K&F INDUSTRIES INC - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

---------------------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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

COMMISSION FILE NUMBER 33-29035

---------------------

K & F INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 34-1614845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

600 THIRD AVENUE, NEW YORK, NY 10016
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 297-0900

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 126.2). Yes [ ] No [X]

There is no trading market for the registrant's common stock and none of
the registrant's common stock is held by non-affiliates of the registrant. As of
March 1, 2003, there were 740,398 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

K & F INDUSTRIES, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, including, without limitation, the statements
under, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business." The words "believes," "anticipates," "plans,"
"expects," "intends," "estimates" and similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance and achievements, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.

All forward-looking statements included in this Annual Report on Form 10-K
are based on information available to us on the date of this Annual Report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this Annual Report.

ii

PART I

ITEM I. BUSINESS

We were incorporated in Delaware on March 13, 1989. We sell our products to
a wide range of major airframe manufacturers, commercial airlines and
replacement part distributors and to the United States and certain foreign
governments. We are, through our wholly-owned subsidiary, Aircraft Braking
Systems Corporation, or Aircraft Braking Systems, one of the world's leading
manufacturers of aircraft wheels, brakes and brake control systems for
commercial transport, military and general aviation aircraft. During the year
ended December 31, 2002, approximately 86% of our total revenues were derived
from sales made by Aircraft Braking Systems. In addition, we believe we are,
through our wholly-owned subsidiary, Engineered Fabrics Corporation, or
Engineered Fabrics, the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 80% of the worldwide general aviation and commercial
transport markets and over 50% of the domestic military market for those
products. Engineered Fabrics also manufactures and sells iceguards and specialty
coated fabrics with storage, shipping, environmental and rescue applications for
military and commercial uses. During the year ended December 31, 2002,
approximately 14% of our total revenues were derived from sales made by
Engineered Fabrics.

Aircraft Braking Systems has been a leader in the design and development of
aircraft wheels, brakes and brake control systems, investing significant
resources to refine existing braking systems, develop new technologies and
design braking systems for new airframes. We have carefully directed our efforts
toward expanding Aircraft Braking Systems' presence in each of the commercial
transport, military and general aviation segments of the aircraft industry.

THE AIRCRAFT WHEEL AND BRAKE INDUSTRY

Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals (which for medium- and short-range commercial aircraft
generally averages once or twice a year), sales of replacement parts are
expected to provide a long and steady source of revenues for the manufacturer of
the braking system.

Due to the cost and time commitment associated with the aircraft
certification process, competition among aircraft wheel and brake suppliers most
often occurs at the time the airframe manufacturer makes its initial
installation decision. Generally, competing suppliers submit proposals in
response to requests for bids from manufacturers, although in recent years,
Aircraft Braking Systems has occasionally teamed with landing gear manufacturers
to respond to requests for proposals for a complete or "dressed" landing gear
system. Selections are made by the manufacturer on the basis of technological
superiority, conformity to design criteria established by the manufacturer and
pricing considerations. Typically, general aviation aircraft manufacturers will
select one supplier of wheels and brakes for a particular aircraft. In the
commercial transport market, however, there will often be "dual sourcing" of
wheels and brakes. In that case, an airframe manufacturer may approve and
receive FAA certification to configure a particular airframe with equipment
provided by two or more wheel and brake manufacturers. Generally, where more
than one supplier has been certified, the aircraft customer, such as a major
airline, will designate the original equipment to be installed on the customer's
aircraft. Competition among certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to

1

load the aircraft with passengers, freight or fuel, and the technical operating
performance characteristics of the wheel and brake systems. Once selected,
airlines infrequently replace entire wheel and brake systems because of the
expense.

In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
assemblies below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through the
sale of replacement parts. Recovery of pricing concessions and design costs for
each airframe's wheels and brakes is contingent on a number of factors but
occurs prior to the end of the useful life of the particular aircraft. Price
concessions on original wheel and brake equipment are not customary in the
military market. Although manufacturers of military aircraft generally select
only one supplier of wheels and brakes for each model, the government has
approved at times the purchase of specific component replacement parts from
suppliers other than the original supplier of the wheel and brake system.

The following table illustrates the lifecycle of a typical commercial
aircraft program.

BUSINESS STRATEGY

COMMERCIAL TRANSPORT. Aircraft Braking Systems has directed its efforts
toward expanding its presence on high-cycle, medium- and short-range commercial
aircraft, i.e., regional jets. These aircraft typically make more frequent
landings than long-range commercial aircraft and require more frequent
replacement of wheels and brakes. As a result, we believe that Aircraft Braking
Systems has become the largest supplier of wheels and brakes for regional jets,
adding approximately 1,900 medium- and short-range commercial aircraft to the
portfolio of aircraft using its products. We believe that this strategy has been
successful, because more and more passengers are demanding non-stop service to
the destination of their choice, with more frequent departure times. This
increase in point-to-point service has resulted in fewer connecting flights but
more frequent service from smaller, local airports. Following the events of
September 11, 2001, major airlines became increasingly dependent on lower-cost
regional aircraft, further accelerating point-to-point geographical coverage,
even as the major airlines reduced capacity overall by grounding some planes and
eliminating some flights.

MILITARY. We will continue to try to increase our leadership in the
military sector. The 2003 U.S. defense budget for aircraft procurement is $24.2
billion. This reflects an approximate 19.5% increase over 2002 levels. This
renewed emphasis on defense spending is expected to benefit the fleet of more
than 12,000 military aircraft already in Aircraft Braking Systems' customer
portfolio through replenishment,

2

upgrades and modernization activities and may lead to additional program
opportunities. In addition, Engineered Fabrics is expected to benefit from this
renewed emphasis as more than 70% of its revenues for the year ended December
31, 2002 were attributable to U.S. military sales.

GENERAL AVIATION. We will continue to focus our efforts on high-end
business and executive jet platforms within the general aviation sector. We
expect further utilization of aircraft within this sector through the increased
use of "fractional" ownership programs, which allow multiple parties to share in
the ownership of an aircraft through such forms as memberships and limited
partnerships. Business jet utilization should also benefit from the perception
of greater safety, as well as the convenience of easier security checks. We
believe that Aircraft Braking Systems already provides braking equipment for
more than 50% of the business jets in the current general aviation fleet.

PRODUCTS

AIRCRAFT BRAKING SYSTEMS. Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, brakes and brake control systems for commercial
transport, military and general aviation aircraft. The braking systems produced
by Aircraft Braking Systems are either carbon-based or steel-based. While steel-
based systems typically are sold for less than carbon-based systems, these
systems generally require more frequent replacement because their steel brake
pads tend to wear more quickly. More than 75% of Aircraft Braking Systems'
revenues are derived from the sale of replacement parts.

As of December 31, 2002, Aircraft Braking Systems' products had been
installed on approximately 28,000 commercial transport, military and general
aviation aircraft. Current fleets of commercial transport aircraft include the
DC-9, DC-10, Fokker FO-100/70, Fokker F-27/28, Fokker F-50/60, Fairchild Dornier
DO-228, Bombardier CRJ-100/200, CRJ-700, Saab 340 and Saab 2000, for all of
which Aircraft Braking Systems is the sole certified supplier. In addition,
Aircraft Braking Systems is a supplier of spare parts for the dual-sourced MD-80
program.

Aircraft Braking Systems' wheels and brakes have been selected for use on a
number of high-cycle airframe designs including the Airbus A-320, A-321 and the
MD-90. Aircraft Braking Systems is also the sole certified supplier for the
Bombardier CRJ-100/200, CRJ-440, CRJ-700 and CRJ-900 regional jets. Since its
introduction in late 1992, Bombardier has received firm orders for approximately
1,215 Canadair Regional Jets with approximately 775 aircraft currently in
service. In addition, Aircraft Braking Systems is the sole certified supplier of
wheels and carbon brakes for the Embraer ERJ-170, ERJ-175, ERJ-190-100,
ERJ-190-200 and ERJ-195, a family of regional jets introduced in 2001. Since
2000, we have been the sole source supplier for the Fairchild Dornier DO-328
Turboprop.

Aircraft Braking Systems is a supplier of wheels and carbon brakes on the
Airbus A-321, the 186-seat "stretch" version of the popular A-320 standard body
twin-jet. Airbus has approximately 415 orders booked for A-321 aircraft. Of the
256 aircraft delivered to date, Aircraft Braking Systems has provided wheels and
brakes for 111 of these aircraft.

Some of the U.S. military platforms using wheels and brakes supplied by
Aircraft Braking Systems are the F-14 and F-16 fighters, the B-1B bomber and the
C-130 transport. In 2002, we were selected to supply the wheels, brakes and
brake control systems on the Korean Aerospace T-50 Trainer. In 2001, we were
selected to supply the wheels and brakes for the new Dassault Falcon 7X business
jet and the Raytheon Hawker 450. Other general aviation aircraft supplied by us
include the Dassault Falcon 900EX, the Gulfstream G100, G200 and GIV-X aircraft
and the Learjet 31A and Learjet 60.

Aircraft Braking Systems' brake control systems, which are integrated into
the total braking system, are designed to minimize the distance required to stop
an aircraft by controlling applied brake pressure to maximize the braking force
while also preventing the wheels from locking and skidding. Of the three
principal competitors in the wheel and brake industry, Aircraft Braking Systems,
Honeywell's Aircraft Landing Systems Division and Goodrich Corporation, Aircraft
Braking Systems is the only significant manufacturer of brake control systems.
Because of the sensitivity of brake control systems to variations in brake
performance, our management believes that our braking system integration
capability gives Aircraft Braking Systems a

3

competitive advantage over our two largest competitors. Other products
manufactured by Aircraft Braking Systems include helicopter rotor brakes and
brake temperature monitoring equipment for various types of aircraft.

A large part of Aircraft Braking Systems' existing programs are in the
mature stage. This is favorable to us because our investments to establish these
programs are completed, resulting in cash inflows from the sale of replacement
parts. Additionally, programs in the growth stage should provide stability and
substantial cash flow in the future, offsetting the loss of revenues from
programs in the declining stage.

ENGINEERED FABRICS. We believe Engineered Fabrics is the leading worldwide
manufacturer of flexible bladder type fuel tanks for aircraft, serving
approximately 80% of the worldwide commercial transport and general aviation
markets and over 50% of the domestic military market for those products.
Engineered Fabrics' programs include fixed-wing aircraft fuel tank programs for
the U.S. Navy's F-18 C/D and E/F aircraft and F-14, F-15, F-16, C-130, KC-10 and
KC-135 aircraft. Military helicopter fuel tank programs include the UH-60,
SH-60, CH/MH-53 and RAH-66 platforms with Sikorsky, the CH-47 with Boeing and
the V-22 with Bell/Boeing. Commercial helicopter applications include the MD-500
and MD-600 and the Bell 214-ST. Many of these platforms also utilize Engineered
Fabrics' iceguards for deicing and anti-icing of the rotor blades and inlets.

Bladder fuel tanks, manufactured by combining multiple layers of coated
fabrics and adhesives, are sold for use in commercial transport, military and
general aviation aircraft. During the year ended December 31, 2002, sales of
fuel tanks accounted for approximately 80% of Engineered Fabrics' total
revenues. For military helicopter applications, Engineered Fabrics' fuel tanks
feature encapsulated layers of rubber which expand in contact with fuel, thereby
sealing off holes or gashes caused by bullets or other projectiles penetrating
the walls of the fuel tank. Engineered Fabrics manufactures crash-resistant fuel
tanks for helicopters and military aircraft that significantly reduce the
potential for fires, leaks and spilled fuel following a crash. Engineered
Fabrics is the only known domestic supplier of polyurethane fuel tanks for
aircraft, which are substantially lighter and more flexible than their metal or
nitrile counterparts, and are therefore cost-advantageous.

