by reportable segment is as follows:

Precision components $28,109
Performance racing 4,386
-------
Total $32,495
=======

NOTE 3 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is as follows:

NOTE 4 - INVENTORIES

Inventories are stated at the lower of cost or market. Cost includes materials,
labor and overhead and is determined by the first-in, first-out (FIFO) method.

8

NOTE 5 - EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per share are computed as follows:

9

NOTE 6 - EMPLOYEE STOCK OPTION PLAN

In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) the Company has elected to continue applying the
provisions of Accounting Principles Board Opinion 25 and related interpretations
in accounting for its stock-based compensation plans. Accordingly, the Company
does not recognize compensation expense for stock options when the stock option
price at the grant date is equal to or greater than the fair market value of the
stock at that date. The following illustrates the pro forma effect on net income
(loss) and earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS 123:

On June 27, 2003, the Company offered to its employees, who are not members of
the board of directors, the opportunity to exchange all outstanding options to
purchase shares of the Company's Class A common stock having an exercise price
of $6.00 per share or more for new options to be granted under the Company's
1997 Stock Option Plan and 2000 Long Term Incentive Plan upon the terms and
conditions set forth in the Offer to Exchange dated June 27, 2003 (Offer to
Exchange).

The Offer to Exchange, including all withdrawal rights, expired at midnight,
Eastern Time, on July 28, 2003. A total of 65 eligible employees participated in
the Offer to Exchange. Promptly upon expiration of the Offer to Exchange, the
Company accepted for cancellation options to purchase an aggregate of 268,850
shares of common stock, representing approximately 96% of the shares of common
stock subject to options that were eligible to be exchanged under the Offer to
Exchange. Subject to the terms and conditions of the Offer to Exchange, the
Company will grant new options under its 1997 Stock Option Plan and 2000 Long
Term Incentive Plan on or about January 30, 2004 in exchange for options
tendered and accepted pursuant to the Offer to Exchange.

NOTE 7 - BUSINESS SEGMENTS

The Company operates in four primary business segments: friction products,
precision components, performance racing and motors. 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 precision component segment engineers, manufactures and markets specialized
powder metal components, used primarily in industrial applications. The Company,
through this segment, targets four areas of the powder metal component
marketplace: high precision components that are used in fluid power
applications, large powder metal

10

NOTE 7 - BUSINESS SEGMENTS - CON'T

parts primarily used in construction, agricultural and truck applications, and
smaller high-volume parts and metal injected molded parts for a variety of
industries.

The performance racing segment engineers, manufactures and markets high
performance friction material for use in racing car brakes in addition to
premium branded clutch and drive train components. The Company, through this
segment, targets leading teams in several racing series, as well as
high-performance street vehicles and other road race and oval track competition
cars.

The motor segment engineers, manufactures and markets die-cast aluminum rotors
for use in the fractional and subfractional horsepower electric motors. The
Company, through this segment, targets a wide variety of applications such as
appliances, business equipment, pumps and fans.

Certain information by segment is as follows:

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NOTE 8 - SUPPLEMENTAL GUARANTOR INFORMATION

Each of the Company's Guarantor Subsidiaries has fully and unconditionally
guaranteed, on a joint and several basis, the obligation to pay principal,
premium and interest with respect to the Senior Notes. The Guarantor
Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.

The following supplemental unaudited consolidating condensed financial
statements present (in thousands):

1. Consolidating condensed balance sheets as of June 30, 2003 and
December 31, 2002, consolidating condensed statements of operations
for the three and six months ended June 30, 2003 and 2002 and
consolidating condensed statements of cash flows for the six months
ended June 30, 2003 and 2002.

2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
non-U.S. subsidiaries) with their investments in subsidiaries
accounted for using the equity method.

3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.

Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Senior Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented.

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SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)

JUNE 30, 2003
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 73 $ 68 $ 987 $ 1,128
Accounts receivable, net 22,855 13,763 36,618
Inventories, net 23,303 9,410 $ (255) 32,458
Deferred income taxes 1,565 187 1,752
Tax receivable 1,048 1,048
Other current assets 1,489 1,276 910 3,675
--------- --------- --------- --------- ---------
Total current assets 4,175 47,502 25,257 (255) 76,679
Investment in subsidiaries 794 (3,231) 2,437
Inter-company advances, net 154,469 25,609 (21,102) (158,976)
Property, plant and equipment, net 5 54,454 10,597 65,056
Intangible assets 72 42,738 42,810
Other 4,911 348 1,231 (1,010) 5,480
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 164,426 $ 167,420 $ 15,983 $(157,804) $ 190,025
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 13,409 $ 6,922 $ 20,331
Accrued compensation $ 578 3,540 1,526 5,644
Other accrued expenses 5,629 4,756 1,401 $ (158) 11,628
Bank facility 21,010 21,010
Current portion of long-term debt 583 1,392 623 2,598
--------- --------- --------- --------- ---------
Total current liabilities 27,800 23,097 10,472 (158) 61,211

Long-term liabilities:
Long-term debt 66,184 2,029 461 68,674
Deferred income taxes 6,024 232 6,256
Other 4,929 1,918 6,847
Inter-company advances, net 1,128 151,765 6,131 (159,024)
--------- --------- --------- --------- ---------
Total long-term liabilities 73,336 158,723 8,742 (159,024) 81,777
--------- --------- --------- --------- ---------
Total liabilities 101,136 181,820 19,214 (159,182) 142,988
Shareholders' equity (deficit) 63,290 (14,400) (3,231) 1,378 47,037
--------- --------- --------- --------- ---------

TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 164,426 $ 167,420 $ 15,983 $(157,804) $ 190,025
========= ========= ========= ========= =========

13

SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)

14

SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)

15

SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)

16

SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)

17

SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS (UNAUDITED)

18

SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)

19

SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
report.

