K&F INDUSTRIES INC, POS AM, 1994-11-30

K&F INDUSTRIES INC
POS AM, 1994-11-30
AIRCRAFT PARTS & AUXILIARY EQUIPMENT, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1994

Registration No. 33-47028
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE

AMENDMENT NO. 4

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
K & F INDUSTRIES, INC.
(Exact name of registrant as specified in charter)

DELAWARE 3728 34-1614845
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code) Identification No.)

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

600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices)
212-297-0900
(Registrant's telephone number including area code)

-------------------
KENNETH M. SCHWARTZ
CHIEF FINANCIAL OFFICER
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(Name and address of agent for service)

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

Copies to:

JOHN J. SUYDAM, ESQ.
O'SULLIVAN GRAEV & KARABELL
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112

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

Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

K & F INDUSTRIES, INC.

CROSS REFERENCE SHEET PURSUANT TO
SECTION 501(b) OF REGULATION S-K

<TABLE>
<CAPTION>
Prospectus Heading
Registration Statement Item and Caption or Other Location
--------------------------------------- ------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus . . . . . . . . . . . . . . . . . . Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of Prospectus. . . Inside Front Cover Page; Additional
Information; Outside Back Cover Page

3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges. . . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors;
Summary Financial Data

4. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds

5. Determination of Offering Price . . . . . . . . . . . . . . Not Applicable

6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable

7. Selling Security Holders . . . . . . . . . . . . . . . . . . Not Applicable

8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . Plan of Distribution

9. Description of Securities to be Registered . . . . . . . . . Description of Senior Notes
Debentures
10. Interests of Named Experts and Counsel . . . . . . . . . . . Not Applicable

11. Information with Respect to the Registrant . . . . . . . . . Prospectus Summary; The Company;
Selected Financial Data;
Management's Discussion and
Analysis of Results of Operations
and Financial Condition; Business;
Management; Ownership of Capital
Stock; Description of Certain
Indebtedness; Certain Transactions;
Financial Statements

12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities . . . . . . . . . . . . . . . . . Undertakings

</TABLE>
<PAGE> 3

PROSPECTUS

$100,000,000
K & F INDUSTRIES, INC.
11 7/8% SENIOR SECURED NOTES DUE 2003

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

Interest Payable June 1 and December 1

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

K & F Industries, Inc. ("K & F" or the "Company") offered $100,000,000 (the
"Offering") aggregate principal amount of its 11 7/8% Senior Secured Notes Due
2003 (the "Senior Notes"). Interest on the Senior Notes is payable on June 1
and December 1, of each year. The Senior Notes are redeemable at the option of
the Company, in whole or in part, on or after June 1, 1997, at the redemption
prices set forth herein plus accrued interest to the date of redemption. The
Senior Notes are not subject to mandatory sinking fund payments. Upon the
occurrence of a Change of Control (as defined herein), each holder of Senior
Notes will be entitled to require the Company to repurchase such holder's
Senior Notes at 101% of the principal amount thereof plus accrued interest to
the date of such repurchase.

The Senior Notes are secured by a pledge of all of the outstanding shares
of capital stock of the Company's subsidiaries. All of the Company's assets
are held through its two wholly-owned subsidiaries, Aircraft Braking Systems
Corporation ("Aircraft Braking Systems") and Engineered Fabrics Corporation
("Engineered Fabrics"). Aircraft Braking Systems and Engineered Fabrics are
currently parties to an Amended and Restated Revolving Credit Agreement (the
"Restated Revolving Credit Agreement") providing for revolving loans (the
"Revolving Loans") in an aggregate principal amount not to exceed $80 million.
The Revolving Loans are secured by a first priority lien on all inventory and
accounts receivable of Aircraft Braking Systems and Engineered Fabrics. The
Senior Notes are effectively subordinated to the Revolving Loans and the claims
of the other creditors of the Company's subsidiaries. As of September 30,
1994, the aggregate amount of indebtedness, including trade payables and other
liabilities, of the Company's subsidiaries to which the Senior Notes were
effectively subordinated, was approximately $78.3 million. See "Risk Factors -
Holding Company Structure," "Description of Senior Notes" and "Description of
Certain Indebtedness."

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

The Company is, and will continue to be, highly leveraged. See "Risk
factors" For certain factors that should be considered by prospective
investors.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The prospectus is to be used by the Underwriter in connection with offers
and sales in market-making transactions of negotiated prices related to
prevailing market prices at the time of the sale. The Underwriter may act as
principal or agent in such transactions.

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

LEHMAN BROTHERS

November 30, 1994

<PAGE> 4

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass all
amendments, exhibits and schedules thereto) under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Subordinated Debentures
being offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
The Registration Statement and the exhibits and schedules thereto, as well as
such reports and other information filed by the Company with the Commission,
can be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
following regional offices of the Commission: 75 Park Place, New York, New York
10007, Kluczynski Federal Building, 230 South Dearborn Street, Chicago,
Illinois 60604 and Jacob K. Javits Federal Building, 26 Federal Plaza, New
York, New York 10278. Copies of such information can also be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.

The Company is required under the Indenture governing the Subordinated
Debentures to file periodic reports with the Commission and to distribute
copies of such filings to the holders of the Subordinated Debentures.

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<PAGE> 5

PROSPECTUS SUMMARY

This following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Prospective investors should carefully consider the information
set forth under the heading "Risk Factors." References to worldwide markets
and market share information contained herein have been derived from
information compiled by the Company due to the lack of independently compiled
information. Such references exclude markets formerly controlled by the
U.S.S.R. about which accurate information is not readily available.

THE COMPANY

K & F, through its wholly-owned subsidiary Aircraft Braking Systems
Corporation ("Aircraft Braking Systems"), is one of the world's leading
manufacturers of aircraft wheels, brakes and anti-skid systems for commercial
transport, general aviation and military aircraft. Aircraft Braking Systems'
products are marketed internationally and are used on over 30,000 commercial
transport, general aviation and military aircraft. During the fiscal year
ended March 31, 1994, approximately 86% of the Company's total revenues were
derived from sales made by Aircraft Braking Systems. In addition, through its
wholly-owned subsidiary Engineered Fabrics Corporation ("Engineered Fabrics"),
K & F believes it is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 90% of the worldwide general aviation and commercial
transport market and nearly one-half of the domestic military market.
Engineered Fabrics also manufactures and sells iceguards, inflatable oil booms
and various other products made from coated fabrics. During the fiscal year
ended March 31, 1994, approximately 14% of the Company's total revenues were
derived from sales made by Engineered Fabrics.

Aircraft Braking Systems and its predecessors have been leaders in the
design and development of aircraft wheels, brakes and anti-skid systems,
investing significant resources refining existing braking systems, developing
new technologies and designing braking systems for new airframes. As is
customary in the industry, Aircraft Braking Systems supplies original wheels
and brakes for commercial aircraft to the aircraft manufacturer at or
substantially below the production cost of such equipment. Once a
manufacturer's wheels and brakes have been certified and installed on an
aircraft, Federal Aviation Administration ("FAA") regulations and similar
requirements in foreign countries generally require that all replacement parts
for such system be provided by such manufacturer. Since most modern aircraft
have a useful life of 25 years or longer and require periodic replacement of
certain components of the braking system, the Company typically recoups its
initial investment in original equipment and generates significant profits from
sales of replacement parts over the life of the aircraft. During the fiscal
year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total
revenues were derived from the sale of replacement parts to service braking
systems previously installed by Aircraft Braking Systems.

BACKGROUND

In connection with the Offering (i) Aircraft Braking Systems,
Engineered Fabrics, the Company and Chemical Banking Corporation ("Chemical")
as agent for a syndicate of banks terminated the Term Loan Credit Agreement and
amended and restated the original Revolving Loan Credit Agreement to provide
for up to $80 million of Revolving Loans to Aircraft Braking Systems and
Engineered Fabrics, and ii) amended the Convertible Debenture Indenture to
allow payment of interest on the 14.75% Convertible Debentures due 2004 (the
"Convertible Debentures") with additional convertible debentures through April
15, 1997. See "Use of Proceeds," "Description of Senior Notes," "Description
of Certain Indebtedness -- Subordinated Debentures" and "Description of Certain
Indebtedness -- The Amended and Restated Revolving Credit Agreement".

On September 2, 1994 K & F retired the $65.4 million principal amount
of Convertible Debentures, held by Loral, in exchange for $12.76 million in
cash and 4,589,938 shares of Class B common stock representing 22.5% of equity.
The cash portion of this transaction was funded with the proceeds from the sale
of capital stock to K & F's principal stockholders for which stockholders
received a total of 687,273 shares of Class A common stock and 127,636 shares
of preferred stock. As a result, K & F stockholders' equity was increased by
$65.4 million and long-term debt was reduced by an equal amount. (See Note 7
to the September 30, 1994 consolidated financial statements.)

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<PAGE> 6

PROCEEDS FROM THE OFFERING

The net proceeds obtained by the Company from the sale of the Senior
Notes were approximately $96.7 million. The Company used such proceeds to
prepay in full its senior term loan (the "Term Loan") and to reduce the
outstanding amount of Revolving Loans. The repayment of the Term Loan relieved
the Company of $92.5 million in principal payments scheduled to be made on the
Term Loan through the fiscal year ending March 31, 1998. The Restated Revolving
Credit Agreement contains financial covenants which are less restrictive than
those contained in the original Revolving and Term Loan Credit Agreements.
While the interest rate on the Senior Notes is higher than the rate that was
applicable to the Term Loan, the elimination of the principal payments on the
Term Loan provided the Company with the option of dedicating more of its cash
flow to investments in original equipment for selected airframes, paying down
debt or applying such cash flow towards other general corporate purposes.

THE OFFERING - SENIOR NOTES
<TABLE>
<S> <C>
Securities Offered . . . . . . . . . . . . . $100,000,000 aggregate principal amount of 11 7/8% Senior Secured Notes Due
2003, issued pursuant to the Indenture dated as of June 1, 1992, (the
"Senior Note Indenture") between the Company and the Bank of New York, as
Trustee.

Maturity Date . . . . . . . . . . . . . . . . December 1, 2003.

Interest Payment Dates . . . . . . . . . . . June 1 and December 1.

Optional Redemption . . . . . . . . . . . . . The Senior Notes are redeemable at the option of the Company, in whole or
in part, on or after June 1, 1997, at the redemption prices set forth
herein plus accrued interest to the date of redemption.

Mandatory Sinking Fund . . . . . . . . . . . None.

Change of Control . . . . . . . . . . . . . . Upon the occurrence of a Change of Control, each holder of Senior Notes
will be entitled to require the Company to repurchase such holder's Senior
Notes at a price equal to 101% of the principal amount thereof plus accrued
interest to the date of repurchase.

Ranking . . . . . . . . . . . . . . . . . . . The Senior Notes rank senior in right of collateral to all unsecured
indebtedness of the Company and senior in right of collateral and payment
to the Subordinated Debentures. The Senior Notes are effectively
subordinated to the Revolving Loans and to the claims of other creditors of
Aircraft Braking Systems and Engineered Fabrics. See "Risk Factors-Holding
Company Structure.
</TABLE>

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<PAGE> 7

<TABLE>
<S> <C>
Certain Covenants . . . . . . . . . . . . . . The Senior Note Indenture contains certain covenants, including but not
limited to covenants limiting the following: (i) the incurrence by the
Company of additional indebtedness; (ii) the issuance of capital stock by
Aircraft Braking Systems; (iii) the payment of dividends and interest on
and redemption of capital stock and subordinated debt of the Company and
its subsidiaries; (iv) transactions with shareholders and affiliates; (v)
the application of the proceeds of certain asset sales; (vi) the incurrence
of liens; (vii) the creation of restrictions on the ability of the
Company's subsidiaries to make distributions; and (viii) the ability of the
Company and its subsidiaries to engage in certain mergers or consolidations
or to transfer all or substantially all of their assets to another person.
However, such limitations and prohibitions are subject to a number of
important exemptions. See "Description of Senior Notes."

Collateral . . . . . . . . . . . . . . . . . The Senior Notes are secured by a pledge of all of the outstanding capital
stock of Aircraft Braking Systems and Engineered Fabrics. See "Risk
Factors-Holding Company Structure" and "Description of Senior Notes."

Use of Proceeds . . . . . . . . . . . . . . . The Company used the net proceeds received from the issuance of the Senior
Notes (approximately 96.7 million) to repay the indebtedness remaining
under the Term Loan ($92.5 million) and to reduce the outstanding amount of
Revolving Loans. See "Use of Proceeds."
</TABLE>

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<PAGE> 8

SUMMARY FINANCIAL DATA

The summary financial data should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The summary consolidated financial data as of and for the six months ended
September 30, 1994 and 1993 was derived from unaudited financial statements
which in the opinion of management of the Company include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation.
The summary consolidated financial data as of and for the fiscal years ended
March 31, 1994, 1993, 1992, 1991 and 1990 was derived from audited financial
statements.

<TABLE>
<CAPTION>
For the Six Months For the Years
Ended September 30, Ended March 31,
-------------------- -----------------------------------------------------------
1994 1993 1994 1993 1992 1991 1990(a)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . $115,143 $ 115,773 $226,131 $277,107 $295,490 $314,635 $300,210
Cost of sales . . . . . . . . . . . 79,101 81,476 159,751 199,002 209,552 223,360 215,872
Independent research and
development . . . . . . . . . . . 4,778 6,659 12,858 11,417 14,130 11,781 10,902
Selling, general and
administrative expenses . . . . . 9,468 11,103 22,421 24,154 24,047 25,345 20,682
Amortization . . . . . . . . . . . 5,230 5,312 10,884 10,258 10,306 10,233 9,380
-------- --------- -------- -------- -------- -------- --------
Operating income . . . . . . . . . 16,566 11,223 20,217 32,276 37,455 43,916 43,374
Interest expense, net . . . . . . . 25,171 25,995 51,953 53,486 52,179 54,196 58,580
-------- --------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
charge and cumulative effect of
accounting principles . . . . . . (8,605) (14,772) (31,736) (21,210) (14,724) (10,280) (15,206)
Extraordinary charge(b) . . . . . . -- -- -- (2,477) (992) -- --
Cumulative effect of accounting
changes . . . . . . . . . . . . . -- (2,305)(c) (2,305)(c) (73,540)(d) -- -- --
-------- --------- -------- -------- -------- -------- --------

Net loss . . . . . . . . . . . . . $ (8,605) $ (17,077) $(34,041) $(97,227) $(15,716) $(10,280) $(15,206)
======== ========= ======== ======== ======== ======== ========

Ratio of earnings to fixed charges(e) -- -- -- -- -- -- --

BALANCE SHEET DATA (at end of
period):
Working capital . . . . . . . . . . $ 48,543 $ 65,913 $ 53,091 $ 70,028 $ 77,606 $ 52,312 $ 79,755
Total assets . . . . . . . . . . . 434,021 473,659 446,880 489,968 518,938 536,781 529,975
Long-term obligations(f) . . . . . 413,344 482,365 484,407 480,580 405,111 404,871 415,033
Stockholders' equity
(deficiency)(f) . . . . . . . . . (33,464) (66,639) (90,355) (51,868) 48,331 38,172 49,794

OTHER DATA (for the period):
Capital expenditures, net . . . . . 611 1,890 3,127 4,670 3,986 8,718 8,878
Depreciation and amortization . . . 9,786 10,056 20,527 19,862 19,501 18,683 16,403
Non-cash interest - convertible
debentures(f) . . . . . . . . . . 3,950 4,066 8,443 7,282 6,213 5,237 4,245
Non-cash interest - financing costs. 663 705 1,480 1,507 2,467 1,692 7,089
</TABLE>

(a) Consists of the results of operations for the period April 28, 1989 to
March 31, 1990 (338 days).
(b) The extraordinary charge of $2,477 and $992 relates to the accelerated
amortization of unamortized financing costs associated with the
prepayment in full of the Term Loan in fiscal year 1993 and the partial
prepayment of the Term Loan in fiscal year 1992. (See Note 7 to the
March 31, 1994 consolidated financial statements.)
(c) Represents cumulative effect of the change in method of accounting for
the discounting of workers' compensation losses. (See Note 2 to the
March 31, 1994 consolidated financial statements.)
(d) Includes cumulative effect of accounting change for SFAS No. 106 and the
change in method of accounting for certain overhead costs in inventory.
(See Notes 11 and 4 to the March 31, 1994 consolidated financial
statements.)

(e) For purposes of this computation, earnings consist of income (loss)
before income taxes plus fixed charges (excluding capitalized interest).
Fixed charges consist of interest on indebtedness (including capitalized
interest and amortization of debt issuance costs) plus that portion of
lease rental expense representative of the interest factor (deemed to be
one-third of lease rental expense). The Company's earnings were
insufficient to cover fixed charges by $8,605, $14,772, $31,736, $21,210,
$14,724, $10,280 and $15,206 for the six months ended September 30, 1994
and 1993 and for the fiscal years ended March 31, 1994, 1993, 1992, 1991
and 1990, respectively. Non-cash charges included in the deficiency of
earnings available to cover fixed charges for the six months ended
September 30, 1994 and 1993 and for the fiscal years ended March 31,
1994, 1993, 1992, 1991 and 1990 are $14,399, $14,827, $30,450, $28,651,
$28,181, $25,612 and $27,737, respectively. Non-cash charges consist of
depreciation, amortization and non-cash interest on the Convertible
Debentures and deferred financing costs.

(f) On September 2, 1994 K & F retired the $65.4 million principal amount of
Convertible Debentures, held by Loral, in exchange for $12.76 million in
cash and 22.5% of equity. As a result, K & F stockholders' equity was
increased by $65.4 million and long-term debt was reduced by an equal
amount. (See Note 7 to the September 30, 1994 consolidated financial
statements.)

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<PAGE> 9

THE COMPANY

GENERAL

K & F, through its wholly owned subsidiary Aircraft Braking Systems,
is one of the world's leading manufacturers of aircraft wheels, brakes and
anti-skid systems for commercial transport, general aviation and military
aircraft. Aircraft Braking Systems' products are marketed directly to
airframe manufacturers, airlines and governments worldwide, as well as through
a distribution network comprising approximately 130 outlets, and are used on
over 30,000 commercial transport, general aviation and military aircraft.
During the fiscal year ended March 31, 1994, approximately 86% of the Company's
total revenues were derived from sales made by Aircraft Braking Systems. In
addition, through its wholly-owned subsidiary Engineered Fabrics, K & F
believes it is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 90% of the worldwide general aviation and commercial
transport market and nearly one-half of the domestic military market.
Engineered Fabrics also manufactures and sells iceguards, inflatable oil booms
and various other products made from coated fabrics for commercial and military
uses. During the fiscal year ended March 31, 1994, approximately 14% of the
Company's total revenues were derived from sales made by Engineered Fabrics.

Aircraft Braking Systems and its predecessors have been leaders in the
design and development of aircraft wheels, brakes and anti-skid systems,
investing significant resources refining existing braking systems, developing
new technologies and designing braking systems for new airframes. As is
customary in the industry, Aircraft Braking Systems supplies original wheels
and brakes for commercial aircraft to the aircraft manufacturers at or
substantially below the production cost of such equipment. Once a
manufacturer's wheels and brakes have been certified and installed on an
aircraft, FAA regulations and similar requirements in foreign countries
generally require that all replacement parts for such systems be provided by
such manufacturer. Since most modern aircraft have a useful life of 25 years
or longer and require periodic replacement of certain components of the braking
system, the Company typically recoups its initial investment in original
equipment and generates significant profits from sales of replacement parts
over the life of the aircraft. During the fiscal year ended March 31, 1994,
approximately 75% of Aircraft Braking Systems' total revenues were derived from
the sale of replacement parts to service braking systems previously installed
by Aircraft Braking Systems.

Aircraft Braking Systems also manufactures anti-skid systems for use
on a variety of commercial, military and general aviation aircraft. These
systems, which are integrated into a braking system, are designed to minimize
the distance required to stop an aircraft by utilizing sensors, mounted on each
brake and wheel, to maximize the braking force while preventing the wheels from
locking and skidding. Of the three principal competitors in the wheel and
brake industry, Aircraft Braking Systems is the only significant manufacturer
of anti-skid systems. Because of the sensitivity of anti-skid systems to
variations in brake performance, the Company's management believes that the
ability to control the design and performance characteristics of both the
anti-skid system and its integrated brakes gives Aircraft Braking Systems a
competitive advantage over its two largest competitors.

K & F currently sells its products to virtually all major airframe
manufacturers and commercial airlines and to the United States and certain
foreign governments. The Company has carefully directed its efforts toward
expanding Aircraft Braking Systems' presence in the commercial and general
aviation segments of the aircraft industry, focusing particularly on medium-
and short-range commercial aircraft. These aircraft typically make more
frequent landings than long-range commercial aircraft and correspondingly
require more frequent replacement of brake parts. The Company has been
successful in having its wheels and brakes selected for use on a number of new
airframe designs which serve this market, including the McDonnell Douglas
Corp.'s ("McDonnell Douglas") MD-90 program, the Airbus Industries ("Airbus")
A-321, the Fokker Aircraft ("Fokker") Fo-100 and Fo-70, the Canadair Regional
Jet, the Saab-Scania AB ("Saab") 340 and 2000 and The Fairchild Aircraft
Corporation ("Fairchild") Metro 23. The Company has also been chosen to supply
products for use on a number of long-range commercial transport,

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<PAGE> 10

general aviation and military aircraft, including: brakes for the Airbus A-330
and A-340 programs; wheels, brakes, anti-skid systems and fuel tanks for the
Beech 400 and its military counterpart the T-1A "Jayhawk"; and wheels and
brakes for the Lear 60. The Company's management believes that these new
airframes will broaden the portfolio of aircraft using the Company's products
and that the revenue generated from such aircraft will eventually replace the
revenue generated by those aircraft in the Company's current portfolio which
are reaching maturity.

The Company is a Delaware corporation formed on March 13, 1989, at the
direction of BLS and LBH, to effect the Acquisition. The Company is the
successor to the businesses of Aircraft Braking Systems/Engineered Fabrics
which were acquired by Loral from Goodyear on March 13, 1987. The principal
executive offices of the Company are located at 600 Third Avenue, New York, New
York 10016, and its telephone number is (212) 297-0900.

BACKGROUND

In connection with the Offering (i) Aircraft Braking Systems,
Engineered Fabrics, the Company and Chemical Banking Corporation ("Chemical")
as agent for a syndicate of banks terminated the Term Loan Credit Agreement and
amended and restated the original Revolving Loan Credit Agreement to provide
for up to $80 million of Revolving Loans to Aircraft Braking Systems and
Engineered Fabrics, and ii) amended the Convertible Debenture Indenture to
allow payment of interest on the Convertible Debentures with additional
convertible debentures through April 15, 1997. See "Use of Proceeds,"
"Description of Senior Notes," "Description of Certain Indebtedness --
Subordinated Debentures" and "Description of Certain Indebtedness -- The
Amended and Restated Revolving Credit Agreement".

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<PAGE> 11

RISK FACTORS

Purchasers of the Senior Notes offered hereby should consider the
specific factors set forth below as well as the other information set forth in
this Prospectus.

HIGHLY LEVERAGED POSITION

Debt to Equity Ratio. The Company is highly leveraged. As of
September 30, 1994 and March 31, 1994, the Company had a stockholders'
deficiency. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and the consolidated financial statements.

Dependence on Future Performance to Make Debt Payments. The Company
will be required to make sinking fund payments on the Subordinated Debentures
of $52.5 million on August 1, 1999, $52.5 million on August 1, 2000, to retire
the remaining $105 million of Subordinated Debentures on August 1, 2001 and to
pay all principal plus accrued interest on the Senior Notes in 2003. The
Company's ability to make required principal and interest payments on its
indebtedness is dependent on the future performance of the Company and its
subsidiaries. The Company's performance is subject to a number of factors
beyond its control, including the performance of the global economy and
financial markets, worldwide demand for air travel, legislative pronouncements,
performance of the commercial and military aircraft industries and other
factors affecting the Company and its subsidiaries.

Operating and Financial Restrictions. The Company's level of
indebtedness and the restrictive covenants contained in its debt instruments
could significantly limit the Company's ability to withstand competitive
pressures or adverse economic consequences, including the ability of the
Company to make investments in aircraft programs and capital expenditures. In
addition, the Revolving Loans are floating rate obligations of the Company's
subsidiaries, causing the Company and its subsidiaries to be sensitive to
changes in prevailing interest rates. The Company currently believes that,
based on current levels of operations and anticipated growth, its cash flow
from operations, together with funds available from the Revolving Loans, will
be adequate to allow for anticipated capital expenditures and investments in
original equipment for aircraft programs, to fund working capital requirements
and to make required payments of principal and interest on its debt. However,
if the Company is unable to generate sufficient cash flow from operations in
the future, it may be required to refinance all or a portion of its debt or to
obtain additional financing. There can be no assurance that any such
refinancing would be possible or that any additional financing could be
obtained.

Restrictive Covenants. The Senior Note Indenture and the Subordinated
Debenture Indenture impose certain operating and financial restrictions on the
Company and its subsidiaries. Such restrictions affect, and in many respects
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends, permit
subsidiaries to issue preferred stock, repay certain indebtedness prior to its
stated maturity, create liens, sell assets or engage in mergers or acquisitions
and make certain capital expenditures. These restrictions, in combination with
the leveraged nature of the Company, could limit the ability of the Company to
effect future financings or otherwise restrict corporate activity. In addition,
the Restated Revolving Credit Agreement will impose certain restrictions on the
Company's subsidiaries, including limitations on additional indebtedness,
dividend payments and other distributions from Aircraft Braking Systems and
Engineered Fabrics to the Company and investments in original equipment for new
airframe programs.

DEFICIENCY OF EARNINGS TO FIXED CHARGES

For the six months ended September 30, 1994 and for the fiscal years
ended March 31, 1994, 1993 and 1992, the Company's deficiency of earnings
available to cover fixed charges was approximately $8.6 million, $31.7 million,
$21.2 million and $14.7 million, respectively. See "Selected Financial Data"
and "Management's Discussion and Analysis of Results of Operations and
Financial Condition." The Company's cash flow from operations has been
sufficient to meet its debt service obligations for interest and required
principal payments. Although the Company expects that it may continue to have a
deficiency of earnings to cover fixed charges, the Company expects that, based
upon current operations, it will be able to meet required principal and
interest payments on the Senior Notes. However, no assurance can be given that
the Company's operating results will provide sufficient cash flow to meet its
financial obligations, including payment of principal and interest on the
Senior Notes.

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<PAGE> 12

HOLDING COMPANY STRUCTURE

The Company is the sole obligor on the Senior Notes. The Company's
operations are conducted through, and substantially all of the Company's assets
are owned by, its directly owned operating subsidiaries, Aircraft Braking
Systems and Engineered Fabrics. As a result, the Company will be dependent on
the earnings and cash flow from Aircraft Braking Systems and Engineered Fabrics
to meet its obligations under the Senior Notes and the Subordinated Debentures
and to pay its general expenses. Aircraft Braking Systems and Engineered
Fabrics provide funds to the Company through payments on intercompany
indebtedness and dividends. Because the assets of the Company are held by and
will continue to be held by these subsidiaries, the claims of holders of the
Senior Notes will be subject to the prior claims of creditors of Aircraft
Braking Systems and Engineered Fabrics, including the claims of the Banks under
the Restated Revolving Credit Agreement and the claims of trade creditors. At
September 30, 1994, the aggregate amount of indebtedness, including trade
payables and other liabilities, of the Company's subsidiaries to which the
Senior Notes would effectively be subordinated, was approximately $78.3
million. See "Description of Senior Notes-Certain Covenants."

Pursuant to a Pledge Agreement between the Company and The Bank of New
York, as collateral trustee (the "Collateral Trustee"), the Company has
assigned and pledged to the Collateral Trustee, for the benefit of the holders
of the Senior Notes, a security interest in all of the capital stock of
Aircraft Braking Systems and Engineered Fabrics to secure performance by the
Company of its obligations under the Senior Note Indenture and the Senior
Notes. The value of the collateral securing the Senior Notes will depend upon
the value of the equity of Aircraft Braking Systems and Engineered Fabrics at
any given time. No assurance can be given that the value of the equity of
Aircraft Braking Systems and Engineered Fabrics would be sufficient to satisfy
the Company's obligations with respect to the Senior Notes.

ADDITIONAL INDEBTEDNESS

The Senior Note Indenture limits but does not prohibit the incurrence
by the Company or its operating subsidiaries of additional indebtedness. See
"Description of Senior Notes-Certain Covenants."

INTEREST OF BLS, LEHMAN BROTHERS AND ITS AFFILIATES

BLS owns 27.12% of the capital stock of the Company and has operating
control of the Company by reason of certain stockholder arrangements. In
addition, BLS serves as Chairman of the Board of Directors and Chief Executive
Officer of the Company. In his capacity as Chairman and Chief Executive
Officer, BLS participates in the material business decisions relating to the
Company and its operations but does not participate in the ordinary day to day
operations of the Company. BLS is also the Chairman and Chief Executive Officer
of Loral which owns 22.5% of the capital stock of K & F. (See Note 7 to the
September 30, 1994 consolidated financial statements.) BLS and certain other
executive officers of Loral provide, pursuant to a Director Advisory Agreement
(the "Advisory Agreement"), certain services to the Company, including acting
as directors of and providing advisory services to the Company and its
subsidiaries. The Company pays BLS and persons designated at his discretion an
aggregate of $200,000 per month for such services. BLS and certain other
advisors to the Company participate in certain other incentive compensation
plans. See "Management," "Ownership of Capital Stock" and "Certain
Transactions."

