<PAGE>

<PAGE>

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


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 for the quarterly period ended: June 30, 1998

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

                       Commission File Number 333-41939-01

                                KII HOLDING CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                           <C>
              DELAWARE                                    13-3954446
       (STATE OF INCORPORATION)               (IRS EMPLOYER IDENTIFICATION NO.)

       1430 BROADWAY, 13TH FLOOR
       NEW YORK, NEW YORK 10018                             10018
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                 (ZIP CODE)

</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 391-1392

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

As of January 1, 1999, the number of shares outstanding of the registrant's
Common Stock, no par value, was 10,000 shares. There is no trading market for
the Common Stock. Accordingly, the aggregate market value of the Common Stock
held by non-affiliates of the registrant is not determinable.

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

<PAGE>

<PAGE>


ITEM 1: FINANCIAL STATEMENTS


                       KII HOLDING CORP. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                    ASSETS                        June 30,   December 31,
                                                    1998         1997
                                                    ----         ----
                                                (Unaudited)

    <S>                                          <C>          <C>
    CURRENT ASSETS:
      Cash and cash equivalents                 $   916,900  $ 1,152,200
      Account receivables, net                    6,066,800    5,446,700
      Inventories                                13,819,300   12,817,100
      Prepaid and other assets                      419,200      916,700
      Deferred income taxes                         564,200      531,800
                                                -----------  -----------
      Total current assets                       21,786,400   20,864,500

    Property, plant and equipment, net           15,076,700   14,458,900
    Deferred financing costs, net                   933,200      983,200
    Other assets                                  1,154,400    1,059,100
                                                -----------  -----------
      Total assets                              $38,950,700  $37,365,700
                                                ===========  ===========

      LIABILITIES & SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES:
      Current portion of long term obligations  $   115,600  $   139,700
      Accounts payable                            2,085,800    1,638,400
      Customer deposits                             216,400      116,700
      Accrued liabilities                         2,680,400    2,190,800
                                                -----------  -----------
      Total current liabilities                   5,098,200    4,085,600
    Long-term obligations, less current portion  24,874,500   25,624,800
    Deferred employee benefits                    1,473,200    1,405,700
    Unfunded pension benefits                       298,300      298,300
    Deferred income taxes                         1,878,300    1,693,400
                                                -----------  -----------
      Total liabilities                          33,622,500   33,107,800

    Equity Put Rights on common stock             2,568,400    1,078,100

    SHAREHOLDERS' EQUITY:
    Common stock, no par value, 20,000
       shares authorized, 8,010 issued 
       and outstanding                            3,131,900    3,131,900
    Series A Preferred stock, $10,000 
       stated value, 400 shares authorized, 
       84 shares issued and outstanding             840,000      840,000
    Series B Preferred stock, $10,000
       stated value, 75 shares authorized, 
       none issued and outstanding                        -            -
    Undesignated Preferred stock, $10,000
       stated value, 25 shares authorized, none 
       issued and outstanding                             -            -
    Accumulated deficit                          (1,212,100)    (792,100)
                                                -----------  -----------
       Total shareholders' equity                 2,759,800    3,179,800
                                                -----------  ----------- 
       Total liabilities and shareholders' 
         equity                                 $38,950,700  $37,365,700
                                                ===========  ===========

</TABLE>

      See accompanying notes to unaudited consolidated financial statements

                                       2
<PAGE>

<PAGE>


                       KII HOLDING CORP. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                              Three Months                   Six Months
                                                  Ended                        Ended
                                                 June 30,                     June 30,
                                           1998         1997            1998         1997
                                           ----         ----            ----         ----
                                                    (Predecessor)                (Predecessor)

