10-K

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, 2005

Commission File No. 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 1500, Cleveland, Ohio 44114

(Address of principal executive offices) (Zip Code)

(216) 861-3553

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Class A Common Stock, par value $.01	American Stock Exchange
8 3/4% Senior Notes due 2014	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES £ NO R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES £ NO R

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 R 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. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer £ Accelerated Filer £ Non-accelerated Filer R

Indicate by check mark whether the registrant is a shell company as defined in Rule12b-2 of the Act: Shell Company YES £ NO R 

The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2005 was $70,222,862 (based on the closing price as quoted on the American Stock Exchange on that date).

As of March 23, 2006, the Registrant had 8,989,427 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, non-affiliates held 6,130,008 shares of Class A Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2006 Proxy Statement of Hawk Corporation are incorporated by reference into Part III of this Form 10-K.

As used in this Form 10-K, 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-K is as of December 31, 2005.

PART I

ITEM 1. BUSINESS

Our Company

Hawk Corporation is a leading supplier of friction products and powder metal precision components for industrial, agricultural, performance and aerospace applications. We focus on designing, manufacturing and marketing products requiring sophisticated engineering and production techniques for applications in markets in which we have achieved a significant market share. Our friction products include parts for brakes, clutches and transmissions used in construction and mining vehicles, agricultural vehicles, trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and general aviation. Our precision and metal injection molded components are used in industrial, consumer and other applications, such as pumps, motors and transmissions, lawn and garden equipment, appliances, small hand tools, trucks and telecommunications equipment. Our performance racing products include premium clutch, transmissions and driveline systems. Our friction products and precision components are made principally from proprietary formulations and designs of composite materials and metal powders.

Founded in 1989, Hawk Corporation is a holding company, that through our subsidiaries, enjoys customer relationships that span 50 years or more, and has a manufacturing history dating back to 1920. Our common stock has been publicly traded since 1998 under the symbol “HWK”.

Today, we benefit from a deep and diversified customer base, with approximately 2,500 total customers, none of which accounted for more than 10.3% of our net sales for the year ended December 31, 2005. We are a preferred supplier to many of the world’s largest and most well-known brand name original equipment manufacturers, including Caterpillar, Aircraft Braking Systems, Goodrich, Eaton, Deere, CNH, Hydro-Gear, Sauer-Danfoss, Parker Hannifin, Electrolux and Haldex. We believe that more than 80% of our net sales are from products for which we are the sole source provider for the specific customer application. We offer our customers full service capabilities, from design through production, and work closely with original equipment manufacturers to improve performance and develop product innovations to generate increased sales. We also benefit from a diversified product list, with over 5,000 total products, none of which accounted for more than 5% of our net sales in 2005. We do not target the cyclical consumer automotive sector. Consequently, less than 9% of our net sales in any of the last five years were to the consumer automotive market, and this percentage declined to approximately 5% of our net sales for the year ended December 31, 2005. For the year ended December 31, 2005, we generated record net sales of $265.4 million and income from operations of $9.3 million, representing an operating margin of 3.5%. We define operating margin as our income from operations as a percentage of our net sales. Our margins in 2005 were negatively impacted by costs related to a move of a friction products manufacturing facility from Ohio to Oklahoma.

Through our subsidiaries, we operate in three reportable segments: friction products, precision components and performance racing.

 

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2005 Sales by Segment

•Friction Products

We believe that, based on net sales, we are one of the top worldwide manufacturers of friction products used in off-highway, on-highway, industrial, agricultural, performance and aerospace applications. Our friction products segment manufactures parts and components made from proprietary formulations of composite materials, primarily consisting of metal powders and synthetic and natural fibers. Friction products are used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear. Our friction products include parts for brakes, clutches and transmissions used in construction and mining vehicles, agricultural vehicles, trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and general aviation. We believe we are:

·   a leading domestic and international supplier of friction products for construction and mining equipment, agricultural equipment and trucks,  

·   the leading North American independent supplier of friction materials for braking systems for new and existing series of many commercial aircraft models, including the Boeing 737 and 757 and the MD-80, and several regional jets including the Canadair regional jet series,  

·   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  

·   a leading domestic supplier of friction products into performance and specialty markets such as motorcycles, race cars, performance automobiles, military Hummers, ATV’s and snowmobiles.  

For the years ended December 31, 2005 and 2004, our friction products segment generated net sales of $167.0 million and $148.3 million, representing 62.9% and 61.5% of our total net sales, respectively and reported income from operations of $5.7 million and $13.1 million, representing 61.3% and 75.7%, of our total income from operations, respectively. The foreign operations of our friction products segment represented 32.9% of total friction segment net sales in 2005 compared to 32.5% in 2004.

•Precision Components

We are a leading supplier of powder metal and metal injection molded precision components used in industrial, consumer and other applications, such as pumps, motors and transmissions, lawn and garden equipment, appliances, small hand tools and telecommunications equipment. 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:

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

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

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

·   metal injection molded parts for a variety of industries, including small hand tools, medical and telecommunications.  

For the years ended December 31, 2005 and 2004, our precision components segment generated net sales of $83.6 million and $78.6 million, representing 31.5% and 32.6% of our total net sales, respectively and reported income from operations of $4.1 million and $3.5 million, representing 44.1% of our total income from operations in 2005 and 20.2% of our total income from operations in 2004.

•Performance Racing

We engineer, manufacture and market premium branded clutch, transmissions and driveline systems for the performance racing market. Through this segment, we supply parts for the National Association for Stock Car Auto Racing (NASCAR), the American LeMans Series (ALMS) and by weekend enthusiasts in the Sports Car Club of America (SCCA) racing clubs, as well as for other road racing and competition cars. For the years ended December 31, 2005 and 2004, our performance racing segment generated net sales of $14.8 million and $14.3 million, representing 5.6% and 5.9% of our total net sales, respectively and reported a loss from operations of $0.5 million and income from operations of $0.7 million, representing (5.4%) and 4.1% of our total (loss) income from operations, respectively.

Discontinued Operations

During the fourth quarter of 2003, we committed to a plan to sell our motor segment, with operations in Monterrey, Mexico and Alton, Illinois. This segment, which manufactures die-cast aluminum rotors for fractional and subfractional horsepower electric motors, failed to achieve a certain level of profitability and, after completing an extensive analysis, we determined that a divestiture of this segment would allow us to concentrate on our major lines of business.

In the fourth quarter of 2004, we sold certain fixed assets of our Alton, Illinois facility, which had been previously adjusted to their fair market value as of December 31, 2003. In addition, we sold the land and building of this facility, and recognized a $0.3 million ($0.2 million, net of tax) fair market value adjustment (loss) in the results of discontinued operations.

In addition, we continue to actively negotiate the sale of the Monterrey, Mexico facility and anticipate selling the remaining portion of the business during the first half of 2006.

We restated our results of operations to reclassify the net earnings, assets, and liabilities of the motor segment as discontinued operations for all periods presented in this report. Corporate expenses previously allocated to this segment have been reallocated to the remaining continuing operations, resulting in a restatement of operating profit by segment (see “Note 3 - Discontinued Operations” to the accompanying Consolidated Financial Statements of this Form 10-K).

Operating results from discontinued operations are summarized as follows:

	2005		2004			2003
	(dollars in millions)
Net sales	$	8.9	$	13.0		$	14.5
Income (loss) from operations, net of tax	$	0.0	$	(0.3	)	$	(5.0	)

Business Strategy

Our business strategy builds on our corporate strengths and includes the following principal elements:

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·   Continued Product Innovation. We believe that we are an industry leader in the development of systems, processes and technologies that enable the manufacturing of friction products with numerous performance advantages, such as greater wear resistance, increased stopping power, lower noise and smoother engagement. We are committed to maintaining our technological advantages. As a result, we are focusing our research and development efforts on improving our existing products and developing materials and technologies for new applications for our existing end markets. For example, in our precision components segment, we have embarked on a strategic initiative by investing in advanced equipment that enables us to manufacture parts in higher densities and more complex shapes than our competitors. Across all of our business segments, we seek new product developments and production techniques that will enable us to develop new applications for our existing end markets. For the year ended December 31, 2005, we spent $6.5 million, or 2.5% of our net sales, on research and development which represents a 16.1% increase from 2004.

 

·   Focus on High-Margin, Specialty Applications. We focus on markets that require sophisticated engineering and production techniques and in which we have achieved a significant market share. We seek to compete in markets requiring a high level of engineering expertise and technical capability, rather than in markets in which the primary competitive factor is product pricing. We believe margins for our products in these markets are higher than in other manufacturing markets that use standardized products and that this strategy will continue to provide market stability going forward. Our gross margins were 19.7% for the year ended December 31, 2005 and 23.4% for the year ended December 31, 2004. Our margins in 2005 were negatively impacted by costs related to the relocation of one of our friction products manufacturing facilities from Ohio to Oklahoma and production inefficiencies associated with the start-up of operations in Oklahoma.  

	Capitalize on Aftermarket Opportunities. We estimate that aftermarket sales of friction products have comprised approximately 40% of friction product sales in recent years. Our aftermarket sales enable us to reduce our exposure to adverse economic cycles. Sales of our friction products can offer decades of continued sales for products such as aircraft brakes, heavy duty trucks and construction equipment. We have expanded our friction products segment aftermarket sales force to focus on increasing direct aftermarket sales to fleets and retail customers. For the year ended December 31, 2005 our direct aftermarket sales were $27.1 million, or 16.2% of our friction products sales, an increase of 5.7% from 2004.
·	Institute Cost-Reduction Initiatives. To maintain our profit margins in highly competitive markets and in periods of rising raw material costs, we aggressively manage our operating cost structure. Through various cost reduction programs, lean manufacturing initiatives and Six Sigma projects, we continue to look for ways to lower the total cost of producing our products. We use an incentive based compensation system to further align our employees with our focus on providing products of the highest quality and at the lowest cost.
·	Globalization. We have manufacturing facilities in Italy, Canada and China and a sales office in Argentina. Through our friction products segment’s worldwide distribution network, we continue to selectively expand our international operations in established markets throughout Europe, Asia, North America, South America and Australia. In 2003, we constructed our second facility in China giving us the ability to manufacture powder metal components in addition to the friction products we were already manufacturing in China. We experienced our first sales from this facility at the end of 2003, and achieved rapid sales growth at this facility in 2005, which we expect to continue into the future, as many of our existing customers are looking to us to provide a high quality source of products for their facilities located in Asia. We also market to domestic Asian customers from our facilities in China. Our international net sales represented $55.9 million, or 21.1%, of our consolidated net sales for the year ended December 31, 2005, and $48.4 million, or 20.1%, of our consolidated net sales in 2004.

Our principal offices are located at 200 Public Square, Suite 1500, Cleveland, Ohio 44114-2301 and we can be reached by telephone at (216) 861-3553. Our web site address is: www.hawkcorp.com

Our Principal Markets and Products

We focus on supplying the off-highway, on-highway, industrial, agricultural, aerospace, and performance racing markets with components that require sophisticated engineering and production techniques for applications where we have achieved a significant market share. We have diversified our end markets through acquisitions and product line expansions. We believe that diversification has reduced our economic exposure to the cyclical effects of any particular industry. For the year ended December 31, 2005, our sales by principal markets were:

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2005 Sales by Principal Markets

Friction Products

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 components in construction vehicles enable their braking systems to slow and stop the vehicles and enable their clutches and transmissions to function in controlling the motion of the vehicles. Our friction products 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 truck, construction, mining, agriculture, aircraft and specialty vehicle braking systems. Our friction products segment manufactures products made from proprietary formulations of composite materials that primarily consist of metal powders and synthetic and natural fibers.

Our 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-related component of these systems, a new friction material introduction engineered for a new system provides us with a long-term opportunity to supply that friction product.

The principal markets served by our friction segment include manufacturers of truck clutches, transmissions, heavy-duty construction, mining and agricultural vehicle brakes, aircraft brakes, motorcycle, snowmobile and racing and performance automotive brakes. Based on net sales, we believe that we are among the top worldwide manufacturers of friction products used in industrial, agricultural and aerospace applications. We estimate that our direct and indirect aftermarket sales of friction products have comprised approximately 40% of our net friction product sales in recent years. We believe that our aftermarket sales component enables us to reduce our exposure to adverse economic cycles.

Construction/Mining/Agriculture/Trucks/Performance and Specialty. We supply a variety of friction products for use in brakes, clutches and transmissions on construction, mining and agriculture equipment, trucks and specialty vehicles. These components are designed to precise friction characteristics and mechanical tolerances permitting brakes to stop or slow a moving vehicle and the clutch or transmission systems to engage or disengage. We believe we are a leading supplier to original equipment manufacturers and to the aftermarket. We also believe that our trademarks, including Velvetouch®, Fibertuff® and Hawk Performance®, are well known to the direct aftermarket for these components. The use of our friction products in conjunction with a new or existing brake, clutch or transmission system provides us with the opportunity to supply the aftermarket with the friction product for the life of the system.

·   Construction and Mining Equipment. We supply friction products such as transmission discs, clutch facings and brake components to manufacturers of construction and mining equipment, including Caterpillar. We believe we are one of the largest domestic supplier of these types of friction products. Replacement components for construction equipment are sold through original equipment manufacturers as well as directly to aftermarket distributors.

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·   Agriculture Equipment. We supply friction products such as clutch facings, transmission discs and brake components to manufacturers of agriculture equipment, including John Deere and CNH. We believe we are the one of the largest domestic suppliers of these types of friction products. Replacement components for agricultural equipment are sold through original equipment manufacturers, as well as directly to aftermarket distributors.  

·   Medium and Heavy Trucks. We supply friction products for clutch buttons and facings used in medium and heavy trucks to original equipment manufacturers, such as Eaton and ZF Sachs. We believe we are the leading domestic supplier of replacement friction products used in these applications. Replacement components are sold through original equipment manufacturers and directly to aftermarket distributors.  

·   Performance and Specialty Friction. We supply friction products for use in specialty applications, such as brake pads for Harley-Davidson motorcycles, Bombardier, Polaris and Arctic Cat snowmobiles, race cars and performance automotive vehicles and the military version of the Hummer. We believe that these markets are experiencing significant growth, and that we have increased our market share with our combination of superior quality and product performance. Our replacement components are sold through original equipment manufacturers, directly to aftermarket distributors and through relationships with national automotive retailers such as Pep Boys.  

Aerospace. We believe we are a leading independent supplier of friction products to the manufacturers of aircraft braking systems for the Boeing 727, 737 and 757, the DC-9, DC-10, MD-80 and Bombardier’s Canadair regional jet series used by commuter airlines. We believe we are also the largest supplier of metallic friction products to the general aviation (non-commercial airline, non-military) market, supplying friction materials for aircraft such as Cessna, Lear, Gulfstream and Beechcraft.

Each aircraft braking system, including the friction products supplied by us, must meet stringent Federal Aviation Administration criteria and certification requirements. New model development and Federal Aviation Administration testing for our aircraft braking system customers generally begins two to five years before full scale production of new braking systems. If we and our aircraft brake system manufacturing partner are successful in obtaining the rights to supply a particular model of aircraft, we will typically supply our friction products for that model’s aircraft braking system for as long as the model continues to fly because it is generally not economically feasible to redesign a braking system once it is certified by the Federal Aviation Administration. Moreover, Federal Aviation Administration maintenance requirements mandate that brake lining components be changed after a specified number of take-offs and landings, which results in a continued and steady market for our aerospace friction products.

Precision Components

Our precision components segment is a leading supplier of powder metal components consisting primarily of pump, motor and transmission elements, gears, pistons and other component parts for applications ranging from lawn and garden tractors to industrial equipment. The Metal Powder Industries Federation, an industry trade group, estimates that the powder metal market size for automotive and non-automotive applications in North America was over $5 billion in 2005.

We manufacture a variety of components made from powder metals for use in:

·   fluid power applications, such as pumps and other hydraulic mechanisms,  

·   transmissions, other drive mechanisms and anti-lock braking systems used in trucks, off-road and lawn and garden equipment,  

·   gears and other components for use in home appliances, small hand tools, office equipment, medical, and telecommunication equipment, and

·   components used in automotive applications.  

Powder metal components can generally be produced at a lower cost per unit than products manufactured with forging, casting or machining technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste. Consequently, there has been a trend of substituting powder metal for forged, cast or machined components. In addition, we are advancing in our core powder metal technology to enable production of powder metal components with improved strength, hardness and durability and greater dimensional precision thereby expanding the number of customer applications available to us.

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Our precision component segment proactively targets four specific niches in the market place:

·   High Precision. Our pressing and finishing capabilities enable us to specialize in tight tolerance fluid power components such as pump elements and gears. In addition, we believe that our machining capabilities provide us with a competitive advantage by giving us the ability to supply a completed part to our customers, typically without any subcontracted precision machining. We expect that our growth in this niche will be driven by customers’ new design requirements and new product applications primarily for pumps, motors and transmissions.  

·   Large Size Capability. We have the capability to make powder metal components that are among the largest used in North America. For example, we make reactor plates, which serve as an opposing surface to friction disks made by us, having diameters of up to 19 inches for use in transmissions in construction and mining equipment. We expect our sales of large powder metal components to continue to grow as we create new designs for existing customers and benefit from market growth, primarily in construction, mining, agricultural and truck applications.  

·   Large Size Capability. We have the capability to make powder metal components that are among the largest used in North America. For example, we make reactor plates, which serve as an opposing surface to friction disks made by us, having diameters of up to 19 inches for use in transmissions in construction and mining equipment. We expect our sales of large powder metal components to continue to grow as we create new designs for existing customers and benefit from market growth, primarily in construction, mining, agricultural and truck applications.  

·   High Volume. We also target smaller, high volume parts where we can use efficient pressing and sintering capabilities to our best advantage. In this niche, our primary markets have been powder metal components for the lawn and garden, home appliance, power hand tool, truck, automotive and business equipment markets. We believe that our high volume capabilities provide us with opportunities to cross-sell numerous of our other precision components to customers of high precision and large size parts. Several of our leading original equipment customers have a variety of applications that we supply from both our friction and precision components segments.  

·   Metal Injection Molding. We also manufacture small, complex metal injection molded parts for a variety of industries, such as small hand tools, medical and telecommunications. We believe that many traditional powder metal customers may also be attractive prospects for metal injected molded parts.  

Performance Racing

We supply premium clutch, transmissions and driveline systems under our Quarter Master and Tex Racing brands. These products are used by leading teams in NASCAR, ALMS and by weekend enthusiasts in the SCCA racing clubs, as well as in other road racing and oval track competition cars. We supply the official brake pad of the SCCA and are a participating sponsor of the SCCA and several other racing series.

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Our Business Segments

The following table set forth comparative operating results and total assets by each of our operating segments:

	Year ended December 31
	2005					2004				2003
	(dollars in millions)
Net sales to external customers:
Friction products	$	167.0		62.9	%	$	148.3	61.5	%	$	121.6	60.0	%
Precision components (1)		83.6		31.5	%		78.6	32.6	%		68.1	33.6	%
Performance racing		14.8		5.6	%		14.3	5.9	%		12.9	6.4	%
Consolidated	$	265.4		100.0	%	$	241.2	100.0	%	$	202.6	100.0	%
Gross profit:
Friction products	$	33.6		64.1	%	$	36.5	64.6	%	$	29.5	62.2	%
Precision components (1)		15.8		30.2	%		16.6	29.4	%		14.5	30.6	%
Performance racing		3.0		5.7	%		3.4	6.0	%		3.4	7.2	%
Consolidated	$	52.4		100.0	%	$	56.5	100.0	%	$	47.4	100.0	%
Income (loss) from operations
Friction products	$	5.7		61.3	%	$	13.1	75.7	%	$	8.3	76.1	%
Precision components (1)		4.1		44.1	%		3.5	20.2	%		2.2	20.2	%
Performance racing		(0.5	)	(5.4)	%		0.7	4.1	%		0.4	3.7	%
Consolidated	$	9.3		100.0	%	$	17.3	100.0	%	$	10.9	100.0	%
Adjusted income (loss) from operations (2)
Friction products	$	11.3		73.4	%	$	14.6	76.4	%	$	10.2	79.7	%
Precision components		4.5		29.2	%		3.8	19.9	%		2.2	17.2	%
Performance racing		(0.4	)	(2.6)	%		0.7	3.7	%		0.4	3.1	%
Consolidated	$	15.4		100.0	%	$	19.1	100.0	%	$	12.8	100.0	%

	December 31
	2005		2004
Total assets:
Friction products	$	121,128	$	114,608
Precision components		89,210		85,545
Performance racing		12,257		12,365
Continuing operations		222,595		212,518
Discontinued operations		3,633		4,499
Consolidated	$	226,228	$	217,017

____________

(1)   A line of business formerly associated with our motor segment, which was discontinued as of December 31, 2003, was retained by us and production was transferred to a facility within our precision components segment effective July 1, 2004. Net sales from this line of business were $0.8 million through the date of transfer effective July 1, 2004 and $1.2 million for the year ended December 31, 2003.

(2)   See the disclosure set forth in the following section captioned “Hawk’s Use of Non-GAAP Financial Measures” for further explanation.

Hawk’s Use of Non-GAAP Financial Measures

In our discussion and analysis of our financial condition and results of operations, we may refer to financial measures which are considered to be “non-GAAP financial measures” under the rules and regulations of the Securities and Exchange Commission. The non-GAAP financial measure used by us is “Adjusted income from operations”. This measure is reconciled to the most comparable GAAP financial measure in the tables presented in this Form 10-K.

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The “Adjusted income from operations” non-GAAP financial measure is defined by us as “Income from operations” as presented in our Consolidated Statement of Income plus restructuring and loan forgiveness costs less employee benefit curtailment income. We use this measure to more accurately gauge the ongoing day to day operating activities of our business. As a result of our decision to relocate one of our friction products manufacturing facilities to Oklahoma from Ohio, we have incurred significant non-recurring costs related to this one-time event that has impacted the financial results for 2005 and 2004. Additionally, in conjunction with the closure of our Ohio facility, for the period ended December 31, 2005, we reported employee benefit curtailment income due to the termination of employees upon the closure of the facility. This non-recurring income resulted from the reduction of a liability computed by our actuary to reflect the portion of benefits based on age and years of service requirements that are no longer owed by us at the date of termination. The loan forgiveness expense resulted from a one-time, non-recurring action taken by our compensation committee on January 30, 2004 approving the forgiveness of the shareholder notes of two of our senior executive officers. The action required the full forgiveness of the shareholder notes by July 1, 2005 if specific operating targets were met. Based on our performance, a portion of the shareholder notes was forgiven as of March 31, 2004 and the remainder in March 2005.

We have presented this non-GAAP financial measure because we believe that meaningful analysis of our financial performance is enhanced by an understanding of isolated factors underlying that performance. By excluding our non-recurring restructuring and other costs, we believe that this non-GAAP financial measure allows our investors to more easily compare the Company’s financial performance period to period. In addition, our chief operating decision makers use this measure in monitoring and evaluating both our overall performance and the ongoing performance of each of our business segments. This non-GAAP financial measure should not be considered an alternative to measures required by GAAP.

Reconciliation of Income from operations to Adjusted income from operations determined in accordance with GAAP:

	Year ended December 31
	2005			2004		2003
Income from operations - Friction products:	$	5.7		$	13.1	$	8.3
Restructuring costs		5.5			1.1
Employee benefit curtailment (income) expense		(0.4	)				1.9
Loan forgiveness costs		0.5			0.4
Adjusted income from operations - Friction products	$	11.3		$	14.6	$	10.2
Income from operations - Precision components:	$	4.1		$	3.5	$	2.2
Loan forgiveness costs		0.4			0.3
Adjusted income from operations - Precision components	$	4.5		$	3.8	$	2.2
(Loss) income from operations - Performance racing:	$	(0.5	)	$	0.7	$	0.4
Loan forgiveness costs		0.1
Adjusted (loss) income from operations - Performance racing	$	(0.4	)	$	0.7	$	0.4

Our Manufacturing Processes

The manufacturing processes for most of our friction products, performance brake products and powder metal precision components are similar. In general, all use composite metal alloys in powder form to make high quality powder metal components. The basic manufacturing steps 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. The formulas are designed to produce precise performance characteristics necessary for a customer’s particular application. We often work together with our 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. Our molding presses are capable of producing pressures of up to 3,000 tons. We believe that we have some of the largest presses in the powder metal industry, enabling us to produce large, complex components. We can also create complex shapes not obtainable with conventional powder metal presses with our metal injection molding and advanced technology equipment.  