The Lehman Investors own 48.17% of the capital stock of the Company.
The Lehman Investors have the right pursuant to certain stockholders
arrangements to designate three members of the Company's Board of Directors. In
addition, in the event BLS dies or is disabled or owns less than a specified
number of shares of capital stock of the Company, the Lehman Investors will be
entitled to designate a majority of the directors of the Company. Pursuant to a
financial advisory agreement between Lehman Brothers and the Company, Lehman
Brothers acts as exclusive financial adviser to the Company. Lehman Brothers
has performed investment banking services for the Company in connection with
the Senior Note Offering and the Subordinated Debenture Offering. In
connection with the Senior Note Offering and the Subordinated Debenture
Offering, Lehman Brothers received discounts and commissions of $2.25 million
and $7.35 million, respectively. The Offering was made in compliance with the
requirements of Schedule E to the By-Laws ("Schedule E") of the National
Association of Securities Dealers, Inc. ("NASD"). Ladenburg, Thalmann & Co.
Inc. acted as a "qualified independent underwriter" within the requirements of
Schedule E. See "Certain Transactions," "Ownership of Capital Stock" and "Plan
of Distribution."

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<PAGE> 13

REDUCTIONS IN AIR TRANSPORT ACTIVITY; DELIVERY OF NEW AIRCRAFT

During fiscal year 1994, sales of replacement parts for braking
systems previously installed on aircraft accounted for approximately 75% of
Aircraft Braking Systems' total revenues. The demand for replacement parts for
the Company's wheels and braking systems varies depending upon the number of
aircraft equipped with the Company's products and the number of landings made
by such aircraft. A reduction in airline travel will usually result in reduced
utilization of commercial aircraft, fewer landings, and a corresponding
decrease in the Company's sales of replacement parts and related income and
cash flow. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business."

Since original equipment in new commercial aircraft is supplied at or
substantially below the Company's cost of production, delivery of new aircraft
equipped with the Company's products negatively affects cash flow. The
Company's 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 the Company's cash flow
in such year.

REDUCTIONS IN MILITARY APPROPRIATIONS

Recent political developments throughout the world have led to
reconsideration of the United States' military objectives and requirements and
a decline in spending on defense related products. Reduced United States
government (the "Government") demand for products supplied by the Company has
and may continue to have adverse affects on the Company's sales, income and
cash flow. Sales to the Government or to prime contractors or subcontractors
of the Government were approximately 15%, 23% and 31% of the Company's total
sales for the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Business-Government Contracts."

TRADING MARKET FOR THE DEBENTURES

Lehman Brothers currently makes a market in the Senior Notes.
However, it is not obligated to do so, and any such market making activity may
be discontinued at any time without notice, at its sole discretion. Therefore,
no assurance can be given as to the liquidity of, or the trading market for,
the Senior Notes. In addition, in the recent past the market for "high yield"
securities (of which the Senior Notes may be deemed a part) has been
characterized by certain periods of relative instability and illiquidity. No
assurance can be given as to the status of the market for "high yield"
securities in the future or whether an active trading market will develop for
the Senior Notes.

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<PAGE> 14

USE OF PROCEEDS

The net proceeds received by the Company from the sale of the Senior
Notes, after the payment of fees and expenses in connection with the Offering
and certain related transactions were approximately $96.7 million. The Company
used the net proceeds from the Offering to repay in full the Term Loan ($92.5
million) and to reduce the outstanding amount of the Revolving Loans. The
repayment of the Term Loan relieved the Company of approximately $92.5 million
in principal payments scheduled to be made on the Term Loan through the fiscal
year ending March 31, 1998. The Restated Revolving Credit Agreement contains
financial covenants which are less restrictive than those contained in the
Original Revolving Credit Agreement and the Term Loan. While the interest rate
on the Senior Notes is higher than that applicable to the Term Loan, the
elimination of the principal payments on the Term Loan will provide the Company
with the option of dedicating more of its cash flow to investments in original
equipment for selected airframes, paying down debt or applying such cash flow
towards other general corporate purposes. The Term Loan matured on April 30,
1997 and bore interest at 2 3/4% above the London Interbank Offering Rate.

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<PAGE> 15

SELECTED FINANCIAL DATA

The selected financial data should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The summary consolidated financial data as of and for the six months ended
September 30, 1994 and 1993 was derived from unaudited financial statements
which in the opinion of management of the Company include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation.
The summary consolidated financial data as of and for the fiscal years ended
March 31, 1994, 1993, 1992, 1991 and 1990 was derived from audited financial
statements.

<TABLE>
<CAPTION>
For the Six Months For the Years
Ended September 30, Ended March 31,
------------------- -------------------------------------------------------
1994 1993 1994 1993 1992 1991 1990(a)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . . $115,143 $115,773 $226,131 $277,107 $295,490 $314,635 $ 300,210
Cost of sales . . . . . . . . . . . . 79,101 81,476 159,751 199,002 209,552 223,360 215,872
Independent research and development 4,778 6,659 12,858 11,417 14,130 11,781 10,902
Selling, general and administrative
expenses . . . . . . . . . . . . . . 9,468 11,103 22,421 24,154 24,047 25,345 20,682
Amortization . . . . . . . . . . . . . 5,230 5,312 10,884 10,258 10,306 10,233 9,380
-------- -------- -------- -------- -------- -------- ---------
Operating income . . . . . . . . . . . 16,566 11,223 20,217 32,276 37,455 43,916 43,374
Interest expense, net . . . . . . . . 25,171 25,995 51,953 53,486 52,179 54,196 58,580
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before extraordinary
charge and cumulative effect of
changes in accounting principles . . (8,605) (14,772) (31,736) (21,210) (14,724) (10,280) (15,206)

Extraordinary charge(b) . . . . . . . -- -- -- (2,477) (992) -- --

Cumulative effect of accounting changes -- (2,305)(c) (2,305)(c) (73,540)(d) -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net loss . . . . . . . . . . . . . . . $ (8,605) $(17,077) $(34,041) $(97,227) $(15,716) $(10,280) $ (15,206)
======== ======== ======== ======== ======== ======== =========

Ratio of earnings to fixed charges (e) -- -- -- -- -- -- --

BALANCE SHEET DATA (at end of period):
Working capital . . . . . . . . . . . $ 48,543 $ 65,913 $ 53,091 $ 70,028 $ 77,606 $ 52,312 $ 79,755
Total assets . . . . . . . . . . . . . 434,021 473,659 446,880 489,968 518,938 536,781 529,975
Long-term obligations(f) . . . . . . 413,344 482,365 484,407 480,580 405,111 404,871 415,033
Stockholders' equity (deficiency)(f) (33,464) (66,639) (90,355) (51,868) 48,331 38,172 49,794

OTHER DATA (for the period):
Capital expenditures, net . . . . . . 611 1,890 3,127 4,670 3,986 8,718 8,878
Depreciation and amortization . . . . 9,786 10,056 20,527 19,862 19,501 18,683 16,403
Non-cash interest - convertible
debentures(f) . . . . . . . . . . . 3,950 4,066 8,443 7,282 6,213 5,237 4,245
Non-cash interest - financing costs. . 663 705 1,480 1,507 2,467 1,692 7,089
</TABLE>

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<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

GENERAL

Aircraft Braking Systems generates approximately 75% of its revenues through
the sale of replacement parts for wheels and braking systems previously
manufactured by the Company and its predecessors and installed on over 30,000
commercial, general aviation and military aircraft. As is customary in the
industry, Aircraft Braking Systems incurs substantial expenditures to research,
develop, design and supply original wheel and brake equipment to aircraft
manufacturers at or below the cost of production ("program investments"). Such
expenditures are charged to operations when incurred, or in the case of program
investments, when delivered to the aircraft manufacturer. Since most modern
aircraft have a useful life of 25 years or longer and require periodic
replacement of certain components of the braking system, the Company typically
recoups its initial investment in original equipment and generates significant
profits from the sales of replacement parts over the life of the aircraft. The
Company has invested and will continue to invest significant resources to have
its products selected for use on new commercial airframes, focusing
particularly on medium- and short-range aircraft. During the three years ended
March 31, 1994, the Company spent an aggregate of $104 million for research,
development, design and program investments. As a result of these efforts, the
Company has been selected as a basic supplier of wheels and carbon brakes on
the Airbus A-321, the sole supplier of wheels, carbon brakes and anti-skid
systems on the MD-90, Fo-100 and Fo-70, the sole supplier of wheels and brakes
for the Saab 2000, the Canadair Regional Jet, the Lear 60, the Fairchild Metro
23 and as a supplier of wheels and carbon brakes for the Airbus A-330 and
A-340. These programs are in the early stages of their life cycles and
represent significant future growth opportunities for the Company.

The Company believes that Department of Defense budget reductions have resulted
in a general reduction in the use and deployment of military aircraft and,
accordingly, sales to the United States military decreased from 23% of the
Company's total sales during the fiscal year ended March 31, 1993, to 15%
during the fiscal year ended March 31, 1994. The Company does not anticipate
any further significant reduction in sales to the United States military from
their fiscal year 1994 levels.

RESULTS OF OPERATIONS

SIX MONTHS ENDED SEPTEMBER 30, 1994 COMPARED WITH SEPTEMBER 30, 1993

Sales. Sales for the first half of fiscal year 1995 totaled $115.1 compared
with $115.8 in the first six months of fiscal 1994. The decrease was due to a
decline in military sales of $3.2 million primarily on the F-16 program and
lower shipments of commercial oil containment booms of $4.4 million.
Offsetting this decrease were higher sales of wheels and brakes for both
commercial transport and general aviation aircraft, which were approximately
10% higher than the prior year. Exceptionally strong demand for DC-9
replacement parts resulted in a 30% increase in sales on this program during
the period.

Operating Margins. Operating income increased to $16.6 million or 14.4% of
sales for the first half of fiscal year 1995, compared with $11.2 million or
9.7% of sales for the same period in the prior year. Operating margins
increased primarily due to a favorable sales mix (whereby higher-margin
commercial sales comprised a higher percentage of total sales), lower shipments
of original equipment to airframe manufacturers at or below the cost of
production and cost reductions implemented during fiscal year 1994.

Interest Expense. Interest expense decreased $.8 million for the first half of
fiscal year 1995 compared with the same period in the prior year. This
decrease was primarily due to the retirement of the Convertible Debentures on
September 2, 1994 (see Note 7 to the September 30, 1994 consolidated financial
statements) and a lower average principal balance on the Revolving Loan.

Approximately 360 hourly employees of the Company's Aircraft Braking Systems
subsidiary are represented by the United Auto Workers' Union. Aircraft Braking
Systems' three-year contract with the United Auto Workers' Union expired on
August 10, 1991. Aircraft Braking Systems has not had a ratified collective
bargaining agreement since August 10, 1991, but has operated under Company
implemented terms and conditions of employment.

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<PAGE> 17

FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993

Sales. Sales for fiscal year 1994 totaled $226.1 million compared with $277.1
million in the prior year. Military sales decreased $27.2 million primarily on
the F-16, F-14A, S-3A, F-117A and Saab J-35 and J-37 programs, reflecting the
overall decline in government procurements. Commercial sales decreased $23.8
million, of which approximately $7.0 million was attributable to replacement
parts of aircraft wheels and brakes, principally on the DC-10 program.
Additionally, demand for original equipment on the MD-11 and various Gulfstream
programs was down, reflecting what the Company believes is a temporary
industry-wide trend of aircraft operators deferring receipt of new airplanes.
Sales of oil spill containment booms were also below prior year levels.

Gross Margin. The gross margin for fiscal year 1994 was 29.4% compared with
28.2% for fiscal year 1993. This increase was due primarily to lower
postretirement health care and life insurance costs in fiscal year 1994
resulting from various plan amendments (see Note 11 to the March 31, 1994
consolidated financial statements) and a favorable sales mix (whereby higher
margin-commercial sales comprised a higher percentage of total sales) partially
offset by the overhead absorption effect relating to lower sales volume.

Independent Research and Development. Independent research and development
costs were $12.9 million in fiscal year 1994 compared with $11.4 million in
fiscal year 1993 or 5.7% and 4.1% of sales for fiscal year 1994 and 1993,
respectively. This increase was primarily due to the incurrence of higher
costs associated with the design and development of wheels and brakes for the
CL-604, Saab 2000 and Japan's FSX programs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.7 million in fiscal year 1994 compared
with fiscal year 1993. This decrease was primarily due to the Company's
continuous cost containment efforts and lower postretirement health care and
life insurance costs due to various plan amendments. (See Note 11 to the March
31, 1994 consolidated financial statements.)

Interest Expense, Net. Net interest expense decreased $1.5 million in fiscal
year 1994 compared with the prior year primarily due to a lower average
principal balance on the Revolving Loan. Partially offsetting this decrease
was a higher principal balance on the Convertible Debentures. The Company
issued $8.4 million and $7.3 million in additional Convertible Debentures
during fiscal years 1994 and 1993, respectively, in payment of non-cash
interest. (See Note 7 to the September 30, 1994 consolidated financial
statements).

In the fourth quarter of fiscal year 1994, retroactive to April 1, 1993, in
response to recent Securities and Exchange Commission guidance, the Company
changed its method of accounting for the discounting of liabilities for
workers' compensation losses, to use a risk-free rate rather than its
incremental borrowing rate. The cumulative effect for periods prior to April
1, 1993, of this change amounted to $2,305,000, and is included as an increase
to the net loss for the fiscal year ended March 31, 1994. (See Note 2 to the
March 31, 1994 consolidated financial statements.)

FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992

Sales. Sales for fiscal year 1993 totaled $277.1 million reflecting a decrease
of $18.4 million compared with the prior year. This decrease was due to a
decline in military sales of $26.3 million, primarily attributable to reduced
sales of replacement parts for wheels and brakes on the Lockheed F-16 and S-3A
programs and for fuel tanks on the McDonnell Douglas F-15 program. Partially
offsetting this decline were higher commercial sales of oil containment booms.

-15-
<PAGE> 18

Gross Margin. The gross margin for fiscal year 1993 was 28.2% compared with
29.1% for fiscal year 1992. This decrease was primarily due to the fiscal year
1993 effect of adopting Statement of Financial Accounting Standards (SFAS) No.
106 (see Note 11 to the March 31, 1994 consolidated financial statements) and a
change in accounting for inventory (see Note 4 to the March 31, 1994
consolidated financial statements), lower sales volume and higher shipments of
original equipment to airframe manufacturers at or below the cost of
production. Partially offsetting this decrease was a favorable sales mix
(whereby higher margin-commercial sales comprised a higher percentage of total
sales) and enhanced operating efficiencies.

Independent Research and Development. Independent research and development
costs were $11.4 million in fiscal 1993 compared with $14.1 million in fiscal
year 1992 or 4.1% and 4.8% of sales for fiscal years 1993 and 1992,
respectively. This decrease was primarily due to the incurrence of higher
costs during the prior fiscal year 1992, associated with the design and
development of wheels and brakes for the Airbus A-330 and A-340, the Canadair
Regional Jet and the Saab 2000 programs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $.1 million in fiscal year 1993 compared
with fiscal year 1992. This increase was primarily due to the fiscal year 1993
effect of adopting SFAS No. 106, offset by the Company's continuous cost
containment efforts as well as the consolidation of the Moerfelden, Germany,
distribution warehouse into the product support facility in Slough, England,
during fiscal year 1992.

Interest Expense, Net. Net interest expense increased $1.3 million in fiscal
year 1993 compared with the prior year. This increase was attributable to the
higher interest rate on the Senior Notes issued June 10, 1992 compared with the
senior term loan that was prepaid (see Note 7 to the March 31, 1994
consolidated financial statements) and a higher interest rate and principal
balance on the Convertible Debentures. Partially offsetting this increase was
a lower interest rate and average principal balance on the Revolving Loan. The
Company issued $7.3 million and $6.2 million in additional Convertible
Debentures during fiscal years 1993 and 1992, respectively, in payment of
non-cash interest. (See Note 7 to the September 30, 1994 consolidated
financial statements.)

In the fourth quarter of fiscal year 1993, the Company adopted, retroactive to
April 1, 1992, SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires accrual of these benefits during
an employee's service period. The effect of adopting SFAS No. 106 was a
cumulative charge of $77.9 million and an increase in fiscal year 1993
operating expenses of $6.2 million ($5.5 million included in cost of sales and
$.7 million included in selling, general and administrative expenses). (See
Note 11 to the March 31, 1994 consolidated financial statements.) Prior year
results have not been restated to reflect this accounting change.

LIQUIDITY AND FINANCIAL CONDITION

The Company's primary source of funds for conducting its business activities
and servicing its indebtedness has been from cash generated from operations and
borrowings under the Revolving Loan. The Company's long-term indebtedness
increased from $379.5 million at March 31, 1993, to $381.4 million at March 31,
1994. This increase was primarily due to the accrual of non-cash interest on
the Convertible Debentures of $8.4 million, partially offset by $6.5 million of
repayments on the Revolving Loan.

On September 2, 1994 K & F retired the $65.4 million principal amount of
Convertible Debentures, held by Loral, in exchange for $12.76 million in cash
and 4,589,938 shares of Class B common stock representing 22.5% of equity. The
retirement of the Convertible Debentures has reduced the Company's future cash
requirement by approximately $195 million had the debentures been outstanding
until maturity. (See Note 7 to the September 30, 1994 consolidated financial
statements.)

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<PAGE> 19

The Company expects that its principal use of funds for the next several years
will be to pay interest on indebtedness, fund capital expenditures and make
investments in original equipment for new airframes. Debt principal
amortization commences August 1, 1999. The Company's management believes that
it will have adequate resources to meet its cash requirements through funds
generated from operations and borrowings under its $80 million Revolving Loan
(maturing April 27, 1997 and subject to a borrowing base of eligible accounts
receivable and inventory). At September 30, 1994 and March 31, 1994, the
Company had $55.1 million and $38.2 million, respectively, available to borrow
under its Revolving Loan.

CAPITAL EXPENDITURES

The Company had additions to fixed assets of $3.1 million and $4.7 million for
the fiscal years ended March 31, 1994 and 1993, respectively. These additions
were primarily for manufacturing equipment. Capital spending for fiscal year
1995 is expected to be approximately $5.0 million.

INFLATION

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

ACCOUNTING CHANGE

Effective April 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits."
The adoption of SFAS No. 112 did not have a material effect on the Company's
financial position or results of operations. (See Note 2 to the September 30,
1994 consolidated financial statements.)

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<PAGE> 20

BUSINESS

GENERAL

K & F Industries, Inc. ("K & F" or the "Company") was incorporated in
Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's
leading manufacturers of aircraft wheels, brakes and anti-skid systems for
commercial transport, general aviation and military aircraft. Aircraft
Braking Systems' products are marketed directly to airframe manufacturers,
airlines and governments worldwide, as well as through a distributor network
comprising approximately 130 outlets, and are used on over 30,000 commercial
transport, general aviation and military aircraft. The Company also maintains
nine product support offices located in four countries. During the fiscal year
ended March 31, 1994, approximately 86% of the Company's total revenues were
derived from sales made by Aircraft Braking Systems. In addition, K & F, through
its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered
Fabrics"), believes it is the leading worldwide manufacturer of aircraft fuel
tanks, supplying approximately 90% of the worldwide general aviation and
commercial transport market and nearly one-half of the domestic military
market. Engineered Fabrics also manufactures and sells iceguards, inflatable
oil booms and various other products made from coated fabrics, for commercial
and military uses. During the fiscal year ended March 31, 1994, approximately
14% of the Company's total revenues were derived from sales made by
Engineered Fabrics.

Aircraft Braking Systems and its predecessors have been leaders in the design
and development of aircraft wheels, brakes and anti-skid systems, investing
significant resources refining existing braking systems, developing new
technologies and designing braking systems for new airframes. As is customary
in the industry, Aircraft Braking Systems supplies original wheels and brakes
for commercial aircraft to the aircraft manufacturers at or substantially below
the production cost of such equipment. Once a manufacturer's wheels and brakes
have been certified and installed on an aircraft, FAA regulations and similar
requirements in foreign countries generally require that all replacement parts
for such systems be provided by such manufacturer. Since most modern aircraft
have a useful life of 25 years or longer and require periodic replacement of
certain components of the braking system, the Company typically recoups its
initial investment in original equipment and generates significant profits from
sales of replacement parts over the life of the aircraft. During the fiscal
year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total
revenues were derived from the sale of replacement parts to service braking
systems previously installed by Aircraft Braking Systems.

K & F currently sells its products to virtually all major airframe
manufacturers and most commercial airlines and to the United States and certain
foreign governments. The Company has carefully directed its efforts toward
expanding Aircraft Braking Systems' presence in the commercial and general
aviation segments of the aircraft industry, focusing particularly on medium-
and short-range commercial aircraft. These aircraft typically make more
frequent landings than long-range commercial aircraft and correspondingly
require more frequent replacement of brake parts. The Company has been
successful in having its wheels and brakes selected for use on a number of new
airframe designs that serve this market, including the McDonnell Douglas MD-90
program, the Airbus A-321, the Fokker Fo-100 and Fo-70, the Canadair Regional
Jet, the Saab 340 and 2000, the Fairchild Metro 23 and the Indonesian commuter
IPTN-250. The Company has also been chosen to supply products for use on a
number of long-range commercial transport, general aviation and military
aircraft, including: wheels and brakes for the Airbus A-330 and A-340
programs; wheels, brakes and fuel tanks for the Beech 400 and its military
counterpart, the T-1A "Jayhawk"; and wheels and brakes for the Lear 60. The
Company's management believes that these new airframes will broaden the
portfolio of aircraft using the Company's products and that the revenue
generated from these aircraft will eventually replace the revenue generated by
those aircraft in the Company's current portfolio which are reaching maturity.

-18-
<PAGE> 21

THE AIRCRAFT WHEEL AND BRAKE INDUSTRY

During fiscal year 1993, the latest data available to the Company, K & F
believes the aircraft wheel, brake and anti-skid business generated
approximately $960 million in sales worldwide. Furthermore, the Company
believes that the three largest competitors, Aircraft Braking Systems, Allied
Signal's Aircraft Landing Systems Division and B.F. Goodrich Aerospace, Inc.
("B.F. Goodrich") accounted for approximately 70% of the worldwide sales of
aircraft wheels, brakes, anti-skid systems and replacement parts in fiscal year
1993.

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

Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for
bids from manufacturers. Selections are made by the manufacturer on the basis
of technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be
"dual sourcing" of wheels and brakes. In such 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. Where
two suppliers have been certified, the aircraft customer, such as a major
airline, will designate the original equipment to be installed on the
customer's aircraft. Competition among two 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 and performance characteristics of the wheel
and brake system. Once selected, airlines infrequently replace entire wheel
and brake systems because of the expense.

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

OPERATIONS

Aircraft Braking Systems. Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, steel and carbon brakes and anti-skid systems
for commercial transport, general aviation and military aircraft. As of March
31, 1994, the Company's products had been installed on over 30,000 aircraft,
including the following aircraft for which K&F is the sole-source supplier:
DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340. In
addition, the Company supplies spare parts for the MD- 80 program on a dual-

-19-
<PAGE> 22

source wheel and brake program. For the fiscal year ended March 31, 1994,
approximately 86% of the Company's total revenues were derived from sales made
by Aircraft Braking Systems. Sales of replacement brake parts account for
approximately 75% of Aircraft Braking Systems' total revenues.

The Company's anti-skid systems, which are integrated into a braking system,
are designed to minimize the distance required to stop an aircraft by utilizing
sensors, mounted on the wheel and brake, to maximize the braking force while
also preventing the wheels from locking and skidding. Of the three principal
competitors in the wheel and brake industry, Aircraft Braking Systems is the
only significant manufacturer of anti-skid systems. Because of the sensitivity
of anti-skid systems to variations in brake performance, the Company's
management believes that the ability to control the design and performance
characteristics of both the anti-skid system and its integrated brakes gives
Aircraft Braking Systems a competitive advantage over its two largest
competitors. Other products manufactured by the Company include helicopter
rotor brakes and brake temperature monitoring equipment for various types of
aircraft.

The following table shows the distribution of sales of aircraft wheels, brakes
and anti-skid systems to total sales of the Company:

<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Wheels and brakes . . . . . . . . . . . . . . . . . . . . . . . 76% 75% 78%
Anti-skid systems . . . . . . . . . . . . . . . . . . . . . . . 10% 10% 10%
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 86% 85% 88%
=== === ===

</TABLE>

Aircraft Braking Systems has a long history of establishing and maintaining its
relationships with major airframe manufacturers in the commercial transport
sector, having sold its products to McDonnell Douglas since the early 1930s,
Aerospatiale and Fokker since the early 1960s and Canadair since 1974.
Similarly, in the general aviation market, Aircraft Braking Systems has
supplied braking systems to Beechcraft since the early 1940s, Cessna since the
1940s, Lear since its inception in the 1960s and Gulfstream Aerospace since it
was founded in 1970.

The Company has carefully directed its efforts toward expanding Aircraft
Braking Systems' presence in the commercial transport and general aviation
segments of the aircraft industry, focusing particularly on medium- and
short-range commercial aircraft. As a result of this increased focus, the
Company has been successful in having its products selected on a number of new
airframe designs, including the Airbus A-321, the McDonnell Douglas MD-90 and
the Fokker Fo-70. In August 1991, Aircraft Braking Systems was selected as a
basic supplier of wheels and carbon brakes on the Airbus A-321, the European
consortium's new 186-seat "stretch" version of its popular A-320 standard body
twin-jet. Equipped with Aircraft Braking Systems' wheels and carbon brakes,
the first A-321 was delivered to Lufthansa German Airlines on January 27, 1994
in ceremonies in Hamburg, Germany. Based on airline supplier selections to
date, Aircraft Braking Systems has captured more than 80% of the A-321 aircraft
orders including Alitalia and Swissair in addition to Lufthansa. Airbus has
booked orders for 141 aircraft to date and projects the program to be in
production beyond the year 2000.

In December 1990, Aircraft Braking Systems was awarded a sole-source contract
to supply wheels, carbon brakes and anti-skid equipment on the McDonnell
Douglas MD-90 twin-jet. The MD-90 adds new performance characteristics to a
product line that began as the DC-9 model jet that first flew in 1965 and
evolved later into the popular MD-80 series. Development of the MD-90 has
remained on schedule since the program was formally launched in the late 1980s
with orders from Delta Air Lines. The first MD-90 was officially rolled out
February 13, 1993 and just nine days later, on February 23, completed its
maiden flight. A technologically innovative design, the MD-90 is equipped with
an advanced turbofan engine that complies with the FAA's restrictive Stage III
noise restrictions and offers fuel savings over competing engines. The first
MD-90 is scheduled for delivery to Delta Air Lines in the first quarter of
calendar year 1995.

-20-
<PAGE> 23

Aircraft Braking Systems has also been selected as the basic supplier of wheels
and brakes for the Saab 2000, the Canadair Regional Jet, the Lear 60, the
Fairchild Metro 23, the Indonesian IPTN-250 and as a supplier of wheels and
carbon brakes for the Airbus A-330 and A-340 wide-body jets.

Engineered Fabrics. Engineered Fabrics is the largest aircraft fuel tank
manufacturer in the world, serving approximately 90% of the worldwide general
aviation and commercial transport market and nearly one-half of the domestic
military market. For the fiscal year ended March 31, 1994, approximately 14%
of the Company's total revenues were derived from sales made by Engineered
Fabrics.

Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the fiscal year ended March 31, 1994, sales of fuel
tanks accounted for approximately 60% of Engineered Fabrics' total revenues.
For military helicopter applications, Engineered Fabrics' fuel tanks feature
encapsulated layers of natural 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. The Company uses this "self-sealing" technology to
manufacture crash-resistant fuel tanks for helicopters, military aircraft and
race cars that significantly reduce the potential for fires, leaks and spilled
fuel following a crash. Engineered Fabrics is the only known supplier of
polyurethane fuel tanks for aircraft, which are lighter than their metal or
nitrile counterparts and therefore cost-advantageous.

In addition to fuel tanks, Engineered Fabrics produces iceguards, which are
heating systems made out of layered composite materials that are applied on
engine inlets, propellers, rotor blades and tails. Encapsulated in the
material are heating elements which are connected to the electrical system of
the aircraft and, when activated by the pilot, heat the composite to inhibit
the formation of ice.

The Company also produces a variety of products utilizing coated fabrics such
as oil containment booms, 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. Engineered Fabrics has recently
developed towable storage bladders 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 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

K & F sells its products to more than 150 airlines, airframe manufacturers,
governments and distributors representing each of the commercial transport,
general aviation and military aircraft markets. Sales to the U.S. government
represented approximately 15%, 23% and 31% of total sales for the fiscal years
ended March 31, 1994, 1993 and 1992, respectively. No other customer accounted
for more than 10% of sales.

