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

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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

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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.

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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.

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