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·   Sintering: After compacting, molded parts are heated in furnaces to specific temperatures slightly below melting, enabling metal powders to metallurgically bond, harden and strengthen 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. This processing is generally necessary to attain increased hardness or strength, tighter dimensional tolerances or corrosion resistance. To achieve these specifications, parts are heat or steam treated, precision coined or flattened, ground, machined or treated with a corrosion resistant coating.

Some of our friction products, including those used in oil-cooled brakes and power shift transmissions, do not require all of the foregoing steps. For example, composite cellulose 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. Also, our metal injection molding operation does not compact a powder alloy under pressure, but rather injects a powder slurry into a mold to form the desired shape.

Our Quality Control Procedures

Throughout our design and manufacturing process, we focus on quality control. For product design, each manufacturing facility uses state-of-the-art testing equipment to replicate virtually any application required by our customers. This equipment is essential to our ability to manufacture components that meet stringent design and customer specifications. To ensure that tolerances have been met and that the requisite quality is inherent in our finished products, we use statistical process controls, a variety of electronic measuring equipment and computer-controlled testing machinery. We have also established quality control programs within each of our facilities to detect and prevent potential quality problems.

Since 2001, we utilize Six Sigma and lean manufacturing initiatives focused on creating a culture of continuous improvement. These tools are data-driven programs of continuous improvement designed to eliminate waste, reduce process variations, improve productivity, and eliminate costs throughout the organization.

Our Global Operations

We operate friction manufacturing facilities in Orzinuovi, Italy; Ontario, Canada; and Suzhou, China. We also operate a powder metal manufacturing facility in Suzhou, China. Our international operations are subject to the usual risks of operating in foreign jurisdictions. Risks inherent in international operations include the following:

·   foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including exchange controls,  

·   fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U. S. dollars of products and services provided by us in foreign markets where payment for our products is made in local currency,  

·   unexpected adverse changes in foreign laws or regulatory requirements may occur,  

·   compliance with a variety of foreign laws and regulations may be difficult, and  

·   overlap of different tax laws may subject us to additional taxes.  

Net sales from our international facilities represented $55.9 million, or 21.1% of our consolidated net sales in 2005 compared to $48.4 million or 20.1% of our consolidated net sales in 2004.

For information regarding our net sales, income from operations, net income, and total assets by geographic area see “Note 14 - Business Segments” and the accompanied Consolidated Financial Statements of this Form 10-K.

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Our Technology

We believe we are an industry leader in the development of systems, processes and technologies that enable the manufacturing of friction products with numerous performance advantages, such as greater wear resistance, increased stopping power, lower noise and smoother engagement. Our expertise is evidenced by our aircraft brake components, which are currently being installed on many of the braking systems of the Boeing 737-600, -700, -800 and -900 commercial airliners and Bombardier’s Canadair regional jet series of commuter aircraft, as well as new series of industrial equipment from various original equipment manufacturers.

     We maintain 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. A slight change in a mixture can produce significantly different performance characteristics. We use a variety of technologies and materials in developing and producing our products, such as graphitic and cellulose composites. We believe our expertise in the development and production of products using these different technologies and materials gives us a competitive advantage over other friction product manufacturers, which typically have expertise in only one or two types of friction material.

We also believe that our precision components business is able to produce a wide range of products from small precise components to large parts. We have presses that produce some of the largest powder metal parts in the world, and our 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 such as forging, casting or machining. With our metal injection molding technology, we are able to create complex shapes previously not available using conventional powder metal technology.

Our expenditures for product research and development and engineering were $6.5 million, or 2.5% of net sales for the year ended December 31, 2005 compared with $5.6 million in 2004, an increase of 16.1%.

Our Customers

We seek to provide advanced solutions to customers, enhancing our long-term relationships. Our engineers work closely with our customers to develop and design new products and improve the performance of existing products. We believe that more than 80% of our sales are from products and materials for which we are the sole source provider for the specific customer application. Our predecessors developed, and we have continued to build, relationships with a number of customers dating back over 50 years. Our commitment to quality, service and on-time delivery has enabled us to build and maintain strong and stable customer relationships. We believe that strong relationship with our customers provide us with significant competitive advantages in obtaining and maintaining new business opportunities.

We sell our friction products and powder metal components to a diversified group of original equipment manufacturers, second tier component suppliers, retailers and distributors in a wide variety of markets. In addition, through our performance racing segment we sell transmissions, clutches and other driveline components directly to some of the most recognizable race teams in NASCAR as well as to distributors serving other race enthusiasts. Our top five customers represented 29.0% of our consolidated net sales in 2005, and 28.5% of our consolidated net sales in 2004. No one customer exceeded 10.3% of our consolidated net sales in 2005 or 2004.

How We Market and Sell Our Products

We market our products globally through product managers and direct sales professionals, who operate primarily from our facilities in the United States, Italy, China and Canada, a sales office in Argentina. Our product managers and sales force work directly with our 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. Our friction products are sold both directly to original equipment manufacturers and to the aftermarket through our original equipment customers and a network of distributors and representatives throughout the world. We also sell our precision components to original equipment manufacturers through independent sales representatives. Sales to customers in our performance racing segment are sold directly to race teams and distributors throughout the world.

Our Competition

Our success depends on our ability to continue to meet our customers’ changing specifications with respect to reliability and timeliness of delivery, technical expertise, product design capability, manufacturing expertise, operational flexibility and customer service.

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We compete for new business principally at the beginning of the development of new applications and at the redesign of existing applications by our customers. For example, new model development for our aircraft braking system customers generally begins two to five years before full-scale production of new braking systems. Initiatives by customers to upgrade existing products typically involve long lead times as well. We also compete 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 that we supply friction materials for, but are generally more expensive. The carbon-carbon brakes are typically used on wide-body aircraft, such as the Boeing 747, 767 and 777, and on military aircraft, where the advantages in reduced weight may justify the additional expense.

In addition, as our powder metal components are increasingly substituted for wrought steel or iron components due to advances in our powder metal technology, we increasingly compete with companies using forging, casting or machining technologies to produce precision components. Powder metal components can often be produced at a lower cost per unit than products manufactured with forging, casting or machining technologies due to the elimination of, or substantial reduction in, secondary machining, lower material costs and the virtual elimination of raw material waste.

The Suppliers and Prices of Raw Materials We Use

We require substantial amounts of raw materials, including copper and iron powders, steel and custom-fabricated cellulose sheet. Substantially all of the raw materials we require are purchased from third party suppliers and are generally in adequate supply. However, the availability and costs of raw materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation among their customers to other purchasers, interruptions in production by suppliers and changes in exchange rates and worldwide price and demand levels. We are not currently party to any material long-term supply agreements. Our inability to obtain adequate supplies of raw materials for our products at favorable prices could have a material adverse effect on our business, financial condition or results of operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a timely basis.

Government Regulation of Our Businesses

Our sales to manufacturers of aircraft braking systems represented 10.2% of our consolidated net sales in 2005 and 10.0% of our consolidated net sales in 2004. Each aircraft braking system, including the friction products supplied by us, must meet stringent Federal Aviation Administration criteria and testing requirements. We have been able to meet these requirements in the past and we continuously review Federal Aviation Administration compliance procedures to help ensure our continued and future compliance.

Environmental, Health and Safety Matters

We 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. Some 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. Our compliance with environmental laws also may require the acquisition of permits or other authorizations for some kinds of activities and compliance with various standards or procedural requirements. We are also subject to the federal Occupational Safety and Health Act and similar foreign and state laws. The nature of our operations, the long history of industrial uses at some of our current or former facilities, and the operations of predecessor owners or operators of some of the businesses expose us to risk of liabilities or claims with respect to environmental and worker health and safety matters. We review our procedures and policies for compliance with environmental and health and safety laws and regulations and believe that we are in substantial compliance with all material laws and regulations applicable to our operations. Our costs of complying with environmental, health and safety requirements have not been material.

Our Intellectual Property

Our federally registered trademarks include Hawk®, Wellman Friction Products®, Wellman Products Group®, Hawk Precision Components Group®, Velvetouch®, Hawk Brake®, Hawk Performance®, Fibertuff®, Feramic®, Velvetouch Feramic®, Velvetouch Organik®, Conversioneering®, Quarter Master® and Tex Racing®. Velvetouch®, Fibertuff® and Hawk Performance® are our principal trademarks for use in the friction products direct aftermarket segment. Although we maintain patents related to our business, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent. To protect our intellectual property, we rely on a combination of internal procedures, confidentiality agreements, patents, trademarks, trade secrets law and common law, including the law of unfair competition.

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Personnel

At December 31, 2005, we had approximately 1,400 domestic employees and 400 international employees at our continuing operations. Approximately 30 employees at our Akron, Ohio facility are covered under a collective bargaining agreement with the United Automobile Workers expiring in July 2006; and approximately 200 employees at our Orzinuovi, Italy facility are represented by a national mechanics union agreement that expires in June 2007. The Italian employees are also covered by a local union agreement that expires in June 2007. We have experienced no material work stoppages and believe we have good relations with our employees and their unions.

ITEM 1A. RISK FACTORS

Cautionary Note Regarding 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 guarantees of performance. Although we believe that our plans, objectives, intentions and expenditures reflected in our forward-looking statements are reasonable, we can give no assurance that our plans objectives, intentions and expenditures will be achieved. Our forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by our forward-looking statements. These risks and other factors include those listed under Item 1A "Risk Factors" and elsewhere in this report.

        When considering these risk factors, you should keep in mind the cautionary statements elsewhere in this report and the documents incorporated by reference. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. We assume no obligation to update any forward-looking statements or risk factor after the date of this report as a result of new information, future events or developments, except as required by the federal securities laws.

We continue to experience manufacturing inefficiencies at our Oklahoma friction products facility

     We have relocated one of our friction products manufacturing facilities from Brook Park, Ohio to a new facility in Tulsa, Oklahoma. We began production in the new facility at the beginning of 2005. Our Brook Park facility ceased operations at the end of the third quarter of 2005.

     In connection with the relocation, we incurred costs at levels higher than we originally anticipated, and we continue to incur additional costs. Expenses related to the relocation and employee severance costs associated with the closure of our Brook Park, facility were $5.5 million in 2005 (of which $0.5 million was included in Cost of sales). We incurred significant additional expenses as of result of manufacturing inefficiencies related to the move of that facility to Oklahoma. We expect to incur additional expenses during the first half of 2006, as we continue to experience manufacturing inefficiencies at the Oklahoma facility.

     Future success at the Oklahoma facility depends on our ability to:

·   hire, train and retain a qualified workforce,  

·   manufacture friction products without causing customer delays or dissatisfaction, and  

·   achieve the projected cost savings including whether the cost savings can be achieved in a timely fashion.  

     Failure to successfully complete the transition of our business to the new facility may have a material adverse effect on our financial condition, results of operations and prospects.

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     Expenses related to the relocation and employee severance costs associated with closure of our Brook Park, Ohio facility were $5.5 million ($0.5 million included in Cost of sales) in 2005. We incurred significant additional expenses as of result of manufacturing inefficiencies related to the move of the facility to Oklahoma. We expect to incur additional expenses during the first half of 2006 as we continue to experience manufacturing inefficiencies at the Oklahoma facility.

We have incurred losses in the past and may incur losses in future years.

For the year ended December 31, 2005, we reported a net loss of $1.3 million compared to net income of $1.1 million for the year ended December 31, 2004 and a net loss of $5.4 million for the year ended December 31, 2003. Of the 2005 net loss, $5.5 million ($0.5 million in Cost of sales) resulted from a pre-tax charge related to the relocation of our friction products facility from Brook Park, Ohio to Tulsa, Oklahoma.

If we incur additional losses in the future or do not increase net income, then our growth potential and our ability to execute our business strategy may be constrained. In addition, our ability to service our debt, may be harmed because we may not generate sufficient cash flow from operations to pay principal or interest when due.    

We may be unable to generate sufficient taxable income from future operations to fully utilize our significant tax net operating loss carryforwards or maintain our deferred tax assets.

We have a recent history of unprofitable operations primarily due to domestic operating losses. These losses have generated significant federal tax net operating losses, or NOLs. We had available at December 31, 2005, total NOL carryforwards for federal tax purposes of approximately $27.5 million that will begin to expire in the year 2023. Further, even though we expect to be profitable and generate taxable income in 2006 and beyond, we may not be able to sustain the necessary levels of taxable income to fully utilize our significant NOL carryforwards prior to expiration. There is considerable management judgment necessary to determine future taxable income, and accordingly, actual results could vary significantly from such estimates. Accordingly, the recorded amount of the deferred tax assets considered realizable could be reduced in the near term if estimates of our tax planning strategy or our future taxable income are reduced. If actual results differ from our plans or we do not achieve profitability, we may be required to incur a valuation allowance on our tax assets by taking a charge to our tax provision in our Statement of Operations. Accordingly, our inability to generate domestic pre-tax profit may require us to record a tax valuation allowance in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). If this occurs, our results of operations, financial condition and cash flows could be materially and adversely affected.

Our China precision component facility and metal injection molding operation have yet to achieve profitability.

     Our precision components operation in China commenced operations in 2003, and we began our metal injection molding operation, which is also a part of our precision component segment, in 2000. We expect that our precision components operations in China and our metal injection molding operation will have operating losses in 2006. We cannot be certain when, or if, either of these operations will be profitable.

Our precision components segment may be adversely affected by low-cost production in China.

     Our precision components segment is able to produce powder metal components at a lower cost per unit than products manufactured with forging, casting or stamping technologies due to the reduction in secondary machining, lower material costs and the virtual elimination of raw material waste. However, we may not be able to successfully compete with components manufactured in China at a lower cost using these traditional manufacturing technologies.

Our net income may be impacted by the sale of our motor segment.

     We anticipate selling the balance of our motor segment as an ongoing business during the first half of 2006 and are accounting for the results of the motor segment as a discontinued operation in our financial statements. We cannot be certain that we will be successful in divesting the motor segment, or if divested, that the terms of the transaction will be satisfactory to us. There may be additional charges required to reflect actual results of a sale.

Work stoppages by union employees may negatively impact our business.

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     As of December 31, 2005, 12.4% of our employees were represented by unions. If it is necessary to negotiate new agreements or extensions with the unions, we cannot be certain that we will be able to do so on favorable terms or without experiencing work stoppages. Any work stoppage may have a material adverse effect on our financial condition, results of operations and prospects.

Our gross margins are subject to fluctuation because of product mix.

     Certain of our friction products have lower gross margins than our other friction products, and in general, our precision component products have lower gross margins than our friction products. For the year ended December 31, 2005, our friction products segment gross profit was 20.2% of net sales compared to our precision components segment gross profit margin of 18.9% of net sales. Our consolidated gross margin was 19.7% for the year ended 2005 compared to 23.4% for the year ended 2004. Our margins in 2005 were negatively impacted by costs related to a move of a friction products manufacturing facility from Ohio to Oklahoma. We cannot guarantee that, in the future, our product mix will continue to be made up of higher gross margin product sales.

We operate in a highly competitive industry, which may prevent us from growing and may decrease our business.

We operate in an industry that is highly competitive and fragmented. There are many small manufacturers in our industry and only a few generate annual sales in excess of $50.0 million. Our larger competitors have greater financial resources to devote to manufacturing, promotion and sales, which could adversely affect our customer relationships or product mix.

     We compete for new business primarily when our existing customers develop new applications or redesign existing applications, which may involve lengthy periods of development and testing. For example, developing new aircraft braking systems typically begins two to five years before full-scale production. Although we have successfully obtained this business from our customers in the past, we may be unable to obtain this business in the future, which could adversely affect our financial condition, results of operations and prospects. Our success will depend on our ability to continue to meet our customers’ changing specifications with respect to reliability and timeliness of delivery, technical expertise, product design capability, manufacturing expertise, operational flexibility, customer service and overall management.

     Some of our competitors use different technologies, such as carbon composite friction material for aircraft braking system components. We also compete with manufacturers using more traditional forging, casting and stamping technology. Our competitors’ use of different technology may adversely affect our ability to compete and negatively impact our financial condition, results of operations and prospects.

Our debt could adversely affect our financial condition and prevent us from fulfilling our obligations.

    As of December 31, 2005, we had $110.5 million of net debt outstanding compared to $106.2 million as of December 31, 2004.

     Our high level of debt could have important consequences, including the following:

·   it may make it difficult for us to satisfy our obligations under our debt and contractual and commercial commitments,  

·   we must use a substantial portion of our cash flow from operations to pay interest on our debt, which reduces funds available to us for other purposes,  

·   all of the debt outstanding under our Bank Facility is secured by certain of our assets,  

·   our Bank Facility has a variable rate of interest, which exposes us to the risk of increased interest rates,  

·   our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited,  

·   our high level of debt could limit our flexibility in reacting to changes in the industry and make us more vulnerable to adverse changes in our business or economic conditions in general,  

·   our high level of debt could place us at a competitive disadvantage to those of our competitors who operate on a less leveraged basis, and

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·   our high level of debt could place us at a competitive disadvantage to those of our competitors who operate on a less leveraged basis, and

·   if we fail to comply with the covenants in the instruments governing our other debt, such failure could have material adverse effect on our business and our ability to repay our debt.  

     Our ability to make payments on our debt obligations will depend on our future operating performance and our ability to refinance our debt, which could be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond our control.

We may require significant ongoing and recurring additional capital expenditures and investment in research and development, manufacturing and other areas to remain competitive.

We cannot assure you that we will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive within our business. In addition, we cannot assure you that any technology development by us can be adequately protected such that we can maintain a sustainable competitive advantage.

Our goodwill may be subject to asset impairment charges.

In 2002 we adopted SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142), and in the year of adoption recognized impairment of a portion of our goodwill. We test the remaining goodwill reported in our precision components and performance racing segments annually, and have determined that no further impairment has occurred. In assessing the recoverability of our goodwill, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. Estimates of future discounted cash flows are highly subjective judgments based on our experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, and competitive trends. We cannot assure you that future goodwill impairment will not occur or that if such impairment occurs that it will not adversely affect our financial position and results of operations.

We are subject to governmental regulations that may affect our ability to implement our business objectives.

     Our net sales to manufacturers of aircraft braking systems represented 10.2% of our consolidated net sales for the year ended December 31, 2005. Every aircraft braking system, including those containing components supplied by us, must satisfy Federal Aviation Administration criteria and testing requirements. If we fail to meet these requirements or any new or changed requirements, then our results of operations may be adversely affected or we may not be able to meet our business objectives. There can be no assurance that Federal Aviation Administration review of an aircraft braking system containing components supplied by us will result in a favorable determination or that we or our customers will continue to meet Federal Aviation Administration criteria and testing requirements, which are subject to change in the discretion of the Federal Aviation Administration.

Environmental and health and safety liabilities and requirements could require us to incur material costs.

     We are subject to various U.S. and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing:

·   discharges of pollutants into the air and water,  

·   the management and disposal of hazardous substances, and  

·   the cleanup of contaminated properties.  

     The nature of our operations exposes us to the risk of liabilities or claims with respect to environmental matters, including on-site and off-site disposal matters. Future events could require us to make additional expenditures to modify or curtail our operations, install pollution control equipment or investigate and cleanup contaminated sites, such as:

 

·   the discovery of new information concerning past releases of hazardous substances,

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·   the discovery or occurrence of compliance problems relating to our operations, and

·   changes in existing environmental laws or their interpretation.

     We are also subject to the federal Occupational Safety and Health Act and similar foreign and state laws. The nature of our operations, the extensive uses of our existing and former facilities, and the operations of prior owners and operators expose us to the risk of liabilities or claims concerning environmental and health and safety laws and regulations.

We are dependent upon the availability of raw materials, and we may not be able to receive favorable prices for, or continued supplies of, raw materials, which may affect our ability to obtain enough supplies to conduct our business.

We require substantial amounts of raw materials, including copper and iron powders, steel and custom-fabricated cellulose sheet and substantially all of the raw materials we require are purchased from third party suppliers and are generally in adequate supply. However, the availability and costs of raw materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers, interruptions in production by suppliers and changes in exchange rates and worldwide price and demand levels. We are not currently party to any long-term supply agreements. Our inability to obtain adequate supplies of raw materials for our products at favorable prices could have a material adverse effect on our business, financial condition or results or operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a timely basis. Recently, we have experienced an increase in the costs of our copper and iron powders and steel. Although we may determine that it is necessary to pass on the raw material price increases to our customers, in certain circumstances, it may not be possible or practicable for us to pass on these increases. If we are not able to reduce or eliminate the effect of these cost increases through lowering other costs of production or successfully implementing price increases to our customers, such raw material cost increases could have a negative effect on our financial results.

We are subject to risks associated with international operations.

     We conduct business outside the United States which subjects us to the risks inherent in international operations. Risks inherent in international operations include the following:

·   foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including exchange controls,  

·   fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products is made in local currency,  

·   unexpected adverse changes in foreign laws or regulatory requirements may occur,  

·   compliance with a variety of foreign laws and regulations may be difficult, and  

·   overlap of different tax laws may subject us to additional taxes.  

     Our international net sales represented $55.0 million, or 27.2% of our consolidated net sales, for the year ended December 31, 2005.

We depend on our key personnel.

     Our performance depends on our ability to retain and motivate officers and key employees. The loss of any of our executive officers or other key employees could materially and adversely affect our financial condition, results of operations and prospects. Hawk has an employment agreement with Ronald E. Weinberg, its Chairman of the Board, Chief Executive Officer and President, and maintains a “key person” life insurance policy on the life of Mr. Weinberg in the face amount of $1.0 million.

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     Our future success also depends on identifying, attracting, hiring, training, retaining and motivating other highly skilled technical, managerial and marketing personnel. Competition for these employees is intense, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel.

Our existing preferred shareholders have the ability to exert voting control with respect to the election of directors.

Ronald E. Weinberg, Chairman of the Board, Chief Executive Officer and President, Norman C. Harbert, Chairman Emeritus and Founder, and Byron S. Krantz, Secretary and Director, beneficially own 45%, 45% and 10%, respectively, of the outstanding shares of our Series D preferred stock as well as 14%, 13% and 3%, respectively, of our Class A common stock. The holders of our Series D preferred stock are entitled to elect a majority of the members of our board of directors. Accordingly, if any two of these shareholders vote their shares of Series D preferred stock in the same manner, they will have sufficient voting power (without the consent of our holders of Class A common stock) to elect a majority of the board of directors and to thereby control and direct the policies of the board of directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Hawk’s world headquarters is located in Cleveland, Ohio. We maintain manufacturing, research and development, sourcing, sales and administrative facilities at 17 locations in 5 countries. We are a lessee under operating leases for some of our properties. Hawk’s principal research and development facility is located in Solon, Ohio. In addition, research and development is also performed in a number of the operating divisions’ facilities. We believe that substantially all of our property and equipment is maintained in good condition, adequately insured and suitable for its present and intended use.

ITEM 3. 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 or results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2005.

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES

Our Class A Common Stock has traded on the American Stock Exchange under the symbol “HWK” since January 7, 2004. Through January 6, 2004, our stock traded on the New York Stock Exchange. The following table sets forth, for the fiscal periods indicated, the high and low closing prices of our common stock as reported on the American and New York Stock Exchanges.

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Quarterly Stock Prices

Quarter Ended	High		Low
2005
December 31, 2005	$	14.99	$	12.45
September 30, 2005	$	13.64	$	11.48
June 30, 2005	$	11.80	$	10.15
March 31, 2005	$	10.20	$	8.01
2004
December 31, 2004	$	8.98	$	7.42
September 30, 2004	$	8.19	$	6.26
June 30, 2004	$	6.99	$	4.25
March 31, 2004	$	5.90	$	3.62

The closing sale price for our common stock on December 31, 2005 was $14.67.

