K&F INDUSTRIES INC - 10-K Annual Report

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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, 2004

[ ] 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 12b.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, 2005, there were 1,000 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: NONE
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K&F INDUSTRIES, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

1

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 of 1933 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. They include statements
relating to future revenues and expenses, the expected growth of our business,
spending by the United States government on defense, future levels of business
in the commercial and general aviation industries, competition from other
suppliers and the effect of environmental or similar laws and determinations in
lawsuits.

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.

References in this Annual Report on Form 10-K to "we," "us," "our," "K&F,"
"K&F Industries," and the "Company" refer to K&F Industries, Inc., together with
its subsidiaries. References to "K&F Acquisition" refer to K&F Acquisition, Inc.
prior to the merger of K&F Acquisition with and into K&F Industries and to K&F
Industries upon and following the consummation of such merger. References to
"K&F Parent" refer to K&F Parent, Inc., the indirect parent company of K&F
Industries, and references to "Intermediate Holdco" refer to K&F Intermediate
Holdco, Inc., a wholly owned subsidiary of K&F Parent and the direct parent
company of K&F. All references to events or activities which occurred prior to
the acquisition, as discussed below, relate to K&F "Predecessor."

PART I

ITEM I. BUSINESS

THE ACQUISITION AND RELATED FINANCINGS

On November 18, 2004, we were acquired by an affiliate of Aurora Capital
Group for cash of approximately $1.06 billion. A portion of the cash
consideration was used to repay substantially all of our then existing
indebtedness and our fees and expenses as well as those of certain of our
stockholders in connection with the acquisition, with the balance paid to our
prior equityholders. We refer to this transaction as the "Acquisition."

The Acquisition was financed with $795.0 million of debt financing
described below and $309.8 million of preferred and common equity capital from
affiliates of Aurora Capital Group and certain co-investors. K&F Parent
contributed the $309.8 million of equity to Intermediate Holdco which then
contributed such proceeds as equity to K&F Acquisition prior to the merger of
K&F Acquisition with and into K&F. In addition, K&F Parent issued a note in the
amount of approximately $14.7 million payable to the selling equityholders for
the estimated tax benefits to be received by us due to the payment of fees and
premiums in connection with the tender offers we made for our 9 1/4% senior
subordinated notes due 2007, or our "9 1/4% notes," and 9 5/8% senior
subordinated notes due 2010, or our "9 5/8% notes," and collectively our "prior
senior subordinated notes" and other transaction expenses. The note will mature
in May 2005, and we anticipate receiving the proceeds of a tax refund in the
approximate amount of the note at about the same time.

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We also entered into the following financing transactions, or the
"Financing Transactions," which we refer to, together with the Acquisition, as
the "Transactions:"

- the issuance of $315.0 million of 7 3/4% senior subordinated notes due
2014, which we refer to as the "7 3/4% notes;"

- the closing of a new $530.0 million senior secured credit facility, which
we refer to as the "new credit facility," consisting of a six-year $50.0
million revolving credit facility (undrawn at Acquisition date except for
$2.0 million of letters of credit) and an eight-year $480.0 million term
loan facility; and

- the repurchase pursuant to tender offers and consent solicitations, or
the "tender offers," of $138.9 million of our previously outstanding
9 1/4% notes and $249.4 million of our previously outstanding 9 5/8%
notes. As a result of receiving the requisite consents, we entered into a
supplemental indenture with the trustee and the guarantors under the
applicable indentures to eliminate certain restrictive covenants
contained in such indentures.

On December 23, 2004, we redeemed the remaining $6.1 million principal
amount of our 9 1/4% notes that were not tendered in the tender offer. An
aggregate principal amount of $577,000 of our 9 5/8% notes remains outstanding
and are governed by the related amended indenture.

THE COMPANY

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, 2004, approximately 83% 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 60% 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, 2004,
approximately 17% of our total revenues were derived from sales made by
Engineered Fabrics.

We were incorporated in Delaware on March 13, 1989.

AIRCRAFT BRAKING SYSTEMS

Aircraft Braking Systems' products are used on approximately 27,000
commercial transport, general aviation and military aircraft worldwide. U.S. and
foreign governmental authorities, including the Federal Aviation Administration,
or the "FAA," impose strict certification requirements for new aircraft
programs, including the wheel and brake systems. Once a manufacturer's wheels
and brakes have been installed on an aircraft, these governmental authorities
generally require certified replacement parts for such systems be provided by an
approved manufacturer. In addition, regional and general aviation aircraft
manufacturers typically select one manufacturer to supply original wheels and
brakes for an entire fleet of aircraft, and such manufacturer typically becomes
the sole source supplier for replacement parts. As a result, approximately 75%
of Aircraft Braking Systems' revenues are derived from programs supplied on a
sole source basis.

Aircraft manufacturers and wheel and brake suppliers, in conjunction with
the FAA, require the replacement of aircraft wheels and brakes at regular
intervals, which generally averages once or twice a year for high-cycle
commercial aircraft, i.e. regional jets. When Aircraft Braking Systems' products
have been certified and installed on an aircraft, we typically generate
recurring revenues from sales of replacement parts over the life of the
aircraft, which for most modern aircraft is 25 years or longer. As a result,
more than 75% of Aircraft Braking Systems' revenues are derived from the sale of
high-margin replacement parts.

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We believe that Aircraft Braking Systems is the largest supplier of wheels
and brakes for (1) high-cycle regional jets, which make more frequent landings
than long-range commercial aircraft, (2) high-end general aviation aircraft and
(3) the U.S. military. Aircraft Braking Systems also manufactures brake control
systems for use on a variety of commercial transport, general aviation and
military aircraft. Other products manufactured by Aircraft Braking Systems
include helicopter rotor brakes and brake temperature monitoring equipment for
various types of aircraft.

In the commercial transport market, Aircraft Braking Systems' products are
used on a broad range of large commercial transport (120 seats or more),
regional jet (between 30 and 120 seats) and other commuter aircraft. We provide
replacement parts for aircraft manufactured by, among others, Boeing, Airbus,
Bombardier and Embraer, as well as to commercial airlines and replacement part
distributors. Aircraft Braking Systems' general aviation market includes
products for business and personal aircraft (19 seats or less), and its
customers include airframe manufacturers such as Gulfstream, Raytheon Aircraft,
Learjet, Canadair, Cessna, Dassault and Israeli Aircraft Industries, and
distributors, such as Aviall. In the military market, Aircraft Braking Systems'
products are used on a variety of fighters, training aircraft, transports, cargo
planes, bombers and helicopters. Substantially all of our military products are
sold to the U.S. Department of Defense, foreign governments and airframe
manufacturers, including Lockheed Martin, Boeing, Sikorsky, Bell, Saab and AIDC
in Taiwan.

During the year ended December 31, 2004, 83% of our total revenues were
derived from sales made by Aircraft Braking Systems.

ENGINEERED FABRICS

We believe Engineered Fabrics is the leading worldwide manufacturer of
flexible bladder fuel tanks for aircraft and helicopters, supplying
approximately 60% of the flexible bladder fuel tanks for the worldwide
commercial transport and general aviation markets and over 50% of these tanks
for the U.S. military. With its proprietary technology, Engineered Fabrics is
the only FAA-certified supplier of polyurethane manufactured fuel tanks in the
United States, which feature "selfsealing" technology that significantly reduces
the potential for fires, leaks and spilled fuel following a crash.

During the year ended December 31, 2004, 17% of our total revenues were
derived from sales made by Engineered Fabrics.

OUR STRATEGY

EXPAND OUR PRESENCE ON HIGH-CYCLE REGIONAL JETS. Aircraft Braking Systems
has focused on expanding its presence on high-cycle regional jets, which make
more frequent landings than long-range commercial aircraft and thus require more
frequent replacement of wheels and brakes. As a result, we believe that Aircraft
Braking Systems is now the largest supplier of wheels and brakes for regional
jets, with a 41% worldwide market share. We believe that regional jets represent
a significant and fast growing segment of the commercial aircraft market. Since
2002, passenger traffic on regional jets has averaged over 20% annual growth. We
intend to capitalize on the growing number of regional jets in service and the
resulting opportunities for original equipment and replacement part sales.

FOCUS ON HIGH-END GENERAL AVIATION AIRCRAFT. We focus on high-end business
jet platforms within the general aviation sector. We expect increased use of
aircraft within this sector due to the growing popularity of "fractional"
ownership of aircraft, which today account for approximately 40% of new business
jet backlog. Fractional fleet aircraft are used more often than corporate or
personal aircraft, resulting in more frequent replacement of wheels and brakes.
We expect that business jet utilization will also benefit from the perception of
greater safety, as well as more convenient security checks. We believe that
Aircraft Braking Systems already provides braking equipment for more than 50% of
the business jets in the worldwide general aviation fleet.

INCREASE OUR LEADERSHIP IN THE MILITARY AIRCRAFT MARKET. We believe we are
the largest supplier of wheels, brakes and flexible bladder fuel tanks to the
U.S. military. The U.S. defense budget for aircraft

4

procurement has grown from $18.0 billion in 2001 to $23.8 billion in 2005. We
expect this increased defense spending will benefit the fleet of more than
11,000 military aircraft already in our portfolio through replenishment,
upgrades and modernization activities and may lead to additional program
opportunities.

AIRCRAFT PROGRAM SELECTION AND LIFECYCLE STAGES

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

In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
assemblies at or 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 within the first half of the life of an
aircraft. The average life for most modern aircraft is over 25 years. 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 lifecycle of a typical aircraft program consists of four stages: (1)
the development stage, (2) the growth stage, (3) the mature stage and (4) the
decline stage. During the development stage the aircraft manufacturer will
select suppliers for various components and parts, including wheels, brakes and
brake control or anti-skid systems. Airframe manufacturers work with such
suppliers to obtain certification of the airframe and its parts. No revenues are
generated by the suppliers during this stage, as the program has not yet begun
production. Once the program has been certified, the program enters the growth
stage and the airframe manufacturer will commence and complete the production of
the aircraft fleet. During this stage, aircraft wheel and brake suppliers
continue to invest in the original equipment outfitted on new deliveries of
commercial and general aviation aircraft by delivering such equipment at less
than cost, but also receive cash flows from replacement parts provided to those
planes already in service. The mature stage for an aircraft program begins after
the entire fleet has been delivered. This is the most profitable stage, as no
additional investments are required and the maximum number of program aircraft
are then in service. The decline stage begins when individual planes are taken
out of service. Although aircraft wheel and brake suppliers still realize cash
flows during this stage, replacement part orders decrease as the size of the
operating fleet shrinks.

5

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

PROGRAM LIFECYCLE STAGES

PRODUCTS

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:

Aircraft Braking Systems. Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, brakes and brake control systems for commercial
transport, general aviation and military 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.

Aircraft Braking Systems' products are installed on approximately 27,000
commercial transport, general aviation and military 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 and
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 replacement 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 and A-321 and
the MD-80 Series. Aircraft Braking Systems is also the sole certified supplier
for the Boeing MD-90 and Bombardier's CRJ-100/200, CRJ-440, CRJ-700 and CRJ-900
regional jets. In addition, Aircraft Braking Systems is the sole certified
supplier of wheels and carbon brakes for the Embraer 170, 175, 190 and 195
aircraft, a family of regional jets, with the first platform having entered
service during 2004.

6

In general aviation, we have been selected to supply the wheels and brakes
for the new Dassault Falcon 7X long-range business jet, and we supply wheels and
brakes for such general aviation aircraft in production as the Raytheon Hawker
400XP, the Dassault Falcon 900EX EASy, the Gulfstream G100, G200 and G450 and
the Learjet 60. Some of the 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. We also supply the wheels, brakes and brake control systems
on the Korean Aerospace T-50 Trainer.

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 brake performance
to variations in the braking force while also preventing the wheels from locking
and skidding. We believe that our ability to integrate the design and
performance characteristics of wheels, brakes and antiskid systems into a
complete braking system provides Aircraft Braking Systems with a competitive
advantage. Other products manufactured by Aircraft Braking Systems include
helicopter rotor brakes and brake temperature monitoring equipment for various
types of aircraft.

The following table is a summary of the principal aircraft platforms
equipped with Aircraft Braking Systems products or that are in the "development"
stage:

Engineered Fabrics. We believe Engineered Fabrics is the leading worldwide
manufacturer of flexible bladder fuel tanks for aircraft and helicopters,
supplying approximately 60% of the flexible bladder fuel tanks for the worldwide
commercial transport and general aviation markets and over 50% of these tanks
for the U.S. military market. 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, AH-64, SH3A, SH3D, 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.

Flexible bladder fuel tanks, manufactured by combining multiple layers of
coated fabrics and adhesives, are sold for use in commercial transport, general
aviation and military aircraft. During the year ended December 31, 2004, sales
of fuel tanks accounted for approximately 77% 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. With its proprietary technology, Engineered Fabrics
is the only FAA-certified supplier of polyurethane manufactured fuel tanks in
the United States, which feature "selfsealing" technology that significantly
reduces the potential for fires, leaks and spilled fuel following a crash.

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

8

material are heating elements which are connected to the electrical system of
the aircraft and, when activated by the pilot, the system provides anti-icing
protection when in flight.

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.

SALES AND CUSTOMERS

We sell our products to more than 175 airlines, aircraft manufacturers,
governments and distributors across the commercial transport, general aviation
and military sectors. Sales to the U.S. government represented approximately
23%, 26% and 26% of total sales for the years ended December 31, 2004, 2003 and
2002, 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 aircraft manufacturers, commercial
airlines and replacement part distributors. Our products are used on a broad
range of large commercial transport (120 seats or more), regional jet (between
30 and 120 seats) and other commuter aircraft. Customers include Delta Air
Lines, Alitalia, Japan Air Systems, Lufthansa, Swiss Airlines, Northwest
Airlines, Continental Airlines, American Airlines, Saudi Arabian Airlines,
Aeromexico, TAM Airlines, Asiana Airlines, China Eastern Airlines, Honeywell and
Goodrich Corporation. We provide replacement parts to aircraft manufactured by,
among others, Boeing, Airbus, Bombardier and Embraer.

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 business and personal aircraft. Customers include airframe
manufacturers, such as Gulfstream, Raytheon Aircraft, Bombardier, 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 Raytheon Hawker 400XP and Hawker Horizon, the Lear series 20, 30, 50
and 60, the Gulfstream G-I, G-II, G-IIB, G-III and G-IV, the IAI 1123, 1124 and
1125, Astra SPX and Galaxy, the Challenger CL600, CL601 and CL604, and the
Dassault Falcon 10, 20, 50, 100, 200 and 50EX.

Military. We believe we are the largest supplier of wheels, brakes and
flexible bladder 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, C-130, C-130J, E-2E, EA6B, E3, E8, T-1A, and T-2B.
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, Westland Super Lynx in Great Britain, Saab JAS-39 in Sweden, Alenia C-27
and Augusta A129 in Italy, Casa C-212 in Spain, and the T-50 in South Korea.
Substantially all of our military products are sold to the U.S. Department of

9

Defense, foreign governments or to aircraft 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, IDF and T-50 aircraft.

DOMESTIC AND FOREIGN SALES

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, 2004, we employed approximately 132 engineers
(of whom 19 held advanced degrees).

The costs incurred relating to independent research and development for the
years ended December 31, 2004, 2003 and 2002 were $13.8 million, $14.9 million
and $14.6 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, Goodrich Corporation and Messier-Bugatti. All
three 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. The principal competitors for flexible bladder
fuel tanks are American Fuel Cell & Coated Fabrics Company and Aerazur, both
owned by Zodiac S.A. See "Risk Factors -- We operate in a very competitive
business environment."

BACKLOG

Backlog at December 31, 2004 and 2003 amounted to approximately $153.2
million and $130.6 million, respectively. Backlog consists of firm orders for
our products which have not been shipped. Approximately 88% of our total backlog
at December 31, 2004 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, 2004, approximately 36% 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.

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GOVERNMENT CONTRACTS

For the years ended December 31, 2004, 2003 and 2002, approximately 23%,
26% and 26%, 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.

GOVERNMENT REGULATION

The FAA in the United States, and similar agencies in other jurisdictions
(for example, the Joint Aviation Authorities or JAA in Europe), issues and
enforces regulations and minimum standards covering the manufacturing,
operation, and maintenance of aircraft, which provide for the safety of
airframes and the assemblies and parts initially installed on new aircraft, as
well as the continuing airworthiness of aircraft and the safety of parts as
replaced and maintained on aircraft. This regime includes auditing by the FAA of
published maintenance procedures that manufacturers generate and which the
manufacturers, such as Aircraft Braking Systems and Engineered Fabrics, and
repair stations must comply with on a continuous basis, so that the flying
public can be assured that safety standards are met. These governmental
authorities impose strict certification requirements for new aircraft programs
and replacement parts. Aircraft Braking Systems has a long history of compliance
with FAA and JAA requirements and both the Akron, Ohio facility and the Slough,
UK facility hold production quality system approvals and repair station
approvals, and publish copyrighted component maintenance manuals, that satisfy
all FAA and JAA requirements. Engineered Fabrics, similarly, meets FAA
requirements for its commercial products and military specifications for its
military products.