In the commercial transport and general aviation markets, airframe
manufacturers issue requests for formal proposals for various subsystems,
including braking systems, to be included in new airframes. Producers of the
various subsystems then prepare and submit competing proposals which are
evaluated based on technological merit, conformity to design criteria
established by the manufacturer and pricing considerations. After negotiations
between an airframe manufacturer and the potential supplier, airframe
manufacturers in the general aviation market generally choose one supplier of
wheels and brakes for an aircraft. Where wheels and brakes are dual sourced in
the commercial transport market, suppliers of approved products compete to have
their brakes and wheels chosen by the ultimate customer, such as an airline,
for use on such customer's aircraft. Competition for an aircraft customer
focuses generally on the maintenance costs associated with the particular
manufacturer's braking system, relationship with the customer and ongoing
ability to provide technical support after the aircraft has been equipped with
the manufacturer's product.

-21-
<PAGE> 24

In the military aircraft market, suppliers work in conjunction with airframe
manufacturers to design complete airframes in response to requests for
proposals issued by branches of the military through the Department of Defense.
Generally, two or three teams of airframe manufacturers and suppliers will be
selected to build prototypes of the aircraft. The aircraft are then evaluated
for overall technological merit, conformity to design criteria and pricing
considerations. Military aircraft are not generally dual sourced for parts by
the airframe manufacturer.

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

<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
---------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Commercial transport . . . . . . . . . . . . . . . . . . . . . . . . . 60% 55% 48%
Military (U.S. and foreign) . . . . . . . . . . . . . . . . . . . . . 22% 28% 35%
General aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . 18% 17% 17%
---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
==== ==== ====
</TABLE>

Commercial Transport. Customers for the Company's products in the commercial
transport market include most airframe manufacturers and major airlines. The
Company's products are used on a broad range of large commercial transports (60
seats or more) and commuter aircraft (20 to 60 seats). Where multiple braking
systems are certified for a particular aircraft, it is generally the airline
and not the airframe manufacturer that decides which of the approved wheel and
brake suppliers will originally equip such airlines fleet. Some of the
Company's airline customers include American Airlines, Delta Air Lines,
Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines, United
Airlines and USAir. The Company provides replacement parts for certain
aircraft designed by The Boeing Company ("Boeing") including the Boeing 707,
but does not produce products for any commercial aircraft currently
manufactured by Boeing.

Military. The Company believes it is the largest supplier of wheels, brakes
and fuel tanks to the U.S. military and also supplies the militaries of certain
foreign governments. The Company's products are used on a variety of fighters,
training aircraft, transports, cargo planes, bombers and helicopters. Some of
the military aircraft using these products are the F-4, F-14, F-16, F-117A,
A-10, B-1B and the C-130. Substantially all of the Company's military products
are sold to the Department of Defense or to airframe manufacturers including
Lockheed, McDonnell Douglas, Boeing, Sikorsky, Bell and Rockwell. In 1990, the
Department of Defense selected Beech Aircraft, in potentially the largest
military contract for a general aviation aircraft in history, to supply the
T-1A Tanker Transport Training System to be used to train Air Force pilots for
in-flight refueling and transport duties. The Company will supply the wheels,
brakes, fuel tanks and iceguards for this aircraft. Beechcraft expects to
receive orders for a total of over two hundred aircraft before the program is
completed. Anti-skid systems, manufactured for the military, are used on the
F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and Jaguar
aircraft.

General Aviation. The Company believes it is the industry's largest supplier
of wheels, brakes and fuel tanks for general aviation aircraft. This market
includes personal, business and executive aircraft. Customers include airframe
manufacturers, such as Gulfstream, Beech Aircraft, Lear, Canadair, Cessna,
Dassault and distributors, such as Aviall. Anti-skid systems are supplied by
the Company to Gulfstream, Canadair, Dassault and a variety of other aircraft
manufacturers. General aviation aircraft using the Company's equipment
exclusively include the Beech Starship and Beech 400 series of aircraft, the
Lear series 20, 30, 50 and 60 and the Gulfstream G-IV, G-III, G-II and G-I.

-22-
<PAGE> 25

FOREIGN CUSTOMERS

The Company supplies products to a number of foreign aircraft manufacturers,
airlines and foreign governments. The following table shows sales of the
Company to both foreign and domestic customers for the last three fiscal years:

<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63% 68% 72%
Foreign sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37% 32% 28%
---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
==== ==== ====
</TABLE>

INDEPENDENT RESEARCH AND DEVELOPMENT

The Company employs scientific, engineering and other personnel to improve its
existing product lines and to develop new products and technologies in the same
or related fields. At March 31, 1994, the Company employed approximately 164
engineers (of whom 32 held advanced degrees); approximately 27 of such
engineers (including 14 holding advanced degrees) devoted all or part of their
effort toward a variety of projects including: refining carbon processing
techniques to create more durable braking systems; upgrading existing braking
systems to provide enhanced performance; and developing new technologies to
improve the Company's products.

The costs incurred relating to independent research and development for the
fiscal years ended March 31, 1994, 1993, and 1992 were $12.9 million, $11.4
million and $14.1 million, respectively.

PATENTS AND LICENSES

The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.

COMPETITION

The Company faces substantial competition from a few suppliers in each of its
product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and B.F. Goodrich. Both
significant competitors are larger and have greater financial resources than
the Company. The principal competitor for anti-skid systems is the Hydro-Aire
Division of Crane Co. The principal competitor for fuel tanks is American Fuel
Cell & Coated Fabrics Company.

BACKLOG

Backlog at September 30, 1994 and March 31, 1994 amounted to approximately
$141.3 million and $141.5 million, respectively. Backlog consists of firm
orders for the Company's products which have not been shipped. Approximately
41% of total Company backlog at September 30, 1994 is expected to be shipped
during the fiscal year ended March 31, 1995, with the balance expected to be
shipped over the subsequent two-year period. No significant seasonality
exists for sales of the products manufactured by the Company.

Of the total Company backlog at September 30, 1994, approximately 35% was
directly or indirectly for end use by the United States Government (the
"Government"), substantially all of which was for use by the Department of
Defense. For certain risks associated with Government contracts, see
"Government Contracts" discussed below.

-23-
<PAGE> 26

GOVERNMENT CONTRACTS

Recent political developments in some regions of the globe have led to
reconsideration of the United States' military objectives and requirements and
a resultant decline in spending on defense related products. Reduced
Government demand for products supplied by the Company has and may continue to
have adverse effects on sales, income and cash flow. For the fiscal years
ended March 31, 1994, 1993 and 1992, approximately 15%, 23% and 31%,
respectively, of the Company's total sales were made to agencies of the
Government or to prime contractors or subcontractors of the Government.

All of the Company's defense contracts are firm, fixed-price contracts under
which the Company agrees to perform for a predetermined price. Although the
Company's fixed-price contracts generally permit the Company to keep unexpected
profits if costs are less than projected, the Company does bear the risk that
increased or unexpected costs may reduce profit or cause the Company to sustain
losses on the contract. All domestic defense contracts and subcontracts to
which the Company is a party are subject to audit, various profit and cost
controls and 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. To date, no significant fixed-price contract of the Company has
been terminated.

Companies supplying defense-related equipment to the Government are subject to
certain additional business risks peculiar to that industry. Among these risks
are the ability of the Government to unilaterally suspend the Company from new
contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the 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 the Company, or lower
margins resulting from increasingly competitive procurement policies, or a
reduction in the volume of contracts or subcontracts awarded to the Company or
substantial cost overruns would have an adverse effect on the Company's cash
flow.

SUPPLIES AND MATERIALS

The principal raw materials used in the Company's wheel and brake manufacturing
operations are steel, aluminum forgings and carbon compounds. The Company
purchases steel and aluminum forgings from several sources. Historically,
substantially all of the Company's carbon was purchased from HITCO, a division
of British Petroleum Company, p.l.c., pursuant to a multi-year supply contract.
During the fiscal year ended March 31, 1991, Aircraft Braking Systems completed
installation of a continuous carbon furnace to internally manufacture carbon
material. The Company intends to fabricate its entire carbon requirements for
the A-330, A-340, MD-90 and CL-604 programs, using in-house production
facilities. The Company also recently developed a new European source of
carbon to supply a portion of the carbon which will be used to produce braking
systems for use on the A-321. 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.

The Company has not experienced any difficulty obtaining sources of supplies or
adequate supplies of these raw materials, and believes that sufficient
supplies and alternative sources of supply will be available in the foreseeable
future.

-24-
<PAGE> 27

PERSONNEL

At March 31, 1994, the Company had 1,141 full-time employees, of which 825 were
employed by Aircraft Braking Systems (373 hourly and 452 salaried employees)
and 316 were employed by Engineered Fabrics (195 hourly and 121 salaried
employees). All 373 of Aircraft Braking Systems' hourly employees are
represented by the United Auto Workers' Union and all 195 of Engineered
Fabrics' hourly employees are represented by the United Textile Workers' Union.

Engineered Fabrics has entered into a three-year contract with its union that
expires on February 5, 1995. Aircraft Braking Systems' three-year contract
with the United Auto Workers' Union expired on August 10, 1991. Aircraft
Braking Systems has not had a ratified collective bargaining agreement since
August 10, 1991, but has operated under Company implemented terms and
conditions of employment.

PROPERTIES

United States Facilities. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are
individually owned except as set forth below under "Akron Facility
Arrangements." Aircraft Braking Systems' facility is located in Akron, Ohio,
and consists of approximately 733,000 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. The Company believes that its property and
equipment are generally well-maintained, in good operating condition and
adequate for its present needs.

Foreign Facilities. The Company occupies approximately 13,000 square feet of
leased office and warehouse space in Slough, England, under a lease expiring in
2017. During the fiscal year ended March 31, 1992, foreign distribution
activities were consolidated from Moerfelden, Germany, into the Slough
facility. The facility is used to distribute the Company's products to foreign
purchasers. The Company also maintains sales and service offices in London,
Rome, Tokyo and Toulouse, France.

Akron Facility Arrangements. The Aircraft Braking Systems manufacturing plant
acquired from Loral Corporation ("Loral") was a part of a larger complex owned
and operated by Loral. Since complete physical separation of the Aircraft
Braking Systems facility from the balance of the complex was impractical at the
time of the Acquisition, Loral and Aircraft Braking Systems entered into
various agreements covering occupancy arrangements and shared easements and
services (including utility services). As an occupant of space within the
Loral complex of approximately 433,000 square feet, Aircraft Braking Systems is
subject to annual occupancy payments to Loral. During the fiscal year ended
March 31, 1994 Aircraft Braking Systems made occupancy payments to Loral of
$1.2 million. While most of the agreements are temporary (having terms ranging
from two to 10 years from the closing date of the Acquisition), certain access
easements and easements regarding water, sanitary sewer, storm sewer, gas,
electricity and telecommunication are perpetual. In addition, as a condition
to obtaining governmental approval to divide the real property following the
Acquisition, Loral and Aircraft Braking Systems jointly formed and equally
control Valley Association Corporation, an Ohio corporation, thereby
establishing a single legal entity to deal with the City of Akron and utility
companies concerning governmental and utility services furnished to Loral's and
Aircraft Braking Systems' facilities and to receive and comply with remedial
requests issued by such institutions.

LEGAL PROCEEDINGS

Aircraft Braking Systems is a defendant in a patent infringement suit filed on
January 31, 1991, by the B.F. Goodrich Company in the United States District
Court for the District of Delaware. The suit alleges infringement by Aircraft
Braking Systems of two Goodrich patents related to the structure and method of
overhaul of aircraft brake assemblies and seeks damages of approximately $75
million. Aircraft Braking Systems has vigorously defended the suit on the
grounds that the patents are invalid, that Aircraft Braking Systems' brake
assemblies do not infringe the patents and that the damage claim is speculative
and inflated.

-25-
<PAGE> 28

On November 10. 1994, after an extensive hearing, submission of written briefs
and oral argument, the court issued a decision and order finding for Aircraft
Braking Systems and rejecting the plaintiff's claims. The court held that the
patents at issue were invalid and that the Company's brake assemblies did not
infringe the patents. While the time period for filing an appeal has not
lapsed, management believes based on the court's decision and its own
assessment of the facts and circumstances, as well as advice from counsel, that
it is remote that the Company would suffer a material liability as a result of
the above mentioned lawsuit.

In addition to the foregoing, there are various lawsuits and claims pending
against the Company incidental to its business. Although the final results in
such suits and proceedings cannot be predicted with certainty, in the opinion
of management, the ultimate liability, if any, will not have a material adverse
effect on the Company.

ENVIRONMENTAL MATTERS

The Company's manufacturing operations are subject to regulation by various
federal, state and local agencies concerned with environmental control. The
Company believes that its manufacturing facilities are in substantial
compliance with all existing federal, state and local environmental
regulations, but it cannot predict whether more burdensome air, water or solid
waste disposal requirements will be imposed in the future by governmental
authorities.

The Company currently discharges wastewater from its manufacturing operations
at the Akron facility into the Akron municipal waste water system. There is
currently no wastewater pretreatment system employed on site. As specified in
the existing governmental permit to discharge such waste water, sampling of the
Akron facility sanitary wastewater streams is performed at one location after
all sources throughout the facility have been combined. Samples taken at this
location indicate substantial compliance with all existing federal, state and
local environmental regulations. Aircraft Braking Systems has been notified by
the City of Akron that separate waste stream sampling may be required in the
future. When this occurs, anodizing facilities will require pretreatment.
The Company estimates that the cost of installation of pretreatment equipment
is not likely to exceed $200,000. The Company has received notice of
potential liability for EPA Superfund clean-up costs for a hazardous waste
disposal site previously utilized. Total expenses at this time are estimated
to be $150,000. Beginning in fiscal year 1996, the Company believes it will
incur compliance expenditures at its Rockmart, Georgia, facility as a result of
recent amendments to the Clean Air Act. The Company does not believe that such
expenditures will have a material adverse effect on its financial condition.

-26-
<PAGE> 29

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Bernard L. Schwartz* 68 Chairman of the Board
and Chief Executive Officer
Herbert R. Brinberg* 68 Director
Ronald H. Kisner* 45 Director
John R. Paddock* 40 Director
James A. Stern** 43 Director
A. Robert Towbin** 58 Director
Alan H. Washkowitz** 53 Director
Kenneth M. Schwartz 43 Chief Financial Officer,
Treasurer and Secretary
- -----------------------
</TABLE>

* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by Lehman Brothers Holdings Inc. ("LBH") pursuant
to the Stockholders Agreement.

Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the
Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer
of Loral Corporation since 1972. Mr. Schwartz is a Director of Reliance Group
Holdings, Inc. and certain subsidiaries, Director of Sorema North American
Reinsurance Company, Director of First Data Corporation and Trustee of New York
University Medical Center.

Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. Dr. Brinberg received an A.B. from Cornell University, an M.S. from
Columbia University and a Ph.D. in Economics from New York University. He is
also currently an Adjunct Professor of Management at Baruch College City
University of New York.

Mr. Kisner has been a member of the law firm of Chekow & Kisner, P.C., since
1984. From 1973 to 1982, he was Associate General Counsel of APL Corporation,
where he held such offices as Secretary, Vice President and Director. From
1982 to 1984, Mr. Kisner was a sole practitioner. Mr. Kisner received a B.A.
from Syracuse University in 1970 and a J.D. from Washington College of Law,
American University, in 1973.

Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia
since 1982. He has also been Director of Training for the Georgia School of
Professional Psychology, Adjunct Associate Professor of Psychology at Emory
University, Assistant Professor of Psychology at Kennesaw State College, and
Southern Region Coordinator for National Employee Assistance Services. Dr.
Paddock received his B.A. from Williams College and his M.A. and Ph.D. in
Clinical Psychology from Emory University. Currently, he has clinical faculty
appointments at both Emory's Department of Psychology and in the medical
school.

-27-
<PAGE> 30

Mr. Stern is Chairman of The Cypress Group, a private merchant bank. He was a
Managing Director of Lehman Brothers from 1984 to 1994. Lehman Brothers is a
division of a direct subsidiary of LBH, a company whose common stock is
principally owned by American Express Company. Since 1989, Mr. Stern has also
been head of the Merchant Banking Group of Lehman Brothers. He was a Managing
Director of Lehman Brothers Kuhn Loeb, Inc. from 1982 to 1984. Mr. Stern is
also a director of Infinity Broadcasting Corporation, Loral Aerospace Holdings,
Inc., R.P. Scherer Corp., Noel Group Inc. and Lear Seating Corporation.

Mr. Towbin was elected President and Chief Executive Officer of the
Russian-American Enterprise Fund in January of 1994 and has taken a leave of
absence from Lehman Brothers where he had been a Managing Director of the High
Technology Investment Banking Group since 1987. Prior to joining Lehman
Brothers, Mr. Towbin was Vice Chairman, Member of the Executive Committee and
Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to
1987. From 1983 to 1986, Mr. Towbin was Vice Chairman, and from 1977 to 1983
he was General Partner of L.F. Rothschild, Unterberg, Towbin. From 1959 to
1977, Mr. Towbin was General Partner of C.E. Unterberg, Towbin Co. Mr. Towbin
received a B.A. from Dartmouth College in 1957. Mr. Towbin is also a Director
of Columbus New Millennium Fund, Gerber Scientific, Inc. and the
Russian-American Enterprise Fund.

Mr. Washkowitz has been a Managing Director of Lehman Brothers since 1984. He
was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1984.
Mr. Washkowitz began in the Corporate Finance Department of Kuhn Loeb & Co. in
1968 and became a general partner of the firm in 1975. Mr. Washkowitz received
an A.B. from Brooklyn College, an M.B.A. from Harvard Business School and a
J.D. from Columbia Law School. Mr. Washkowitz is also a director of Illinois
Central Corporation and Lear Seating Corporation.

Mr. Kenneth M. Schwartz has been Chief Financial Officer, Treasurer and
Secretary of the Company since June 1989. Previously he was the Corporate
Director of Internal Audit for Loral since late 1987. From 1984 to 1987, Mr.
Schwartz held the position of Director of Cost and Schedule Administration for
Loral Electronic Systems. Prior to 1984, Mr. Schwartz held various other
positions with Loral Electronic Systems and the accounting firm of Deloitte &
Touche. Mr. Schwartz received a B.B.A. in accounting from the University of
Miami in 1973.

EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED
FABRICS CORPORATION

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

AIRCRAFT BRAKING SYSTEMS CORPORATION

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald E. Fogelsanger 68 President
Ronald E. Welsch 59 Executive Vice President
Robert Crawford 50 Senior Vice President-Operations
Frank P. Crampton 50 Vice President-Marketing
Richard W. Johnson 50 Vice President-Finance and Controller
</TABLE>

ENGINEERED FABRICS CORPORATION

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger C. Martin 57 President
Terry L. Lindsey 49 Vice President-Marketing
Anthony G. McCann 34 Vice President-Operations
John A. Skubina 39 Vice President-Finance
</TABLE>

-28-
<PAGE> 31

Mr. Fogelsanger has been President of Aircraft Braking Systems Corporation
since 1989. From 1987 to 1989 he was President of Loral's Aircraft Braking
Systems Division. January 1986 to March 1987 he was Vice President and General
Manager of Goodyear Aerospace Corporation's ABS division. From 1980 to 1986 he
was General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr.
Fogelsanger directed Goodyear's development of a crash-resistant fuel system
for helicopters that was credited with saving hundreds of lives during the
Vietnam War. He joined Goodyear in 1951 after graduating from Pennsylvania
State University with a bachelor's degree in industrial engineering.

Mr. Welsch joined Aircraft Braking Systems Corporation in September 1993 as
Executive Vice President. Prior to joining Aircraft Braking Systems, Mr.
Welsch was General Manager of the GE 90 Commercial Engine program at General
Electric Aircraft Engines and held various positions in management, including
engineering, product support, marketing, product planning and program
management, over the course of 26 years. Mr. Welsch started his aviation
career at Douglas Aircraft in 1958 and joined Northrop Corporation in 1961. He
entered the U.S. Marine Corp Aviation following graduation from Purdue
University with a bachelor's degree in mechanical engineering. Mr. Welsch also
attended Massachusetts Institute of Technology-Sloan School in 1983.

Mr. Crawford was named Senior Vice President of Operations at Aircraft Braking
Systems in April 1988. He joined Loral's ABS division as Vice President of
Operations in June 1987 after 26 years working for prime aircraft
manufacturers. Mr. Crawford has been involved in the building and delivery of
both military and commercial aircraft. Prior to joining ABS, he was Vice
President of Operations at the Fairchild plant on Long Island, General Manager
of the Fairchild facility in Hagerstown and of the Precision Fabrication Center
in Columbus, Georgia. Mr. Crawford had extensive experience in Industrial
Engineering, Manufacturing Engineering, and Manufacturing at Canadair prior to
leaving there in 1981 as Director of Manufacturing to join Fairchild
Industries. He studied mechanical engineering at Sir George Williams
University and also studied Business Administration at Alexandria Hamilton
Institute.

Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems
in March 1987. He had been Director of Business Development for Goodyear
Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that
assignment, he was the divisional manager of Program Operations since 1983.
Mr. Crampton joined Goodyear in 1967 following his graduation from the
University of Akron with a bachelor's degree in electrical engineering. He
became Section Manager in Commercial Sales in 1977, a product marketing manager
in 1978, and Divisional Sales Manager in 1979. In August of 1982, he joined
manufacturing as the manager of the manufacturing process organization. Mr.
Crampton completed the executive management program at Northwestern University
in 1982 and received an M.B.A. from Kent State University in 1983. He also
worked for NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966.

Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989 he was Vice President of
Finance and Controller of Loral's Aircraft Braking Systems Division. Prior to
this assignment, he had spent 22 years with Goodyear Aerospace Corporation,
including one year as the Controller of the wheel and brake division. Mr.
Johnson joined Goodyear Aerospace Corporation in 1966 following his graduation
from Kent State University with a bachelor's degree in accounting. He became
Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear
Aerospace Corporation after holding various positions in the Defense Systems
Division.

Mr. Martin has been President of Engineered Fabrics Corporation since 1987.
From June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics
Division. Mr. Martin has been continuously employed by Goodyear, GAC and Loral
for the past 32 years. Other positions Mr. Martin held with Goodyear include
General Manager, Program Manager and a number of research positions. He holds
a patent for elastomeric protective coating for metal storage reels. Mr.
Martin received a B.S. and a B.Ch.E. in 1958 and 1962, respectively, from
Auburn University.

-29-
<PAGE> 32

Mr. Lindsey has served as Vice President of Business Development since 1989.
He has been with Goodyear Aerospace Corporation, Loral and K & F Industries
since 1977. Prior to this he had 12 years of federal service with the US Army.
He joined GAC as Contract Administrator of the Industrial Brake Operation in
Berea, Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of
Contracts. He received a B.S. in Industrial Technology from Berea College in
1967.

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

Mr. Skubina has been Vice President of Finance and Administration since
February 1991. Prior to that, he was made Vice President of Finance on April
1, 1990. He joined Engineered Fabrics Corporation in 1988 as Accounting
Manager. From 1985 until 1988, Mr. Skubina was the Assistant Controller and
Controller of MPD, a division of M/A-Com. He received a B.S. in Accounting in
1979 from New York Institute of Technology.

-30-
<PAGE> 33

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation for the past three years paid
to the chief executive officer and each of the other four most highly
compensated executive officers of the Company and the Company's subsidiaries
whose aggregate current remuneration exceeded $100,000.

Annual
Compensation Long-Term Compensation All
---------------------------- ---------------------- Other
Options LTIP Compen-
Fiscal Salary Bonus Granted Payouts sation( b)
Name and Principal Position Year ($) ($) (#) ($) ($)
--------------------------- ------ ------------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz 1994 1,859,800(a) -- -- -- --
Chairman of the Board and Chief 1993 1,840,650(a) -- -- -- --
Executive Officer 1992 1,739,000(a) -- -- -- (c)

Kenneth M. Schwartz 1994 176,418 37,500 -- -- 3,404
Chief Financial Officer - K & F 1993 167,809 75,000 7,500 10,000 3,322
Industries, Inc. 1992 135,000 50,000 -- 10,000 (c)

Donald E. Fogelsanger 1994 185,000 -- -- -- 18,949
President of Aircraft 1993 178,340 85,000 5,000 13,333 19,032
Braking Systems 1992 172,337 70,000 -- 13,333 (c)

Robert Crawford 1994 145,000 -- -- -- 2,848
Senior Vice President - Operations - 1993 137,293 47,500 -- 8,333 2,985
Aircraft Braking Systems 1992 132,372 38,000 -- 8,333 (c)

Roger C. Martin 1994 127,000 -- -- -- 10,545
President of Engineered Fabrics 1993 120,231 38,000 5,000 6,667 10,237
Corporation 1992 110,938 25,364 -- 6,667 (c)

</TABLE>

(a) Comprised of amounts paid to BLS under the Advisory Agreement.

(b) Includes the following Company contributions to individual 401(k) plan
accounts for fiscal year 1994 and 1993, respectively: Mr. K. Schwartz -
$3,225 and $3,152; Mr. Fogelsanger - $2,719 and $2,977; Mr. Crawford -
$2,848 and $2,985; Mr. Martin $3,161 and $2,985. Also includes the value
of supplemental life insurance programs for fiscal year 1994 and 1993,
respectively: Mr. K. Schwartz - $179 and $170; Mr. Fogelsanger - $16,230
and $16,055; Mr. Martin - $7,384 and $7,252.

(c) In accordance with the transitional provisions applicable to the revised
rules on executive compensation adopted by the Securities and Exchange
Commission, amounts of all other compensation are not disclosed for
fiscal years ending prior to December 15, 1992.

-31-
<PAGE> 34

OPTION GRANTS IN LAST FISCAL YEAR

There were no grants of stock options by the Company, during fiscal year
1994, to the named executive officers.

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

<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)(1)
------------- -------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz 0 0 0/0 0/0

Kenneth M. Schwartz 0 0 5,625/9,375 0/0

Donald E. Fogelsanger 0 0 15,000/10,000 0/0

Robert Crawford 0 0 3,750/1,250 0/0

Roger C. Martin 0 0 7,500/7,500 0/0
</TABLE>

(1) None of the Company's stock is currently publicly traded. All
options were granted at book value computed as of the date of
Acquisition.

-32-
<PAGE> 35

LONG-TERM INCENTIVE PLAN AWARDS

Under the Company's long-term incentive plan designed to provide an incentive
to encourage attainment of Company objectives and retain and attract key
executives of the Company, a limited number of persons participate in a
Deferred Bonus Plan. Under the terms of the plan, no awards are allocated to
any participant unless the Company has achieved at least a 10% growth in
earnings before interest, taxes and amortization over the prior fiscal year.
Awards vest and are paid (unless deferred by recipient direction)in three equal
annual installments starting on January 15th following each fiscal year-end.
All nonvested amounts to an executive are forfeited upon termination of
employment for any reason other than death or disability prior to the vesting
date. Awards earned in fiscal year 1990 were paid in fiscal years 1991, 1992
and 1993. No awards have been earned since fiscal year 1990.

THE RETIREMENT PLAN

The Company established, effective May 1, 1989, as amended, the K & F
Industries Retirement Plan for Salaried Employees (the "Company Retirement
Plan"), a defined benefit pension plan. The Company intends to apply for a
determination letter from the Internal Revenue Service that the Company
Retirement Plan is a qualified plan under the Internal Revenue Code. The terms
of the Company Retirement Plan are as follows: a non-contributory benefit and a
contributory benefit. The cost of the former is borne by the Company; the cost
of the latter is borne partly by the Company and partly by the participants.
Salaried employees who have completed at least six months of service and
satisfied a minimum earnings level are eligible to participate in the
contributory portion of the Company Retirement Plan; salaried employees become
participants in the non-contributory portion on their date of hire. The Plan
provides a benefit of $20.00 per month for each year of credited service. For
participants who contribute to the Plan, in addition to the benefit of $20.00
per month for each year of credited service, the Plan provides an annual
benefit equal to the greater of: 60% of the participant's aggregate
contributions; or, average compensation earned (while contributing) during the
last 10 years of employment in excess of 90% of the Social Security Wage Base
amount multiplied by: (a) 2.4% times years of continuous service up to 10,
plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2%
times additional years of such service up to 30, plus, (d) 0.6% times all
additional such service above 30 years.

Effective January 1, 1990, the Plan was amended for eligible employees of the
K & F Industries and Aircraft Braking Systems to provide an annual benefit equal
to (a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (i) for 14 years of continuous
service or less, 1.05% of annual earnings between $19,800 and the Social
Security Wage Base plus 2.25% of annual earnings above the Social Security Wage
Base, (ii) for more than 14 years of continuous service, 1.35% of annual
earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual
earnings above the Social Security Wage Base. In no event will the amount
calculated in (c) above be less than 60% of the participant's aggregate
contributions made on and after January 1, 1990. Benefits are payable upon
normal retirement age at age 65 in the form of single life or joint and
survivor annuity or, at the participant's option with appropriate spousal
consent, in the form of an annuity with a term certain. A participant who has
(a) completed at least 30 years of continuous service, (b) attained age 55 and
completed at least 10 years of continuous service, or (c) attained age 55 and
the combination of such participant's age and service equals at least 70 years,
is eligible for early retirement benefits. If a participant elects early
retirement before reaching age 62, such benefits will be reduced except that
the non-contributory benefits of a participant with at least 30 years of
credited service will not be reduced. In addition, employees who retire after
age 55 but before age 62 with at least 30 years of service are entitled to a
supplemental non-contributory benefit until age 62. Annual benefits under the
Company Retirement Plan are subject to a statutory ceiling of $118,800 per
participant. Participants are fully vested in their accrued benefits under the
Company Retirement Plan after five years of credited service with the Company.