Shareholders of record as of March 10, 2006 numbered 77. We estimate that an additional 1,100 shareholders own stock in their accounts at brokerage firms and other financial institutions.

We have never declared or paid, and do not intend to declare or pay, any cash dividends on Class A common stock for the foreseeable future and intend to retain earnings for the future operation and expansion of our business. If we were to pay dividends, we are limited to $2.0 million in dividend payments per annum, under the terms of our Bank Facility. In addition under our Bank Facility, we may pay dividends only as long as there is no event of default and we have availability under our Bank Facility in excess of $10.0 million.

ITEM 6. SELECTED FINANCIAL DATA

Years ended December 31	2005			2004			2003			2002			2001
	(in millions, except per share data)
Statement of Operations Data:
Net sales	$	265.4		$	241.2		$	202.6		$	185.9		$	176.9
Gross profit		52.4			56.5			47.4			44.2			40.7
Restructuring costs (1)		5.5			1.1									1.1
Employee benefit curtailment (income) (2)		(0.4	)
Pension curtailment and contractual termination benefit costs (3)								1.9
Income from operations (4)		9.3			17.3			10.9			13.0			7.2
Adjusted income from operations (5)		15.5			19.1			12.8			13.0			7.2
(Loss) income from continuing operations before income taxes		(1.2	)		1.5			(0.4	)		0.8			(2.2	)
Discontinued operations, net of tax					(0.3	)		(5.0	)		(1.9	)		(2.1	)
Cumulative effect of change in accounting principle, net of tax (6)											(17.2	)
Net (loss) income	$	(1.3	)	$	1.1		$	(5.4	)	$	(18.3	)	$	(4.3	)
Earnings (Loss) Per Share:
Basic (loss) earnings per share	$	(.17	)	$	.11		$	(.65	)	$	(2.15	)	$	(.52	)
Diluted (loss) earnings per share	$	(.17	)	$	.11		$	(.65	)	$	(2.14	)	$	(.52	)
Other Data:
Depreciation	$	10.7		$	10.1		$	10.1		$	10.2		$	10.7
Amortization(7)		0.7			0.7			0.8			0.8			3.8
Capital expenditures (including capital leases and financed capital expenditures)		14.2			18.3			11.2			9.7			8.5

20

December 31	2005		2004		2003		2002		2001
	(In millions)
Balance Sheet Data:
Cash and cash equivalents	$	7.1	$	6.8	$	3.4	$	1.7	$	3.1
Working capital (8)		50.3		51.1		13.5		9.1		31.5
Property plant and equipment, net		70.9		70.0		63.1		61.8		61.7
Assets of discontinued operations		3.6		4.5		4.3		10.4		14.7
Total assets		226.2		220.9		193.5		192.9		204.1
Liabilities of discontinued operations		3.3		4.3		3.7		2.8		1.4
Total indebtedness (including capital leases)		117.6		113.0		95.0		108.3		97.8
Shareholders’ equity		40.7		45.0		41.7		44.8		66.4

____________

(1)   In 2005 and 2004, reflects planning, travel, severance and moving costs associated with the closure of the Brook Park, Ohio facility and the construction of the new facility in Tulsa, Oklahoma (see “Note 4 — Restructuring” to the accompanying Consolidated Financial Statements of this Form 10-K). In 2001, reflects primarily a work force reduction at our domestic facilities of approximately 160 salaried and production personnel.

(2)   Reflects a one-time, non-cash gain related to an employee benefit curtailment as a result of employment terminations at the Brook Park, Ohio friction segment facility.

(3)   In 2003, reflects a one-time, non-cash charge related to the pension curtailment and contractual termination benefit costs associated with the announced closure of the Brook Park, Ohio friction segment facility.

(4)   In accordance with the non-amortization provisions of SFAS 142 we discontinued the amortization of goodwill in 2002 (see “Note 2 — Significant Accounting Policies” to the accompanying Consolidated Financial Statements of this Form 10-K).

(5)   Adjusted income from operations is considered to be a “non-GAAP financial measure” under the rules and regulations of the Securities Exchange Commission (SEC). See “Hawk’s Use of Non-GAAP Financial Measures” of Item 7 of this Form 10-K for more detailed disclosure.

(6)   In 2002, the Company changed the accounting for goodwill and other indefinite-lived intangible assets from an amortization methodology to an impairment-only methodology. The Company, with the assistance of independent valuation experts, concluded that certain of its goodwill was impaired at January 1, 2002 by $21.5 million ($17.2 million after tax) (see Note 2 - “Significant Accounting Policies” to the accompanying Consolidated Financial Statements of this Form 10-K).

(7)   Amortization outlined in this table does not include deferred financing amortization of $0.4 million in 2005, $0.4 million in 2004, $0.8 million in 2003, $0.6 million in 2002 and $0.6 million in 2001, which is included in interest expense on the Consolidated Statement of Operations.

(8)   Working capital is defined as current assets less current liabilities. Beginning in 2002 and through its retirement in the fourth quarter of 2004, our then existing Bank Facility was included as a current liability in working capital, as required by EITF 95-22. As of December 31, 2003 and 2002 there was $24.1 million and $36.3 million outstanding under the then existing Bank Facility, respectively.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion in conjunction with the consolidated financial statements, notes and tables included in Part II, Item 8 of this Form 10-K. Management’s discussion and analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, this performance involves risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. Some of the important factors that could cause our actual results or outcomes to differ from those discussed are listed under Item 1A Risk Factors.

21

Results of Operations

Through our subsidiaries, we operate in three reportable segments: friction products, precision components and performance racing. Our results of operations are affected by a variety of factors, including but not limited to, general customer demand for our products, competition, raw material pricing and availability, labor relations with our personnel, political conditions in the countries in which we operate and general economic conditions. We sell a wide range of products that have a corresponding range of gross margins. Our consolidated gross margin is affected by product mix, selling prices, material and labor costs as well as our ability to absorb overhead costs resulting from fluctuations in demand for our products.

In the fourth quarter of 2003, we committed to a plan to sell our motor segment, which had operations in Alton, Illinois and Monterrey, Mexico. This segment, which manufactures die-cast aluminum rotors for fractional and sub-fractional horsepower electric motors, failed to achieve a certain level of profitability, and, after completing an extensive analysis, we determined that a divestiture of this segment would allow us to concentrate on our core segments of friction products and precision components. In the fourth quarter of 2004, we sold certain fixed assets of our Alton, Illinois facility, which had been previously adjusted to their fair market value as of December 31, 2003. In addition, we recognized a fair market value adjustment (loss) of $0.3 million ($0.2 million, net of tax) on the sale of the land and building of this facility, which was included in the results of discontinued operations. We continue to actively negotiate the sale of the Monterrey, Mexico facility and anticipate selling the remaining portion of the business during the first half of 2006. We restated our results of operations for this segment to reclassify its net operations, assets and liabilities as discontinued for all periods presented in this report and these results are not included in this discussion of our results of operations.

Also in the fourth quarter of 2003, we committed to a restructuring program to achieve cost savings in our friction products segment by moving operations at our Brook Park, Ohio location to a new production facility in Tulsa, Oklahoma. Manufacturing in the Oklahoma facility began in late 2004 and the facility became operational in 2005. Additionally, we completed the closure of our Brook Park, Ohio operation during the fourth quarter of 2005. When fully operational, we expect annual savings of approximately $2.0 million from the new facility. In connection with the closure of the Ohio facility, we reported pre-tax restructuring costs of $5.5 million ($0.5 million is included in cost of goods sold in our Consolidated Statement of Operations) for the year ended December 31, 2005 and $1.1 million in the comparable period of 2004 related to relocation and employee severance expenses.

 

    In 2005, our income from operations decreased $8.0 million to $9.3 million, or 46.2%, from the prior year. This decrease in operating income was primarily the result of the direct restructuring costs, operating inefficiencies and duplicate manufacturing costs associated with the transition of operations to our new Oklahoma manufacturing facility from Ohio. In addition, we incurred increased loan forgiveness costs and research and development spending. These increased costs were partially offset by sales increases in most of our end markets and favorable product mix.

Outlook for 2006

Based on our current view of the markets we serve, and new business awarded by customers during 2005, we believe that our 2006 net sales will increase between 9.3% and 13.0% to between $290.0 million and $300.0 million compared to 2005 net sales of $265.4 million. We expect that we will continue to see strength through 2006 in the majority of our end markets including, construction and mining, heavy-duty truck, specialty friction and fluid power. Furthermore, we expect that our net sales will be positively impacted by continued new business awards in all of our business segments, increased sales in the friction products segment direct aftermarket and continued strong performance from our international operations.

We expect our income from operations to increase to a range of $23.0 million and $25.0 million representing an increase of 49.4% to 62.3% from adjusted income from operations of $15.4 million reported for the full year 2005. Our adjusted income from operations in 2005 excludes restructuring charges of $5.5 million related to the move of our friction products segment facility to Oklahoma and other net costs of $0.7 million relating to pension curtailment income and loan forgiveness costs. Our 2006 outlook gives continuing effect to the manufacturing start-up costs we expect to incur at our Oklahoma facility during the first and second quarters of the year.

We expect, that as a result of the above factors, our net income for 2006 will be in a range of $.80 to $.90 per fully diluted share. Our common stock outstanding during the period is estimated to be 9.4 million fully diluted shares.

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Critical Accounting Policies

     Some of our 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.  On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions. 

We review our financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment.  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.  However, historically our estimates have not been materially different from actual results.  Our critical accounting policies include the following:

·   Revenue Recognition. We recognize revenues when products are shipped and title has transferred to our customer.  

·   Goodwill. Goodwill represents the excess of the cost of companies we acquired over the fair value of their net assets as of the date of acquisition. In accordance with SFAS 142, our policy is to evaluate the carrying value of our goodwill and indefinite-lived intangible assets at least annually, or more frequently if there is a significant adverse event or change in the environment in which one of our business unit operates. We will record an impairment loss in the period such determination is made. In assessing the recoverability of our goodwill, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. Estimates of future discounted cash flows are highly subjective judgments based on our experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation and competitive trends. If actual results are materially different than the assumptions used, impairment could result. We did not record any impairment charges in the periods ended December 31, 2005, 2004 and 2003.  

·   Asset Impairment. We review long-lived assets (excluding goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. Estimates of future undiscounted cash flows are highly subjective judgments based on our experience and knowledge of our operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation and competitive trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. We did not record any impairment charges in any of the periods ended December 31, 2005, 2004 or 2003.  

·   Pension 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 are the expected return on plan assets and appropriate discount rates. We assumed that the expected weighted average long-term rate of return on plan assets will be 8.6% for 2006. 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. However, should the rate of return differ materially from our assumed rate we could experience a material adverse effect on the funded status of our plans and our future pension expense. 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). Our cumulative unrecognized net actuarial loss on pension assets as of December 31, 2005 and 2004 was $13.5 million and $7.8 million, respectively.

We determine the discount rate to be used to discount plan liabilities at their measurement date, December 31. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. At December 31, 2005, we determined this rate to be 5.5%. Changes in discount rates over the past three years have not materially affected pension income (expense), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, has been deferred as permitted by SFAS 87.

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·   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. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for reporting and income tax purposes. Our effective tax rate is substantially driven by the impact of the mix of our foreign and domestic income and losses and the federal and local tax rate differences on each.

SFAS No. 109, provides certain guidelines to follow in making the determination of the need for a valuation allowance. We must show that taxable income is expected to be available for future periods sufficient to realize the benefits of temporary differences and carryforwards to not record an allowance. We have identified strategies which, if implemented, would enable us to realize the aforementioned tax benefits, and therefore, we have determined that no valuation allowance is required as of December 31, 2005. On June 30, 2005, the Governor of Ohio signed House Bill 66 into law which significantly changed the corporate tax structure in Ohio.  The major provisions of the bill include phasing-out the Ohio Franchise Tax and phasing-in a Commercial Activities Tax. The tax changes did not have a material effect on our tax provision for the year ended December 31, 2005.

·

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 exchange rates as determined throughout the year.  Gains or losses resulting from translation are included in a separate component of our shareholders' equity.  Other comprehensive income includes a translation loss of $1.4 million for the year ended December 31, 2005.  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.  Sales or purchases in foreign currencies, other than the subsidiary's local currency, are exchanged at the date of the transation.  The effect of transaction gains or losses are included in "Other (expense) income, net" in our Consolidated Statements of Operations.  Foreign currency transaction gains and losses were not material to the results of operations in 2005 and 2004.

·   Recent Accounting Developments. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), which is a revision of SFAS 123. This statement addresses the accounting transactions in which a company exchanges its equity instruments for goods or services. It also addresses transactions in which a company incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method and requires instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. On April 14, 2005, the U.S. Securities and Exchange Commission (SEC) announced a deferral of the effective date of SFAS 123(R) for calendar year companies until the beginning of 2006. Effective January 1, 2006, we have elected to expense employee stock-based compensation using the fair value based method prospectively for all awards granted, modified, or settled on or after January 1, 2006. The fair value at the grant date of the stock options is estimated using the Black-Scholes option pricing model. Expense associated with share-based paymentsissued to employees will be included in our Consolidated Statement of Operations beginning on January 1, 2006. We expect that our pre-tax compensation expense for the year ended December 31, 2006 related to the implementation of SFAS 123(R) will be approximately $0.2 million.  

Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) contains provisions requiring an annual assessment by management, as of the end of the fiscal year, of the effectiveness of internal control for financial reporting. Section 404 also requires attestation and reporting by independent auditors on management’s assessment as well as other control-related matters. On March 2, 2005, the SEC published a final rule extending for one year the compliance dates for non-accelerated filers to report on internal control over financial reporting. For these issuers, Section 404 now will be effective for fiscal years ending on or after July 15, 2006. At this time, we continue to qualify for non-accelerated filer status and therefore, will not need to comply with Section 404 until December 31, 2006. Our compliance initiatives are moving forward and we anticipate being compliant with requirements of Section 404 as of December 31, 2006.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), and requires such costs to be recognized as current period charges. In addition, this statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 will be effective for us beginning January 1, 2006 and we do not believe the adoption will have a material effect on our results of operations, financial condition or liquidity.

24

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Our continuing operations are organized into three strategic segments. These segments include friction products, precision components and performance racing. In the fourth quarter of 2003 we committed to selling our motor segment. As a result, we have classified this business as discontinued.

Net Sales. Our consolidated net sales in 2005 were $265.4 million, an increase of $24.2 million or 10.0% from the same period in 2004. We experienced sales increases in all of our segments, primarily as a result of the continuing economic expansion during 2005 in the industrial markets we serve, new product introductions and market share gains during the year.

Net Segment Sales:	2005		2004		$ Change		% Change
	(dollars in millions)
Friction products	$	167.0	$	148.3	$	18.7		12.6	%
Precision components		83.6		78.6		5.0		6.4	%
Performance racing		14.8		14.3		0.5		3.5	%
Consolidated	$	265.4	$	241.2	$	24.2		10.0	%

·   Friction Products. Net sales in the friction products segment, our largest, were $167.0 million in 2005, an increase of $18.7 million, or 12.6%, compared to $148.3 million in 2004. As a result of new product introductions, general economic expansion and market share gains, we experienced increases in most of our major markets, including construction and mining, heavy truck and aerospace, increased sales to the direct aftermarket. This segment continued to experience strong sales growth from our international operations in 2005. Net sales at our Italian facility, on a local currency basis, increased 10.3% in 2005 compared to 2004, as a result of new product introductions and market share gains. Total shipments at our Chinese facility, on a local currency basis, were up 36.0% in 2005 compared to 2004. Our sales to the construction and mining, our largest market, were up 16.4% in 2005 compared to 2004, as a result of strong economic conditions in that market as well as market share gains achieved by us. Our sales to the truck market increased by 22.5% in 2005 compared to 2004 as our customers supported the continued growth in new truck builds and aftermarket service requirements to existing truck fleets during the year. Our sales to the aerospace market were up 12.4% in 2005 compared to 2004 as world-wide commercial air travel continued its positive growth trend. Our sales to the agriculture market decreased 3.2% during the year as a result of a weak farm economies in North America and Europe. During 2005, we continued to focus our efforts on the friction direct aftermarket that we service through the Velvetouch® and Hawk Performance® brand names. Sales in this product category were up 5.7% to $27.1 million in 2005 compared to 2004.

·   Precision Components. Net sales in our precision components segment were $83.6 million in 2005, an increase of 6.4% compared to 2004. The increase in net sales was primarily attributable to continued improving conditions in the general industrial segments of the domestic economy served by this segment. We experienced sales increases in the fluid power, automotive and power tool markets served by this segment. These increases were partially offset by a slight decline in the lawn and garden and appliance markets during the year due primarily to a customer-designed engineering change that eliminated a product previously supplied by us. Our precision component segment began production and sale of product from its new powder metal production facility in China during the fourth quarter of 2003. For the year ended December 31, 2005, total shipments from this facility, on a local currency basis, were up 211.5% for the comparable period of 2004.  

·   Performance Racing. Net sales in our performance racing segment were $14.8 million, an increase of 3.5% compared to net sales of $14.3 million in 2004. The increase in revenues was primarily attributable to the introduction of new clutch and transmission products during the year.

Gross Profit. Gross profit decreased $4.1 million to $52.4 million during 2005, a 7.3% decline compared to gross profit of $56.5 million in 2004. Our gross profit margin declined to 19.8% of our net sales in 2005 compared to 23.4% of our net sales in 2004. The decline is primarily the result of significant costs incurred during the year as a result of operating inefficiencies associated with the relocation of our Ohio friction products facility to Oklahoma, including increased labor, overtime, maintenance, training, freight and outsourcing costs as a result of the start-up of operations in Oklahoma and operating both the Ohio and Oklahoma facilities during the production transition period. In addition we incurred phase-in costs associated with our technology initiatives in our precision components segment and increased inventory reserves in our performance racing segment primarily as a result of rule changes in the racing circuits served by us that rendered portions of our inventory obsolete.

25

Gross Profit Margin:		2005	2004			Change
Friction products	20.1%			24.6	%		(4.5	%)
Precision components	18.9%			21.1	%		(2.2	%)
Performance racing	20.3%			23.8	%		(3.5	%)
Consolidated	19.7%			23.4	%		(3.7	%)

·   Friction Products. Our friction products segment reported gross profit of $33.7 million or 20.1% of its net sales in 2005 compared to $36.5 million or 24.6% of its net sales in 2004. The decrease in our gross profit margin was primarily the result of operating inefficiencies and direct restructuring costs associated with the transition of operations to our new facility in Oklahoma. The decrease was partially offset by the impact of sales volume increases during the period and favorable product mix.  

·   Precision Components. Gross profit in our precision components segment was $15.8 million or 18.9% of its net sales in 2005 compared to $16.6 million or 21.1% of its net sales in 2004. The decrease in this segment’s margins was primarily the result of phase-in costs associated with our new technology initiative, higher raw material and energy costs, continuing start-up costs associated with this segment’s operations in China and outsourcing costs required as a result of the overall segments’ sales volume increase to meet customer delivery schedules.  

·   Performance Racing. Our performance racing segment reported gross profit of $3.0 million or 20.3% of net sales in 2005 compared to $3.4 million or 23.8% of net sales in 2004. The decline in gross profit in 2005 was primarily the result of cost increases on certain driveline components, reserves created to reflect inventory rendered obsolete as a result of rule changes increased employee benefit costs and product mix.

Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A) expenses increased $0.5 million, or 1.3%, to $37.9 million in 2005 from $37.4 million during 2004. As a percentage of net sales, ST&A decreased to 14.2% in 2005 compared to 15.5% in 2004. The slight increase in ST&A expenses resulted primarily from increased personnel costs to support the sales volume increase in each of our business segments marketing expenses to support our direct aftermarket marketing programs, higher levels of research and development spending and loan forgiveness costs during 2005, offset by reductions in incentive compensation expense for the year. Incentive compensation expense declined 38.2% in 2005 compared to 2004 levels. We spent $6.5 million, or 2.5% of our net sales on product research and development in 2005 compared to $5.6 million, or 2.3%, in 2004.

Restructuring Costs. Direct restructuring costs (excluding the $0.5 million recorded in our Cost of sales) for the year ended 2005 were $5.0 million, consisting of severance, planning, recruiting, relocation and other costs associated with our new manufacturing facility in Oklahoma. In the comparable period of 2004, we incurred direct restructuring costs of $1.1 million. The costs reflected in 2005 and 2004 are part of the same initiative relating to the closure of our Brook Park, Ohio facility and its transition to the Tulsa, Oklahoma facility.

Employee Benefit Curtailment. As a result of employment reductions at our Brook Park, Ohio facility as of September 30, 2005, we reduced an actuarially computed liability relating to a benefit no longer owed by us. The benefit provided for medical benefits to individuals who met certain age and service requirements at termination of employment. This action resulted in reported income of $0.4 million for the year ended December 31, 2005. There were no employee benefit curtailment charges in 2004.

Income from Operations. Income from operations decreased $8.0 million or 46.2% to $9.3 million for the year ended December 31, 2005, from $17.3 million in the comparable period of 2004. Income from operations as a percentage of net sales decreased to 3.5% for the year ended December 31, 2005 from 7.2% in the comparable period of 2004. The decrease was primarily the result of direct restructuring costs, operating inefficiencies and duplicate manufacturing costs associated with the transition of operations to our Oklahoma facility from Ohio, increased loan forgiveness costs and increased research and development costs, partially offset by product mix and $0.4 million of employee benefit curtailment income.

As a result of the items discussed above, income from operations at each of our segments was as follows:

26

Income (loss) from operations by segment:	2005			2004		$ Change			% Change
	(dollars in millions)
Friction products	$	5.7		$	13.1	$	(7.4	)		(56.5	%)
Precision components		4.1			3.5		0.6			17.1	%
Performance racing		(0.5	)		0.7		(1.2	)		(171.4	%)
Consolidated	$	9.3		$	17.3	$	(8.0	)		(46.2	%)

Included in our income from operations for the year ended December 31, 2005 was $5.5 million of direct restructuring costs related to the plant relocation ($0.5 million of which was included in our cost of sales), a $1.0 million charge related to forgiveness of shareholder loans outstanding as of March 31, 2005 and other non-recurring income of $0.4 million relating to a reversal of a post retirement benefit liability no longer owed by us. For the year ended December 31, 2004, income from operations included direct restructuring costs of $1.1 million and loan forgiveness costs of $0.7 million. Income from operations before these charges was $15.4 million, or 5.8% of net sales in 2005, a decrease of $3.7 million, or 19.4%, from $19.1 million, or 7.9% of net sales in the comparable period of 2004.

	Years ended December 31
	Income (loss) from operations, as reported (GAAP)						Restructuring costs (1)				Other costs, net (2)				Adjusted income (loss) from operations
	2005			2004			2005		2004		2005		2004		2005			2004
	(dollars in millions)
Friction products	$	5.7		$	13.1		$	5.5	$	1.1	$	0.1	$	0.4	$	11.3		$	14.6
Precision components		4.1			3.5							0.4		0.3		4.5			3.8
Performance racing		(0.5	)		0.7							0.1				(0.4	)		0.7
Total	$	9.3		$	17.3		$	5.5	$	1.1	$	0.6	$	0.7	$	15.4		$	19.1
Operating margin		3.5	%		7.2	%										5.8	%		7.9	%

           (1)  Restructuring costs in this table for the period ended December 31, 2005 include $0.5 million classified in our Consolidated Statement of Operations as cost of sales items. 

           (2)  Other costs, net includes loan forgiveness costs of $1.0 million for the year ended December 31, 2005 and $0.7 million for the year ended December 31, 2004, net of employee benefit curtailment income of $0.4 million for the year ended December 31, 2005. 

The table above discloses “Adjusted income (loss) from operations,” which is considered to be a “non-GAAP financial measure” under the rules and regulations of the. We have presented this non-GAAP financial measure because we believe that meaningful analysis of our financial performance is enhanced by an understanding of isolated factors underlying that performance. By excluding our non-recurring restructuring and other costs, we believe that this non-GAAP financial measure allows our investors to more easily compare our financial performance period to period. In addition, our chief operating decision makers use this measure in monitoring and evaluating both our overall performance and the ongoing performance of each of our business segments. This non-GAAP financial measure should not be considered an alternative to measures required by GAAP. See the section in Item 1 Business captioned “Hawk’s Non-GAAP Financial Measures” in this Form 10-K for more detailed disclosure.

