##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM
10-Q/A
 (Amendment
No. 1)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission
file number: 333-124870
 K&F Industries Holdings, Inc.
 
  Delaware
    20-1844325(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 50 Main Street, White Plains, New York
    10606(Address of principal executive offices)
    
    (Zip Code)
 (914) 448-2700
 þ o
 o þ
 o þ




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##### 



K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 September
30, 2005 Quarterly Report on
Amendment No. 1 on Form 10-Q/A
 EXPLANATORY
PARAGRAPH
 Uncertainties Related to Income Taxes in a Purchase
Business Combination
 INDEX
 PagePart I. Consolidated Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)a)   Condensed
Consolidated Balance Sheets as   of September 30, 2005 (As Restated,
See Note 17) and December 31, 2004
    
    
    3b)   Condensed
Consolidated Statements of Operations for the nine months ended September 30, 2005 (As Restated,
See Note 17) and 2004 (Predecessor)
    
    
    4c)   Condensed
Consolidated Statements of Operations for the three months ended September 30, 2005 (As Restated,
See Note 17) and 2004 (Predecessor)
    
    
    5d)   Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 (As Restated,
See Note 17) and 2004 (Predecessor)
    
    
    6e)   Condensed
Consolidated Statement of Stockholders Equity for the nine
months ended September 30, 2005 (As Restated,
See Note 17)
    
    
    7f)    Notes to
Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements
Discussion and Analysis of Financial Condition and Results of
Operations (As Restated)
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33Part II. Other InformationItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 6.
    
    Exhibits
    
    
    34Signatures
    
    
    
    
    35EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004(As Restated See Note 17)ASSETS:Current Assets:Cash and cash equivalents
    
    $
    22,170,000
    
    
    $
    15,009,000Accounts receivable, net
    
    
    50,969,000
    
    
    
    42,333,000Inventory
    
    
    59,367,000
    
    
    
    61,247,000Deferred
income taxes and other current assets
    
    
    19,065,000
    
    
    
    4,173,000Total current assets
    
    
    151,571,000
    
    
    
    122,762,000Property, plant and equipment
    
    
    104,444,000
    
    
    
    101,083,000Less, accumulated depreciation and amortization
    
    
    8,222,000
    
    
    
    1,491,00096,222,000
    
    
    
    99,592,000Other long-term assets
    
    
    93,000
    
    
    
    351,000Debt issuance costs, net of amortization
    
    
    23,118,000
    
    
    
    28,768,000Program participation costs, net of amortization
    
    
    69,610,000
    
    
    
    51,778,000Intangible assets, net of amortization
    
    
    186,153,000
    
    
    
    195,196,000Goodwill
    
    
    846,554,000
    
    
    
    856,668,000$
    1,373,321,000
    
    
    $
    1,355,115,000LIABILITIES AND STOCKHOLDERS EQUITY:Current Liabilities:Accounts payable, trade
    
    $
    15,806,000
    
    
    $
    15,030,000Interest payable
    
    
    11,035,000
    
    
    
    3,505,000Note payable
    
    
    
    
    
    
    14,773,000Income taxes payable
    
    
    8,940,000
    
    
    
    3,678,000Other current liabilities
    
    
    46,334,000
    
    
    
    46,420,000Total current liabilities
    
    
    82,115,000
    
    
    
    83,406,000Pension liabilities
    
    
    51,048,000
    
    
    
    48,248,000Deferred
income tax liabilities
    
    
    37,710,000
    
    
    
    18,951,000Postretirement benefit obligation other
than pensions
    
    
    93,936,000
    
    
    
    92,269,000Other long-term liabilities
    
    
    5,431,000
    
    
    
    5,180,000Senior term loan
    
    
    456,000,000
    
    
    
    475,000,0007 3/4% senior subordinated notes due 2014
    
    
    315,000,000
    
    
    
    315,000,0009 5/8% senior subordinated notes due 2010
    
    
    577,000
    
    
    
    577,000Senior preferred stock subject to mandatory redemption
    
    
    
    
    
    
    94,196,000Stockholders Equity:Preferred stock, $.01 par value  authorized, 20,000 shares; issued and outstanding,
0 shares
at September 30, 2005 and 12,250 shares at December 31, 2004
    
    
    
    
    