Iceguards manufactured by Engineered Fabrics are heating systems made from
layered composite materials that are applied on engine inlets, propellers, rotor
blades and tail assemblies. Encapsulated in the material are heating elements
which are connected to the electrical system of the aircraft and, when activated
by the pilot, the system provides protection.

Engineered Fabrics also produces a variety of products utilizing coated
fabrics such as oil containment booms, towable storage bladders, heavy lift bags
and pillow tanks. Oil containment booms are air-inflated cylinders that are used
to confine oil spilled on the high seas and along coastal waterways. Towable
storage bladders are used for storage and transportation of the recovered oil
after removal from the water. Heavy lift bags, often used in emergency
situations, are inserted into tight spaces and inflated to lift heavy loads for
short distances. Pillow tanks are collapsible rubberized containers used as an
alternative to steel drums and stationary storage tanks for the storage of
liquids.

The following table shows the distribution of sales of aircraft wheels and
brakes, brake control systems and fuel tanks as a percentage of our total sales:

4

SALES AND CUSTOMERS

We sell our products to more than 175 airlines, airframe manufacturers,
governments and distributors across the commercial transport, military and
general aviation sectors. Sales to the U.S. government represented approximately
26%, 21% and 17% of total sales for the years ended December 31, 2002, 2001 and
2000, respectively. No other customer accounted for more than 10% of total
sales.

The following table shows the distribution of our total revenues by
respective market, as a percentage of total sales:

COMMERCIAL TRANSPORT. Customers for our products in the commercial
transport market include a wide variety of airframe manufacturers, commercial
airlines and replacement part distributors. Our products are used on a broad
range of large commercial transports (100 seats or more), regional jets and
other commuter aircraft (between 20 and 120 seats). Customers include Delta Air
Lines, Alitalia, Japan Air Systems, Lufthansa, Swiss Air, Northwest Airlines,
Continental Airlines, American Airlines, Saudi Arabian Airlines, AeroMexico, TAM
Airlines, China Eastern Airlines, Honeywell and Goodrich Corporation.
Additionally, we provide spare replacement parts to aircraft manufactured by the
four largest commercial aircraft manufacturers: Boeing, Airbus, Bombardier and
Embraer.

MILITARY. We believe we are the largest supplier of wheels, brakes and
fuel tanks to the U.S. military. We also supply the militaries of many foreign
governments. Our products are used on a variety of fighters, training aircraft,
transports, cargo planes, bombers and helicopters. Some of the U.S. military
aircraft using these products are the F-4, F-14, F-15, F-16, F-18, F-117A, A-10,
B-1B, B2, C-130, C-130J and C-141. Some of the foreign military aircraft using
these products include the F-2 (formerly the FS-X) in Japan, AIDC Indigenous
Defensive Fighter, or IDF, in Taiwan, Saab JAS-39 in Sweden, Alenia C-27 in
Italy and the Casa C-212 in Spain. Substantially all of our military products
are sold to the U.S. Department of Defense, foreign governments or to airframe
manufacturers including Lockheed Martin, Boeing, Sikorsky, Bell, Saab and AIDC
in Taiwan. Some of the brake control systems we manufacture for the military are
used on the F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39
and IDF aircraft.

GENERAL AVIATION. We believe we are the industry's largest supplier of
wheels, brakes and fuel tanks for general aviation aircraft (19 seats or less).
This market includes personal, business and executive aircraft. Customers
include airframe manufacturers, such as Gulfstream, Raytheon Aircraft, Learjet,
Canadair, Cessna, Dassault and Israeli Aircraft Industries, and distributors,
such as Aviall. We supply brake control systems to Gulfstream, Dassault and
other aircraft manufacturers. General aviation aircraft using our wheels and
brakes exclusively include the Beech Starship and Beech 400 A/T series of
aircraft, the Lear series 20, 30, 31A, 55 and 60, the Gulfstream G-I, G-II,
G-III and G-IV, the IAI 1123, 1124, 1125 Astra, Astra SPX and Galaxy, the
Challenger CL600, CL601 and CL604, the Raytheon Hawker Horizon and the Falcon
10, 100, 20, 200, 50 and 50EX.

5

FOREIGN CUSTOMERS

We supply products to a number of foreign aircraft manufacturers, airlines
and foreign governments. Substantially all sales to foreign customers are in
U.S. dollars and, therefore, the impact of currency translations is immaterial
to us. The following table shows our sales to both foreign and domestic
customers:

INDEPENDENT RESEARCH AND DEVELOPMENT

We employ scientific, engineering and other personnel to improve our
existing product lines and to develop new products and technologies in the same
or related fields. At December 31, 2002, we employed approximately 138 engineers
(of whom 22 held advanced degrees). Approximately 26 of those engineers
(including 11 holding advanced degrees) devoted all or part of their efforts
toward a variety of projects including refining carbon processing techniques to
create more durable braking systems, upgrading existing braking systems to
provide enhanced performance, and developing new technologies to improve our
products.

The costs incurred relating to independent research and development for the
years ended December 31, 2002, 2001 and 2000 were $14.6 million, $16.2 million
and $15.8 million, respectively.

PATENTS AND LICENSES

We have a large number of patents related to the products of our
subsidiaries. While in the aggregate our patents are of material importance to
our business, we believe no single patent or group of patents is of material
importance to our business as a whole.

COMPETITION

We face substantial competition from a few suppliers in each of our product
areas. Our principal competitors that supply wheels and brakes are Honeywell's
Aircraft Landing Systems Division and Goodrich Corporation. Both significant
competitors are larger and have greater financial resources than us. The
principal competitors for brake control systems are the Hydro-Aire Division of
Crane Co. and Messier Bugatti in France. The principal competitors for fuel
tanks are American Fuel Cell & Coated Fabrics Company and Aerazur of France,
both owned by Zodiac S.A., a French company.

BACKLOG

Backlog at December 31, 2002 and 2001 amounted to approximately $142.5
million and $150.2 million, respectively. Backlog consists of firm orders for
our products which have not been shipped. Approximately 86% of our total backlog
at December 31, 2002 is expected to be shipped during the next twelve months,
with the balance expected to be shipped over the subsequent two-year period. No
significant seasonality exists for sales of our products.

Of our total backlog at December 31, 2002, approximately 40% was directly
or indirectly for end use by the U.S. government, substantially all of which was
for use by the Department of Defense. For certain risks associated with U.S.
government contracts, see "Government Contracts" discussed below.

6

GOVERNMENT CONTRACTS

For the years ended December 31, 2002, 2001 and 2000, approximately 26%,
21% and 17%, respectively, of our total sales were made to agencies of the U.S.
government or to prime contractors or subcontractors of the U.S. government.

The majority of our defense-related sales are from basic ordering
agreements. The remainder of our defense business is derived from contracts that
are firm, fixed-price contracts under which we agree to perform for a
predetermined price. Although our fixed-price contracts generally permit us to
keep unexpected profits if costs are less than projected, we do bear the risk
that increased or unexpected costs may reduce profit or cause us to sustain
losses on the contract. All domestic defense contracts and subcontracts to which
we are a party are subject to standard provisions for termination at the
convenience of the government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for allowable
costs and to an allowance for profit. Foreign defense contracts generally
contain comparable provisions relating to termination at the convenience of the
government.

Companies supplying defense-related equipment to the U. S. government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the U.S. government to unilaterally suspend us
from new contracts pending resolution of alleged violations of procurement laws
or regulations. Other risks include a dependence on appropriations by the U. S.
government, changes in the U. S. government's procurement policies (such as
greater emphasis on competitive procurements) and the need to bid on programs in
advance of design completion. A reduction in expenditures by the government for
aircraft using products of the type manufactured by us, lower margins resulting
from increasingly competitive procurement policies, a reduction in the volume of
contracts or subcontracts awarded to us or substantial cost overruns would have
an adverse effect on our cash flow and results of operations.

SUPPLIES AND MATERIALS

The principal raw materials used by Aircraft Braking Systems in its wheel
and brake manufacturing operations are steel, aluminum forgings and carbon
compounds. We produce most of our carbon at our carbon manufacturing facility in
Akron, Ohio. Steel and aluminum forgings are purchased from multiple sources.
The principal raw materials used by Engineered Fabrics to manufacture fuel tanks
and related coated fabric products are nylon cloth, forged metal fittings and
various adhesives and coatings, whose formulae are internally developed and
proprietary. We have not experienced any shortage of raw materials to date.

PERSONNEL

At December 31, 2002, we had 1,261 full-time employees, of which 771 were
employed by Aircraft Braking Systems (345 hourly and 426 salaried employees) and
490 were employed by Engineered Fabrics (356 hourly and 134 salaried employees).
All of Aircraft Braking Systems' hourly employees are represented by the United
Auto Workers' Union and all of Engineered Fabrics' hourly employees are
represented by the United Food and Commercial Workers' Union.

Aircraft Braking Systems' current four-year labor agreement will expire on
June 30, 2006. Engineered Fabrics' three-year contract with its union expires on
February 5, 2004.

ITEM 2. PROPERTIES

UNITED STATES FACILITIES. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio and consists of
approximately 770,000 square feet of manufacturing, engineering and office
space. Engineered Fabrics' facility is located in Rockmart, Georgia and consists
of approximately 564,000 square feet of manufacturing, engineering and office
space. We believe that our properties and equipment are generally
well-maintained, in good operating condition and adequate for our present needs.

7

FOREIGN FACILITIES. We occupy approximately 19,000 square feet of leased
office and warehouse space in Slough, England, under a lease expiring in 2020.
We also maintain a sales and service office in Toulouse, France.

AKRON FACILITY ARRANGEMENTS. The manufacturing facilities owned by
Aircraft Braking Systems are part of a larger complex owned by Lockheed Martin.
Aircraft Braking Systems and Lockheed Martin have various occupancy and service
agreements to provide for shared easements and services (including utility,
sewer and steam). In addition to the 770,000 square feet owned by Aircraft
Braking Systems, we lease approximately 433,000 square feet of space within the
Lockheed Martin complex and are subject to annual occupancy payments to Lockheed
Martin. During the years ended December 31, 2002, 2001 and 2000, Aircraft
Braking Systems made occupancy payments to Lockheed Martin of $0.9 million, $0.9
million and $2.1 million, respectively. Certain access easements and agreements
regarding water, sanitary sewer, storm sewer, gas, electricity and
telecommunication are perpetual. In addition, Lockheed Martin and Aircraft
Braking Systems equally control Valley Association Corporation, an Ohio
corporation, which was formed to establish a single entity to deal with the City
of Akron and utility companies concerning governmental and utility services
which are furnished to Lockheed Martin's and Aircraft Braking Systems'
facilities.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

There are various lawsuits and claims pending against us incidental to our
business. Although the final results in those suits and proceedings cannot be
predicted with certainty, in the opinion of our management, the ultimate
liability, if any, will not have a material adverse effect on us.