Interest Expense. Interest expense increased $0.3 million during the year ended December 31, 2005 to $10.6 million from $10.3 million in the comparable period of 2004. Higher levels of total borrowings during the year were partially offset by lower borrowing rates during the period. Included as a component of interest expense in our financial statements are the amortization of deferred financing costs. Amortization of deferred financing costs included in interest expense was $0.4 million for the years ended December 31, 2005 and 2004.

Income Taxes. We recorded a tax provision for our continuing operations of $0.2 million for the year ended December 31, 2005 compared to $2.9 million in the comparable period of 2004. Our effective income tax rate differs from the current federal U.S. statutory rate of 35.0%, primarily as a result of tax rate differences on our foreign income compared to our consolidated domestic losses and individual state tax liabilities for the years ended December 31, 2005 and 2004. Our worldwide provision for income taxes is based on annual tax rates for the year applied to all of our sources of income. An analysis of changes in our income taxes and our effective tax rate is contained in “Note 11 — Income Taxes” in the accompanying audited Consolidated Financial Statements of this Form 10-K.

27

Discontinued Operations, net of tax. In the fourth quarter of 2003, we committed to a plan to divest our motor segment operations. In accordance with GAAP, we have accounted for the motor segment in our financial statements on the line item “Discontinued operations, net of tax.” The following is a summary of the results of discontinued operations for the years ended December 31, 2005 and 2004. An analysis of Discontinued Operations is contained in “Note 3 — Discontinued Operations” in the accompanying audited Consolidated Financial Statements of this Form 10-K.

	Years ended December 31
	2005		2004
	(dollars in millions)
Net sales	$	8.9	$	13.0
Income (loss) from discontinued operations before income taxes		0.0		(0.5	)
Income tax provision (benefit)		0.0		(0.2	)
Income (loss) from discontinued operations, net of tax	$	0.0	$	(0.3	)

Net Income (Loss). As a result of the factors noted above, we reported net loss of $1.3 million in 2005 compared to net income of $1.1 million in 2004.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Our continuing operations are organized into three strategic segments. These segments include friction products, precision components and performance racing. In the fourth quarter of in 2003 we committed to selling our motor segment. As a result, we have classified this business as discontinued.

Net Sales. Our consolidated net sales in 2004 were $241.2 million, an increase of $38.6 million or 19.1% from the same period in 2003. We experienced sales increases in all of our segments, primarily a result of the continuing economic recovery during 2004 in the industrial markets we serve, new product introductions and market share gains during the year. Foreign currency exchange rates caused net sales for the full year 2004 to increase by 2.0%

Net Segment Sales:	2004		2003		$ Change		% Change
	(dollars in millions)
Friction products	$	148.3	$	121.6	$	26.7		22.0	%
Precision components		78.6		68.1		10.5		15.4	%
Performance racing		14.3		12.9		1.4		10.9	%
Consolidated	$	241.2	$	202.6	$	38.6		19.1	%

·   Friction Products. Net sales in the friction products segment, our largest, were $148.3 million in 2004, an increase of $26.7 million, or 22.0%, compared to $121.6 million 2003. As a result of new product introductions, and market share gains, we experienced increases in most of our major markets, including construction and mining, agriculture, heavy truck, aerospace, and direct aftermarket. This segment continued to experience strong sales growth from our international operations in 2004. At our Italian facility, net sales, exclusive of any translation gains increased 27.2% in 2004 compared to 2003, as a result of new product introductions and market share gains. Net sales at our Chinese facility were up 206.4% in 2004 compared to 2003. Foreign currency exchange rates caused the friction segment’s sales for the full year 2004 to increase by 3.3%. Our sales to the construction and mining markets were up 40.8% in 2004 compared to 2003, as a result of strong economic conditions in that market as well as market share gains achieved by us. Our sales to the truck market increased by 28.2% in 2004 compared to 2003 as our customers supported the continued growth in new truck builds and aftermarket service requirements to existing truck fleets during the year. Our sales to the agriculture market increased 19.7% during the year as we benefited from a strong farm economy in North America. Our sales to the aerospace market were up 6.8% in 2004 compared to 2003 as commercial air travel continued to show a positive growth trend.   During 2004, we refocused our efforts on the friction direct aftermarket that we service through the Velvetouch® and Hawk Performance® brand names. Sales in this product category were up 19.4% to $25.2 million in 2004 compared to 2003. In the second quarter of 2004, we shipped an initial stocking order to Pep Boys automotive retail outlets for the national rollout of Hawk Performance® brand brake pads throughout their chain.  

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·   Precision Components. Net sales in our precision components segment were $78.6 million in 2004, an increase of 15.4% compared to 2003. The increase in net sales was primarily attributable to continued improving conditions in the general industrial segments of the domestic economy served by this segment. We experienced sales increases in the fluid power, automotive, appliance, truck and power tool markets served by this segment. These increases were partially offset by a slight decline in the lawn and garden market during the year due primarily to an engineering change that eliminated a product previously supplied by us. Our precision component segment began production and sale of product from its new powder metal production facility in China during the fourth quarter of 2003.

·   Performance Racing. Net sales in our performance racing segment were $14.3 million, an increase of 10.9% compared to net sales of $12.9 million in 2003. The increase in revenues was primarily attributable to the introduction of new clutch and transmission products during the year.

Gross Profit. Gross profit increased $9.1 million to $56.5 million during 2004, a 19.2% increase compared to gross profit of $47.4 million in 2003. Our gross profit margin held steady at 23.4% of net sales in 2004 and 2003 despite production efficiencies experienced due to volume increases, offset by significant increases in our basic raw material costs, changes in product mix, as well as increased labor and incentive compensation costs during 2004.

Gross Profit Margin:	2004			2003			Change
Friction products		24.6	%		24.3	%		0.3	%
Precision components		21.1	%		21.3	%		(0.2	%)
Performance racing		23.8	%		26.4	%		(2.6	%)
Consolidated		23.4	%		23.4	%		0.0	%

·   Friction Products. Our friction products segment reported gross profit of $36.5 million or 24.6% of its net sales in 2004 compared to $29.5 million or 24.3% of its net sales in 2003. The increase in our gross profit margin was primarily the result of sales volume increases that provided a higher absorption of fixed manufacturing costs and continued emphasis on operational efficiencies. We achieved an increase in gross margin in 2004 despite increased raw material costs, changes in product mix and increased operating costs to support the higher sales volumes during the year.  

·   Precision Components. Gross profit in our precision components segment was $16.6 million or 21.1% of its net sales in 2004 compared to $14.5 million or 21.3% of its net sales in 2003. The slight decrease in this segment’s margins was primarily the result of raw material cost increases in 2004 as well as continuing start-up costs associated with this segment’s new operation in China and start up costs associated with our new technology initiatives. We will continue to provide start-up support to the China operation and expect this operation to achieve profitability at the gross profit line during 2005.  

·   Performance Racing. Our performance racing segment reported gross profit of $3.4 million or 23.8% of net sales in 2004 compared to $3.4 million or 26.4% of net sales in 2003. The decline in gross profit in 2004 was primarily the result of product mix.  

Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A) expenses increased $3.7 million, or 11.0%, to $37.4 million in 2004 from $33.7 million during 2003. As a percentage of net sales, ST&A decreased to 15.5% in 2004 compared to 16.6% in 2003. The increase in ST&A expenses resulted primarily from increased personnel costs to support the sales volume increase, increased expenses to support our direct aftermarket marketing programs, increased incentive compensation and discretionary profit sharing contribution expense and higher levels of research and development spending during 2004. We spent $5.6 million, or 2.3% of our net sales on product research and development in 2004 compared to $4.7 million, or 2.3%, in 2003.

Restructuring Costs. In 2004, we recorded a charge of $1.1 million to reflect the planning, severance and moving costs associated with the construction of our new friction manufacturing facility in Oklahoma. There were no restructuring costs related to this project incurred during 2003.

Income from Operations. Income from operations increased $6.4 million or 58.7% to $17.3 million in 2004 from $10.9 million in 2003. Income from operations as a percentage of net sales increased to 7.2% in 2004 from 5.4% in 2003. The increase was primarily the result of increased sales volumes which provided a higher absorption of fixed manufacturing costs, and continued cost reduction programs throughout the organization. This increase was partially offset by surcharges and price increases on our raw materials, changes in product mix, increased labor and incentive compensation costs and increased friction aftermarket sales and marketing costs.

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As a result of the items discussed above, income from operations at each of our segments was as follows:

Income from Operations by Segment:	2004		2003		$ Change		% Change
	(dollars in millions)
Friction Products	$	13.1	$	8.3	$	4.8		57.8	%
Precision Components		3.5		2.2		1.3		59.1	%
Performance Racing		0.7		0.4		0.3		75.0	%
Consolidated	$	17.3	$	10.9	$	6.4		58.7	%

Included in our income from operations for the year ended December 31, 2005 was $5.5 million of direct restructuring costs related to the plant relocation ($0.5 million of which was included in our cost of sales), a $1.0 million charge related to forgiveness of shareholder loans outstanding as of March 31, 2005 and other non-cash recurring income of $0.4 million relating to a reversal of a post retirement benefit liability no longer owed by us. For the year ended December 31, 2004, income from operations included direct restructuring costs of $1.1 million and loan forgiveness costs of $0.7 million. Income from operations before these charges was $15.4 million, or 5.8% of net sales in 2005, a decrease of $3.7 million, or $19.4%, from $19.1 million, or 7.9% of net sales in the comparable period of 2004.

	Years ended December 31
	Income from operations, as reported (GAAP)						Restructuring costs			Other costs, net 1				Adjusted income from operations
	2004			2003			2004		2003	2004		2003		2004			2003
	(dollars in millions)
Friction products	$	13.1		$	8.3		$	1.1		$	0.4	$	1.9	$	14.6		$	10.2
Precision components		3.5			2.2						0.3				3.8			2.2
Performance racing		0.7			0.4										0.7			0.4
Total	$	17.3		$	10.9		$	1.1		$	0.7	$	1.9	$	19.1		$	12.8
Operating margin		7.2	%		5.4	%									7.9	%		6.3	%

(1)  Other costs, net includes loan forgiveness costs for the year ended December 31, 2004 and pension curtailment and contractual benefit costs for the year ended December 31, 2003. 

The table above discloses “Adjusted income (loss) from operations,” which is considered to be a “non-GAAP financial measure” under the rules and regulations of the SEC. We have presented this non-GAAP financial measure because we believe that meaningful analysis of our financial performance is enhanced by an understanding of isolated factors underlying that performance. By excluding our non-recurring restructuring and other costs, we believe that this non-GAAP financial measure allows our investors to more easily compare our financial performance period to period. In addition, our chief operating decision makers use this measure in monitoring and evaluating both our overall performance and the ongoing performance of each of our business segments. This non-GAAP financial measure should not be considered an alternative to measures required by GAAP. See the section in Item 1 Business captioned “Hawk’s Non-GAAP Financial Measures” in this Form 10-K for more detailed disclosure.

Interest Expense. Interest expense decreased $0.5 million, or 4.6%, to $10.3 million in 2004 from $10.8 million in 2003. The decrease is primarily attributable to lower interest rates on our variable rate debt partially offset by higher average borrowings during the year. Additionally, in November 2004, we initiated an exchange offer of our Old Senior Notes and issued $110.0 million of new Senior Notes. The interest rate on our new Senior Notes decreased from 12% to 8.75%; however, the principal amount of the Senior Notes is $43.8 million greater than the $66.2 million in outstanding principal of Old Senior Notes at the time of the exchange. In addition, deferred financing amortization, which is included in interest expense in the consolidated statement of operations, decreased to $0.4 million in 2004 compared to $0.8 million in 2003.

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Income Taxes. We recorded a tax provision for continuing operations of $2.9 million in 2004 compared to $0.9 million in 2003. We recorded an effective tax rate for the year of 66.1% compared to an effective tax rate of 210.6% in 2003. Our effective tax rate is substantially driven by the impact of tax rate differences on our foreign income and domestic losses in addition to our inability to utilize certain tax credits during 2004. An analysis of changes in our income taxes and our effective tax rate is contained in “Note 11 — Income Taxes” in the accompanying audited consolidated financial statements of this Form 10-K.

Discontinued Operations, net of tax. In the fourth quarter of 2003, we committed to a plan to divest of our motor segment operations. In accordance with U.S. generally accepted accounting principles (GAAP), we have accounted for the motor segment in our financial statements on the line item “Discontinued operations, net of tax.” In 2004, the segment reported a loss from operations of $0.3 million, net of tax. In addition to the segment’s pre-tax net operating loss of $3.2 million for 2003, we also recorded a pre-tax, non-cash long-lived asset impairment charge of $4.5 million in 2003 which resulted in a loss from operations of $5.0 million, net of tax. An analysis of Discontinued Operations is contained in “Note 3 — Discontinued Operations” in the accompanying audited consolidated statements of this Form 10-K.

Net Income (Loss). As a result of the factors noted above, we reported net income of $1.1 million in 2004, compared to a net loss of $5.4 million in 2003.

Liquidity and Capital Resources

Our primary financing requirements are:

·   for capital expenditures for maintenance, replacement and acquisition of equipment, expansion of capacity, productivity improvements and product development,  

·   for funding our day-to-day working capital requirements, and  

·   to pay interest on, and to repay principal of, our indebtedness.  

Hawk’s primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under our Bank Facility and Senior Notes. The following selected measures of liquidity and capital resources outline various metrics that are reviewed by our management and are provided to enhance the understanding of our business.

Selected Measures of Liquidity and Capital Resources from Continuing Operations

	December 31
	2005			2004
	(dollars in millions)
Cash and cash equivalents	$	7.1		$	6.8
Working capital (1)	$	50.3		$	51.1
Current ratio (2)		1.9 to 1.0			2.0 to 1.0
Net debt as a % of capitalization (30		73.1	%		70.2	%
Average number of days sales in accounts receivable		51 days			61 days
Average number of days sales in inventory		77 days			78 days

(1)   Working capital is defined as current assets minus current liabilities.

(2)   Current ratio is defined as current assets divided by current liabilities.

(3)   Debt is defined as long-term debt, including current portion, and short-term borrowings, less cash. Capitalization is defined as debt plus shareholders’ equity.

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As part of our working capital management program, we review certain working capital measures on a continuing basis. The $0.8 million decrease in our net working capital from December 31, 2004 resulted from increased payables and a reduction in our accounts receivable balances as of December 31, 2005 partially offset by increased inventory requirements to support our increased sales volumes and the inventory build to support the move to our new facility in Oklahoma. Our accounts receivable and inventory levels are reviewed through the computation of days sales outstanding and inventory turnover, respectively. The number of days sales outstanding in accounts receivable was 51 days compared to 61 days at December 31, 2004. The decrease is mainly attributable to a strong focus on accounts receivable collection efforts within our operating segments.

Average inventory days improved to 77 days at December 31, 2005 as compared to 78 days at December 31, 2004. Our overall inventory investment has increased approximately $4.8 million at December 31, 2005 as compared to December 31, 2004 levels primarily to support our increased sales volumes and the inventory build to support the move to our new facility in Oklahoma.

Debt

The following table summarizes the components of our indebtedness as of December 31:

	December 31
	2005		2004
	(dollars in millions)
Short-term debt	$	1.4	$	1.0
Senior Notes		110.0		110.0
Bank facility		5.0		0.2
Other		1.2		1.8
Total debt	$	117.6	$	113.0

Senior Notes

On November 1, 2004, we completed a public offering of $110.0 million aggregate principal amount of 8 ¾% Senior Notes due November 1, 2014 (the Senior Notes). The Senior Notes are senior unsecured obligations, rank senior in right of payment to all of Hawk’s existing and future subordinated debt and rank equally in right of payment with all of Hawk’s existing and future senior debt, including the Credit and Security Agreement, dated November 1, 2004, with KeyBank National Association, serving as Administrative Agent and Letter of Credit Issuer (the Bank Facility), which is described in more detail below. Interest is payable on the Senior Notes each January 1 and July 1.

The Senior Notes are unconditionally guaranteed on a senior unsecured basis by all of our existing and future domestic restricted subsidiaries (the Guarantors). The guarantees rank senior in right of payment to all of the existing and future subordinated debt of the Guarantors and equally in right of payment with all existing and future senior debt of the Guarantors, including the Bank Facility. The Senior Notes and the guarantees are effectively subordinated to all of Hawk’s and our Guarantors’ secured debt, including the Bank Facility, to the extent of the value of the assets securing that debt.

On or after November 1, 2009, we may, at our option, redeem some or all of the Senior Notes at the following redemption prices, plus accrued and unpaid interest and additional interest, if any, to the date of redemption:

For the period below	Percentage
On or after November 1, 2009		104.375	%
On or after November 1, 2010		103.281	%
On or after November 1, 2011		102.188	%
On or after November 1, 2012		101.094	%
On or after November 1, 2013		100.000	%

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Prior to November 1, 2008, up to 35% of the aggregate principal amount of the Senior Notes originally issued in the offering may be redeemed at our option with the net proceeds of certain equity offerings at 108.750% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of redemption, provided at least 65% of the aggregate principal amount of the Senior Notes originally issued in the offering remain outstanding. In addition, upon a change of control as defined in the indenture, dated November 1, 2004, among Hawk, the Guarantors and HSBC Bank USA, National Association, as trustee, each holder of the Senior Notes will have the right to require us to repurchase all or any part of such holder’s Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of purchase.

The Senior Notes are governed by the indenture. The indenture also contains certain covenants, subject to a number of important limitations and exceptions that limit our ability to:

·   incur or guarantee additional debt or issue disqualified capital stock,  

·   pay dividends, redeem subordinated debt or make other restricted payments,  

·   issue preferred stock of our subsidiaries,

·   transfer or sell assets, including capital stock of our subsidiaries,  

·   incur dividend or other payment restrictions affecting certain of our subsidiaries,  

·   make certain investments or acquisitions,  

·   grant liens on our assets,  

·   enter into certain transactions with affiliates, and  

·   merge, consolidate or transfer substantially all of our assets.

     The indenture considers non-compliance with the limitations set forth above events of default. The indenture also considers non-payment of interest and principal amounts on the Senior Notes and certain payment defaults with respect to other debt in excess of $5.0 million to be events of default. In the event of a default, the principal and interest could be accelerated upon written notice by more than 25% or more of the holders of the Senior Notes.

The indenture permits us to incur additional debt without limitation, provided that we continue to meet a cash flow ratio greater than 2.0 to 1.0 for the most recently ended four quarters. Hawk may pay cash dividends on its Class A common stock under the indenture provided:

·   there is no default or event of default,  

·   we meet the cash flow ratio, and  

·   the amount of the dividend payment plus certain other payments is not in excess of a formula based on the sum of our consolidated net income after November 1, 2004, the cash proceeds of certain equity offerings by us after November 1, 2004 and the return on certain investments made by us.  

As of December 31, 2005, we were in compliance with the provisions of our Senior Notes and met the cash flow ratio requirement that would permit us to incur additional debt.

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Bank Facility

Our Bank Facility, which is available for general corporate purposes, has a maximum commitment of $30.0 million, including a letter of credit sub-facility of up to $5.0 million. The Bank Facility matures on November 1, 2009, subject to extension at our request on an annual basis thereafter, with the consent of the lender. The interest rates on the Bank Facility range from 150 to 225 basis points over the London Interbank Offered Rates, or alternatively, 0 basis points over the prime rate, and the commitment fee is 25 basis points on the unused portion of the Bank Facility. At December 31, 2005, we had $5.0 million outstanding under the Bank Facility and $2.4 million of letters of credit outstanding under the letter of credit sub-facility. At December 31, 2005, we had $22.5 million available to borrow under the Bank Facility.

The Bank Facility is collateralized by a security interest in our cash, accounts receivable, inventory and certain intangible assets. We also pledged the stock of our guarantor subsidiaries and 65% of the stock of certain of our foreign subsidiaries as collateral. The restrictive terms of the Bank Facility require that we maintain a minimum amount of shareholders’ equity as determined by reference to an adjusted shareholders’ equity at September 30, 2004 plus net income earned by us after such date. The Bank Facility also requires that we maintain an earnings before interest, taxes, depreciation and amortization to interest expense ratio of at least 1.0 to 1.0, although the lender will test this ratio only if our borrowing availability falls below $10.0 million. This test was not required to be performed as of December 31, 2005 as a result of our excess borrowing availability. Under the Bank Facility, we may pay cash dividends on our Class A common stock in an amount up to $2.0 million per year under certain circumstances.

We have entered into various short-term, variable-rate, debt agreements of up to $6.2 million with local financial institutions at our facilities in Italy and China. Borrowings under these credit facilities totaled $1.0 million as of December 31, 2005.

As of December 31, 2005, we were in compliance with the provisions of our Bank Facility.

Other Debt

We have entered into various short-term, variable-rate, debt agreements of up to $6.2 million with local financial institutions at our facilities in Italy and China. Borrowings under these credit facilities totaled $1.0 million as of December 31, 2005. As of December 31, 2005, we were in compliance with the terms of these debt obligations

Cash Flow

The following table summarizes the major components of cash flow:

	Year ended December 31
	2005			2004
	(in millions)
Cash provided by operating activities of continuing operations	$	10.0		$	6.0
Cash used in investing activities of continuing operations		(14.1	)		(17.4	)
Cash provided by financing activities of continuing operations		5.2			14.3
Effect of exchange rates on cash		(0.7	)		0.3
Cash (used) provided by discontinued operations		(0.1	)		0.2
Net increase in cash and cash equivalents	$	0.3		$	3.4

At December 31, 2005, we had cash and cash equivalents of $7.1 million compared to $6.8 million at December 31, 2004. The cash on the balance sheet at December 31, 2005 and 2004 is primarily at our foreign operations. Excess domestic cash is used to pay down the outstanding loans of our Bank Facility.

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Net cash provided by operating activities was $10.0 million in 2005 compared to $6.0 million in 2004. The increase in cash provided by our operations in 2005 compared to 2004 was the result of the improvement in our accounts receivable collection efforts. Our net working capital was $50.3 million at year-end 2005 compared to $51.1 million at year-end 2004. As part of our working capital management, we review certain working capital metrics on a continuing basis. Our accounts receivable and inventory levels are reviewed through the computation of days sales outstanding and inventory turnover ratio, respectively. The number of days sales outstanding as of December 31, 2005, was approximately 51 days compared to the 61 days as of December 31, 2004. Average inventory turns during 2005 improved 1 day to 77 days compared to 78 days at 2004. Our accounts payable and accrued expenses, excluding accrued interest, increased by approximately $3.0 million at December 31, 2005 compared to December 31, 2004 primarily as a result of timing of payments and increased business levels. We have not changed our payment terms to vendors. Additionally, we made a $4.8 million cash payment for interest on the Senior Notes on January 3, 2006.

We used cash in our investing activities of $14.2 million in 2005 and $17.4 million in 2004 for the purchase of property, plant and equipment.

Cash provided by financing activities was $5.2 million in 2005 compared to $14.3 million in 2004. The decrease in 2005 financing activities was primarily fixed asset acquisitions compared to 2004, and higher levels of working capital as of December 31, 2005.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market Risk Disclosres.  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.  In seeking to minimize the risks and costs associated with market risk, we manage our exposures to interest rates and foreign currency exchange rates through our regular operating and financial activities and through foreign currency hedge contracts.  We had no foreign currency hedge contracts outstanding as of December 31, 2005.  We do not use derivative financial instruments for speculative or trading purposes. 

    Interest Rate Sensitivity.  As December 31, 2005, approximately 5.1%, or $6.0 million, of our total debt bears interest at a variable rate.  Our primary interest rate risk exposure results from floating rate debt.  If interest rates were to increase 100 basis points (1%) from December 30, 2005 rates, and assuming no changes in debt from December 31, 2005 levels, our additional annual interest expense would be less than $0.1 million. 

The interest rates on our long-term debt reflect market rates and therefore, the carrying value of long-term debt approximates fair value. An analysis of our obligations is further discussed in “Note 6 - Financing Arrangements” and “Note 10 - Lease Obligations” in the accompanying audited Consolidated Financial Statements of this Form 10-K.