 <S>                                    <C>           <C>           <C>           <C>        
  Sales                                 $9,884,600    $7,854,400    $18,155,700   $14,296,000
  Cost of sales                          6,730,000     5,491,900     12,606,400    10,139,600
                                        ----------    ----------    -----------   -----------
    Gross profit                         3,154,600     2,362,500      5,549,300     4,156,400
  Selling, general and administrative    2,042,800       910,000      3,955,800     1,798,700
                                        ----------    ----------    -----------   -----------
  Income from operations                 1,111,800     1,452,500      1,593,500     2,357,700
                                        ----------    ----------    -----------   -----------
  Other income (expense):
    Interest expense                      (626,800)     (194,100)    (1,237,600)     (375,700)
    Other income (expense)                 (65,700)      (87,500)      (124,100)      (98,400)
                                        ----------    ----------    -----------   -----------
    Total other expense                   (692,500)     (281,600)    (1,361,700)     (474,100)
                                        ----------    ----------    -----------   -----------
  Income before provision for
    income taxes                           419,300     1,170,900        231,800     1,883,600
  Provision (benefit) for income taxes     395,800       468,300        606,900       753,400
                                        ----------    ----------    -----------   -----------
  Net income (loss)                         23,500       702,600       (375,100)    1,130,200
  Preferred stock dividends                (22,600)            -        (44,900)            -
                                        ----------    ----------    -----------   -----------
  Income (loss) applicable to
    common shareholders                 $      900    $  702,600    $  (420,000)  $ 1,130,200
                                        ==========    ==========    ===========   ===========
</TABLE>

 
     See accompanying notes to unaudited consolidated financial statements.


                                       3
<PAGE>

<PAGE>




                       KII HOLDING CORP. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                Six Months           Six Months
                                                  Ended                 Ended
                                                 June 30,              June 30,
                                                  1998                   1997
                                                  ----                   ----
                                                                    (Predecessor)

<S>                                            <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                               $  (375,100)          $ 1,130,200
Reconciliation to net cash provided
  by (used in) operating activities:
  Depreciation and amortization                     894,900               878,200
  Deferred income taxes                             149,500               125,100
  Stock compensation                              1,490,300                     -
  Other                                              (2,200)               (4,000)
Changes in assets and liabilities:
  Accounts receivable                              (620,100)             (978,200)
  Inventories                                    (1,002,200)           (1,078,300)
  Prepaid and other current assets                  497,500              (105,300)
  Other assets                                      (70,100)               (2,100)
  Accounts payable                                  447,400               559,000
  Accrued and other liabilities                     489,600               (42,100)
  Customer deposits                                  99,700                (3,100)
                                                -----------           -----------
   Net cash provided by operating activities      1,999,200               479,400
                                                -----------           -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets                        (1,454,200)             (868,500)
Proceeds from sale of fixed assets                   24,500                33,500
Net cash used in acquisitions                             -                     -
                                                -----------           -----------
   Net cash used in investing activities         (1,429,700)             (835,000)
                                                -----------           -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit                          -               300,000
Repayment of intercompany loans                    (743,000)                    -
Other                                               (61,800)              (28,400)
                                                -----------           -----------
   Net cash provided by (used in) financing
    activities                                     (804,800)              271,600
                                                -----------           -----------
   Net increase (decrease) in
    cash and cash equivalents                      (235,300)              (84,000)

Cash and cash equivalents, beginning  
    of period                                     1,152,200               406,000
                                                -----------           -----------
Cash and cash equivalents, end of period        $   916,900           $   322,000
                                                ===========           ===========
                                    
</TABLE>



     See accompanying notes to unaudited consolidated financial statements.

                                       4


<PAGE>

<PAGE>


                       KII HOLDING CORP. AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                        Six Months     Six Months
                                                          Ended           Ended
                                                         June 30,        June 30,
                                                          1998             1997
                                                          ----             ----
                                                                      (Predecessor)

<S>                                                     <C>             <C>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for:
  Interest                                               $1,005,800      $377,800
                                                         ==========      ========
  Income taxes, net                                      $        -      $633,000
                                                         ==========      ======== 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES:
  Capital lease agreements for equipment                 $   30,400      $      -
                                                         ==========      ======== 
</TABLE>

                                      

            See accompanying notes to unaudited financial statements

                                       5

<PAGE>

<PAGE>



                       KII HOLDING CORP. AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND DESCRIPTION OF BUSINESS

Predecessor

Kleinert Industries, Inc. (predecessor) ("Kleinert") was a wholly owned
subsidiary of Kleinert Industrie Holding A.G., a Swiss company (the "Parent"),
and was organized under the laws of the State of California on July 1, 1988,
commencing operations on September 1, 1988, and which provided management
services for its wholly owned subsidiaries - Paragon Precision Products ("PPP"),
Bandy Machining International ("BMI"), Scanning Electron Analysis Laboratories,
Inc. ("SEAL"), and General Inspection Laboratories, Inc. ("GIL").

PPP specializes in the manufacture of precision aerospace components. BMI
manufactures precision hinges, door panels and hinged assemblies for both
aerospace and industrial applications. SEAL specializes in materials analysis
and problem-solving for government and industry. GIL provides a complete array
of non-destructive testing services for inspecting critical parts and
manufactured components.