-33-
<PAGE> 36

Estimated annual benefits upon retirement for the individuals named in the
Summary Compensation Table, who are participants in the amended plan of K & F
and Aircraft Braking Systems, are $11,441 for Mr. K. Schwartz (does not
currently participate in contributory portion of plan); $88,246 for Mr.
Fogelsanger; and $69,755 for Mr. Crawford. BLS does not participate in this
plan. The retirement benefits have been computed on the assumption that (a)
employment will be continued until normal retirement at age 65; and (b) current
levels of creditable compensation and the Social Security Wage Base will
continue without increases or adjustments throughout the remainder of the
computation period.

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

The following table sets forth the estimated annual retirement benefits
assuming a contributory formula applicable to eligible employees of Engineered
Fabrics payable in the form of a single life annuity under the Company
Retirement Plan to a salaried employee at various levels of credited
compensation upon retirement at age 65 with the indicated years of service.

<TABLE>
<CAPTION>
FINAL AVERAGE YEARS OF SERVICE
SALARY 15 20 25 30 35
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$125,000 $30,095 $38,521 $44,538 $ 50,556 $54,164
150,000 38,345 49,021 56,538 64,056 68,414
175,000 46,595 59,521 68,538 77,556 82,664
200,000 54,845 70,021 80,538 91,056 96,914
</TABLE>

These figures have not been limited by the Section 415 dollar limitation of the
Internal Revenue Code, which was $115,641 in 1993 and is $118,800 in 1994.
Currently the Internal Revenue Code permits only $150,000 of annual
compensation to be taken into account for purposes of determining retirement
benefits.

At March 31, 1994, the credited service (as calculated under the Company
Retirement Plan for Engineered Fabrics to the nearest whole year) for Mr.
Martin was 32 years.

COMPENSATION OF DIRECTORS

The Board of Directors held four meetings during the fiscal year ended March
31, 1994. Nonequity members of the Board of Directors receive annual fees of
$12,000 per year. Messrs. Towbin, Washkowitz and Stern (three directors
designated by LBH pursuant to the Stockholders Agreement) waived any
compensation for services as a director for the fiscal year ended March 31,
1994. All directors are reimbursed for reasonable out-of-pocket expenses
incurred in that capacity.

-34-
<PAGE> 37

EMPLOYMENT AGREEMENT

The Company has an Advisory Agreement with BLS which provides for the payment
of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain other executive officers of Loral who are
active in the management of the Company) in exchange for acting as directors
and providing advisory services to the Company and its subsidiaries. Such
agreement will continue until BLS dies or is disabled or ceases to own at least
1,350,000 shares of common stock of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company has not in the past used a compensation committee to determine
executive officer compensation. The annual salary and bonus paid to BLS, the
Company's Chairman and Chief Executive Officer, are determined in accordance
with his employment agreement with the Company as described above. All other
executive compensation decisions are made by BLS in accordance with policies
established in consultation with the Board of Directors.

-35-
<PAGE> 38

OWNERSHIP OF CAPITAL STOCK

The following table sets forth the ownership of the capital stock of the
Company at September 30, 1994:

<TABLE>
<CAPTION>
Number of
Number of Shares of Number of Percentage
Shares of Class B Shares of Ownership
Class A Common Preferred of Capital
Common Stock Stock (a) Stock(b) Stock(c)
----------- --------- -------- --------
<S> <C> <C> <C> <C>
Bernard L. Schwartz . . . . . . . . . . . 5,533,427(d) -- -- 27.12%

*Lehman Brothers Merchant
Banking Portfolio Partnership L.P. . . -- -- 478,387(e) 23.45

*Lehman Brothers Offshore
Investment Partnership L.P. . . . . . . -- -- 129,745(f) 6.36

*Lehman Brothers Offshore
Investment Partnership - Japan
L.P. . . . . . . . . . . . . . . . . . -- -- 49,348(f) 2.42

*Lehman Brothers Capital
Partners II, L.P. . . . . . . . . . . . -- -- 325,156(g) 15.94

CBC Capital Partners, Inc . . . . . . . . 10 -- 44,999 2.21

Loral Corporation . . . . . . . . . . . . -- 4,589,938 -- 22.50
--------- --------- --------- ------
5,533,437 4,589,938 1,027,635 100.00%
========= ========= ========= ======

</TABLE>

*Collectively referred to as the "Lehman Investors."

(a) On September 2, 1994 K & F retired the $65.4 million principal amount
of Convertible Debentures, held by Loral, in exchange for $12.76
million in cash and 4,589,938 shares of Class B common stock
representing 22.5% of equity. The cash portion of this transaction
was funded with the proceeds from the sale of capital stock to K & F's
principal stockholders for which stockholders received a total of
687,273 shares of Class A common stock and 127,636 shares of preferred
stock. As a result, K & F stockholders' equity was increased by $65.4
million and long-term debt was reduced by an equal amount. (See Note
7 to the September 30, 1994 consolidated financial statements.)

(b) The preferred stock is convertible into common stock on a one-for-ten
basis.

(d) BLS has granted options to officers and directors of the Company and
its subsidiaries, at a per share exercise price of $4, for an
aggregate of 535,000 shares of the voting common stock owned by BLS.
The agreements pursuant to which such options are issued (i) provide
that the option is exercisable in whole or in part at any time prior
to the tenth anniversary of the date of such agreement and (ii)
restrict the transfer of the option and any shares purchased upon
exercise of the option. The option agreements further provide that
BLS will retain all voting rights with respect to shares sold to an
option holder upon exercise of an option.

(e) Lehman Brothers Merchant Banking Partners Inc. is the general partner
of the limited partnership and is an indirect wholly owned subsidiary
of LBH.

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

(g) Lehman Brothers II Investment Inc. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
The limited partnership is a fund for employees of LBH and its
affiliates.

-36-
<PAGE> 39
STOCKHOLDERS AGREEMENT

The Company, BLS, the Lehman Investors, CBC Capital Partners, Inc. and Loral
(each, a "Stockholder") entered into an Amended and Restated Stockholders
Agreement (the "Stockholders Agreement") dated as of September 2, 1994, which
contains certain restrictions with respect to the transferability of the
Company's capital stock, certain rights granted by the Company with respect to
such shares and certain voting and other arrangements. The Stockholders
Agreement will terminate as of such time as more than 75% of the shares of
common stock and shares of common stock issuable upon the exercise of options
or rights to acquire common stock or upon conversion of convertible securities
("Common Equivalents") then outstanding have been sold pursuant to one or more
public offerings, except that the registration rights continue as to any common
stock held by parties thereto as long as they own their shares, and the voting
provisions contained in the Stockholders Agreement terminate on September 2,
2004.

The Stockholders Agreement provides that the Company's Board of Directors be
comprised initially of 7 directors. BLS is entitled to (i) appoint a majority
of the directors as long as he and his affiliates own at least 1,350,000 shares
of common stock, (ii) three directors as long as he and his affiliates own at
least 1,000,000 shares of common stock, and (iii) one director as long as he
and his affiliates own any shares of common stock. The Lehman Investors are
entitled to (i) appoint three directors as long as they collectively own at
least 1,000,000 Common Equivalents, (ii) a majority of the directors if (i)
they own at least 1,350,000 shares of common stock and (ii) BLS dies or becomes
disabled or owns less than 1,350,000 shares of Common Equivalents and (iii) one
director as long as they own any Common Equivalents. If and for so long as
Loral and its affiliates own any shares of voting common stock, at the request
of Loral, the number of members of the Board of Directors shall be increased to
9, Loral shall be entitled to designate one member of Board of Directors, and
the remaining member shall be designated by the stockholder which at such time
has the right to designate a majority of the Board of Directors. The
Company's by-laws provide that the following corporate actions will require the
vote of at least one Lehman Investor designated director including (with
certain limited exceptions) (i) mergers, consolidations or recapitalizations,
(ii) issuances of capital stock or preferred stock, (iii) repurchases of and
dividends on capital stock, (iv) issuance of employee options representing more
than 500,000 shares of common stock, (v) dissolution or liquidation of the
Company, (vi) acquisition, sale or exchange of assets in excess of $5,000,000,
(vii) the incurrence of debt or liens in excess of $10 million in the
aggregate, (viii) the making of loans, investments or capital expenditures in
excess of $10 million, (ix) transactions with affiliates and (x) prepayments of
or amendments to any amount of financing in excess of $10 million. The
Stockholders Agreement provides that the Charter and By-laws of the Company in
effect on the closing date of the Acquisition may not be amended without the
consent of the Lehman Investors designated director for so long as the Lehman
Investors or its affiliates own at least 1,000,000 shares of the outstanding
capital stock.

The Stockholders Agreement provides each Stockholder with a right of first
refusal with respect to certain transfers of Common Stock or Common
Equivalents. In addition, subject to certain limitations, if any Stockholder
or group of Stockholders proposes to transfer securities representing more than
15% of the Common Equivalents, then each other Stockholder is permitted to
transfer to the proposed transferee their pro rata share of Common Equivalents
at the price and on the other terms of the proposed transfer.

The Stockholders Agreement provides that either BLS or the Lehman Investors
(the "Put Party") may request an appraisal of the value of the capital stock of
the Company (the "Appraised Value") and may notify the other party of its
desire to sell all of its and its transferee's capital stock for a pro rata
share of such Appraised Value. The other party may elect to purchase such
capital stock, arrange for the purchase of such capital stock by a third party
or notify the Put Party that it does not intend to purchase such capital stock.
If such election is made such party must use its best efforts to purchase or
arrange for the purchase of such capital stock. If such capital stock is not
purchased within a specified period, BLS and the Lehman Investors shall cause
the Company to be sold if such sale can be arranged for a price at least equal
to the Appraised Value. Any sale of the Company as an entirety shall include
all Stockholders and the proceeds thereof shall be allocated among the
Stockholders in accordance with their stock ownership.

Stockholders of specified percentages of capital stock may demand registration
rights. The Stockholders Agreement also grants the Stockholders incidental
registration rights with respect to shares of capital stock held by them;
provided that the Stockholders not exercising such rights have the right to
purchase the shares which are the subject of such registration rights pursuant
to the right of first offer provided in the Stockholders Agreement. The
Stockholders Agreement contains customary terms and provisions with respect to
such registration rights.

Pursuant to the Stockholders Agreement, Stockholders have certain preemptive
rights, subject to certain exceptions, with respect to future issuances of
shares or share equivalents of capital stock so that such Stockholders may
maintain their proportional equity ownership interest in the Company.

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<PAGE> 40

DESCRIPTION OF SENIOR NOTES

The 11 7/8% Senior Secured Notes Due 2003 (the "Senior Notes") were
issued pursuant to an Indenture dated as of June 1, 1992 (the "Senior Note
Indenture") between the Company and The Bank of New York, as trustee (the
"Senior Note Trustee"). The terms of the Senior Notes include those stated in
the Senior Note Indenture and those made part of the Senior Note Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") as in
effect on the date of the Senior Note Indenture. The Senior Notes are subject
to all such terms, and holders of the Senior Notes are referred to the Senior
Note Indenture and the Trust Indenture Act for a statement thereof. Principal
of, premium, if any, and interest on the Senior Notes are payable, and the
Senior Notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York (which will be the corporate trust office
of the Senior Note Trustee at 101 Barclay Street, New York, New York 10286);
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the Person entitled thereto as shown on the register
for the Senior Notes. No service charge will be made for any registration of
transfer or exchange of Senior Notes, except for any tax or other governmental
charge that may be imposed in connection therewith. The Senior Note Indenture
and the Senior Notes are governed by and construed in accordance with the laws
of the State of New York.

The following is a summary of the material terms and provisions of the
Senior Notes. The summary does not purport to be a complete description of the
Senior Notes and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the Senior Note Indenture (including the definitions
contained therein). A copy of the proposed form of Senior Note Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.

GENERAL

The Senior Notes are direct obligations of the Company, secured in the
manner described below, limited to $100,000,000 in aggregate principal amount.
The Senior Notes were issued in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. The Senior Notes will
mature on December 1, 2003, unless redeemed before such date. The Senior Notes
bear interest at the rate shown on the cover page of this Prospectus from the
date of their issuance or from the most recent Interest Payment Date to which
interest has been paid or duly provided for. Interest is payable semi-annually
(to holders of record at the close of business on the May 15 and November 15
immediately preceding the Interest Payment Date) on June 1 and December 1,
commencing December 1, 1992.

REDEMPTION

Optional Redemption. The Senior Notes may not be redeemed prior to
June 1, 1997. On or after June 1, 1997 the Company at its option may, at any
time, redeem all, or from time to time any part of, the Senior Notes at the
following prices (expressed as percentages of the outstanding principal
amount), together with accrued interest to the date fixed for redemption. If
redeemed during the 12 month period commencing:

<TABLE>
<CAPTION>
June Redemption Prices
---- -----------------
<S> <C>
1997 105.28%
1998 103.96%
1999 102.64%
2000 101.32%
2001 and thereafter 100.00%
</TABLE>

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<PAGE> 41

Selection and Notice of Redemption. Selection of Senior Notes for any
redemption in part will be made by the Senior Note Trustee in such manner as in
its sole discretion it shall deem fair and appropriate. Notice of redemption to
the holders of Senior Notes to be redeemed as a whole or in part shall be given
by mailing notice of such redemption by first-class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to such holders of Senior Notes at their last addresses as they shall appear
upon the registry books. On and after the redemption date, interest ceases to
accrue on Senior Notes or portions thereof called for redemption.

Sinking Fund. The Senior Notes are not subject to a sinking fund.

CERTAIN DEFINITIONS

Set forth below is a summary of certain of the defined terms used in
the Senior Note Indenture. Reference is made to the Senior Note Indenture for
the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.

"Acquisition" means the purchase by the Company from Loral Corporation
of substantially all of the assets and the assumption of certain liabilities of
the Principal Subsidiary and EFC.

"Affiliate" means, when used with reference to a specified Person, any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified. For the purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise.

"Agent" means the agent under the Credit Agreement.

"Asset Acquisition" means (i) an investment by the Company or any of
its Subsidiaries in any other Person pursuant to which such Person shall become
a Subsidiary of the Company or any of its Subsidiaries or shall be merged with
the Company or any of its Subsidiaries or (ii) the acquisition by the Company
or any of its Subsidiaries of the assets of any Person which constitutes
substantially all of an operating unit or business of such Person.

"Asset Sale" means the sale or other disposition (by merger or
otherwise) by the Company or any of its Subsidiaries (other than to Wholly
owned Subsidiaries) of (i) any of the Capital Stock of any of the Company's
Subsidiaries (other than the Principal Subsidiary) or (ii) substantially all of
the assets which constitute substantially all of an operating unit or business
of the Company or any of its Subsidiaries (other than the Principal
Subsidiary).

"Average Life" means, as of the date of determination, with respect to
any debt security, the quotient obtained by dividing (i) the sum of the
products of the numbers of years from the date of determination to the dates of
each successive scheduled principal payment of such debt security multiplied by
the amount of such principal payment by (ii) the sum of all such principal
payments.

"Bank" or "Banks" means any financial institution(s) extending credit
to the Company pursuant to the Credit Agreement.

"BLS" means Mr. Bernard L. Schwartz.

"BLS Group" means (i) BLS; (ii) BLS's spouse and descendants
(collectively, "relatives"); (iii) a trust of which there are no beneficiaries
other than BLS and the relatives of BLS; (iv) a partnership of which there are
no other partners other than BLS or the relatives of BLS; (v) a corporation of
which there are no stockholders other than BLS or relatives of BLS; and (vi)
any other Affiliate of BLS.

"Business Day" means each day other than Saturdays, Sundays and days
when commercial banks are authorized to be closed for business in New York, New
York.

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<PAGE> 42

"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued after the date of the
Senior Note Indenture, including, without limitation, all Common Stock and
Preferred Stock.

"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) the discounted present value of the
rental obligations of such Person as lessee under which, in conformity with
generally accepted accounting principles, is required to be capitalized on the
balance sheet of that Person.

"Change of Control" means an event or series of events by which (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) other than a Permitted Investor is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire without condition, other than the passage of
time, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total power of all
classes of stock entitled to vote for directors of the Company ("Voting Stock")
or (ii) the Company consolidates with or merges into another corporation or
conveys, transfers or leases all or substantially all of its assets to any
person, or any corporation consolidates with or merges into the Company, in any
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction between the Company and a Wholly owned
Subsidiary of the Company or between the Company and any of the Permitted
Investors or any transaction in which the Permitted Investors own, in the
aggregate, directly or indirectly, at least 50% of the Voting Stock of the
resulting, surviving or transferee corporation and have the right to designate
a majority of the board of directors thereof or (iv) the shareholders of the
Company shall approve any plan or proposal for the liquidation or dissolution
of the Company.

"Collateral" means all of the shares of capital stock of the Principal
Subsidiary and EFC, which shares have been pledged to the Collateral Trustee
pursuant to the Pledge Agreement and not released pursuant to the terms hereof
and thereof.

"Collateral Trustee" has the meaning set forth in the Pledge Agreement.

"Common Stock" means, with respect to any Person, any and all shares,
interests, participations and other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Senior Notes, and includes, without limitation,
all series and classes of such common stock.

"Consolidated Capital Expenditures" means, for any period, the
aggregate of all expenditures Incurred (whether paid in cash or accrued as
liabilities), by the Company and its Consolidated Subsidiaries during such
period that, in conformity with generally accepted accounting principles, are
included in the property, plant or equipment or similar fixed asset account
reflected in the consolidated balance sheet of the Company and its Consolidated
Subsidiaries.

"Consolidated Interest Coverage Ratio" means the ratio, on a pro forma
basis, of (i) the aggregate amount of Operating Cash Flow of any Person for the
Reference Period immediately prior to the date of the transaction giving rise
to the need to calculate the Consolidated Interest Coverage Ratio (the
"Transaction Date") to (ii) the aggregate Consolidated Interest Expense of such
Person during such Reference Period; provided that for the purposes of such
computation, in calculating Operating Cash Flow and Consolidated Interest
Expense, (1) the Incurrence of the Debt giving rise to the need to calculate
the Consolidated Interest Coverage Ratio and the application of the proceeds
therefrom shall be assumed to have occurred on the first day of the Reference
Period, (2) Asset Sales and Asset Acquisitions which occur during the Reference
Period or subsequent to the Reference Period and prior to the Transaction Date
(but including any Asset Acquisition occurring in connection with the
Incurrence of Debt pursuant to (1) above) shall be assumed to have occurred on
the first day of the Reference Period, (3) the Incurrence of any Debt during
the Reference Period or subsequent to the Reference Period and prior to the
Transaction Date and the application of the proceeds therefrom shall be assumed
to have occurred on the first day of such Reference Period,

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<PAGE> 43

(4) Consolidated Interest Expense attributable to any Debt (whether existing
or being Incurred) computed on a pro forma basis and bearing a floating
interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period unless such
Person or any of its Subsidiaries is a party to an Interest Rate Agreement
which has the effect of reducing the interest rate below the rate on the date
of computation, in which case such lower rate shall be used and (5) there shall
be excluded from Consolidated Interest Expense any Consolidated Interest
Expense related to any Debt which was outstanding during and subsequent to the
Reference Period but is not outstanding on the Transaction Date ("Repaid
Debt"), unless the Company may again Incur such Repaid Debt in an amount equal
to the weighted average amount of Repaid Debt outstanding during such Reference
Period (the "Weighted Average Amount") pursuant to clauses (i), (iv), (xi)(D),
(xii) and (xiii) set forth under the exceptions to the "Limitation on Debt"
covenant, in which case such Consolidated Interest Expense shall not be
excluded (it being understood that if the Company can again so Incur an amount
of Repaid Debt which is less than the Weighted Average Amount, then a portion
of such Consolidated Interest Expense shall be excluded equivalent to a
fraction of which the numerator shall be the difference between the Weighted
Average Amount and the amount of such Repaid Debt which the Company can again
so Incur and of which the denominator shall be the Weighted Average Amount).
For the purposes of making the computation referred to above, Asset Sales and
Asset Acquisitions which have been made by any Person which has become a
Subsidiary of the Company or been merged with or into the Company or any
Subsidiary of the Company during the Reference Period or subsequent to the
Reference Period and prior to the Transaction Date shall be calculated on a pro
forma basis (including all of the calculations referred to in numbers (1)
through (5) above) assuming such Asset Sales or Asset Acquisitions occurred on
the first day of the Reference Period.

"Consolidated Interest Expense" of any Person for any period means
interest expense (including amortization of original issue discount and
non-cash interest payments or accruals and the interest portion of Capitalized
Leases) of such Person and its Consolidated Subsidiaries, all as determined in
accordance with generally accepted accounting principles.

"Consolidated Subsidiary" of any Person means a Subsidiary which for
financial reporting purposes is or, in accordance with generally accepted
accounting principles, should be, accounted for by such Person as a
consolidated subsidiary.

"Credit Agreement" means the Amended and Restated Revolving Credit
Agreement to be dated as of June 10, 1992, among the Banks, the Principal
Subsidiary and EFC providing for the $80 million revolving credit facility
together with any security and other related documents, as such Agreement and
other documents may be amended, restated or supplemented from time to time and
includes any agreement extending the maturity of, or restructuring all or any
portion of, the Debt under such Agreement or any successor agreements and
includes any agreement with one or more banks refinancing or refunding all or
any portion of the Debt under such Agreement or any successor agreements,
covering an aggregate amount not to exceed $110 million.

"Cumulative Operating Cash Flow" means, for the period beginning March
31, 1992 through and including the end of the last fiscal quarter (taken as one
accounting period) preceding the date of any proposed Restricted Payment,
Operating Cash Flow for the Company and its Consolidated Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP.

"Cumulative Total Interest Expense" means, for the period beginning
March 31, 1992 through and including the end of the last fiscal quarter (taken
as one accounting period) preceding the date of any proposed Restricted
Payment, Consolidated Interest Expense for the Company and its Consolidated
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.

"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
the Company against fluctuations in currency values.

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<PAGE> 44

"Debt" of any Person means, at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit or other
similar instruments (or reimbursement obligations with respect thereto), (iv)
all obligations of such Person to pay the deferred purchase price of property
or services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person,
(vii) all Debt of others Guaranteed by such Person and (viii) to the extent not
otherwise included, obligations under Currency Agreements and Interest Rate
Agreements.

"EFC" means Engineered Fabrics Corporation, a Delaware corporation or
any successors.

"Excluded Entity" means (i) any Joint Venture or (ii) any Subsidiary
that is subject to consensual restrictions, direct or indirect (other than
pursuant to the Credit Agreement), on the declaration or payment of dividends
or similar distributions by that Subsidiary to the Company or any other
Consolidated Subsidiary of the Company.

"generally accepted accounting principles" or "GAAP" means generally
accepted accounting principles in the United States as in effect as of the date
of the Senior Note Indenture, including, without limitation, those set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession; provided that all ratios and computations based on
generally accepted accounting principles contained in the Senior Note Indenture
shall be computed in accordance with generally accepted accounting principles
except that calculations made for the purpose of determining compliance with
the terms of the covenants set forth therein and other provisions of the Senior
Note Indenture shall be made, except as otherwise provided therein, without
giving effect to adjustments in component amounts required or permitted by
Accounting Principles Board Opinions Nos. 16 and 17 as a result of the
Acquisition and for the amortization of any expenses Incurred in connection
with the Acquisition or the financing with respect thereto.

"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in
any other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.

"Incurrence" means the Incurrence, creation, assumption or in any
other manner becoming liable with respect to, or the extension of the maturity
of or becoming responsible for the payment of, any Debt. "Incur" shall have a
comparable meaning.

"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future, interest rate option, interest rate swap,
interest rate cap or other interest rate hedge arrangement, to or under which
the Company or any of its Subsidiaries is a party or a beneficiary on the date
hereof or becomes a party or a beneficiary hereafter.

"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided
that no Subsidiary of any Person shall be deemed a Joint Venture of such
Person.

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<PAGE> 45

"Lehman Investor" means (i) LBH, (ii) any Affiliate of LBH and (iii)
any merchant banking limited partnerships affiliated with LBH or any Affiliate
of LBH.

"Lien" means, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
Property. For the purposes of this Agreement, the Company shall be deemed to
own subject to a Lien any Property which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale agreement,
Capital Lease or other title retention agreement relating to such Property.

"Material Subsidiary" of any Person means, as of any date, any
Subsidiary of such Person (a) the value of whose assets, as such assets would
appear on a consolidated balance sheet of such Subsidiary and its Consolidated
Subsidiaries prepared as of the end of the fiscal quarter next preceding such
determination in accordance with generally accepted accounting principles, is
at least 10% of the value of the assets of such Person and its Consolidated
Subsidiaries, determined as aforesaid, or (b) whose Operating Cash Flow for the
most recently completed fiscal quarter next preceding such date was at least
10% of the Operating Cash Flow of such Person for such fiscal quarter.

"Net Cash Proceeds" from a sale, transfer or other disposition of
properties or assets means cash payments received (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received (including
any cash received upon sale or disposition of such note or receivable),
excluding any other consideration received in the form of assumption by the
acquiring Person of Debt or other obligations relating to such properties or
assets or received in any other non-cash form) therefrom, in each case, net of
all legal, title and recording tax expenses, commissions and other fees and
expenses Incurred, and all federal, state, provincial, foreign and local taxes
required to be accrued as a liability under generally accepted accounting
principles, as a consequence of such sale, transfer or other disposition
(including any taxes attributable to the assets sold arising pursuant to any
election or action taken for income tax purposes in connection with or relating
to the Acquisition), and in each case net of appropriate amounts to be provided
by the Company as a reserve, in accordance with generally accepted accounting
principles, against any liabilities associated with such assets and retained by
the Company or any Subsidiary after such sale or other disposition thereof,
including, without limitation, pension and other post-employment benefit
liabilities and liabilities related to environmental matters and the
after-tax-cost of any indemnification payments (fixed and contingent)
attributable to seller's indemnities to the purchaser undertaken by the Company
or any of its Subsidiaries in connection with such sale or disposition and net
of all payments made on any Debt which is secured by such assets, in accordance
with the terms of any Lien upon or with respect to such assets or which must by
its terms, or in order to obtain a necessary consent to such asset disposition,
or by applicable law be repaid out of the proceeds from such sale, transfer or
other disposition, and net of all distributions and other payments made to
minority interest holders in Subsidiaries or Joint Ventures as a result of such
sale, transfer or other disposition.

"Net Income" of any Person for any period means the net income (loss)
of such Person and its Consolidated Subsidiaries for such period, determined in
accordance with generally accepted accounting principles, except that
extraordinary, unusual and non- recurring gains and losses as determined in
accordance with generally accepted accounting principles shall be excluded.

"Net Worth" of any Person means as of any date the aggregate of
capital, surplus and retained earnings of such Person and its Consolidated
Subsidiaries as would be shown on a consolidated balance sheet of such Person
and its Consolidated Subsidiaries prepared as of such date in accordance with
generally accepted accounting principles plus, without duplication, all Capital
Stock (other than Redeemable Stock) not otherwise included in Net Worth in
accordance with generally accepted accounting principles.

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<PAGE> 46

"Operating Cash Flow" of any Person means, for any period, the sum of
(a) Net Income of such Person and its Consolidated Subsidiaries for such
period, plus (b) provision for taxes based on income or profits included in
computing Net Income of such Person for such period, plus (c) Consolidated
Interest Expense of such Person for such period, plus (d) other non-cash
charges deducted from consolidated revenues in determining Net Income of such
Person for such period, in each case, determined on a consolidated basis in
accordance with GAAP.

"Permitted Investor" means any Person that is a member of the BLS Group
or a Lehman Investor.

"Permitted Payments" means with respect to the Company or any of its
Subsidiaries (i) any dividend on shares of Capital Stock payable solely in
shares of Capital Stock (other than Redeemable Stock) or in options, warrants
or other rights to purchase Capital Stock (other than Redeemable Stock); (ii)
any dividend or other distribution with respect to Capital Stock payable to the
Company by any of its Subsidiaries or by a Subsidiary to another Subsidiary;
(iii) the repurchase or other acquisition or retirement for value of any shares
of the Company's Capital Stock with additional shares of, or out of the
proceeds of a substantially contemporaneous issuance of, Capital Stock (other
than Redeemable Stock); (iv) any defeasance, redemption, repurchase or other
acquisition for value of any Debt which is subordinate in right of payment to
the Senior Notes with the proceeds from the issuance of (x) Debt which is
subordinate in right of payment to the Senior Notes at least to the extent and
in the manner as the Subordinated Debentures are subordinate to the Senior
Obligations on the date hereof; provided that such new subordinated Debt has a
remaining Average Life equal to or greater than the remaining Average Life of
the Senior Notes and that the agreements or investments creating such new
subordinated Debt do not provide for the redemption or retirement by way of a
sinking fund, mandatory redemption or otherwise (including defeasance or at the
option of the holder) of more than 25% of the principal amount of such new
subordinated Debt prior to the maturity of the Senior Notes and that the
proceeds of such new subordinated Debt are utilized for such purpose within 90
days of issuance or (y) Capital Stock (other than Redeemable Stock); (v)
investments, loans or advances to Excluded Entities in an aggregate amount at
any time not to exceed $20 million; and (vi) the repurchase of shares of, or
options to purchase shares of, the Company's Common Stock held by employees of
the Company (other than any member of the BLS Group) or any of its subsidiaries
pursuant to the forms of agreements under which such employees purchase, or are
granted the option to purchase, shares of the Company's Common Stock in an
aggregate amount not to exceed $2 million in any fiscal year; provided that the
amount available in any given fiscal year shall be increased by the excess, if
any, of (A) $2 million over (B) the amount used pursuant to this clause (vi) in
the immediately preceding fiscal year; and (vii) any payment of interest on the
Convertible Debentures with additional Convertible Debentures, in accordance
with the Indenture governing the Convertible Debentures. Notwithstanding the
foregoing, where any transaction described in clause (iv)(x) above involves a
defeasance, redemption, repurchase or the acquisition for value of the
Convertible Debentures, the agreements or instruments creating Debt so Incurred
may not permit payment of cash interest prior to April 15, 1997, unless at the
date of Incurrence of such Debt, the Consolidated Interest Coverage Ratio,
after giving effect to such transaction on a pro forma basis, would be greater
than 1.50 to 1.