The following table presents our total contractual obligations and other commercial commitments as of December 31, 2005:

	Total		2006		2007 - 2010		Thereafter
Contractual obligations (1):
Short-term debt (2)	$	1.4	$	1.4
Bank Facility (2)		5.0			$	5.0
Senior Notes (3)		110.0					$	110.0
Operating leases		32.5		3.0		12.5		17.0
Purchase obligations (4)		46.0		41.1		3.3		1.6
Total contractual obligations	$	194.9	$	45.5	$	20.8	$	128.6
Stand-by letters of credit	$	2.4	$	2.4

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____________

(1)   This contractual obligation table does not include our defined benefit pension obligations. An analysis of our obligations under our defined benefit plans is contained in “Note 8 — Employee Benefits” in the accompanying audited Consolidated Financial Statements of this Form 10-K.

(2)   Variable rate obligations

(3)   The Senior Notes due November 1, 2014, accrue interest at a fixed rate of 8 3/4% per annum or $9.6 million per year.

(4)   Purchase obligations primarily represent commitments for inventory purchases, services and capital expenditures under purchase order.

Inflation Risk. We manage our inflation risks by ongoing review of product selling prices and production costs. In spite of the recent surcharges and prices increases on a number of our raw materials, we do not believe that inflation risks are material to our business, its consolidated financial position, results of operations, or cash flows.

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 have operations outside the United States with foreign currency denominated assets and liabilities, primarily denominated in Euros, Canadian dollars, 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. We do not expect that our unhedged foreign currency balance sheet exposure as of December 31, 2005 will result in a significant impact on our earnings or cash flows. We also monitor exposure to transactions denominated in currencies other than the functional currency of each country in which Hawk operates, and have periodically entered into forward contracts to mitigate that exposure. As of December 31, 2005, we have no derivative instruments outstanding.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Hawk Corporation and subsidiaries

December 31, 2005, 2004 and 2003

Audited Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	37
Consolidated Balance Sheets	38
Consolidated Statements of Operations	40
Consolidated Statements of Shareholders’ Equity	41
Consolidated Statements of Cash Flows	42
Notes to Consolidated Financial Statements	43

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Hawk Corporation

We have audited the accompanying consolidated balance sheets of Hawk Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawk Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Cleveland, Ohio

March 17, 2006

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HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

	December 31
	2005		2004
Assets
Current assets:
Cash and cash equivalents	$	7,111	$	6,785
Accounts receivable, less allowance of $1,046 in 2005 and $970 in 2004		36,225		39,044
Inventories:
Raw materials and work-in-process		28,314		24,043
Finished products		18,065		17,507
Total inventories		46,379		41,550
Deferred income taxes		4,430		4,583
Taxes receivable		347		373
Shareholder notes				600
Assets held for sale		1,644
Other current assets		5,660		3,460
Assets of discontinued operations		3,633		4,499
Total current assets		105,429		100,894
Property, plant and equipment:
Land and improvements		1,340		1,850
Buildings and improvements		18,539		20,705
Machinery and equipment		126,201		116,663
Furniture and fixtures		9,365		9,220
Construction in progress		5,317		8,469
		160,762		156,907
Less accumulated depreciation		89,844		86,879
Total property, plant and equipment		70,918		70,028
Other assets:
Goodwill		32,495		32,495
Other intangible assets		8,435		9,170
Deferred income taxes		916
Other		8,035		8,279
Total other assets		49,881		49,944
Total assets	$	226,228	$	220,866

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	December 31
	2005			2004
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	30,444		$	25,554
Accrued compensation		6,102			8,173
Accrued interest		4,895			1,630
Accrued taxes		664			2,877
Other accrued expenses		7,968			5,597
Short-term debt		1,386			980
Current portion of long-term debt		307			639
Liabilities of discontinued operations		3,334			4,297
Total current liabilities		55,100			49,747
Long-term liabilities:
Long-term debt		115,892			111,402
Deferred income taxes		885			3,631
Pension liabilities		10,522			7,358
Other		3,113			3,701
Total long-term liabilities		130,412			126,092
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
Series E preferred stock, $.01 par value; 100,000 shares authorized; none issued or outstanding
Class A common stock, $.01 par value; 75,000,000 shares authorized; 9,187,750 issued; and 8,935,659 and 8,782,121 outstanding in 2005 and 2004, respectively		92			92
Class B common stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding
Additional paid-in-capital		53,349			53,867
Retained earnings (deficit)		(4,845	)		(3,353	)
Accumulated other comprehensive loss		(5,986	)		(2,431	)
Treasury stock, at cost, 252,091 and 405,629 shares in 2005 and 2004, respectively		(1,895	)		(3,149	)
Total shareholders’ equity		40,716			45,027
Total liabilities and shareholders’ equity	$	226,228		$	220,866

See notes to consolidated financial statements.

39

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share data)

	Year ended December 31
	2005			2004			2003
Net sales	$	265,434		$	241,188		$	202,551
Cost of sales		213,013			184,662			155,182
Gross profit		52,421			56,526			47,369
Operating expenses:
Selling, technical and administrative expenses		37,874			37,405			33,731
Restructuring costs		4,962			1,117
Employee benefit curtailment (income) expense		(424	)					1,920
Amortization of finite-lived intangibles assets		734			734			800
Total operating expenses		43,146			39,256			36,451
Income from operations		9,275			17,270			10,918
Interest expense		(10,588	)		(10,265	)		(10,752	)
Interest income		40			54			57
Exchange offer costs					(2,431	)
Other income (expense), net		98			(244	)		183
(Loss) income from continuing operations, before income taxes		(1,175	)		4,384			406
Income tax provision		201			2,899			855
(Loss) income from continuing operations, after income taxes		(1,376	)		1,485			(449	)
Income (loss) from discontinued operations, net of tax of $17 in 2005, $186 in 2004 and $2,700 in 2003		32			(344	)		(4,973	)
Net (loss) income	$	(1,344	)	$	1,141		$	(5,422	)
(Loss) earnings per share:
Basic (loss) earnings per share:
(Loss) earnings from continuing operations, after income taxes	$	(.17	)	$	.15		$	(.07	)
Discontinued operations					(.04	)		(.58	)
Net (loss) earnings per basic share	$	(.17	)	$	.11		$	(.65	)
Diluted earnings (loss) per share:
(Loss) earnings from continuing operations, after income taxes	$	(.17	)	$	.15		$	(.07	)
Discontinued operations					(.04	)		(.58	)
Net (loss) earnings per diluted shares	$	(.17	)	$	.11		$	(.65	)

See notes to consolidated financial statements.

40

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands)

											Accumulated Other Comprehensive Income (Loss)
	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings(Deficit)			Foreign Currency Translation			Minimum Pension Liability			Treasury Stock			Total
Balance at December 31, 2002	$	1	$	92	$	54,616		$	1,228		$	(1,957	)	$	(4,479	)	$	(4,667	)	$	44,834
Net loss									(5,422	)											(5,422	)
Other comprehensive income:
Minimum pension liability, net  of tax $14															23						23
Foreign currency translation												2,330									2,330
Total comprehensive income																					2,353
Preferred stock dividends									(150	)											(150	)
Issuance of common stock from treasury as compensation and exercise of stock options						(133	)											223			90
Balance at December 31, 2003	$	1	$	92	$	54,483		$	(4,344	)	$	373		$	(4,456	)	$	(4,444	)	$	41,705
Net income									1,141												1,141
Other comprehensive income:
Minimum pension liability, net of tax of $378															605						605
Foreign currency translation												1,047									1,047
Total comprehensive income																					1,652
Preferred stock dividends									(150	)											(150	)
Issuance of common stock from treasury as compensation and exercise of stock options						(616	)											1,295			679
Balance at December 31, 2004	$	1	$	92	$	53,867		$	(3,353	)	$	1,420		$	(3,851	)	$	(3,149	)	$	45,027
Net loss									(1,344	)											(1,344	)
Other comprehensive (loss):
Minimum pension liability, net of tax of  $1,337															(2,135	)					(2,135	)
Foreign currency translation												(1,420	)								(1,420	)
Total comprehensive (loss)																					(3,555	)
Preferred stock dividends									(148	)											(148	)
Issuance of common stock from treasury as compensation and exercise of stock options						(518	)											1,254			736
Balance at December 31, 2005	$	1	$	92	$	53,349		$	(4,845	)				$	$(5,986	)	$	(1,895	)	$	40,716

See notes to consolidated financial statements.

41

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Year ended December 31
	2005			2004			2003
Cash flows from operating activities
Net (loss) income	$	(1,344	)	$	1,141		$	(5,422	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Income from discontinued operations, net of tax		32			344			4,973
Depreciation and amortization		11,880			11,180			11,674
Write-off of unamortized consent payments and deferred financing					1,521
Deferred income taxes		(2,141	)		(1,602	)		(3,699	)
Loss on fixed assets		962			996			204
Changes in operating assets and liabilities:
Accounts receivable		1,487			(5,949	)		(949	)
Inventories		(5,669	)		(5,657	)		(1,656	)
Other assets		(1,930	)		2,122			3,048
Accounts payable		5,246			3,311			4,494
Accrued expenses		(1,680	)		125			4,214
Other liabilities and other		3,136			(1,516	)		6,904
Net cash provided by operating activities of continuing operations		9,979			6,016			23,785
Net cash (used in) provided by operating activities of discontinued operations		(85	)		368			2,299
Cash flows from investing activities
Purchases of property, plant and equipment		(14,232	)		(18,297	)		(10,677	)
Proceeds from sale of property, plant and equipment		104			881			568
Net cash used in investing activities of continuing operations		(14,128	)		(17,416	)		(10,109	)
Net cash used in investing activities of discontinued operations		(44	)		(173	)		(308	)
Cash flows from financing activities
Deferred financing					(4,096	)
Payments on short-term debt		(940	)		(342	)
Proceeds from short-term debt		899						1,326
Proceeds from long-term debt		84,245						503
Payments on long-term debt		(79,610	)		(1,629	)		(2,960	)
Proceeds from Senior Notes					110,000
Proceeds from Bank Facility					13,575
Payments on Bank Facility					(13,355	)
Payment on Old Senior Notes					(66,267	)		(583	)
Proceeds from Old Bank Facility					92,336			68,173
Payments on Old Bank Facility					(116,395	)		(80,441	)
Net proceeds from exercise of stock options		736			679			59
Payments of preferred stock dividends		(148	)		(150	)		(150	)
Net cash provided by (used in) financing activities of continuing operations		5,182			14,356			(14,073	)
Effect of exchange rate changes on cash		(578	)		269			69
Net cash provided by (used in) continuing operations		455			3,225			(328	)
Net cash (used in) provided by discontinued operations		(129	)		195			1,991
Net increase in cash and cash equivalents		326			3,420			1,663
Cash and cash equivalents at beginning of year		6,785			3,365			1,702
Cash and cash equivalents at end of year	$	7,111		$	6,785		$	3,365
Supplemental cash flow information
Cash payments for interest	$	6,849		$	$12,189		$	5,556
Cash payments (refunds) for income taxes, net	$	4,540		$	3,252		$	(1,879	)
Noncash investing and financing activities:
Equipment purchased with capital leases and notes payable							$	546
Issuance of common stock from treasury	$	40		$	40		$	30
Issuance of payment in kind (PIK) payments in the form of Old Senior Notes				$	$83		$	124

See notes to consolidated financial statements.

42

HAWK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003

(In Thousands, except share data)

1. Basis of Presentation

Hawk Corporation, 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 to conform to the 2005 presentation.

2. Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) 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.

Cash Equivalents

The Company considers investments in highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents.

Trade Receivables

The Company has the ability to hold all trade receivables until payments are received from customers. Trade receivables are stated at outstanding amounts as adjusted for an allowance for credits and doubtful accounts. Trade receivables are evaluated on an ongoing basis and written off to current operations when collection is no longer reasonably assured. The Company establishes bad debt reserves based on historical experience and believes that the collection of receivables, net of the allowance, is reasonably assured.

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.

Long-Lived Assets

Property, plant and equipment are stated at cost and includes expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The Company uses the straight-line and double declining methods of depreciation for financial reporting purposes. Buildings and improvements are depreciated over periods ranging from 15 to 33 years. Machinery and equipment are depreciated over periods ranging from 4 to 12 years. Furniture and fixtures are depreciated over periods ranging from 3 to 10 years. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations. The Company’s depreciation expense was $10,709 in 2005, $10,059 in 2004 and $10,073 in 2003.

43

Long-lived assets, except goodwill, are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value.

Goodwill

Goodwill represents the excess of the cost of companies we acquired over the fair value of their net assets as of the date of acquisition. In accordance with SFAS 142, the Company’s policy is to evaluate the carrying value of our goodwill and indefinite-lived intangible assets at least annually, or more frequently if there is a significant adverse event or change in the environment in which one of the business unit operates. The Company records an impairment loss in the period such determination is made. In assessing the recoverability of its goodwill, the Company considers changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. Estimates of future discounted cash flows are highly subjective judgments based on the Company’s experience and knowledge of operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation and competitive trends. If actual results are materially different than the assumptions used, impairment could result. The Company performed its annual impairment test as of October 31, 2005, 2004 and 2003 and concluded the fair value of the reporting units exceeded their respective carrying values.

Insurance

The Company uses a combination of insurance and self-insurance for a number of risks including property, general liability, directors’ and officers’ 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 liabilities for these self-insured liabilities at December 31, 2005 and 2004 of $1,350 and $1,515, respectively, could be significantly affected if future actual occurrences and claims differ from these assumptions and historical trends.

Contingencies

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

Foreign Currency

The Company’s primary functional currency is the U.S. dollar. Assets and liabilities of the Company’s foreign operations denominated in foreign currencies are translated into U.S. dollars using period-end exchange rates, while revenue and expense transactions are translated using average exchange rates as determined throughout the period. Gains and losses from foreign currency translation of assets and liabilities are included in accumulated other comprehensive loss, a separate component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in other income (expense), net in the Consolidated Statements of Operations. Foreign currency transaction gains and losses were not material to the results of operations for both 2005 and 2004.

Revenue Recognition

Revenue from the sale of the Company’s products is generally recognized upon shipment to the customer and when title has transferred. Substantially all of the Company’s revenues are derived from fixed price purchase orders. Costs and related expenses to manufacture the products are recorded as costs of sales when the related revenue is recognized. Shipping and handling are included in cost of products sold and are included in the sales price when billed to customers.

44

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 or specific line of business. The Company has one significant customer in the friction segment representing 10.3% of the total revenues. The Company does not require collateral and performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have been within the range of management’s expectations.

Product Research and Development

Product research and development costs are expensed as incurred. The Company’s expenditures for product research and development and engineering were approximately $6,480 in 2005, $5,556 in 2004, and $4,740 in 2003.

Advertising

All advertising costs are expensed as incurred. The Company’s expenditures for advertising were approximately $527 in 2005, $716 in 2004, and $400 in 2003.

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 tax laws and rates for differences between the tax and financial reporting basis of assets and liabilities.

Stock Compensation

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 No. 25 (APB 25) and related interpretations in accounting for its stock-based compensation plans. Using the intrinsic-value method as provided in APB 25, because the exercise price of the stock option equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following illustrates the pro forma effect on net (loss) income and (loss) earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 for the years ended 2005, 2004, and 2003:

	Year Ended December 31
	2005			2004		2003
Net (loss) income as reported	$	(1,344	)	$	1,141	$	(5,422	)
Employee stock-based compensation expense determined under fair value based methods, net of tax		213			237		663
Pro forma net (loss) income	$	(1,577	)	$	904	$	(6,085	)
Basic (loss) earnings per share:
As reported	$	(.17	)	$	.11	$	(.65	)
Pro forma	$	(.19	)	$	.09	$	(.73	)
Diluted (loss) earnings per share:
As reported	$	(.17	)	$	.11	$	(.65	)
Pro forma	$	(.19	)	$	.08	$	(.73	)

The fair value of the options granted used to compute pro forma net (loss) income and (loss) earnings per share is the estimated present value at the grant date using the Black-Scholes option-pricing model with the following assumptions:

45

	Year Ended December 31
	2005			2004			2003
Dividend yield		0	%		0	%		0	%
Expected volatility		57.1	%		54.7	%		54.0	%
Risk free interest rate		4.86	%		4.33	%		4.00	%
Expected average holding period		7.1 years			7.3 years			7.3 years

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), which is a revision of SFAS 123. This statement addresses the accounting transactions in which a company exchanges its equity instruments for goods or services. It also addresses transactions in which a company incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method and requires instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. On April 14, 2005, the U.S. Securities and Exchange Commission (SEC) announced a deferral of the effective date of SFAS 123(R) for calendar year companies until the beginning of 2006. When the Company adopts SFAS 123(R) in 2006, it will include the expense associated with share-based payments issued to employees in its Consolidated Statement of Operations. Effective January 1, 2006, the Company has elected to expense employee stock-based compensation using the fair value based method prospectively for all awards granted, modified, or settled on or after January 1, 2006. The fair value at the grant date of stock options is estimated using the Black-Scholes option pricing-model. Expense associated with share-based payments issued to employees will be included in the Company’s Consolidated Statement of Operations beginning on January 1, 2006. The Company expects that its pre-tax compensation expense for the year ended December 31, 2006 related to the implementation of SFAS 123(R) will be approximately $187.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, short-term trade receivables, long-term notes receivable, notes payable and debt instruments. For short-term instruments, the historical carrying value is a reasonable estimate of fair value. Fair values for long-term financial instruments that are not readily marketable are estimated based upon the discounted future cash flows at prevailing market interest rates. Based on these assumptions, management believes that the fair market values of the Company’s financial instruments are not materially different from their respective carrying values as of December 31, 2005.

Recent Accounting Developments

Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) contains provisions requiring an annual assessment by management, as of the end of the fiscal year, of the effectiveness of internal control over financial reporting. Section 404 also requires attestation and reporting by independent auditors on management’s assessment as well as other control-related matters. On March 2, 2005, the SEC published a final rule extending for one year the compliance dates for non-accelerated filers to report on internal control over financial reporting. For these issuers, Section 404 now will be effective for fiscal years ending on or after July 15, 2006. At this time, the Company continues to qualify for non-accelerated filer status and therefore, will not need to comply with Section 404 until December 31, 2006. The Company’s compliance initiatives are moving forward and management anticipates being compliant with requirements of Section 404 as of December 31, 2006.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), and requires such costs to be recognized as current period charges. In addition, this statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 will be effective for the Company beginning January 1, 2006 and the Company does not believe the adoption will have a material effect on the Company’s results of operations, financial condition or liquidity.

3. Discontinued Operations

During the fourth quarter of 2003, the Company committed to a plan to sell its motor segment, with operations in Monterrey, Mexico and Alton, Illinois. This segment, which manufactures die-cast aluminum rotors for fractional and subfractional horsepower electric motors, failed to achieve a certain level of profitability and, after completing an extensive analysis, the Company determined that a divestiture of this segment would allow the Company to concentrate on its major business segments.

46

In the fourth quarter of 2004, the Company sold certain fixed assets of its Alton, Illinois facility which had previously been adjusted to fair market value as of December 31, 2003, and also sold the land and building of this facility, which had previously been included with continuing operations.

The Company continues to actively negotiate the sale of the Monterrey, Mexico operations and anticipates selling the remaining portion of the business during the first half of 2006.

Operating results from discontinued operations are summarized as follows:

	Year Ended December 31
	2005		2004			2003
Net sales	$	8,892	$	12,978		$	14,463
Income (loss) from operations before income taxes	$	49	$	(530	)	$	(7,673	)
Income tax expense		17		186			2,700
Income (loss) from operations, net of tax	$	32	$	(344	)	$	(4,973	)

The assets and liabilities of this segment, which have been classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, consist of the following at December 31, 2005 and 2004:

	December 31
	2005		2004
Accounts receivable	$	1,926	$	3,069
Inventory		490		673
Other current assets		889		418
Property, plant and equipment		328		289
Other assets				50
Total assets of discontinued operations	$	3,633	$	4,499
Accounts payable	$	3,135	$	3,973
Other accrued expenses		199		324
Total liabilities of discontinued operations	$	3,334	$	4,297

4. Restructuring

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring), we record liabilities for costs associated with exit or disposal activities, including restructuring costs, when the liability is incurred instead of at the date of commitment to an exit or disposal activity.

In the fourth quarter of 2003, the Company committed to a restructuring program to achieve cost savings and expand its friction products capacity by moving operations from its Brook Park, Ohio location to a new production facility in Tulsa, Oklahoma. During 2004, the Company substantially completed the construction of its new and larger, leased facility. During 2005, all manufacturing was transferred to Tulsa and the Brook Park operation was closed. During 2005 and 2004, the Company incurred restructuring charges of $5,464 and $1,117 respectively, relating to employee severance, recruiting, and transferring the production capabilities to Tulsa. In 2005, $501 of “restructuring costs” were included in “Cost of sales” in the Consolidated Statements of Operations.

47

The following table sets forth the cash flow activity related to restructuring costs for the year ended December 31, 2005:

Amounts recognized as restructuring costs (including $501 recorded in “Cost of sales”) through December 31, 2005	$	5,464
Cash payments through December 31, 2005		4,991
Restructuring cost accrual as of December 31, 2005	$	473

In the fourth quarter of 2003, the Company recorded a $1,920 charge related to the curtailment and contractual termination benefit costs of a defined benefit pension plan covering certain union employees of the Brook Park facility. During the third quarter of 2005, the Company recorded employee benefit curtailment income of $424, as a result of employment terminations at Brook Park based on the reduction of actuarial computed liabilities which provided for medical benefits to individuals who met certain age and service requirements at termination of their employment.

During the third quarter of 2005, the Company entered into a contract to sell the Brook Park, Ohio manufacturing facility, with an anticipated transaction closing date in the second quarter of 2006. The assets under contract have been reported as “Assets held for sale” in the Consolidated Balance Sheets as of December 31, 2005, in accordance with SFAS No 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The net proceeds from the sale are expected to approximate the book value of the facility.

5. Intangible Assets

A summary of the Company’s goodwill for both December 31, 2005 and 2004 by reportable operating segment is as follows:

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

The components of finite-lived intangible assets are as follows:

	December 31, 2005						December 31, 2004
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Product certifications	$	20,820	$	12,441	$	8,379	$	20,820	$	11,716	$	9,104
Other intangible assets		2,719		2,663		56		2,719		2,653		66
	$	23,539	$	15,104	$	8,435	$	23,539	$	14,369	$	9,170

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 Company estimates that amortization expense for finite-lived intangible assets for each of the next five years will be approximately $750.

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

48

6. Financing Arrangements

	December 31
	2005		2004
Short-term debt	$	1,386	$	980
Senior Notes		110,000		110,000
Bank Facility		5,041		220
Other		1,158		1,821
		117,585		113,021
Less current portion and short-term debt		1,693		1,619
	$	115,892	$	111,402

On November 1, 2004, the Company completed a public offering of $110,000 aggregate principal amount of 8 3/4% Senior Notes due November 1, 2014 (the Senior Notes). The Senior Notes are senior unsecured obligations, rank senior in right of payment to all of the Company’s existing and future subordinated debt and rank equally in right of payment with all of the Company’s existing and future senior debt, including the Credit and Security Agreement, dated November 1, 2004, with KeyBank National Association, serving as Administrative Agent and Letter of Credit Issuer (the Bank Facility), which is described in more detail below.

The Senior Notes are unconditionally guaranteed on a senior unsecured basis by all of the Company’s existing and future domestic restricted subsidiaries (the Guarantors). The guarantees rank senior in right of payment to all of the existing and future subordinated debt of the Guarantors and equally in right of payment with all existing and future senior debt of the Guarantors, including the Bank Facility. The Senior Notes and the guarantees will be effectively subordinated to all of Hawk’s and the Company’s Guarantors’ secured debt, including the Bank Facility, to the extent of the value of the assets securing that debt.