GENERAL

Hawk operates in four reportable segments: friction products, precision
components, performance racing and motor. We focus on manufacturing products
requiring sophisticated engineering and production techniques for applications
in markets in which we have achieved a significant market share.

o Friction Products

We believe that, based on net sales, we are one of the top worldwide
manufacturers of friction products used in industrial, agricultural,
power-sports and aerospace applications. Our friction products segment
manufactures products made from proprietary formulations of composite
materials that primarily consist of metal powders, synthetic and
natural fibers. Friction products are the parts used in brakes,
clutches and transmissions to absorb vehicular energy and dissipate it
through heat and normal mechanical wear. The principal markets served
by our friction products segment include construction vehicles,
agricultural vehicles, trucks, recreational vehicles, commercial
aviation and general aviation. We believe we are:

o a leading domestic supplier of friction products for construction
equipment, agricultural equipment and trucks,

o the only independent supplier of friction materials for braking
systems for new and existing series of many commercial aircraft
models, including Boeing's 737, 757 and MD-80 jet series, and
several regional jet aircraft, including the Canadair regional
jet series,

o one of the largest supplier of friction materials for the growing
general aviation market, including numerous new and existing
series of Gulfstream, Cessna, Lear and Beech aircraft, and

o a leading domestic supplier of friction products into specialty
markets such as motorcycles, all terrain vehicles (ATVs) and
snowmobiles.

o Precision Components

We are a leading supplier of powder metal components for industrial
equipment, lawn and garden equipment, appliances, hand tools and
trucks. We use composite metal alloys in powder form to manufacture
high quality custom-engineered metal components. Our precision
components segment serves four specific areas of the powder metal
marketplace:

o tight tolerance fluid power components such as pump elements and
gears,

o large powder metal components used primarily in construction
equipment, agricultural equipment and trucks,

o high volume parts for the lawn and garden, appliance and other
markets, and

o metal injected molded parts for a variety of industries,
including small hand tools and telecommunications.

o Performance Racing

We engineer, manufacture and market premium branded clutch and
drive-train components for the performance racing market. Through this
segment, we supply parts for the National Association for

21

Stock Car Auto Racing (NASCAR), the Championship Auto Racing Teams
(CART) and the Indy Racing League (IRL) racing series as well as for
the weekend enthusiasts in the Sports Car Club of America (SCCA), the
American Speed Association (ASA) racing clubs and other road racing
and competition cars.

o Motor

We design and manufacture die-cast aluminum rotors for fractional and
subfractional horsepower electric motors. These parts are used in a
wide variety of motor applications, including appliances, business
equipment, pumps and fans. We believe our motor segment is the largest
independent U.S. manufacturer of die-cast aluminum rotors for use in
fractional and subfractional horsepower electric motors.

As of June 30, 2003, Hawk had approximately 1,650 employees and 17
manufacturing, research and administrative sites in five countries.

CRITICAL ACCOUNTING POLICIES

Hawk's critical accounting policies require the application of significant
judgment by us in the preparation of our financial statements. In applying these
policies, we use our best judgment to determine the underlying assumptions that
are used in calculating the estimates that affect the reported values on our
financial statements. We base our estimates and assumptions on historical
experience and other factors that we consider relevant. If these estimates
differ materially from actual results, the impact on our consolidated financial
statements may be material. Hawk's critical accounting policies include the
following:

o Revenue Recognition. Revenues are recognized when products are shipped
and title has transferred to the customer.

o Allowance for Doubtful Accounts. Our policy regarding the
collectibility of accounts receivable is based on a number of factors.
In circumstances where a specific customer is unable to pay its
obligations, we record a specific allowance for bad debts against
amounts due to reduce the net recognized receivable to the amount that
we reasonably expect to collect. If circumstances change, estimates of
the recoverability of the amounts due to Hawk could change.

o Inventory Reserves. Reserves for slow moving and obsolete inventories
are developed based on historical experience and product demand. We
continuously evaluate the adequacy of our inventory reserves and make
adjustments to the reserves as required.

o Goodwill. Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets as of the date of
acquisition. In accordance with Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS
142), our policy is to periodically, and in no case less than
annually, review our goodwill and other intangible assets based upon
the evaluation of such factors as the occurrence of a significant
adverse event or change in the environment in which one of our
business units operate. An impairment loss would be recorded in the
period a determination is made that the carrying value exceeded the
fair value of the related assets.

o Pension and Postretirement Benefits. We account for our defined
benefit pension plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions" (SFAS 87) which requires that amounts
recognized in financial statements be determined on an actuarial
basis. The most significant elements in determining our pension income
(expense) in accordance with SFAS 87 is the expected return on

22

plan assets and appropriate discount rates. Based on our existing and
forecasted asset allocation and related long-term investment
performance results, we believe that our assumption of future returns
is reasonable. The assumed long-term rate of return on assets is
applied to a calculated value of plan assets, which recognizes changes
in the fair value of plan assets in a systematic manner over five
years. This produces the expected return on plan assets that is
included in pension income (expense). The difference between this
expected return and the actual return on plan assets is deferred. The
net deferral of past asset gains (losses) affects the calculated value
of plan assets and, ultimately, future pension income (expense).
Defined benefit pension expense was $0.8 million in the first half of
2003 compared to $0.2 million in the comparable period of 2002.

o Insurance. We use a combination of insurance and self-insurance for a
number of risks including general liability, workers' compensation,
vehicle liability and employee-related health care benefits.
Liabilities associated with the risks that are retained are estimated
by considering various historical trends and forward-looking
assumptions. The estimated accruals for these liabilities could be
significantly affected if future occurrences and claims differ from
these assumptions and historical trends.