Additionally, to the extent that we export products, technical data and
services outside the United States, we are subject to U.S. laws and regulations
governing international trade and exports, including but not limited to the
International Traffic in Arms Regulations, the Export Administration Regulations
and trade sanctions against embargoed countries, which are administered by the
Office of Foreign Assets Control within the Department of the Treasury. A
determination that we have failed to comply with one or more of these export
controls could result in civil and/or criminal sanctions, including the
imposition of fines upon us as well as the denial of export privileges and
debarment from participation in U.S. government contracts. Any one or more of
such sanctions could have a material adverse effect on our business, financial
condition and results of operations. In December 2004, we received an inquiry
from the U.S. Department of Commerce regarding our compliance with certain of
these regulations in relation to a proposed foreign sale, which was never
completed. Consequently, we began a comprehensive internal review of our export
practices. As a result of that review we identified and voluntarily disclosed to
the Office of Defense Trade Controls Compliance certain inadvertent or

11

possible export violations that were unrelated to the proposed foreign sale.
Although we do not currently anticipate that the government inquiry or any
consequences of the voluntary disclosure will have a material adverse effect on
our business, financial condition or results of operations, we can give no
assurance as to whether we will ultimately be subject to sanctions as a result
of either the inquiry or the voluntary disclosure, or the extent or effect
thereof, if any sanctions are imposed.

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, 2004, we had 1,306 full-time employees, of which 727 were
employed by Aircraft Braking Systems (347 hourly and 380 salaried employees) and
579 were employed by Engineered Fabrics (441 hourly and 138 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' collective bargaining agreement will expire on
June 30, 2006 and the collective bargaining agreement at Engineered Fabrics will
expire on February 5, 2007. We believe that our relationships with our employees
are good.

RISK FACTORS

Set forth below are important risks and uncertainties that could negatively
affect our business and financial conditions and could cause our actual results
to differ materially from those expressed in forward-looking statements made by
K&F management.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR NEW CREDIT FACILITY AND
OUR 7 3/4% NOTES.

As of December 31, 2004, we had $790.6 million of consolidated indebtedness
excluding unused commitments under our new revolving credit facility.

Our substantial indebtedness could:

- increase our vulnerability to general adverse economic and industry
conditions;

- require us to dedicate a substantial portion of cash flow from operations
to payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures, research and
development efforts, program investment efforts and other general
corporate needs;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

- place us at a competitive disadvantage compared to our competitors with
less debt; and

- limit our ability to borrow additional funds.

The indenture governing the 7 3/4% notes and the new credit facility
contain financial and other restrictive covenants that will limit our ability to
engage in activities that may be in our long-term best interests. Our failure to
comply with those covenants could result in an event of default, which, if not
cured or waived, could result in the acceleration of all of our debts.
12

DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR SUBSTANTIAL INDEBTEDNESS.

We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture governing the 7 3/4%
notes and the new credit facility do not fully prohibit us or our subsidiaries
from doing so. The revolving credit portion of our new credit facility permits
additional borrowings of up to $50.0 million.

TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.

Our ability to make payments on and to refinance our indebtedness, and to
fund planned capital expenditures, program investment efforts and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.

Accordingly, we cannot assure you that our business will generate
sufficient cash flow from operations, or that future borrowings will be
available to us under our new credit facility to enable us to pay our
indebtedness, or to fund other liquidity needs. We may need to refinance all or
a portion of our indebtedness, on or before maturity. We cannot assure you that
we will be able to refinance any of our indebtedness, including our new credit
facility and the 7 3/4% notes, on commercially reasonable terms or at all.

Without such refinancing, we could be forced to sell assets to make up for
any shortfall in our payment obligations under unfavorable circumstances. Our
new credit facility and our obligations under the 7 3/4% notes will limit our
ability to sell assets and will also restrict the use of proceeds from any such
sale. Furthermore, our new credit facility is secured by substantially all of
our assets. Therefore, we may not be able to sell our assets quickly enough or
for sufficient amounts to enable us to meet our debt service obligations.

THE AGREEMENTS GOVERNING THE NEW CREDIT FACILITY AND THE 7 3/4% NOTES IMPOSE
SIGNIFICANT RESTRICTIONS ON OUR BUSINESS.

The agreements governing the new credit facility and the 7 3/4% notes
contain a number of covenants imposing significant restrictions on our business.
These restrictions may affect our ability to operate our business and may limit
our ability to take advantage of potential business opportunities as they arise.
The restrictions these covenants place on us and our restricted subsidiaries
include limitations on our ability and the ability of our restricted
subsidiaries to:

- incur indebtedness or issue disqualified stock or preferred stock;

- pay dividends or make other distributions on, redeem or repurchase our
capital stock;

- make investments or acquisitions;

- create liens;

- sell assets;

- engage in sale and lease back transactions;

- restrict dividends or other payments to us;

- guarantee indebtedness;

- engage in transactions with affiliates; and

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

Our new credit facility also requires us to meet a number of financial
ratio tests and restricts our ability to make capital expenditures or prepay
certain other debt. We may not be able to maintain these ratios. These
restrictions could limit our ability to plan for or react to market conditions
or meet our capital needs. We cannot assure you that we will be granted waivers
or amendments to our new credit facility if for any reason we
13

are unable to meet its requirements, or that we will be able to refinance our
debt on terms acceptable to us, or at all.

The breach of any of these covenants or restrictions could result in a
default under the indenture governing the 7 3/4% notes or our new credit
facility. An event of default under either the indenture or our new credit
facility would permit some of our lenders to declare all amounts borrowed from
them to be due and payable. An event of default under either the indenture or
our new credit facility would likely result in a cross default under the other
instrument. If we are unable to repay debt, lenders having secured obligations
could proceed against the collateral securing that debt.

OUR COMMERCIAL BUSINESS IS SENSITIVE TO OUR CUSTOMERS' USAGE OF PLANES AND OUR
CUSTOMERS' PROFITABILITY, WHICH ARE, IN TURN, AFFECTED BY GENERAL ECONOMIC
CONDITIONS.

We compete in the aircraft component sector of the aerospace industry. Our
business is directly affected by economic factors and other trends that affect
our customers, including projected market growth that may not materialize or be
sustainable. Specifically, the aircraft component segment is sensitive to
changes in the number of miles flown by paying customers of commercial airlines,
which are referred to as revenue passenger miles, and, to a lesser extent, to
changes in the profitability of the commercial airline industry and the size and
age of the worldwide aircraft fleet.

Revenue passenger miles and airline profitability have historically
correlated with the general economic environment, although national and
international events can also play a key role. The airline industry in recent
years has been severely affected by the September 11, 2001 terrorist attacks, a
soft global economy, the SARS epidemic and the conflicts in Afghanistan and
Iraq. As a result of the substantial reduction in airline traffic arising from
these events, the airline industry incurred, and some in the industry continue
to incur, large losses. Furthermore, certain major carriers have filed for
bankruptcy protection while others may do so in the near future. Many major
carriers have also parked or retired a portion of their fleets and have reduced
workforces and flights. Any future terrorist attacks could cause airlines to
cancel or delay the purchase of replacement parts and new aircraft. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The demand for Aircraft Braking Systems' replacement parts varies
based on the number of aircraft equipped with Aircraft Braking Systems' products
and the number of landings made by those aircraft. A reduction in airline travel
will usually result in reduced utilization of commercial aircraft, fewer
landings and a corresponding decrease in Aircraft Braking Systems' sales,
related income and cash flow.

During periods of reduced airline profitability, some airlines may delay
purchases of replacement parts, preferring instead to deplete existing
inventories. If demand for new aircraft and replacement parts decreases, there
may be a decrease in demand for certain of our products. Therefore, any future
decline in revenue passenger miles, airline profitability or the size of the
worldwide aircraft fleet, for any reason, could have a material adverse effect
on our business, financial condition and results of operations.

PARTICIPATION IN NEW AIRCRAFT PROGRAMS NEGATIVELY AFFECTS OUR CASH FLOW.

Since original equipment in new commercial aircraft is supplied at or
substantially below the cost of production, delivery of new aircraft equipped
with Aircraft Braking Systems' products decreases our cash flow. Our business
plan budgets cash needs based on current delivery schedules of new aircraft and
also accommodates certain increases in aircraft deliveries. However,
significant, unanticipated increases in commercial aircraft deliveries in a
given year could have a material adverse impact on our cash flow in that year.
In addition, if we do not have sufficient capital to participate in all of the
new programs in which we would like to invest, our business, financial
condition, results of operations and future cash flows could be adversely
affected.

THE U.S. GOVERNMENT IS A SIGNIFICANT CUSTOMER, THE LOSS OF WHICH COULD
ADVERSELY AFFECT US.

Sales to the U.S. government or to prime contractors or subcontractors of
the government were approximately 23%, 26% and 26% of our total sales for the
years ended December 31, 2004, 2003 and 2002,

14

respectively. The loss of all or a substantial portion of those types of sales
could adversely affect us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "--Government Contracts."

In addition, we bear the risk that the U.S. government may unilaterally
suspend us from new contracts pending the resolution of alleged violations of
procurement laws or regulations. Historically, under our management, there have
been no alleged violations of procurement laws or regulations and none are
alleged at this time. The terms of defense contracts with the U.S. government
generally permit the government to terminate contracts partially or completely,
with or without cause, at any time. Any unexpected termination of a significant
government contract could have an adverse effect on our business. Our U.S.
government sales are also subject to changes in the government's procurement
policies and, at times, the need to bid on programs in advance of design
completion. A reduction in expenditures by the U.S. government for aircraft
using our products, 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
business, financial condition and results of operations.

A DECLINE IN THE U.S. DEFENSE BUDGET OR LIMITATIONS ON SALES TO FOREIGN
GOVERNMENTS MAY ADVERSELY AFFECT OUR SALES.

The U.S. defense budget has fluctuated over the years, at times resulting
in reduced demand for new aircraft and, to a lesser extent, replacement parts.
In addition, foreign military sales are affected by U.S. government regulations,
regulations by the purchasing foreign government and political uncertainties in
the United States and abroad. The U.S. defense budget may continue to fluctuate,
and may decline, and sales of defense related items to foreign governments may
decrease. If there is a decline in the U.S. defense budget that reduces demand
for our components or additional restrictions are imposed on foreign sales, our
business, financial condition and results of operations may be adversely
affected.

WE COULD BE ADVERSELY AFFECTED IF ONE OF OUR COMPONENTS CAUSES AN AIRCRAFT TO
CRASH.

Our operations expose us to potential liabilities for personal injury or
death as a result of the failure of an aircraft component that has been
designed, manufactured or serviced by us. While we believe that our liability
insurance is adequate to protect us from future product liability claims, it may
not be enough. Also, we may not be able to maintain insurance coverage in the
future at an acceptable cost. Any such liability not covered by insurance or for
which third party indemnification is not available could have a material adverse
effect on our business, financial condition and results of operations.

A crash caused by one of our components could also damage our reputation
for quality products. Our customers consider safety and reliability as primary
concerns in selecting a provider of aircraft wheels, brakes, brake control
systems and fuel tanks. If a crash were to be caused by one of our components,
or if we were otherwise to fail to maintain a satisfactory record of safety and
reliability, our ability to retain and attract customers may be adversely
affected.

THE AIRLINE INDUSTRY IS HEAVILY REGULATED AND FAILURE TO COMPLY WITH
APPLICABLE LAWS COULD REDUCE OUR SALES OR REQUIRE US TO INCUR ADDITIONAL COSTS
TO ACHIEVE COMPLIANCE, WHICH COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.

The FAA prescribes standards and qualification requirements for aircraft
components, including virtually all commercial airline and general aviation
products, and licenses component repair stations within the United States.
Comparable agencies, such as the U.K. Civil Aviation Authority and the Japanese
Civil Aviation Board, regulate these matters in other countries. If we fail to
qualify or to obtain a required license for one of our products or services or
lose a qualification or license previously granted, the sale of the subject
product or service would be prohibited by law until such license is obtained or
renewed. In addition, designing new products to meet existing regulatory
requirements and retrofitting installed products to comply with new regulatory
requirements can be expensive and time consuming.

15

From time to time the FAA or comparable agencies propose new regulations or
changes to existing regulations. These new regulations or changes generally
cause an increase in costs of compliance. To the extent the FAA, or comparable
agencies, implement new regulations or changes in the future, we may incur
significant additional costs to achieve compliance.

ANY PROBLEM OR INTERRUPTION IN OUR SUPPLY FROM KEY VENDORS COULD DELAY
PRODUCTION AND ADVERSELY AFFECT OUR SALES.

We rely on independent suppliers for key raw materials, some of which may
be available only from limited sources. Our continued supply of materials is
subject to a number of risks including:

- the destruction of our suppliers' facilities or their distribution
infrastructure;

- a work stoppage or strike by our suppliers' employees;

- the failure of our suppliers to provide materials of the requisite
quality;

- the failure of essential equipment at our suppliers' plants;

- the failure or shortage of supply of raw materials to our suppliers; and

- contractual amendments and disputes with our suppliers.

In addition, contracts with certain of our suppliers for raw materials and
other goods are short-term contracts. We cannot assure you that these suppliers
will continue to provide products to us at attractive prices or at all, or that
we will be able to obtain such products in the future from these or other
providers on the scale and within the time periods we require. If we are not
able to obtain key products on a timely basis and at an affordable cost, or we
experience significant delays or interruptions of their supply, it could have a
material adverse effect on our business, financial condition and results of
operations.

WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT.

The aircraft component sector of the aerospace industry is highly
competitive. 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, Goodrich Corporation and
Messier-Bugatti. The principal competitors for brake control systems are the
Hydro-Aire Division of Crane Co. and Messier Bugatti. The principal competitors
for flexible bladder fuel tanks are American Fuel Cell & Coated Fabrics Company
and Aerazur, both owned by Zodiac S.A. Many of our competitors have greater
resources than us, and therefore may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or devote greater
resources to the development, promotion and sale of their products than we can.
Providers of aircraft components have traditionally competed on the basis of
cost, technology, quality and service. We believe that developing and
maintaining a competitive advantage will require continued investment in product
development, engineering, program investments and sales and marketing. We cannot
assure you that we will have enough resources to make the necessary investments
to do so and we cannot assure you that we will be able to compete successfully
in this market or against such competitors.

THE UNCERTAINTIES RELATING TO OUR FOREIGN OPERATIONS COULD AFFECT OUR
OPERATING RESULTS.

While most of our operations are based in the United States, we sell to
foreign governments and airlines all over the world. As a result, approximately
40% of our consolidated sales for the past three fiscal years were from sales
outside of the United States and we believe that revenue from sales outside the
United States will continue to account for a material portion of our total
revenues for the foreseeable future. International operations and any foreign
business expansion plans we may undertake are subject to numerous additional
risks, including:

- the difficulty of enforcing agreements and collecting receivables through
some foreign legal systems;

- foreign customers may pay more slowly than customers in the United
States;

16

- unexpected changes in regulatory requirements;

- the risk that foreign governments may adopt regulations or take other
actions that would have a direct or indirect adverse impact on our
business and market opportunities; and

- the potential difficulty in enforcing intellectual property rights in
some foreign countries.

As we continue to expand our business globally, our success will depend, in
large part, on our ability to anticipate and effectively manage these and other
risks associated with our international operations. However, any of these
factors could adversely affect our international operations and, consequently,
our operating results.

To the extent that we operate outside the United States, we are subject to
the Foreign Corrupt Practices Act, or "FCPA," which generally prohibits U.S.
companies and their intermediaries from bribing foreign officials for the
purpose of obtaining or keeping business or otherwise obtaining favorable
treatment. In particular, we may be held liable for actions taken by our
strategic or local partners even though such partners are foreign companies that
are not subject to the FCPA. Any determination that we have violated the FCPA
could result in sanctions that could have a material adverse effect on our
business, financial condition and results of operations.

Additionally, to the extent that we export products, technical data and
services outside the United States, we are subject to U.S. laws and regulations
governing international trade and exports, including but not limited to the
International Traffic in Arms Regulations, the Export Administration Regulations
and trade sanctions against embargoed countries, which are administered by the
Office of Foreign Assets Control within the Department of the Treasury. A
determination that we have failed to comply with one or more of these export
controls could result in civil and/or criminal sanctions, including the
imposition of fines upon us as well as the denial of export privileges and
debarment from participation in U.S. government contracts. Any one or more of
such sanctions could have a material adverse effect on our business, financial
condition and results of operations. In December 2004, we received an inquiry
from the U.S. Department of Commerce regarding our compliance with certain of
these regulations in relation to a proposed foreign sale, which was never
completed. Consequently, we began a comprehensive internal review of our export
practices. As a result of that review we identified and voluntarily disclosed to
the Office of Defense Trade Controls Compliance certain inadvertent or possible
export violations that were unrelated to the proposed foreign sale. Although we
do not currently anticipate that the government inquiry or any consequences of
the voluntary disclosure will have a material adverse effect on our business,
financial condition or results of operations, we can give no assurance as to
whether we will ultimately be subject to sanctions as a result of either the
inquiry or the voluntary disclosure, or the extent or effect thereof, if any
sanctions are imposed.

WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS AND OUR OPERATIONS MAY EXPOSE US
TO ENVIRONMENTAL LIABILITIES.

Our manufacturing operations are subject to various environmental laws and
regulations, including those related to soil and groundwater contamination, air
emissions and the protection of human health and the environment, administered
by federal, state and local agencies. We regularly 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 our business, financial condition or results
of operations. 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.

The Goodyear Tire and Rubber Company, the parent of a former owner and
operator of our Akron, Ohio facility, is and has been conducting remediation of
groundwater contamination there that is believed to have been released during
the operations of a former subsidiary of Goodyear. Although we could be held
liable as the current operator of this site, no one has alleged that we caused
the groundwater contamination or that we should be held responsible for its
cleanup, and Goodyear has paid all costs to date pursuant to contractual

17

indemnities. There nonetheless can be no assurance that we will not incur
material costs in connection with contamination resulting from former industrial
operations at our Ohio and Georgia facilities. We have purchased an
environmental contamination insurance policy designed to cover liability for
third party claims seeking damages related to cleanup costs or personal injuries
arising from contamination existing at our Ohio and Georgia facilities on or
before November 18, 2004. The policy has an aggregate limit of $50.0 million and
is subject to deductibles and other limitations. Although we believe that the
policy is adequate to cover potential contamination liabilities at these sites,
there can be no assurance that we will in fact be able to recover any
contamination-related costs under the policy or that the policy will be
sufficient to cover any such liabilities that we may incur.