Acquisition And Successor

On July 1, 1997, KII Holding Corp. (successor), a Delaware company ("KII
Holding") incorporated on July 1, 1997, through a wholly owned subsidiary (KII
Acquisition Corp., a Delaware corporation), acquired all of the issued and
outstanding capital stock of Kleinert and Subsidiaries (predecessor company and
currently known as Stellex Aerospace and Subsidiaries) from Kleinert Industrie
Holding A.G. (the "Seller"). The acquisition has been accounted for using the
purchase method of accounting, and, accordingly, the net purchase price of
approximately $26.5 million (including the assumption of $2.65 million of
mortgage indebtedness and the issuance to the Seller of a note for $1.75
million) has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. There was no excess
purchase price over the fair values on the net assets acquired in connection
with the acquisition. The acquisition was financed in part from new borrowings
totaling $19.3 million and the issuance of common and preferred stock totaling
$4.75 million. KII Holding is owned by Stellex Industries, Inc., a Delaware
corporation, which owns 80.1% of the issued and outstanding common stock of KII
Holding, with certain members of Stellex Aerospace's management holding the
remainder of its outstanding common stock. KII Holding is a holding company
whose operations are conducted through its operating subsidiaries. References to
the "Company" include both KII Holding and its predecessor, Kleinert.

2.  BASIS OF PRESENTATION

The accompanying consolidated financial statements dated prior to the
acquisition of Kleinert and Subsidiaries on July 1, 1997, include the accounts
of Kleinert and its wholly owned subsidiaries (the "Predecessor"). Financial
statements dated subsequent to the acquisition include the accounts of KII
Holding (the "Successor") and its wholly owned subsidiaries, KII Acquisition
Corp., Stellex Aerospace and Subsidiaries (PPP, BMI, SEAL and GIL). Intercompany
transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation, which were of a normal and
recurring nature, have been included. The results of operations for any interim
period are not necessarily indicative of the results for the year. These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.


                                       6
<PAGE>

<PAGE>



3.  RECENT ACCOUNTING STANDARDS

Effective January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be classified, as required. The Company had no
items of other comprehensive income or loss for the three and six-month periods
ended June 30, 1998.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 annual financial statements.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company's 1998 annual
financial statements.

4.  INVENTORIES

     Inventories consisted of the following:

<TABLE>
<CAPTION>


                                                          June 30,    December 31,
                                                           1998           1997
                                                           ----           ----
                                                        (Unaudited)

<S>                                                     <C>           <C>       
      Raw materials                                     $ 1,404,100   $ 1,212,500
      Work-in-process                                     7,000,400     6,250,300
      Finished goods                                      5,414,800     5,354,300
                                                        -----------   ----------- 
      Total                                             $13,819,300   $12,817,100
                                                        ===========   ===========
</TABLE>

 
5.  LONG-TERM OBLIGATIONS

     Long-term obligations consisted of the following:

<TABLE>
<CAPTION>


                                                         June 30,      December 31,
                                                          1998            1997
                                                          ----            ----
                                                       (Unaudited)

<S>                                                     <C>           <C>    
    
      Demand note payable to Stellex Industries, Inc.   $20,200,000   $20,943,000
      7.785% Mortgage notes payable                       2,593,200     2,624,000    
      Sellers Notes Payable                               1,750,000     1,750,000
      Obligations under capital leases                      446,900       447,500
                                                        -----------   -----------
                                                         24,990,100    25,764,500
      Less current portion                                  115,600       139,700
                                                        -----------   -----------
                Total                                   $24,874,500   $25,624,800
                                                        ===========   ===========
</TABLE>

6.  COMMITMENTS AND CONTINGENCIES

The Company is involved from time to time in lawsuits that arise in the normal
course of business. The Company actively and vigorously defends all lawsuits.
Management believes that there are no lawsuits that will have a material affect
on the Company's financial position.


                                       7
<PAGE>

<PAGE>


ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997.