ENVIRONMENTAL

Our manufacturing operations are subject to various environmental laws and
regulations, including those related to pollution, air emissions and the
protection of human health and the environment, administered by federal, state
and local agencies. We continually assess our obligations and compliance with
respect to these requirements. Based upon these assessments and other available
information, we believe that our manufacturing facilities are in substantial
compliance with all applicable existing federal, state and local environmental
laws and regulations and we do not expect environmental costs to have a material
adverse effect on us. The operation of manufacturing plants entails risk in
these areas, and there can be no assurance that we will not incur material costs
or liabilities in the future that could adversely affect us. For example, such
costs or liabilities could arise due to changes in the existing law or its
interpretation, or newly discovered contamination.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no trading market for our common stock. All of our common stock is
owned or controlled by Bernard L. Schwartz, our Chairman and Chief Executive
Officer, and by four limited partnerships of Lehman Brothers Holdings Inc. See
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters" in Part IV of this Annual Report on Form 10-K. In 2002, we
paid a dividend to stockholders in connection with a recapitalization. Our
ability to pay dividends in the future is restricted by, among other things, our
current credit agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Financial Condition."

8

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the related audited consolidated financial statements contained in this Annual
Report on Form 10-K.

- ---------------

(a) On December 20, 2002, we completed a recapitalization that included the
issuance of $250 million of 9 5/8% Senior Subordinated Notes Due 2010. The
net proceeds of the notes were used to pay a $200 million dividend to our
stockholders, pay off our former credit facility, pay transaction fees of
$8.5 million and pay $9.4 million to holders of our common stock options. As
a result of this transaction, our stockholders' deficiency increased by $200
million for the dividend, we recorded a $9.4 million charge to selling,
general and administrative expenses for the payment to the holders of common
stock options, we capitalized $8.5 million for the transaction fees and we
recorded a $0.4 million extraordinary charge for the early extinguishment of
debt. See Note 7 to the consolidated financial statements contained in this
Annual Report on Form 10-K.

(b) On January 1, 2002, we adopted SFAS No. 142. Assuming the adoption of SFAS
No. 142 at the beginning of the periods presented, amortization would have
decreased by $6.1 million for each of the four years in the period ended
December 31, 2001. Net income would have increased to $39.4 million, $68.9
million, $77.6 million and $43.0 million for the years ended December 31,
2001, 2000, 1999 and 1998, respectively.

9

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

The following section may include forward-looking statements that involve
inherent risks and uncertainties. A number of important factors could cause
actual results to differ materially from those in the forward-looking
statements. These factors include reduction in airline traffic, business risks
inherent in the airline industry, including terrorism, government regulation,
lower than expected revenues, general economic conditions and competition in the
areas in which we operate.

GENERAL

Aircraft Braking Systems generates more than 75% of its revenues through
the sale of replacement parts for wheels and braking systems which are installed
on approximately 28,000 commercial transport, military and general aviation
aircraft. As is customary in the industry, Aircraft Braking Systems incurs
substantial expenditures to research, develop, design and supply original wheel
and brake equipment to aircraft manufacturers at or below the cost of
production. Research, development and design expenditures are charged to
operations when incurred. Original wheel and brake equipment supplied to
aircraft manufacturers at or below the cost of production, or program
investments, are charged to operations when delivered to the aircraft
manufacturers. Since most modern aircraft have a useful life of 25 years or
longer and require periodic replacement of certain components of the braking
system, we typically recoup our initial investment in original equipment and
generate significant profits from the sales of replacement parts over the life
of the aircraft. We have invested and will continue to invest significant
resources to have our products selected for use on new commercial airframes,
focusing on high-cycle, medium- and short-range aircraft, i.e. regional jets.

During the years ended December 31, 2002, 2001 and 2000, we spent an
aggregate of approximately $51.3 million, $54.1 million and $53.3 million,
respectively, for research, development, design, program investments, capital
expenditures and development participation costs. These types of costs are
somewhat discretionary in any given year and our levels of spending may increase
or decrease as the business base dictates. In 2002, we achieved many design and
development milestones as we moved closer to aircraft certification and initial
rates of production on a number of our recent sole source wins: CRJ-900, ERJ
170, ERJ-175, Dassault Falcon 7X, Falcon 900EX, Raytheon Hawker Horizon, Sino
Swearingen SJ-30 and the T-50 Military Trainer. In prior years, we were selected
as the sole supplier of wheels and brakes for each of the Saab 2000, the
Bombardier CRJ-100/200, CRJ-440, CRJ-700, the Learjet 60, Embraer's 70, 75, 90
and 108 passenger jets, the Fairchild Dornier DO-328 Turboprop, the Dassault
Falcon 900EX, Dassault Falcon 7X, the Gulfstream GIV-X and Raytheon Hawker
Horizon and one of three suppliers of wheels and carbon brakes on the Airbus
A-321; and the sole supplier of wheels, carbon brakes and brake control systems
on the MD-90. Aircraft produced under most of these programs are in development
or the early stages of their life cycles and represent significant future
revenue opportunities for us.

Results for the year ended December 31, 2001 were adversely affected by the
sluggish economy and the events of September 11, 2001. Results for the year
ended December 31, 2002 continued to be adversely affected by the sluggish
economy that reduced demand for air travel and financial difficulties that
confronted commercial aircraft operators.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This section is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires our
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to bad debts, inventories, intangible assets, income
taxes, warranty obligations, workers compensation liabilities, pension and other
postretirement benefits, and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other

10

sources. Actual results may differ from these estimates. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of the consolidated financial statements.

Inventory. Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts related to contracts with long production cycles, a portion of
which will not be realized within one year. Reserves for slow moving and
obsolete inventories are provided based on current assessments about future
product demand and production requirements for the next twelve months. These
factors are impacted by market conditions, technology changes, and changes in
strategic direction, and require estimates and management judgment that may
include elements that are uncertain. We evaluate the adequacy of these reserves
quarterly.

Our inventory reserve balances of $9.6 million, $11.8 million and $9.5
million as of December 31, 2002, 2001 and 2000, respectively, represent 15.6%,
16.3% and 12.9% of our gross inventory balances for each period. Although we
strive to achieve a balance between market demands and risk of inventory excess
or obsolescence, it is possible that, should conditions change, additional
reserves may be needed. Any changes in reserves will impact operating income
during a given period. This policy is consistently applied to all of our
operating segments and we do not anticipate any changes to our policy in the
near term.

Evaluation of Long-Lived Assets. Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with SFAS No. 144. In
evaluating the value and future benefits of long-lived assets, their carrying
value is compared to management's estimate of the anticipated undiscounted
future net cash flows of the related long-lived asset. Any necessary impairment
charges are recorded when we do not believe the carrying value of the long-lived
asset will be recoverable. There were no adjustments to the carrying amount of
long-lived assets during the years ended December 31, 2002, 2001 and 2000
resulting from our evaluations.

Warranty. Estimated costs of product warranty are accrued when individual
claims arise with respect to a product. When we become aware of those types of
defects, the estimated costs of all potential warranty claims arising from those
types of defects are fully accrued. As of December 31, 2002, 2001 and 2000, our
warranty liability was $15.2 million, $13.7 million and $11.9 million,
respectively.

Pension and Other Postretirement Benefits. We have significant pension and
postretirement benefit costs and liabilities. The determination of our
obligation and expense for pension and other postretirement benefits is
dependent on our selection of certain assumptions used by actuaries in
calculating those amounts. Assumptions are made about interest rates, expected
investment return on plan assets, rate of increase in health care costs, total
and involuntary turnover rates, and rates of future compensation increases. In
addition, our actuarial consultants use subjective factors such as withdrawal
rates and mortality rates to develop our valuations. We generally review and
update these assumptions at the beginning of each fiscal year. We are required
to consider current market conditions, including changes in interest rates, in
making these assumptions. The actuarial assumptions that we may use may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact to the amount
of pension and postretirement benefits expense we have recorded or may record.
See Note 11 to the consolidated financial statements contained in this Annual
Report on Form 10-K for a disclosure of our assumptions.

The discount rate enables us to state expected future cash flows at a
present value on the measurement date. We have little latitude in selecting this
rate, and it must represent the market rate of high-quality fixed income
investments. A lower discount rate increases the present value of benefit
obligations and increases pension expense. A 75 basis point decrease in the
discount rate would increase our current year pension expense by approximately
$0.9 million. We used a 7 1/2% discount rate in 2002 and will use a 6 3/4%
discount rate for 2003 to reflect market interest rate conditions.

To determine the expected long-term rate of return on pension plan assets,
we consider the current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. A 50 basis point
decrease in the expected annual return on assets would increase our current year
pension expense by approximately $0.5 million. We assumed that the long-term
returns on our pension plan assets was 9 1/2% in

11

2002. We reduced our expected long-term rate of return on pension plan assets
for 2003 to 9% to reflect projected returns in the fixed income and equity
markets.

The annual postretirement expense was calculated using a number of
actuarial assumptions, including a health care cost trend rate and a discount
rate. Our discount rate assumption for postretirement benefits is consistent
with that used in the calculation of pension benefits. The healthcare cost trend
rate range used to calculate the 2002 postretirement expense was 11% in 2002
trending down to 4.5% for 2009. A 1% increase in the assumed health care cost
trend rate would increase 2002 postretirement benefit costs and the benefit
obligation by approximately $1.1 million and $13.0 million, respectively.

RESULTS OF OPERATIONS

COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2002 AND
DECEMBER 31, 2001

Sales for the year ended December 31, 2002 totaled $348.6 million, a
decrease of $6.7 million or 1.9%, compared with $355.3 million for the same
period in the prior year. This decrease was principally due to lower sales of
wheels and brakes for commercial transport aircraft of $14.1 million, primarily
on the Fokker F100, DC-9, Fokker F27/28, CRJ-700 and DC-10 programs. General
aviation sales decreased $5.2 million due to lower sales of wheels, brakes and
fuel tanks on Gulfstream and Raytheon aircraft. Military sales increased $12.6
million primarily due to higher sales of wheels and brakes of $15.0 million on
the B-1B, F-4, A-10 and F-14 programs, partially offset by lower sales of
helicopter cabin interiors on various Sikorsky aircraft.

The gross margin for the year ended December 31, 2002 was 41.3% compared
with 42.6% for the same period in the prior year. This decrease was primarily
due to the unfavorable overhead absorption effect relating to the lower sales
and higher program investments.

Independent research and development costs were $14.6 million for the year
ended December 31, 2002 compared with $16.2 million for the same period in the
prior year. This decrease was primarily due to lower costs associated with the
Dassault Falcon 900 and JAS-39 programs.

Selling, general and administrative expenses were $40.2 million for the
year ended December 31, 2002 compared with $30.3 million for the same period in
the prior year. This increase was primarily due to a $9.4 million charge
relating to payments made to holders of our common stock options in connection
with the recapitalization described below under "Liquidity and Financial
Condition."

Amortization expense was $3.9 million for the year ended December 31, 2002
compared with $8.8 million for the same period in the prior year. This decrease
was primarily due to the elimination of $6.1 million of goodwill amortization
during the year ended December 31, 2002 in accordance with SFAS No. 142,
partially offset by higher amortization of intangible assets and deferred
charges.

Interest expense, net was $25.8 million for the year ended December 31,
2002 compared with $32.6 million for the same period in the prior year. This
decrease was due to lower non-cash interest expense of $4.3 million (non-cash
interest income of $0.4 million during the year ended December 31, 2002 compared
with non-cash interest expense of $3.9 million for the same period in the prior
year) relating to the change in market value of our interest rate swap in
accordance with SFAS No. 133. Net interest expense also decreased due to a lower
average debt balance.