WE HAVE BEEN INCLUDED, AND MAY IN THE FUTURE BE INCLUDED, IN CLAIMS AGAINST
PRIOR OWNERS OF OUR FACILITIES.

Previous owners of the aircraft braking system production assets that we
now operate in Akron installed brake pads containing asbestos in certain of
their products. As a result, from time to time, we have been named, along with
other defendants, in a relatively small number of products liability cases and
employee exposure lawsuits alleging that we are responsible, as a corporate
successor or otherwise, for the asbestos exposure liabilities of the previous
owners. To date, there has been no finding adverse to us in any such litigation,
and we believe that we have defenses to the allegations of successor liability
and other theories of liability, as well as rights to contribution and indemnity
from others.

Products Liability. Since 1993, we have been named in products liability
lawsuits brought by approximately 170 non-employee plaintiffs alleging personal
injury from exposure to asbestos. To date in connection with these lawsuits, we
have sought and received defense and indemnity from Goodyear, which produced
aircraft braking systems equipped with asbestos-containing brake linings between
approximately 1940 and 1985 at the Akron, Ohio facility now operated by Aircraft
Braking Systems. Goodyear has been named as a defendant in all of these claims.
In addition, these claims name Loral Corporation (now part of Lockheed Martin
Corporation), from whom we bought the aircraft braking system production assets
in 1989. To date, we have incurred only administrative costs in connection with
these claims.

Employee Exposure. In 2003, we participated with Lockheed Martin
Corporation in the resolution of numerous worker-related claims, including 157
claims made against us, for an aggregate cost to us of $120,000. There are
currently no further employee asbestos exposure claims pending against us.

Accordingly, the costs we have expended to date in connection with asbestos
exposure claims have not had a material adverse effect on our business,
financial condition or results of operations. However, we cannot predict the
extent to which we may be involved in any such claims in the future or whether
defense and indemnity for such claims will be available. As noted above,
Goodyear has defended and resolved the products claims for us to date, but
Goodyear has recently reserved its rights to dispute whether such defense and
indemnification are required. We have obtained limited indemnification regarding
these and other issues, upon the terms and conditions of the purchase agreement,
from the prior stockholders of K&F selling their shares in the Acquisition.
There can be no assurance that these defense and indemnity arrangements will be
available or sufficient to satisfy any claims or losses we suffer as a result of
asbestos issues. If the indemnifications are not available or sufficient, and if
we are found to be responsible for these exposures, resulting liabilities could
have a material adverse impact on our business, financial condition and results
of operations.

ITEM 2. PROPERTIES

United States Facilities. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States, which are 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. Our Ohio and
Georgia facilities are now held subject to encumbrances created by our new
credit

18

facility. We believe that our properties and equipment are generally
well-maintained, in good operating condition and adequate for our present needs.

Foreign Facilities. We occupy approximately 21,000 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. 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 which are
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 our business, financial condition or results of operations. See
"Business -- Government Regulation" and "-- Environmental."

ENVIRONMENTAL

Our manufacturing operations are subject to various environmental laws and
regulations, including those related to soil and groundwater contamination, air
emissions and the protection of human health and the environment, administered
by federal, state and local agencies. We regularly 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 our business, financial condition or results
of operations. 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.

The Goodyear Tire and Rubber Company, the parent of a former owner and
operator of our Akron, Ohio facility, is and has been conducting remediation of
groundwater contamination there that was released during the operations of a
former subsidiary of Goodyear. Although we could be held liable as the current
operator of this site, no one has alleged that we caused the groundwater
contamination or that we should be held responsible for its cleanup, and
Goodyear has paid all costs to date pursuant to contractual indemnities. We have
purchased an environmental contamination insurance policy designed to cover
liability (up to the policy limits) for third party claims seeking damages
related to cleanup costs or personal injuries arising from contamination
existing at our Ohio and Georgia facilities on or before November 18, 2004. The
policy is subject to deductibles and has other limitations. Although we believe
that the policy is adequate to cover potential contamination liabilities at
these sites, there can be no assurance that we will in fact be able to recover
any contamination-related costs under the policy or that the policy will be
sufficient to cover any such liabilities that we may incur.

Previous owners of the aircraft braking system production assets that we
now operate in Akron installed brake pads containing asbestos in certain of
their products. As a result, from time to time, we have been named, along with
other defendants, in a relatively small number of products liability cases and
employee

19

exposure lawsuits alleging that we are responsible, as a corporate successor or
otherwise, for the asbestos exposure liabilities of the previous owners. To
date, there has been no finding adverse to us in any such litigation, and we
believe that we have defenses to the allegations of successor liability and
other theories of liability, as well as rights to contribution and indemnity
from others.

Products Liability. Since 1993, we have been named in products liability
lawsuits brought by approximately 170 non-employee plaintiffs alleging personal
injury from exposure to asbestos. To date in connection with these lawsuits, we
have sought and received defense and indemnity from Goodyear, which produced
aircraft braking systems equipped with asbestos-containing brake linings between
approximately 1940 and 1985 at the Akron, Ohio facility now operated by Aircraft
Braking Systems. Goodyear has been named as a defendant in all of these claims.
In addition, these claims name Loral Corporation (now part of Lockheed Martin
Corporation), from whom we bought the aircraft braking system production assets
in 1989. To date, we have incurred only administrative costs in connection with
these claims.

Employee Exposure. In 2003, we participated with Lockheed Martin
Corporation in the resolution of numerous worker-related claims, including 157
claims made against us, for an aggregate cost to us of $120,000. There are
currently no further employee asbestos exposure claims pending against us.

Accordingly, the costs we have expended to date in connection with asbestos
exposure claims have not had a material adverse effect on our business,
financial condition or results of operations. However, we cannot predict the
extent to which we may be involved in any such claims in the future or whether
defense and indemnity for such claims will be available. As noted above,
Goodyear has defended and resolved the products claims for us to date, but
Goodyear has recently reserved its rights to dispute whether such defense and
indemnification are required in all cases. We also obtained limited
indemnification regarding these and other issues from our prior stockholders in
connection with the Acquisition. There can be no assurance that these defense
and indemnity arrangements will be available or sufficient to satisfy any claims
or losses we suffer as a result of these or other issues. If the
indemnifications are not available or sufficient, and if we are found to be
responsible for these exposures, resulting liabilities could have a material
adverse impact on our business, financial condition and results of operations.

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

Our former Board of Directors and our former security holders unanimously
approved the Transactions at special meetings held on October 15, 2004 and
November 18, 2004. See Item 1, "Business -- The Acquisition and Related
Financings."

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

There is no trading market for our common stock.

HOLDERS

At December 31, 2004, all of our common stock is directly owned by
Intermediate Holdco and indirectly owned by K&F Parent, which is owned or
controlled by affiliates of Aurora Capital Group and certain co-investors. See
Item 12, "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters" in Part III of this Annual Report on Form 10-K.

DIVIDENDS

There have been no cash dividends declared on any class of common stock for
the two most recent fiscal years. We do not anticipate paying dividends in the
foreseeable future on common equity. Our ability to pay dividends in the future
is restricted by, among other things, our new credit facility and by the
indenture governing our 7 3/4% notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 7 to the consolidated financial statements for restrictions
on K&F's ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

On November 18, 2004, K&F was acquired by an affiliate of Aurora Capital
Group, in exchange for cash consideration of $1.06 billion. The following table
sets forth historical consolidated financial and other data of K&F for the
periods November 18, 2004 through December 31, 2004 and January 1, 2004 through
November 17, 2004, and for the years ended December 31, 2003, 2002, 2001 and
2000. The Company's consolidated financial statements for the period subsequent
to the Transactions reflect a new basis of accounting incorporating: (i) the
fair value adjustments made in recording the Acquisition and Financial
Transactions; and (ii) the capitalization of the amount by which the cost of
production exceeds the sales price upon shipment of sole source original wheel
and brake equipment to commercial and general aviation aircraft manufacturers,
or "Program Participation Costs," which are amortized using a straight-line
method over a period of the lesser of the aircraft's economic useful life or 25
years. During the periods prior to the Acquisition we recognized such amounts as
an expense in cost of sales upon shipment. The accompanying selected historical
financial and other data as of the dates and for the periods prior to the
Transactions are labeled as Predecessor. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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) Reflected in cost of sales for the period ended November 18, 2004 through
December 31, 2004 are the following: (i) a non-cash charge of $6.7 million
resulting from inventory purchase price adjustments; (ii) a non-cash charge
of $0.3 million for incremental depreciation due to the step-up in fixed
assets as a result of purchase price adjustments; and (iii) the
capitalization of $2.8 million of Program Participation Costs.

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(b) 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 and we capitalized $8.5 million for the transaction fees. See
Note 1 to the consolidated financial statements contained in this Annual
Report on Form 10-K.

(c) 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 two years in the period ended
December 31, 2001. Net income would have increased to $39.4 million, and
$68.9 million for the years ended December 31, 2001 and 2000, respectively.

(d) The Company's results of operations for the period from November 18, 2004
through December 31, 2004 and from January 1, 2004 through November 17, 2004
include one-time charges of $5.4 million and $101.5 million, respectively.
These charges were a result of the Acquisition and related Financing
Transactions, and are as follows:

(e) On October 15, 2003, we redeemed $40.0 million of our 9 1/4% notes. In 2003,
we took a $1.6 million charge to interest expense for the redemption
premiums and the write-off of a portion of unamortized financing costs
associated with the redemption.

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

The following discussion and analysis of our financial condition and
results of operations covers periods prior to the consummation of the
Transactions. Accordingly, the discussion and analysis of historical periods
does not reflect the impact that the Transactions will have on us, including
increased levels of indebtedness and the impact of purchase accounting. You
should read the following discussion of our financial condition and results of
operations in conjunction with "Selected Historical Consolidated Financial
Information," and the consolidated financial statements, including the related
notes, included elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements about our business and operations and the
markets for our products. Our future results and financial condition may differ
materially from those we currently anticipate as a result of the factors we
describe under "Special Note Regarding Forward-Looking Statement."

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GENERAL

We are a leading global designer and manufacturer of aircraft wheels,
brakes, brake control systems and flexible bladder fuel tanks for commercial
transport, general aviation and military aircraft. Through our wholly-owned
subsidiary, Aircraft Braking Systems Corporation, or "Aircraft Braking Systems,"
we supply approximately 20% of the worldwide market for aircraft wheels, brakes
and brake control systems. Through our wholly-owned subsidiary, Engineered
Fabrics Corporation, or "Engineered Fabrics," we supply approximately 60% of the
flexible bladder fuel tanks for the worldwide commercial transport and general
aviation markets and over 50% of these tanks for the U.S. military aircraft
market.

Aircraft Braking Systems' products are used on approximately 27,000
commercial transport, general aviation and military aircraft worldwide. U.S. and
foreign governmental authorities, including the FAA, impose strict certification
requirements for new aircraft programs, including the wheel and brake systems.
Once a manufacturer's wheels and brakes have been installed on an aircraft,
these governmental authorities generally require certified replacement parts for
such systems be provided by an approved manufacturer. In addition, regional and
general aviation aircraft manufacturers typically select one manufacturer to
supply original wheels and brakes for an entire fleet of aircraft, and such
manufacturer typically becomes the sole source supplier for replacement parts.
As a result, approximately 75% of Aircraft Braking Systems' revenues are derived
from programs supplied on a sole source basis.

In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
assemblies at or below cost in order to win selection of their products by
manufacturers and airlines. These investments are typically recouped through the
sale of replacement parts within the first half of the life of an aircraft. The
average life for most modern aircraft is over 25 years. 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.

We believe Engineered Fabrics is the leading worldwide manufacturer of
flexible bladder fuel tanks for aircraft and helicopters. With its proprietary
technology, Engineered Fabrics is the only FAA-certified supplier of
polyurethane manufactured fuel tanks in the United States, which feature
"selfsealing" technology that significantly reduces the potential for fires,
leaks and spilled fuel following a crash.

CERTAIN MARKET TRENDS

We service a diversified portfolio of customers across the commercial
transport, general aviation and military sectors, such that declines in any one
market have often been offset by increased revenues in another. For example, the
commercial transport and general aviation markets that we serve were adversely
affected by the events of September 11, 2001, but the downturn in those markets
was partially offset by an increase in military aircraft spending.

We believe that conditions in the commercial transport and general aviation
markets have improved and the regional jet market, in particular, will provide
new opportunities for original equipment and replacement part sales. Since the
beginning of 2004, our sales and bookings in both commercial transport and
general aviation sectors have shown recovery from this downturn. During the same
period, our military business has leveled off, but we expect military aircraft
spending to continue at current levels.

PLATFORM INVESTMENTS

During the years ended December 31, 2004, 2003 and 2002, we spent an
aggregate of approximately $59.9 million, $53.3 million and $51.3 million,
respectively, for research, development, design, capital expenditures and
Program Participation Costs (including development participation payments).
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 2003, 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: Embraer

23

170/175, 190/195, Dassault Falcon 7X, Falcon 900EX EASy, Raytheon Hawker
Horizon, Sino-Swearingen SJ-30 and the T-50 Military Trainer. We were selected
as the sole supplier of wheels and steel brakes for the Bombardier CRJ-100,
CRJ-200 and CRJ-440 aircraft, the Fairchild Dornier DO-328 turboprop and the
Alenia C27J; total braking systems including wheels, steel brakes and brake
control systems for the Bombardier CRJ-700 and 900 and the SJ-30 aircraft; total
braking systems, including wheels, carbon brakes and brake control systems for
the Dassault F-7X, Dassault 900EX EASy, Raytheon's Hawker Horizon, and the T-50
Military Trainer; wheels and carbon brakes for the Embraer 170, 175, 190 and 195
aircraft; and one of three suppliers of wheels and carbon brakes on the Airbus
A-320 and A-321 aircraft. 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. With these program wins, we expect a number
of favorable things to occur in our business including:

- sales of replacement parts increase in the aftermarket;

- the number of airplanes using Aircraft Braking Systems' wheels and brakes
increases, net of retired aircraft; and

- the average age of the total fleet using Aircraft Braking Systems'
products will be reduced.

THE ACQUISITION AND RELATED FINANCINGS

On November 18, 2004, we were acquired by an affiliate of Aurora Capital
Group for cash of approximately $1.06 billion. A portion of the cash
consideration was used to repay substantially all of our then existing
indebtedness and our fees and expenses and those of certain of our stockholders
in connection with the acquisition, with the balance paid to our prior
equityholders.

The Acquisition was financed with $795.0 million of debt financing
described below and $309.8 million of preferred and common equity capital from
affiliates of Aurora Capital Group and certain co-investors. K&F Parent
contributed the $309.8 million of equity to Intermediate Holdco which then
contributed such proceeds as equity to K&F Acquisition prior to the merger of
K&F Acquisition with and into K&F. In addition, K&F Parent issued a note in the
amount of approximately $14.7 million payable to the selling equityholders for
the estimated tax benefits to be received by us due to the payment of fees and
premiums in connection with the tender offers we made for our prior senior
subordinated notes and other transaction expenses. The note will mature in May
2005, and we anticipate receiving the proceeds of a tax refund in the
approximate amount of the note at about the same time.

We also entered into the following Financing Transactions:

- the issuance of $315.0 million of 7 3/4% notes;

- the closing of a new $530.0 million senior secured credit facility
consisting of a six-year $50.0 million revolving credit facility (undrawn
at Acquisition date except for $2.0 million of letters of credit) and an
eight-year $480.0 million term loan facility; and

- the repurchase pursuant to tender offers and consent solicitations of
$138.9 million of our previously outstanding 9 1/4% notes and $249.4
million of our previously outstanding 9 5/8% notes. As a result of
receiving the requisite consents, we entered into a supplemental
indenture with the trustee and the guarantors under the applicable
indentures to eliminate certain restrictive covenants contained in such
indentures.

On December 23, 2004, we redeemed the remaining $6.1 million principal
amount of our 9 1/4% notes that were not tendered in the tender offer. An
aggregate principal amount of $577,000 of our 9 5/8% notes remains outstanding
and is governed by the related amended indenture.

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 of America. The preparation of these

24

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 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.

Revenue Recognition. Revenue from the sale of products is generally
recognized upon shipment to customers, provided that there are no uncertainties
regarding customer acceptance, there is persuasive evidence of an arrangement,
the sales price is fixed and determinable, and collection of the related
receivable is probable.

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 $5.6 million, $9.1 million and $9.6
million as of December 31, 2004, 2003 and 2002, respectively, represent 8.4%,
15.4% and 15.6% 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. The carrying amount of long-lived assets were
adjusted in 2004 to reflect the fair value accounting adjustments made in
connection with the Acquisition. There were no adjustments to the carrying
amount of long-lived assets during the years ended December 31, 2003 and 2002
resulting from our evaluations.

Program Participation Costs. Program Participation Costs consist of
incentives given to original equipment aircraft manufacturers in connection with
their sole source selection of our products for installation on aircraft. These
incentives include cash payments, discounts and free product. The costs of these
incentives is recognized in the period incurred unless the incentive is subject
to recovery through a long-term product maintenance requirement mandated by the
Federal Aviation Administration, or its equivalent, for certified replacement
equipment and service. Capitalized amounts are being amortized on a
straight-line basis over the shorter of the economic service life of the
aircraft or 25 years, as a charge to costs of sales. 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.