o Contingencies. Our treatment of contingent liabilities in the
financial statements is based on the expected outcome of the
applicable contingency. In the ordinary course of business, we consult
with legal counsel on matters related to litigation and other experts
both within and outside of Hawk. We will accrue a liability if the
likelihood of an adverse outcome is probable of occurrence and the
amount is estimable. We will not accrue a liability if either the
likelihood of an adverse outcome is only reasonably possible or an
estimate is not determinable.

o Income Taxes. Our effective tax rate, taxes payable and other tax
assets and liabilities reflect the current tax rates in the domestic
and foreign tax jurisdictions in which we operate.

o Foreign Currency Translation and Transactions. Assets and liabilities
of our foreign operations are translated using period-end exchange
rates and revenues and expenses are translated using average exchange
rates as determined throughout the year. Gains or losses resulting
from translation are included in a separate component of our
shareholder's equity. Primarily as a result of the strength of the
Euro in the first half of 2003, we recorded foreign currency
translation gains through our shareholder's equity of $1.7 million
compared to a gain of $0.5 million in the first half of 2002. Gains or
losses resulting from foreign currency transactions are translated to
local currency at the rates of exchange prevailing at the dates of the
transactions. Accounts receivable or payable in foreign currencies,
other than the subsidiary's local currency, are translated at the
rates of exchange prevailing at the balance sheet date. The effect of
the transaction's gain or loss is included in other expense, net in
our Consolidated Statement of Operations.

SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002

Net Sales. Our consolidated net sales for the second quarter of 2003 were $55.9
million, an increase of $5.6 million, or 11.1 percent, from the comparable
period in 2002. The increase in our consolidated net sales was primarily the
result of new product introductions leading to market share gains in our
friction products and motor segments, increased sales and production levels at
our foreign facilities and foreign currency exchange rates arising primarily
from our Italian facility. The effect of foreign currency exchange rates
accounted for 3.4 percent of the 11.1 percent consolidated net sales increase in
the second quarter of 2003.

o Friction Products Segment. Net sales in our friction products segment
during the second quarter of 2003 were $31.9 million, an increase of
17.7 percent compared to our net sales of $27.1 million in the

23

second quarter of 2002. Most of the increase in this segment was
generated by new product introductions primarily in the construction
and agriculture markets in both the United States and Europe,
increased sales to the aftermarket and fleet markets, increased global
market penetration and increased sales to the aerospace market.
Despite continued softness in the commercial aviation market, our net
sales to the aerospace market were up during the quarter as a result
of increased military aircraft sales and certain commercial aircraft
programs. As a result, our net sales to the aerospace market in the
second quarter of 2003 were up 14.2 percent when compared to the prior
year second quarter. However, we do not expect our sales volumes to
the aerospace market for the balance of 2003 to remain at the levels
achieved during the first half of this year. We expect that most of
the other markets our friction products segment serves will experience
gradual economic improvement during the last half of 2003. We
experienced strong sales activity at our foreign operations during the
quarter. As a result of new product introductions and market share
gains, our Italian operation experienced a net sales increase,
exclusive of any translation gains, of 19.0 percent in the second
quarter of 2003 compared to the prior year period. We also benefited
from the continuing ramp up of sales and production activity at our
Chinese operation. Net sales at our Chinese friction facility were up
47.2 percent during the second quarter of 2003 compared to the prior
year quarter. The effect of foreign currency exchange rates accounted
for 11.2 percent of the 17.7 percent of the friction products
segment's net sales increase in the second quarter of 2003.

o Precision Component Segment. Net sales in our precision components
segment for the second quarter of 2003 were $16.7 million, a decrease
of $0.4 million, or 2.3 percent, compared to the second quarter of
2002. The decrease in net sales was primarily attributable to general
weakness in the North American manufacturing markets we serve.
However, this decline was partially offset by new customers and the
introduction of new products during the quarter.

o Performance Racing. Net sales in our performance racing segment were
flat during the second quarter of 2003 and 2002 at $3.3 million.

o Motor Segment. Net sales in our motor segment during the second
quarter of 2003 were $4.0 million, an increase of $1.2 million, or
42.9 percent, from the same period in 2002. The net sales growth in
the motor segment came primarily from new outsourcing business at our
manufacturing facilities in the United States and Monterrey, Mexico.
Excluding the incremental net sales of $0.9 million of zero margin
component product during the quarter, net sales in the motor segment
were up 13.1 percent. These component products, which are integral to
the production of the segment's primary product, were historically
provided by our customers and not included in the sales price of the
finished product. During 2003 our motor segment began purchasing
significantly higher quantities of these components and selling them
to its customers at cost.

Gross Profit. Our gross profit increased $0.9 million to $12.5 million during
the second quarter of 2003, a 7.8 percent increase compared to the comparable
period of 2002. The gross profit margin decreased in the second quarter of 2003
to 22.4 percent compared to 23.1 percent in the comparable period of 2002. We
experienced margin improvement in our friction products segment, primarily as a
result of higher sales volumes, product mix and manufacturing process cost
reductions through the use of six sigma initiatives. These improvements were
offset by continuing production inefficiencies in our Mexican rotor facility,
increased pension and employee benefit costs and a $0.4 million write-off of
idle equipment at our rotor manufacturing facility in Mexico.

o Friction Products Segment. Our friction products segment reported
gross profit of $9.0 million, or 28.2 percent, of its net sales in the
second quarter of 2003 compared to $6.9 million or 25.5 percent of its
net sales in the second quarter of 2002. The increase in this
segment's gross profit margin during the quarter was primarily the
result of sales volume increases during the quarter and the ability of
the