Our effective tax rate of 28.2% for the year ended December 31, 2002
differs from the statutory rate of 35% due to utilization of state net operating
losses and tax benefits derived from foreign sales. The effective tax rate of
43.3% for the year ended December 31, 2001 differs from the statutory rate of
35% due to foreign, state and local taxes. The decrease in the effective rate in
2002 compared with 2001 is primarily due to higher tax benefits derived from
foreign sales and utilization of state net operating losses.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000

Sales for the year ended December 31, 2001 totaled $355.3 million, a
decrease of $20.6 million or 5.5%, compared with $375.9 million for the same
period in the prior year. This decrease was due to lower sales of

12

wheels and brakes for commercial transport aircraft of $23.5 million, primarily
on the DC-9, MD-90, DC-10 and SAAB 340 programs, partially offset by higher
sales on the CRJ-700 program. General aviation sales also decreased $5.7
million, primarily due to lower sales of wheels and brakes on Gulfstream and
Lear aircraft. This overall weakness in commercial and general aviation sales
was primarily due to the sluggish economy and the events of September 11. Other
commercial sales decreased $5.2 million primarily due to lower sales of coated
fabrics used on railroad train cars. Military sales increased $13.8 million,
primarily due to higher sales of wheels and brakes on the B-IB program, fuel
tanks on the AH-64 and Blackhawk programs and helicopter cabin interiors on
various Sikorsky aircraft.

The gross margin for the year ended December 31, 2001 was 42.6% compared
with 46.9% for the same period in the prior year. This decrease was primarily
due to an unfavorable product sales mix and the unfavorable effect that the
lower sales volume had on margin.

Independent research and development costs were $16.2 million for the year
ended December 31, 2001 compared with $15.8 million for the same period in the
prior year. This increase was primarily due to higher costs associated with the
Gulfstream GIV and Dassault Falcon 900 programs, partially offset by lower costs
on the JAS-39 program.

Selling, general and administrative expenses were $30.3 million for the
year ended December 31, 2001 compared with $37.7 million for the same period in
the prior year. This decrease was primarily due to lower performance-related
incentive compensation.

Interest expense, net was $32.6 million for the year ended December 31,
2001 compared with $36.0 million for the same period in the prior year. This
decrease was due to a lower average debt balance and lower interest rates on our
variable rate indebtedness, partially offset by a non-cash charge of $3.9
million relating to the change in fair market value on our interest rate swap in
accordance with SFAS No. 133.

Our effective tax rate of 43.3% for the year ended December 31, 2001
differs from the statutory rate of 35% due to foreign, state and local taxes.
The effective tax rate of 18.9% for year ended December 31, 2000 differs from
the statutory rate of 35% due to utilization of net operating losses for which a
tax benefit had not been recognized and foreign sales corporation tax benefits,
partially offset by state and local taxes. The increase in the effective rate in
2001 over 2000 is primarily due to a net decrease in the valuation allowance
during 2000.

LIQUIDITY AND FINANCIAL CONDITION

Our cash and cash equivalents totaled $22.7 million at December 31, 2002
compared with $5.1 million at December 31, 2001. Our total debt, consisting of
our 9 5/8% notes and our 9 1/4% notes, was $435.0 million at December 31, 2002
compared with $285.6 million at December 31, 2001. The reason for the increase
in the debt balance is due to the recapitalization as described below, partially
offset by principal payments made on our debt during 2002.

On December 20, 2002, we completed a recapitalization as follows:

- We issued $250 million of senior subordinated notes due December 15, 2010
for which we received $241.5 million after paying fees and expenses.

- We paid $32.0 million of outstanding borrowings under our former credit
facility.

- We established a new $30.0 million revolving credit facility.

- We paid a dividend of $200.0 million to the holders of our common stock.

- We paid $9.4 million to the holders of our common stock options.

We expect that our principal use of funds for the next several years will
be to pay interest and principal on indebtedness, fund capital expenditures and
make program investments. Our primary source of funds for conducting our
business activities and servicing our indebtedness has been cash generated from
operations and

13

borrowings under our credit facility. In the past, the cash generated from
operations has been sufficient to pay our indebtedness. We do not have to pay
principal on our notes until October 2007, when our 9 1/4% notes mature.

Our credit facility provides for revolving loans not to exceed $30.0
million, with up to $10.0 million available for letters of credit. At December
31, 2002, we had outstanding letters of credit of $2.9 million and $27.1 million
available to borrow under the credit facility. The credit facility commitment
terminates on June 30, 2007. The credit facility is secured by substantially all
of our assets, including the stock of our subsidiaries.

The credit facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The credit facility also contains
certain financial ratio requirements, including a cash interest coverage ratio
and a leverage ratio.

The following represents our scheduled debt maturities, letters of credit,
non-cancelable operating lease commitments, payments required under the advisory
agreement with Bernard L. Schwartz and interest rate swap, subsequent to
December 31, 2002:

- ---------------

* Represents one annual payment under the advisory agreement which has an
indefinite term.

Based upon the current level of operations, our management believes that
our cash flow from operations, together with available borrowings under the
credit facility, are adequate to meet our anticipated requirements for working
capital, capital expenditures, research and development expenditures, program
and other discretionary investments and interest payments. There can be no
assurance, however, that our business will continue to generate cash flow at or
above current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to sell assets,
reduce capital expenditures, refinance all or a portion of our existing debt
(including notes) or obtain additional financing. Our ability to make scheduled
principal payments, to pay interest and to refinance our indebtedness (including
our 9 5/8% notes and our 9 1/4% notes) depends on our future performance and
financial results, which, to a certain extent, are subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond our
control. There can be no assurance that sufficient funds will be available to
enable us to service our indebtedness, including senior subordinated notes, or
make necessary capital expenditures and program and other discretionary
investments.

CASH FLOW

During the year ended December 31, 2002, net cash provided by operating
activities amounted to $90.4 million and was driven by operating profitability
and a reduction in accounts receivable and inventory due to improved asset
management, partially offset by an increase in funding for our pension plans.
During the year ending December 31, 2001, net cash provided by operating
activities amounted to $77.5 million and was driven by operating profitability
and a reduction in accounts receivable and inventory, partially offset by a
decrease in accounts payable, notes payable and payment of bonuses earned in
2000. During the year ended December 31, 2000, net cash provided by operating
activities amounted to $110.7 million and was driven by operating profitability
and a reduction in accounts receivable and inventory, partially offset by an
increase in funding for our pension plans.
14

During the year ended December 31, 2002, net cash used in investing
activities amounted to $13.7 million due to $4.1 million of capital expenditures
and $9.6 million of program participation costs. During the year ended December
31, 2001, net cash used in investing activities amounted to $17.3 million due to
$5.1 million of capital expenditures, $11.7 million of program participation
payments and $0.5 million for costs relating to intangible assets. During the
year ended December 31, 2000, net cash used in investing activities amounted to
$21.3 million due to $9.8 million of capital expenditures, $5.8 million of
program participation payments and $5.7 million for the purchase of intellectual
property for the Dornier 328 program. Capital spending for the year ending
December 31, 2003 is expected to be approximately $8.0 million.

During the year ended December 31, 2002, net cash used in financing
activities amounted to $59.1 million due to the payment of a $200 million
dividend to the holders of our common stock, the repayment of indebtedness of
$100.6 million and transaction fees of $8.5 million in connection with our
issuance of our 9 5/8% notes, partially offset by proceeds of $250 million from
our 9 5/8% notes. During the years ended December 31, 2001 and 2000, net cash
used in financing activities amounted to $61.5 million and $86.5 million,
respectively, due to the repayment of indebtedness.

ACCOUNTING CHANGES AND PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations." SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.

Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized,
but instead be tested for impairment at least annually. SFAS No. 142 also
requires that any recognized intangible asset determined to have an indefinite
useful life not be amortized, but instead be tested for impairment in accordance
with this standard until its life is determined to no longer be indefinite. We
adopted SFAS No. 142 on January 1, 2002, at which time amortization of goodwill
ceased. Our impairment analysis did not result in an impairment charge.

Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. There was no impact to our financial position, results of
operations or cash flows related to the adoption of this standard.

Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value will be recognized in earnings.

As a requirement of a previous credit facility, we entered into an interest
rate swap agreement in 1997 to reduce the impact of potential increases in
interest rates on the credit facility. This interest rate swap agreement is our
only financial instrument that is required to be accounted for at fair value in
accordance with SFAS No. 133.

The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction in other comprehensive income of $0.9 million ($0.6 million
after tax) during the year ended December 31, 2001, related to the derivative
designated in a cash flow-type hedge prior to adopting SFAS No. 133. This amount
is being amortized into interest expense over three years, which was the
remaining life of the interest rate swap agreement at January 1, 2001. During
the years ended December 31, 2002 and 2001, the change in fair market value of
this derivative instrument resulted in non-cash interest income of $0.4 million
and non-cash interest

15

expense of $3.9 million, respectively. These amounts were recorded in interest
expense as this derivative was not designated as a hedging instrument. We do not
utilize derivatives for speculative purposes.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies," establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. The objective of SFAS No.
143 is to provide guidance for legal obligations associated with the retirement
of tangible long-lived assets. The retirement obligations included within the
scope of this project are those that an entity cannot avoid as a result of
either acquisition, construction or normal operation of a long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. At this time, we do not expect this standard to
have a material impact on our consolidated financial position, results of
operation or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002." SFAS No. 145 rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002. We do not expect this standard to have any material impact on our
consolidated financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." This Statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We are evaluating the impact of this standard on our
consolidated financial position, results of operations and cash flows.

In December 2002, the FASB issued No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 did not require the
Company to change to the fair value method of accounting for stock based
compensation. Effective January 1, 2002, the disclosure provisions of SFAS No.
148 have been adopted by the Company.

In November 2002, the FASB issued Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
45 requires the Company to recognize an initial liability for the fair value of
an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. We have adopted
the disclosure provisions and are evaluating the impact that full adoption of
this interpretation will have on our consolidated financial position, results of
operations and cash flows.

16

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," expanding the guidance in Accounting Research Bulletin No.
51, "Consolidated Financial Statements," relating to transactions involving
variable interest entities. As we do not have any variable interest entities, we
do not expect the adoption of this standard to have an impact on our
consolidated financial position, results of operations and cash flows.

INFLATION

A majority of our sales are conducted through annually established price
lists and long-term contracts. The effect of inflation on our sales and earnings
is minimal because the selling prices of those price lists and contracts,
established for deliveries in the future, generally reflect estimated costs to
be incurred in these future periods. In addition, some contracts provide for
price adjustments through escalation clauses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have $435 million of total fixed rate debt outstanding at December 31,
2002. Borrowings under the credit facility bear interest that varies with LIBOR.

As a requirement of a previous credit facility, we entered into an interest
rate swap agreement to reduce the impact of potential increases in interest
rates. This agreement has a notional amount of $84.0 million and we are required
to make payments for the difference between actual three month LIBOR and 5.95%
on this amount. The interest rate swap agreement expires on December 17, 2003.
The payments made under the swap agreement were $3.8 million in 2002, and are
expected to be approximately $4.0 million in 2003 assuming three month LIBOR at
December 31, 2002 remains constant throughout the year. If interest rates change
by 10%, it would not have a significant impact on the fair value or the future
payments to be made under our swap agreement. Given that all of our outstanding
debt is at a fixed rate, a 10% change in interest rates would not have a
significant impact on fair values, cash flows or earnings. We have no other
derivative financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-21 hereof.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages and positions of our directors and
executive officers. All directors hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified, and all
executive officers hold office at the pleasure of the Board of Directors. Our
following executive officers or directors are related by blood or marriage:
Kenneth M. Schwartz is the nephew of Bernard L. Schwartz, Ronald H. Kisner's
wife is the niece of Bernard L. Schwartz and John R. Paddock's wife is the
daughter of Bernard L. Schwartz. No other executive officer or director of ours
is related by blood, marriage or adoption.