Warranty. Estimated costs of warranty are accrued when individual claims
arise with respect to a product or performance. 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, 2004, 2003 and
2002, our warranty liability was $12.9 million, $13.9 million and $15.2 million,
respectively.

25

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. The rate represents 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 50 basis
point decrease in the discount rate would increase our current year pension
expense by approximately $0.7 million. We used a 6 1/4% discount rate to
determine the 2004 expense and will use a 6.0% discount rate for 2005 to reflect
market 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 9.0% in 2004 and will remain at 9.0% for
2005 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 2004 postretirement expense was 11% in 2004
trending down to 5.0% for 2010. A 1% increase in the assumed health care cost
trend rate would increase 2004 postretirement benefit costs and the benefit
obligation by approximately $0.8 million and $10.2 million, respectively.

RESULTS OF OPERATIONS

On November 18, 2004, K&F was acquired by an affiliate of Aurora Capital
Group, in exchange for cash consideration of $1.06 billion. The amounts below
for the year ended December 31, 2004 represent a combination of the results of
operations for the Predecessor period (January 1, 2004 through November 17,
2004) with the results after the Acquisition (November 18, 2004 through December
31, 2004). The consolidated financial statements for the period subsequent to
the Transactions reflect a new basis of accounting incorporating: (i) the fair
value adjustments made in recording the Acquisition and Financial Transactions;
and (ii) the capitalization of Program Participation Costs, which are amortized
using a straight-line method over a period of the lesser of the aircraft's
economic useful life or 25 years. During the periods prior to the Acquisition we
recognized such amounts as an expense in cost of sales upon shipment.

26

The following table sets forth, for the periods indicated, certain
operating data of K&F:

27

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
DECEMBER 31, 2003

Our sales for the year ended December 31, 2004 totaled $353.3 million,
reflecting an increase of $10.5 million, compared with $342.8 million for the
same period in the prior year. This increase was due to higher sales at Aircraft
Braking Systems of $6.3 million and higher sales at Engineered Fabrics of $4.2
million.

Commercial sales at Aircraft Braking Systems increased $14.4 million,
primarily on the Bombardier CRJ-700, the Embraer 170 and a number of Boeing
programs, including the MD-90, MD-80, DC-10 and DC-9, partially offset by lower
sales on the Boeing 707 program. General Aviation sales increased $7.3 million,
primarily on Gulfstream, Lear and Israeli Aircraft Industries aircraft. Military
sales decreased $15.4 million, primarily on the Lockheed Martin C-130 and F-16,
the Boeing B-1B and the Northrop Grumman F-14 programs.

Sales at Engineered Fabrics increased primarily due to higher military
sales of fuel tanks for the Boeing F-15, the Northrop Grumman T-38 and the
Sikorsky Blackhawk programs and higher sales of iceguards on the Bell/Boeing
V-22 program, partially offset by lower sales of oil containment booms.

Our gross margin for the year ended December 31, 2004 was 41.3%, compared
with 42.3% for the same period in the prior year. Aircraft Braking Systems'
gross income was $133.6 million, or 45.4% of sales for the year ended December
31, 2004, compared with $132.8 million, or 46.2% of sales for the same period in
the prior year. Engineered Fabrics' gross income was $12.2 million, or 20.6% of
sales for the year ended December 31, 2004, compared with $12.2 million, or
22.1% of sales for the same period in the prior year.

Aircraft Braking Systems' gross margin decreased primarily due to a
non-cash charge of $6.3 million, resulting from inventory purchase price
accounting adjustments and higher expensed program participation costs,
partially offset by a favorable mix of products sold, lower operating costs and
the favorable overhead absorption effect relating to the higher sales.
Engineered Fabrics' gross margin decreased primarily due to an unfavorable mix
of products sold and a non-cash charge of $0.4 million, resulting from inventory
purchase price accounting adjustments, partially offset by the overhead
absorption effect relating to the higher sales.

Independent research and development costs were $13.8 million for the year
ended December 31, 2004, compared with $14.9 million for the same period in the
prior year. This decrease was primarily due to lower costs associated with the
Embraer 170 and various other programs, partially offset by higher costs on the
China ARJ21 and Dassault Falcon 7X programs.

Selling, general and administrative expenses were $32.2 million for the
year ended December 31, 2004 compared with $30.5 million for the same period in
the prior year. This increase was primarily due to higher performance-related
incentive compensation.

Amortization expense was $5.6 million for the year ended December 31, 2004,
compared with $4.3 million for the same period in the prior year. This increase
was due to fair value accounting for intangible assets related to the
Acquisition, which will increase annual amortization expense by approximately
$10.0 million.

28

Acquisition expenses were $106.9 million during the year ended December 31,
2004. These charges were a result of the Acquisition and Financing Transactions
and include the following:

Our net interest expense was $40.7 million for the year ended December 31,
2004 compared with $44.2 million for the same period in the prior year. This
decrease was primarily due to a lower average debt balance prior to the
Acquisition. This decrease was partially offset by higher interest expense
associated with the increased debt levels in connection with the Financing
Transactions.

Our effective tax rate of (47.4)% differs from the statutory rate of 35%
primarily due to tax benefits derived from the net loss generated as a result of
the Acquisition and related transaction expenses, in addition to the reversal of
prior years tax reserves no longer needed and tax benefits derived from export
sales. Our effective tax rate of 20.5% for the year ended December 31, 2003
differs from the statutory rate of 35% due to reversal of prior years tax
reserve no longer needed, utilization of state net operating losses, tax
benefits derived from export sales, available tax credits and a favorable
foreign tax rate.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
DECEMBER 31, 2002

Our sales for the year ended December 31, 2003 totaled $342.8 million,
reflecting a decrease of $5.8 million, or 1.7%, compared with $348.6 million for
the same period in the prior year. This decrease was due to lower sales at
Aircraft Braking Systems of $13.9 million, partially offset by higher sales at
Engineered Fabrics of $8.1 million.

Commercial sales at Aircraft Braking Systems decreased $6.0 million,
primarily due to lower sales of wheels and brakes on the Boeing DC-9 and DC-10
and the Airbus A-321 programs, partially offset by higher sales on the Canadair
CRJ-100/200, CRJ-700 and CRJ-900 programs. General aviation sales decreased $5.3
million, primarily on Israeli Aircraft Industries and Raytheon aircraft.
Military sales decreased $2.6 million primarily on the Boeing B-1B, the Northrop
Grumman F-14 and the Fairchild Republic A-10 programs, partially offset by
higher sales on the Lockheed Martin C-130 program.

Sales at Engineered Fabrics increased primarily due to higher sales of oil
containment booms, fuel tanks for the Northrop Grumman F-18, the Sikorsky
Blackhawk, SH3A and SH3D programs, and iceguards on the Sikorsky UH-60 program.

Our gross margin for the year ended December 31, 2003 was 42.3%, compared
with 41.3% for the same period in the prior year. Aircraft Braking Systems'
gross income was $132.8 million, or 46.2% of sales for the year ended December
31, 2003, compared with $135.2 million, or 44.9% of sales for the same period in
the prior year. Engineered Fabrics' gross income was $12.2 million, or 22.1% of
sales for the year ended December 31, 2003, compared with $8.6 million, or 18.3%
for the same period in the prior year.

Aircraft Braking Systems' gross margin increased primarily due to a
favorable mix of products sold and lower warranty costs, partially offset by
higher program investments and the unfavorable overhead absorption effect
relating to lower sales. Engineered Fabrics' gross margin increased primarily
due to a favorable overhead absorption effect relating to the higher sales.

29

Independent research and development costs were $14.9 million for the year
ended December 31, 2003, compared with $14.6 million for the same period in the
prior year. This increase was primarily due to higher costs associated with the
Dassault Falcon 7X program, partially offset by lower costs on the Gulfstream
G450 program.

Selling, general and administrative expenses were $30.5 million for the
year ended December 31, 2003, compared with $40.2 million for the same period in
the prior year. This decrease was primarily due to a $9.4 million charge
incurred in 2002, relating to payments made to holders of our common stock
options in connection with the recapitalization described below under "Liquidity
and Financial Conditions."

Our net interest expense was $44.2 million for the year ended December 31,
2003, compared with $26.2 million for the same period in the prior year. This
increase was primarily due to higher interest relating to our issuance of $250.0
million of 9 5/8% notes in December 2002, in connection with the
recapitalization described below under "Liquidity and Financial Condition" and a
$1.6 million charge taken in 2003, for redemption premiums and the write-off of
a portion of unamortized financing costs, associated with the early redemption
of $40.0 million of our 9 1/4% notes on October 15, 2003.

Our effective tax rate of 20.5% for the year ended December 31, 2003
differs from the statutory rate of 35% due to reversal of prior years tax
reserve no longer needed, utilization of state net operating losses, tax
benefits derived from foreign sales, available tax credits and a favorable
foreign tax rate. The effective tax rate of 28.4% for the year ended December
31, 2002 differs from the statutory rate of 35% due to utilization of state net
operating losses, tax benefits derived from foreign sales and available tax
credits.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The following table sets forth, for the periods indicated, certain
information regarding K&F's cash flows:

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

(a) The amounts for the year ended December 31, 2004 represent a combination of
the results for the Predecessor period (January 1, 2004 through November 17,
2004) and the period subsequent to the Acquisition (November 18, 2004
through December 31, 2004).

During the year ended December 31, 2004, net cash provided by operating
activities amounted to $52.0 million, compared with $47.2 million for the same
period in the prior year, an increase of $4.8 million. Our cash flows from
operating activities increased from the prior year primarily due to lower
interest payments of $6.9 million and payments made in 2003 to the holders of
our common stock options in connection with the 2002 recapitalization, partially
offset by $5.4 million of costs relating to an interim loan commitment fee paid
in connection with the Transactions which was written-off. During the year ended
December 31, 2003, net cash provided by operating activities amounted to $47.2
million, compared with $80.8 million for the same period in the prior year, a
decrease of $33.6 million. Our cash flow from operating activities decreased
from the prior year due to higher interest payments of $22.3 million, relating
to the issuance of $250.0 million of our 9 5/8% notes in December 2002, payments
made in 2003 to the holders of our common stock options in connection with the
2002 recapitalization, decreased reductions in inventory and an increase in
accounts receivable due to the timing of sales in the later part of the fourth
quarter of 2003. This was partially offset by a decrease in the amount required
to fund the pension plan in 2003 versus 2002.

30

During the year ended December 31, 2004, net cash used in investing
activities amounted to $698.8 million due to $694.1 million relating to the
Acquisition and $4.7 million for capital expenditures. During the year ended
December 31, 2003, net cash used in investing activities amounted to $5.5
million for capital expenditures. During the year ended December 31, 2002, net
cash used in investing activities amounted to $4.1 million for capital
expenditures. Capital spending for the year ending December 31, 2005 is expected
to be approximately $16.0 million. This increase is primarily related to the
expansion of our carbon manufacturing facility.

During the year ended December 31, 2004, net cash provided by financing
activities amounted to $632.0 million due to the Acquisition and Financing
Transactions. During the year ended December 31, 2003, net cash used in
financing activities amounted to $40.0 million due to the prepayment of $40.0
million of our 9 1/4% notes. During the year ended December 31, 2002, net cash
used in financing activities amounted to $59.1 million due to the payment of a
$200.0 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 $250.0 million from our sale of the 9 5/8% notes.

The Acquisition and Related Financings

On November 18, 2004, we were acquired by an affiliate of Aurora Capital
Group for cash of approximately $1.06 billion. A portion of the cash
consideration was used to repay substantially all of our then existing
indebtedness and our fees and expenses and those of certain of our stockholders
in connection with the Acquisition, with the balance paid to our prior
equityholders.

The Acquisition was financed with $795.0 million of debt financing
described below and $309.8 million of preferred and common equity capital from
affiliates of Aurora Capital Group and certain co-investors. K&F Parent
contributed the $309.8 million of equity to Intermediate Holdco which then
contributed such proceeds as equity to K&F Acquisition prior to the merger of
K&F Acquisition with and into K&F. In addition, K&F Parent issued a note in the
amount of approximately $14.7 million payable to the selling equityholders for
the estimated tax benefits to be received by us due to the payment of fees and
premiums in connection with the tender offers we made for our prior senior
subordinated notes and other transaction expenses. The note will mature in May
2005, and we anticipate receiving the proceeds of a tax refund in the
approximate amount of the note at about the same time.

We also entered into the following Financing Transactions:

- the issuance of $315.0 million of 7 3/4% notes;

- the closing of a new $530.0 million senior secured credit facility
consisting of a six-year $50.0 million revolving credit facility (undrawn
at Acquisition date except for $2.0 million of letters of credit) and an
eight-year $480.0 million term loan facility; and

- the repurchase pursuant to tender offers and consent solicitations of
$138.9 million of our previously outstanding 9 1/4% notes and $249.4
million of our previously outstanding 9 5/8% notes. As a result of
receiving the requisite consents, we entered into a supplemental
indenture with the trustee and the guarantors under the applicable
indentures to eliminate certain restrictive covenants contained in such
indentures.

On December 23, 2004, we redeemed the remaining $6.1 million principal
amount of our 9 1/4% notes that were not tendered in the tender offer. An
aggregate principal amount of $577,000 of our 9 5/8% notes remains outstanding
and is governed by the related amended indenture.

The term loan is repayable in quarterly installments of $1.2 million for
the first seven years, and thereafter in quarterly installments of $111.6
million during the eighth year. The revolving credit facility is available,
subject to certain conditions, for our and our subsidiaries general corporate
purposes and for certain other permitted transactions. A portion of the
revolving credit facility is available for letters of credit. The obligations
under the new credit facility are secured by a lien on substantially all of our
and our subsidiaries' assets and are guaranteed by our direct and indirect
domestic subsidiaries.

31

Borrowings under the new credit facility bear interest, at our option, at a
rate equal to an applicable margin plus (a) the base rate, which will be the
higher of (1) the prime lending rate as set forth on the British Banking
Association Telerate page 5 and (2) the federal funds effective rate from time
to time plus 0.5% or (b) the eurodollar rate, which will be the rate at which
eurodollar deposits for one, two, three or six or (if available to all lenders
under the relevant facility, as determined by such lenders in their sole
discretion) nine or twelve months are offered in the interbank eurodollar
market. The applicable margin for the revolving credit facility is currently
1.50% with respect to the base rate loans and 2.50% with respect to eurodollar
loans. The applicable margin for the term loan facility is currently 1.50% with
respect to base rate loans and 2.50% with respect to eurodollar loans. Upon the
occurrence of any payment default, all outstanding amounts under our new credit
facility will bear interest at a rate equal to the rate then in effect with
respect to such borrowings, plus 2% per annum. We are also obligated to pay a
commission on all outstanding letters of credit in the amount of an applicable
margin then in effect with respect to eurodollar loans under the revolving
credit facility as well as fronting fees on the aggregate drawable amount of all
outstanding letters of credit. The weighted average interest rate on outstanding
indebtedness under the new credit facility was 4.9% at December 31, 2004.

The new credit facility contains customary representations and warranties,
covenants and conditions to borrowing.

The new credit facility contains a number of negative covenants that limit
us and our subsidiaries from, among other things, incurring other indebtedness,
entering into merger or consolidation transactions, disposing of all or
substantially all of their assets, making certain restricted payments, making
capital expenditures, creating any liens on ours or our subsidiaries' assets,
creating guarantee obligations and material lease obligations and entering into
sale and leaseback transactions and transactions with affiliates.

The new credit facility also requires the maintenance of certain quarterly
financial and operating ratios, including a consolidated cash interest coverage
ratio and consolidated leverage ratio. K&F was in compliance with all covenants
at December 31, 2004.

The new credit facility also contains customary events of default,
including default upon the nonpayment of principal, interest, fees or other
amounts or the occurrence of a change of control.

The new credit facility provides for revolving loans not to exceed $50.0
million, with up to $10 million available for letters of credit. The revolving
loan commitment terminates on November 18, 2010. At December 31, 2004, we had
$48.0 million available to borrow under the revolving credit facility and $2.0
million of letters of credit outstanding.

On November 18, 2004, in connection with the Transactions, we issued $315.0
million of 7 3/4% notes which mature on November 15, 2014. The 7 3/4% notes are
unsecured obligations ranking subordinate to our senior debt, as defined in the
indenture governing the 7 3/4% notes. Interest on the 7 3/4% notes is payable
semi-annually. The 7 3/4% notes are redeemable at any time after November 15,
2009, at descending redemption prices ranging from 103.875% in November 2009 to
100% after November 2012. At any time prior to November 15, 2007, K&F may, on
any one or more occasions, redeem up to 35% of the aggregate principal of the
7 3/4% notes from the proceeds of equity offerings at a redemption price of
107.75% of the principal amount thereof.

Our ability to make payments on and to refinance our indebtedness,
including the 7 3/4% notes, and to fund planned capital expenditures will depend
on our ability to generate cash in the future. This is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control as well as other factors.

Our management believes that our cash on hand, together with cash expected
to be generated from operations and, if required, borrowings under the revolving
credit facility, will be sufficient for our cash requirements for at least the
next 12 months.

32

Contractual Obligations

The following represents our contractual commitments consisting of our
scheduled debt maturities, scheduled interest payments, letters of credit,
purchase commitments, non-cancelable operating lease commitments and employment
contracts, subsequent to December 31, 2004:

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

* Assumes that the variable interest rate on our borrowings under our new
credit facility remains constant at 5.12%.