"Pledge Agreement" means the pledge agreement dated as of June 10,
1992 between the Company and The Bank of New York, as Collateral Trustee, as
such Pledge Agreement shall be amended or supplemented or supplemented from
time to time.

"Principal Subsidiary" means Aircraft Braking Systems Corporation, a
Delaware corporation or any successors.

"Redeemable Stock" means, with respect to any Person, any class or
series of Capital Stock which is redeemable at the option of the holder or is
subject to mandatory redemption prior to December 1, 2003.

"Reference Period" means the four fiscal quarters for which financial
information is available preceding the date of a transaction giving rise to the
need to make a financial calculation.

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<PAGE> 47

"Restricted Payment" means with respect to any Person (i) any dividend
or other distribution on any shares of such Person's Capital Stock, (ii) any
payment on account of the purchase, redemption, retirement or other acquisition
of (a) any shares of such Person's Capital Stock or (b) any option, warrant or
other right to acquire shares of such Person's Capital Stock, or (iii) any
defeasance, redemption, repurchase or other acquisition or retirement for value
prior to scheduled maturity of (A) any Debt (other than (x) Debt Incurred under
the Credit Agreement or the Senior Notes or (y) any required payment by way of
a sinking fund or mandatory repurchase in respect of the Subordinated
Debentures) ranked pari passu or subordinate in right of payment to the Senior
Notes but not including the Convertible Debentures or (B) any of the
Convertible Debentures or (iv) any investment, loan or advance to any Excluded
Entity or (v) prior to April 15, 1997, any payment of interest in cash on the
Convertible Debentures. Notwithstanding the foregoing, "Restricted Payment"
shall not include any Permitted Payment.

"Senior Obligations" means the Senior Notes and debt Incurred under the
Credit Agreement, collectively.

"Subordinated Debentures" means the 13 3/4% Senior Subordinated
Debentures Due 2001 of the Company.

"Subordinated Debenture Indenture" means the Indenture dated as of
August 1, 1989 between the Company and The Connecticut National Bank, as
Trustee.

"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.

"Subsidiary Stock Sale" means a sale, transfer or other disposition of
any Capital Stock of a Subsidiary (including any new issuance of such Capital
Stock by such Subsidiary) other than the Principal Subsidiary.

"Wholly owned Subsidiary" means, at any time, a Subsidiary all of the
Capital Stock of which (except directors' qualifying shares) are at the time
owned directly or indirectly by the Company.

RANKING

The Senior Notes rank senior in right of collateral to all unsecured
indebtedness of the Company and senior in right of collateral and payment to
the Subordinated Debentures. The Senior Notes are effectively subordinated to
the Revolving Loans and to the claims of other creditors of the Principal
Subsidiary and EFC.

As discussed herein, the Company is principally a holding company for
the Principal Subsidiary and EFC with limited operations of its own and limited
assets. Accordingly, the Company is dependent upon the distribution of amounts
from the Principal Subsidiary and EFC, whether in the forms of dividends,
advances or payments on account of intercompany obligations, to service its
debt obligations. See "Risk Factors-Holding Company Structure."

COLLATERAL AND SECURITY

Pursuant to the Pledge Agreement, the Company has assigned and pledged
to the Collateral Trustee for the benefit of the holders of the Senior Notes a
security interest in all of the capital stock of the Principal Subsidiary and
EFC to secure performance of the Company's obligations under the Senior Note
Indenture and the Senior Notes.

If the Senior Notes become due and payable prior to maturity or are
not paid in full at the maturity, the Senior Note Trustee shall promptly notify
the Collateral Trustee. The Collateral Trustee will thereupon foreclose upon
the Collateral in accordance with instructions received from holders of a
majority in principal amount of the Senior Notes, or in the absence of such
instructions, in such manner as the Collateral Trustee deems appropriate, in
each case as

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<PAGE> 48

provided in the Pledge Agreement. The proceeds received from the sale of any
Collateral that is the subject of a foreclosure shall be applied first to pay
the expenses of such foreclosure and amounts then payable to the Senior Note
Trustee and the Collateral Trustee and thereafter to pay the principal of and
interest on the Senior Notes. Notwithstanding the above, the Company shall at
all times have the right to vote and receive dividends and distributions on
such Collateral unless and until the Senior Note Trustee shall foreclose upon
such Collateral.

The Collateral was pledged pursuant to the Pledge Agreement between
the Company and the Collateral Trustee. Collateral may be sold or disposed of
by the Company, the Principal Subsidiary or EFC, free and clear of the liens
referred to above in the following circumstances: (i) the sale or other
disposition of the Collateral in accordance with the covenant described above
under "Certain Covenants-Restrictions on Disposition of Assets of the Company";
and (ii) the release of additional Collateral in accordance with the terms of
the Pledge Agreement. See "Risk Factors-Holding Company Structure."

CERTAIN BANKRUPTCY LIMITATIONS

The right of the Collateral Agent to repossess and dispose of the
Collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company or the Principal Subsidiary or
EFC prior to the Collateral Agent having repossessed and disposed of the
Collateral. Under Bankruptcy Law, secured creditors are prohibited from
repossessing their security from a debtor in a bankruptcy case, or from
disposing of security repossessed from such debtor without bankruptcy court
approval. Moreover, Bankruptcy Law permits the debtor to continue to retain and
to use collateral even though the debtor is in default under the applicable
debt instruments; provided that the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according
to circumstances, but it is intended in general to protect the value of the
secured creditor's interest in the collateral and may include cash payments or
the granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the Collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack
of a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Senior Notes could be delayed following commencement of
a bankruptcy case, whether or when the Collateral Agent could repossess or
dispose of the Collateral or whether or to what extent holders of the Senior
Notes would be compensated for any delay in payment or loss of value of the
Collateral through the requirement of "adequate protection."

CERTAIN COVENANTS

The Senior Note Indenture contains, among others, the following
covenants.

Limitation on Debt. The Company shall not, and shall not permit any of
its Subsidiaries to, Incur any Debt if, after giving effect thereto, (i) an
Event of Default or an event that through the passage of time or the giving of
notice or both, would become an Event of Default, shall have occurred and be
continuing or (ii) the Consolidated Interest Coverage Ratio of the Company
would be less than 1.70 to 1.

Notwithstanding the foregoing, the Company and its Subsidiaries may
Incur each and all of the following: (i) Debt under or in respect of the Credit
Agreement in an aggregate principal amount not to exceed $110 million; (ii)
Debt evidenced by the Senior Notes; (iii) (A) Debt of the Company to any of its
Wholly owned Subsidiaries; provided that such Indebtedness is subordinated to
the Senior Obligations in a manner no less favorable to the holders of Senior
Obligations than the manner in which the Subordinated Debentures are
subordinated to the Senior Obligations, or (B) Debt of a Wholly owned
Subsidiary to the Company or to a Wholly owned Subsidiary, except that any
subsequent

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issuance or transfer of any Capital Stock which results in any such Wholly
owned Subsidiary ceasing to be a Wholly owned Subsidiary or any transfer of
such Debt by any Wholly owned Subsidiary will, in each case, be deemed an
Incurrence of Debt by the Company or any such Wholly owned Subsidiary; (iv)
Debt under Currency Agreements and Interest Rate Agreements; provided that in
the case of Currency Agreements which relate to Debt (other than Debt Incurred
under the Credit Agreement), such Currency Agreements do not increase the Debt
of the Company or any of its Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder; (v) Debt the proceeds of which
are applied to redeem the Subordinated Debentures, the Convertible Debentures
or Debt Incurred pursuant to this clause (v); provided that (A) such
Indebtedness is subordinated to Senior Obligations at least to the extent and
in the manner that the Subordinated Debentures are subordinate to the Senior
Obligations on the date hereof, (B) has a remaining Average Life equal to or
greater than the remaining Average Life of the Senior Notes and (C) the
agreements or instruments creating such new subordinated Debt do not provide
for the redemption or retirement by way of a sinking fund, mandatory redemption
or otherwise (including defeasance or at the option of the holder) of more than
25% of the principal amount of such new subordinated Debt prior to the maturity
of the Senior Notes and that the proceeds of such new subordinated Debt are
utilized for such purpose within 90 days of issuance, and further provided that
the agreements or instruments creating any such Debt referred to in this clause
(v) that is applied to redeem the Convertible Debentures shall not permit the
payment of cash interest prior to April 15, 1997, unless at the date of
Incurrence of such Debt the Consolidated Interest Coverage Ratio, after giving
effect to such transaction on a pro forma basis, would be greater than 1.50 to
1; (vi) Debt, the proceeds of which are applied to redeem the Senior Notes;
provided that (A) such indebtedness has a remaining Average Life equal to or
greater than the remaining Average Life of the Senior Notes and (B) the
agreements or instruments creating such new Debt do not provide for the
redemption or retirement by way of a sinking fund, mandatory redemption or
otherwise (including defeasance or at the option of the holder) of more than
25% of the principal amount of such new Subordinated Debt prior to the maturity
of the Senior Notes and that the proceeds of such new Debt are utilized for
such purpose within 90 days of issuance; (vii) Debt the proceeds of which are
applied to repay Debt Incurred under the Credit Agreement; (viii) Debt Incurred
as payment of interest on the Convertible Debentures with additional
Convertible Debentures in accordance with the Convertible Debenture Indenture;
(ix) Debt under Guarantees in respect of obligations of Excluded Entities in an
aggregate principal amount not to exceed $20 million at any one time; (x) (A)
Debt Incurred to finance the purchase or construction of property, plant or
equipment which will be treated as Consolidated Capital Expenditures of the
Company so long as such Debt is secured by a Lien on the property, plant or
equipment so purchased or constructed and such Debt does not exceed the value
of such property, plant or equipment so purchased or constructed and such Lien
shall not extend to or cover other assets of the Company or any of its
Subsidiaries other than the property, plant or equipment so purchased or
constructed and the real property, if any, on which the property so constructed
or so purchased, is situated and the accessions, attachments, replacements and
improvements thereto or (B) Debt Incurred in connection with any lease
financing transaction in conjunction with the acquisition of new property;
provided that such lease financing transaction is consummated within 60 days of
such acquisition (whether such lease will be treated as an operating or capital
lease in accordance with generally accepted accounting principles) and the
aggregate of the Debt Incurred pursuant to clauses (A) and (B) does not exceed
$15 million during any fiscal year (such amount is referred to as the "Maximum
Amount"); provided that the Maximum Amount for each year shall be increased by
the excess, if any, of (a) $30 million over (b) Consolidated Capital
Expenditures for the immediately preceding two years; (xi) obligations Incurred
in the ordinary course of business under (A) trade letters of credit which are
to be repaid in full not more than one year after the date on which such Debt
is originally Incurred to finance the purchase of goods by the Company or a
Subsidiary of the Company; (B) standby letters of credit issued for the purpose
of supporting (1) workers' compensation liabilities of the Company or any of
its Subsidiaries as required by law, (2) obligations with respect to leases of
the Company or any of its Subsidiaries, (3) performance, payment, deposit or
surety obligations of the Company or any of its Subsidiaries or (4)
environmental liabilities of the Company or any of its Subsidiaries as required
by law, not exceeding an aggregate amount of $15 million at any one time
outstanding in addition to any amounts required by law; (C) performance bonds
and surety bonds, and refinancings thereof; and (D) Guarantees of Debt Incurred
in the ordinary course of business of suppliers, licensees, franchisees, or
customers in an aggregate amount not to exceed $5 million; (xii) Debt to
repurchase shares, or cancel options to purchase shares, of the Company's
Common Stock held by employees of the Company (other than any member of the BLS
Group) or any

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<PAGE> 50

of its Subsidiaries pursuant to the forms of agreements under which such
employees purchase shares of the Company's Common Stock; and (xiii) Debt (other
than Debt permitted under clauses (i) through (xii) above); provided that the
aggregate principal amount of such Debt shall not exceed $25 million at any
time outstanding, including any extension, renewal or replacement thereof.

For the purpose of determining compliance, (A) in the event that an
item of Debt meets the criteria of more than one of the types of Debt described
in the above clauses, the Company, in its sole discretion, shall classify such
item of Debt and only be required to include the amount and type of such Debt
in one of such clauses, and (B) the amount of Debt issued at a price which is
less than the principal amount thereof shall be equal to the amount of the
liability in respect thereof determined in accordance with generally accepted
accounting principles.

Limitation on Restricted Payments. On and after the date of the Senior
Note Indenture, the Company will not, and will not permit any Subsidiary to,
make any Restricted Payment, if, after giving effect thereto:

(a) an Event of Default, or an event that through the passage of time
or the giving of notice, or both, would become an Event of Default, shall
have occurred and be continuing; or

(b) the aggregate amount of all Restricted Payments (together with any
amounts paid pursuant to clause (vi) of the definition of Permitted
Payments) made by the Company and its Subsidiaries (the amount expended or
distributed for such purposes, if other than in cash, to be valued at its
fair market value as determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a resolution of
the Board of Directors), from and after March 31, 1992 shall exceed the sum
(without duplication) of: (i) an amount equal to the difference (but not
less than zero) between (A) Cumulative Operating Cash Flow and (B) the
product of 1.3 times Cumulative Total Interest Expense; and (ii) the
aggregate net proceeds, including the fair market value of property other
than cash (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the
Board of Directors), received by the Company from the issuance or sale
(other than to a Subsidiary) of its Capital Stock after March 31, 1992
(excluding Redeemable Stock but including Capital Stock other than
Redeemable Stock issued upon conversion of, or exchange for, Redeemable
Stock or securities other than its Capital Stock) and warrants and rights
to purchase its Capital Stock (other than Redeemable Stock), but excluding
the net proceeds from the issuance, sale, exchange, conversion or other
disposition of (x) its Capital Stock convertible (whether at the option of
the Company or the Holder thereof or upon the happening of any event) into
any security other than its Capital Stock; (y) its Capital Stock which may
be mandatorily redeemed (whether at the option of the Company or the Holder
thereof or upon the happening of any event) earlier than payment in full of
the Senior Notes; and (z) its Redeemable Stock; and (iii) $15 million;

provided that any Restricted Payment described in clauses (i), (ii) and
(iii)(B) of the definition of Restricted Payment provided under "Certain
Definitions" made with respect to any Capital Stock or subordinated Debt
outstanding on the date of the Senior Note Indenture which is otherwise
permissible under clause (b) of the Restricted Payment covenant above, shall be
allowed under such covenant only if in addition to satisfying clause (b) of
such covenant, the Company could Incur $1.00 of Debt pursuant to the first
paragraph of the "Limitation on Debt" covenant after giving effect to such
Restricted Payment on a pro forma basis. The foregoing clause (b) shall not
prevent the payment of any dividend within 60 days after the date of its
declaration if such dividend could have been made on the date of its
declaration without violation of the provisions stated herein. Notwithstanding
clause (b)(ii), (x) the aggregate net proceeds received by the Company from the
issuance of its Capital Stock upon the conversion of, or exchange for,
securities evidencing Debt of the Company shall be calculated on the assumption
that the gross proceeds from such issuance are equal to the aggregate principal
amount of the Debt evidenced by such securities converted or exchanged, (y) the
aggregate net proceeds received by the Company upon the conversion or exchange
of other securities of the Company shall be equal to the aggregate net proceeds
of the original sale of the securities so converted or exchanged if such
proceeds of such

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<PAGE> 51

original sale were not previously included in any calculation for this purpose
plus any additional sums payable upon conversion or exchange and (z) in
connection with the sale of any Capital Stock for property other than cash, the
Company shall obtain a written opinion of an Independent Financial Advisor
stating that the terms of such transaction are fair to the Company from a
financial point of view.

Restrictions on Disposition of Assets of the Company. Subject to the
provisions as set forth in the Senior Note Indenture, the Company will not, and
will not permit any of its Subsidiaries to, sell, transfer or otherwise dispose
of, in any consecutive 12- month period, any assets (including by way of
sale-and-leaseback or Subsidiary Stock Sale), other than in the ordinary course
of business and other than to the Company or a Wholly owned Subsidiary of the
Company, in any such case, with an aggregate fair market value of greater than
$5,000,000, unless (i) the Company (or the Subsidiary, as the case may be)
receives consideration at the time of such sale or other disposition at least
equal to the fair market value (as determined in good faith by the Board of
Directors) of the shares or assets sold or otherwise disposed of, (ii) not less
than 70% of the consideration received by the Company (or the Subsidiary, as
the case may be) is in the form of cash or Cash Equivalents and (iii) the Net
Cash Proceeds of the sale, transfer or other disposition of such assets or
Capital Stock in excess of $5,000,000 are either (x) invested in the business
or businesses of the Company or any of its Subsidiaries or any business related
to any business then conducted by the Company or any of its Subsidiaries or any
business related to the aircraft industry or are used for working capital
purposes; provided however, that in the case of a Subsidiary Stock Sale, for
purposes of this clause (x), such Net Cash Proceeds may only be invested in the
Principal Subsidiary or in any Wholly owned Subsidiary of the Company (a
"Venture Subsidiary") and in such case, proceeds must be used for any business
directly related to the business of the Principal Subsidiary; provided further
that any investment in a business related to any business then conducted by the
Company or any of its Subsidiaries or any business related to the aircraft
industry shall be made only if (A) the investment is to be made in any Person
and such Person will become a Wholly owned Subsidiary subsequent to such
investment or (B) the Company or one of its Subsidiaries will acquire the
assets of any Person which constitutes substantially all of an operating unit
or business of such Person and (C) in each case, such investment is committed
to be made within 6 months from the later of the date of such sale or the
receipt of the Net Cash Proceeds or (y) to the extent that such Net Cash
Proceeds are not actually applied in accordance with clause (x), or, if after
being so applied there remain Net Cash Proceeds, to the payment of the
principal of and interest on any Senior Obligation of the Company or, in the
case of any such sale, transfer or other disposition by a Subsidiary, any
payment of Debt of such Subsidiary or any other Wholly owned Subsidiary (other
than Debt owed to the Company or another Wholly owned Subsidiary) and in
connection with any such payment, any related loan commitment shall be reduced
in an amount equal to the principal amount so repaid. In the case of (y) above,
the Net Cash Proceeds are to be applied within three months of the expiration
of the six month period referred to in clause (x) above.

Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary to,
create, assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock; (b) make
payments in respect of any Debt owed to the Company or any of the Company's
Subsidiaries; (c) make loans or advances to the Company or any of the Company's
Subsidiaries; or (d) transfer any of its assets to the Company or any of the
Company's Subsidiaries, other than (i) those required by the Credit Agreement
as in effect on the date of the Senior Notes (or the Senior Note Indenture) or
the Subordinated Debentures (or the Subordinated Debenture Indenture), (ii)
terms relating to the nonassignability of any operating lease, (iii) consensual
encumbrances or restrictions which are no less favorable to the Company than
those required by the Credit Agreement as in effect on the date of the Senior
Note Indenture in connection with any refinancing of Debt Incurred under the
Credit Agreement, (iv) consensual encumbrances or restrictions binding upon any
Person at the time such Person becomes a Subsidiary of the Company or (v) any
restrictions with respect to a Subsidiary of the Company imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary.

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<PAGE> 52

Limitation on Capital Stock of the Principal Subsidiary or any Venture
Subsidiary. The Company will not permit the Principal Subsidiary or any Venture
Subsidiary (as defined above under "Restrictions on Dispositions of Assets of
the Company") to cease to be a Wholly owned Subsidiary.

Limitation on Liens. The Company will not, and will not permit any of
its Subsidiaries to, create, Incur, assure or suffer to exist any Lien upon any
of its property, assets, income or profits, whether now owned or hereafter
acquired, except for Permitted Liens.

"Permitted Liens" means (1) Liens existing as of the date of issuance
of the Senior Notes and any renewals or extensions thereof, including, without
limitation, Liens securing the Senior Notes; (2) Liens with respect to assets
of a Subsidiary granted by such Subsidiary to the Company to secure debt owing
to the Company; (3) statutory Liens or landlords and carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business; (4) Liens for taxes, assessments,
government charges or claims which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor; (5) Liens Incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (6)
Liens created or deposits made to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, government contracts,
performance and return-of-money bonds and other obligations of a like nature
Incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (7) easements, rights-of-way, restrictions and
other similar charges or encumbrances not interfering in any material respect
with the business of the Company or any Material Subsidiary Incurred in the
ordinary course of business; (8) any attachment or judgment Lien, unless the
judgment it secures shall not, within 60 days after the entry thereof, have
been discharged or execution thereof stayed pending appeal, or shall not have
been discharged within 60 days after the expiration of any such stay; (9) any
other Liens imposed by operation of law which do not materially affect the
Company's ability to perform its obligations under the Senior Notes and the
Senior Note Indenture; (10) rights of banks to set off deposits against debts
owed to said bank; (11) Liens on the assets of any entity existing at the time
such assets are acquired by the Company or any of its Subsidiaries, whether by
merger, consolidation, purchase of assets or otherwise; provided that such
Liens (x) are not created, Incurred or assumed in connection with, or in
contemplation of, such assets being acquired by the Company or any of its
subsidiaries and (y) do not extend to any other Property of the Company or any
of its Subsidiaries; (12) Liens granted pursuant to the Credit Agreement or the
Pledge Agreement; (13) Liens upon specific items of inventory or other goods
and proceeds of the Company or its Subsidiaries securing the Company's or any
Subsidiary's obligations in respect of bankers' acceptances issued or created
for the account of any such Person to facilitate the purchase, shipment or
storage of such inventory or other goods; (14) Liens securing reimbursement
obligations with respect to letters of credit which encumber documents and
other property relating to such letters of credit and the products and proceeds
thereof; (15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods; and (16) Liens encumbering property or assets under
construction arising from progress or partial payments by a customer of the
Company or one of its Subsidiaries relating to such property or assets.

Transactions with Affiliates. So long as any of the Senior Notes
remain outstanding, neither the Company nor any of its Subsidiaries will
directly or indirectly enter into any transaction involving aggregate
consideration in excess of $500,000 with any Affiliate or holder of 5% or more
of any class of Capital Stock of the Company (including any Affiliates of such
holders) except for transactions (including any loans or advances by or to any
Affiliate) in good faith the terms of which are fair and reasonable to the
Company or such Subsidiary, as the case may be, and are at least as favorable
as the terms which could be obtained by the Company or such Subsidiary, as the
case may be, in a comparable transaction made on an arm's length basis with
Persons who are not such a Holder, an Affiliate of such Holder or Affiliate of
the Company; provided that any such transaction shall be conclusively deemed to
be on terms which are fair and reasonable to the Company or any of its
Subsidiaries and on terms which are at least as favorable as the terms which
could be obtained on an arm's length basis with Persons who are not such a
Holder, an Affiliate

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<PAGE> 53

of such Holder or Affiliate of the Company if such transaction is approved by a
majority of the Company's directors (including a majority of the Company's
independent directors, if any); and provided further that with respect to the
purchase or disposition of assets of the Company or any of its Subsidiaries
having a net book value in excess of $5 million, if the Company does not have
any independent directors, in addition to approval of its board of directors,
the Company shall obtain a written opinion of an Independent Financial Advisor
stating that the terms of such transaction are fair and reasonable to the
Company or its Subsidiary, as the case may be, and are at least as favorable to
the Company or such Subsidiary, as the case may be, as could have been obtained
on an arm's length basis with Persons who are not such a holder, an Affiliate
of such holder or Affiliate of the Company. This covenant shall not apply to
(a) any transaction between the Company and LBH, or any Affiliate thereof
relating to the Senior Note Indenture (including the issuance of the Senior
Notes) or the payment of fees to any of the foregoing for financial and
consulting services, (b) transactions between the Company or any of its
Subsidiaries and any employee or director of, or consultant to, the Company or
any of its Subsidiaries that are approved by the Board of Directors, (c) the
payment of reasonable and customary regular fees to directors of the Company,
(d) any transaction between the Company and any of its Wholly owned
Subsidiaries or between any of its Wholly owned Subsidiaries, (e) any
transaction between the Company or any of its Subsidiaries and Loral as
required by the Acquisition Agreement or with respect to the Convertible
Debentures, (f) transactions with or relating to the joint venture between the
Principal Subsidiary and Loral Information Defense Systems Division, which
joint venture may be in partnership, corporate or other business entity form,
and any successor joint venture or (g) any Restricted Payment not otherwise
prohibited by the "Limitation on Restricted Payments" covenant.

Change of Control. (a) Upon a Change of Control, each Holder of the
Senior Notes shall have the right to require that the Company (or its successor
or transferee) repurchase such Holder's Senior Notes at a repurchase price in
cash equal to 101% of the principal amount of the Senior Notes plus, accrued
and unpaid interest, if any, to the date of repurchase, in accordance with the
terms contemplated in paragraph (b) below.

(b) Within 30 days following any Change of Control, the Company (or
its successor or transferee) shall mail a notice to each Holder with a copy to
the Senior Note Trustee stating: (1) that a Change of Control has occurred and
that such Holder has the right to require the Company (or its successor or
transferee) to repurchase such Holder's Senior Notes at a repurchase price in
cash equal to 101% of the principal amount of the Senior Notes plus accrued and
unpaid interest, if any, to the date of repurchase; (2) the circumstance and
relevant facts regarding such Change of Control (including information with
respect to pro forma historical income, cash flow and capitalization after
giving effect to such Change in Control); (3) the repurchase date (which shall
be not earlier than 30 days or later than 60 days from the date such notice is
mailed); and (4) the instructions determined by the Company (or its successor
or transferee), consistent with this Section, that a Holder must follow in
order to have its Senior Notes repurchased.

(c) Holders electing to have Senior Notes repurchased will be required
to surrender the Senior Notes, with an appropriate form duly completed, to the
Company (or its successor or transferee) at the address specified in the notice
at least 10 Business Days prior to the repurchase date. Holders will be
entitled to withdraw their election if the Senior Note Trustee or the Company
(or its successor or transferee) receives not later than three Business Days
prior to the repurchase date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the face amount of the Senior
Notes which was delivered for purchase by the Holder and a statement that such
Holder is withdrawing his election to have such Senior Notes repurchased.

(d) On the repurchase date, all Senior Notes repurchased by the
Company (or its successor or transferee) under this Section shall be delivered
by the Senior Note Trustee for cancellation, and the Company (or its successor
or transferee) shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.

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<PAGE> 54

MERGER, CONSOLIDATION OR SALE OF ASSETS

The Company shall not consolidate or merge with or into, or sell,
lease, convey or otherwise dispose of all or substantially all of its assets
to, any Person (other than a merger with or into a Wholly owned Subsidiary;
provided that such Wholly owned Subsidiary is not organized in a foreign
jurisdiction) unless: (a) the Corporation formed by or surviving any such
consolidation or merger (if other than the Company), or to which sale, lease,
conveyance or other disposition shall have been made (the "Surviving Entity"),
is a corporation organized and existing under the laws of the United States,
any state thereof or the District of Columbia; (b) the Surviving Entity assumes
by supplemental indenture all the obligations of the Company on the Senior
Notes and the Senior Note Indenture; (c) immediately after the transaction no
Event of Default or event or condition which through the giving of notice or
lapse of time or both would become an Event of Default shall have occurred and
be continuing; (d) immediately after giving effect to such transaction on a pro
forma basis, the Consolidated Net Worth of the Surviving Entity would be at
least equal to the Consolidated Net Worth of the Company immediately prior to
such transaction; and (e) immediately after giving effect to such transaction
on a pro forma basis, the Surviving Entity could Incur at least $1.00 of Debt
pursuant to the first paragraph of the "Limitation on Debt" covenant.