    
    Common stock, $.01 par value  authorized, 250,000,000
shares; issued and outstanding, 39,585,867 shares at September
30, 2005 and 13,300,000 shares at December 31,
2004
    
    
    396,000
    
    
    
    133,000Additional paid-in capital
    
    
    324,266,000
    
    
    
    223,864,000Retained earnings (deficit)
    
    
    6,959,000
    
    
    
    (1,778,000
    )Accumulated other comprehensive (loss) income
    
    
    (117,000
    )
    
    
    69,000Total stockholders equity
    
    
    331,504,000
    
    
    
    222,288,000$
    1,373,321,000
    
    
    $
    1,355,115,000
  3




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(As Restated See Note 17)

    
    
    (Predecessor)Sales
    
    $
    278,982,000
    
    
    $
    257,497,000Cost of sales (including inventory purchase
accounting charges of $12,084,000 for the
nine months ended September 30, 2005)
    
    
    160,114,000
    
    
    
    147,863,000Gross profit
    
    
    118,868,000
    
    
    
    109,634,000Independent research and development
    
    
    11,490,000
    
    
    
    10,226,000Selling, general and administrative expenses
    
    
    27,760,000
    
    
    
    23,364,000Amortization of intangible assets
    
    
    9,043,000
    
    
    
    3,552,000Operating income
    
    
    70,575,000
    
    
    
    72,492,000Interest and investment income
    
    
    654,000
    
    
    
    393,000Interest expense
    
    
    (56,128,000
    )
    
    
    (29,588,000
    )Income before income taxes
    
    
    15,101,000
    
    
    
    43,297,000Income tax provision
    
    
    (6,364,000
    )
    
    
    (10,647,000
    )Net income
    
    
    8,737,000
    
    
    $
    32,650,000Preferred stock dividends
    
    
    (8,931,000
    )Loss
applicable to common stockholders
    
    $
    (194,000
    )Basic and
diluted loss per share:Basic loss per common share
    
    $
    (0.01
    )Weighted average common shares
    
    
    20,724,000Diluted loss
per common share
    
    $
    (0.01
    )Diluted weighted average common shares
    
    
    20,724,000
  4




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(As Restated See Note 17)
    

    
    (Predecessor)Sales
    
    $
    99,990,000
    
    
    $
    90,757,000Cost of sales
    
    
    51,450,000
    
    
    
    50,101,000Gross profit
    
    
    48,540,000
    
    
    
    40,656,000Independent research and development
    
    
    3,904,000
    
    
    
    3,441,000Selling, general and administrative expenses
    
    
    12,674,000
    
    
    
    8,866,000Amortization of intangible assets
    
    
    3,015,000
    
    
    
    1,212,000Operating income
    
    
    28,947,000
    
    
    
    27,137,000Interest and investment income
    
    
    337,000
    
    
    
    173,000Interest expense
    
    
    (20,358,000
    )
    
    
    (9,864,000
    )Income before income taxes
    
    
    8,926,000
    
    
    
    17,446,000Income tax provision
    
    
    (4,087,000
    )
    
    
    (2,371,000
    )Net income
    
    
    4,839,000
    
    
    $
    15,075,000Preferred stock dividends
    
    
    (2,084,000
    )Income
applicable to common stockholders
    
    $
    2,755,000Basic and diluted earnings per share:Basic earnings per common share
    
    $
    0.09Weighted average common shares
    
    
    31,786,000Diluted earnings per common share
    
    $
    0.08Diluted weighted average common shares
    
    
    32,578,000
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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Condensed
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(As Restated See Note 17)

    
    
    (Predecessor)Cash flows from operating activities:Net income
    
    $
    8,737,000
    
    
    $
    32,650,000Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    7,545,000
    
    
    
    5,322,000Amortization of program participation costs
    
    
    1,886,000
    
    
    
    Amortization of intangible assets
    
    
    9,043,000
    
    
    
    3,552,000Non-cash interest expense  amortization of debt issuance cost
    
    
    7,746,000
    
    
    
    1,377,000Non-cash interest expense  change in fair market value of
interest rate cap
    
    
    272,000
    
    
    
    Non-recurring inventory purchase accounting charge
    
    
    12,084,000
    
    
    
    Deferred income taxes
    
    
    4,052,000
    
    
    