** Represents the value of purchase orders placed with vendors for materials and
equipment.

Our funding policy is to contribute cash to our pension plans to the extent
required under the Employee Retirement Income Security Act of 1974. Based on
this minimum requirement, we made no contributions to the pension plans in 2004
and do not expect to make any in 2005. Our minimum pension liability was $48.2
million and $26.9 million at December 31, 2004 and 2003, respectively. We made
approximately $4.2 million in contributions to our postretirement health care
and life insurance benefit plans in 2004 and expect to contribute approximately
the same amount in 2005.

In 2004, we paid $6.4 million in federal and state income taxes. In 2005,
we expect a refund for federal and state income taxes relating to the tax
benefit created from of the payment of fees and premiums in 2004, in connection
with the tender offers for our prior senior subordinated notes and the
transaction expenses.

ACCOUNTING CHANGES AND PRONOUNCEMENTS

In December 2004 the Financial Accounting Standards Board issued SFAS No.
123-R. SFAS No. 123-R is a revision of SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123-R eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted
in no compensation expense recorded in the financial statements related to the
issuance of equity awards to employees. SFAS No. 123-R requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS No. 123-R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees.

We plan to adopt SFAS No. 123-R using a modified prospective application.
Under this application, companies are required to record compensation expense
for all awards granted after the required effective date and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. The provisions of SFAS No. 123-R are effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005,
but early adoption is encouraged. We do not have a stock option plan at December
31, 2004.

In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or the "Act," was enacted. The Act introduced a plan
sponsor subsidy based on a percentage of a beneficiary's annual prescription
drug benefits, within defined limits, and the opportunity for a retiree to
obtain prescription drug benefits under Medicare.

33

In May 2004, the Financial Accounting Standards Board issued Staff Position
No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act," which supersedes Staff
Position No. 106-1 of the same title. The Staff Position clarifies the
accounting for the benefits attributable to new government subsidies for
companies that provide prescription drug benefits to retirees.

As of December 31, 2003, we had elected to defer any accounting for the
effects of the Act pursuant to Staff Position No. 106-1. We adopted Staff
Position No. 106-2 as of July 1, 2004, the beginning of our third quarter,
retroactive to January 1, 2004. We and our actuarial advisors determined that
benefits provided by the plan were at least actuarially equivalent to Medicare
Part D. We remeasured the effects of the Act on the recorded Accumulated Plan
Benefit Obligation ("APBO") as of January 1, 2004. The effect of the federal
subsidy to which we are entitled has been estimated to decrease the APBO by
$10.5 million.

The decrease in the APBO was treated as a gain, which was amortized from
January 1, 2004. The table below details the reduction in net periodic
postretirement cost by component, which is included in the results of operations
for the year ended December 31, 2004, as a result of the Act and the adoption of
Staff Position No. 106-2.

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 had $315.0 million of total fixed rate debt and $475.0 million of
variable rate debt outstanding at December 31, 2004. Borrowings under the new
credit facility bear interest that varies with the federal funds rate. Interest
rate changes generally do not affect the market value of such debt, but do
impact the amount of our interest payments and, therefore, our future earnings
and cash flows, assuming other factors are held constant. Assuming other
variables remain constant, including levels of indebtedness, a 10% increase in
interest rates on our variable debt would have an estimated impact on pre-tax
earnings and cash flows for the next twelve months of approximately $2.2
million.

As a requirement of our new credit facility, we have entered into the
following interest rate hedges:

- a 3 month LIBOR interest rate cap at 4.5% from December 2004 to December
2005 on $240 million of our term loans;

- a 3 month LIBOR interest rate cap at 6% from December 2005 to December
2007 for an increasing notional amount starting at $144.6 million,
increasing to $161.2 million; and

- a swap arrangement for a portion of our term loans from a variable 3
month LIBOR interest rate to a fixed rate of 4.0375%, beginning January
24, 2006. The notional amount of the swaps is initially $95.4 million and
declines to $78.8 million on January 24, 2008 at the termination of the
swap arrangement.

We have no other derivative financial instruments.

34

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. The interest rate swap agreement expired on December 17, 2003. The
payments made under the swap agreement were $4.0 million and $3.8 million in
2003 and 2002, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the financial statements, together with the auditors' reports thereon,
beginning on page F-1.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the designed
control objectives. Our management, with the participation of our Chief
Executive Officer and our Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2004. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of our disclosure controls and procedures provided reasonable
assurance that the disclosure controls and procedures are effective to
accomplish their objectives.

In addition, there was no change to our internal control over financial
reporting that occurred during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

35

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the directors
and executive officers of K&F or its subsidiaries:

Bernard L. Schwartz has served as our Chairman since 1989, and served as
our Chief Executive Officer from 1989 through November 2004. Mr. Schwartz has
been Chairman and Chief Executive Officer of Loral Space & Communications Ltd.
since April 1996. Loral Space & Communications Ltd. filed for reorganization
under Chapter 11 of the United States Bankruptcy Code on July 15, 2003 and
continues to operate as a debtor-in-possession. From 1972 to April 1996, Mr.
Schwartz was Chairman and Chief Executive Officer of Loral Corporation. Mr.
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. Bernard Schwartz is the uncle of
Kenneth M. Schwartz and of Ronald H. Kisner's wife.

Kenneth M. Schwartz served as our President and Chief Operating Officer
from March 2000 through November 2004. Upon consummation of the Acquisition in
November 2004, Mr. K. Schwartz ceased to be our Chief Operating Officer and
became our Chief Executive Officer and a director. 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. Kenneth Schwartz is the nephew of
Bernard L. Schwartz and the cousin of Mr. Kisner's wife.

Dirkson Charles has been our Executive Vice President and Chief Financial
Officer since November 2004. Mr. Charles was 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. Mr. Charles has been a CPA since 1986.

Ronald H. Kisner served as our director from 1989 through November 2004.
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. Ronald H. Kisner's wife is the niece
of Mr. B. Schwartz and the cousin of Mr. K. Schwartz.

36

Frank P. 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.

Richard W. Johnson has been Senior Vice President of Finance &
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.

James J. 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.

John A. 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.

Lawrence A. Bossidy has served as a director since November 2004. Mr.
Bossidy is a member of the Investment Advisory Committee of Aurora Capital
Group. Mr. Bossidy previously served as Chairman and Chief Executive Officer of
Honeywell International Inc. from 1999 to 2000 and from 2001 to 2002. Prior to
that, he was Chairman and Chief Executive Officer of Allied Signal Inc. from
1991 to 1999. Mr. Bossidy is a director of Merck & Co., Inc., of Berkshire Bank
and of JPMorgan Chase & Co.

Dale F. Frey has served as a director since January 2005. Mr. Frey is a
member of the Investment Advisory Committee of Aurora Capital Group. Prior to
his retirement in 1997, Mr. Frey was Chairman of the Board, President and Chief
Executive Officer of General Electric Investment Corporation, a position he had
held since 1984, and was a Vice President of General Electric Company since
1980. Mr. Frey is a director of and a member of the audit committee of
Aftermarket Technology Corp., Community Health Systems, The Yankee Candle
Company, Inc. and McLeod USA Incorporated and he also is a director of
Ambassador Group, Inc. Mr. Frey has a masters degree in finance and accounting
and has worked in public accounting.

Thomas A. Johnson has served as a director since January 2005. Prior to his
retirement in 2000, Mr. Johnson was Vice President/General Manager of Allied
Signal Aerospace's Commercial Auxiliary Power Units business, a position he had
held since 1995, President of Allied Signal Aerospace's Aircraft Landing Systems
business since 1989, and Director of Material & Business Systems for Aircraft
Landing Systems since 1980.

37

John T. Mapes has served as a director since November 2004. Mr. Mapes is a
partner of Aurora Capital Group, which he joined in 1992. Prior to joining
Aurora Capital Group, Mr. Mapes worked with Salomon Brothers in the corporate
finance group.

Gerald L. Parsky has served as a director since November 2004. Mr. Parsky
is the Chairman and a founding partner of Aurora Capital Group. Prior to forming
Aurora Capital Group in 1991, Mr. Parsky was a senior partner and a member of
the Executive and Management Committees of the law firm of Gibson, Dunn &
Crutcher LLP. Prior to that, he served as Assistant Secretary of the Treasury
for International Affairs. Mr. Parsky is a director of Aftermarket Technology
Corp.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has established an executive and compensation
committee, which we refer to as the executive committee, consisting of Messrs.
Bossidy, B. Schwartz and Parsky. Mr. Bossidy acts as the chairman of the
executive committee. The executive committee is authorized to exercise, during
the intervals between regular board of directors meetings and except as
specifically reserved for action by the full board of directors, all of the
powers and authority of the board of directors in the management of our business
and affairs. The executive committee reviews and approves the compensation and
benefits for our executive officers, administers our employee benefit plans,
authorizes and ratifies stock option grants and other incentive arrangements,
and authorizes employment and related agreements for our employees.

Our board of directors has established an audit committee, consisting of
Messrs. Frey, Mapes and Johnson. Mr. Frey acts as the chairman of the audit
committee and has been determined by the board of directors to qualify as an
audit committee financial expert. Due to his affiliation with Aurora Capital
Group, Mr. Frey is not considered "independent," as that term is used in item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934. The audit
committee will recommend the annual appointment of auditors with whom the audit
committee will review the scope of audit and non-audit assignments and related
fees, accounting principles we will use in financial reporting, internal
auditing procedures and the adequacy of our internal control procedures.

CODE OF ETHICS

We have adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-K of the Securities Act which is available upon request. This Code
of Ethics applies to our principal executive officer, principal financial
officer and other of our officers involved in finance, accounting, treasury and
tax matters.

K&F PARENT, INTERMEDIATE HOLDCO AND K&F BOARD OF DIRECTORS

Except as provided below, the board of directors of K&F Parent will consist
of up to eight members, each of whom will be elected by the holders of the
outstanding common stock of K&F Parent. The holders of a majority of the
outstanding shares of K&F Parent's senior preferred stock have the right to
appoint one person reasonably acceptable to a majority of the members of the
board of directors elected by the holders of the common stock of K&F Parent as
an observer to the board of directors of K&F Parent and any committees thereof,
including the audit committee and compensation committee, subject to customary
confidentiality restrictions. The holders of a majority of the outstanding
shares of K&F Parent's senior preferred stock may elect at any time to change
the appointed observer to a full director position, provided that the individual
elected to a full director position shall be reasonably acceptable to a majority
of the members of the board of directors elected by the holders of the common
stock of K&F Parent, in which case the board of directors of K&F Parent will be
increased from eight to nine members. Under certain circumstances, the holders
of the senior preferred stock are entitled to elect additional members of the
board of directors of K&F Parent, Intermediate Holdco and K&F. Finally, the
holders of the senior preferred stock of K&F Parent have the same rights with
respect to the board of directors of Intermediate Holdco and K&F.

38

VOTING AGREEMENTS

Aurora Equity Partners III L.P., Aurora Overseas Equity Partners III, L.P.,
Aurora Equity Partners II L.P. and Aurora Overseas Equity Partners II, L.P., who
we refer to collectively as the "Aurora Capital stockholders," are party to a
voting agreement with K&F Parent and Cerberus Partners, L.P. with respect to the
shares of common stock of K&F Parent owned of record and/or beneficially by the
Aurora Capital stockholders. In the voting agreement, the Aurora Capital
stockholders have agreed to vote such shares of common stock (and any shares
over which they exercise voting control) (1) to increase the number of members
of the board of directors of K&F Parent, but solely to the extent that the vote
or consent of such stockholders is necessary to increase the number of members
of the board of directors of K&F Parent in order to permit the election of the
designees designated by the holders of a majority of the outstanding shares of
senior preferred stock of K&F Parent and (2) to elect to the board of directors
of K&F Parent the designees of the holders of a majority of the outstanding
shares of senior preferred stock of K&F Parent to the extent the holders of a
majority of the outstanding shares of senior preferred stock of K&F Parent are
entitled to elect their designees to the board of directors of K&F Parent. K&F
Parent has entered into a substantially similar voting agreement with respect to
the shares of common stock it holds of Intermediate Holdco. Finally,
Intermediate Holdco has entered into a substantially similar voting agreement
with respect to the shares of common stock it holds of K&F. See "Certain
Relationships and Related Transactions -- Securityholders Agreement" for a
discussion regarding certain agreements between the holders of K&F Parent's
junior preferred stock and common stock and K&F Parent.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation for the years ended
December 31, 2004, 2003 and 2002, for the chief executive officer and each of
the other four most highly compensated executive officers.

39

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

(a) The bonuses payable to each of the named executive officers for the year
ended December 31, 2004 have not been determined and are not calculable as
of the latest practicable date prior to the filing of this Annual Report on
Form 10-K. We shall disclose the bonuses paid for this period in our next
Annual Report on Form 10-K.

(b) Includes the following: (i) Our contributions to individual 401(k) plan
accounts for the years ended December 31, 2004, 2003 and 2002, respectively:
Mr. K. Schwartz -- $7,380, $7,200 and $7,200; Mr. Charles -- $7,380, $7,200
and $6,600; Mr. Kisner -- $7,380, $7,200 and $7,200; and Mr.
Crampton -- $7,380, $7,200 and $6,882 (ii) the compensation element of
supplemental life insurance programs for the years ended December 31, 2004,
2003 and 2002, respectively: Mr. K. Schwartz -- $7,500, $7,057 and $6,718;
Mr. Charles -- $2,796, $2,796 and $2,796; Mr. Kisner -- $6,456, $6,456 and
$6,456; and Mr. Crampton -- $12,070, $12,019 and $11,601.

(c) Prior to the Acquisition, we were party to an advisory agreement with Mr.
Bernard L. Schwartz, which provided 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, 2004. This agreement was terminated upon the consummation of
the Acquisition.

(d) Includes payments made as a holder of common stock options in connection
with the 2002 recapitalization, of: $1,725,000 for Mr. K. Schwartz; $780,000
for Mr. Charles; $585,000 for Mr. Kisner; and $420,000 for Mr. Crampton.

40

OPTION GRANTS IN LAST FISCAL YEAR

There were no stock options granted during the year ended December 31,
2004. The capital stock of K&F Industries has never been publicly traded. All
existing options were terminated prior to the consummation of the Acquisition
and each optionholder received with respect to each option held by such
optionholder an amount equal to the excess of the per share consideration
received by the prior K&F stockholders in the Acquisition over the exercise
price of such option. As of December 31, 2004, a new stock option plan has not
yet been established.

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, 2004 and the value of unexercised
stock options at year-end. Our stock has never been publicly traded. All
existing options were terminated prior to the consummation of the Acquisition
and each optionholder received with respect to each option held by such
optionholder an amount equal to the excess of the per share consideration
received by the prior K&F stockholders in the Acquisition over the exercise
price of such option. As of December 31, 2004, a new stock option plan has not
yet been established.

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(1) Represents the value (including an amount to be received upon payment of the
K&F Parent note due in May 2005) realized for cancellation of all options in
connection with the Acquisition.

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 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. Long-term incentive
awards have not been determined for 2004 and are not calculable as of the latest
practicable date prior to the filing of this Annual Report on Form 10-K. We will
disclose the long-term incentive awards for 2004 in our next Annual Report on
Form 10-K.

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 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

41

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 $170,000 per participant. Participants are
fully vested in their accrued benefits under our Retirement Plan after five
years of credited service with us. We have a similar plan at Engineered Fabrics.

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: $676,000 for Mr. B. Schwartz; $566,000 for
Mr. K. Schwartz; $291,000 for Mr. Charles; $132,000 for Mr. Kisner; and $156,000
for Mr. Crampton. 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.

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 members of the board of directors serving prior to the Acquisition held
four meetings during the year ended December 31, 2004. Four prior members of the
board of directors received a director's fee of $12,000 for 2004. Messrs. B.
Schwartz and Kisner and two other persons who were directors prior to the
Acquisition did not receive director's fees during the year ended December 31,
2004. All directors have been reimbursed for reasonable out-of-pocket expenses
incurred in that capacity. Our new board of directors will establish reasonable
and customary compensation arrangements for board members serving on an on-going
basis.