EVENTS OF DEFAULT AND REMEDIES

An Event of Default is (a) default in the payment of any interest upon
any of the Senior Notes as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; (b) default in the payment
of all or any part of the principal of (or premium, if any, on) any of the
Senior Notes as and when the same shall become due and payable, either at
maturity, upon any redemption, by declaration or otherwise; provided that, in
the case of any obligation to repurchase the Senior Notes pursuant to the
covenant relating to a Change of Control more than 33 1/3 % of the then
outstanding Senior Notes have been surrendered to the Company (or its successor
or transferee) for repurchase and the Company (or its successor or transferee)
has failed to repurchase all of the Senior Notes so surrendered, whether or not
such purchase is prohibited by the Credit Agreement or any other agreement
binding upon the Company; (c) failure on the part of the Company duly to
observe or perform any other covenant or agreement set forth in the Senior
Notes or in the Senior Note Indenture for a period of 45 days after the date on
which written notice specifying such failure, stating that such notice is a
"Notice of Default" hereunder and demanding that the Company remedy the same,
shall have been given by registered or certified mail, return receipt
requested, to the Company by the Senior Note Trustee or to the Company and the
Senior Note Trustee by the Holders of a majority in aggregate principal amount
of the Senior Notes at the time outstanding; (d)(i) the Company and/or any
Subsidiary shall have failed to make any principal payment due at final
maturity of $10,000,000 in principal amount or more individually or in the
aggregate and such failure to pay is continuing for more than 30 days after the
payment default has occurred, or (ii) there shall have occurred with respect to
any issue or issues of Debt of the Company or any Subsidiary having an
outstanding principal amount when due of $10,000,000 individually or in the
aggregate for all such issues of all such persons, an event of default which
permits, or with the giving of notice or lapse of time or both, would permit
the holders of such Debt to declare such Debt to be due and payable prior to
the maturity thereof; (e) the Company or any Subsidiary shall fail to discharge
any final judgment not covered by insurance (from which no further appeal may
be taken) in excess of $5,000,000 and such judgment shall remain in force,
undischarged, unsatisfied, unstayed and unbonded for more than 30 days; (f)
certain events of bankruptcy or insolvency of the Company or any Material
Subsidiary; or (g) the Pledge Agreement shall cease to be in full force and
effect in any material respect, or shall cease to give the Collateral Trustee
the Liens, rights, powers and privileges purported to be created thereby
(including, without limitation, a perfected security interest in, and Lien on,
the Collateral) in favor of the Collateral Trustee for the benefit of the
Holders superior to and prior to the rights of all third Persons and subject to
no other Liens (in each case, except as otherwise permitted and other than as a
result of any action on the part of the Collateral Trustee), or the Company
shall default in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to the Pledge
Agreement.

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<PAGE> 55

If an Event of Default (other than an Event of Default specified in
clause (f) above if the event in question relates to the Company) occurs and is
continuing under the Senior Note Indenture, either the Senior Note Trustee or
the holders of 25% in aggregate principal amount of the Senior Notes then
outstanding thereunder, by notice in writing to the Company (and to the Senior
Note Trustee if given by Holders) (the "Acceleration Notice"), may declare all
unpaid principal of, and accrued interest on, the Senior Notes to be due and
payable immediately, and the same shall, upon such declaration, become
immediately due and payable. If an Event of Default specified in clause (f)
above occurs with respect to the Company, all unpaid principal of, and accrued
interest on, the Senior Notes shall become and be immediately due and payable
without any declaration or other act on the part of the Senior Note Trustee or
any Holder. The Holders of at least a majority in principal amount of the
Senior Notes, by notice to the Senior Note Trustee, may rescind an acceleration
and its consequences if all existing Events of Default, other than the
nonpayment of the principal of, and accrued interest on, the Senior Notes which
became due solely by such declaration of acceleration, have been cured or
waived.

SATISFACTION AND DISCHARGE OF THE SENIOR NOTE INDENTURE; COVENANT DEFEASANCE

If at any time (a) the Company shall have paid or caused to be paid
the principal of and interest on all the Senior Notes outstanding hereunder, as
and when the same shall have become due and payable, or (b) the Company shall
have delivered to the Senior Note Trustee for cancellation all Senior Notes
theretofore authenticated (other than any Senior Notes which shall have been
destroyed, lost or stolen and which shall have been replaced or paid as
provided in the Senior Note Indenture) or (c)(i) the Senior Notes not
theretofore delivered to the Senior Note Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year, or are to be called for redemption under arrangements satisfactory to
the Senior Note Trustee for the giving of notice of redemption, and (ii) the
Company shall have irrevocably deposited or caused to be deposited with the
Senior Note Trustee as trust funds the entire amount in cash (other than moneys
repaid by the Senior Note Trustee or any paying agent to the Company in
accordance with the provisions of the Senior Note Indenture), sufficient to pay
at maturity or upon redemption all such Senior Notes not theretofore delivered
to the Senior Note Trustee for cancellation, including principal and interest
(and premium, if any) due or to become due to such date of maturity or
redemption, as the case may be, and if, in any such case, the Company shall
also pay or cause to be paid all other sums payable hereunder by the Company,
then this Senior Note Indenture shall cease to be of further effect (except as
to (i) rights of registration of transfer and exchange, and the Company's right
of optional redemption, (ii) substitution of apparently mutilated, defaced,
destroyed, lost or stolen Senior Notes, (iii) rights of holders to receive
payments of principal thereof and interest thereon (and premium, if any,), (iv)
the rights, obligations and immunities of the Senior Note Trustee hereunder and
(v) the rights of the holders as beneficiaries thereof with respect to the
property so deposited with the Senior Note Trustee payable to all or any of
them), and the Senior Note Trustee, on demand of the Company accompanied by an
Officers' Certificate and an Opinion of Counsel and at the cost and expense of
the Company, shall execute proper instruments acknowledging such satisfaction
of and discharging this Senior Note Indenture. The Company has agreed to
reimburse the Senior Note Trustee for any costs or expenses (including the
reasonable fees of its counsel) thereafter reasonably and properly Incurred and
to compensate the Senior Note Trustee for any services thereafter reasonably
and properly rendered by the Senior Note Trustee in connection with the Senior
Note Indenture or the Senior Notes.

The Company shall be deemed to have paid and discharged the entire
indebtedness on all the Outstanding Senior Notes on the 123rd day after the
date of the deposit referred to below, and the provisions of the Senior Note
Indenture, as it relates to such Outstanding Senior Notes, shall no longer be
in effect (and the Senior Note Trustee, at the expense of the Company, shall
execute proper instruments acknowledging the same), except as to (a) rights of
registration of transfer and exchange, and the Company's right of optional
redemption, (b) substitution of apparently mutilated, defaced, destroyed, lost
or stolen Senior Notes, (c) rights of holders to receive payments of principal
thereof and interest thereon (and premium, if any,), (d) the rights,
obligations and immunities of the Senior Note Trustee thereunder and (e) the
rights of the holders as beneficiaries thereof with respect to the property so
deposited with the

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<PAGE> 56

Senior Note Trustee payable to all or any of them; provided that the following
conditions shall have been satisfied: (A) with reference to this provision the
Company has irrevocably deposited or caused to be irrevocably deposited with
the Senior Note Trustee (or another trustee satisfying the requirements of the
terms of the Senior Note Indenture) as trust funds in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
the Senior Notes, (i) money in an amount, or (ii) U.S. Government Obligations
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide not later than one day before the due
date of any payment referred to in this subparagraph (A) money in an amount, or
(iii) a combination thereof, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Senior Note Trustee, to pay and
discharge without consideration of the reinvestment of such interest and after
payment of all Federal, state and local taxes or other charges and assessments
in respect thereof payable by the Senior Note Trustee the principal of and
interest on the Outstanding Senior Notes at the maturity date of such principal
or interest; (B) such deposit shall not cause the Senior Note Trustee to have a
conflicting interest as defined in the Trust Indenture Act; (C) such deposit
will not result in a breach or violation of, or constitute a default under, the
Senior Note Indenture or any other agreement or instrument to which the Company
is a party or by which it is bound; (D) no Event of Default or event which with
notice or lapse of time would become an Event of Default shall have occurred
and be continuing on the date of such deposit or during the period ending on
the 123rd day after such date; (E) the Company has delivered to the Senior Note
Trustee (i) either (a) a ruling directed to the Senior Note Trustee received
from the Internal Revenue Service to the effect that the Holders of the Senior
Notes will not recognize income, gain or loss for Federal income tax purposes
as a result of the Company's exercise of its option herein and will be subject
to Federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such option had not been exercised or (b)
an Opinion of Counsel to the same effect as the ruling described in clause (a)
and (ii) an Opinion of Counsel to the effect that, after the passage of 123
days following the deposit, the trust funds will not, with respect to the
Company, be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar law affecting creditors' rights generally; and (F)
the Company has delivered to the Senior Note Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent provided
for relating to the defeasance contemplated by this provision have been
complied with.

The Company may omit to comply with any term, provision or condition
set forth in the covenants described under "Certain Covenants" above with
respect to the Senior Notes, if (a) the Company has irrevocably deposited or
caused to be irrevocably deposited with the Senior Note Trustee (or another
trustee satisfying the requirements of the Senior Note Indenture) as trust
funds in trust, specifically pledged as security for, and dedicated solely to,
the benefit of the Holders of the Senior Notes, (i) money in an amount, or (ii)
U.S. Government Obligations which through the payment of interest and principal
in respect thereof in accordance with their terms will provide not later than
one day before the due date of any payment referred to below money in an
amount, or (iii) a combination thereof, sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Senior Note Trustee, to pay and
discharge without consideration of the reinvestment of such interest and after
payment of all Federal, state and local taxes or other charges and assessments
in respect thereof payable by the Senior Note Trustee the principal of and each
installment of principal and interest on the Outstanding Senior Notes on the
maturity date of such principal or installment or principal or interest; (b)
such deposit shall not cause the Senior Note Trustee to have a conflicting
interest as defined in the Trust Indenture Act; (c) such deposit will not
result in a breach or violation of, or constitute a default under, the Senior
Note Indenture or any other agreement or instrument (including the Credit
Agreement) to which the Company is a party or by which it is bound; (d) no
Event of Default or event which with notice or lapse of time would become an
Event of Default shall have occurred and be continuing on the date of such
deposit; (e) the Company has delivered to the Senior Note Trustee an Opinion of
Counsel to the effect that (i) the creation of the defeasance trust does not
violate the Investment Company Act of 1940 and (ii) the Holders of the Senior
Notes have a valid perfected first-priority security interest in the trust
funds; and (f) the Company has delivered to the Senior Note Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent herein provided for relating to the defeasance
contemplated herein have been complied with.

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<PAGE> 57

TRANSFER AND EXCHANGE

A holder may transfer or exchange such holder's Senior Notes in
accordance with the Senior Note Indenture. The Registrar may require a holder,
among other things, to furnish appropriate endorsements and transfer documents,
and to pay any taxes and fees required by law or permitted by the Senior Note
Indenture. The Registrar is not required to transfer or exchange any Senior
Notes selected for redemption.

The registered holder of a Senior Note may be treated as the owner of it for
all purposes.

AMENDMENT, SUPPLEMENT AND WAIVER

The Senior Note Indenture contains provisions permitting the Company
and the Senior Note Trustee, with the consent of the Holders of not less than a
majority in aggregate principal amount of Senior Notes at the time outstanding,
to amend or supplement such Senior Note Indenture or any supplemental indenture
or modify the rights of the relevant holders; provided that no such
modifications may, (a) extend the final maturity of any Senior Notes, or reduce
the principal amount thereof, or reduce the rate or extend the time of payment
of interest thereon, or reduce any amount payable on redemption thereof, or
impair or affect the right of any Senior Note holder to institute suit for the
payment thereof without the consent of the holder of each Senior Note so
affected, or (b) reduce the aforesaid percentage of Senior Notes, the consent
of the holders of which is required for any such supplemental indenture,
without the consent of the holders of all Senior Notes then outstanding; or (c)
consent to the assignment or transfer by the Company of any of its rights and
obligations under the Senior Note Indenture or to the release of any Collateral
from the lien created by the Pledge Agreement except in accordance with the
Pledge Agreement and the Senior Note Indenture.

CONCERNING THE SENIOR NOTE TRUSTEE

The Senior Note Indenture provides that except during the continuance
of an Event of Default, the Senior Note Trustee thereunder will perform only
such duties as are specifically set forth in such Senior Note Indenture. During
the existence of an Event of Default, such Senior Note Trustee will exercise
such rights and powers vested in it under the Senior Note Indenture and use the
same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs. The
Company may remove the Senior Note Trustee at any time for any reason.

The Senior Note Indenture and provisions of the Trust Indenture Act
contain limitations on the rights of the Senior Note Trustee thereunder, should
it become a creditor of the Company, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claims, as security or otherwise. The Senior Note Trustee is permitted to
engage in other transactions; provided, that if it acquires any conflicting
interest (as defined) it must eliminate such conflict or resign.

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<PAGE> 58

DESCRIPTION OF CERTAIN INDEBTEDNESS

The following is a summary of certain indebtedness of the Company and
its subsidiaries and is qualified in its entirety by reference to the
definitive agreements and instruments governing such indebtedness, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.

THE AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

General. The Original Revolving Credit Agreement was amended and
restated pursuant to an Amended and Restated Revolving Credit Agreement (the
"Restated Revolving Credit Agreement") simultaneously with the issuance of the
Senior Notes. In connection with such amendment and restatement, the Banks
released their lien on the capital stock of Aircraft Braking Systems and
Engineered Fabrics. The Restated Revolving Credit Agreement provides for
revolving loans (the "Revolving Loans") to Aircraft Braking Systems and
Engineered Fabrics (each a "Borrower" and together the "Borrowers") in an
aggregate principal amount of up to $80 million (but not exceeding a borrowing
base equal to 85% of eligible accounts receivable and 45% of eligible
inventory), secured by a lien on the inventories and accounts receivable of
Aircraft Braking Systems and Engineered Fabrics. As part of the total
commitment under the Revolving Loans, the Restated Revolving Credit Agreement
provides for the issuance of letters of credit for the account of the Borrowers
in an aggregate amount not to exceed $11 million for specified purposes.

Maturity. All borrowings under the Revolving Loans will mature on
April 27, 1997. Borrowings under the Revolving Loans may be prepaid in whole or
in part at any time without premium or penalty, and the Banks' commitment under
Revolving Loans may be reduced in whole or in part at any time.

Interest. Borrowings under the Revolving Loans bear interest at
floating rates.

Security. The obligations of the Borrowers under the Revolving Credit
Agreement are secured by liens on the Borrowers' inventory and accounts
receivable.

Covenants; Event of Default. The Restated Revolving Credit Agreement
contains covenants and events of default, including limitations on additional
indebtedness, liens, asset sales, investments in original equipment by the
Company in new airframe programs, and contains financial ratio requirements
including cash interest coverage and consolidated net worth.

K & F Agreement. In connection with the execution and delivery of the
Restated Revolving Credit Agreement, the Company entered into the K & F
Agreement with the Banks which contains limitations on the incurrence by the
Company of additional indebtedness and limitations on annual operating
expenses.

THE SUBORDINATED DEBENTURES

General. The Subordinated Debentures are unsecured subordinated
obligations of the Company. At September 30, 1994, the Company had outstanding
$210 million of Subordinated Debentures. The Subordinated Debentures bear
interest at the rate of 13.75% per annum payable semi-annually on August 1 and
February 1. The Subordinated Debentures will mature on August 1, 2001, unless
redeemed prior to such date.

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<PAGE> 59

Optional Redemption. The Subordinated Notes may be redeemed at any
time on or after August 1, 1994, upon payment of the following redemption
price, together with accrued interest to the date fixed for redemption, if
redeemed during the 12 month period commencing:

<TABLE>
<CAPTION>
August Redemption Prices
------ -----------------
<S> <C>
1994 105.00%
1995 103.75%
1996 102.50%
1997 101.25%
1998 and thereafter 100.00%
</TABLE>

Sinking Fund. The Company is required to provide for the retirement,
by redemption, of 25% of the principal amount of the Subordinated Debentures
originally issued on each of August 1, 1999 and August 1, 2000, at a redemption
price of 100% of the principal amount thereof, plus accrued interest to the
redemption date. The Company may, at its option, receive credit against sinking
fund payments for the principal amount of Subordinated Debentures acquired by
the Company and surrendered for cancellation prior to such dates or redeemed
other than through the operation of the sinking fund.

Subordination. The payment of the principal of and interest on the
Subordinated Debentures is subordinated in right of payment, as set forth in
the Subordinated Debenture Indenture, to the prior payment in full of all
Senior Debt (including, the Senior Notes and the Revolving Loans). "Senior
Debt" is defined in the Subordinated Debenture Indenture as (i) all
indebtedness and other monetary obligations (whether now existing or hereafter
incurred) of the Company on, under or in respect of, the Term Credit Agreement
or the Original Revolving Credit Agreement (including the Additional Bank
Credit Amount as defined in the Subordinated Debenture Indenture), and
including all fees, expenses (including reasonable fees and expenses of
counsel), claims, charges, indemnity obligations and interest accruing
subsequent to the filing of a petition initiating any proceeding in bankruptcy,
insolvency or like proceeding whether or not such interest is an allowed claim
enforceable against the debtor in a bankruptcy case under Title 11 of the
United States Code; (ii) all other indebtedness of the Company (other than the
Debentures), whether presently outstanding or hereafter created, incurred or
assumed, unless such indebtedness, by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to or pari passu
with the Subordinated Debentures and (iii) obligations of the Company under any
interest rate agreement or currency agreement; provided that the term Senior
Debt shall not include (a) any indebtedness of the Company which when incurred
and without respect to any election under Section 1111(b) of the Bankruptcy
Code, was without recourse to the Company, (b) any indebtedness of the Company
to any of its subsidiaries, (c) any indebtedness of the Company not otherwise
permitted by the "Limitation on Debt" and "Limitation on Issuance of other
Subordinated Debt Senior to the Debentures" covenants contained in the
Subordinated Debenture Indenture, (d) indebtedness to any employee of the
Company, (e) any liability for taxes and (f) trade payables. The Convertible
Debentures are subordinated to the Subordinated Debentures.

If any default in the payment of any principal of or interest on any
Senior Debt when due and payable, whether at maturity, upon any redemption, by
declaration or otherwise, occurs and is continuing, no payment may be made by
the Company with respect to the principal of or interest on, or other amounts
owing with respect to, the Subordinated Debentures, or to redeem or acquire any
of the Subordinated Debentures for cash or property or otherwise. If any event
of default occurs and is continuing, as such event of default is defined in
such Senior Debt, permitting the holders thereof to accelerate the maturity
thereof and if the holder or holders or a representative of such holder or
holders gives written notice of the event of default to the Company and the
Trustee under the Subordinated Debenture Indenture (a "Default Notice"), then,
unless and until such event of default has been cured or waived or has ceased
to exist or the Trustee receives notice from the holder or holders of the
relevant Senior Debt (or a representative of such holder or holders)
terminating the Blockage Period (as defined below), during the 179 day period
after the delivery of such Default Notice (the "Blockage Period"), the Company,
or any person acting on its behalf, shall not (x) make any payment of or with
respect to the principal of or interest on, the Subordinated Debentures or (y)
acquire

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<PAGE> 60

any of the Subordinated Debentures for cash or property or otherwise. At the
expiration of such Blockage Period, the Company shall, as set forth in the
Subordinated Debenture Indenture, promptly pay to the Trustee all sums which
the Company would have been obligated to pay during such Blockage Period but
for this restriction. Only one such Blockage Period may be commenced within any
360 consecutive days.

Certain Covenants. The Company and its subsidiaries are generally
prohibited from incurring any indebtedness unless the Company's Consolidated
Fixed Charge Ratio (as defined in the Subordinated Debenture Indenture) is at
least 1.50 to 1 through March 31, 1996 and 1.75 to 1 thereafter.
Notwithstanding the foregoing, the limitations on indebtedness do not apply to
(i) indebtedness such as the Senior Notes used to retire indebtedness of the
Company, (ii) indebtedness among the Company and its subsidiaries, (iii)
indebtedness under currency or similar interest rate swap agreements, (iv)
indebtedness incurred to refinance existing indebtedness of the Company, and
(v) indebtedness not described in clauses (i) through (iv) provided that the
aggregate principal amount of such indebtedness does not exceed $25,000,000 at
any time outstanding.

Restricted Payments. The Company is not permitted to make restricted
payments, which include dividends and distributions on the capital stock of the
Company and the making of certain investments by the Company and its
subsidiaries, if (i) an event of default has occurred and is continuing under
the Subordinated Debenture Indenture, (ii) if the aggregate amount of such
proposed restricted payment, (A) is greater than 50% of the Company's
Consolidated Net Income and (B) the aggregate net proceeds received by the
Company after the date of the Subordinated Debenture Indenture from sales of
the Company's capital stock.

Additional Covenants. The Subordinated Debenture Indenture contains
additional covenants which restrict, among other things, the merger or
consolidation of the Company and/or its subsidiaries, sales of the Company's or
any subsidiaries' assets, the issuance by any subsidiary of a class of
preferred stock, limitations on liens, and restrictions on transactions with
affiliates.

Default Provisions. The Subordinated Debenture Indenture contains
default provisions which are typical in subordinated debt financings. Upon the
occurrence of an event of default, the holders of at least 33% of the principal
amount of the Subordinated Debentures may declare the Subordinated Debentures
due and payable.

CONVERTIBLE DEBENTURES

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<PAGE> 61

CERTAIN TRANSACTIONS
GENERAL

BLS owns 27.12% of the capital stock of the Company and pursuant to
the Stockholders Agreement has the right to designate a majority of the Board
of Directors of the Company. In addition, BLS serves as Chairman of the Board
of Directors and Chief Executive Officer of the Company and devotes such time
to the business and affairs of the Company as he deems appropriate. BLS is
also Chairman and Chief Executive Officer of Loral. Because BLS is Chairman of
the Board of Directors and has the right to designate a majority of the
Directors to the Board of the Company, he has operating control of the Company.

The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and
persons designated by him (including certain other executive officers of Loral
who are active in the management of the Company) in exchange for acting as
directors and providing advisory services to the Company and its subsidiaries.
Such agreement will continue until BLS dies or is disabled or ceases to own at
least 1,350,000 shares of common stock of the Company.

The Company has a bonus plan pursuant to which the Company's board of
directors awards bonuses to BLS and other advisers ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization. No
bonuses were earned under this plan during fiscal years ended March 31, 1994,
1993 and 1992.

Certain persons who are designated by LBH to serve as members of the
Company's Board of Directors may, under certain limited circumstances, comprise
a majority of the Board of Directors, although initially BLS has the right to
designate all of the directors of the Company other than the three directors
which may be LBH designees so long as BLS and his affiliates own at least
1,350,000 shares of the outstanding Common stock. See "Ownership of Capital
Stock -- Stockholders Agreement" for a description of the restrictions on
transfer of Common Stock, registration rights and voting arrangements.

In addition, Loral, BLS and the Lehman Investors have engaged in a
variety of commercial transactions to which the Company and its subsidiaries
were not party.

See "Business -- Properties -- Akron Facility Arrangements" for a
description of certain property arrangements between Loral and the Company.

Pursuant to a financial advisory agreement between Lehman Brothers and
the Company, Lehman Brothers acts as exclusive financial adviser to the
Company. The Company pays Lehman Brothers customary fees for services rendered
on an as-provided basis. The agreement may be terminated by the Company or
Lehman Brothers upon certain conditions. In connection with the Senior Note
Offering on June 10, 1992, Lehman Brothers received underwriting discounts and
a commission of $2.25 million.

Pursuant to the Services Agreement, Loral provides the Company with
certain services which it previously provided to the subsidiaries. These
services include, among others, security, fire protection, yard service and
road maintenance, power plant and equipment calibration as well as other
services on an as needed basis (the "Loral Services"). Certain of the Loral
Services are used by the Company on a limited basis. The charge for these
services is based on actual costs incurred. Billings from Loral were $3.0
million, $3.7 million and $4.5 million in fiscal years 1994, 1993 and 1992,
respectively. Billings to Loral were $1.1 million, $1.1 million and $1.1
million in fiscal years 1994, 1993 and 1992. Purchases from Loral were $4.2
million, $3.7 million and $8.8 million in fiscal years 1994, 1993 and 1992.
Included in accounts receivable and accounts payable at March 31, 1994 is $.6
million and $2.0 million. Included in accounts receivable and accounts payable
at March 31, 1993 is $1.6 million and $3.7 million.

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<PAGE> 62

PLAN OF DISTRIBUTION

This Prospectus is to be used by Lehman Brothers in connection with
offers and sales of the Senior Notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Lehman Brothers may act as principal or agent in such transactions and has no
obligation to make a market in the Senior Notes, and may discontinue its
market-making activities at any time without notice, at its sole discretion.

Lehman Brothers is affiliated with entities that own capital stock of
the Company representing 48.17% of the aggregate voting power of the capital
stock of the Company and have the ability to elect 3 members of the Company's
Board of Directors. See "Certain Risk Factors-Interest of BLS, Lehman Brothers
and its Affiliates" and "Ownership of Capital Stock."

Lehman Brothers acted as underwriter in connection with the original
offering of the Subordinated Debentures and received underwriting discounts and
commissions of $7.35 million in connection therewith.

Lehman Brothers acted as underwriter in connection with the original
offering of the Senior Notes and received underwriting discounts and
commissions of $2.25 million in connection therewith.

LBH received fees and additional interest aggregating $5.4 million in
connection with the sale of the Subordinated Bridge Notes, plus certain
out-of-pocket expenses.

Lehman Brothers has from time to time provided investment banking,
financial advisory and other services to the Company, for which services Lehman
Brothers has received fees. As the beneficial owners of 48.17% of the
outstanding capital stock, the Lehman Investors are able to elect three
directors to the Company's board of directors. See "Management -- Directors
and Executive Officers of the Company" and "Certain Transactions."

LEGAL MATTERS

The validity of the Senior Notes was passed upon for the Company by
O'Sullivan Graev & Karabell, New York, New York. Certain legal matters in
connection with the sale of the Senior Notes were passed upon for the
Underwriter by Davis Polk & Wardwell. Davis Polk & Wardwell represented the
Company in connection with the Acquisition and the Financing. Michael B.
Targoff represented the Company in connection with the preparation of this
Prospectus.

EXPERTS

The consolidated financial statements as of March 31, 1994 and 1993
and for the years ended March 31, 1994, 1993 and 1992, included in this
Prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports dated May 4, 1994 (which
expresses an unqualified opinion and includes an explanatory paragraph related
to changes in the Company's method of accounting for discounting of certain
liabilities, effective April 1, 1993, and certain overhead costs included in
inventory and postretirement benefits other than pensions, effective April 1,
1992) appearing herein and elsewhere in the registration statement, and are
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.

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<PAGE> 63

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
K & F INDUSTRIES, INC. AND SUBSIDIARIES PAGE

Consolidated Balance Sheets as of September 30, 1994 (unaudited) and March 31, 1994 . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the six months ended
September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the three months ended
September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the three months ended
September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Balance Sheets as of March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Operations for the years ended March 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
March 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Consolidated Statements of Cash Flows for the years ended March 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
</TABLE>

F-1
<PAGE> 64

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
September 30, March 31,
1994 1994
----------- ----------

ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 2,552,000 $ 4,327,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . 34,201,000 32,783,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,537,000 67,613,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,394,000 1,196,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 102,684,000 105,919,000
------------ ------------

Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . 112,493,000 111,882,000
Less, accumulated depreciation and amortization . . . . . . . . . . . 47,698,000 43,142,000
------------ ------------
64,795,000 68,740,000
------------ ------------

Deferred Charges - Net of amortization . . . . . . . . . . . . . . . . 27,129,000 28,050,000
Cost in Excess of Net Assets Acquired - Net of amortization . . . . . . 211,282,000 214,340,000

Intangible Assets - Net of amortization . . . . . . . . . . . . . . . . 28,131,000 29,831,000
------------ ------------

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $434,021,000 $446,880,000
============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . $ 10,119,000 $ 9,028,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . 8,771,000 8,818,000
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 35,251,000 34,982,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 54,141,000 52,828,000
------------ ------------

Postretirement Benefit obligation other than pensions . . . . . . . . . 79,199,000 80,150,000
Other Long-term Liabilities . . . . . . . . . . . . . . . . . . . . . . 24,145,000 22,836,000
Senior revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000,000
11 7/8% senior secured notes due 2003 . . . . . . . . . . . . . . . . . 100,000,000 100,000,000
13 3/4% subordinated debentures due 2001 . . . . . . . . . . . . . . . 210,000,000 210,000,000
14.75% convertible debentures due 2004 . . . . . . . . . . . . . . . . - 61,421,000

Stockholders' Deficiency:
Preferred stock, $.01 par value - authorized 1,500,000 and 900,000
shares; issued and outstanding 1,027,635 and 899,999 shares
(liquidation preference of $60,110,000 and $76,154,000) . . . . . . 10,000 9,000
Common stock, Class B, $.01 par value - authorized 4,600,000
shares; issued and outstanding 4,589,938 shares (liquidation
preference of $26,848,000) . . . . . . . . . . . . . . . . . . . . 46,000 -
Common stock, Class A, $.01 par value - authorized 21,000,000 and
5,350,000 shares; issued and outstanding 5,533,437 and 4,846,164
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 48,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 155,260,000 89,943,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (181,075,000) (172,470,000)
Adjustment to equity for minimum pension liability . . . . . . . . . (7,467,000) (7,467,000)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . (293,000) (418,000)
------------ ------------
Total stockholders' deficiency . . . . . . . . . . . . . . . . . . . . (33,464,000) (90,355,000)
------------ ------------

Total Liabilities and Stockholders' Deficiency . . . . . . . . . . . . $434,021,000 $446,880,000
============ ============

</TABLE>

See notes to consolidated financial statements.