24

segment to leverage its fixed manufacturing costs associated with the
volume increase as well as favorable product mix, including increased
sales to the aerospace market. However, if aerospace sales decline
through the rest of 2003, as we expect, our overall gross margin in
this segment will be negatively affected. In the second quarter of
2003, the gross margin improvement was partially offset by increased
costs, including pension and employee benefit costs.

o Precision Components Segment. Gross profit in our precision components
segment during the second quarter of 2003 was $3.2 million, or 19.3
percent, of our net sales compared to $3.6 million, or 21.1 percent,
of our net sales in 2002. The decrease in margin was primarily the
result of the sales volume declines during the quarter.

o Performance Racing Segment. Our performance racing segment reported
gross profit of $0.9 million, or 27.3 percent, of its sales in the
second quarter of 2003 compared to $1.1 million, or 33.3 percent in
2002. The gross profit margin deterioration during the quarter was
primarily the result of increased labor costs.

o Motor Segment. Our motor segment reported a gross margin loss of $0.6
million during the second quarter of 2003 compared to break even
results for the comparable quarter of 2002. The decline in our gross
margin was primarily the result of higher than anticipated operating
expenses resulting from production and employee training
inefficiencies at our Mexican facility. In addition, we took a charge
of $0.4 million during the quarter to write-off idle equipment at that
facility. We continue to work to resolve the operational
inefficiencies at our Mexican facility, but can provide no assurances
as to when these inefficiencies will be resolved.

Selling, Technical and Administrative Expenses (ST&A). Our ST&A expenses
increased $0.4 million, or 4.8 percent, to $8.7 million in the second quarter of
2003 from $8.3 million in the comparable period of 2002. As a percentage of net
sales, our ST&A expense margin improved to 15.6 percent of net sales in the
second quarter of 2003 from 16.5 percent of net sales in the comparable quarter
of 2002. As a percent of net sales, we continued to benefit from the cost
containment programs that we implemented in the second quarter of 2002. However,
the hiring of additional research and development personnel in our precision
components and performance racing segments, as well as increased pension and
employee benefit costs, partially offset these cost reductions.

Income from Operations. Our income from operations increased to $3.6 million in
the second quarter of 2003, or 16.1 percent, from $3.1 million in the comparable
period of 2002. The increase in operating income was primarily the result of the
gross margin improvements in our friction products segment due to improved
absorption of fixed costs, favorable product mix and our continuing cost control
initiatives. However, this improvement was partially offset by continued
operating and employee training inefficiencies at our Mexican facility during
the quarter, increased pension and employee benefit costs and a write-off of
idle equipment at the Company's rotor manufacturing facility in Mexico. Our
income from operations as a percentage of our net sales increased to 6.4 percent
in the second quarter of 2003 compared to 6.2 percent in the comparable quarter
of 2002.

As a result of the items discussed above, our results from operations at each
segment were as follows:

o Our friction products segment income from operations increased to $4.2
million, or 44.8 percent, in the second quarter of 2003 from $2.9
million in the comparable period of 2002.
o Income from operations in our precision components segment was $0.6
million in the second quarter of 2003, a decrease of $0.3 million, or
33.3 percent, compared to the year ago period in 2002.
o Our income from operations at the performance racing segment was $0.1
million in the second quarter of 2003 compared to break-even results
in the comparable period of 2002.
o The loss from operations in our motor segment increased $0.6 million
to $1.3 million in the second

25

quarter of 2003 from a loss of $0.7 million in the comparable period
in 2002.

Interest Expense, net. Our interest expense increased $0.2 million to $2.7
million in the second quarter of 2003 from the comparable prior year period. Our
borrowing costs were higher during the quarter as a result of the increased
interest rate on the Senior Notes, which were exchanged during the fourth
quarter of 2002. The increase was partially offset by lower borrowing costs as a
result of lower interest rates and a lower principal amount outstanding under
our Bank Facility during the quarter.

Income Taxes. We recorded an income tax provision in the second quarter of 2003
of $0.4 million compared to $0.3 million in the comparable quarter of 2002. As a
percent of pretax income, income taxes were 46.0 percent in the second quarter
of 2003 compared to 55.8 percent in the comparable period of 2002.

Net Income (Loss). As a result of the factors noted above, we reported net
income of $0.5 million in the second quarter of 2003, compared to $0.2 million
in the comparable quarter of 2002, an increase of 150.0 percent.

FIRST SIX MONTHS OF 2003 COMPARED TO FIRST SIX MONTHS OF 2002

Net Sales. Our consolidated net sales for the first six months of 2003 were
$114.5 million, an increase of $14.3 million, or 14.3 percent, from the
comparable period in 2002. The increase in our consolidated net sales was
primarily the result of new product introductions leading to market share gains
in our friction products and precision component segments, increased sales to
the military and commercial aerospace markets and increased sales and production
levels at our foreign facilities during the period. The effect of foreign
currency exchange rates accounted for 3.3 percent of the 14.3 percent
consolidated net sales increase in the first half of 2003.

o Friction Products Segment. Net sales in our friction products segment
during the first half of 2003 were $63.2 million, an increase of $10.0
million, or 18.8 percent, compared to our net sales of $53.2 million
in the first half of 2002. Most of the increase in this segment was
generated by new product introductions primarily in the construction
and agriculture markets in both the United States and Europe as well
as increased sales in the aerospace market. However, we do not expect
our sales volumes to the aerospace market for the balance of 2003 to
remain at the levels achieved during the first six months of this
year. We expect that most of the other markets our friction products
segment serves will begin to experience gradual economic improvement
towards the end of 2003. Our Italian operation experienced a net sales
increase, on an exchange rate adjusted basis, of 21.9 percent in the
first half of 2003 compared to the prior year period. Net sales at our
Chinese friction facility were up 11 percent during the first half of
2003 compared to the prior year period. The effect of foreign currency
exchange rates accounted for 12.6 percent of the 18.8 percent of the
friction products segment's net sales increase in the first half of
2003.