17

- ---------------

* Designated as director by Bernard L. Schwartz pursuant to the Stockholders
Agreement.

** Designated as director by certain Lehman Brothers merchant banking
partnerships pursuant to the Stockholders Agreement.

*** Designated as independent director by Bernard L. Schwartz and certain Lehman
Brothers merchant banking partnerships pursuant to the Stockholders
Agreement.

Mr. Bernard L. Schwartz has been our Chairman and Chief Executive Officer
since 1989. Mr. B. Schwartz has been Chairman and Chief Executive Officer of
Loral Space & Communications Ltd. since April 1996. From 1972 to April 1996, Mr.
B. Schwartz was Chairman and Chief Executive Officer of Loral Corporation. Mr.
B. Schwartz is a Director of Loral Cyberstar, Inc., a Director of Satelites
Mexicanos, S.A. de C.V., a Director of First Data Corporation, a Trustee of
Mount Sinai-NYU Medical Center and Health System and a Trustee of Thirteen/WNET
Educational Broadcasting Corporation.

Mr. Brand is a Managing Director of Lehman Brothers and a senior principal
in the Global Mergers & Acquisitions Group. From 1995 to April 2002, Mr. Brand
led Lehman Brothers' Technology Mergers and Acquisitions business. Mr. Brand
joined Lehman Brothers in 1987 and has been responsible for merger and corporate
finance advisory services for many of Lehman Brothers' technology and defense
industry clients.

Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. He is also currently an Adjunct Professor of Management at Baruch College
City University of New York and a Director of Brill Academic Publishers, Inc.

Mr. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which
he has been associated since 1949. He is a Director of LCH Investments N.V.,
Loral Space & Communications Ltd., Mueller Industries, Inc., Restructured
Capital Holdings Ltd. and R.V.I. Guaranty Co., Ltd.

Mr. Kisner has been our Secretary since 1997 and employed by us since
January 1999. He was a member of the law firm of Chekow & Kisner, P.C. from 1984
until 1999. From 1982 to 1984, Mr. Kisner was a sole practitioner. From 1973 to
1982, he was Associate General Counsel of APL Corporation, where he held the
offices of Secretary, Vice President and Director.

Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994). He holds appointments in the Departments of Psychology and
Psychiatry at Emory University.

18

Mr. Towbin is a Managing Director of Stephens, Inc. and a Founder of
Stephens Financial Group. From January 2000 to November 2001 he was Co-Chairman
of C.E. Unterberg Towbin. From September of 1995 to January 2000 he was Senior
Managing Director. From January 1994 to September 1995, he was President and
Chief Executive Officer of the Russian-American Enterprise Fund and later Vice
Chairman of its successor fund, The U.S. Russia Investment Fund. Mr. Towbin was
a Managing Director at Lehman Brothers and Co-head, High Technology Investment
Banking from January 1987 until January of 1994. Mr. Towbin was Vice Chairman
and a Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. and its
predecessor companies from 1959 to 1987. Mr. Towbin is also a Director of Gerber
Scientific, Inc., Globalstar Telecommunications Ltd. and Globecomm Systems, Inc.

Mr. Washkowitz is a Managing Director of Lehman Brothers and Head of the
Merchant Banking Group, and is responsible for the oversight of Merchant Banking
Fund II and its affiliated investment vehicles, as well as their predecessor,
Merchant Banking Fund I. He has served on the Investment Committee for 14 years,
and he is also a member of Lehman Brothers' Commitment Committee and Fairness
Opinion Committee. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968. He became a
general partner of Lehman Brothers in 1977 when Kuhn Loeb was acquired and a
Managing Director of Lehman Brothers in 1978. Prior to joining the Merchant
Banking Group in 1988, Mr. Washkowitz headed the Financial Restructuring Group,
which advised distressed companies and their creditors on a wide range of
business and financial issues. Mr. Washkowitz is a Director of L-3
Communications Corporation, Peabody Energy Corporation and C.P. Kelco.

Mr. Fogelsanger has been our Vice Chairman since March 2000. Mr.
Fogelsanger was our President from January 1996 to March 2000. From April 1989
to January 1996, Mr. Fogelsanger was the President of Aircraft Braking Systems.
From 1987 to 1989 he was President of Loral Corporation's Aircraft Braking
Systems Division. From January 1986 to March 1987 he was Vice President and
General Manager of Goodyear Aerospace Corporation's ABSC division. From 1980 to
1986 he was General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr.
Fogelsanger directed Goodyear's development of a crash-resistant fuel system for
helicopters that was credited with saving hundreds of lives during the Vietnam
War. He joined Goodyear in 1951.

Mr. Kenneth M. Schwartz has been our President and Chief Operating Officer
since March 2000. Mr. K. Schwartz was our Executive Vice President from January
1996 to March 2000. From June 1989 to January 1996, Mr. K. Schwartz held the
positions of Chief Financial Officer, Treasurer and Secretary. Previously he was
the Corporate Director of Internal Audit for Loral Corporation and prior to that
held various positions with the accounting firm of Deloitte & Touche LLP.

Mr. Charles has been our Chief Financial Officer since May 1996. From May
1993 to May 1996, Mr. Charles was our Controller. Previously, he was the Manager
of Accounting and Financial Planning. Prior to employment with us in 1989, Mr.
Charles held various other positions with a major accounting firm, which he
joined in 1984.

EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED
FABRICS CORPORATION

Set forth below are the names, ages and positions of the executive officers
of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.

Aircraft Braking Systems Corporation

19

Engineered Fabrics Corporation

Mr. Crampton has been Senior Vice President of Marketing at Aircraft
Braking Systems since October 1999. He was previously Vice President of
Marketing at Aircraft Braking Systems since March 1987. He had been Director of
Business Development for Goodyear Aerospace Corporation's Wheel and Brake
Division since 1985. Prior to that assignment, he was the divisional manager of
Program Operations since 1983. Mr. Crampton joined Goodyear in 1967. He became
Section Manager in Commercial Sales in 1977, a product marketing manager in 1978
and Divisional Sales Manager in 1979. In August of 1982, he joined manufacturing
as the manager of the manufacturing process organization. He also worked for
NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966.

Mr. Johnson has been Senior Vice President of Finance and Administration at
Aircraft Braking Systems since October 1999. He was previously Vice President of
Finance and Controller at Aircraft Braking Systems since April 1989. From 1987
to 1989, he was Vice President of Finance and Controller of Loral Corporation's
Aircraft Braking Systems Division. Prior to this assignment, he had spent 22
years with Goodyear Aerospace Corporation, including one year as the Controller
of the Wheel and Brake Division. Mr. Johnson joined Goodyear Aerospace
Corporation in 1966. He became Manager of Accounting in 1979 for the Centrifuge
Equipment Division of Goodyear Aerospace Corporation after holding various
positions in the Defense Systems Division.

Mr. Williams has been Senior Vice President of Operations at Aircraft
Braking Systems since October 1999. He was previously Vice President of
Manufacturing at Aircraft Braking Systems since May 1992. He had been Director
of Manufacturing since joining Aircraft Braking Systems in September 1989.
Previously, from April 1985 to August 1989, he was Branch Manager of
Refurbishment Operations at United Technologies responsible for the
refurbishment process of the Solid Rocket Boosters on the Shuttle Program. Mr.
Williams started his aviation career in 1975 in the Air Force as a Hydraulic
Systems Specialist. He was Superintendent, Manufacturing at Fairchild Republic
Company from 1979 to 1983, followed by Manager, B-1B Manufacturing Operations at
Rockwell International Corporation from 1983 to 1985.

Mr. Rimlinger was named Vice President of Engineering at Aircraft Braking
Systems in June 1998. He had been Director of Research and Technology for
Aircraft Braking Systems since February 1990. Prior to this assignment, he spent
11 years in various Engineering and Engineering Management positions in the
Research and Technology Department of Aircraft Braking Systems, Loral
Corporation's Aircraft Braking Systems Division and Goodyear Aerospace.

Mr. Skubina has been President of Engineered Fabrics Corporation since
April 2000. Mr. Skubina was Senior Vice President of Engineered Fabrics
Corporation from September 1999 to April 2000. He had been Vice President of
Finance and Administration since February 1991. Prior to that, he was made Vice
President of Finance on April 1, 1990. He joined Engineered Fabrics Corporation
in 1988 as Accounting Manager. From 1985 until 1988, Mr. Skubina was the
Assistant Controller and Controller of MPD, a division of M/A-Com.

Mr. Arsenault joined Engineered Fabrics Corporation in 1997 as Vice
President of Finance. Prior to this he held various finance positions with the
Remington Arms Company from 1994 to 1996 and he held Accounting and Auditing
positions with the Fibers business, Composites business, and Corporate offices
of E.I. Dupont from 1988 to 1994. He also worked for the U.S. Army Audit Agency
in various capacities from 1983 to 1988 and is a veteran of the U.S. Army, 82nd
Airborne Division.

Mr. Lindsey has been Vice President of Business Development at Engineered
Fabrics Corporation since 1989. He has been with Goodyear Aerospace Corporation,
Loral Corporation and Engineered Fabrics

20

Corporation since 1977. Prior to this he had 12 years of federal service with
the U.S. Army. He joined GAC as Contract Administrator of the Industrial Brake
Operation in Berea, Kentucky, and transferred to Engineered Fabrics in 1979 as
Manager of Contracts.

Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production Support
from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August
1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann
worked for Aircraft Braking Systems as Manager of Manufacturing Engineering,
Manager of Assembly and as a Manufacturing Engineer.

Mr. Sydow has served as the Director and Vice President of Engineering
since 1993. He joined Engineered Fabrics Corporation in September 1985 as a
Senior Engineer. He served as the Manager of Product Engineering from 1989 to
1993. Before that, he served as the Supervisor of Centrifuge Assembly at
Goodyear Atomic from 1981 to 1985.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation for the years ended
December 31, 2002, 2001 and 2000, paid to the chief executive officer and each
of the other four most highly compensated executive officers.

- ---------------

(a) Includes the following: (i) Our contributions to individual 401(k) plan
accounts for the years ended December 31, 2002, 2001 and 2000, respectively:
Mr. K. Schwartz -- $7,200, $6,120 and $5,057; Mr. Fogelsanger -- $6,600,
$6,120 and $5,086; Mr. Charles -- $6,600, $6,120 and $5,092: and Mr.
Kisner -- $7,200, $6,120 and $5,096; and (ii) the compensation element of
supplemental life insurance programs for the years ended December 31, 2002,
2001 and 2000, respectively: Mr. K. Schwartz -- $6,718, $6,398 and $6,083;
Mr. Fogelsanger -- $24,556, $25,526 and $25,296; Mr. Charles -- $2,796,
$2,796 and $2,796; and Mr. Kisner -- $6,456, $6,456 and $6,456.

(b) We have an Advisory Agreement with Mr. Bernard L. Schwartz which provides
for the payment of an aggregate of $200,000 per month of compensation to Mr.
B. Schwartz and persons or expenses designated by him. Mr. B. Schwartz
designated that $150,000 of the aggregate annual advisory fee be paid to
Kenneth M. Schwartz, which is included in his salary for each of the three
years in the period ended December 31, 2002.

21

(c) Includes payments made as a holder of common stock options in connection
with the recapitalization, of: $1,725,000 for Mr. K. Schwartz; $375,000 for
Mr. Fogelsanger; $780,000 for Mr. Charles; and $585,000 for Mr. Kisner.

(d) In 2000, the Board of Directors awarded special bonuses to various
directors, officers and employees, including: $650,000 for Mr. K. Schwartz;
$250,000 for Mr. Fogelsanger; $420,000 for Mr. Charles; and $340,000 for Mr.
Kisner.