On or after November 1, 2009, the Company may, at its option, redeem some or all of the Senior Notes at the following redemption prices, plus accrued and unpaid interest and additional interest, if any, to the date of redemption:

For the period below	Percentage
On or after November 1, 2009		104.375	%
On or after November 1, 2010		103.281	%
On or after November 1, 2011		102.188	%
On or after November 1, 2012		101.094	%
On or after November 1, 2013		100.000	%

Prior to November 1, 2008, up to 35% of the aggregate principal amount of the Senior Notes originally issued in the offering may be redeemed at the Company’s option with the net proceeds of certain equity offerings at 108.750% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of redemption, provided at least 65% of the aggregate principal amount of the Senior Notes originally issued in the offering remain outstanding. In addition, upon a change of control as defined in the indenture, dated November 1, 2004, among Hawk, the Guarantors and HSBC Bank USA, National Association, as trustee, each holder of the Senior Notes will have the right to require the Company to repurchase all or any part of such holder’s Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of purchase.

The Senior Notes are governed by the indenture. The indenture also contains certain covenants, subject to a number of important limitations and exceptions that limit the Company’s ability to:

·   incur or guarantee additional debt or issue disqualified capital stock,  

·   pay dividends, redeem subordinated debt or make other restricted payments,  

·   issue preferred stock of our subsidiaries,  

49

·   transfer or sell assets, including capital stock of our subsidiaries,  

·   incur dividend or other payment restrictions affecting certain of our subsidiaries,  

·   make certain investments or acquisitions,  

·   grant liens on our assets,  

·   enter into certain transactions with affiliates, and  

·   merge, consolidate or transfer substantially all of our assets.

The indenture considers non-compliance with the limitations set forth above events of default. The indenture also considers non-payment of interest and principal amounts on the Senior Notes and certain payment defaults with respect to other debt in excess of $5,000 to be events of default. In the event of a default, the principal and interest could be accelerated upon written notice by more than 25% or more of the holders of the Senior Notes.

The indenture permits the Company to incur additional debt without limitation, provided that the Company continues to meet a cash flow ratio greater than 2.0 to 1.0 for the most recently ended four quarters. Hawk may pay cash dividends on its Class A common stock under the indenture provided:

·   there is no default or event of default,  

·   the Company meets the cash flow ratio, and  

·   the amount of the dividend payment plus certain other payments is not in excess of a formula based on the sum of the Company’s consolidated net income after November 1, 2004, the cash proceeds of certain equity offerings by the Company after November 1, 2004 and the return on certain investments made by the Company.  

The Bank Facility has a maximum commitment of $30,000, including a $5,000 letter of credit subfacility. The Bank Facility matures on November 1, 2009, subject to extension at the Company’s request on an annual basis thereafter, with the consent of the lender. The interest rates on the Bank Facility range from 150 to 225 basis points over the London Interbank Offered Rates, or alternatively, 0 basis points over the prime rate, and the commitment fee is 25 basis points on the unused portion of the Bank Facility. At December 31, 2005 there was $5,041 outstanding under the Bank Facility at an average interest rate of 6.77% and availability of $22,519.

The Bank Facility is collateralized by a security interest in the Company’s domestic cash, accounts receivable, inventory and certain intangible assets. The Company also pledged the stock of its guarantors and 65% of the stock of certain of its foreign subsidiaries as collateral. The restrictive terms of the Bank Facility require that the Company maintain a minimum amount of shareholders’ equity as determined by reference to shareholders’ equity at September 30, 2004 plus 50% of net income earned by the Company after such date. The Bank Facility also requires that the Company maintain an earnings before interest, taxes, depreciation and amortization to interest expense ratio of at least 1.0 to 1.0. This requirement only applies if the Company’s availability falls below $10,000. Under the Bank Facility, the Company may pay cash dividends on its Class A common stock in an amount up to $2,000 per year provided:

·   there is no event of default, and  

·   availability is not less than $10,000.  

The Company uses its Bank Facility to finance its ongoing working capital requirements, capital expenditure requirements and for general corporate purposes.

At December 31, 2005 and 2004, the Company had issued stand-by Letters of Credit totaling $2,440 and $3,002, respectively.

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The Company was in compliance with the provisions of all of its debt instruments.

Aggregate principal payments due on long-term debt as of December 31, 2005 are as follows: 2006 — $307; 2007 — $229; 2008 — $174; 2009 — $79; 2010 — $70; and thereafter — $301.

7. Accounts Receivables Factoring Agreement

The Company’s Italian subsidiary, has a factoring agreement to sell without recourse, certain of their European-based accounts receivables to an unrelated third party financial institution. Under the terms of the factoring agreement, the maximum amount of the outstanding advances at any one time is $4,749, which limitation is subject to change based on the level of eligible receivables. During the course of the year in 2005, $9,225 of receivables had been sold under the terms of the factoring agreement, compared to $5,875 during 2004. The sale of these receivables accelerated the collection of the Company’s cash and reduced the credit exposure of the Company. Sales of account receivable are reflected as a reduction of accounts receivable and an expense is reflected in the Consolidated Statement of Operations on such sale, as they meet the applicable criteria of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The amount due from the factoring company in 2005 and 2004, net of advances received, was $756 and $624, respectively, and is shown in accounts receivable in the Consolidated Balance Sheets. The Company pays fees associated with the sale of receivables based on the dollar value of the receivables sold. Administrative costs related to this program for fiscal 2005 and 2004 were $58 and $40, respectively and are included in Selling, technical and administrative expenses in the Consolidated Statement of Operations.

8. Shareholders’ Equity

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 $1,000 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.

9. Employee Stock Option Plan

The Company grants stock options to certain key employees and non-employee directors under various plans, to purchase shares of Class A common stock. During 2005 and 2003, there were no stock options grants issued under the Company’s plans. In 2004, the Company granted stock options to purchase an aggregate of 523,630 shares at exercise prices representing the closing market price on the Company’s common stock at the time of the grant. The options vest ratably over specific defined periods. Canceled options are available for future issuance under the provisions of the stock option plans.

The following table summarizes the stock option activity for the years ended December 31, 2005, 2004 and 2003:

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	2005					2004					2003
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Options outstanding at beginning of year		1,111,300		$	5.09		821,781		$	4.54		1,217,729		$	6.63
Granted							523,630			5.62
Exercised		(149,370	)		4.70		(185,353	)		3.66		(17,094	)		3.40
Forfeited or expired		(19,850	)		5.82		(48,758	)		6.90		(378,854	)		11.41
Options outstanding at end of year		942,080		$	5.13		1,111,300		$	5.09		821,781		$	4.54
Exercisable at the end of the year		729,916		$	4.85		793,910		$	4.72		718,306		$	4.42
Weighted average fair value of options granted during the year									$	3.49
Shares available for future grant		106,103					86,253					578,219

On July 29, 2003 the Company cancelled stock options outstanding which had an original exercise price greater than $6.00 per share, granted to employees who were not members of the Board of Directors and who had tendered such options for cancellation. On January 30, 2004 the Company granted new options to those employees based on the January 29, 2004 closing price of the Company’s common stock as reported by the American Stock Exchange. During the period that the stock options were cancelled and new options were granted, in accordance with the provision of SFAS No. 123, Accounting for Stock-Based Compensation, the Company elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its stock-based compensation plans. Under the provisions of APB 25 and its related interpretations, this transaction is not required to be treated as a modification that would require variable plan accounting because the optionees were at risk for changes in the market price of the underlying stock for at least a six month period, no other arrangement existed to compensate the optionees for increases in the market value of the stock during the period between the cancellation and the grant date of the new options, and the new options were granted with an exercise price that equaled the fair market value of the stock on the date of grant. The options that were cancelled with an exercise price between $6.00 and $16.99 were replaced with new options equal to the number of options tendered for cancellation by the optionee. The options that were cancelled with an exercise price of $17.00 or greater were replaced with new options equal to 90% of the total number of options tendered for cancellation by the optionee. For those options that were cancelled and for which a lesser number of new options were granted, the number of new options was not determined by a formula that was either directly or indirectly linked to changes in the market price of the underlying stock. All of the other terms and conditions of the new options, including vesting schedules, remained the same as the cancelled options.

As of December 31, 2003, 268,850 options had been forfeited and as a result, are included in the caption forfeited or expired and in shares available for future grant in the above table for the period ended December 31, 2003. On January 30, 2004, 254,630 options were granted at an exercise price of $5.05 per share.

Based on the above, the Company believes that fixed accounting continues to apply and consider the cancelled and new options to be sufficiently separated and, therefore, permitted to be accounted for independently under the provisions of APB 25 and its related interpretations.

Exercise prices for options outstanding as of December 31, 2005 ranged from $3.40 to $17.00. A summary of the options by range of exercise prices is as follows:

	Outstanding						Exercisable
					Weighted Average
			Weighted Average		Remaining Contractual				Weighted Average
Range of Exercise Price	Options		Exercise Price		Life (years)		Options		Exercise Price
$ 3.40 to $ 3.50		123,256	$	3.40		5.8		123,256	$	3.40
$ 3.51 to $ 5.00		269,367	$	3.85		5.7		264,763	$	3.84
$ 5.01 to $ 6.00		313,457	$	5.16		7.2		233,897	$	5.20
$ 6.01 to $17.00		236,000	$	7.46		6.9		108,000	$	8.24

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10. 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 the Employee Retirement Income Security Act of 1974.

The components of the Company’s defined benefit pension plans are as follows:

	December 31
	2005			2004
Accumulated benefit obligation	$	29,383		$	24,956
Change in benefit obligation:
Benefit obligation at beginning of year	$	26,115		$	24,159
Service cost		1,061			1,073
Interest cost		1,516			1,490
Actuarial losses		6,064			480
Foreign currency exchange rate impact		45			102
Benefits paid		(1,638	)		(1,189	)
Benefit obligation at end of year	$	33,163		$	26,115
Change in plan assets:
Fair value of plan assets at beginning of year	$	20,948		$	18,415
Actual return on plan assets		1,874			2,022
Foreign currency exchange rate impact		32			95
Company contributions		1,612			1,605
Benefits paid		(1,638	)		(1,189	)
Fair value of plan assets at end of year	$	22,828		$	20,948
Funded status of the plans	$	(10,335	)	$	(5,167	)
Unrecognized net actuarial losses		13,479			7,813
Unrecognized initial net obligation		41			110
Foreign currency exchange rate impact		36			61
Unamortized prior service cost		111			120
Net prepaid benefit cost	$	3,332		$	2,937
Amounts recognized in the balance sheet consist of the following:
Prepaid benefit cost	$	3,968		$	3,857
Accrued benefit liability		(10,522	)		(7,356	)
Intangible asset		159			175
Cumulative other comprehensive loss		9,727			6,261
Net amount recognized	$	3,332		$	2,937

Amounts applicable to the Company’s under-funded pension plans at December 31, 2005 and 2004 are as follows:

	December 31
	2005		2004
Projected benefit obligation	$	33,163	$	26,115
Accumulated benefit obligation	$	29,383	$	24,956
Fair value of plan assets	$	22,828	$	20,948
Amounts recognized as accrued benefit liabilities	$	10,522	$	7,943
Amounts recognized as intangible asset	$	159	$	175

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	Year ended December 31
	2005			2004			2003
Components of net periodic pension cost:
Service cost	$	1,061		$	1,073		$	840
Interest cost		1,516			1,490			1,329
Expected return on plan assets		(1,813	)		(1,610	)		(1,269	)
Amortization of prior service cost		9			74			71
Contractual termination benefit cost								1,836
Pension settlement/curtailment		194						386
Recognized net actuarial loss		266			251			362
	$	1,233		$	1,278		$	3,555

The plans’ assets are primarily invested in equity and fixed income securities. In addition, one of the Company’s defined benefit plans also contains investments in the Company’s stock. As of December 31, 2005, 60,000 shares of the Company’s Class A common stock were held by a defined benefit plan at a cost of $717. The market value of such investment as of December 31, 2005, was $800. The Company does not pay dividends on its Class A common stock.

The weighted-average asset allocation of all defined benefit plans at December 31, 2005 and 2004, by asset category are as follows:

	December 31
	2005			2004
Asset Category
Equity securities		74	%		73	%
Debt securities		20	%		21	%
Hawk Corporation common stock		4	%		3	%
Other		2	%		3	%
Total		100	%		100	%

The objectives of the Company’s investment strategies are as follows: (a) to provide a total return that, over the long term, maximizes investment return on assets, at a level of risk deemed appropriate, (b) to maximize return on assets by investing primarily in equity securities, and (c) to diversify investments within asset classes to reduce the impact of losses in any single investment. Target asset allocations are 75% equity securities and 25% fixed income securities. These target asset allocations have been determined after giving consideration to the expected returns of each asset class, the expected variability or volatility of the asset class returns over time, and the complementary nature or correlation of the asset classes within the portfolio. The Company also employs an active management approach for the portfolio. Each asset class is managed by one or more external money managers with the objective of generating returns, net of management fees that exceed market-based benchmarks.

The following assumptions were used in accounting for the defined benefit plans:

	2005			2004			2003
Weighted average rates used to compute the projected benefit obligation as of December 31:
Discount rate		5.50	%		6.00	%		6.25	%
Rate of compensation increase		3.04	%		3.04	%		3.03	%

Weighted average rates used to determine the net periodic benefit cost for the years ended December 31:
Discount rate	6.00	%	6.25	%	6.75	%
Rate of compensation increase	3.06	%	3.02	%	3.02	%
Expected long-term return on plan assets	8.60	%	8.57	%	8.59	%

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The measurement date used to determine the pension benefit measurements for all plans in all periods presented is December 31. The Company has reviewed historical rates of return specific to its respective plans to determine the expected long-term rate of return on assets. 

The Company previously disclosed in its financial statements for the year ended December 31, 2004 that is expected to contribute $1,842 on a cash basis to its defined benefit pension plans in 2005.  As of December 31, 2005, $1,606 of the contribution has been made.  The Company will contribute an additional $268 to fund its pension plans in 2006 for the 2005 plan year for a total of $1,874 based on the revised contribution expectation provided by its third party actuary. 

     Estimated benefit payments for the next five years and in the aggregate for the five years thereafter are:

Year	Benefit Payments
2006	$	1,361
2007	$	1,457
2008	$	1,447
2009	$	1,502
2010	$	1,560
2011-2015	$	9,303

The Company also sponsors several defined contribution plans which provide voluntary employee contributions and, in certain plans, matching and discretionary employer contributions. Aggregate defined contribution plan expenses were approximately $1,217 in 2005, which included $705 in discretionary employer contributions, $1,497 in 2004, which included $1,029 in discretionary employer contributions and $1,272 in 2003, which included $992 in discretionary employer contributions.

11. Lease Obligations

The Company has capital lease commitments for buildings, machinery and equipment. Assets recorded under capital lease agreements included in property, plant and equipment consist of the following:

	December 31
	2005		2004
Buildings and improvements	$	969	$	1,107
Machinery and equipment		1,012		1,119
Gross assets under capital lease		1,981		2,226
Accumulated amortization		752		521
Net assets under capital lease	$	1,229	$	1,705

Amortization of assets recorded under capital leases is included with depreciation expense. Future minimum annual rentals are: 2006 — $182; 2007 — $123; 2008 — $53; 2009 — $ ; and thereafter — $0. Amount representing interest is $22. Total capital lease obligations are included in other long-term debt.

The Company leases certain office and warehouse facilities and equipment under operating leases. Certain of these operating leases provide the Company with a renewal option after the initial lease term. Rental expense was recognized on a straight-line basis over the lease term in accordance with FASB Technical Bulletin No. 85-3, Accounting for OperatingLeases with Scheduled Rent Increases, was approximately $4,522 in 2005, $2,594 in 2004, and $2,212 in 2003. The increase in rental expense for 2005 was due to the opening of the Tulsa facility. The initial lease term of this facility is 15 years beginning 1/1/2005 with a minimum lease commitment of $20,942. The Company has the option to renew the lease for two additional five year terms. The first 18 months of the lease is a rent holiday.

All leasehold improvements are being amortized over the original lease term. Future non-cancelable minimum lease commitments under these agreements that have an original or existing term in excess of one year as of December 31, 2005 are as follows: 2006 — $2,860; 2007 — $2,859; 2008 — $2,729; 2009 — $2,602; 2010 — $3,912;and thereafter — $16,746.

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12. Income Taxes

The provision (benefit) for income taxes from continuing operations consists of the following:

	Year ended December 31
	2005			2004			2003
Current:
Federal
State and local	$	232		$	744		$	45
Foreign		2,929			3,630			1,885
		3,161			4,374			1,930
Deferred:
Federal		(3,099	)		(1,248	)		(1,059	)
State and local		(503	)		(135	)		(12	)
Foreign		642			(92	)		(4	)
		(2,960	)		(1,475	)		(1,075	)
Total income tax provision	$	201		$	2,899		$	855

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:

	2005		2004
Deferred tax assets:
NOL and AMT carryforward	$	10,607	$	6,735
Accrued vacation		601		627
Employee benefits		2,494		2,459
Other accruals		3,039		3,521
Inventory		2,037		1,320
Total deferred tax assets		18,778		14,662
Deferred tax liabilities:
Tax over book depreciation		11,068		10,909
Tax over book amortization		2,834		1,964
Foreign leased property		339		353
Debt financing costs				28
Other		76		456
Total deferred tax liabilities		14,317		13,710
Net deferred tax assets	$	4,461	$	952

As of December 31, 2005 and 2004 the Company had net U.S. federal operating loss (NOL) carryforwards of $27,527 and $16,449, respectively. The NOL carryforwards expire beginning in 2023. At December 31, 2005 and 2004, the Company had alternative minimum tax (AMT) credit carryforwards of $972, respectively for both years. The AMT carryforwards have no date of expiration.

Although the Company is in a net deferred tax asset position at December 31, 2005, it has been determined that a valuation allowance is not required. SFAS No. 109, Accounting for Income Taxes, (SFAS 109) provides certain guidelines to follow in making the determination of the need for a valuation allowance. The Company must show that taxable income is available for future periods sufficient to realize the benefits of temporary differences and carryforwards to not record an allowance. The Company has identified certain tax-planning strategies which, if implemented, would enable the Company to realize the aforementioned tax benefits. Tax planning strategies are one of the four acceptable sources of taxable income allowable under SFAS 109 and, therefore, the Company has determined that no valuation allowance is required as of December 31, 2005.

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The provision for income taxes from continuing operations differs from the amounts computed by applying the federal statutory rate as follows:

	December 31
	2005			2004		2003
Income tax (benefit) expense at federal statutory rate	$	(413	)	$	1,534	$	142
State and local tax, net of federal tax benefit		(176	)		396		21
Nondeductible intangible amortization		38			53		60
Taxes on foreign income which differs from United States statutory rate		595			505		560
Foreign tax withholding		183			294		87
Adjustment to worldwide tax accrual and other		(26	)		117		(15	)
Provision for income taxes	$	201		$	2,899	$	855

The following table illustrates the domestic and foreign components of the Company’s income (loss) from continuing operations before income taxes:

	Year ended December 31
	2005			2004			2003
(Loss) income from continuing operations before income taxes:
Domestic	$	(9,163	)	$	(2,911	)	$	(2,185	)
Foreign		7,988			7,295			2,591
As reported	$	(1,175	)	$	4,384		$	406

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $17,453 and $13,026 at December 31, 2005 and 2004. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided. The Company cannot determine in any practical manner the amount of income tax liability that would result if such earnings would be repatriated. 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.

The Company has decided not to elect the application of the American Jobs Creation Act of 2004 (the Act) as it relates to the Foreign Earnings Repatriation provision. This provision provides for a one year opportunity in which the Company is allowed to repatriate foreign earnings at a reduced tax rate. In accordance with the provision of the Act, the Company had deferred the repatriation provisions until the year beginning January 1, 2005. Due to the company’s current tax position, it was determined that the repatriation provisions would not be utilized. The Act also established a tax deduction for qualified production activities effective January 1, 2005. The Company intends to evaluate the applicability of the deduction for qualified production activities during the 2006 tax year; however, due to NOL’s available to the Company, it is not anticipated that the deduction will be implemented during 2006.

On June 30, 2005, the Governor of Ohio signed House Bill 66 into law which significantly changed the corporate tax structure in Ohio. The major provisions of the bill include phasing-out the Ohio Franchise Tax and phasing-in a Commercial Activities Tax. The tax changes have been included and did not have a material effect on the Company’s tax provision for the year ended December 31, 2005.

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13. (Loss) Earnings Per Share

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

	Year Ended December 31
	2005			2004			2003
(Loss) income from continuing operations, after income taxes	$	(1,376	)	$	1,485		$	(449	)
Less: Preferred stock dividends		148			150			150
(Loss) income from continuing operations, after income taxes available to common shareholders	$	(1,524	)	$	1,335		$	(599	)
Net (loss) income	$	(1,344	)	$	1,141		$	(5,422	)
Less: Preferred stock dividends		148			150			150
Net (loss) income available to common shareholders	$	(1,492	)	$	991		$	(5,572	)
Weighted average shares outstanding (in thousands):
Basic weighted average shares outstanding		8,869			8,691			8,571
Diluted:
Basic weighted average shares outstanding		8,869			8,691			8,571
Dilutive effect of stock options (1)					281
Diluted weighted average shares outstanding		8,869			8,972			8,571
(Loss) earnings per share:
Basic (loss) earnings from continuing operations, after income taxes	$	(.17	)	$	.15		$	(.07	)
Discontinued operations					(.04	)		(.58	)
Net (loss) earnings per basic share	$	(.17	)	$	.11		$	(.65	)
Diluted (loss) earnings from continuing operations, after income taxes	$	(.17	)	$	.15		$	(.07	)
Discontinued operations					(.04	)		(.58	)
Net (loss) earnings per diluted share	$	(.17	)	$	.11		$	(.65	)

(1) All outstanding stock options at December 31, 2005 and December 31, 2003 are antidilutive.

14. Related Parties

In July 1995, two of the Company’s senior executive officers were issued interest-bearing notes by the Company in the amount of $1,604, enabling them to repay certain indebtedness incurred by them with respect to an acquisition. The notes bore interest at the prime rate. The notes were due and payable on July 1, 2005. In May 1998, $604 of the principal balance of the notes was repaid by the senior executive officers. On January 30, 2004, the compensation committee of the Company’s Board of Directors approved the forgiveness of the shareholder notes of these two senior executive officers by July 1, 2005 if specific operating targets were achieved. As a result of the achievement of those targets, the compensation committee forgave $400 in shareholder notes as of March 31, 2004. In addition, the Board of Directors awarded $332 to the senior executive officers to pay the taxes associated with the forgiveness of this portion of their debt. The remaining $600 of the shareholder notes was forgiven by the compensation committee of the Company’s Board of Directors as of March 31, 2005 based on the achievement of similar specified operating targets. In addition, the Board of Directors awarded $500 to the senior executive officers to pay the taxes associated with the forgiveness of this portion of their debt. As of December 31, 2005, there are no shareholder notes outstanding. The forgiveness of the shareholder notes and the associated taxes were reported as compensation expense and included in Selling, technical and administrative expenses in the Company’s Consolidated Statement of Operations.

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15. Business Segments

The Company operates in three business segments: friction products, precision components and performance racing. 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 industrial, commercial and aerospace applications. The Company, through this segment, is a worldwide supplier of friction components for brakes, clutches and transmissions.

The precision components segment engineers, manufactures and markets specialized powder metal components, used primarily in industrial and consumer 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 structural powder metal parts used in construction, agricultural and truck applications, smaller high-volume parts and metal injected molded parts.

The performance racing segment engineers, manufactures and markets premium branded clutch, transmissions and driveline systems. The Company, through this segment, targets leading teams in the National Association for Stock Car Auto Racing (NASCAR), the American LeMans Racing Series (ALMS), and for the weekend enthusiasts in the Sports Car Club of America (SCCA) and other road racing and oval track competition cars.