o Precision Component Segment. Net sales in our precision components
segment for the first half of 2003 were $35.7 million, an increase of
$1.4 million, or 4.1 percent, compared to the first half of 2002. The
increase in net sales was primarily attributable to increased sales to
our customers in the lawn and garden, truck, appliance, power tool and
fluid power markets, as the general industrial segments of the
domestic economy continued to show improvement during the first half
of 2003. Additionally, we gained new customers and introduced new
products during the quarter which led to market share increases.

o Performance Racing. Net sales in our performance racing segment were
up slightly during the first half of 2003 at $7.3 million compared to
$7.2 million in the first half of 2002, an increase of 1.4 percent.

o Motor Segment. Net sales in our motor segment during the first half of
2003 were $8.3 million, an

26

increase of $2.8 million, or 50.9 percent, from the same period in
2002. The net sales growth in the motor segment came primarily from
new outsourcing business. Net sales for the first half of 2003 include
$2.1 million of zero margin component product which are integral to
the production of rotors, our primary product. Excluding the impact of
these component revenues, sales for the first half of 2003 increased
15.4 percent compared to the comparable prior year period.

Gross Profit. Our gross profit increased $2.7 million to $25.1 million during
the first half of 2003, a 12.1 percent increase compared to the comparable
period of 2002. Our gross profit margin decreased slightly in the first half of
2003 to 21.9 percent compared to 22.4 percent in 2002. We experienced margin
improvement in our friction products and precision components segments,
primarily as a result of higher sales volumes, product mix and cost containment
programs. However, continuing production inefficiencies in our Mexican rotor
facility, increased pension and employee benefit costs and a $0.7 million
write-off of idle equipment offset these improvements.

o Friction Products Segment. Our friction products segment reported
gross profit of $16.3 million, or 25.8 percent, of its net sales in
the first half of 2003 compared to $13.0 million or 24.4 percent of
its net sales in the first half of 2002. The increase in this
segment's gross profit margin during the period was primarily the
result of sales volume increases and the ability of the segment to
leverage its fixed manufacturing costs associated with the volume
increase as well as favorable product mix, including increased sales
to the aerospace market. In the first half of 2003, the gross margin
improvement was partially offset by increased costs, including pension
and employee benefit costs and the write-off of idle equipment during
the period.

o Precision Components Segment. Gross profit in our precision components
segment during the first half of 2003 was $7.2 million, or 20.2
percent, of our net sales compared to $6.7 million, or 19.5 percent,
of our net sales in 2002. The increase in margin was primarily the
result of sales volume increases we experienced in the first quarter
of 2003, product mix and the ability of the segment to leverage fixed
manufacturing costs associated with the volume increase.

o Performance Racing Segment. Our performance racing segment reported
gross profit of $2.2 million, or 30.1 percent, of its sales in the
first half of 2003 compared to $2.6 million, or 36.1 percent in 2002.
The gross profit margin deterioration during the period was primarily
the result of increased labor costs.

o Motor Segment. Our motor segment reported a gross margin loss of $0.5
million during the first half of 2003 compared to a gross margin of
$0.1 million for the comparable period of 2002. The decline in our
gross margin was primarily the result of higher than anticipated
operating expenses resulting from continued operating inefficiencies
and employee costs at our Mexican facility. In addition, we recognized
a $0.4 million write-off of idle equipment at our rotor manufacturing
facility in Mexico during the period.

Selling, Technical and Administrative Expenses. Our ST&A expenses increased $0.6
million, or 3 percent, to $18.1 million in the first half of 2003 from $17.5
million in the comparable period of 2002. As a percentage of net sales, our ST&A
expense margin improved to 15.8 percent in the first half of 2003 from 17.5
percent in the comparable quarter of 2002. We continued to benefit from the cost
containment programs that we implemented in the second quarter of 2002. However,
the hiring of additional research and development personnel in our precision
components and performance racing segments, as well as increased pension and
employee benefit costs, partially offset these cost reductions.

Income from Operations. Our income from operations increased to $6.6 million in
the first half of 2003, or 46.7 percent, from $4.5 million in the comparable
period of 2002. The increase in operating income was primarily the

27

result of the gross margin improvements in our friction products segment due to
improved absorption of fixed costs, favorable product mix and our continuing
cost control initiatives. However, this improvement was partially offset by
increased pension and employee benefit costs, continued operating and employee
training inefficiencies at our Mexican facility during the quarter, and a charge
for the write-off of idle equipment at our friction products and motor segments.
Our income from operations as a percentage of our net sales increased to 5.8
percent in the first half of 2003 compared to 4.5 percent in the comparable
period of 2002.

As a result of the items discussed above, our results from operations at each
segment were as follows:

o Our friction products segment income from operations increased to $6.6
million, or 73.7 percent, in the first half of 2003 from $3.8 million
in the comparable period of 2002.
o Income from operations in our precision components segment was $1.3
million in the first half of 2003, an increase of $0.2 million, or
18.2 percent, compared to the year ago period in 2002.
o Income from operations at our performance racing segment was $0.6
million in the first half of 2003, a decrease of $0.2 million,
compared to $0.8 million in the comparable period of 2002.
o The loss from operations in our motor segment increased $0.7 million
to $1.9 million in the first half of 2003 from a loss of $1.2 million
in the comparable period in 2002.