OPTION GRANTS IN LAST FISCAL YEAR

We granted non-qualified stock options during the year ended December 31,
2002 to the executive officers named below. The options granted in 2002 become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant, and remain exercisable until 10 years from
the date of the grant. None of our stock is publicly traded.

AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND YEAR-END OPTION VALUES

The following sets forth information concerning the exercise of stock
options during the year ended December 31,2002 and the value of unexercised
stock options at year-end. Our stock is not publicly traded.

LONG-TERM INCENTIVE PLAN AWARDS

Under our long-term incentive plan (designed to provide an incentive to
encourage attainment of our objectives and retain and attract key executives), a
limited number of persons participate in a Deferred Bonus Plan. Under the terms
of the plan, generally no awards are allocated to any participant unless the we
achieve at least a 5% growth in earnings before interest, taxes and amortization
over the prior fiscal year. Awards vest and are paid in three equal annual
installments starting on January 15th following each fiscal year-end. All
amounts not vested are forfeited upon termination of employment for any reason
other than death or disability prior to the vesting date. No awards were earned
during the year ended December 31, 2002.

THE RETIREMENT PLAN

We established, effective May 1, 1989, as amended, the K & F Industries
Retirement Plan for Salaried Employees, or our Retirement Plan or the Plan, a
defined benefit pension plan. We have received favorable

22

determination letters from the Internal Revenue Service that our Retirement
Plan, as amended, is a qualified plan under the Internal Revenue Code. Our
Retirement Plan provides a non-contributory benefit and a contributory benefit.
The cost of the former is borne by us; the cost of the latter is borne partly by
us and partly by the participants. Salaried employees who have completed at
least six months of service and satisfied a minimum earnings level are eligible
to participate in the contributory portion of our Retirement Plan; salaried
employees become participants in the non-contributory portion on their date of
hire. The Plan provides a benefit of $20.00 per month for each year of credited
service. For participants who contribute to the Plan, in addition to the benefit
of $20.00 per month for each year of credited service, the Plan provides an
annual benefit equal to the greater of: 60% of the participant's aggregate
contributions or average compensation earned (while contributing) during the
last 10 years of employment in excess of 90% of the Social Security Wage Base
amount multiplied by: (1) 2.4% times years of continuous service up to 10, plus
(2) 1.8% times additional years of such service up to 20, plus (3) 1.2% times
additional years of such service up to 30, plus (4) 0.6% times all additional
such service above 30 years.

Effective January 1, 1990, the Plan was amended for our eligible employees
and those of Aircraft Braking Systems to provide an annual benefit equal to (1)
the accrued benefit described above as of December 31, 1989, plus (2) a
non-contributory benefit for each year of credited service after January 1, 1990
of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (3) for each year of contributory service on and
after January 1, 1990, a contributory benefit of (i) for 14 years of
contributory service or less, 1.05% of annual earnings between $19,800 and the
Social Security Wage Base plus 2.25% of annual earnings above the Social
Security Wage Base, and (ii) for more than 14 years of contributory service,
1.35% of annual earnings between $19,800 and the Social Security Wage Base plus
2.65% of annual earnings above the Social Security Wage Base. In no event will
the amount calculated in (3) above be less than 60% of the participant's
aggregate contributions made on and after January 1, 1990. Benefits are payable
upon normal retirement age at age 65 in the form of single life or joint and
survivor annuity or, at the participant's option with appropriate spouse
consent, in the form of an annuity with a term certain. A participant who has
(a) completed at least 30 years of continuous service, (b) attained age 55 and
completed at least 10 years of continuous service, or (c) attained age 55 and
the combination of such participant's age and service equals at least 70 years,
is eligible for early retirement benefits. If a participant elects early
retirement before reaching age 62, such benefits will be reduced except that the
non-contributory benefits of a participant with at least 30 years of credited
service will not be reduced. In addition, employees who retire after age 55 but
before age 62 with at least 30 years of service are entitled to a supplemental
non-contributory benefit until age 62. Annual benefits under our Retirement Plan
are subject to a statutory ceiling of $160,000 per participant. Participants are
fully vested in their accrued benefits under our Retirement Plan after five
years of credited service with us.

The individuals named in the Summary Compensation Table also participate in
a supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in our Retirement
Plan and the supplemental plan are: $401,000 for Mr. B. Schwartz; $390,000 for
Mr. K. Schwartz; $187,000 for Mr. Fogelsanger; $257,000 for Mr. Charles; and
$116,000 for Mr. Kisner. The retirement benefits have been computed on the
assumption that (1) employment will be continued until normal retirement at age
65 or current age if greater; (2) current levels of creditable compensation and
the Social Security Wage Base will continue without increases or adjustments
throughout the remainder of the computation period; and (3) participation in the
contributory portion of the plan will continue at current levels. We have a
similar plan at Engineered Fabrics.

For purposes of eligibility, vesting and benefit accrual, participants
receive credit for years of service with Loral Corporation and Goodyear. At
retirement, retirement benefits calculated according to the benefit formula
described above are reduced by any retirement benefits payable from The Goodyear
Tire & Rubber Company Retirement Plan for Salaried Employees.

COMPENSATION OF DIRECTORS

The Board of Directors held five meetings during the year ended December
31, 2002. Members of the Board of Directors are entitled to receive a director's
fee of $12,000 per year. Messrs. B. Schwartz, Brand,
23

Kisner and Washkowitz did not receive director's fees during the year ended
December 31, 2002. All directors are reimbursed for reasonable out-of-pocket
expenses incurred in that capacity.

ADVISORY AGREEMENT

We have an Advisory Agreement with Bernard L. Schwartz which provides for
the payment of an aggregate of $200,000 per month of compensation to Mr. B.
Schwartz and persons or expenses designated by him. Such agreement will continue
until Mr. B. Schwartz dies or is disabled or ceases to own a specified number of
shares of our common stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We have not used a compensation committee to determine executive officer
compensation. The payments to Bernard L. Schwartz, our Chairman and Chief
Executive Officer, are paid in accordance with the Advisory and Stockholders
Agreements. All other executive compensation decisions are made by Mr. B.
Schwartz in accordance with policies established in consultation with the Board
of Directors.

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

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth the ownership of our capital stock as of
December 31, 2002.

- ---------------

* Collectively referred to as the "Lehman Investors."

** The executive officers named in Item 11 hold options covering 14,700 shares,
and executive officers and directors as a group hold options covering 27,150
shares, which may be acquired within 60 days pursuant to the exercise of the
options.

*** In 2002, Bernard L. Schwartz transferred 10,000 shares to each of his
daughters (one of whom is the wife of John Paddock, one of our directors)
and 5,000 shares to Mr. Hodes, one of our directors. All of these

24

shares remain subject to the Stockholders Agreement and Bernard L. Schwartz
has the right to vote all of these shares. Dr. Paddock disclaims beneficial
ownership of the shares owned by his wife.

(a) LBI Group Inc. is the general partner of the limited partnership and is an
indirect wholly owned subsidiary of Lehman Brothers Holdings Inc. ("LBH").

(b) Lehman Brothers Offshore Partners Ltd. is the general partner of the limited
partnership and is an indirect wholly owned subsidiary of LBH.

(c) LBH is the general partner of the limited partnership. The limited
partnership is a fund for current and former employees of LBH.

STOCKHOLDERS AGREEMENT

Bernard L. Schwartz and the Lehman Investors entered into a Stockholders
Agreement dated as of October 15, 1997. The Stockholders Agreement contains
certain restrictions with respect to the transferability of our capital stock,
subject to certain exceptions. The Stockholders Agreement also includes
provisions regarding designation of members of the Board of Directors and other
voting arrangements. The Stockholders Agreement will terminate at the time when
more than 75% of the shares of common stock and shares of common stock issuable
upon the exercise of options or rights to acquire common stock or upon
conversion of convertible securities then outstanding have been sold pursuant to
one or more public offerings, except that the registration rights contained
therein (as described below) continue as to any common stock held by the
Stockholders as long as they own their shares and the voting provisions
contained therein terminate on October 15, 2007.

The Stockholders Agreement provides that our Board of Directors be
comprised initially of nine directors. Under the Stockholders Agreement, Mr. B.
Schwartz is entitled to appoint five directors, the Lehman Investors are
entitled to appoint three directors and Mr. B. Schwartz and the Lehman Investors
are jointly entitled to designate one independent director. Upon the death,
retirement or resignation as Chairman or Chief Executive Officer or permanent
disability of Mr. B. Schwartz, the Lehman Investors and the BLS Group (as
defined in the Stockholders Agreement) will each be entitled to designate 50% of
the members of the Board of Directors. Our By-laws provide that for so long as
there is a director designated by the Lehman Investors, certain corporate
actions will require the vote of at least one director designated by the Lehman
Investors, including (with certain exceptions) (i) mergers, consolidations or
recapitalizations, (ii) issuances of capital stock, (iii) repurchases of and
dividends on capital stock, (iv) issuance of employee options to purchase more
than 50,000 shares of capital stock, (v) our dissolution or liquidation, (vi)
acquisition, sale or exchange of assets in excess of $5 million, (vii) the
incurrence of debt or liens in excess of $10 million in the aggregate, (viii)
the making of loans, investments or capital expenditures in excess of $10.0
million in each case in any single year, (ix) transactions with affiliates, (x)
prepayments of or amendments to any amount of financing in excess of $10.0
million, (xi) amendment of our Certificate of Incorporation and By-laws, (xii)
engaging in new businesses or ventures and (xiii) certain employee compensation
and other matters.

The Stockholders Agreement provides that either the BLS Group or the Lehman
Investors may request an appraisal of the value of our capital stock, or the
Appraised Value, and may notify the other party of its desire to sell all of its
and its transferees' capital stock for a pro rata share of the Appraised Value.
The other party may elect to purchase the capital stock, arrange for the
purchase of the capital stock by a third party or notify the other party that it
does not intend to purchase or arrange for the purchase by a third party of the
capital stock. If the other party is unable or chooses not to arrange for and
consummate the purchase of the capital stock, the BLS Group and the Lehman
Investors shall cause us to be sold as an entirety if the sale can be arranged
for a price at least equal to the Appraised Value (subject to reduction by no
more than 10% under specified circumstances). Any sale of us as a whole shall
include all Stockholders and the proceeds thereof shall be allocated among the
Stockholders in accordance with their stock ownership.

Notwithstanding other restrictions, the Lehman Investors have the right to
transfer capital stock to a third party, subject to specified conditions. The
put-sale rights of the Lehman Investors described above and

25

the rights of the Lehman Investors to designate 50% of the members of the Board
of Directors upon the death, retirement, resignation or disability of Mr. B.
Schwartz will terminate upon any transfer.

The Stockholders Agreement provides certain first offer and tag-along
rights with respect to certain transfers of common stock or shares of common
stock issuable upon the exercise of options or rights to acquire common stock or
upon conversion of convertible securities then outstanding.

The Stockholders Agreement grants the Stockholders demand and incidental
registration rights with respect to shares of capital stock held by them, which
rights will be exercisable at any time after an initial public offering of our
common stock approved by the Board of Directors. The Stockholders Agreement
contains customary terms and provisions with respect to those registration
rights.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Bernard L. Schwartz owns or controls 50% of our capital stock and pursuant
to the Stockholders Agreement has the right to designate a majority of our Board
of Directors. In addition, he serves as our Chairman of the Board of Directors
and Chief Executive Officer and devotes such time to our business and affairs as
he deems appropriate. Mr. B. Schwartz is also Chairman of the Board and Chief
Executive Officer of Loral Space & Communications Ltd., or Loral Space. Because
Mr. B. Schwartz is Chairman of the Board of Directors and has the right to
designate a majority of the Directors to our Board, he has operating control of
us.