    1,323,000Changes in assets and liabilities:Accounts receivable, net
    
    
    (8,720,000
    )
    
    
    (544,000
    )Inventory
    
    
    (10,306,000
    )
    
    
    (1,348,000
    )Other current assets
    
    
    684,000
    
    
    
    1,509,000Program participation costs
    
    
    (19,718,000
    )
    
    
    (6,282,000
    )Accounts payable, interest payable and other current
liabilities
    
    
    24,852,000
    
    
    
    4,462,000Postretirement benefit obligation other
than pensions
    
    
    1,667,000
    
    
    
    (597,000
    )Long-term liabilities
    
    
    3,051,000
    
    
    
    6,144,000Net cash provided by operating activities
    
    
    42,875,000
    
    
    
    47,568,000Cash flows from investing activities:Payment of deferred purchase price
    
    
    (14,773,000
    )
    
    
    Capital expenditures
    
    
    (6,314,000
    )
    
    
    (2,071,000
    )Net cash used in investing activities
    
    
    (21,087,000
    )
    
    
    (2,071,000
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    303,157,000
    
    
    
    Proceeds from issuance of 11 1/2% senior PIK notes
    
    
    55,000,000
    
    
    
    Net proceeds from private placement equity offerings
    
    
    92,558,000
    
    
    
    Redemption of senior redeemable preferred stock
    
    
    (94,196,000
    )
    
    
    Redemption of junior preferred stock
    
    
    (184,379,000
    )
    
    
    Payment of common stock dividends
    
    
    (110,671,000
    )
    
    
    Redemption of 11 1/2% senior PIK notes
    
    
    (55,000,000
    )
    
    
    Payments of long-term debt
    
    
    (19,000,000
    )
    
    
    Debt issuance costs
    
    
    (2,096,000
    )
    
    
    Net cash used by financing activities
    
    
    (14,627,000
    )
    
    
    Net increase in cash and cash equivalents
    
    
    7,161,000
    
    
    
    45,497,000Cash and cash equivalents, beginning of period
    
    
    15,009,000
    
    
    
    24,464,000Cash and cash equivalents, end of period
    
    $
    22,170,000
    
    
    $
    69,961,000Supplemental cash flow information:Interest paid during period
    
    $
    40,580,000
    
    
    $
    18,842,000Income taxes paid during the period
    
    $
    767,000
    
    
    $
    6,419,000
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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Condensed
Consolidated Statement of Stockholders Equity
(Unaudited)
 JuniorPreferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    RetainedShares
    
    
    
    
    
    
    Shares
    
    
    
    
    
    
    Paid-In
    
    
    EarningsIssued
    
    
    Amount
    
    
    Issued
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)Balance, January 1, 2005
    
    
    12,250
    
    
    $
    
    
    
    
    13,300,000
    
    
    $
    133,000
    
    
    $
    223,864,000
    
    
    $
    (1,778,000
    )Net income (As Restated See Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,737,000Private placement
equity offerings
    
    
    5,145
    
    
    
    
    
    
    
    5,585,867
    
    
    
    56,000
    
    
    
    92,502,000Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    18,709,900
    
    
    
    187,000
    
    
    
    302,970,000Redemption of
junior preferred stock
    
    
    (17,395
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (184,379,000
    )Common stock cash
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,671,000
    )Common stock
dividends
    
    
    
    
    
    
    
    
    
    
    1,990,100
    
    
    
    20,000
    
    
    
    (20,000
    )Balance,
September 30, 2005 (As Restated See Note 17)
    
    
    
    
    
    $
    
    
    
    
    39,585,867
    
    
    $
    396,000
    
    
    $
    324,266,000
    
    
    $
    6,959,000
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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 
 Notes
to Condensed Consolidated Financial Statements
(Unaudited)
  Description of Business
    Initial Public Offering and Other Financing Developments
    8




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
     The Acquisition
    9




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Assets Acquired:Current assets
    