Information by segment is as follows:

	Year ended December 31
	2005			2004		2003
Net sales to external customers:
Friction products	$	167,059		$	148,242	$	121,569
Precision components (1)		83,576			78,629		68,123
Performance racing		14,799			14,317		12,859
Consolidated	$	265,434		$	241,188	$	202,551
Depreciation and amortization: (2)
Friction products	$	6,955		$	6,792	$	7,135
Precision components (1)		4,259			3,791		3,511
Performance racing		229			210		227
Consolidated	$	11,443		$	10,793	$	10,873
Gross profit:
Friction products	$	33,661		$	36,483	$	29,510
Precision components (1)		15,760			16,605		14,458
Performance racing		3,000			3,438		3,401
Consolidated	$	52,421		$	56,526	$	47,369
Income (loss) from operations:
Friction products	$	5,652		$	13,051	$	8,284
Precision components (1)		4,131			3,508		2,254
Performance racing		(508	)		711		380
Consolidated	$	9,275		$	17,270	$	10,918
Capital expenditures: (including capital leases):
Friction products	$	7,482		$	9,126	$	5,151
Precision components (1)		6,465			8,983		5,889
Performance racing		285			188		183
Consolidated	$	14,232		$	18,297	$	11,223

59

	December 31
	2005		2004
Total assets:
Friction products	$	121,128	$	116,684
Precision components (1)		89,210		87,094
Performance racing		12,257		12,589
Continuing operations		222,595		216,367
Discontinued operations		3,633		4,499
Consolidated	$	226,228	$	220,866

____________

(1)   A line of business formerly associated with the Company’s motors segment, which was discontinued as of December 31, 2003, was retained by the Company and production was transferred to a facility within the Company’s precision components segment effective July 1, 2004. Net sales from this line of business were $802 through the date of transfer effective July 1, 2004, and $1,235 for the year ended December 31, 2003. All prior periods have been reclassified to reflect this change.

(2)   Depreciation and amortization outlined in this table does not include deferred financing amortization of $435 in 2005, $387 in 2004, and $801 in 2003, which is included in Interest expense on the Statement of Operations.

Geographic information for the years ended December 31, 2005, 2004 and 2003 is as follows:

	2005								2004								2003
	Domestic Operations			Foreign Operations		Total			Domestic Operations			Foreign Operations		Total			Domestic Operations			Foreign Operations			Total
	(In thousands)
Net sales	$	209,578		$	55,856	$	265,434		$	192,836		$	48,352	$	241,188		$	165,451		$	37,100		$	202,551
Income from operations		508			8,767		9,275			10,298			6,972		17,270			7,818			3,100			10,918
Discontinued operations, net of tax					32		32			(662	)		318		(344	)		(620	)		(4,353	)		(4,973	)
Net (loss) income		(6,091	)		4,747		(1,344	)		(2,019	)		3,160		1,141			(1,866	)		(3,556	)		(5,422	)
Total assets of continuing operations	$	183,513		$	39,082	$	222,595		$	176,269		$	36,249	$	212,518		$	159,406		$	29,841		$	189,247

The Company has continuing foreign operations in Canada, Italy, and China.

The following section discloses adjusted income from operations for each business segment. This disclosure differs from income from operations, the most directly comparable measure calculated in accordance with GAAP. A reconciliation of this financial measure to the most comparable GAAP measure is included in the table below.

Reconciliation of Adjusted income from operations to Income from operations determined in accordance with GAAP:

	Years ended
	2005			2004		2003
(Loss) income from operations - Friction products:	$	5,652		$	13,051	$	8,284
Restructuring costs		5,464			1,117
Employee benefit curtailment (income) expense		(424	)				1,920
Loan forgiveness costs		593			389
Adjusted income from operations - Friction products	$	11,285		$	14,557	$	10,204
Income from operations - Precision components:	$	4,131		$	3,508	$	2,254
Loan forgiveness costs		443			300
Adjusted income from operations - Precision components	$	4,574		$	3,808	$	2,254
(Loss) income from operations - Performance racing:	$	(508	)	$	711	$	380
Loan forgiveness costs		64			43
Adjusted (loss) income from operations - Performance racing	$	(444	)	$	754	$	380

60

     We have presented this non-GAAP financial measure because we believe that meaningful analysis of our financial performance is enhanced by an understanding of isolated factors underlying that performance. In addition, our chief operating decision makers use this measure in monitoring and evaluating both our overall performance and the ongoing performance of each of our business segments. This non-GAAP financial measure should not be considered an alternative to measures required by GAAP. Refer to the section “Non-GAAP Financial Measure” in the MD&A section of Form 10-K for more detailed disclosure.

16. Supplemental Guarantor Information

Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, 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 consolidating condensed financial statements present:

·   Consolidating condensed balance sheets as of December 31, 2005 and December 31, 2004, consolidating condensed statements of income for the years ended December 31, 2005, 2004 and 2003 and consolidating condensed statements of cash flows for the years ended December 31, 2005, 2004 and 2003.

·   Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries consisting of the Company's subsidiaries in Canada, Italy, and China with their investments in subsidiaries accounted for using the equity method.

·   Elimination entries necessary to consolidate the financial statements of the Parent and all of its subsidiaries.

     The Company 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.  The Bank Facility contains covenants with respect to the Company and its subsidiaries that, among other things, would prohibit the payment of dividends to the Company by the subsidiaries (including Guarantor Subsidiaries) in the event of a default under the terms of the Bank Facility.  The indenture governing the Senior Notes permits the payment of any dividends to the Company by the subsidiaries (including Guarantor Subsidiaries) provided that no event of default has occurred under the terms of the indenture. 

61

Supplemental Consolidating Condensed

Balance Sheet

	December 31, 2005
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Elimination			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	229		$	45		$	6,837					$	7,111
Accounts receivable, net					25,989			10,236						36,225
Inventories		(716	)		37,119			10,543		$	(567	)		46,379
Deferred income taxes		4,112						318						4,430
Taxes receivable		347												347
Assets held for sale					1,644									1,644
Other current assets		1,258			2,481			2,038			(117	)		5,660
Current assets of discontinued operations					5			3,628						3,633
Total current assets		5,230			67,283			33,600			(684	)		105,429
Investment in subsidiaries		793									(793	)
Inter-company advances, net		(800	)		2,593			(1,793	)
Property, plant and equipment, net					60,856			10,062						70,918
Other assets:
Goodwill and other intangible assets		286			40,644									40,930
Other		916			8,034			897			(896	)		8,951
Total other assets		1,202			48,678			897			(896	)		49,881
Total assets	$	6,425		$	179,410		$	42,766		$	(2,373	)	$	226,228
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable				$	20,620		$	9,824					$	30,444
Accrued compensation	$	286			3,987			1,829						6,102
Accrued interest		4,863						32						4,895
Accrued taxes		603			197			37		$	(173	)		664
Other accrued expenses		1,203			6,164			601						7,968
Short-term debt								1,386						1,386
Current portion of long-term debt					165			142						307
Current liabilities of discontinued operations					67			3,267						3,334
Total current liabilities		6,955			31,200			17,118			(173	)		55,100
Long-term liabilities:
Long-term debt		115,041			689			162						115,892
Deferred income taxes								885						885
Other					10,156			3,479						13,635
Inter-company advances, net		(186,777	)		178,420			8,846			(489	)
Total long-term liabilities		(71,736	)		189,265			13,372			(489	)		130,412
Shareholders’ equity		71,206			(41,055	)		12,276			(1,711	)		40,716
Total liabilities and shareholders’ equity	$	6,425		$	179,410		$	42,766		$	(2,373	)	$	226,228

62

Supplemental Consolidating Condensed

Balance Sheet

	December 31, 2004
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	1,967		$	49		$	4,769					$	6,785
Accounts receivable, net					26,491			12,553						39,044
Inventories		(974	)		31,316			12,081		$	(873	)		41,550
Deferred income taxes		3,698						885						4,583
Taxes receivable		373												373
Other current assets		1,809			1,771			480						4,060
Current assets of discontinued operations					84			4,415						4,499
Total current assets		6,873			59,711			35,183			(873	)		100,894
Investment in subsidiaries		793									(793	)
Inter-company advances, net		162			2,531			(4,970	)		2,277
Property, plant and equipment, net					60,299			9,729						70,028
Other assets:
Goodwill and other intangible assets		72			41,593									41,665
Other		228			8,341			720			(1,010	)		8,279
Total other assets		300			49,934			720			(1,010	)		49,944
Total assets	$	8,128		$	172,475		$	40,662		$	(399	)	$	220,866
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable				$	15,749		$	9,805					$	25,554
Accrued compensation	$	1,395			5,052			1,726						8,173
Accrued interest		1,623						7						1,630
Accrued taxes		778			408			2,077		$	(386	)		2,877
Other accrued expenses		1,840			3,993			(236	)					5,597
Short-term debt								980						980
Current portion of long-term debt					362			277						639
Current liabilities of discontinued operations					257			4,040						4,297
Total current liabilities		5,636			25,821			18,676			(386	)		49,747
Long-term liabilities:
Long-term debt		110,000			887			515						111,402
Deferred income taxes		2,820						810						3,631
Other		313			7,920			2,826						11,059
Inter-company advances, net		(180,565	)		170,490			8,388			1,688
Total long-term liabilities		(67,432	)		179,297			12,539			1,688			126,092
Shareholders’ equity		69,924			(32,643	)		9,447			(1,701	)		45,027
Total liabilities and shareholders’ equity	$	8,128		$	172,475		$	40,662		$	(399	)	$	220,866

63

Supplemental Consolidating Condensed

Statement of Operations

	Year ended December 31, 2005
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	211,487		$	65,242		$	(11,295	)	$	265,434
Cost of sales					173,709			50,599			(11,295	)		213,013
Gross profit					37,778			14,643						52,421
Operating expenses:
Selling, technical and administrative expenses	$	1,005			30,993			5,876						37,874
Restructuring costs					4,962									4,962
Employee benefit curtailment					(424	)								(424	)
Amortization of intangibles					734									734
Total operating expenses		1,005			36,265			5,876						43,146
(Loss) income from operations		(1,005	)		1,513			8,767						9,275
Interest income (expense), net		3,577			(14,017	)		(108	)					(10,548	)
Income from equity investee		(2,394	)		4,744						(2,350	)
Other (expense) income, net		(34	)		678			(546	)					98
Income (loss) from continuing operations before income taxes		144			(7,082	)		8,113			(2,350	)		(1,175	)
Income tax provision (benefit)		1,488			(4,684	)		3,397						201
(Loss) income from continuing operations, after income taxes		(1,344	)		(2,398	)		4,716			(2,350	)		(1,376	)
Discontinued operations, net of tax					4			28						32
Net (loss) income	$	(1,344	)	$	(2,394	)	$	4,744		$	(2,350	)	$	(1,344	)

64

Supplemental Consolidating Condensed

Statement of Operations

	Year ended December 31, 2004
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	195,942		$	56,361		$	(11,115	)	$	241,188
Cost of sales	$	42			151,744			43,991			(11,115	)		184,662
Gross profit		(42	)		44,198			12,370						56,526
Expenses:
Selling, technical and administrative expenses		406			31,589			5,410						37,405
Restructuring costs					1,117									1,117
Amortization of finite-lived intangible assets					734									734
Total operating expenses		406			33,440			5,410						39,256
(Loss) income from operations		(448	)		10,758			6,960						17,270
Interest income (expense), net		3,666			(13,777	)		(100	)					(10,211	)
Exchange offer costs		(1,464	)		(967	)								(2,431	)
Income from equity investee		748			3,160						(3,908	)
Other (expense) income, net		(172	)		702			(774	)					(244	)
Income (loss) from continuing operations before income taxes		2,330			(124	)		6,086			(3,908	)		4,384
Income tax provision (benefit)		1,189			(1,534	)		3,244						2,899
Income before discontinued operations		1,141			1,410			2,842			(3,908	)		1,485
Discontinued operations, net of tax					(662	)		318						(344	)
Net income	$	1,141		$	748		$	3,160		$	(3,908	)	$	1,141

65

Supplemental Consolidating Condensed

Statement of Operations

	Year ended December 31, 2003
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	169,770		$	42,289		$	(9,508	)	$	202,551
Cost of sales					129,655			34,833			(9,306	)		155,182
Gross profit					40,115			7,456			(202	)		47,369
Expenses:
Selling, technical and administrative expenses	$	(229	)		29,604			4,356						33,731
Pension curtailment and contractual termination benefit costs					1,920									1,920
Amortization of finite-lived intangible assets		9			791									800
Total expenses		(220	)		32,315			4,356						36,451
Income from operations		220			7,800			3,100			(202	)		10,918
Interest income (expense), net		3,556			(13,778	)		(473	)					(10,695	)
Loss from equity investee		(9,001	)		(3,556	)					12,557
Other (expense) income, net		(278	)		497			(36	)					183
(Loss) income from continuing operations before income taxes		(5,503	)		(9,037	)		2,591			12,355			406
Income tax (benefit) provision		(201	)		(656	)		1,794			(82	)		855
(Loss) income before discontinued operations		(5,302	)		(8,381	)		797			12,437			(449	)
Discontinued operations, net of tax					(620	)		(4,353	)					(4,973	)
Net loss	$	(5,302	)	$	(9,001	)	$	(3,556	)	$	12,437		$	(5,422	)

66

Supplemental Consolidating Condensed

Cash Flow Statement

	Year ended December 31, 2005
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations	Consolidated
Net cash (used in) provided by operating activities of continuing operations	$	(7,145	)	$	12,163		$	4,961			$	9,979
Net cash (used in) provided by operating activities of discontinued operations								(85	)			(85	)
Cash flows from investing activities:
Purchases of property, plant and equipment					(12,088	)		(2,144	)			(14,232	)
Proceeds from sale or property, plant and equipment					92			12				104
Net cash used in investing activities of continuing operations					(11,996	)		(2,132	)			(14,128	)
Net cash used in investing activities of discontinued operations								(44	)			(44	)
Cash flows from financing activities:
Proceeds on short-term debt								899				899
Payments on short-term debt					(138	)		(802	)			(940	)
Proceeds from long-term debt		84,095			150							84,245
Payments on long-term debt		(79,276	)		(183	)		(151	)			(79,610	)
Net proceeds from exercise of stock options		736										736
Payments of preferred stock dividends		(148	)									(148	)
Net cash provided by (used in) financing activities of continuing operations		5,407			(171	)		(54	)			5,182
Effect of exchange rate changes on cash								(578	)			(578	)
Net cash (used in) provided by continuing operations		(1,738	)		(4	)		2,197				455
Net cash (used in) provided by discontinued operations								(129	)			(129	)
Net (decrease) increase in cash and cash equivalents		(1,738	)		(4	)		2,068				326
Cash and cash equivalents, at beginning of period		1,967			49			4,769				6,785
Cash and cash equivalents, at end of period	$	229		$	45		$	6,837			$	7,111

67

Supplemental Consolidating Condensed

Cash Flow Statement

	Year ended December 31, 2004
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliinations	Consolidated
Net cash (used in) provided by operating activities of continuing operations	$	(15,678	)	$	18,172		$	3,522			$	6,016
Net cash (used in) provided by operating activities of discontinued operations					(1,084	)		1,452				368
Cash flows from investing activities:
Proceeds from sale of assets					881							881
Purchases of property, plant and equipment					(16,691	)		(1,606	)			(18,297	)
Net cash used in investing activities of continuing operations					(15,810	)		(1,606	)			(17,416	)
Net cash used in investing activities of discontinued operations								(173	)			(173	)
Cash flows from financing activities:
Deferred financing		(4,096	)									(4,096	)
Payments on short-term debt								(342	)			(342	)
Payments on long-term debt					(1,358	)		(271	)			(1,629	)
Payment on Bank Facility		(13,355	)									(13,355	)
Proceeds from Bank Facility		13,575										13,575
Proceeds from Senior Notes		110,000										110,000
Payment on Old Senior Notes		(66,267	)									(66,267	)
Proceeds from Old Bank Facility		92,336										92,336
Payments on Old Bank Facility		(116,395	)									(116,395	)
Proceeds from exercise of stock options		679										679
Payments of preferred stock dividends		(150	)									(150	)
Net cash provided by (used in) financing activities of continuing operations		16,327			(1,358	)		(613	)			14,356
Effect of exchange rate changes on cash								269				269
Net cash provided by continuing operations		649			1,004			1,572				3,225
Net cash (used in) provided by discontinued operations					(1,084	)		1,279				195
Net increase (decrease) in cash and cash equivalents		649			(80	)		2,851				3,420
Cash and cash equivalents, at beginning of period		1,318			129			1,918				3,365
Cash and cash equivalents, at end of period	$	1,967		$	49		$	4,769			$	6,785

68

Supplemental Consolidating Condensed

Cash Flow Statement

	Year ended December 31, 2003
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations	Consolidated
Net cash provided by operating activities of continuing operations	$	13,890		$	8,982		$	913			$	23,785
Net cash provided by operating activities of discontinued operations					912			1,387				2,299
Cash flows from investing activities:
Proceeds from sale of assets					568							568
Purchases of property, plant and equipment					(7,818	)		(2,859	)			(10,677	)
Net cash used in investing activities of continuing operations					(7,250	)		(2,859	)			(10,109	)
Net cash used in investing activities of discontinued operations					(116	)		(192	)			(308	)
Cash flows from financing activities:
Proceeds from short-term debt								1,326				1,326
Proceeds from long-term debt					25			478				503
Payments on long-term debt					(2,775	)		(185	)			(2,960	)
Payment on Old Senior Notes		(583	)									(583	)
Proceeds from Old Bank Facility		68,173										68,173
Payments on Old Bank Facility		(80,441	)									(80,441	)
Proceeds from exercise of stock options		59										59
Payments of preferred stock dividends		(150	)									(150	)
Net cash provided by (used in) financing activities of continuing operations		(12,942	)		(2,750	)		1,619				(14,073	)
Effect of exchange rate changes on cash								69				69
Net cash (used in) provided by continuing operations		948			(1,018	)		(258	)			(328	)
Net cash provided by discontinued operations					796			1,195				1,991
Net increase (decrease) in cash and cash equivalents		948			(222	)		937				1,663
Cash and cash equivalents, at beginning of period		370			351			981				1,702
Cash and cash equivalents, at end of period	$	1,318		$	129		$	1,918			$	3,365

69

16. Summary of Quarterly Results of Operations (Unaudited)

	March 31, 2005		June 30, 2005		September 30, 2005			December 31, 2005			March 31, 2004		June 30, 2004		September 30, 2004			December 31, 2004
Net sales	$	72,071	$	70,874	$	62,808		$	59,681		$	60,295	$	63,376	$	59,367		$	58,150
Gross profit		18,686		17,518		9,856			6,361			15,724		15,761		13,639			11,402
Income (loss) from continuing operations		1,871		1,667		(1,707	)		(3,209	)		1,755		1,467		1,051			(2,788	)
Discontinued operations, net of tax		73		38		14			(93	)		5		4		(424	)		71
Net income (loss)	$	1,944	$	1,705	$	(1,693	)	$	(3,300	)	$	1,760	$	1,471	$	627		$	(2,717	)
Basic earnings (loss) per share:
Earnings (loss) per share from continuing operations	$	.21	$	.18	$	(.19	)	$	(.36	)	$	.20	$	.16	$	.12		$	(.32	)
Discontinued operations		.01		.00		.00			(.01	)		.00		.00		(.05	)		.01
Net earnings (loss) per basic share	$	.22	$	.18	$	(.19	)	$	(.37	)	$	.20	$	.16	$	.07		$	(.31	)
Diluted earnings (loss) per share:
Earnings (loss) per share from continuing operations	$	.20	$	.17	$	(.19	)	$	(.36	)	$	.20	$	.16	$	.11		$	(.32	)
Discontinued operations		.01		.00		.00			(.01	)		.00		.00		(.05	)		.01
Net earnings (loss) per diluted share	$	.21	$	.17	$	(.19	)	$	(.37	)	$	.20	$	.16	$	.06		$	(.31	)

Schedule II - Valuation and Qualifying Accounts

			Additions
	Balance at Beginning of Year		Charged to Costs and Expenses		Deductions			Balance at End of Year
Year ended December 31, 2005:
Allowance for uncollectible accounts	$	970	$	482	$	404(1	)	$	1,046
Slow moving and obsolete inventory reserve		2,546		1,320		492(2	)		3,375
Year ended December 31, 2004:
Allowance for uncollectible accounts	$	429	$	787	$	246(1	)	$	970
Slow moving and obsolete inventory reserve		2,462		720		635(2	)		2,546
Year ended December 31, 2003:
Allowance for uncollectible accounts	$	502	$	397	$	471(1	)	$	429
Slow moving and obsolete inventory reserve		2,285		784		607(2	)		2,462

(1)   Uncollectible accounts written off, net of recoveries.

(2)   Inventory items written off against the reserve account

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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Evaluation of Disclosure Controls and Procedures. As of December 31, 2005, 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, our Chief Executive Officer, Chief Financial Officer and Vice President - Finance each 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 SEC under the Securities Exchange Act of 1934. We continue to evaluate the need for improvements in our disclosure controls and procedures, including further formalizing our processes, procedures and policies.

Changes in Internal Control. There have been no changes in our internal controls over financial reporting during the most recent fiscal quarter that are judged to have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On March 22, 2006, Norman C. Harbert, Chairman Emeritus and Founder, advised Hawk that Norman C. Harbert and Northern Trust Securities, Inc. amended and modified the sales plan between the parties, in the form of the agreement filed as exhibit 10.15 to this Form 10-K, designed to comply with Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended. The amended sales plan provides for the sale of a total of 60,000 of Hawk’s common stock to be completed in quarterly installments of specified share amounts provided that Hawk’s common stock on the date of sale is less than the average per share closing price on the ten trading days immediately preceding the date of sale. In the event all of the shares under the sales plan are sold, Mr. Harbert will continue to beneficially own 1,131,475 shares of Hawk’s common stock.

On March 27, 2005, Hawk announced the creation of a new position, Vice President of Manufacturing Innovation. The position will initially be filled, on an acting basis, by Christopher DiSantis who is currently President of our precision components segment. Mr. DiSantis’ focus will be completion of the operational ramp-up of the new manufacturing plant in Tulsa.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE 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 2006 Annual Meeting of Stockholders (the “Proxy Statement”), under the captions “Structure and Practices of the Board of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.” This Proxy Statement will be filed with the SEC prior to April 30, 2006.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees worldwide. The Code of Ethics is available on our website at www.hawkcorp.com.

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. This Proxy Statement will be filed with the SEC prior to April 30, 2006.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information at December 31, 2005

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Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights(a)		Weighted-average exercise price of outstanding options, warrants and rights(b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a) (c)
Equity compensation plans approved by security holders		729,916	$	4.85		106,103
Equity compensation plans not approved by security holders		0				0
Total		729,916	$	4.85		106,103

For additional information regarding our equity compensation plans, see “Note 8 — Employee Stock Option Plan” in the accompanying audited consolidated financial statements of this Form 10-K.

Additional information required by Item 12 is contained under the caption “Principal Stockholders” in the Proxy Statement and is incorporated herein by reference. This Proxy Statement will be filed with the SEC prior to April 30, 2006.