We have an advisory agreement with Mr. B. Schwartz which provides for the
payment of an aggregate of $200,000 per month of compensation to him and persons
or expenses designated by him in exchange for acting as directors or providing
advisory services to us and our subsidiaries. The advisory agreement will
continue until Mr. B. Schwartz dies or is disabled or ceases to own a specified
number of shares of our common stock.

We have a bonus plan pursuant to which our Board of Directors awards
bonuses to Mr. B. Schwartz ranging from 5% to 10% of earnings in excess of $50.0
million before interest, taxes and amortization. Bonuses earned under this plan
were $4.8 million, $5.5 million and $7.3 million for the years ended December
31, 2002, 2001 and 2000, respectively.

We reimburse Loral Space for rent and certain other services. The related
charges agreed upon were established to reimburse Loral Space for actual costs
incurred without profit or fee. We believe this arrangement is as favorable to
us as could have been obtained from unaffiliated parties. Payments to Loral
Space were $0.3 million, $0.5 million and $0.6 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

Pursuant to a financial advisory agreement, Lehman Brothers has agreed to
act as our exclusive financial adviser and we have agreed to pay Lehman Brothers
customary fees for services when rendered. During the year ended December 31,
2002, we paid Lehman Brothers $6.3 million for underwriting discounts and
commission in connection with the issuance of our 9 5/8% notes. During the two
years ended December 31, 2001, no amounts were paid under this agreement. The
agreement may be terminated by us or Lehman Brothers upon certain conditions.
Certain merchant banking partnerships affiliated with Lehman Brothers own 50% of
our outstanding capital stock and are entitled to elect three directors (in
addition to one independent director jointly designated by Mr. B. Schwartz and
the certain merchant banking partnerships affiliated with Lehman Brothers) to
our Board of Directors. The certain merchant banking partnerships affiliated
with Lehman Brothers have the benefit of certain additional rights under the
Stockholders Agreement and our By-laws.

ITEM 14. CONTROLS AND PROCEDURES

An evaluation was recently performed under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our management,
including the

26

CEO and CFO, concluded that our disclosure controls and procedures were
effective. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
their evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Index to Financial Statements:

All other schedules and separate financial statements are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.6 through 10.11 and 10.13, 10.14,
10.21, 10.27 and 10.28 are management contracts or compensation plans.

(b) Reports on Form 8-K:

(i) A report on Form 8-K was filed on December 9, 2002 to report our
intent to issue $250 million of new senior subordinated notes due 2010 and
enter into a new $30 million credit facility.

(ii) A report on Form 8-K was filed on December 20, 2002 to report the
completion of the previously announced transaction.

Exhibits: See exhibit index below.

(c) Exhibits

INDEX TO EXHIBITS

- ---------------

(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-40977 and incorporated herein by reference.

(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035 and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-47028 and incorporated herein by reference.

(4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein by reference.

(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and incorporated herein by reference.

(7) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-102658 and incorporated herein by reference.

Supplemental Information to Be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act: No annual report or proxy material has been
sent to security holders.

29

SIGNATURES

Pursuant to the requirements of Sections 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.

K & F INDUSTRIES, INC.

By: /s/ KENNETH M SCHWARTZ
------------------------------------
Kenneth M. Schwartz
President and Chief Operating
Officer

Date: March 31, 2003

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.

30

CERTIFICATION

I, Bernard L. Schwartz, certify that:

1. I have reviewed this annual report on Form 10-K of K & F Industries,
Inc.;

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures 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 annual report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ BERNARD L. SCHWARTZ
--------------------------------------
Bernard L. Schwartz
Chief Executive Officer

Date: March 31, 2003

31

CERTIFICATION

I, Dirkson R. Charles, certify that:

1. I have reviewed this annual report on Form 10-Q of K & F Industries,
Inc.;

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures 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 annual report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ DIRKSON R. CHARLES
--------------------------------------
Dirkson R. Charles
Chief Financial Officer

Date: March 31, 2003

32

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
K & F Industries, Inc.:

We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 2 to the consolidated financial statements, the
Company has changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.

DELOITTE & TOUCHE LLP

New York, New York
February 12, 2003

F-1

K & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.
F-2

K & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.
F-3

K & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See notes to consolidated financial statements.
F-4

K & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.
F-5

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and brake control systems for commercial,
military and general aviation aircraft, and the manufacture of materials for
fuel tanks, iceguards, inflatable oil booms and various other products made from
coated fabrics for military and commercial uses. The Company serves the
aerospace industry and sells its products to airframe manufacturers and
commercial airlines throughout the world and to the United States and certain
foreign governments. The Company's activities are conducted through its two
wholly owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft
Braking Systems"), which generated approximately 86% of the Company's total
revenues during the year ended December 31, 2002, and Engineered Fabrics
Corporation ("Engineered Fabrics") (collectively, the "Subsidiaries"), which
generated approximately 14% of the Company's total revenues during the year
ended December 31, 2002.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of K & F Industries, Inc. and the Subsidiaries. All
material intercompany accounts and transactions between these entities have been
eliminated.

CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of cash,
commercial paper and other investments that are readily convertible into cash
and have original maturities of three months or less.

REVENUE AND EXPENSE RECOGNITION -- Sales are recorded as units are shipped.
The Company customarily sells original wheel and brake equipment below cost as
an investment in a new airframe which is expected to be recovered through the
subsequent sale of replacement parts. These commercial investments (losses) are
recognized when original equipment is shipped. Losses on U.S. government
contracts are immediately recognized in full when determinable.

INVENTORY -- Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a portion of
which will not be realized within one year. Reserves for slow moving and
obsolete inventories are provided based on current assessments about future
product demand and production requirements for the next twelve months. The
Company evaluates the adequacy of these reserves quarterly.

PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed when incurred; renewals and
betterments are capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation are eliminated from the accounts, and any
gain or loss is included in the results of operations. Depreciation is provided
on the straight-line method over the estimated useful lives of the related
assets as follows: buildings and improvements -- 8 to 40 years; machinery,
equipment, furniture and fixtures -- 3 to 25 years; and leasehold
improvements -- over the life of the applicable lease or 10 years, whichever is
shorter.

GOODWILL, DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS -- Effective January
1, 2002, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS
No. 142 required an initial impairment assessment involving a comparison of the
fair value of goodwill, deferred charges and other intangible assets to current
carrying value. Upon adoption, the impairment analysis did not result in any
impairment of our assets. Deferred charges and other intangible assets
determined to have finite lives are amortized over their useful lives. We review
such deferred charges and other intangible assets with finite lives for
impairment to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions may include
an economic downturn in a geographic market or a change in the assessment of
future operations. Goodwill is not amortized. We perform tests for impairment of
goodwill annually or more frequently if events or circum-
F-6

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stances indicate it might be impaired. Such tests include comparing the fair
value of a reporting unit with its carrying value, including goodwill.
Impairment assessments are performed using cash flow analysis. Where applicable,
an appropriate discount rate is used, based on the Company's cost of capital
rate. See Note 14.

Before January 1, 2002, the Company amortized goodwill on the straight-line
method over a period of 40 years. Goodwill amortization expense was $6.1 million
during each of the years ended December 31, 2001 and 2000.

Deferred charges consist primarily of financing costs ($10.6 million and
$4.4 million, which are net of amortization (non-cash interest expense) of $4.5
million and $7.6 million at December 31, 2002 and 2001, respectively), and
program participation costs ($43.6 million and $36.7 million, which are net of
amortization of $12.4 million and $9.7 million at December 31, 2002 and 2001,
respectively) paid in connection with the award of wheels, brakes and brake
control equipment on various commercial programs. Program participation costs
are being amortized on a straight-line method over a period of 20 years.
Deferred financing charges are primarily being amortized on an effective
interest method over 4.5 to 10 years, which reflect the terms of the Company's
debt.

Intangible assets consist of patents, licenses and computer software which
are stated at cost and are being amortized on a straight-line method over
periods of 3 to 30 years.

EVALUATION OF LONG-LIVED ASSETS -- Effective January 1, 2002, the Company
adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 establishes a single accounting model based on the
framework established in SFAS No. 121 for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. There was no impact to
our financial position, results of operations or cash flows related to the
adoption of this standard.

Long-lived assets are assessed for recoverability on an ongoing basis in
accordance with SFAS No. 144. In evaluating the value and future benefits of
long-lived assets, their carrying value is compared to management's estimate of
the anticipated undiscounted future net cash flows of the related long-lived
asset. There were no adjustments to the carrying amount of long-lived assets
during the years ended December 31, 2002, 2001 and 2000 resulting from the
Company's evaluations.

WARRANTY -- Estimated costs of product warranty are accrued when individual
claims arise with respect to a product. When the Company becomes aware of such
defects, the estimated costs of all potential warranty claims arising from such
defects are fully accrued. See Note 12.

BUSINESS AND CREDIT CONCENTRATIONS -- The Company's customers are
concentrated in the airline industry but are not concentrated in any specific
region. The U.S. government accounted for approximately 26%, 21% and 17% of
total sales for the years ended December 31, 2002, 2001 and 2000, respectively.
No other single customer accounted for 10% or more of consolidated revenues for
the years then ended, and there were no significant accounts receivable from a
single customer, except the U.S. government, at December 31, 2002 and 2001.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

STOCK-BASED COMPENSATION PLANS -- As allowed by SFAS 123, "Accounting for
Stock-Based Compensation," the Company records compensation expense for its
stock-based compensation plans in accordance with the intrinsic-value method
prescribed by Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees." Intrinsic value is the amount by which the market price of
the underlying stock exceeds the exercise price of the stock option or award on
the measurement date, generally the date of grant.
F-7

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective January 1, 2002, the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure," have
been adopted by the Company.

ACCOUNTING CHANGES -- As previously mentioned, effective January 1, 2002,
the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure," SFAS No. 142, "Goodwill
and Other Intangible Assets," and SFAS No 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."

Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value will be recognized in earnings.

As a requirement of a previous credit facility, the Company entered into an
interest rate swap agreement to reduce the impact of potential increases in
interest rates on the credit facility.

The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction in other comprehensive income of $0.9 million ($0.6 million
after tax) related to derivatives designated in cash flow-type hedges prior to
adopting SFAS No. 133. This amount is being amortized into interest expense over
three years which is the remaining life of the interest rate swap agreement.
During the years ended December 31, 2002 and 2001, the change in fair market
value of this derivative instrument resulted in non-cash interest income of $0.4
million and non-cash interest expense of $3.9 million, respectively. These
amounts are recorded in interest expense as this derivative was not designated
as a hedging instrument for accounting purposes.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies," establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. The objective of SFAS No.
143 is to provide guidance for legal obligations associated with the retirement
of tangible long-lived assets. The retirement obligations included within the
scope of this project are those that an entity cannot avoid as a result of
either acquisition, construction or normal operation of a long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. At this time, the Company does not expect this
standard to have a material impact on the Company's consolidated financial
position, results of operation or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002." SFAS No. 145 rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of SFAS No. 145 shall be applied in fiscal years beginning after May
15, 2002. The Company does not expect this standard to have any material impact
on the Company's consolidated financial position, results of operations or cash
flows.

F-8

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain Cost
Incurred in a Restructuring)." This Statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is evaluating the impact of this standard on the Company's
consolidated financial position, results of operations and cash flows.