    $
    183,467,000Property, plant and equipment
    
    
    96,866,000Debt issuance costs
    
    
    29,280,000Program participation costs
    
    
    49,238,000Other intangible assets
    
    
    196,636,000Goodwill
    
    
    858,807,000Total assets acquired
    
    
    1,414,294,000Liabilities Assumed:Current liabilities
    
    
    142,242,000Pension liabilities
    
    
    47,629,000Postretirement benefit obligation
    
    
    91,858,000Deferred income taxes
    
    
    20,169,000Other long-term liabilities
    
    
    5,684,000Long-term debt
    
    
    796,922,000Total liabilities assumed
    
    
    1,104,504,000Net assets acquired
    
    $
    309,790,000
     10




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
(Unaudited)
       11




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
(Unaudited)
         12




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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements  (Unaudited)
  September 30,
    
    
    December 31,2005
    
    
    2004Accounts receivable, principally
from commercial
customers
    
    $
    46,046,000
    
    
    $
    35,885,000Accounts receivable, on U.S.
Government and other long-term
contracts
    
    
    6,300,000
    
    
    
    7,684,000Allowances
    
    
    (1,377,000
    )
    
    
    (1,236,000
    )$
    50,969,000
    
    
    $
    42,333,000
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials and work-in-process
    
    $
    32,068,000
    
    
    $
    35,356,000Finished goods
    
    
    11,900,000
    
    
    
    16,017,000Inventoried costs related to U.S.
Government and other long-term
contracts
    
    
    15,399,000
    
    
    
    9,874,000$
    59,367,000
    
    
    $
    61,247,000
   September 30,
    
    
    December 31,2005
    
    
    2004Accrued payroll costs
    
    $
    13,023,000
    
    
    $
    15,919,000Accrued property and other taxes
    
    
    2,079,000
    
    
    
    2,197,000Accrued costs on long-term contracts
    
    
    5,155,000
    
    
    
    2,639,000Accrued warranty costs
    
    
    13,180,000
    
    
    
    12,261,000Customer credits
    
    
    5,682,000
    
    
    
    5,402,000Postretirement benefit obligation other
than pensions
    
    
    4,000,000
    
    
    
    4,000,000Other
    
    
    3,215,000
    
    
    
    4,002,000$
    46,334,000
    
    
    $
    46,420,000
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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
(Unaudited)
 8.
    
    Stock OptionsIn 2005, K&F Holdings established and amended a stock option plan, covering an aggregate of
2,500,000 authorized but unissued shares of common stock, for the benefit of, and to
incentivize, officers, directors, employees and certain other persons of K&F Holdings and
its subsidiaries. In 2005, K&F Holdings issued stock options to certain of K&Fs
officers, directors, employees and advisors to purchase an aggregate of 1,370,738 shares of
common stock, at an exercise price of $5.22 per share (adjusted pursuant to anti-dilution
provisions contained in the stock option agreements which were triggered by the special cash
and stock dividends issued to common stockholders prior to the initial
public offering). All options were issued at the
estimated fair value at the date of grant and the same price that the Company sold common
stock on November 18, 2004 in connection with the financing of the Acquisition. The options
issued to the advisors vest immediately, and the options issued to officers, directors and
employees vest at the rate of 20% per year.The Company currently applies the intrinsic value method under APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations to
account for its stock option plan (see Note 4).The following tables detail the effect on net income had compensation expense for the stock
option plan been recorded based on the fair value method under SFAS No. 123,
Accounting for Stock-based Compensation, as amended:
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Reported net income
    
    $
    4,839,000
    
    
    $
    15,075,000Deduct: Total stock-based employee and
director compensation expense
determined under fair value method
for all awards, net of related tax
effects
    
    
    (148,000
    )
    
    
    Pro forma net income
    
    
    4,691,000
    
    
    $
    15,075,000Less preferred stock dividends
    
    
    (2,084,000
    )Pro forma
income applicable to
common stockholders
    
    $
    2,607,000Earnings per share:Basic  as reported
    
    $
    0.09Basic  pro forma
    
    $
    0.08Diluted  as reported
    
    $
    0.08Diluted  pro forma
    
    $
    0.08
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K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Reported net income
    
    $
    8,737,000
    
    
    $
    32,650,000Add: Stock-based
compensation included in net income, net of related tax effects
    
    
    40,000
    
    
    
    Deduct: Total stock-based employee and
director compensation expense
determined under fair value method
for all awards, net of related tax
effects
    
    
    (458,000
    )
    