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. This Proxy Statement will be filed with the SEC prior to April 30, 2006.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is contained under the caption “Audit Committee Report — Principal Accountant Fees and Services” in the Proxy Statement and is incorporated herein by reference. This Proxy Statement will be filed with the SEC prior to April 30, 2006.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)Financial Statements and Schedule

The following consolidated financial statements of Hawk Corporation are included in Item 8:

(i)Consolidated Balance Sheets at December 31, 2005 and 2004

(ii)Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003

(iii)Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003

(iv)Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

(v)Notes to Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003

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(vi) Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003

(b)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 National City Bank as successor, 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	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))
4.3	Letter agreement, dated January 5, 1998, amending the Stockholders’ Voting Agreement, effective as of November 27, 1996, by and among the Company, Norman C. Harbert, the Harbert Family Limited Partnership, Ronald E. Weinberg, the Weinberg Family Limited Partnership, Byron S. Krantz and the Krantz Family Limited Partnership (Incorporated by reference to the Company’s Registration Statement on Form S-1 as filed with the Securities and Exchange Commission (Reg. No. 333-40535))
4.4	Indenture, dated as of November 1, 2004, among Hawk Corporation, the Guarantors named therein, and HSBC Bank USA, National Association, as Trustee (Incorporated by reference to the Company’s Form 8-K, dated November 1, 2004, as filed with the Securities and Exchange Commission)
4.5	Registration Rights Agreement, dated as of November 1, 2004, among Hawk Corporation, the Guarantors named therein, and Jefferies & Company, Inc. (Incorporated by reference to the Company’s Form 8-K, dated November 1, 2004, as filed with the Securities and Exchange Commission)
4.6	Form of 8 3/4% Senior Exchange Note due 2014 (Incorporated by reference to the Company’s Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-120991)
10.1	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))
10.2	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))
10.3	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))
10.4	Hawk Corporation 2000 Long Term Incentive Plan (Incorporated by reference to the Company’s Form 10-K for the period ended December 31,2000 as filed with the Securities and Exchange Commission)
10.5	Hawk Corporation Annual Incentive Compensation Plan (Incorporated by reference to the Company’s Form 10-K for the period ended December 31,2000 as filed with the Securities and Exchange Commission)

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10.6	Form of Intellectual Property Security Agreement, dated as of August 10, 2001, by and between the Company and each of the following subsidiaries of the Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and Wellman Friction Products U.K. Corp. (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended June 30, 2001 as filed with the Securities and Exchange Commission)
10.7	Credit and Security Agreement, dated November 1, 2004, among Hawk Corporation, Allegheny Clearfield, Inc., Friction Products Co., Hawk MIM, Inc., Hawk Motors, Inc., Hawk Precision Components, Inc., Helsel, Inc., Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter Master Industries, Inc., Sinterloy Corporation, S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Tex Racing Enterprises, Inc., Wellman Products Group, Inc., and Wellman Products, LLC, as Borrowers, and KeyBank National Association, as Administrative Agent and LC Issuer (Incorporated by reference to the Company’s Form 8-K, dated November 1, 2004, as filed with the Securities and Exchange Commission)
10.8	Form of Pledge and Security Agreement — Borrower in favor of KeyBank National Association (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.9	Form of Collateral Assignment of Security Interest in Trademarks and Licenses, dated as of November 1, 2004, among Hawk Corporation and the other Grantors named therein and KeyBank National Association (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.10	Form of Collateral Assignment of Security Interest in Patents and Patent Applications, dated as of November 1, 2004, among Hawk Corporation and the other Grantors named therein and KeyBank National Association (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.11	Form of Collateral Assignment of Security Interest in Copyrights, dated as of November 1, 2004, among Hawk Corporation and the other Grantors named therein and KeyBank National Association (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.12	Form of Limited License Agreement (Borrower) in favor of KeyBank National Association (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.13	Settlement Agreement, Release and Waiver, dated as of October 27, 2003, by and between the Company and Jeffrey H. Berlin (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission)
10.14	Transition Agreement, Release and Waiver, dated as of January 7, 2004, by and between the Company and Michael J. Corkran (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission)
10.15*	Amended and Restated Common Stock Selling Plan of Norman C. Harbert pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, dated March 22, 2006
10.16	Amended and Restated Employment Agreement, dated as of December 31, 2001, by and among the Company, Friction Products Co. and Ronald E. Weinberg (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2001 as filed with the Securities and Exchange Commission)
10.17	Amendment No. 1 to Amended and Restated Employment Agreement, dated as of March 3, 2004, by and among the Company, Friction Products Co. and Ronald E. Weinberg (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission)
10.18	Amended and Restated Employment Agreement, dated as of December 31, 2001, by and among the Company, Friction Products Co. and Norman C. Harbert (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2001 as filed with the Securities and Exchange Commission)

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10.19	Amended and Restated Wage Continuation Agreement, dated as of December 31, 2001, by and among the Company, Friction Products Co. and Norman C. Harbert (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2001 as filed with the Securities and Exchange Commission)
10.20	Consultant Agreement, dated as of December 31, 2001, by and among the Company, Friction Products Co. and Norman C. Harbert (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2001 as filed with the Securities and Exchange Commission)
10.21	First Amendment to Amended and Restated Employment Agreement, dated as of December 31, 2003, by and among the Company, Friction Products Co. and Norman C. Harbert (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission)
10.22	Agreement of Employment, Confidentiality and Non-Competition, dated January 27, 2000, between Friction Products Co. and Steven J. Campbell Securities (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended March 31, 2003 as filed with the Securities and Exchange Commission)
10.23	First Amendment to Agreement of Employment, Confidentiality and Non-Competition, dated October 5, 2004, between Friction Products Co. and Steven J. Campbell (Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission)
10.24	Depositary Agreement appointing HSBC Bank USA, National Association, as exchange agent (Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (Reg. No. 333-120991)
14	Code of Business Conduct and Ethics (Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission)
21.1*	Subsidiaries of the Registrant
23.1*	Consent of Ernst & Young LLP
31.1*	Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

* Filed or Furnished herewith

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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/ JOSEPH J. LEVANDUSKI

Joseph J. Levanduski

Chief Financial Officer

Date: March 29, 2006

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.

SIGNATURE	TITLE	DATE
/s/ Ronald E. Weinberg	Chairman of the Board, Chief Executive	March 29, 2006
Ronald E. Weinberg	Officer, President and Director
	(principal executive officer)
/s/ Norman C. Harbert	Chairman Emeritus,	March 29, 2006
Norman C. Harbert	Founder and Director
/s/ Joseph J. Levanduski	Chief Financial Officer	March 29, 2006
Joseph J. Levanduski	(principal financial and accounting officer)
/s/ Byron S. Krantz	Secretary and Director	March 29, 2006
Byron S. Krantz
/s/ Paul R. Bishop	Director	March 29, 2006
Paul R. Bishop
/s/ Jack F. Kemp	Director	March 29, 2006
Jack F. Kemp
/s/ Dan T. Moore, III	Director	March 29, 2006
Dan T. Moore, III
/s/ Andrew T. Berlin	Director	March 29, 2006
Andrew T. Berlin

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EX-10.15

EXHIBIT 10.15

Amended and Restated Sales Plan

Amended and Restated Sales Plan, dated March 22, 2006 (this “Sales Plan”), between Norman C. Harbert (“Seller”) and Northern Trust Securities, Inc. (“Northern”).

RECITALS

WHEREAS, on August 10, 2005, Seller established a sales plan (the “2005 Sales Plan”) to sell unregistered shares of Class A common stock, par value $0.01 per share, of Hawk Corporation, a Delaware corporation (the “Issuer”), acquired prior to the initial public offering of the Issuer (the “Stock”);

WHEREAS, Seller desires to amend certain terms of the 2005 Sales Plan as set forth in this Sales Plan;

WHEREAS, Seller desires to sell a total of 60,000 shares of Stock (the “Total Plan Shares”); and

WHEREAS, Seller desires to engage Northern to effect sales of shares of Stock in accordance with this Sales Plan;

NOW, THEREFORE, Seller and Northern hereby agree as follows:

A. IMPLEMENTATION OF THIS SALES PLAN

1.  Subject to Paragraph A.7., Northern shall effect sales (each a “Sale”) as provided herein. Beginning October 7, 2005, and thereafter on the first Friday of each subsequent quarter on which the American Stock Exchange, or any exchange or association on which the shares of the Issuer are then listed (“Amex”), is open and effectuating trades (“Trade Date”), an order for 7,500 shares of Stock (or, if less than 7,500 of the Total Plan Shares remain, such remaining amount) at the market price per share on the Trade Date; provided that in no event shall Northern sell any shares of Stock at a price that is less than the average per share closing price on the ten trading days on which Amex is open and effectuating trades immediately preceding the applicable Friday. If, consistent with ordinary principles of best execution, because of the limit price set forth in the immediately preceding sentence or for any other reason, Northern cannot sell any or all of the 7,500 shares of Stock on the Trade Date, then the amount of such shortfall shall be sold as soon as practicable on the immediately succeeding days in which the Amex is open and trades regular way following the Trade Date (“Business Day”); provided that in no event may the amount of any shortfall be sold any later than the tenth Business Day following the Trade Date. In the event that any shares of Stock are not sold within ten Business Days of the Trade Date, Northern will have no authority to sell any such shortfall on the succeeding Trade Date.

2.  Seller acknowledges and agrees that Northern will handle the above order on a best efforts basis. In the event any limit prices of orders are away from the prevailing market prices at any time, there can be no assurance that such orders will be executed in whole or in part. Seller agrees that all orders may be partially executed and will not be treated as an all or none order.

3.  Seller has deposited 60,000 shares of Stock into its specified Northern brokerage account (the “Account”). Northern shall withdraw Stock from Seller’s Account in order to effect sales of Stock under this Sales Plan. If on any day that sales are to be made under this Sales Plan the number of shares of Stock in Seller’s Account is less than the number of shares to be sold on such day, then Northern shall notify Seller promptly of such deficiency, and Seller agrees to promptly deposit into the Account the number of shares of Stock necessary to eliminate such deficiency.

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4. Subject to Paragraph A.10., Seller agrees not to remove or transfer shares of Stock out of the Account. Upon notification pursuant to Paragraph A.10., Seller shall have the right to remove the portion of the Total Plan Shares subject to such Private Sale or Gift from Seller’s Account.

5. To the extent that any Stock remains in Seller’s Account upon termination of this Sales Plan, Northern agrees to return such Stock promptly to the Issuer’s transfer agent for relegending to the extent that such Stock would then be subject to transfer restrictions in the hands of Seller.

6. Northern will deduct its reasonable and customary commissions from the proceeds of sales of Stock under this Sales Plan, together with any other reasonable expenses incurred by Northern in connection with such sales.

7. Subject to Paragraph E.6., this Sales Plan shall become effective on March 22, 2006, and shall terminate on the earliest of the date on which the Total Plan Shares have been sold, the date this Sales Plan is terminated pursuant to Paragraph E.3., or upon notification of death of Norman C. Harbert.

8. Seller acknowledges and agrees that he does not have authority, influence or control over any sales of Stock effected by Northern pursuant to this Sales Plan, and will not attempt to exercise any authority, influence or control over such sales. Northern agrees not to seek advice from Seller with respect to the manner in which he effects sales under this Sales Plan. Seller understands that Northern shall have no discretion as to the timing of the sales of Stock.

9. Northern will notify Seller and Issuer of all transactions pursuant to customary trade confirmations that are provided in the normal course of business.

10. Seller agrees that he will notify Northern as soon as possible in the event he consummates a private sale of any portion of the Total Plan Shares to the Issuer (a “Private Sale”) or makes a bona fide gift of any portion of the Total Plan Shares (a “Gift”). Seller agrees that in the event that any sale of a portion of the Total Plan Shares by Northern pursuant to this Sales Plan, when combined with a Private Sale or a Gift, results in the sale of Stock in excess of the Total Plan Shares, Seller shall be responsible for delivering additional Stock to Northern to cover the excess number of shares sold.

11. Seller understands that Northern may not be able to effect a sale due to a market disruption or a legal, regulatory or contractual restriction applicable to Northern, an insufficient number of shares of Stock being in the Account or a pending sale under this Sales Plan causing Seller to exceed any applicable volume limitations of Rule 144 or 145 under the Securities Act of 1933 (the “Securities Act”). If any sale cannot be executed as required by Paragraph A.1. due to a market disruption, a legal, regulatory or contractual restriction applicable to Northern or any other such event, Northern shall effect such sale as promptly as practical after the cessation or termination of such market disruption, applicable restriction or other event, or, at the discretion of Northern, this Sales Plan may be terminated.

12. It is the intent of the parties that this Sales Plan comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Securities Exchange Act of 1934 (the “Exchange Act”) and this Sales Plan shall be interpreted to comply with the requirements of Rule 10b5-1(c).

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B. RULES 144 AND 145

The following three paragraphs shall only apply to the extent Seller is subject to Rules 144 and 145.

1. Northern agrees to conduct all sales in accordance with the manner of sale requirement of Rule 144 or 145 under the Securities Act, and in no event shall Northern effect any such sale if such sale would exceed the then applicable volume limitation under Rule 144, assuming Northern’s sales under this Sales Plan and those notified to Northern pursuant to Paragraph B.3. are the only sales subject to that limitation. Seller will be responsible for completing and filing all required Form 144s prior to the sale of any Stock covered under Rule 144. Seller agrees to promptly provide Northern with a copy of any Form 144 filing made by Seller. In the event Seller requests, and Northern agrees, in writing, to make certain Form 144 filings, Seller hereby appoints Northern as agent and attorney-in-fact to execute, file and submit, on behalf of Seller, any such required Form 144s.

2. Each such Form 144 shall state in the “Remarks” section that the sales thereunder are being made pursuant to a previously adopted plan intended to comply with Rule 10b5-1(c), shall include the date Seller adopted this Sales Plan and shall indicate that the representation regarding Seller’s knowledge of material information speaks as of the adoption date of this Sales Plan.

3. Seller agrees not to take any action that would cause the sales not to comply with Rule 144 or 145, and Seller agrees not to cause any person or entity with which Seller would be required to aggregate sales of Stock pursuant to paragraph (a)(2) or (e) of Rule 144 to take any action that would cause the sales not to comply with Rules 144 or 145. Seller will provide notice of any such transactions during the three months preceding the date hereof and may not enter into any other selling program or transaction without the prior consent of Northern.

C.REPRESENTATIONS AND AGREEMENTS OF SELLER

1. Seller represents and warrants that as of the time of execution of this Sales Plan, Seller: (a) is not aware of material, nonpublic information with respect to the Issuer or any securities of the Issuer (including the Stock) and, (b) is entering into this Sales Plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 under the Exchange Act or other applicable securities laws.

2. At the time of Seller’s execution of this Sales Plan, Seller has not entered into or altered a corresponding or hedging transaction with respect to the Stock. Seller agrees not to enter into any such transaction while this Sales Plan remains in effect.

3. Seller agrees to make all filings, if any, required under, and monitor his compliance with, Sections 13(d), 13(g) and 16 of the Exchange Act.

4. Except as provided in Paragraph B.1., Seller acknowledges and agrees that Northern has no duty to determine whether Seller has violated Rules 144 or 145 under the Securities Act, or Sections 13(d), 13(g) or 16 of the Exchange Act or the rules adopted by the SEC thereunder. Seller understands that this Plan in no way alters his obligations and responsibilities under Section 16, including those prohibitions against short swing profits.

5. Seller understands that there may be specific state law restrictions or limitations applicable to this Sales Plan. Seller acknowledges and agrees that Northern has not provided Seller with any tax, accounting or legal advice. Seller understands that he should seek the advice of counsel regarding this Sales Plan and the various securities and tax law issues related thereto.

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6. Seller agrees to notify Northern immediately in the event of trading restrictions being imposed as the result of any lock up event restricting sales by affiliates, such as a stock offering, tender offer or acquisition transaction or any similar event.

7. Seller represents and warrants that he is able to sell shares of Stock, as contemplated by this Sales Plan, in accordance with the Issuer’s statement regarding insider trading and confidentiality, as supplemented and amended from time to time and Seller has obtained the acknowledgement of the Issuer to enter into this Sales Plan. Seller further represents and warrants that the Stock is not subject to any liens, security interests or other impediments to transfer (except for limitations imposed by Rules 144 or 145, if applicable).

D. INDEMNIFICATION AND LIMITATION ON LIABILITY

1. Seller agrees to indemnify and hold harmless Northern and its directors, officers, employees and affiliates from and against all claims, losses, damages and liabilities (including without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) arising out of or attributable to Northern’s actions taken or not taken in compliance with this Sales Plan or arising out of or attributable to any breach by Seller of this Sales Plan (including Seller’s representations and warranties hereunder) or any violation by Seller of applicable laws or regulations. Seller will not be liable under the foregoing sentence to the extent that any claim, loss, damage or liability is found in a final judgement by a court to have resulted from the bad faith, gross negligence or willful misconduct of Northern or its directors, officers, employees or affiliates. This indemnification shall survive termination of this Sales Plan.

2. Notwithstanding any other provision hereof, Northern shall not be liable to Seller for: (a) special, indirect, punitive, exemplary or consequential damages, or incidental losses or damages of any kind, even if advised of the possibility of such losses or damages or if such losses or damages could have been reasonably foreseen; or (b) any failure to perform or to cease performance or any delay in performance that results from a cause or circumstance that is beyond its reasonable control, including but not limited to failure of electronic or mechanical equipment, strikes, failure of common carrier or utility systems, severe weather, market disruptions or other causes commonly known as “acts of God”.

E.  GENERAL

1. This Sales Plan shall be governed by and construed in accordance with the laws of the State of Delaware without reference to choice of law principles and may be modified or amended only by a writing signed by the parties hereto and acknowledged by the Issuer.

2. This Sales Plan shall be subject to all terms and conditions governing Seller’s Account, including the Northern Account Agreement.

3. Notwithstanding anything to the contrary herein, Seller and/or Issuer may notify Northern to terminate this Sales Plan at any time. Seller may also notify Northern to modify sales under this Sales Plan; provided, however, that (except as set forth in Paragraph A.7) such modification shall not be effective until 30 days after the notification thereof and the acknowledgement of Issuer. Any such modification or termination shall be made in good faith and not as a part of a plan or scheme to evade the prohibitions of Rule l0b5-1 or other applicable securities laws. Seller agrees that he will not modify this Sales Plan at any time that he is aware of any material non-public information about the Issuer and/or the Stock.

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4. All notices to Northern under this Sales Plan shall be given to Northern’s office by facsimile at (312) 444-4410 or by certified mail at Northern Trust Securities, Inc., 50 S. LaSalle Street, B-12, Chicago, Illinois 60603. Attention: Debra Mairs. Upon termination or suspension of this Sales Plan, Northern will send notice to Seller and Issuer to the address provided below.

5. Seller’s rights and obligations under this Sales Plan may not be assigned or delegated without the written permission of Northern.

6. This Sales Plan shall not be effective until executed by Seller and Northern, and acknowledged by Issuer. This Sales Plan may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto were upon the same instrument.

Witness the following signatures for this Sales Plan, dated March 22, 2006, between Norman C. Harbert and Northern Trust Securities, Inc.:

/s/ Norman Harbert	/s/ Sheila Dorman
March 22, 2006	Northern Trust Securities, Inc. Senior Vice President, Stock Services March 22, 2006

Solely for purposes of acknowledging notification of the foregoing Sales Plan and not as a party thereto, except to the extent of its rights thereunder, Hawk Corporation, through its representative, has duly signed below:

	Hawk Corporation
Date: March 22, 2006	By:	/s/ Thomas A. Gilbride
		Vice President - Finance

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SCHEDULE A

Communications required by the Plan shall be made to the following persons in accordance with Section E. 4. of such Plan:

To Client: Name: Norman C. Harbert Address: 9156 Andora Hills Road Scottsdale, Arizona 85262 Telephone: 480-595-0750	Copies to: Name: Diane Monteleone Address: Northern Trust 2398 E. Camelback Road Phoenix, Arizona 85016 Telephone: 602-468-2512 Fax: 602-468-2553 E-Mail: dm3@ntrs.com
To Issuer: Name: Thomas A. Gilbride VP - Finance Address: Hawk Corporation 200 Public Square, Suite 1500 Cleveland, OH 44114 Telephone: 216-861-3553 Fax: 216-861-4546 E-Mail: tomgilbride@hawkcorp.com	Name: Michele Hoza Address: Kohrman Jackson & Krantz P.L.L. 1375 East 9th Street, 20th Floor Cleveland, OH 44114 Telephone: 216-696-8700 Fax: 216-621-6536 E-Mail: mlh@kjk.com
To NTSI: Primary Contact: Debra Mairs Alternate Contact: Mike Rodell Address: Northern Trust Securities, Inc. 50 S. LaSalle Street, Chicago, IL 60673 Telephone: 312/444-5140 Fax: 312/444-5478 E-Mail: dm114@ntrs.com

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EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

		JURISDICTION OF	PERCENT OF
PARENT	SUBSIDIARIES	ORGANIZATION	OWNERSHIP
Hawk Corporation	Hawk Precision Components Group, Inc. Quarter Master Industries, Inc. (1) Tex Racing Enterprises, Inc. (1) Wellman Products Group, Inc.	Ohio Delaware Delaware Ohio	100% 100% 100% 100%
Hawk Precision Components Group, Inc.	Allegheny Clearfield, Inc. (2) Hawk MIM, Inc. (2) Helsel, Inc. (2) Sinterloy Corporation (2)	Pennsylvania Ohio Delaware Delaware	100% 100% 100% 100%
Hawk Mauritius, Ltd.	Hawk Composites (Suzhou) Company Limited (3) (4) Hawk International Trading (Shanghai) Company, Ltd.	China China	100% 100%
Hawk MIM, Inc.	Net Shape Technologies LLC (2)	Delaware	100%
Helsel, Inc.	Hawk Motors, Inc. (5) Hawk Motors de Mexico, S. de R.L. de C.V. (5) Hawk Mauritius, LTD.	Delaware Mexico Mauritius	100% 95% 100%
Hawk Motors, Inc. (5)	Hawk Motors de Mexico, S. de R.L. de C.V. (5) Hawk Motors Monterrey, S.A. de C.V. (5)	Mexico Mexico	5% 5%
Hawk Motors de Mexico, S. de R. L. de C.V. (5)	Hawk Motors Monterrey, S.A. de C.V. (5)	Mexico	95%
S. K. Wellman Holdings, Inc.	S. K. Wellman Corp. (4) S. K. Wellman S.p.A.(4) WFP Argentina S.R.L. (4)	Delaware Italy Argentina	100% 95% 95%
S. K. Wellman Corp.	The S. K. Wellman Company of Canada Limited (4) S. K. Wellman S.p.A. (4) WFP Argentina S.R.L. (4)	Canada Italy Argentina	100% 5% 5%
Wellman Products Group, Inc.	Friction Products Co. (4) Logan Metal Stampings, Inc. (4) S.K. Wellman Holdings, Inc. (4) Wellman Products LLC (4)	Ohio Ohio Delaware Ohio	100% 100% 100% 100%

(1)	These subsidiaries also conduct business under the trade name “Hawk Performance.”
(2)	These subsidiaries also conduct business under the trade name “Hawk Precision Components Group.”
(3)	This subsidiary also conducts business under the trade name “Hawk Composites.”
(4)	These subsidiaries also conduct business under the trade name “The Wellman Products Group.”
(5)	This subsidiary is part of our motor segment which is being accounted for as a discontinued operation.

83

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

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, in the Registration Statement (Form S-8 No. 333-68583) pertaining to the Friction Products Co. Profit Sharing Plan; S.K. Wellman Retirement Savings and Profit Sharing Plan; Helsel, Inc. Employee’s Retirement Plan; Helsel, Inc. Employee’s Savings and Investment Plan; Sinterloy Corporation 401(k) Plan; Hawk Motors, Inc. Employees’ 401(k) Plan; Hawk Corporation 401(k) Savings and Retirement Plan; and Quarter Master Industries, Inc. Profit Sharing Plan and Trust and in the Registration Statement (Form S-8 No. 333-47220) pertaining to the Hawk Corporation 2000 Long Term Incentive Plan of our report dated March 17, 2006, with respect to the consolidated financial statements and schedule of Hawk Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ ERNST & YOUNG LLP

Cleveland, Ohio

March 27, 2006

84

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER)

I, Ronald E. Weinberg, Chairman of the Board, Chief Executive Officer and President of Hawk Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Hawk Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 29, 2006

/s/ RONALD E. WEINBERG

Ronald E. Weinberg

Chairman of the Board,

Chief Executive Officer and President

85

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)

I, Joseph J. Levanduski, Chief Financial Officer of Hawk Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Hawk Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 29, 2006

/s/ JOSEPH J. LEVANDUSKI

Joseph J. Levanduski

Chief Financial Officer

86

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Hawk Corporation (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald E. Weinberg, Chairman of the Board, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ RONALD E. WEINBERG

Ronald E. Weinberg

Chairman of the Board, Chief Executive Officer and President

March 29, 2006

This certification is made solely for the purpose of 18 U.S.C. § 1350, subject to the knowledge standard contained in that statute, and not for any other purpose.

87

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Hawk Corporation (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph J. Levanduski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ JOSEPH J. LEVANDUSKI

Joseph J. Levanduski

Chief Financial Officer

March 29, 2006

This certification is made solely for the purpose of 18 U.S.C. § 1350, subject to the knowledge standard contained in that statute, and not for any other purpose.

88