In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
45 requires the Company to recognize an initial liability for the fair value of
an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
adopted the disclosure provisions of FIN No. 45 (see Note 12) and is evaluating
the impact that full adoption will have on the consolidated financial position,
results of operations and cash flows.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," expanding the guidance in Accounting Research Bulletin No.
51, "Consolidated Financial Statements," relating to transactions involving
variable interest entities. As the Company does not have any variable interest
entities, we do not expect the adoption of this standard to have an impact on
our consolidated financial position, results of operations and cash flows.

RECLASSIFICATIONS -- Certain amounts in the financial statements for the
prior years have been reclassified to conform to the presentation in the current
year.

3. ACCOUNTS RECEIVABLE

An analysis of changes in the allowance for doubtful accounts is as
follows:

F-9

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVENTORY

5. PROPERTY, PLANT AND EQUIPMENT

6. OTHER CURRENT LIABILITIES

F-10

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM DEBT

On December 20, 2002, the Company consummated a recapitalization as
follows:

- We issued $250 million of senior subordinated notes due December 15, 2010
for which we received $241.5 million after paying fees and expenses.

- We paid $32.0 million of outstanding borrowings under our former credit
facility.

- We established a new $30.0 million revolving credit facility.

- We paid a dividend of $200.0 million to the holders of our common stock.

- We paid $9.4 million to the holders of our common stock options.

The Company has $185 million of debt maturing on October 5, 2007 and $250
million of debt maturing on December 15, 2010.

The Company has a $30.0 million bank Revolving Credit Facility (the
"Revolving Loan") with up to $10 million available for letters of credit. The
Revolving Loan commitment terminates on June 30, 2007. At December 31, 2002, the
Company had $27.1 million available to borrow and outstanding letters of credit
of $2.9 million.

The Revolving Loan contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Revolving Loan also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2002.

On December 20, 2002, the Company issued $250 million of 9 5/8% Senior
Subordinated Notes which mature on December 15, 2010 (the "9 5/8% Notes"). The
9 5/8% Notes are not subject to a sinking fund. The 9 5/8% Notes may not be
redeemed prior to December 15, 2006. On or after December 15, 2006, the Company
may redeem the 9 5/8% Notes at descending premiums ranging from 104.813% in
December 2006 to no premium after December 2009.

On October 15, 1997, the Company issued $185 million of 9 1/4% Senior
Subordinated Notes which mature on October 15, 2007 (the "9 1/4% Notes"). The
9 1/4% Notes are not subject to a sinking fund. On or after October 15, 2002,
the Company may redeem the 9 1/4% Notes at descending premiums ranging from
104.625% in October 2002 to no premium after October 2005.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of all financial instruments reported on the balance
sheet at December 31, 2002 and 2001 approximate their fair value, except as
discussed below.

F-11

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was approximately
$445 million and $285 million at December 31, 2002 and 2001, respectively.

As a requirement of a previous credit facility, we entered into an interest
rate swap agreement to reduce the impact of potential increases in interest
rates. This agreement has a notional amount of $84.0 million and we are required
to make payments for the difference between actual three month LIBOR and 5.95%
on this amount. The interest rate swap agreement expires on December 17, 2003.
The payments made under the swap agreement were $3.8 million in 2002. The fair
market value of this interest rate swap agreement at December 31, 2002 is an
obligation of $3.7 million which is recorded as a liability on the December 31,
2002 balance sheet. We have no other derivative financial instruments.

9. CAPITAL STOCK

The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire an aggregate of 100,000
authorized but unissued shares of common stock. Only non-qualified stock options
have been granted to date. The options granted prior to 2000 become exercisable
in four equal installments on the second, third, fourth and fifth anniversaries
of the date of grant. The options granted in 2000 and thereafter become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. All options remain exercisable until the
expiration of the option, which is 10 years from the date of the grant. Option
exercise prices approximate fair market value at date of grant, as determined by
the Board of Directors.

Stock option activity is summarized as follows:

F-12

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes information about stock options outstanding at
December 31, 2002:

At December 31, 2001, there were 28,350 options and 4,175 options
exercisable at $175 per share and $250 per share, respectively. At December 31,
2000, there were 18,000 options exercisable at $175 per share. At December 31,
2002, there were 20,350 shares available for future grants under the terms of
our stock option plans.

As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 requires the
disclosure of pro forma net income had the Company adopted the fair value
method. However, disclosure has been omitted because the pro forma effect on net
income required to be disclosed under SFAS No. 123 is not material to the
Company's results of operations. Effective January 1, 2002, the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," have been adopted by the Company.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Components of other comprehensive income (loss) consist of the following:

11. EMPLOYEE BENEFIT PLANS

The Company provides pension benefits to substantially all employees
through hourly and salaried pension plans. The plans provide benefits based
primarily on the participant's years of service. The salaried plan also includes
voluntary employee contributions. The Company's funding policy is to contribute
the minimum required under the Employee Retirement Income Security Act of 1974.

The Company provides postretirement health care and life insurance benefits
for all eligible employees and their dependents active at April 27, 1989 and
thereafter, and postretirement life insurance benefits for

F-13

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

retirees prior to April 27, 1989. Participants are eligible for these benefits
when they retire from active service and meet the eligibility requirements of
the Company's pension plans. The health care plans are generally contributory
and the life insurance plans are generally non-contributory.

The following represents a reconciliation of the benefit obligation, fair
value of plan assets and funded status of the Company's defined benefit and
other postretirement benefit plans:

F-14

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents the net periodic benefit cost (income) for the
defined benefit and postretirement benefit plans:

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $121.8 million, $117.0 million and $97.1 million,
respectively, as of December 31, 2002 and $103.8 million, $99.5 million and
$93.8 million, respectively, as of December 31, 2001.

For measurement purposes, a 10.2% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2003. The rate was assumed
to decrease to 4.5% for 2009 and remain at that level thereafter.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree medical plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:

Investments held by the Company's pension plans consist primarily of S&P
500 equity securities and investment grade fixed income securities.

Eligible employees also participate in the Company's Savings Plan. The
Company matches 60% of a participating employee's contributions, up to 6% of
compensation. The employer contributions generally have vested to participating
employees after five years of service (three years of service effective January
1, 2002). The matching contributions were $1,689,000, $1,796,000 and $1,609,000
for the years ended December 31, 2002, 2001 and 2000, respectively.

F-15

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. COMMITMENTS AND PRODUCT WARRANTIES

COMMITMENTS

The Company is party to various non-cancelable operating leases which are
longer than a one-year term for certain data processing, and other equipment and
facilities with minimum rental commitments payable as follows:

Rental expense was $4,076,000, $4,608,000 and $5,612,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.

PRODUCT WARRANTIES

Estimated costs of product warranty are accrued when individual claims
arise with respect to a product. When the Company becomes aware of those types
of defects, the estimated costs of all potential warranty claims arising from
those types of defects are fully accrued. An analysis of changes in the
liability for product warranty is as follows:

13. CONTINGENCIES

There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate liability, if any, will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.

14. GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be
amortized, but instead be tested for impairment at least annually. SFAS No. 142
also requires that any recognized intangible asset determined to have an
indefinite useful life not be amortized, but instead be tested for impairment in
accordance with this Standard until its life is determined to no longer be
indefinite. The Company adopted SFAS No. 142 on January 1, 2002, at which time
amortization of goodwill ceased. The impairment analysis did not result in an
impairment charge upon adoption or at year-end 2002.

F-16

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table adjusts net income assuming the adoption of SFAS No.
142 at the beginning of the periods presented:

Intangible assets consist of the following:

There was no change in the carrying amount of goodwill during the year
ended December 31, 2002. Total goodwill was $167.0 million at December 31, 2002.
Goodwill at December 31, 2002 allocated to the Company's segments, Aircraft
Braking Systems and Engineered Fabrics, was $135.7 million and $31.3 million,
respectively.

The aggregate amortization expense for the years ended December 31, 2002,
2001 and 2000 was $3.9 million, $8.8 million and $8.1 million, respectively.

The estimated amortization expense for intangible assets subject to
amortization in each of the five succeeding years from December 31, 2002 is
approximately $4.0 million.

F-17

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. INCOME TAXES

The Company's provision for income taxes consists of:

The effective income tax rate differs from the statutory federal income tax
rate for the following reasons:

The components of the net deferred tax liability are as follows:

The Company has $1.2 million of alternate minimum tax credits at December
31, 2002, which may be carried forward indefinitely and used to offset future
regular tax liability.

16. RELATED PARTY TRANSACTIONS

Bernard L. Schwartz ("BLS") owns or controls 50% of the capital stock of
the Company and pursuant to the Stockholders Agreement has the right to
designate a majority of the Board of Directors of the Company. In addition, BLS
serves as Chairman of the Board of Directors and Chief Executive Officer of the
Company and devotes such time to the business and affairs of the Company as he
deems appropriate. BLS is also Chairman of the Board and Chief Executive Officer
of Loral Space & Communications Ltd. ("Loral Space"). Because BLS is Chairman of
the Board of Directors and has the right to designate a majority of the
Directors to the Board of the Company, he has operating control of the Company.

The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
or expenses designated by him. Such agreement will

F-18

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

continue until BLS dies or is disabled or ceases to own a specified number of
shares of common stock of the Company.

The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $4.8 million, $5.5 million and $7.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

The Company reimburses Loral Space for rent and certain other services. The
related charges agreed upon were established to reimburse Loral Space for actual
costs incurred without profit or fee. The Company believes this arrangement is
as favorable to the Company as could have been obtained from unaffiliated
parties. Payments to Loral Space were $0.3 million, $0.5 million and $0.6
million for the years ended December 31, 2002, 2001 and 2000, respectively.

Pursuant to a financial advisory agreement between Lehman Brothers Inc.
("Lehman Brothers") and the Company, Lehman Brothers has agreed to act as
exclusive financial adviser to the Company and the Company has agreed to pay
Lehman Brothers customary fees for services when rendered. During the year ended
December 31, 2002, the Company paid Lehman Brothers $6.3 million for
underwriting discounts and commissions in connection with the issuance of the
9 5/8% Notes. During the two years ended December 31, 2001, no amounts were paid
under this agreement. The agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. The Lehman Investors own 50% of the
outstanding capital stock of the Company and are entitled to elect three
directors (in addition to one independent director jointly designated by BLS and
the Lehman Investors) to the Company's Board of Directors. The Lehman Investors
have the benefit of certain additional rights under the Stockholders' Agreement
and the Company's By-laws.

17. SEGMENTS

The Company's activities are conducted through its two wholly owned
subsidiaries, Aircraft Braking Systems and Engineered Fabrics, each considered
an operating segment. Aircraft Braking Systems manufactures aircraft wheels,
brakes and brake control systems. Engineered Fabrics manufactures aircraft fuel
tanks and iceguards and various other products from coated fabrics. The
accounting policies of the subsidiaries are the same as those described in the
summary of significant accounting policies. Both subsidiaries are managed
separately due to different products, technology and marketing strategies. The
Company evaluates performance of the subsidiaries based on profits from
operations before interest, income taxes and extraordinary charges.

F-19

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents financial information about the Company's
segments:

F-20

K & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following reconciles the total assets for the reportable segments to
the Company's consolidated assets:

The following represents the Company's total sales by products:

The following represents sales by geographic location:

Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $269,000,
$239,000 and $266,000 as of December 31, 2002, 2001 and 2000, respectively.

The U.S. government accounted for approximately 26%, 21% and 17% of the
Company's total sales for the years ended December 31, 2002, 2001 and 2000,
respectively.

F-21