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EMPLOYMENT AGREEMENTS

In connection with the Acquisition, we entered into employment agreements
with each of Messrs. B. Schwartz, K. Schwartz, Charles, Kisner and Crampton. The
agreement with Mr. B. Schwartz has a term of one year commencing on November 18,
2004 and provides that he will serve as Chairman of the board of directors of
K&F with an annual salary of $100,000. The agreement with Mr. K. Schwartz has an
initial term of 48 months commencing on November 18, 2004, after which it will
remain effective for successive one-year periods until we give or are provided
by Mr. K. Schwartz with 90 days notice of termination. Each of the other
employment agreements have an initial term of 36 months commencing on November
18, 2004, after which they will remain effective for successive one-year periods
until we give or are provided by the executive with 90 days notice of
termination. The employment agreements provide for base salaries, which were
adjusted in 2005, of $625,000 for Mr. K. Schwartz, $264,000 for Mr. Charles,
$237,000 for Mr. Kisner, and $235,000 for Mr. Crampton. These salaries are
subject to annual increase at the discretion of the compensation committee of
our board of directors. Mr. K. Schwartz' agreement also provides that he will be
nominated for election to the board of directors of K&F at each stockholders
meeting called to elect directors. If we terminate the employment of Messrs. K.
Schwartz, Charles or Kisner during the respective initial terms of their
employment for any reason, except for cause, or the executive resigns because we
fail to perform a material term of the employment agreement (i) the executive
shall be allowed to exercise all vested stock options held by him for a period
of 12 months after the termination date and (ii) we will be required to (A) pay
the executive a severance payment equal to (x) the executive's then-effective
base salary for the greater of 18 months or the balance of his initial term and
(y) a prorated portion of any bonuses that are earned in the year of termination
under any bonus plans in which the executive participates and (B) extend the
executive's welfare benefits for the greater of 18 months or the balance of his
initial term (or if the applicable welfare plans do not permit extended
coverage, pay the executive the value of such extended welfare benefits). In
addition, if Messrs. K. Schwartz or Kisner are terminated prior to age 62 other
than for cause or by their own resignation (unless such resignation occurs
because we fail to perform a material term of their employment agreement),
either executive would be entitled to receive unreduced pension benefits as if
he had remained employed by K&F through his 62nd birthday. If Mr. K. Schwartz is
terminated by us without cause or if he resigns because we fail to perform a
material term of his employment agreement, in each case, within 24 months
following a change of control of K&F (other than pursuant to the Acquisition),
then (i) he shall be allowed to exercise all vested stock options held by him
for a period of 12 months after the termination date and (ii) we will be
required to (A) pay him a severance payment equal to (x) his then-effective base
salary for 36 months and (y) three times the most recent annual bonus earned by
him and (B) extend his welfare benefits for the greater of 18 months or the
balance of his initial term (or if the applicable welfare plans do not permit
extended coverage, pay him the value of such extended welfare benefits). If we
terminate Mr. Crampton during the initial 36 month term of his employment for
any reason, except for cause, or he resigns because we fail to perform a
material term of the employment agreement (i) he shall be allowed to exercise
all vested stock options held by him for a period of 12 months after the
termination date and (ii) we will be required to (A) pay him a severance payment
equal to (x) his then-effective base salary for the greater of 12 months or the
balance of his initial term and (y) a prorated portion of his performance bonus
and deferred bonus earned in the year of termination and (B) extend his welfare
benefits for 12 months (or if the applicable welfare plans do not permit
extended coverage, pay him the value of such extended welfare benefits). Each
executive officer, other than Mr. B. Schwartz, is also eligible for full
accelerated vesting of stock options held by him upon a change of control of K&F
(other than pursuant to the Acquisition). Each of the employment agreements
contain a non-competition provision that prevents the executive officer from
working for or investing in our competitors and a non-solicit provision that
prevents the executive officers from soliciting our employees, in each case for
at least one year after termination of employment, and a perpetual nondisclosure
provision. Each executive officer, other than Mr. B. Schwartz, is also eligible
to receive a performance bonus for each bonus period based on a stated
percentage of the officer's base pay if certain financial targets are achieved.
A further discretionary deferred bonus may be payable to each executive officer,
other than Messrs. B. Schwartz and K. Schwartz, each year if certain other
financial targets are achieved. The deferred bonuses are payable over a
three-year period. Mr. K. Schwartz is eligible to receive a further annual bonus
if certain financial targets are achieved.

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PRIOR ADVISORY AGREEMENT

Prior to the Acquisition, we were party to an Advisory Agreement with
Bernard L. Schwartz which provided for the payment of an aggregate of $200,000
per month of compensation to Mr. B. Schwartz and persons or expenses designated
by him. This agreement has terminated.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Before the Acquisition, we did not use a compensation committee to
determine executive officer compensation. The payments to Bernard L. Schwartz,
who was our Chairman and Chief Executive Officer before the Acquisition, were
paid in accordance with the Advisory and Stockholders Agreements then existing.
All other executive compensation decisions were made by Mr. B. Schwartz in
accordance with policies established in consultation with the Board of
Directors. Executive Compensation is now determined by our employment agreements
with the individuals named in the Summary Compensation Table and is otherwise
approved by the executive committee of the Board of Directors.

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

EQUITY COMPENSATION PLAN INFORMATION

There were no equity securities authorized for issuance as of December 31,
2004.

CAPITAL STOCK OF K&F AND INTERMEDIATE HOLDCO

All of K&F's issued and outstanding common stock is owned by Intermediate
Holdco and all of Intermediate Holdco's issued and outstanding common stock is
owned by K&F Parent. In addition, Intermediate Holdco and K&F issued, for a
nominal purchase price per share of $0.01, shares of their Senior Redeemable
Preferred Stock, or the "nominal preferred stock," to the holders of the senior
preferred stock of K&F Parent. Each of the holders of the senior preferred stock
of K&F Parent were issued a number of shares of the nominal preferred stock of
Intermediate Holdco and K&F equal to the number of shares of senior preferred
stock of K&F Parent held by each of them. The nominal preferred stock of
Intermediate Holdco and K&F has rights, preferences and privileges similar to
the rights, preferences and privileges of the senior preferred stock of K&F
Parent. The aggregate liquidation preference of the nominal preferred stock
issued by Intermediate Holdco and K&F will be $0.01 per share, resulting in an
initial aggregate liquidation preference of $92.50 for the nominal preferred
stock at each of Intermediate Holdco and K&F.

No shares of senior preferred stock of K&F Parent may be transferred unless
a simultaneous transfer of a like number of shares of the nominal preferred
stock of Intermediate Holdco and K&F is made by the same transferor to the same
transferee. In addition, K&F Parent will not issue or agree to issue any shares
of senior preferred stock of K&F Parent to any person unless a simultaneous
issuance of a like number of shares of the nominal preferred stock of
Intermediate Holdco and K&F is made by Intermediate Holdco and K&F to the same
person.

CAPITAL STOCK OF K&F PARENT

K&F Parent indirectly owned all of our outstanding common stock at December
31, 2004. The outstanding shares of capital stock of K&F Parent, consisting of
9,250 shares of Senior Redeemable Preferred Stock (the "senior preferred
stock"), 12,250 shares of Junior/Series A Redeemable Exchangeable Preferred
Stock (the "junior preferred stock") and 100,000 shares of common stock, are
known by us to be beneficially held, at December 31, 2004, as set forth below.

Other than as set forth in footnotes 2 through 5 below with respect to
Messrs. Parsky and Mapes, none of our directors or officers owned shares of K&F
Parent capital stock at December 31, 2004. K&F Parent may from time to time,
issue shares of its capital stock, or options to acquire shares of its capital
stock, to management, its directors or other investors.

44

The following table sets forth information as of December 31, 2004 with
respect to (i) all persons known by us to be the beneficial owner of more than
5% of any of K&F Parent's classes of stock; (ii) all our executive officers;
(iii) all our directors; and (iv) all our directors and executive officers as a
group. The address for the directors and executive officers is in care of our
offices.

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(1) As described below under "Certain Relationships and Related
Transactions -- Securityholders Agreement," each of Aurora Equity Partners
III L.P., Aurora Overseas Equity Partners III, L.P., Aurora Equity Partners
II L.P. and Aurora Overseas Equity Partners II, L.P. (collectively, the
"Aurora entities"), has been granted a proxy by certain other holders of
junior preferred stock and common stock. With certain exceptions, other
holders have agreed to vote their shares of junior preferred stock and

45

common stock in the same manner as the Aurora entities vote their shares. As
a result of these proxies and voting agreements, the Aurora entities may be
deemed to be the beneficial owner of the shares of junior preferred stock
and common stock covered by such arrangements (the "Aurora Voting Shares").
The shares and percentages set forth with respect to the Aurora entities
reflect only the shares actually owned by each Aurora entity and do not give
effect to the beneficial ownership of the Aurora Voting Shares.

(2) Aurora Equity Partners III L.P. is a Delaware limited partnership the
general partner of which is Aurora Capital Partners III L.P, a Delaware
limited partnership whose general partner is Aurora Advisors III LLC.
Messrs. Parsky and Mapes, each of whom are directors of K&F Parent, own
substantially all of the membership interests in and are the sole voting
members of Aurora Advisors III LLC and may be deemed to beneficially share
ownership of the securities beneficially owned by Aurora Equity Partners
III. The address of Aurora Equity Partners III is 10877 Wilshire Boulevard,
Suite 2100, Los Angeles, CA 90024.

(3) The Aurora entities are party to a voting agreement with K&F Parent and
Cerberus Partners, L.P. with respect to the shares of common stock
beneficially owned by such Aurora entities or over which they exercise
voting control. The Aurora entities have agreed to vote such shares in the
manner and under the circumstances set forth in "Description of Capital
Stock -- Capital Stock of K&F Parent -- Common Stock of K&F Parent -- Voting
Agreements."

(4) Aurora Overseas Equity Partners III, L.P. is a Cayman Islands exempted
limited partnership the general partner of which is Aurora Overseas Capital
Partners III, L.P., a Cayman Islands exempted limited partnership whose
general partner is Aurora Overseas Advisors III, LDC, a Caymans Islands
limited duration company, whose stockholders are Aurora Advisors II LLC and
Aurora Advisors III LLC. Messrs. Parsky and Mapes, each of whom are
directors of K&F Parent, own substantially all of the membership interests
in and are the sole voting members of Aurora Advisors II LLC and Aurora
Advisors III LLC and may be deemed to beneficially share ownership of the
securities beneficially owned by Aurora Overseas Equity Partners III. The
address of Aurora Overseas Equity Partners III is West Wind Building, P.O.
Box 1111, Georgetown, Grand Cayman, Cayman Islands, B.W.I.

(5) Aurora Equity Partners II L.P. is a Delaware limited partnership the general
partner of which is Aurora Capital Partners II L.P., a Delaware limited
partnership whose general partner is Aurora Advisors II LLC. Messrs. Parsky
and Mapes, each of whom are directors of K&F Parent, own substantially all
of the membership interests in and are the sole voting members of Aurora
Advisors II LLC and may be deemed to beneficially share ownership of the
securities beneficially owned by Aurora Equity Partners II L.P. The address
of Aurora Equity Partners II is 10877 Wilshire Boulevard, Suite 2100, Los
Angeles, CA 90024.

(6) Aurora Overseas Equity Partners II, L.P. is a Cayman Islands exempted
limited partnership the general partner of which is Aurora Overseas Capital
Partners II, L.P., a Cayman Islands exempted limited partnership, whose
general partner is Aurora Overseas Advisors II LDC, a Cayman Islands limited
duration company, whose stockholders are Aurora Advisors, Inc. and Aurora
Advisors II LLC. Messrs. Parsky and Mapes, each of whom are directors of K&F
Parent, own substantially all of the membership interests in and are the
sole voting members of Aurora Advisors II LLC and Mr. Parsky is a director
of Aurora Advisors, Inc. Accordingly, each of Messrs. Parsky and Mapes may
be deemed to beneficially own the shares of the common stock beneficially
owned by Aurora Overseas Equity Partners II, LP. The address of Aurora
Overseas Equity Partners II is West Wind Building, P.O. Box 1111,
Georgetown, Grand Cayman, Cayman Islands, B.W.I.

(7) Cerberus Partners, L.P., a Delaware limited partnership ("Cerberus"), is the
holder of 8,250 shares of the senior preferred stock. Stephen Feinberg
possesses sole power to vote and direct the disposition of all shares of the
senior preferred stock held by Cerberus. Thus, Stephen Feinberg is deemed to
beneficially own 8,250 shares of the senior preferred stock, or 89.2% of the
shares of senior preferred stock issued and outstanding.

(8) Employers Reinsurance Corporation ("ERC") is a Missouri corporation and
wholly-owned subsidiary of General Electric Company, a New York corporation
("GE"). General Electric Pension Trust ("GEPT") is a New York common law
pension trust for the benefit of the employees of GE and its

46

subsidiaries. GE Asset Management Incorporated, a Delaware corporation and
wholly-owned subsidiary of GE ("GEAM"), is a registered investment adviser
and acts as Investment Manager for GEPT and ERC. GEAM may be deemed to
beneficially share ownership of the shares owned by GEPT and ERC. GE
expressly disclaims beneficial ownership of all shares owned by GEPT and
ERC. GEPT expressly disclaims beneficial ownership of all shares owned by
ERC. ERC expressly disclaims beneficial ownership of all shares owned by
GEPT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SECURITYHOLDERS AGREEMENT

The following is a summary description of the principal terms of the
securityholders agreement among K&F Parent and certain of its stockholders,
optionholders and warrantholders. The securityholders agreement covers the
outstanding shares of K&F Parent junior preferred stock, which have an initial
liquidation preference of $10,000 per share, and K&F Parent common stock, but
not the senior preferred stock. This summary description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
definitive securityholders agreement.

The securityholders agreement provides that, with certain limited
exceptions, the securityholders party to the agreement may not transfer any of
their shares or any interest therein without the prior approval of Aurora Equity
Partners III L.P., Aurora Overseas Equity Partners III, L.P., Aurora Equity
Partners II L.P., and Aurora Overseas Equity Partners II, L.P. (collectively,
the "Aurora entities"). Each of the securityholders party to the agreement
(other than the Aurora entities and certain co-investors) have granted an
irrevocable proxy to each of the Aurora entities, each of which may act alone to
exercise such proxy. With certain limited exceptions, each such co-investor has
agreed to vote its shares of K&F Parent common stock and junior preferred stock
in the same manner as the Aurora entities vote their respective shares of K&F
Parent common stock and junior preferred stock. With certain limited exceptions,
shares of K&F Parent common stock and junior preferred stock are to be released
from such restrictions on transfer upon the consummation of a qualified initial
public offering by K&F Parent. Shares of K&F Parent common stock and junior
preferred stock are to be released from the proxy and voting agreement when they
are no longer owned by the securityholder party to the agreement or its
permitted transferee or any other person that is bound by the terms of the
securityholders agreement.

The securityholders agreement provides for certain rights of first refusal,
with the right of over-subscription, in favor of securityholders classified as
Qualifying Class B Securityholders, who consist of the Aurora entities and
certain co-investors, in the event that any other securityholder desires to
transfer his or her securities of K&F Parent to any non-affiliate of such
person. To the extent that the Qualifying Class B Securityholders elect to
purchase fewer than all of the securities proposed to be sold by such selling
securityholder, K&F Parent will then have a right of first refusal with respect
to any such unsold securities. The first refusal rights granted to
securityholders will terminate upon the consummation of a qualified initial
public offering by K&F Parent.

In the event that the Aurora entities desire to accept a third party offer
to purchase all outstanding shares of K&F Parent common stock and junior
preferred stock held by all Aurora entities, all or substantially all of the
assets of K&F Parent or to effect a business combination of K&F Parent, the
other securityholders will be required to sell all of their securities on the
terms set forth in such acquisition proposal or to vote all of their shares in
favor of such acquisition proposal, as the case may be. In the event that any
Class B Securityholder desires to sell any shares of K&F Parent common stock and
junior preferred stock held by them (other than to a permitted transferee), the
other securityholders, including any Class B Securityholder, will be entitled to
require, as a condition of such sale, that the proposed buyer purchase shares of
K&F Parent common stock and/or junior preferred stock from each of them on a pro
rata basis. The rights described in this paragraph granted to securityholders
will terminate upon the consummation of a qualified initial public offering by
K&F Parent.

If any securityholder is an employee or consultant of K&F Parent or any of
its direct or indirect subsidiaries, and such employment or consulting
relationship is terminated by the employer for cause or

47

voluntarily by the employee or consultant, then the Aurora entities shall have
the option to purchase such person's securities for a period of 60 days after
the date of such termination. To the extent that the Aurora entities elect to
purchase fewer than all of the securities held by such employee or consultant,
K&F Parent will then have a right to purchase such unsold securities. K&F Parent
securities are to be released from these call provisions for an employee or
consultant of a direct or indirect subsidiary of K&F Parent upon the earlier of
(a) the consummation of a qualified initial public offering by K&F Parent and
(b) the two year anniversary of the later of (i) such employee or consultant's
commencement of work for the subsidiary or (ii) the acquisition of such
subsidiary by K&F Parent.

All stockholders who are parties to the securityholders agreement are
entitled to certain "piggy-back" registration rights with respect to shares of
K&F Parent common stock in connection with the registration of K&F Parent equity
securities at any time following a qualified initial public offering by K&F
Parent. In addition, at any time after 6 months following a qualified initial
public offering by K&F Parent, any holder of more than 10% of the outstanding
shares of K&F Parent common stock shall be entitled to demand the registration
of its shares, subject to customary restrictions. K&F Parent will bear all
expenses incident to any such registrations, including the fees and expenses of
a single counsel retained by the selling stockholders; however, each selling
stockholder will be responsible for the underwriting discounts and commissions
and transfer taxes in connection with shares sold by such stockholder. Each
selling stockholder and the underwriters through whom shares are sold on behalf
of a selling stockholder will be entitled to customary indemnification from K&F
Parent against certain liabilities, including liabilities under the Securities
Act.

Subject to certain exceptions, each Class B Securityholder has the right to
purchase its pro rata share of any future issuance of new equity securities by
K&F Parent other than any senior preferred stock and subject to certain other
customary exceptions.

So long as K&F is required to file such information with the SEC each Class
B Securityholder will have rights to receive (i) all quarterly and annual
financial information required to be contained in a filing with the SEC on Forms
10-Q and 10-K, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by K&F Parent's certified
independent accountants; (ii) all current reports required to be filed with the
SEC on Form 8-K, (iii) an annual business plan and (iv) notice of any event of
default on any material debt. If K&F is not required to file such information
with the SEC, each Class B Securityholder will have rights to receive (i)
audited annual financial statements, (ii) unaudited quarterly financial
statements, (iii) an annual business plan and (iv) notice of any event of
default on any material debt. In addition, each Class B Securityholder will have
access to the facilities, records and personnel (including outside accountants)
of K&F Parent and its subsidiaries. Each Qualifying Class B Securityholder will
have the right to send one observer to all meetings of the board of directors of
K&F Parent, subject to customary confidentiality restrictions.