Interest Expense, net. Our interest expense increased $0.6 million to $5.5
million in the first half of 2003 from the prior year period. Our borrowing
costs were higher during the period as a result of the increased interest rate
on the Senior Notes, which were exchanged during the fourth quarter of 2002. The
increase was partially offset by lower borrowing costs as a result of lower
interest rates and a lower principal amount outstanding under our Bank Facility
during the period.

Other (Expense) Income, Net. Other (expense) income, net was break-even for the
first half of 2003. In the comparable period of 2002, the expense of $0.3
million consisted primarily of bank fees associated with an amendment to our old
bank credit facility.

Income Taxes. We recorded an income tax provision in the first half of 2003 of
$0.6 million compared to a tax benefit of $0.3 million in the comparable period
of 2002. As a percent of our pretax income (loss), income taxes were 49.6
percent in the first half of 2003 compared to 46.2 percent in the comparable
period of 2002.

Cumulative Effect of Change in Accounting Principle. In accordance with the
requirements of SFAS 142, we recorded a charge for the cumulative effect of
change in accounting principle of $17.2 million in the first quarter of 2002.
This charge represents the write-off of $21.5 million of goodwill ($17.2
million, net of income taxes of $4.3 million). There was no impairment of
goodwill during the six months ended June 30, 2003.

Net Income (Loss). As a result of the factors noted above, we reported net
income of $0.6 million in the first half of 2003, compared to a loss of $17.6
million in the comparable period of 2002.

LIQUIDITY AND CAPITAL RESOURCES

Hawk's primary financing requirements are (1) for capital expenditures for
maintenance, replacement and acquisitions of equipment, expansion of capacity,
productivity improvements and product development, (2) for funding our
day-to-day working capital requirements and (3) to pay interest on, and to repay
principal of, our indebtedness. The primary source of funds for conducting our
business activities and servicing our indebtedness has been cash generated from
operations and borrowings under our Bank Facility.

28

Our Bank Facility, available for general corporate purposes, has a maximum
commitment of $53.0 million, including a letter of credit facility of up to $5.0
million, comprised of a $50.0 million revolving credit component and a $3.0
million capital expenditure loan component. The capital expenditure loan
component may be used to finance 80% of the cost of new equipment. The Bank
Facility matures 120 days prior to the maturity of the Senior Notes (described
below) in 2006. As of June 30, 2003, a total of $21.0 million was outstanding
under the Bank Facility and we had $3.5 million of undrawn letters of credit
allocated under the Bank Facility. As of June 30, 2003, we had approximately
$18.4 million available for future borrowings under our Bank Facility, and we
were in compliance with the financial covenants under our Bank Facility.

Under EITF 95-22 "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement", we are required to classify all of our outstanding
debt under the Bank Facility as a current liability. Under the subjective
acceleration clause of the Bank Facility, the lending banks may declare a
default if they reasonably believe that any of the following events have
occurred or could reasonably be expected to occur:

o a material adverse effect on our business, operations or condition
(financial or otherwise);
o a material adverse effect on our ability, or any subsidiary borrower
or guarantor, to comply with the terms and conditions of the Bank
Facility;
o a material adverse effect on the enforceability of any Bank Facility
document or the ability of the lending banks to enforce any rights or
remedies under any Bank Facility document; or
o a material adverse effect on the validity, perfection or priority of
any lien arising under the Bank Facility.

We do not believe that any of these material adverse effects have occurred or
can reasonably be expected to occur. Therefore, we do not believe that the
lending banks have any rights to declare a default under the subjective
acceleration clause of our Bank Facility. Hawk intends to manage the Bank
Facility as long-term debt with a final maturity date in 2006, as provided for
in the agreement that we signed. We expect the long-term availability under the
revolving credit portion of the Bank Facility to be $50.0 million for the next
twelve month period, subject to the borrowing base. However, if in the future
the lending banks do believe that a material adverse effect has occurred or
could reasonably be expected to occur, they may declare a default and declare
that all outstanding principal and interest under the Bank Facility is due and
payable. We do not have sufficient cash or other credit facilities that would
permit immediate repayment of the Bank Facility. If we were not able to
negotiate new terms with the lending banks or other banks or lending sources,
our financial condition and liquidity would be materially and adversely
affected.

In October 2002, we exchanged $64.4 million of our $65.0 million, 10-1/4% Senior
Notes due December 1, 2003 (Old Senior Notes), for 12% Senior Notes due December
1, 2006 (Senior Notes). The remaining principal of the Old Senior Notes in the
amount of $583 remain outstanding and will mature on December 1, 2003. In
addition, the holders of the Old Senior Notes that participated in the exchange
for Senior Notes received a consent payment of $25.63 for each $1,000.00 of Old
Senior Notes held as of October 23, 2002. The consent payment which totaled $1.6
million, was issued in the form of new Senior Notes and is payable to the
holders at maturity of the Senior Notes. The Senior Notes are general unsecured
senior obligations of Hawk and are fully and unconditionally guaranteed, on a
joint and several basis, by all of our domestic wholly-owned subsidiaries. The
Senior Notes accrue interest at a rate of 12% per annum. Interest payments are
due December 31 and June 30. In addition, in the event that our leverage ratio
exceeds 4.0 to 1.0 for the most recently ended four quarters beginning with the
semi-annual period ended December 31, 2002, we will be required to pay
additional payment in kind (PIK) interest at a rate ranging from .25% to 2.00%
until the next semi-annual test period. Any interest payment required under this
test will be made by issuing additional new Senior Notes. At June 30, 2003, we
were not required to pay any additional PIK interest as a result of our leverage
being under the required minimum for the semi-annual test period.