<TABLE>
<CAPTION>

                                       QUARTER ENDED JUNE 30,
                                      -----------------------
                                       1998        1997
                                       ----        ----
                                              (Predecessor)

<S>                                   <C>         <C>   
Net sales                             100.0%      100.0%
Cost of sales                          68.1        69.9
                                      -----       -----
Gross margin                           31.9        30.1
Selling, general and administrative    20.7        11.6
                                      -----       -----
Operating income                       11.2        18.5
Other expense (income):
  Interest expense                      6.3         2.5
  Other                                 0.7         1.1
                                      -----       -----
Income before income taxes              4.2        14.9
Provision for income taxes              4.0         6.0
                                      -----       -----
Net income                              0.2%        8.9%
                                      =====       =====
</TABLE>


Net sales

Net sales for KII Holding Corp. for the quarter ended June 30, 1998 were $9.9
million which represents an increase of 25.8% over sales of $7.9 million for the
three months ended June 30, 1997. The sales increase is primarily attributable
to strong demand in the commercial aviation market for new aircraft production,
primarily at Boeing, increases in manufacturing requirements for military
aircraft and increased deliveries of turbo-machinery components.

Gross margins

Gross margin for the quarter ended June 30, 1998 was 31.9%, which increased from
30.1% in the comparable period in 1997. This increase resulted primarily from
increased production volumes which allowed production efficiencies and fixed
cost utilization.

Selling, general and administrative

Selling, general and administrative expenses for the quarter ended June 30, 1998
were $2.0 million which represented an increase in expense of $1.1 million over
the comparable quarter in 1997. This increase was due primarily to incremental
non-cash charges of $775,000 relating to the valuation of management ownership
puts plus an increase in compensation expense resulting from additional
managerial hires.

Interest Expense

Interest expense for the quarter ended June 30, 1998 was $626,800 which
represented a $432,700 increase in expense over the comparable quarter in 1997.
This increase was due primarily to the acquisition financing relating to the
acquisition of Kleinert on July 1, 1997.

                                       8


<PAGE>

<PAGE>





SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>


                                   SIX MONTHS ENDED JUNE 30,
                                   ------------------------
                                      1998        1997
                                      ----        ----
                                             (Predecessor)

<S>                                   <C>         <C>   
Net sales                             100.0%      100.0%
Cost of sales                          69.4        70.9
                                      -----       -----
Gross margin                           30.6        29.1
Selling, general and administrative    21.8        12.6
                                      -----       -----
Operating income                        8.8        16.5
Other expense (income):
  Interest expense                      6.8         2.6
  Other                                 0.8         0.7
                                      -----       -----
Income before income taxes              1.2        13.2
Provision for income taxes              3.3         5.3
                                      -----       -----
Net income (loss)                      (2.1)%       7.9%
                                      =====       =====
</TABLE>


Net sales

Net sales for KII Holding Corp. for the six months ended June 30, 1998 were
$18.2 million, which was 27.0% greater than the first half of 1997. The increase
in net sales was a result of the strong demand in the commercial aviation market
for new aircraft production, primarily at Boeing, increases in manufacturing
requirements for military aircraft, and increased deliveries of turbo-machinery
components.

Gross margins

Gross margin for the six months ended June 30, 1998 was 30.6%, which increased
from 29.1% in the comparable period of 1997. This increase resulted primarily
from increased production volumes which allowed for production efficiencies and
fixed cost utilization.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 30,
1998 were $4.0 million which represented an increase in expense of $2.2 million
over the six months ended June 30, 1997. This increase was due primarily to
incremental non-cash charges of $1.5 million relating to the valuation of
management ownership puts and increased labor costs for new managerial hires.

Interest Expense

Interest expense for the six months ended June 30, 1998 was $1,237,600 which
represented a $861,900 increase in expense over the comparable period in 1997.
This increase was due primarily to the acquisition financing relating to the
acquisition of Kleinert on July 1, 1997.

Liquidity and capital resources

KII Holding Corp. generated cash flows from operations for the six months ended
June 30, 1998, in the amount of $2.0 million, compared to cash generated in the
amount of $479,400 for the comparable period in 1997. This increase in cash
flows resulted primarily from improved management of working capital.

The Company was a net user of cash flows from investing activities for the six
months ended June 30, 1998, totaling $1.4 million compared to $0.8 million in
the comparable period in 1997. The increase in cash used in investing activities
primarily reflects increased purchases of property, plant and equipment to
support increased production demand.

                                       9

<PAGE>

<PAGE>



Cash used in financing activities for the six months ended June 30, 1998
primarily consisted of approximately $0.7 million in payments of bank and
intercompany loans. During the six months ended June 30, 1997, cash provided by
financing activities of approximately $300,000 resulted from borrowings under
the predecessor line of credit. The change in the cash flows from financing
activities primarily reflects the timing of working capital needs and the
changes in the capital structure of the Company which resulted subsequent to the
Kleinert Acquisition.