The securityholders agreement may be amended only by a written agreement
(i) executed by K&F Parent, the Aurora entities, the holders of a majority in
interest of the shares of K&F Parent common stock (other than the Aurora
entities) and the holders of a majority interest of the shares of K&F Parent
junior preferred stock (other than the Aurora entities), (ii) in the case of an
amendment adversely affecting the rights of any securityholder or group of
securityholders in particular, the written agreement of such securityholder or
group of securityholders, (iii) in the case of an amendment to the proxy
provisions or liability provisions as applicable to certain co-investors, the
written agreement of such co-investors and (iv) in the case of an amendment to
the rights of first refusal, drag-along rights, tag-along rights, preemptive
rights, information rights, registration rights and the amendment and
termination provisions of the securityholders agreement, the holders of 66 2/3%
in interest of the shares of K&F Parent common stock (other than the Aurora
entities) and the holders of 66 2/3% in interest of the shares of K&F Parent
junior preferred stock (other than the Aurora entities) will be required. The
securityholders agreement will terminate on the written approval of K&F Parent,
the Aurora entities, the holders of 66 2/3% in interest of the shares of K&F
Parent common stock (other than the Aurora entities) and the holders of 66 2/3%
in interest of the shares of K&F Parent junior preferred stock (other than the
Aurora entities), but in the case of a termination that adversely

48

affects the rights of any securityholder in particular, the written agreement of
such securityholder is required before such termination will be deemed effective
as to such securityholder.

INDEMNIFICATION

Pursuant to the stock purchase agreement, K&F Parent agreed that after the
consummation of the Acquisition, it and K&F will indemnify all current and
former directors, officers, employees and agents of K&F and its subsidiaries and
will, subject to certain limitations, maintain for six years a directors' and
officers' insurance and indemnification policy containing terms and conditions
that are no less advantageous than the policy in effect as of the date of the
stock purchase agreement.

MANAGEMENT SERVICES AGREEMENT

In connection with the Transactions, we entered into a management services
agreement with Aurora Management Partners LLC, an affiliate of Aurora Capital
Group, for management and financial advisory services to be provided to us and
our subsidiaries. Pursuant to this agreement, subject to certain conditions, we
will pay an annual management fee to Aurora Management Partners of $1.0 million
and will reimburse its out-of-pocket expenses. If we consummate any significant
acquisition or disposition, Aurora Management Partners will be entitled to
receive a fee from us for investment banking services in connection with the
transaction. The fee is equal to up to 2% of the transaction consideration
(including debt assumed and current assets retained). Aurora Management Partners
also received a one-time transaction fee of $11.4 million and reimbursement of
$1.4 million in expenses at consummation of the Transactions.

BERNARD L. SCHWARTZ

Prior to the Acquisition, Bernard L. Schwartz owned or controlled 50% of
our capital stock and had the right to designate a majority of our board of
directors. Mr. B. Schwartz currently serves as the Chairman of our board of
directors. We entered into an agreement with Mr. B. Schwartz in 2004 whereby Mr.
B. Schwartz is entitled to the full and exclusive use of our leased 1988
Gulfstream G-IV aircraft. The agreement will terminate in 2005. Mr. B. Schwartz
is responsible for all fees and expenses related to the use of the airplane,
including lease payments, salaries and benefits for the flight crew, severance
payments due at the termination of the lease, repairs, maintenance and
insurance. Mr. B. Schwartz is also obligated to indemnify us and our directors,
officers and affiliates for any losses incurred by any of them due to his use of
the airplane during the term of the agreement.

Mr. B. Schwartz is also Chairman of the Board and Chief Executive Officer
of Loral Space & Communications Ltd., or Loral Space. 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,
$0.4 million and $0.3 million for the years ended December 31, 2004, 2003 and
2002, respectively.

Prior to the Acquisition, we had a bonus plan pursuant to which our Board
of Directors awarded bonuses to Bernard L. Schwartz ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization. The
bonus payable to Bernard L. Schwartz for the year ended December 31, 2004 has
not been determined and is not calculable as of the latest practicable date
prior to the filing of this Annual Report on Form 10-K. We shall disclose the
bonus paid for this period in our next Annual Report on Form 10-K. Bonuses
earned under this plan were $2.7 million and $4.8 million for the years ended
December 31, 2003 and 2002, respectively. This plan was terminated upon
consummation of the Acquisition.

COMMITMENT FEE

Cerberus Capital Management, L.P., an affiliate of a holder of senior
preferred stock, was paid approximately $2.8 million in connection with the
Acquisition, pursuant to a commitment letter delivered for part of the equity.

49

PURCHASERS OF 7 3/4% NOTES

Mr. B. Schwartz, Mr. K. Schwartz, Mr. Kisner and certain of their family
members and affiliates, and Mr. Charles acquired an aggregate of $31.1 million
in principal amount of our 7 3/4% notes from the initial purchasers of such
notes in the Transactions.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees to Deloitte & Touche LLP
for audit services rendered in connection with the consolidated financial
statements and reports and for other services rendered during the years ended
December 31, 2004 and 2003 on our and our subsidiaries behalf, as well as all
out-of-pocket costs incurred in connection with these services:

Audit Fees: Consists of fees billed for professional services rendered for
the audit of the Company's consolidated financial statements, for the review of
the interim condensed consolidated financial statements included in quarterly
reports, services that are normally provided by Deloitte & Touche LLP in
connection with statutory and regulatory filings or engagements and attest
services, except those not required by statute or regulation.

Audit Related Fees: Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's consolidated financial statements and are not reported under
"Audit Fees". These services include employee benefit plan audits, offering
memorandums, registration statements, attest services that are not required by
statute or regulation, and consultations concerning financial accounting and
reporting standards.

Tax Fees: Consists of tax compliance/preparation and other tax services.
Tax compliance/preparation consists of fees billed for professional services
related to federal, state and international tax compliance and assistance with
tax audits and appeals. Other tax services consist of fees billed for other
miscellaneous tax consulting and planning.

PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

The Board of Directors pre-approved all audit and permissible non-audit
services provided by Deloitte & Touche LLP in 2004. Our new Audit Committee will
pre-approve all such services going forward. These services may include audit
services, audit-related services, tax services and other services. Management
negotiates the annual audit fee directly with the Company's independent
auditors, which is then reviewed for approval by the Audit Committee. The Audit
Committee has also established pre-approved services for which the Company's
management can engage the Company's independent auditors. Any work in addition
to these pre-approved services requires the advance approval of the Audit
Committee. All fees in respect of 2004 services were approved by the former
Board of Directors.

50

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 10.1 through 10.7, 10.9 through 10.12 and
10.14 are management contracts or compensation plans.

(c) Exhibits

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

* Filed herewith

(1) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated November 23, 2004 and incorporated herein by reference.

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

52

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

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

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

(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by
reference.

(7) Previously filed as on exhibit to the Registration Statement on Form S-4,
No. 333-122672 and incorporated herein by reference.

53

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 Executive
Officer

Date: March 30, 2005

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.

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.

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of K&F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 2004, and
the related consolidated statement of operations, stockholders' equity, and cash
flows for the period from November 18, 2004 through December 31, 2004. We have
also audited the accompanying consolidated balance sheet of K&F Industries, Inc.
and subsidiaries (Predecessor) as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2003 and 2002 and for the period from January 1,
2004 through November 17, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, 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 consolidated financial position of K&F Industries,
Inc. and subsidiaries as of December 31, 2004, and the consolidated results of
their operations and their cash flows for the period from November 18, 2004
through December 31, 2004, the consolidated financial position of K&F
Industries, Inc. and subsidiaries (Predecessor) as of December 31, 2003, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2003 and 2002 and for the period from January 1, 2004 through
November 17, 2004 in conformity with accounting principles generally accepted in
the United States of America.

DELOITTE & TOUCHE LLP

New York, NY
March 28, 2005

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' EQUITY (DEFICIENCY)

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. and subsidiaries ("K&F" or 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% and 83% of the Company's total revenues during the periods
November 18, 2004 through December 31, 2004 and January 1, 2004 through November
17, 2004, respectively, and Engineered Fabrics Corporation ("Engineered
Fabrics," and together with Aircraft Braking Systems, the "Subsidiaries"), which
generated approximately 14% and 17% of the Company's total revenues during the
periods November 18, 2004 through December 31, 2004 and January 1, 2004 through
November 17, 2004, respectively.

THE ACQUISITION

On November 18, 2004, K&F Parent, Inc. ("K&F Parent"), an affiliate of
Aurora Capital Group, acquired K&F in exchange for cash consideration of
approximately $1.06 billion (excluding capitalized transaction costs of $40.4
million). In addition, the former K&F equityholders retained $77.2 million of
cash on hand at the Acquisition date. The cash consideration was used to repay
substantially all of K&F's then existing indebtedness and the related fees and
expenses of K&F and certain of its stockholders, with the balance paid to prior
equityholders of K&F (the "Acquisition").

The Acquisition was financed with an offering by K&F of $315.0 million of
7 3/4% Senior Subordinated Notes due 2014 (the "7 3/4% Notes"), the borrowing by
K&F of $480.0 million under a new $530 million Senior Secured Credit Facility
(the "New Credit Facility") and $309.8 million in equity investments from K&F
Parent. K&F Parent contributed the $309.8 million of equity to K&F Intermediate
Holdco, Inc. ("Intermediate Holdco"), which then contributed such proceeds as
equity to K&F Acquisition, Inc. prior to the merger of K&F Acquisition, Inc.
with and into K&F.

The Acquisition was accounted for using the purchase method of accounting,
pursuant to which the total purchase price, including related fees and expenses,
was allocated to the acquired net assets based upon estimates of fair value.
These adjustments were made by obtaining third-party valuations of certain
tangible and intangible assets and liabilities.

The following table summarizes the fair values assigned to K&F's assets
acquired and liabilities assumed in connection with the Acquisition on November
18, 2004:

Assets Acquired:
Current assets............................................ $ 183,467,000
Property, plant and equipment............................. 99,005,000
Debt issuance costs....................................... 29,280,000
Program participation costs............................... 49,238,000
Other intangible assets................................... 196,636,000
Goodwill.................................................. 856,668,000
--------------
Total assets acquired.................................. 1,414,294,000
--------------

F-6

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Liabilities Assumed:
Current liabilities....................................... 142,242,000
Pension liabilities....................................... 47,629,000
Postretirement benefit obligations........................ 91,858,000
Deferred income taxes..................................... 20,169,000
Other long-term liabilities............................... 5,684,000
Long-term debt............................................ 796,922,000
--------------
Total liabilities assumed.............................. 1,104,504,000
--------------
Net assets acquired......................................... $ 309,790,000
==============

TRANSACTION EXPENSES

The Company's results of operations for the period from November 18, 2004
through December 31, 2004 and from January 1, 2004 through November 17, 2004
include one-time charges of $5.4 million and $101.5 million, respectively. These
charges were a result of the Acquisition and related financing transactions, and
are as follows:

THE 2002 RECAPITALIZATION

On December 20, 2002, K&F consummated a recapitalization which included:
(i) the payment of a $200 million dividend to the holders of our common stock;
(ii) payment of $9.4 million to the holders of our common stock options; and
(iii) borrowing of $250 million of 9 5/8% senior subordinated due 2010 (the
"9 5/8% Notes").

All references in the Notes to the Consolidated Financial Statements to
events or activities which occurred prior to the completion of the Acquisition
relate to K&F "Predecessor".

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.

F-7

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 -- Revenue from the sale of products is
generally recognized upon shipment to customers, provided that there are no
uncertainties regarding customer acceptance, there is persuasive evidence of an
arrangement, the sales price is fixed and determinable, and collection of the
related receivable is probable.

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 30 years; and leasehold
improvements -- over the life of the applicable lease or 10 years, whichever is
shorter.

Goodwill and Other Intangible Assets -- In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," we do not amortize goodwill and other
intangible assets that are deemed to have indefinite lives. We test these assets
for impairment at least annually or more frequently if any event occurs or
circumstances change that indicate possible impairment.

Goodwill represents the excess cost of the businesses acquired over the
fair market value of the identifiable net assets.

Upon completion of the Acquisition, we determined that Aircraft Braking
Systems and Engineered Fabrics qualified as reporting units because discrete
financial information exists for each operation and the management of each
operation directly reviewed the operation's performance. In the future, if we
determine that our current structure no longer meets the requirements of a
reporting unit, we will reevaluate the reporting units with respect to the
changes in our reporting structure.

The first step of the impairment test identifies potential impairments by
comparing the estimated fair value using a market multiple analysis and a
discounted cash flow analysis of each reporting unit with its corresponding net
book value, including goodwill. If the net book value of the reporting unit
exceeds its fair value, the second step of the impairment test determines the
potential impairment loss by applying the estimated fair value first to the
tangible assets, then to the identifiable intangible assets. Any remaining value
would then be applied to the goodwill. The excess carrying value of goodwill
over the remaining fair value would indicate the amount of the impairment
charge. See Note 14.

Debt Issuance Costs -- Debt issuance costs consist of financing costs of
$28.8 million and $8.2 million, which are net of amortization (non-cash interest
expense) of $0.5 million and $5.5 million at December 31, 2004 and 2003,
respectively.

Intangible Assets -- Intangible assets consist of customer relationships,
engineering drawings, contract backlog, in-house libraries, technology licenses,
patents and Program Participation Costs which are stated at cost and are being
amortized on a straight-line method over periods of 3 to 25 years.

Program Participation Costs -- Program participation costs consist of
incentives given to original equipment aircraft manufacturers in connection with
their sole source selection of our products for installation

F-8

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on aircraft. These incentives include cash payments, discounts and free product.
The costs of these incentives is recognized in the period incurred unless the
incentive is subject to recovery through a long-term product maintenance
requirement mandated by the Federal Aviation Administration, or its equivalent,
for certified replacement equipment and service. Capitalized amounts are being
amortized on a straight-line basis over the shorter of the economic service life
of the aircraft or 25 years, as a charge to cost of sales. Prior to the
Acquisition, costs related to discounts and free product were recognized in cost
of sales in the period incurred and amounted to approximately $31.2 million,
$27.4 million and $23.0 million for the period January 1, 2004 through November
17, 2004 and for the years ended December 31, 2003 and 2002, respectively.

Evaluation of Long-Lived Assets -- Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with Statement of Financial
Accounting Standards ("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, except for the purchase price adjustments made in connection with the
Acquisition, during the years ended December 31, 2004, 2003 and 2002, resulting
from the Company's evaluations.

Warranty -- Estimated costs of warranty are accrued when individual claims
arise with respect to a product or performance. When the Company becomes aware
of such defects, the estimated costs of all potential warranty claims arising
from such defects are fully accrued. Such costs are included in cost of sales.
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 23%, 26% and 26% of
total sales for the years ended December 31, 2004, 2003 and 2002, 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, 2004 and 2003.

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 permitted by SFAS No. 123, the Company
accounted 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. At December 31, 2004, the Company does not have a
stock option plan. Disclosure related to the stock option plan of K&F
(Predecessor) 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.

Accounting Changes and Pronouncements -- In December 2004 the Financial
Accounting Standards Board issued SFAS No. 123-R. SFAS No. 123-R is a revision
of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123-R eliminates the
alternative to use the intrinsic value method of accounting that was provided in
SFAS No. 123, which generally resulted in no compensation expense recorded in
the financial statements related to the issuance of equity awards to employees.
SFAS No. 123-R requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS No. 123-R
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally all share-based
payment transactions with employees.

F-9

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company plans to adopt SFAS No. 123-R using a modified prospective
application. Under this application, companies are required to record
compensation expense for all awards granted after the required effective date
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. The provisions of SFAS 123-R are effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005, but early adoption is encouraged. The Company does not have
a stock option plan at December 31, 2004.

In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was enacted. The Act introduced a plan
sponsor subsidy based on a percentage of a beneficiary's annual prescription
drug benefits, within defined limits, and the opportunity for a retiree to
obtain prescription drug benefits under Medicare.

In May 2004, the Financial Accounting Standards Board (the "FASB") issued
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act," which supersedes
Staff Position No. 106-1 of the same title. The Staff Position clarifies the
accounting for the benefits attributable to new government subsidies for
companies that provide prescription drug benefits to retirees.

As of December 31, 2003, the Company had elected to defer any accounting
for the effects of the Act pursuant to Staff Position No. 106-1. We adopted
Staff Position No. 106-2 as of July 1, 2004, the beginning of our third quarter,
retroactive to January 1, 2004. The Company determined that benefits provided by
the plan were at least actuarially equivalent to Medicare Part D. The Company
remeasured the effects of the Act on the recorded Accumulated Plan Benefit
Obligation ("APBO") as of January 1, 2004. See Note 11.

In December 2003, the FASB issued SFAS No. 132 (Revised) ("SFAS No.
132-R"), "Employer's Disclosure about Pensions and Other Postretirement
Benefits." SFAS 132-R retains disclosure requirements of the original SFAS No.
132 and requires additional disclosures relating to assets, obligations, cash
flows, and net periodic benefit cost. SFAS No. 132-R is effective for fiscal
years ending after December 15, 2003, except that certain disclosures are
effective for fiscal years ending after June 15, 2004. Interim period
disclosures are effective for interim periods beginning after December 15, 2003.
The adoption of the disclosure provisions of this standard did not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows. See Note 11.