29

Hawk has the option to redeem the Senior Notes in whole or in part during the
twelve months beginning December 1, 2002 at 105.0% of the aggregate principal
amount thereof, beginning December 1, 2003 at 102.50% of the aggregate principal
amount thereof and beginning December 1, 2004 at 100% of the aggregate principal
amount thereof together with any interest accrued and unpaid to the redemption
date. Upon a change of control as defined in the Senior Note indenture, each
holder of the notes will have the right to require Hawk to repurchase all or any
part of such holder's notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.

The Senior Notes permit Hawk and its subsidiaries to incur additional
indebtedness without limitation, provided that we continue to meet a cash flow
coverage and a leverage ratio. As of June 30, 2003, we did not meet the leverage
ratio. The failure to meet this ratio does not constitute a default under the
Senior Note indenture. Rather, the Senior Note indenture continues to permit
certain other types of indebtedness subject to certain limitations. Our Bank
Facility, which is secured by liens on all of our assets and the assets of our
domestic subsidiaries, is permitted. We do not believe that our operations will
be materially impacted by the limitation on indebtedness arising under the
Senior Note indenture.

The Senior Notes prohibit the payment of cash dividends on Hawk's Class A common
stock. The Senior Notes also contain other covenants limiting Hawk's ability and
its subsidiaries to, among other things, make certain other restricted payments,
make certain investments, permit liens, incur dividend and other payment
restrictions affecting subsidiaries, enter into consolidation, merger,
conveyance, lease or transfer transactions, make asset sales, enter into
transactions with affiliates or engage in unrelated lines of business. These
covenants are subject to certain exceptions and qualifications. The Senior Notes
consider non-compliance with the limitations events of default. In addition to
non-payment of interest and principal amounts, the Senior Notes also consider
default with respect to other indebtedness in excess of $5.0 million an event of
default. In the event of a default, the principal and interest could be
accelerated upon written notice by 25% or more of the holders of the notes.

Our net cash provided by operating activities was $19.0 million for the six
month period ended June 30, 2003. Net cash used in our operating activities was
$1.7 million for the comparable six month period of 2002. The increase in cash
from operations was attributable to our net income and the decrease in our
working capital assets during the period. The decrease in our net working
capital resulted from an increase in our accounts payable, other accrued
expenses, including interest and the receipt of $1.9 million in federal and
state tax refunds during the period partially offset by an increase in our
accounts receivable as a result of the net sales increase during the quarter.
Our net working capital, exclusive of bank debt outstanding, which is classified
as a current liability at June 30, 2003, was $36.5 million.

Our net cash used in investing activities was $2.8 million and $4.2 million for
the six month period ended June 30, 2003 and 2002, respectively, primarily for
the purchase of property, plant and equipment.

Our net cash used in financing activities was $16.8 million for the six month
period ended June 30, 2003 as a result of debt paydowns. The decrease in
borrowings during the six month period ended June 30, 2003 resulted from
proceeds from the decrease in our net working capital assets partially offset by
the purchases of property plant and equipment. Net cash provided by financing
activities was $5.6 million for the six month period ended June 30, 2002 as a
result of increased borrowings during the period primarily to support the
increase in our net working capital assets.

We believe that cash flow from operating activities and borrowings under our
Bank Facility will be sufficient to satisfy our working capital, capital
expenditures and debt requirements and to finance continued internal growth for
the next twelve months.

30

FORWARD LOOKING STATEMENTS

Statements that are not historical facts, including statements about our
confidence in our prospects and strategies and our expectations about growth of
existing markets and our 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 us or any other person that our objectives or plans will be
achieved. Many factors could cause our actual results to differ materially and
adversely from those in the forward-looking statements, including the following:

o our ability to continue to meet the terms of our Senior Debt and Bank
Facility which contain a number of significant financial covenants and
other restrictions;

o the effect of our debt service requirements on funds available for
operations and future business opportunities and our vulnerability to
adverse general economic and industry conditions and competition;

o the impact of the reduction in air travel on our aerospace business;

o the impact on our gross profit margins as a result of changes in our
product mix;

o our ability to effectively utilize all of our manufacturing capacity
as the industrial and commercial end-markets we serve gradually
improve or if improvement is not achieved as we anticipate;

o our ability to generate profits at our facilities in Mexico and China,
and to turn a profit at our start-up operation;

o the effect of competition by manufacturers using new or different
technologies;

o the effect on our international operations of unexpected changes in
legal and regulatory requirements, export restrictions, currency
controls, tariffs and other trade barriers, difficulties in staffing
and managing foreign operations, political and economic instability,
difficulty in accounts receivable collection and potentially adverse
tax consequences;

o the effect of fluctuations in foreign currency exchange rates as our
non-U.S. sales continue to grow;

o our ability to negotiate new agreements, as they expire, with our
unions representing certain of our employees, on terms favorable to us
or without experiencing work stoppages;

o the effect of any interruption in our supply of raw materials or a
substantial increase in the price of any of the raw materials;

o the continuity of business relationships with major customers;

31

o the ability of our products to meet stringent Federal Aviation
Administration criteria and testing requirements; and

o our ability to comply with the NYSE's continued listing standards.

You must consider these risks and others that are detailed in this Form 10-Q in
deciding whether to invest in our Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market Risk Disclosures. The following discussion about our market risk
disclosures involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. We are
exposed to market risk related to changes in interest rates and foreign currency
exchange rates. We do not use derivative financial instruments for speculative
or trading purposes.

Interest Rate Sensitivity. At June 30, 2003, approximately 22.8 percent, or
$21.0 million, of our debt obligations bear interest at a variable rate. Our
primary interest rate risk exposure results from variable rate debt instruments.
If interest rates were to increase 100 basis points (1.0%) from June 30, 2003
rates, and assuming no changes in debt from June 30, 2003 levels, our additional
annual interest expense would be approximately $0.2 million. We do not engage in
activities using complex or highly leveraged instruments.