Liquidity demands for the near term will consist of normal levels of capital
expenditure requirements sufficient to accommodate growth in backlog, working
capital needs and debt service funding.

Debt service requirements for 1999 will include the satisfaction of the seller
note totaling $1.8 million resulting from the Kleinert Acquisition coupled with
approximately $2.1 million of cash interest expense.

Management believes that current levels of operating cash flow and availability
under its revolving credit facility will provide adequate liquidity to satisfy
its near term liquidity demands.

THE YEAR 2000 ISSUE

The Year 2000 problem concerns the inability of information systems to recognize
properly and process date-sensitive information beyond January 1, 2000. Each of
the Company's operating subsidiaries face unique issues in their identification
and resolution of problems related to the Year 2000.

State of readiness: In November 1997, the company initiated an assessment of the
impact of the Year 2000 issue on its internal operations and began the
development of a plan to bring all of its computer systems into compliance
before the end of 1998. This focus has been on all systems potentially impacted
by the Year 2000 issue, including information technology ("IT") systems and
non-IT systems. At the present time management has completed Year 2000 compliant
upgrades to their internal IT systems. The Company is in the process of
completing its assessment of the impact of Year 2000 on its non-IT systems,
products and significant vendors and customers. The initial assessment indicates
that the Year 2000 should not significantly affect these areas.

Costs to address Year 2000 issues: To date costs to implement and the timeframe
contemplated by management to be Year 2000 compliant are based on management's
best estimates. Cumulative costs to date are estimated to be less than $215,000.
Estimated costs to complete the process are not expected to have a material
impact on the Company's future financial results.

Risks associated with Year 2000 issue: The Company believes there is low risk of
any internal critical system, embedded system, or other critical asset not being
Year 2000-ready by the end of 1999. The company continues to assess its risk
exposure attributable to external factors, suppliers and customers. With respect
to outside parties, those parties, who have been contacted, have indicated that
their hardware, software and related non-IT systems are currently or will be
Year 2000 complaint within the 1999 calendar year. Evaluations of these issues
is continuing and there can be no assurance that additional issues, not
presently known to the Company, will be discovered which could present a
material risk of disruption to the Company's operations. Such disruptions could
result in delays in the delivery or sale of products. Contingency plans for
suppliers, customers and mission critical systems impacted by Year 2000 issues
are currently under development and are expected to be completed in the first
quarter of 1999.

RECENT ACCOUNTING STANDARDS

Effective January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be classified, as required. The Company had no
items of other comprehensive income or loss for the three and six-month periods
ended June 30, 1998.



                                       10
<PAGE>

<PAGE>



In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 annual financial statements.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company's 1998 annual
financial statements.

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to (i)
general economic conditions in the markets in which the Company operates, (ii)
cancellation of specific aircraft programs due to defense spending or general
budgetary constraints or poor customer demand, (iii) success in hiring and
retaining key management and technical personnel.

PART II - OTHER INFORMATION

ITEM 6.  EXHIBIT AND REPORTS ON FORM 8-K

         (a)  Exhibit 27: Financial Data Schedule

         (b)  Reports on Form 8-K: None


                                       11


<PAGE>

<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused the Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, as of February 3, 1999.

                                       KII HOLDING CORP.

                                       By: /s/ William L. Remley
                                           ---------------------
                                       William L. Remley,
                                       Vice Chairman, Treasurer and Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and as of dates indicated.


<TABLE>
<CAPTION>

       Signature                        Title                 Date
       ---------                        -----                 ----
<S>                          <C>                       <C> 
/s/ Richard L. Kramer        Chairman of the Board     February 3, 1999
---------------------        of Directors Secretary
    Richard L. Kramer        and Director of KII
                             Holding Corp

/s/ William L. Remley        Vice Chairman, Teasurer   February 3, 1999
---------------------        and Director of
    William L. Remley        KII Holding Corp.
                             

/s/ Bradley C. Call          President of KII          February 3, 1999
---------------------        Holding Corp.
    Bradley C. Call                 


/s/ Julius E. Hodge          Chief Financial Officer   February 3, 1999
--------------------         of KII Holding Corp.
    Julius E. Hodge           

</TABLE>
   




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