In January 2003, the FASB issued Interpretation ("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. In December 2003,
the FASB issued FIN No. 46 (Revised) to address certain FIN No. 46
implementation issues. The Company adopted FIN No. 46 (Revised) as of December
31, 2003. As the Company does not have any variable interest entities, the
adoption of this standard did not have an impact on the Company's consolidated
financial statements.

3. ACCOUNTS RECEIVABLE

F-10

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

4. INVENTORY

5. PROPERTY, PLANT AND EQUIPMENT

6. OTHER CURRENT LIABILITIES

F-11

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM DEBT

New Credit Facility -- Concurrent with the closing of the Acquisition, K&F
entered into a new $530.0 million senior secured credit facility, consisting of
a six-year $50.0 million revolving credit facility and an eight-year $480.0
million term loan facility and terminated its prior $30 million revolving credit
facility. The term loan is repayable in quarterly installments of $1.2 million
for the first seven years and thereafter in quarterly installments of $111.6
during the eighth year. The revolving credit facility is available, subject to
certain conditions, for general corporate purposes of K&F and its subsidiaries
in the ordinary course of business and for other transactions permitted under
the New Credit Facility. A portion of the revolving credit facility is available
for letters of credit. The obligations under the New Credit Facility are secured
by a lien on substantially all of K&F's assets and substantially all of the
assets of the K&F's direct and indirect subsidiaries and are guaranteed by K&F's
direct and indirect domestic subsidiaries.

Borrowings under the New Credit Facility bear interest, at the option of
K&F, at a rate equal to an applicable margin plus (a) the base rate, which will
be the higher of (1) the prime lending rate as set forth on the British Banking
Association Telerate page 5 and (2) the federal funds effective rate from time
to time plus 0.5% or (b) the eurodollar rate, which will be the rate at which
eurodollar deposits for one, two, three or six or (if available to all lenders
under the relevant facility, as determined by such lenders in their sole
discretion) nine or twelve months are offered in the interbank eurodollar
market. The applicable margin for the revolving credit facility is currently
1.50% with respect to the base rate loans and 2.50% with respect to eurodollar
loans. The applicable margin for the term loan facility is currently 1.50% with
respect to base rate loans and 2.50% with respect to eurodollar loans. Upon the
occurrence of any payment default, all outstanding amounts under the New Credit
Facility will bear interest at a rate equal to the rate then in effect with
respect to such borrowings, plus 2% per annum. K&F is also obligated to pay a
commission on all outstanding letters of credit in the amount of an applicable
margin then in effect with respect to eurodollar loans under the revolving
credit facility as well as fronting fees on the aggregate drawable amount of all
outstanding letters of credit. The weighted average interest rate on outstanding
indebtedness under the New Credit Facility was 4.9% at December 31, 2004.

The New Credit Facility contains customary representations and warranties,
covenants and conditions to borrowing.

The New Credit Facility contains a number of negative covenants that limit
K&F and its subsidiaries from, among other things, incurring other indebtedness,
entering into merger or consolidation transactions, disposing of all or
substantially all of their assets, making certain restricted payments, making
capital expenditures, creating any liens on ours or our subsidiaries' assets,
creating guarantee obligations and material lease obligations and entering into
sale and leaseback transactions and transactions with affiliates.

The New Credit Facility also requires the maintenance of certain quarterly
financial and operating ratios, including a consolidated cash interest coverage
ratio and consolidated leverage ratio. K&F was in compliance with all covenants
at December 31, 2004.

The New Credit Facility also contains customary events of default,
including default upon the nonpayment of principal, interest, fees or other
amounts or the occurrence of a change of control.
F-12

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled debt maturities for the five years subsequent to December 31,
2004 are as follows:

The New Credit Facility provides for revolving loans not to exceed $50.0
million, with up to $10 million available for letters of credit. The revolving
loan commitment terminates on November 18, 2010. At December 31, 2004, K&F had
$48.0 million available to borrow under the revolving credit facility and $2.0
million of letters of credit outstanding.

Senior Subordinated Notes -- In connection with the Acquisition, on
November 18, 2004, K&F repurchased $138.9 million in principal amount of our
9 1/4% senior subordinated notes due 2007 (the "9 1/4% Notes") and $249.4
million of our 9 5/8% Notes. On December 23, 2004, K&F redeemed the remaining
$6.1 million principal amount outstanding of our 9 1/4% Notes. The $577,000
principal amount of our 9 5/8% Notes remain outstanding and will be governed by
the related amended indenture.

On November 18, 2004, in connection with the Acquisition, K&F issued $315.0
million of 7 3/4% Notes which mature on November 15, 2014. The 7 3/4% Notes are
unsecured obligations of K&F ranking subordinate to K&F's senior debt, as
defined in the indenture governing the 7 3/4% Notes. Interest on the 7 3/4%
Notes is payable semi-annually.

The 7 3/4% Notes are redeemable by K&F at any time after November 15, 2009,
at descending redemption prices ranging from 103.875% in November 2009 to 100%
after November 2012. At any time prior to November 15, 2007, K&F may on any one
or more occasions redeem up to 35% of the aggregate principal of the 7 3/4%
Notes from the proceeds of equity offerings at a redemption price of 107.75% of
the principal amount thereof.

On October 15, 2003, the Company redeemed $40 million aggregate principal
amount of the 9 1/4% Notes at a redemption price of 103.083% of the principal
amount thereof. In connection therewith, the Company recorded a charge to
interest expense of $1.6 million, for redemption premiums and the write-off of a
portion of related unamortized financing costs.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of all financial instruments reported on the balance
sheet at December 31, 2004 and 2003 approximate their fair value, except as
discussed below.

The estimated fair value of the Company's 7 3/4% Notes, based on quoted
market prices or on current rates for similar debt with the same maturities was
approximately $323.0 million at December 31, 2004. The estimated fair value of
the Company's outstanding indebtedness on the New Credit Facility approximates
its fair value because the interest rates on the debt are reset on a frequent
basis to reflect current market rates.

As a requirement of our New Credit Facility, K&F entered into the
following: (i) a 3 month LIBOR interest rate cap at 4.5% from December 2004 to
December 2005 on $240 million of the term loans; and (ii) a 3 month interest
rate cap at 6% from December 2005 to December 2007 for an increasing notional
amount starting at $144.6 million, increasing to $161.2 million. The carrying
amounts of these interest rate caps ($351,000 in long-term assets and $14,000 in
current assets) approximate their fair values as reflected in the December 31,
2004 balance sheet.

F-13

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 expired on December 17, 2003. The payments made under the
swap agreement were $4.0 million and $3.8 million in 2003 and 2002,
respectively, which is included in interest expense.

9. CAPITAL STOCK AND STOCK OPTIONS

Common Stock -- Authorized common stock at December 31, 2004 of K&F
consists of 1,000 shares of voting common stock, par value $.01 per share. The
total number of shares of voting common stock of K&F issued and outstanding at
December 31, 2004 was 1,000 shares. Prior to the Acquisition, there were
1,000,000 authorized shares of voting common stock, par value $.01 per share.
The total number of shares of voting common stock prior to the Acquisition
issued and outstanding was 740,398 shares. All of K&F's issued and outstanding
common stock at December 31, 2004 is owned by Intermediate Holdco and all of
Intermediate Holdco's issued and outstanding common stock is owned by K&F
Parent.

Senior Redeemable Preferred Stock -- Authorized senior redeemable preferred
stock at December 31, 2004 of K&F consists of 9,250 shares, par value $.01 per
share. The total number of shares of senior redeemable preferred stock of K&F
issued and outstanding at December 31, 2004 was 9,250 shares. K&F issued, for a
nominal purchase price per share of $.01, shares of senior redeemable preferred
stock to the holders of the senior preferred stock of K&F Parent. Each of the
holders of the senior preferred stock of K&F Parent were issued a number of
shares of the nominal preferred stock of K&F equal to the number of shares of
senior preferred stock of K&F Parent held by each of them. The aggregate
liquidation preference of the nominal preferred stock issued by K&F is $.01 per
share, resulting in an initial aggregate liquidation preference of $92.50 for
the nominal preferred stock.

Stock Options -- There was no stock option plan at December 31, 2004.

Prior to the Acquisition the Company had two stock option plans which
provided for the grant of non-qualified or incentive stock options to acquire an
aggregate of 100,000 authorized but unissued shares of common stock. Such
options generally vested upon the passage of time or a change of control. In
connection with the Acquisition, all unvested stock options became vested and
were canceled for cash consideration in connection with the Acquisition. Option
exercise prices were issued above the fair market value of the Company's common
stock at the date of grant, as determined by an independent appraisal of the
Company.

F-14

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Components of accumulated other comprehensive income (loss), net of taxes,
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
("ERISA").

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 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.

F-15

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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-16

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents the net periodic benefit cost 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 $150.1 million, $144.7 million and $102.3 million,
respectively, as of December 31, 2004 and $136.1 million, $129.6 million and
$102.7 million, respectively, as of December 31, 2003.

In the fourth quarter of 2003 the Company announced to all active salaried
and the majority of its retired salaried employees that effective January 1,
2012 it would freeze its share of the retiree health care costs at the 2011
employer cost level. This announcement was also made to all Aircraft Braking
Systems' retired bargaining employees or their continuing beneficiary.

In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"), was enacted. The Act introduced a plan
sponsor subsidy based on a percentage of a beneficiary's annual prescription
drug benefits, within defined limits, and the opportunity for a retiree to
obtain prescription drug benefits under Medicare.

In May 2004, the Financial Accounting Standards Board issued Staff Position
No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act," which supersedes Staff
Position No. 106-1 of the same title. The Staff Position clarifies the
accounting for the benefits attributable to new government subsidies for
companies that provide prescription drug benefits to retirees.

As of December 31, 2003, the Company had elected to defer any accounting
for the effects of the Act pursuant to Staff Position No. 106-1. The Company
adopted Staff Position No. 106-2 as of July 1, 2004, the beginning of our third
quarter, retroactive to January 1, 2004. The Company determined that benefits
provided by the plan were at least actuarially equivalent to Medicare Part D.
The Company remeasured the effects of the Act on the recorded APBO as of January
1, 2004. The effect of the federal subsidy to which we are entitled has been
estimated to decrease the APBO by approximately $10.5 million.

F-17

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The decrease in the APBO was treated as a gain, which was amortized from
January 1, 2004. The table below details the reduction in net periodic
postretirement cost by component, which is included in the results of operations
for the year ended December 31, 2004, as a result of the Act and the adoption of
Staff Position No. 106-2.

For measurement purposes, a 11.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2004. The rate was assumed
to decrease to 5.0% for 2010 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 for the
year ended December 31, 2004:

The Company hired an investment manager to oversee the selection of
investment managers and their performance. Our current asset allocation is 50%
of assets invested primarily in U.S. equities with the balance primarily in
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 vest to participating
employees after three years of service. The matching contributions were
$193,000, $1,460,000, $1,690,000 and $1,689,000 for the periods November 18,
2004 through December 31, 2004 and January 1, 2004 through November 17, 2004 and
for the years ended December 31, 2003 and 2002, respectively.

F-18

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 $464,000, $4,601,000, $4,155,000 and $4,076,000 for the
periods November 18, 2004 through December 31, 2004 and January 1, 2004 through
November 17, 2004 and for the years ended December 31, 2003 and 2002,
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 consolidated financial statements.

F-19

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. GOODWILL AND INTANGIBLE ASSETS

Intangible assets subject to amortization consist of the following:

Goodwill and intangible assets not subject to amortization consist of the
following:

Goodwill allocated to the Company's reporting units, Aircraft Braking
Systems and Engineered Fabrics, was $779.3 million and $77.4 million,
respectively, at December 31, 2004 and $135.7 million and $31.3 million,
respectively, at December 31, 2003.

F-20

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate amortization expense during the periods November 18, 2004
through December 31, 2004 and January 1, 2004 through November 17, 2004 and for
the years ended December 31, 2003 and 2002 was $1.7 million, $4.2 million, $4.3
million and $3.9 million, respectively.

The estimated annual amortization expense for intangible assets, debt
issuance costs (non-cash interest) and program participation costs subject to
amortization in each of the five succeeding years from December 31, 2004 is as
follows:

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:

F-21

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

16. RELATED PARTY TRANSACTIONS

Indemnification

Pursuant to the stock purchase agreement for the Acquisition, K&F Parent
agreed that after the consummation of the Acquisition, it and K&F will indemnify
all current and former directors, officers, employees and agents of K&F and its
subsidiaries and will, subject to certain limitations, maintain for six years a
directors' and officers' insurance and indemnification policy containing terms
and conditions that are no less advantageous than the policy in effect as of the
date of the stock purchase agreement.

Bernard L. Schwartz

Prior to the Acquisition, Bernard L. Schwartz ("BLS") owned or controlled
50% of K&F's capital stock and had the right to designate a majority of K&F's
board of directors. Mr. B. Schwartz currently serves as the Chairman of K&F's
board of directors. We have entered into an agreement with Mr. B. Schwartz
whereby Mr. B. Schwartz is entitled to the full and exclusive use of K&F's
leased 1988 Gulfstream G-IV aircraft from the date of the closing of the
Acquisition to November 3, 2005, provided that either K&F or Mr. B. Schwartz may
terminate the agreement as of an earlier date under certain circumstances. Mr.
B. Schwartz is responsible for all fees and expenses related to the use of the
airplane, including lease payments, salaries and benefits for the flight crew,
severance payments due at the termination of the lease, repairs, maintenance and
insurance. Mr. B. Schwartz is also obligated to indemnify K&F and its directors,
officers and affiliates for any losses incurred by any of them due to his use of
the airplane during the term of the agreement.

Mr. B. Schwartz is also Chairman of the Board and Chief Executive Officer
of Loral Space & Communications Ltd., or Loral Space. K&F 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. K&F 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, $0.4 million and $0.3 million for the years ended December 31, 2004,
2003 and 2002, respectively.

The Company had an Advisory Agreement with BLS which provided for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
or expenses designated by him. Such agreement was terminated upon consummation
of the Acquisition.

The Company had a bonus plan pursuant to which the Company's Board of
Directors awarded bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. The bonus payable to
Bernard L. Schwartz for the year ended December 31, 2004 has not been determined
and is not calculable as of the latest practicable date prior to the filing of
this Annual Report on Form 10-K. The

F-22

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company shall disclose the bonus paid for this period in its next Annual Report
on Form 10-K. Bonuses earned under this plan were $2.7 million and $4.8 million
for the years ended December 31, 2003 and 2002, respectively. This plan was
terminated upon consummation of the Acquisition.

Commitment Fee

Cerberus Capital Management, L.P. the holder of 89.2% of K&F Parent's
senior preferred stock, delivered a commitment letter to K&F Parent, in
connection with its proposed purchase of K&F Parent's senior preferred stock.
Approximately $2.8 million was paid to Cerberus Capital on the closing date of
the Acquisition, pursuant to the commitment letter.

Purchasers of 7 3/4% Notes

Mr. B. Schwartz, Mr. K. Schwartz, Mr. Kisner and certain of their family
members and affiliates, and Mr. Charles acquired an aggregate of $31.1 million
in principal amount of the 7 3/4% Notes from the initial purchasers of such
notes.

Management Services Agreement

In connection with the Acquisition, the Company entered into a management
services agreement with Aurora Management Partners LLC, an affiliate of Aurora
Capital Group, for management and financial advisory services to be provided to
us and our subsidiaries. Pursuant to this agreement, subject to certain
conditions, we will pay an annual management fee to Aurora Management Partners
of $1.0 million and will reimburse its out-of-pocket expenses. If we consummate
any significant acquisition or disposition, Aurora Management Partners will be
entitled to receive a fee from us for investment banking services in connection
with the transaction. The fee is equal to up to 2% of the transaction
consideration (including debt assumed and current assets retained). Aurora
Management Partners also received a one-time transaction fee of $11.4 million in
addition to reimbursement of $1.4 million in expenses at consummation of the
Transactions.

Lehman Brothers

Pursuant to a financial advisory agreement between Lehman Brothers Inc.
("Lehman Brothers") and the Company, Lehman Brothers acted as exclusive
financial adviser to the Company and the Company agreed to pay Lehman Brothers
customary fees for services when rendered. This financial advisory agreement was
terminated upon consummation of the Acquisition. During the period November 18,
2004 through December 31, 2004 and for the year ended December 31, 2002, the
Company paid Lehman Brothers $3.5 million and $6.3 million for underwriting
discounts and commissions in connection with the issuance of the 7 3/4 Notes and
the 9 5/8% Notes, respectively. During the period November 18, 2004 through
December 31, 2004, the Company also paid Lehman Brothers $5.2 million in
connection with the New Credit Facility and an interim credit facility. During
the period January 1, 2004 through November 17, 2004 and for the year ended
December 31, 2003, no amounts were paid under this agreement. Affiliates of
Lehman Brothers owned 50% of the outstanding capital stock of the Company prior
to the Acquisition.

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 perform-

F-23

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ance of the subsidiaries based on profits from operations before interest,
income taxes and extraordinary charges ("Operating Profits").

K&F has no independent assets or operations, and its obligations under the
7 3/4% Notes are fully and unconditionally guaranteed by all of K&F's domestic
subsidiaries, on a joint and several basis. As almost all of the Company's
revenues and profits are derived from the subsidiaries which guarantee the
7 3/4% Notes, the other subsidiaries of K&F, which are foreign subsidiaries, are
not material to the Company.

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

F-24

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:

F-25

K&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $284,000 and
$323,000 as of December 31, 2004 and 2003, respectively.

The U.S. government accounted for approximately 23%, 26% and 26% of the
Company's total sales for the years ended December 31, 2004, 2003 and 2002,
respectively. No other customer accounted for more than 10% of total sales.

F-26