F-2
<PAGE> 65

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
Six Months Ended,
-----------------------------------
September 30, September 30,
1994 1993
-------------- ---------------

<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,143,000 $115,773,000

Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 93,347,000 99,238,000

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,230,000 5,312,000
------------ ------------

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 16,566,000 11,223,000

Interest and investment income . . . . . . . . . . . . . . . . . . . 78,000 35,000

Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . (25,249,000) (26,030,000)
------------ ------------

Loss before cumulative effect of
change in accounting principle . . . . . . . . . . . . . . . . . . (8,605,000) (14,772,000)

Cumulative effect of change in method of accounting for the
discounting of certain liabilities . . . . . . . . . . . . . . . . -- (2,305,000)
------------ ------------

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,605,000) $(17,077,000)
============ ============

</TABLE>

Note (1): Includes non-cash interest expense on the convertible
debentures and financing costs of $4,613,000 and $4,771,000
for the six months ended September 30, 1994 and 1993,
respectively.

See notes to consolidated financial statements.

F-3
<PAGE> 66

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
Three Months Ended,
------------------------------------
September 30, September 30,
1994 1993
--------------- ---------------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,432,000 $ 64,042,000

Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 45,664,000 53,152,000

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,580,000 2,743,000
------------ ------------

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 9,188,000 8,147,000

Interest and investment income . . . . . . . . . . . . . . . . . . . 45,000 17,000

Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . (12,252,000) (12,922,000)
------------ ------------

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,019,000) $ (4,758,000)
============ ============
</TABLE>

Note (1): Includes non-cash interest expense on the convertible
debentures and financing costs of $1,943,000 and $2,394,000
for the three months ended September 30, 1994 and 1993,
respectively.

See notes to consolidated financial statements.

F-4
<PAGE> 67

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
Six Months Ended,
-----------------------------------
September 30, September 30,
1994 1993
---------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,605,000) $(17,077,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting for the discounting
of certain liabilities . . . . . . . . . . . . . . . . . . . . . . -- 2,305,000
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 9,786,000 10,056,000
Non-cash interest expense . . . . . . . . . . . . . . . . . . . . . 4,613,000 4,771,000
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . (1,359,000) 8,982,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,142,000 384,000
Other current assets . . . . . . . . . . . . . . . . . . . . . (198,000) (333,000)
Accounts payable, interest payable, and other
current liabilities . . . . . . . . . . . . . . . . . . . . . 1,313,000 (3,323,000)
Postretirement benefits other than pensions . . . . . . . . . . . (951,000) (781,000)
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 1,309,000 (2,500,000)
------------ ------------
Net cash provided by operating activities . . . . . . . . . . . . . 9,050,000 2,484,000
------------ ------------

Cash flows from investing activities:
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . (611,000) (1,890,000)
Deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . (214,000) --
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . (825,000) (1,890,000)
------------ ------------
Cash Flows From Financing Activities:
Payments of senior revolving loan . . . . . . . . . . . . . . . . . (20,000,000) (23,000,000)
Borrowings of senior revolving loan . . . . . . . . . . . . . . . . 10,000,000 24,000,000
Payment of convertible debentures . . . . . . . . . . . . . . . . . (12,764,000) --
Proceeds from issuance of capital stock . . . . . . . . . . . . . . 12,764,000 --
------------ ------------
Net cash used by financing activities . . . . . . . . . . . . . . . (10,000,000) 1,000,000
------------- ------------

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . (1,775,000) 1,594,000

Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 4,327,000 2,921,000
------------ ------------

Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . $ 2,552,000 $ 4,515,000
============ ============
- -------------------------------

Supplemental information:
Cash interest paid during the period . . . . . . . . . . . . . . . . $ 20,683,000 $ 21,704,000
============ ============

</TABLE>

Supplemental disclosure of non-cash financing activities:
See Note 7 for a discussion of non-cash financing activities

See notes to consolidated financial statements.

F-5
<PAGE> 68

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of
financial position, results of operations and cash flows. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. The consolidated statements of
operations for the three and six months ended September 30, 1994 are
not necessarily indicative of the results to be expected for the full
year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the Company's March 31, 1994 Annual Report on Form 10-K.

2. Accounting Change

Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires that the costs of
benefits provided to employees after employment but before retirement
be recognized in the financial statements on an accrual basis. The
adoption of SFAS No. 112 did not have a material effect on the
Company's financial position or results of operations.

3. Receivables are summarized as follows:

<TABLE>
<CAPTION>
September 30, March 31,
1994 1994
-------------- ------------
<S> <C> <C>
Accounts receivable, principally from
commercial customers $31,911,000 $29,099,000

Accounts receivable, on U. S. Government
and other long-term contracts 2,992,000 4,379,000

Allowances (702,000) (695,000)
----------- -----------
$34,201,000 $32,783,000
=========== ===========

4. Inventory consists of the following:

September 30, March 31,
1994 1994
------------- -----------

Raw materials and work-in-process $40,281,000 $42,375,000
Finished goods 13,626,000 15,821,000
Inventoried costs related to U.S.
Government and other long-term
contracts 11,233,000 9,823,000
----------- -----------
65,140,000 68,019,000
Less, unliquidated progress payments
received, principally related
to long-term government contracts 603,000 406,000
----------- -----------
$64,537,000 $67,613,000
=========== ===========
</TABLE>

F-6
<PAGE> 69

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Inventory is stated at average cost, not in excess of net realizable value. In
accordance with industry practice, inventoried costs may contain amounts
relating to contracts with long production cycles, a portion of which will not
be realized within one year.

5. Other current liabilities consist of the following:

<TABLE>
<CAPTION>
September 30, March 31,
1994 1994
------------- -----------

<S> <C> <C>
Accrued payroll costs $13,690,000 $11,687,000
Accrued taxes 6,663,000 7,094,000
Accrued costs on long-term contracts 3,962,000 3,415,000
Accrued warranty costs 5,103,000 4,502,000
Postretirement benefit obligation other than pensions 2,000,000 2,000,000
Other 3,833,000 6,284,000
----------- -----------
$35,251,000 $34,982,000
=========== ===========

</TABLE>

6. Contingencies

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

7. Retirement of Debt

On September 2, 1994 K & F retired the $65,371,000 principal amount of
14 3/4% Subordinated Convertible Debentures due 2004 held by Loral, in
exchange for $12,764,000 in cash and 4,589,938 shares of Class B common
stock representing 22.5% of equity. The cash portion of this
transaction was funded with a $12,764,000 capital infusion by K & F's
principal stockholders for which stockholders received a total of
687,273 shares of Class A common stock and 127,636 shares of preferred
stock. As a result, K & F stockholders' equity was increased by
$65,371,000 million and long-term debt was reduced by an equal amount,
resulting in no gain or loss on the transaction.

F-7
<PAGE> 70

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of March 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended March 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on the audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of March 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1994, in conformity with generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for discounting of
certain liabilities. As discussed in Notes 4 and 11, respectively, to the
consolidated financial statements, effective April 1, 1992, the Company changed
its method of accounting for certain overhead costs included in inventory and
postretirement benefits other than pensions.

DELOITTE & TOUCHE LLP
New York, New York
May 4, 1994

F-8
<PAGE> 71

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
March 31,
---------------------------------

1994 1993
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,327,000 $ 2,921,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 32,783,000 50,045,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,613,000 77,259,000
Other current assets . . . . . . . . . . . . . . . . . . . . . 1,196,000 1,059,000
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . 105,919,000 131,284,000
------------- -------------

Property, Plant and Equipment - Net . . . . . . . . . . . . . . . 68,740,000 76,262,000

Deferred Charges - Net of amortization of $8,328,000 and
$5,581,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 28,050,000 30,871,000

Cost in Excess of Net Assets Acquired - Net of amortization of
$30,036,000 and $23,927,000 . . . . . . . . . . . . . . . . . 214,340,000 220,449,000

Intangible Assets - Net of amortization of $17,244,000 and
$13,736,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 29,831,000 31,102,000
------------- -------------

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446,880,000 $ 489,968,000
============= =============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 9,028,000 $ 14,326,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . 8,818,000 9,256,000
Other current liabilities . . . . . . . . . . . . . . . . . . . 34,982,000 37,674,000
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . 52,828,000 61,256,000
------------- -------------

Postretirement Benefit Obligation Other Than Pensions . . . . . . 80,150,000 84,240,000

Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 22,836,000 16,862,000

Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 381,421,000 379,478,000

Commitments and Contingencies
(Notes 12 and 13)

Stockholders' Deficiency:
Preferred stock, $.01 par value - authorized, 900,000 shares;
issued and outstanding, 899,999 shares (liquidation
preference of $76,154,000) . . . . . . . . . . . . . . . . . 9,000 9,000
Common stock, $.01 par value - authorized, 5,350,000 shares;
issued and outstanding, 4,846,164 shares . . . . . . . . . . 48,000 48,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . 89,943,000 89,943,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,470,000) (138,429,000)
Adjustment to equity for minimum pension liability . . . . . . (7,467,000) (3,052,000)
Cumulative translation adjustment . . . . . . . . . . . . . . . (418,000) (387,000)
------------- -------------
Total stockholders' deficiency . . . . . . . . . . . . . . . (90,355,000) (51,868,000)
------------- -------------

Total Liabilities and Stockholders' Deficiency . . . . . . . . . $ 446,880,000 $ 489,968,000
============= =============

</TABLE>

See notes to consolidated financial statements.

F-9
<PAGE> 72

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------------------

1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000

Cost of sales . . . . . . . . . . . . . . . . . . . . . 159,751,000 199,002,000 209,552,000

Selling, general and administrative expenses . . . . . 22,421,000 24,154,000 24,047,000

Independent research and development . . . . . . . . . 12,858,000 11,417,000 14,130,000

Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000
------------ ------------ ------------

Operating income . . . . . . . . . . . . . . . . . . . 20,217,000 32,276,000 37,455,000

Interest expense, net of interest income of $96,000,
$108,000 and $152,000 . . . . . . . . . . . . . . . . 51,953,000 53,486,000 52,179,000
------------ ------------ ------------

Loss before extraordinary charge and cumulative effect
of changes in accounting principles . . . . . . . . . (31,736,000) (21,210,000) (14,724,000)

Extraordinary charge from early extinguishment of debt -- (2,477,000) (992,000)

Cumulative effect of change in method of accounting
for the discounting of certain liabilities . . . . . (2,305,000) -- --

Cumulative effect of change in method of accounting
for postretirement benefits other than pensions . . . -- (77,902,000) --

Cumulative effect of change in method of accounting
for certain overhead costs in inventory . . . . . . . -- 4,362,000 --
------------ ------------ ------------

Net loss . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000)
============ ============ ============

</TABLE>

See notes to consolidated financial statements.

F-10
<PAGE> 73

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 1994, 1993 AND 1992

Common Stock Preferred Stock Adjustment
------------ --------------- to Equity for
Additional Minimum Cumulative
Shares Shares Paid-in Pension Translation
Issued Amount Issued Amount Capital Deficit Liability Adjustment
------ ------ ------ ------ ------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1991 . . 3,500,010 $35,000 649,999 $6,000 $64,959,000 $ (25,486,000) $(1,342,000) $ --

Issuance of common
stock . . . . . . . . . 1,346,154 13,000 3,833,000

Issuance of preferred
stock . . . . . . . . . 250,000 3,000 21,151,000

Net loss . . . . . . . . (15,716,000)

Pension adjustment . . . 875,000
--------- ------- ------- ------ ----------- ------------- ----------- ---------

Balance, March 31, 1992 . . 4,846,164 48,000 899,999 9,000 89,943,000 (41,202,000) (467,000) --

Net loss . . . . . . . . (97,227,000)

Pension adjustment . . . (2,585,000)

Cumulative translation
adjustment . . . . . . (387,000)
--------- ------- ------- ------ ----------- ------------- ----------- ---------

Balance, March 31, 1993 . . 4,846,164 48,000 899,999 9,000 89,943,000 (138,429,000) (3,052,000) (387,000)

Net loss . . . . . . . . (34,041,000)

Pension adjustment . . . (4,415,000)

Cumulative translation
adjustment . . . . . . (31,000)
--------- ------- ------- ------ ----------- ------------- ----------- ---------

Balance, March 31, 1994 4,846,164 $48,000 899,999 $9,000 $89,943,000 $(172,470,000) $(7,467,000) $(418,000)
========= ======= ======= ====== =========== ============= =========== =========
</TABLE>

See notes to consolidated financial statements.

F-11
<PAGE> 74

K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000)
Adjustments to reconcile net loss to net cash provided by
operating activities: . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting for:
Discounting certain liabilities . . . . . . . . . . . 2,305,000 -- --
Postretirement benefits other than pensions . . . . . -- 77,902,000 --
Certain overhead costs in inventory . . . . . . . . -- (4,362,000) --
Depreciation . . . . . . . . . . . . . . . . . . . . . 9,643,000 9,604,000 9,195,000
Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000
Non-cash interest expense-convertible debentures . . . 8,443,000 7,282,000 6,213,000
Non-cash interest expense-amortization of deferred
financing charges . . . . . . . . . . . . . . . . . . 1,480,000 1,507,000 2,467,000
Provision for losses on accounts receivable . . . . . . 450,000 190,000 (331,000)
Extraordinary charge from early extinguishment of debt -- 2,477,000 992,000
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 16,797,000 5,110,000 666,000
Inventory . . . . . . . . . . . . . . . . . . . . . . 9,638,000 12,038,000 (469,000)
Other current assets . . . . . . . . . . . . . . . . (137,000) (262,000) (33,000)
Accounts payable . . . . . . . . . . . . . . . . . . (5,298,000) 1,141,000 (6,502,000)
Interest payable . . . . . . . . . . . . . . . . . . (438,000) 3,552,000 (245,000)
Other current liabilities . . . . . . . . . . . . . . (2,692,000) 4,567,000 (370,000)
Postretirement benefit obligation other than pensions (4,090,000) 6,338,000 --
Other long-term liabilities . . . . . . . . . . . . . (3,981,000) (1,289,000) 4,427,000
Deferred charges - financing costs . . . . . . . . . -- (3,256,000) (1,695,000)
------------ ------------ ------------

Net cash provided by operating activities . . . . . . 8,963,000 35,570,000 8,905,000
------------ ------------ ------------

Cash Flows From Investing Activities:
Capital expenditures, net . . . . . . . . . . . . . . . (3,127,000) (4,670,000) (3,986,000)
Deferred charges . . . . . . . . . . . . . . . . . . 74,000 258,000 (1,409,000)
------------ ------------ ------------

Net cash used in investing activities . . . . . . . . (3,053,000) (4,412,000) (5,395,000)
------------ ------------ ------------

Cash Flows From Financing Activities:

Payments of senior revolving loan . . . . . . . . . . . . (43,500,000) (81,000,000) (56,000,000)
Borrowings under senior revolving loan . . . . . . . . . 37,000,000 47,000,000 59,000,000
Proceeds from sale and leaseback transaction . . . . . . 1,996,000 -- --
Payments of senior term loan . . . . . . . . . . . . . . -- (95,875,000) (34,625,000)
Proceeds from issuance of senior secured notes . . . . . -- 100,000,000 --
Proceeds from issuance of common and preferred stocks . . -- -- 25,000,000
------------ ------------ ------------

Net cash used by financing activities . . . . . . . (4,504,000) (29,875,000) (6,625,000)
------------ ------------ ------------

Net increase (decrease) in cash and cash equivalents . . . . 1,406,000 1,283,000 (3,115,000)

Cash and cash equivalents, beginning of year . . . . . . . . 2,921,000 1,638,000 4,753,000
------------ ------------ ------------

Cash and cash equivalents, end of year . . . . . . . . . . . $ 4,327,000 $ 2,921,000 $ 1,638,000
============ ============ ============
- --------------------------------

Supplemental Information:
Interest paid during the year . . . . . . . . . . . . . $ 42,564,000 $ 41,253,000 $ 43,896,000
============ ============ ============

</TABLE>

See notes to consolidated financial statements.

F-12
<PAGE> 75

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development,
manufacture and distribution of wheels, brakes and anti-skid systems
for commercial, military and general aviation aircraft, and the
manufacture of materials for fuel tanks, iceguards, inflatable oil
booms and various other products made from coated fabrics for military
and commercial uses. The Company's activities are conducted through
its two wholly owned subsidiaries, Aircraft Braking Systems
Corporation ("Aircraft Braking Systems") and Engineered Fabrics
Corporation (collectively the "Subsidiaries").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements
include the accounts of the Company. All material intercompany
accounts and transactions between these entities have been eliminated.

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

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

Inventory - Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried
costs may contain amounts relating to contracts with long production
cycles, a portion of which will not be realized within one year.
During fiscal year 1993, the Company changed its method of accounting
for certain overhead costs. (See Note 4.)

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

Deferred Charges - Deferred charges consist primarily of financing
($11.2 million and $12.7 million, which is net of amortization
(non-cash interest expense) of $3.9 million and $2.9 million in fiscal
years 1994 and 1993, respectively), organization and program
participation costs ($15.8 million, net of vendor participations) paid
in connection with the sole-source award of wheels, brakes and
anti-skid equipment on the McDonnell Douglas Corporation's MD-90
twin-jet program. Program participation costs are being amortized on
a straight-line method over a period of 20 years. Deferred financing
charges are primarily being amortized on an effective interest method
over periods of eight to 12 years.

Cost in Excess of Net Assets Acquired - Cost in excess of net assets
acquired is being amortized on the straight-line method over a period
of 40 years.

F-13
<PAGE> 76

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Evaluation of Long-Lived Assets - Long-lived assets are assessed for
recoverability on an on-going basis. In evaluating the value and
future benefits of long-lived assets, their carrying value would be
reduced by the excess, if any, of the long-lived asset over
management's estimate of the anticipated undiscounted future net cash
flows of the related long-lived asset. There were no adjustments to
the carrying amount of long-lived assets in fiscal year 1994 resulting
from the Company's evaluations. Extraordinary charges of $2,477,000
and $992,000 were recorded relating to the accelerated amortization of
unamortized financing costs associated with the full prepayment of the
senior term loan in fiscal year 1993 and partial prepayment in fiscal
year 1992, respectively. (See Note 7.)

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

Business and Credit Concentrations - The Company's customers are not
concentrated in any specific region, but are concentrated in the
airline industry. The United States Government accounted for
approximately 15%, 23% and 31% of sales for the fiscal years ended
March 31, 1994, 1993 and 1992, respectively. No other single customer
accounted for significant sales for the fiscal years then ended, and
there were no significant accounts receivable from a single customer,
except the United States Government, at March 31, 1994.

Changes in Accounting Methods - In the fourth quarter of fiscal year
1994, retroactive to April 1, 1993, in response to recent Securities
and Exchange Commission guidance, the Company changed its method of
accounting for the discounting of liabilities for workers'
compensation losses, to use a risk-free rate rather than its
incremental borrowing rate. The cumulative effect for periods prior
to April 1, 1993, of this change amounted to $2,305,000, and is
included as an increase to the net loss for the fiscal year ended
March 31, 1994. The effect of the change on the results of operations
for the fiscal years ended March 31, 1994 and pro forma 1993 and 1992
were not material. The effect of this change on previously reported
quarterly financial data for the three months ended June 30, 1993, was
to increase the net loss reported as $10,014,000 to $12,319,000.

Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In
connection with such adoption, there was no impact to the financial
statements as the Company has provided a 100% valuation allowance
against its net deferred tax benefit. (See Note 14.)

In the fourth quarter of fiscal year 1993, the Company adopted,
retroactive to April 1, 1992, Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." (See Note 11.)

Accounting Pronouncement - In November 1992, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits," which
requires that employers who provide benefits to employees after
employment but before retirement recognize the obligation in the
financial statements. The Company will adopt Statement of Financial
Accounting Standards No. 112 in the first quarter of fiscal year 1995.
The impact of this new statement has not been fully determined, but
the Company believes its adoption will not have a material effect on
its financial position or results of operations.

F-14
<PAGE> 77

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
March 31,
-------------------------------
1994 1993
---- ----

<S> <C> <C>
Accounts receivable, principally from commercial
customers . . . . . . . . . . . . . . . . . . . . . . $29,099,000 $42,836,000

Accounts receivable on U.S. Government and other
long-term contracts . . . . . . . . . . . . . . . . . 4,379,000 8,391,000

Allowances . . . . . . . . . . . . . . . . . . . . . . . (695,000) (1,182,000)
------------ -----------

Total . . . . . . . . . . . . . . . . . . . . . $32,783,000 $50,045,000
=========== ===========
</TABLE>

4. INVENTORY

<TABLE>
<CAPTION>
March 31,
-------------------------------
1994 1993
---- ----

<S> <C> <C>
Raw materials and work-in-process . . . . . . . . . . . $42,375,000 $46,027,000

Finished goods . . . . . . . . . . . . . . . . . . . . . 15,821,000 17,307,000

Inventoried costs related to U.S.
Government and other long-term contracts . . . . . . . 9,823,000 14,914,000
----------- -----------
68,019,000 78,248,000
Less: unliquidated progress payments received,
principally related to long-term government
contracts . . . . . . . . . . . . . . . . . . . . . . 406,000 989,000
----------- -----------

Total . . . . . . . . . . . . . . . . . . . . . $67,613,000 $77,259,000
=========== ===========

</TABLE>

During the fiscal year ended March 31, 1993, the Company's Aircraft
Braking Systems subsidiary changed its method of accounting, effective
April 1, 1992, to capitalize in inventory certain material related
overhead costs (such as procurement and receiving) at the raw
material, work-in-process and finished goods stages. Historically,
these costs were inventoried only in finished goods. This change is
preferable in that it provides a better matching of product costs with
related revenues.

The cumulative effect of this change in method of accounting for
periods prior to April 1, 1992, amounted to $4,362,000, and is
included as a reduction in the net loss for the fiscal year ended
March 31, 1993. The effect of the change on the results of
operations for the fiscal year ended March 31, 1993 was to increase
the loss before extraordinary charge and cumulative effect of changes
in accounting principles by $1,469,000 and to reduce the net loss by
$2,893,000. Pro forma net loss for the fiscal year ended March 31,
1992 would not be materially different had the change been applied
retroactively.

F-15
<PAGE> 78

K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
March 31,
--------------------------------
1994 1993
---- ----

<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 662,000 $ 662,000
Buildings and improvements . . . . . . . . . . . . . . . 27,113,000 26,791,000
Machinery, equipment, furniture and fixtures . . . . . . 84,107,000 83,081,000
------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . 111,882,000 110,534,000

Less: accumulated depreciation and amortization . . . . 43,142,000 34,272,000
------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $ 68,740,000 $ 76,262,000
============ ============
</TABLE>

During the fiscal year ended March 31, 1994, the Company sold and
leased back assets with a net book value of $1,006,000.

6. OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
March 31,
--------------------------------
1994 1993
---- ----
<S> <C> <C>
Accrued payroll costs . . . . . . . . . . . . . . . . . $ 11,687,000 $ 12,900,000
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 7,094,000 7,199,000
Accrued costs on long-term contracts . . . . . . . . . . 3,415,000 4,933,000
Accrued warranty costs . . . . . . . . . . . . . . . . . 4,502,000 6,158,000
Postretirement benefit obligation other than pensions . . 2,000,000 1,500,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,284,000 4,984,000
------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $ 34,982,000 $ 37,674,000
============ ============
</TABLE>

7. LONG-TERM DEBT

<TABLE>
<CAPTION>
March 31,
--------------------------------
1994 1993
---- ----
<S> <C> <C>
Senior revolving loan (a) . . . . . . . . . . . . . . . $ 10,000,000 $ 16,500,000
11 7/8% Senior Secured Notes due 2003 (b) . . . . . . . 100,000,000 100,000,000
13 3/4% Senior Subordinated Debentures due 2001 (c) . . 210,000,000 210,000,000
14.75% Convertible Debentures due 2004 (d) . . . . . . . 61,421,000 52,978,000
------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $381,421,000 $379,478,000
============ ============

</TABLE>

(a) Credit Agreements - On April 27, 1989, the Company entered into senior
term loan and senior revolving loan credit agreements (collectively
referred to as the "Credit Agreement") with a syndicate of banks. On
June 10, 1992, the Company issued $100 million aggregate principal
amount of 11 7/8% Senior Secured Notes due 2003 (the "Senior Notes").
The net proceeds from the Senior Notes were used to prepay the senior
term loan in full and reduce the outstanding amount of the senior
revolving loan. The Company recorded extraordinary charges of
$2,477,000 and $992,000 relating to the accelerated amortization of
unamortized financing costs associated with the full prepayment of the
senior term loan in fiscal year 1993 and the partial prepayment of the
senior term loan in fiscal year 1992, respectively.

F-16
<PAGE> 79

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with the Senior Note offering, the original senior
revolving loan credit agreement was amended and restated pursuant to
an Amended and Restated Revolving Credit Agreement (the "Restated
Revolving Credit Agreement"). The Restated Revolving Credit Agreement
provides for revolving loans (the "Revolving Loan") in an aggregate
principal amount not to exceed $80 million (subject to a borrowing
base of a portion of eligible accounts receivable and inventory). The
Company's obligation under the Revolving Loan is secured by a first
priority lien on all accounts receivable and inventory of the
Subsidiaries. All borrowings under the Revolving Loan will mature on
April 27, 1997.

Borrowings under the Revolving Loan bear interest at floating rates.
At March 31, 1994 the interest rate on the Revolving Loan was 5.81%.
As part of the total commitment, the Restated Revolving Credit
Agreement provides for the issuance of letters of credit not to exceed
$11 million. As of March 31, 1994, the Company had outstanding
letters of credit of $7.5 million. At March 31, 1994, the Company had
$38.2 million available under the Revolving Loan.

The Restated Revolving Credit Agreement contains certain covenants and
events of default, including limitations on additional indebtedness,
liens, asset sales, dividend payments and other distributions from the
subsidiaries to K & F and contains financial ratio requirements
including cash interest coverage and consolidated net worth. The
Company was in compliance with all covenants at March 31, 1994.

(b) 11 7/8% Senior Secured Notes - On June 10, 1992, the Company issued
$100 million of 11 7/8% Senior Secured Notes which mature on December
1, 2003. The Senior Notes are not subject to a sinking fund. The
Senior Notes may not be redeemed prior to June 1, 1997. On and after
June 1, 1997, the Company may redeem the Senior Notes at descending
premiums from 5.28% in June 1997 to no premium after June 2001.

(c) 13 3/4% Senior Subordinated Debentures - On August 10, 1989, the
Company issued $210 million of 13 3/4% Senior Subordinated Debentures
which mature on August 1, 2001 (the "Subordinated Debentures"). The
Company is required to make sinking fund payments of $52.5 million
plus accrued interest on each of August 1, 1999 and August 1, 2000.
The Company may, at its option, receive credit against sinking fund
payments for the principal amount of Subordinated Debentures acquired
by the Company. However, the Senior Subordinated Debentures may not
be redeemed prior to August 1, 1994. On and after August 1, 1994, the
Company may redeem the Subordinated Debentures at descending premiums
ranging from 5% in August 1994 to no premium after August 1998.

(d) 14.75% Convertible Debentures - On April 27, 1989, the Company issued
$30 million aggregate principal amount of 14.75% Convertible
Debentures to Loral Corporation ("Loral") which mature on April 15,
2004 (the "Convertible Debentures") and pay interest semiannually on
October 15 and April 15. At any time prior to April 15, 1997, the
Company may, at its option, pay interest through the issuance of
additional Convertible Debentures. In accordance with an amendment to
the Credit Agreement, interest will continue to be paid in additional
debentures until all outstanding obligations under the Credit
Agreement have been paid in full or a substantial portion is
refinanced; the interest rate was increased to 15.35% with a future
change to 16.25% unless cash interest is paid with the April 15, 1997
interest payment. For any given six month period that the Company
pays interest in cash, the applicable interest rate is 14.75%.

The Convertible Debentures are convertible into 15% of the Company's
outstanding voting common stock on a fully diluted basis, provided
Loral delivers $5 million principal amount of the Convertible
Debentures to the Company for cancellation on or prior to January 31,
1995. The Convertible Debentures are convertible at the option of the
holders at any time on or after April 15, 1996, and prior to maturity
or upon the occurrence of a triggering event (as defined).

F-17
<PAGE> 80

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Convertible Debentures are subordinate to the Subordinated
Debentures and to all other senior debt of the Company.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of all financial instruments reported on the
balance sheet at March 31, 1994 and 1993 approximate their fair value,
except as discussed below.

The fair value of the Company's total debt, excluding the Convertible
Debentures, based on quoted market prices or on current rates for
similar debt with the same maturities, was approximately $297,000,000
and $332,000,000 at March 31, 1994 and 1993, respectively. Because
the Convertible Debentures are not publicly traded their fair value is
not readily determinable. However, the Company believes that the
Convertible Debentures have a fair value less than the Subordinated
Debentures, which have rights superior to the Convertible Debentures
and pay interest currently, and are trading at approximately 92% of
face value.

9. CAPITAL STOCK

a. The Preferred Stock is convertible into voting Common Stock on
a one-for-ten basis. The Preferred Stock is entitled to vote
on all matters on which the voting Common Stock will vote and
is entitled to ten votes per share.

b. In November 1989, the Company adopted the 1989 Stock Option
Plan, which provides for the grant of nonqualified or
incentive stock options to acquire 500,000 authorized but
unissued shares of common stock. The options are exercisable
in four equal installments on the second, third, fourth and
fifth anniversaries of the date of grant, and shall remain
exercisable until the expiration of the option, 10 years from
the date of the grant, at an exercise price of $8.46.

Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Outstanding at April 1 . . . . . . . . . 137,500 116,000 116,000
Granted . . . . . . . . . . . . . . . . . 5,000 27,500 --
Cancelled . . . . . . . . . . . . . . . . (22,500) (6,000) --
------- ------- -------
Outstanding at March 31, . . . . . . . . 120,000 137,500 116,000
======= ======= =======

Exercisable options outstanding . . . . . 65,625 55,000 29,000
======= ======== ========

Available for future grants . . . . . . . 380,000 362,500 384,000
======= ======= =======

</TABLE>

F-18
<PAGE> 81

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. EMPLOYEE BENEFIT PLANS

The Company provides pension benefits to substantially all employees
through two pension plans (hourly and salaried). The plans provide
benefits based primarily on the participant's years of service. The
salaried plan also includes voluntary employee contributions.

Net pension cost included the following:

<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------

1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the
period . . . . . . . . . . . . . . . . . . . $ 1,361,000 $ 1,407,000 $ 988,000
Interest cost on projected benefit obligation
4,033,000 3,632,000 3,386,000
Actual return on plan assets . . . . . . . . . (3,683,000) (2,960,000) (4,323,000)
Net amortization and deferred gain . . . . . . 809,000 315,000 2,642,000
----------- ----------- -----------

Net pension cost . . . . . . . . . . . . . . $ 2,520,000 $ 2,394,000 $ 2,693,000
=========== =========== ===========

</TABLE>

The table below sets forth the funded status of the plans as follows:

<TABLE>
<CAPTION>
March 31,
---------------------------
1994 1993
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation . . . . . . . . . . . . . . $53,088,000 $39,867,000
=========== ===========

Accumulated benefit obligation . . . . . . . . . . . . 53,535,000 42,353,000
Effect of projected future salary increases . . . . . 1,053,000 766,000
----------- -----------

Projected benefit obligation . . . . . . . . . . . . . 54,588,000 43,119,000
Plan assets at fair market value . . . . . . . . . . . . 40,347,000 33,928,000
----------- -----------

Unfunded projected benefit obligation . . . . . . . . . 14,241,000 9,191,000
Unrecognized prior service cost . . . . . . . . . . . . (2,786,000) (3,183,000)
Unrecognized net gain (loss) . . . . . . . . . . . . . . (7,971,000) 219,000
Adjustment for minimum liability . . . . . . . . . . . . 9,704,000 3,052,000
----------- -----------

Accrued pension cost recognized in the
consolidated balance sheet . . . . . . . . . . . . . . $13,188,000 $ 9,279,000
=========== ===========

</TABLE>

F-19
<PAGE> 82

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Statement of Financial Accounting Standards No. 87 requires
recognition in the balance sheet of an additional minimum pension
liability for underfunded plans with accumulated benefit obligations
in excess of plan assets. A corresponding amount is recognized as an
intangible asset or a reduction of equity. At March 31, 1994, the
Company's additional minimum liability was $9,704,000 with a
corresponding equity reduction of $7,467,000 and intangible asset of
$2,237,000. At March 31, 1993, the Company's additional minimum
liability and corresponding equity reduction was $3,052,000.

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

The assumptions used in accounting for the plans are as follows:

Years Ended March 31,
--------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . 7.75% 9.00% 9.00%
Rate of increase in compensation levels . . . . . . 4.50 5.50 5.50
Expected long-term rate of return on assets . . . . 9.50 9.50 9.50

</TABLE>

The Company offered a voluntary early retirement opportunity in fiscal
year 1992, enabling eligible employees to elect early retirement. The
early retirement program resulted in charges, from a curtailment, in
fiscal year 1992 of $900,000.

Eligible employees having one year of service also participate in one
of the Company's Savings Plans (hourly or salaried). Under one of
these plans, the Company matches 35% of a participating employee's
contributions, up to 6% of compensation. The employer contributions
generally vest to participating employees after five years of service.
The matching contributions were $568,000, $582,000 and $631,000 for
the fiscal years ended March 31, 1994, 1993 and 1992, respectively.

11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides postretirement health care and life insurance
benefits for all eligible employees and their dependents active at
April 27, 1989 and thereafter, and postretirement life insurance
benefits for retirees prior to April 27, 1989. Participants are
eligible for these benefits when they retire from active service and
meet the eligibility requirements of the Company's pension plans. The
health care plans are generally contributory and the life insurance
plans are generally noncontributory. Prior to the fiscal year ended
March 31, 1993, the costs of these benefits were recognized as claims
were paid. The total cost of postretirement benefits was $1,237,000
for the fiscal year ended March 31, 1992. In the fourth quarter of
fiscal year 1993, the Company adopted, retroactive to April 1, 1992,
the provisions of Statement of Financial Accounting Standards (SFAS)
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires accrual of these benefits during an
employee's service period. The Company elected to record the
transition obligation of $77,902,000 as a one-time charge against
earnings.

During the first quarter of fiscal year 1994, the Company adopted
various plan amendments which had the effect of reducing the
accumulated postretirement benefit obligation. This reduction is
being amortized as prior service cost over the average remaining years
of service to full eligibility of active plan participants.

F-20
<PAGE> 83

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Net periodic postretirement benefit cost included the following
components:

<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1994 1993
---- ----

<S> <C> <C>
Service cost-benefits attributed to service during the period . . . $ 458,000 $2,287,000
Interest cost on accumulated postretirement benefit obligation . . 2,749,000 7,100,000
Net amortization and deferral . . . . . . . . . . . . . . . . . . . (4,677,000) --
----------- ----------

Net periodic postretirement benefit cost . . . . . . . . . . . . . $(1,470,000) $9,387,000
=========== ==========
</TABLE>

Included in the results of operations for the fiscal year ended March
31, 1994 is a $1,619,000 charge relating to net postretirement benefit
cost that was capitalized in inventory at March 31, 1993. The net
periodic postretirement benefit cost charged to operations was
$443,000 and $7,768,000 for the fiscal years ended March 31, 1994 and
1993, respectively.

Presented below are the total obligations and amounts recognized in
the Company's consolidated balance sheets, inclusive of the current
portion:

<TABLE>
<CAPTION>
March 31
-------------------------------

1994 1993
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $23,989,000 $31,716,000
Fully eligible active plan participants . . . . . . . . . . . 2,159,000 18,200,000
Other active plan participants. . . . . . . . . . . . . . . . 11,882,000 35,812,000
----------- -----------
Total accumulated postretirement benefit obligation. . . . . . . . 38,030,000 85,728,000
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . (7,416,000) --
Unrecognized prior service cost related to plan amendments . . . . 51,536,000 --
----------- -----------

Accrued postretirement benefit costs . . . . . . . . . . . . . . . $82,150,000 $85,728,000
=========== ===========
</TABLE>

The assumed annual rate of increase in the per capita cost of covered
health care benefits was 14.1% and 15.0% in fiscal year 1994 and 1993,
respectively. The rate was assumed to decrease gradually to 6.5% by
fiscal year 2002 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts
reported. A change in the assumed health care trend rates by 1% in
each year would change the accumulated postretirement benefit
obligation at March 31, 1994 by $3,400,000 and the aggregate of the
service and interest cost components of net postretirement benefit
cost for the fiscal years ended March 31, 1994 by $600,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of March 31, 1994 and 1993 was
7.75% and 9%, respectively.

F-21
<PAGE> 84

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. COMMITMENTS

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

Year Ending March 31, Amount
--------------------- ------

1995 $4,422,000
1996 4,195,000
1997 4,103,000
1998 4,155,000
1999 4,185,000
Thereafter 9,971,000

Rental expense was $4,190,000, $3,941,000 and $4,190,000 for the
fiscal years ended March 31, 1994, 1993 and 1992, respectively.

13. CONTINGENCIES

14. INCOME TAXES

Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In
connection with such adoption, there was no impact to the financial
statements as the Company has provided a 100 percent valuation
allowance against its net deferred tax benefit.

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

<TABLE>
<CAPTION>
March 31, April 1,
1994 1993
----------- --------
<S> <C> <C>
Tax net operating loss carryforwards . . . . . . . . . . . . . . . $ 43,135,000 $28,215,000

Temporary differences:
Postretirement and other employee
benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 37,337,000 37,526,000
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 28,223,000 29,924,000
Program participation costs . . . . . . . . . . . . . . . . . . (6,651,000) (6,759,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,179,000 7,938,000
------------ -----------

Net deferred tax benefit . . . . . . . . . . . . . . . . . . . . . $109,223,000 $96,844,000
============ ===========

</TABLE>

In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced
by approximately $63 million and $46 million, respectively.

F-22
<PAGE> 85

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's effective tax rate of zero percent results from
non-recognition of tax net operating losses and temporary differences
as compared to the federal statutory rate (benefit of 35%).

The Company has tax net operating loss carryforwards of approximately
$110 million at March 31, 1994. The tax net operating losses expire
from 2005 through 2009, with $16 million of carryforwards expiring in
2005.

15. GEOGRAPHIC SEGMENT INFORMATION

The Company operates primarily in one industry segment, the
manufacture of aircraft products. Sales and assets by geographic
location are as follows:

<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Sales:
United States . . . . . . . . . . . . . . . . . . $224,053,000 $275,068,000 $284,002,000
Europe . . . . . . . . . . . . . . . . . . . . . 4,973,000 3,961,000 55,316,000
Eliminations of interdivisional sales . . . . . (2,895,000) (1,922,000) (43,828,000)
------------ ------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000
============ ============ ============

Operating income:
United States (*) . . . . . . . . . . . . . . . $ 20,409,000 $ 32,552,000 $ 29,606,000
Europe . . . . . . . . . . . . . . . . . . . . . (91,000) (311,000) 1,070,000
Eliminations of operating (loss) profit from
interdivisional sales . . . . . . . . . (101,000) 35,000 6,779,000
------------ ------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $ 20,217,000 $ 32,276,000 $ 37,455,000
============ ============ ============

Identifiable assets:
United States . . . . . . . . . . . . . . . . . $444,827,000 $487,596,000 $514,813,000
Europe . . . . . . . . . . . . . . . . . . . . . 2,259,000 2,476,000 4,265,000
Adjustments and eliminations . . . . . . . . . . (206,000) (104,000) (140,000)
------------ ------------ ------------

Total . . . . . . . . . . . . . . . . . . . . . $446,880,000 $489,968,000 $518,938,000
============ ============ ============
</TABLE>

Identifiable assets are all assets identified with operations in each
geographic area.

*Includes operating income in connection with Aircraft Braking Systems
Corporation's sales from the United States to foreign divisions at
transfer prices, which prices represent substantially all of the
profit recorded by Aircraft Braking Systems Corporation in connection
with such export sales.

Sales to U.S. Government agencies for the fiscal years ended March 31,
1994, 1993 and 1992 were $34,473,000, $62,784,000 and $92,405,000,
respectively.

During the fiscal year ended March 31, 1992, Aircraft Braking Systems
consolidated its Moerfelden, Germany, distribution warehouse
operations into the product support facility in Slough, England. The
billings for commercial product support sales previously billed from
the Moerfelden and Slough facilities, representing the majority of the
Company's foreign sales, are now generated from Aircraft Braking
Systems' Akron facility.

F-23
<PAGE> 86

K & F INDUSTRIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. RELATED PARTY TRANSACTIONS

Bernard L. Schwartz ("BLS") owns 35% of the capital stock of the
Company and serves as Chairman of the Board of Directors and Chief
Executive Officer. BLS is also Chairman and Chief Executive Officer
of Loral. The Company has entered into an Advisory Agreement with BLS
which provides for the payment of an aggregate of $200,000 per month
of compensation to BLS and persons designated by him. Such agreement
will continue until BLS dies or is disabled or ceases to own at least
1,350,000 shares of Common Stock of the Company.

The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS and other advisers ranging from 5% to
10% of earnings in excess of $50 million before interest, taxes and
amortization. No bonuses were earned under this plan during fiscal
years ended March 31, 1994, 1993 and 1992.

Pursuant to a financial advisory agreement between Lehman Brothers and
the Company, Lehman Brothers acts as exclusive financial adviser to
the Company. The Company pays Lehman Brothers customary fees for
services rendered on an as-provided basis. The agreement may be
terminated by the Company or Lehman Brothers upon certain conditions.
In connection with the Senior Note Offering on June 10, 1992, Lehman
Brothers received underwriting discounts and a commission of $2.25
million.

Pursuant to the Services Agreement, Loral provides the Company with
certain services which it previously provided to the subsidiaries.
These services include, among others, security, fire protection, yard
service and road maintenance, power plant and equipment calibration as
well as other services on an as needed basis (the "Loral Services").
Certain of the Loral Services are used by the Company on a limited
basis. The charge for these services is based on actual costs
incurred. Billings from Loral were $3.0 million, $3.7 million and
$4.5 million in fiscal years 1994, 1993 and 1992, respectively.
Billings to Loral were $1.1 million, $1.1 million and $1.1 million in
fiscal years 1994, 1993 and 1992. Purchases from Loral were $4.2
million, $3.7 million and $8.8 million in fiscal years 1994, 1993 and
1992. Included in accounts receivable and accounts payable at March
31, 1994 is $.6 million and $2.0 million. Included in accounts
receivable and accounts payable at March 31, 1993, is $1.6 million and
$3.7 million.

F-24
<PAGE> 87

<TABLE>

<S> <C>
======================================================= =======================================================
No dealer, salesman or any other person has been $100,000,000
authorized to give any information or to make any
representations not contained in this Prospectus, and, K & F INDUSTRIES, INC.
if given or made, such information or representation
must not be relied upon as having been authorized by 11-7/8% SENIOR SUBORDINATED
the Company or any of the Underwriters. This DEBENTURES DUE 2003
Prospectus does not constitute an offer of any
securities other than those to which it relates or an
offer to sell, or a solicitation of an offer to buy,
to any person in any jurisdiction where such an offer
or solicitation would be unlawful. Neither delivery
of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that
the information contained herein is correct as of any
time subsequent to the date hereof.

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

TABLE OF CONTENTS PROSPECTUS
NOVEMBER 30, 1994
PAGE
---- -------------------------------------------------------
Additional Information 2
Prospectus Summary 3
The Company 7
Risk Factors 9
Use of Proceeds 12
Selected Financial Data 13
Management's Discussion and Analysis of
Results of Operations and Financial
Condition 14
Business 18
Management 27
Ownership of Capital Stock 36
Description of Senior Notes 38
Description of Certain
Indebtedness 56
Certain Transactions 59
Plan of Distribution 60
Legal Matters 60
Experts 60
Index to Financial Statements F-1 LEHMAN BROTHERS

======================================================= =======================================================

</TABLE>

<PAGE> 88

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all fees and expenses paid by
the Company in connection with the issuance and distribution of the securities
being registered hereby (other than underwriting discounts and commissions).

<TABLE>
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,250
NASD fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500
Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . . . . 44,142
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 47,575
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,042
Trustee's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,624
Qualified Independent Underwriter's fees and expenses . . . . . . . . . . . . 61,913
Rating services registration fees . . . . . . . . . . . . . . . . . . . . . . 60,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,595
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,005,641
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities
incurred in legal proceedings involving such persons because of their being or
having been an officer or director. Pursuant to Section 102(b)(7) of the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation of the Registrant provides that the directors of the Registrant,
individually or collectively, shall not be held personally liable to the
Registrant or its stockholders for monetary damages for breaches of fiduciary
duty as directors, except that any director shall remain liable (1) for any
breach of the director's fiduciary duty of loyalty to the Registrant or its
stockholders, (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (3) for liability under
Section 174 of the General Corporation Law of the State of Delaware or (4) for
any transaction from which the director derived an improper personal benefit.
The by-laws of the Registrant provide for indemnifications of its officers and
directors to the full extent authorized by law.

Reference is made to the Underwriting Agreement and the Independent
Underwriting Agreement, the proposed forms of which were filed herewith as
Exhibits 1.01 and 1.02, respectively, for additional indemnification provisions.

II-1
<PAGE> 89

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Common Stock

On April 27, 1989 in connection with the Acquisition, the Registrant sold
shares of Common Stock as follows:

<TABLE>
Purchaser Shares Purchase Price
--------- ------ --------------
<S> <C> <C>
Lehman Brothers Holdings Inc. 175,000 Voting Common Stock $14,807,693

475,000 Non-Voting Common Stock 40,192,307
-----------
$55,000,000

Bernard L. Schwartz 350,000 Voting Common Stock $10,000,000

</TABLE>

On July 28, 1989, Lehman Brothers Holdings Inc. sold 32,499 shares
of Non-Voting Common Stock to CBC Capital Partners, Inc. who subsequently
exchanged the shares of Non-Voting Common Stock for an equal number of shares
of Convertible Preferred Stock and one share of Voting Common Stock.

On July 28, 1989, Lehman Brothers Holdings, Inc. sold its remaining
shares of Common Stock (at the price and upon the same terms at which Lehman
Brothers Holdings Inc. purchased such Common Stock) to certain affiliates of
Shearson Lehman Brothers Holdings, Inc. which were subsequently exchanged for
an equal number of shares of Convertible Preferred Stock as follows:

<TABLE>
Shares of Convertible
Name Preferred Stock
---- ---------------
<S> <C>
Lehman Brothers Merchant Banking Portfolio Partnership L.P. . . . . . . . . . . . . . 301,143
Lehman Brothers Offshore Investment Partnership L.P. . . . . . . . . . . . . . . . . 81,017
Lehman Brothers Offshore Investment Partnership - Japan L.P. . . . . . . . . . . . . 30,800
Lehman Brothers Capital Partners II, L.P. . . . . . . . . . . . . . . . . . . . . . . 204,540

</TABLE>

On November 15, 1989, the Board of Directors approved a ten-for-one
Common Stock split for all holders of Common Stock on such date. Total Common
Stock and Preferred Stock outstanding subsequent to the events described above
are 3,500,010 and 649,999, respectively.

II-2
<PAGE> 90

On July 22, 1991, the Registrant sold shares of Common Stock and
Convertible Preferred Stock as follows:

<TABLE>
<CAPTION>
Shares of Shares of
Voting Convertible
Common Preferred Purchase
Stock Stock Price
--------- ----------- --------

<S> <C> <C> <C>
Bernard L. Schwartz 1,346,154 $ 3,846,154
Lehman Brothers Merchant Banking Portfolio
Partnership, L.P. 115,353 9,760,607
Lehman Brothers Offshore Investment
Partnership L.P. 31,713 2,683,399
Lehman Brothers Offshore Investment
Partnership - Japan, L.P. 12,050 1,019,576
Lehman Brothers Capital
Partners II, L.P. 78,384 6,632,572
CBC Capital Partners, Inc. 12,500 1,057,692
--------- ------- -----------
1,346,154 250,000 $25,000,000
========= ======= ===========
</TABLE>

On September 2, 1994 the Registrant sold shares of Common Stock
and Convertible Preferred Stock as follows:

<TABLE>
<CAPTION>
Shares of Shares of
Voting Convertible
Common Preferred Purchase
Stock Stock Price
--------- ----------- --------

<S> <C> <C> <C>
Bernard L. Schwartz 687,273 $ 1,963,636
Lehman Brothers Merchant Banking Portfolio
Partnership, L.P. 61,891 5,236,910
Lehman Brothers Offshore Investment
Partnership, L.P. 17,015 1,439,751
Lehman Brothers Offshore Investment
Partnership - Japan, L.P. 6,498 549,839
Lehman Brothers Capital
Partners II, L.P. 42,232 3,573,500
------- ------- -----------
687,273 127,636 $12,763,636
======= ======= ===========
</TABLE>

On September 2, 1994, K & F retired the $65.4 million principal
amount of 14 3/4% Subordinated Convertible Debentures due 2004 held by Loral
Corporation, in exchange for $12.76 million in cash and 4,589,938 shares of
Class B common stock representing 22.5% of equity. The cash portion of this
transaction was funded with the proceeds from the sale of capital stock to K &
F's principal stockholders for which stockholders received a total of 687,273
shares of Class A common stock and 127,636 shares of preferred stock. As a
result, K & F stockholders' equity was increased by $65.4 million and long-term
debt was reduced by an equal amount. (See Note 7 to the September 30, 1994
consolidated financial statements.)

Debt Securities

On April 27, 1989, the Registrant sold $180 million aggregate
principal amount of its Subordinated Bridge Notes due October 27, 1989 to
Lehman Brothers Holdings, Inc. The Subordinated Bridge Notes were repaid in
full on August 10, 1989.

The shares of Common Stock and the Preferred Stock issued as
provided above were not registered under the Securities Act of 1933 (the
"Act"). All of such shares of Common and Preferred Stock were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Act.

II-3
<PAGE> 91

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS.

1.01 - Form of Underwriting Agreement(5)

1.02 - Form of Qualified Independent Underwriting Agreement(2)

2.01 - Agreement or Sale and Purchase of Assets dated March 26, 1989
between Loral Corporation and the Registrant

3.01 - Restated Certificate of Incorporation of K & F Industries, Inc.
(6)

3.02 - Amended and Restated By-Laws of K & F Industries, Inc.(6)

4.01 - Indenture for the 13.75% Senior Subordinated Debentures Due
2001(1)

4.02 - Indenture for the 14.75% Subordinated convertible debentures
Due 2004(1)

4.03 - First Supplemental Indenture dated as of July 22, 1991, to
Convertible Debenture Indenture(4)

4.04 - Form of Second Supplemental Indenture dated as of June 10, 1992,
to Convertible Debenture Indenture(5)

4.05 - Form of Indenture dated as of June 1, 1992 for the 11 7/8%
Senior Secured Notes Due 2003(5)

4.06 - Form of 11 7/8% Senior Secured Notes Due 2003(5)

4.07 - Form of Pledge Agreement(5)

5.01 - Opinion of Davis Polk & Wardwell(1)

8.01 - Tax Opinion of Davis Polk & Wardwell(1)

9.01 - Stockholders Agreement dated April 27, 1989 among the
Registrant, Lehman Brothers Holdings Inc. ("LBH") and Bernard L.
Schwartz ("BLS")(1)

10.01 - Credit Agreement Dated as of April 27, 1989 among the
Registrant, Manufacturers Hanover Trust Company, as Agent and
the Banks named therein(1)

10.02 - Revolving Credit Agreement dated as of April 27, 1989, among
Aircraft Braking Systems Corporation, Engineered Fabrics
Corporation, the Agent and the Banks named therein(1)

10.03 - Securities Purchase Agreement dated as of April 27, 1989, among
the Registrant, BLS and LBH(1)

10.04 - Assumption Agreement dated as of April 27, 1989(1)

10.06 - Senior Subordinated Loan Agreement dated as of April 27, 1989
among the Registrant and LBH(1)

10.07 - Director Advisory Agreement dated as of april 27, 1989, among
the Registrant and BLS(1)

II-4
<PAGE> 92

(A) EXHIBITS (CONTINUED):

10.08 - Shared Services Agreement dated April 27, 1989, among Loral,
the Registrant, Aircraft Braking Systems Corporation and
Engineered Fabrics Corporation(1)

10.09 - Non-Competition Agreement dated as of April 27, 1989, between
the Registrant and BLS(1)

10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees(5)

10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees(5)

10.12 - Goodyear Aerospace Corporation Supplemental Unemployment
Benefits Plan for Salaried Employees - Plan A(1)

10.13 - The Loral Systems Group Release and Separation Allowance Plan(1)

10.14 - Letter Agreement dated April 27, 1989, between the Registrant
and Shearson Lehman Brothers Inc.(1)

10.15 - Amendment and Waiver dated as of July 14, 1989(1)

10.16 - Amendment to Credit Agreement dated as of July 31, 1989,
between K & F Industries, the Subsidiaries and the Banks named
therein(2)

10.17 - K & F Industries, Inc. 1989 Stock Option Plan(2)

10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan(2)

10.19 - Amendment to the Credit Agreement dated as of June 26, 1991(3)

10.21 - Securities Purchase Agreement dated as of July 22, 1991, among
the Registrant, BLS and the Lehman Investors(4)

10.22 - Interest Rate Protection Agreement between K & F Industries,
Inc. and Lehman Brothers Special Financing, Inc(4)

10.23 - Interest Rate Protection Agreement between K & F Industries,
Inc. and Manufacturers Hanover Trust Company(4)

10.24 - Securities Purchase Agreement among K & F Industries, Inc., BLS
and the Lehman Brothers Partnerships dated September 2, 1994(6)

10.25 - Amended and Restated Stockholders Agreement dated as of
September 2, 1994 by and among K & F Industries, Inc., BLS, the
Lehman Brothers Partnerships, CBC Capital Partners, Inc. and
Loral Corporation(6)

10.26 - Agreement dated as of September 2, 1994 between K & F
Industries, Inc. and Loral Corporation(6)

10.27 - Form of Amended and Restated Revolving Credit Agreement dated
as of June 10, 1992, among Chemical Bank, the banks named
therein, Aircraft Braking Systems Corporation and Engineered
Fabrics Corporation(5)

II-5
<PAGE> 93

(A) EXHIBITS (CONTINUED):

10.28 - Waiver and Consent dated as of August 26, 1994(6)

10.29 - Amendment of Stockholders Agreement dated November 8, 1994(6)

10.30 - Securities Conversion Agreement among K & F Industries, Inc.
and the Converting Stockholders, dated November 8, 1994(6)

12.01 - Statement of computations of ratio of earnings (deficiency) to
fixed charges(5)

12.02 - Statement of computation of pro forma deficiency ratio of
earnings to fixed charges(5)

21.01 - Subsidiaries of the Registrant(1)

23.01 - Consent and Report on Schedule of Deloitte & Touche LLP.

24.01 - Powers of Attorney (included on signature page).

26.01 - Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Connecticut National Bank, with
respect to the indenture for the 13 3/4% Senior Subordinated
Debentures due 2001(1)

26.02 - Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Bank of New York, with respect to
the Indenture for the 11 7/8% Senior Secured Notes(5)

27.01 - Financial Data Schedule(6)
-------------------------

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

(2) Previously filed, as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1990.

(3) Previously filed, as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1991.

(4) Previously filed, as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1991.

(5) Previously filed, as an exhibit to the Company's Registration
Statement on Form S-1, No. 33-47028.

(6) Previously filed, as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.

(b) Financial Statement Schedules.

X Supplementary Income Statement Information
All other schedules are omitted because they are not applicable or the
required information is shown in they financial statements or notes
thereto.

II-6
<PAGE> 94

Item 17. Undertakings

The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts
or events arising after the effective date of this registration statement
(or the most recent post-effective amendment hereto) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; provided, however, that the undertakings set forth in
subparagraphs (i) and (ii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 that are incorporated by reference in this
registration statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering; and

(4) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 hereof, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-7
<PAGE> 95

SIGNATURES Exhibit 24.01

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 4 to the Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on the 30th day of November,
1994.

K & F Industries

By: KENNETH M. SCHWARTZ
-------------------
Kenneth M. Schwartz
Chief Financial Officer

POWER OF ATTORNEY

We the undersigned directors of K & F Industries, Inc. do hereby
constitute and appoint Kenneth M. Schwartz our true and lawful attorney and
agent, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for
us in our names in the capacities indicated below, which said attorney and
agent, may deem necessary or advisable to enable said corporation to comply
with the Securities Act of 1933 and any rules, regulations, and requirements of
the Securities and Exchange Commission, in connection with this Post-Effective
Amendment No. 4, including specifically, but without limitation, power and
authority to sign for us or any of us in our names in the capacities indicated
below, any and all amendments (including post-effective amendments) hereto; and
we do hereby ratify and confirm all that said attorney and agent, shall do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 has
been signed by the following persons in the capacity and on the dates
indicated.

<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief November 30, 1994
- ---------------------------- Executive Officer and Director
Bernard L. Schwartz (principal executive officer)

KENNETH M. SCHWARTZ Chief Financial Officer (principal November 30, 1994
- -------------------- financial and accounting officer)
Kenneth M. Schwartz

/s/ HERBERT R. BRINBERG Director November 30, 1994
- -----------------------------
Herbert R. Brinberg

/s/ RONALD H. KISNER Director November 30, 1994
- --------------------------------
Ronald H. Kisner

/s/ JOHN R. PADDOCK Director November 30, 1994
- ---------------------------------
John R. Paddock

/s/ JAMES A. STERN Director November 30, 1994
- -----------------------------------
James A. Stern

/s/ A. ROBERT TOWBIN Director November 30, 1994
- --------------------------------
A. Robert Towbin

/s/ ALAN H. WASHKOWITZ Director November 30, 1994
- -----------------------------
Alan H. Washkowitz

</TABLE>

<PAGE> 96

K & F INDUSTRIES, INC.

AND SUBSIDIARIES

SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>
Column A Column B
- ---------------------------------------------------------------------------------------------------------------------
Charges to costs
Item and expenses
- ---------------------------------------------------------------------------------------------------------------------

Years Ended March 31,
---------------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C> <C>
1. Maintenance and repairs $7,165,000 $8,374,000 $8,644,000

2. Taxes, other than payroll and income 3,508,000 3,034,000 3,317,000
taxes

</TABLE>

<PAGE> 97

EXHIBIT INDEX
-------------

Exhibit No. Description
- ----------- ------------

23.01 Consent and Report on Schedule of Deloitte & Touche LLP.

<PAGE> 1

Exhibit 23.01

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE

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

We consent to the use in this Post-Effective Amendment No. 4 To Registration
Statement No. 33-47028 of K & F Industries, Inc. of our report dated May 4,
1994, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.

Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of K & F
Industries, Inc. listed in Item 16(b). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP

New York, New York

November 28, 1994