The interest rates on our long-term debt reflect market rates and therefore, the
carrying value of long-term debt approximates fair value.

Foreign Currency Exchange Risk. The majority of our receipts and expenditures
are contracted in U.S. dollars, and we do not consider the market risk exposure
relating to currency exchange to be material at this time. We currently do not
hedge our foreign currency exposure and, therefore, have not entered into any
forward foreign exchange contracts to hedge foreign currency transactions. We
have operations outside the United States with foreign-currency denominated
assets and liabilities, primarily denominated in Euro, Canadian dollars, Mexican
pesos and Chinese renminbi. Because we have foreign-currency denominated assets
and liabilities, financial exposure may result, primarily from the timing of
transactions and the movement of exchange rates. The unhedged foreign currency
balance sheet exposures as of June 30, 2003 are not expected to result in a
significant impact on earnings or cash flows.

ITEM 4. CONTROLS AND PROCEDURES.

As of June 30, 2003, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures. The evaluation was carried out under
the supervision of and with the participation of our management, including our
Chief Executive Officer, Chief Financial Officer and Vice President - Finance.
Based on this evaluation, the Chief Executive Officer, Chief Financial Officer
and Vice President - Finance concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to Hawk, including our consolidated subsidiaries, required to be
included in reports we file with or submit to the Securities and Exchange
Commission under the Securities Exchange Act of 1934. There have been no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of the
evaluation.

32

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in lawsuits that have arisen in the ordinary course of our
business. We are contesting each of these lawsuits vigorously and believe we
have defenses to the allegations that have been made. In our opinion, the
outcome of these legal actions will not have a material adverse effect on our
financial condition, liquidity or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 21, 2003, Hawk held its 2003 Annual Meeting of Stockholders to act on a
proposal to elect directors for a one year term expiring in 2004. The following
table sets forth the number of shares of Class A common stock voted for and
withheld with respect to each nominee.

NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Andrew T. Berlin 6,657,736 114,304
Paul R. Bishop 7,008,878 63,162
Jack Kemp 7,008,378 63,662
Dan T. Moore, III 7,008,678 63,362

The holders of the Series D Preferred Stock voted all of their respective shares
in favor of electing Norman C. Harbert, Ronald E. Weinberg, and Byron S. Krantz
as directors at the Annual Meeting.

ITEM 5. OTHER INFORMATION

On January 2, 2003 we announced that the New York Stock Exchange (NYSE) accepted
our business plan for continued listing on the exchange. As a result, we will
continue to be listed on the NYSE, subject to quarterly monitoring to the goals
outlined in our plan presented to the NYSE. Our plan includes steps to comply
with the NYSE's continued listing criteria of maintaining shareholders' equity
of not less than $50.0 million and an average market capitalization of not less
than $50.0 million over a 30 trading-day period. Hawk will work with the NYSE to
achieve the plan's goals by March 2004. Failure to achieve the plan's goal by
March 2004 will result in Hawk being subject to NYSE trading suspension and
delisting.

Our total market capitalization based on the 8.6 million shares of our common
stock and the $3.44 per share closing price of our common stock on June 30, 2003
was approximately $29.6 million. As of August 13, 2003, based on the closing
price of our common stock of $3.25 per share, our total market capitalization
was approximately $28.0 million. Our shareholder's equity at June 30, 2003 was
$47.0 million. Because our Bank Facility and Senior Notes do not contain a
financial covenant requiring continued NYSE listing, we do not believe our
liquidity will be adversely affected if we are unable to conduct our operations
in accordance with our business plan submitted to the NYSE. If we are unable to
reach the minimum NYSE listing standards by March 2004, we intend to seek an
alternative market for the listing of our common stock.

On June 27, 2003, Hawk offered to employees of Hawk or one of our subsidiaries,
who are not members of our board of directors, the opportunity to exchange all
outstanding options to purchase shares of our Class A common stock having an
exercise price of $6.00 per share or more for new options to be granted under
Hawk's 1997 Stock Option Plan and 2000 Long Term Incentive Plan upon the terms
and conditions set forth in the Offer to Exchange dated June 27, 2003 (Offer to
Exchange).

33

The Offer to Exchange, including all withdrawal rights, expired at midnight,
Eastern Time, on July 28, 2003. A total of 65 eligible employees participated in
the Offer to Exchange. Promptly upon expiration of the Offer to Exchange, Hawk
accepted for cancellation options to purchase an aggregate of 268,850 shares of
common stock, representing approximately 96% of the shares of common stock
subject to options that were eligible to be exchanged under the Offer to
Exchange. Subject to the terms and conditions of the Offer to Exchange, we will
grant new options under Hawk's 1997 Stock Option Plan and 2000 Long Term
Incentive Plan on or about January 30, 2004 in exchange for options tendered and
accepted pursuant to the Offer to Exchange.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

31.1* Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002

31.2* Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002

32.1* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

-----------------
* filed herewith

(b) Reports on Form 8-K:

We have filed three reports on Form 8-K since March 31,
2003:

A report dated April 29, 2003 reporting our financial
results for the first quarter of 2003.

A report dated May 6, 2003 reporting information relating to
a meeting we held with analysts to discuss operations,
markets, revenues, earnings and a 4-year growth plan.

A report dated July 29, 2003 reporting our financial results
for the second quarter of 2003.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: August 14, 2003 HAWK CORPORATION

By: /s/ RONALD E. WEINBERG
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Ronald E. Weinberg
Chairman of the Board, CEO and President

By: /s/ JOSEPH J. LEVANDUSKI
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Joseph J. Levanduski
Chief Financial Officer

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