    
    Pro forma net income
    
    
    8,319,000
    
    
    $
    32,650,000Less preferred stock dividends
    
    
    (8,931,000
    )Pro forma
loss applicable to
common stockholders
    
    $
    (612,000
    )Loss per share:Basic  as reported
    
    $
    (0.01
    )Basic  pro forma
    
    $
    (0.03
    )Diluted  as reported
    
    $
    (0.01
    )Diluted  pro forma
    
    $
    (0.03
    )
 Per share data has not been provided for the Predecessor period because the Company was
privately held and its capital structure was not representative of the current capital structure.
Management believes such information would not be meaningful.There were no stock options granted during the three and nine months ended September 30,
2004 (Predecessor). The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future results.The weighted average fair value of the stock options granted during the nine months
September 30, 2005 was $2.25 per stock option, estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average assumptions:
expected volatility of 33% (represents an average of the three-year trailing volatility of
publicly traded companies in our peer group); risk-free interest rate of 3.97% (represents
the rate available on U.S. government bonds at the grant date); and expected lives of option
grants of seven years.9.
    
    Income Taxes
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Predecessor)
    
    
    
    
    
    (Predecessor)Current domestic (provision)
    
    $
    (1,826,000
    )
    
    $
    (3,036,000
    )
    
    $
    (2,103,000
    )
    
    $
    (8,709,000
    )Foreign benefit (provision)
    
    
    (197,000
    )
    
    
    106,000
    
    
    
    (209,000
    )
    
    
    (615,000
    )Deferred tax benefit (provision)
    
    
    (2,064,000
    )
    
    
    559,000
    
    
    
    (4,052,000
    )
    
    
    (1,323,000
    )Income tax (provision)
    
    $
    (4,087,000
    )
    
    $
    (2,371,000
    )
    
    $
    (6,364,000
    )
    
    $
    (10,647,000
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Predecessor)
    
    
    
    
    
    (Predecessor)Statutory federal income tax
rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State tax
    
    
    4.6
    
    
    
    2.2
    
    
    
    3.5
    
    
    
    2.7Change in state tax rate
    
    
    (9.6
    )
    
    
    
    
    
    
    (5.7
    )
    
    
    Tax reserves
    
    
    23.5
    
    
    
    (19.7
    )
    
    
    18.7
    
    
    
    (7.9
    )Extraterritorial income
exclusion benefit
    
    
    (5.5
    )
    
    
    (4.3
    )
    
    
    (9.7
    )
    
    
    (4.4
    )Foreign taxes and other
    
    
    (2.2
    )
    
    
    0.4
    
    
    
    0.3
    
    
    
    (0.8
    )Effective income tax rate
    
    
    45.8
    %
    
    
    13.6
    %
    
    
    42.1
    %
    
    
    24.6
    %
  September 30,
    
    
    December 31,2005
    
    
    2004Deferred tax
assets:Federal and
state net operating loss carryforwards
    
    $
    6,121,000
    
    
    $
    11,975,000Tax
credit carryforwards
    
    
    6,656,000
    
    
    
    6,182,000Postretirement
and other employee benefits
    
    
    60,720,000
    
    
    
    63,623,000Warranty
    
    
    4,603,000
    
    
    
    4,937,000Other
    
    
    3,529,000
    
    
    
    3,777,00081,629,000
    
    
    
    90,494,000Deferred tax
liabilitiesIntangibles
    
    
    60,813,000
    
    
    
    70,036,000Program
participation costs
    
    
    24,558,000
    
    
    
    19,861,000Depreciation
    
    
    17,927,000
    
    
    
    19,507,000Other
    
    
    614,000
    
    
    
    41,000103,912,000
    
    
    
    109,445,000Net deferred
tax liability
    
    $
    22,283,000
    
    
    $
    18,951,000
 15




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##### Table of Contents



K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 10.
    
    ContingenciesThere are various lawsuits and claims pending against the Company which are incidental to
its business. Although the ultimate resolution of such suits cannot be predicted with
certainty, in the opinion of the Companys management, the ultimate settlement, if
any, will not have a material adverse effect on the Companys results of operations or
financial position.11.
    
    Comprehensive Income
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    4,839,000
    
    
    $
    15,075,000Other comprehensive (loss) income:Cumulative translation adjustments
    
    
    (36,000
    )
    
    
    (9,000
    )Comprehensive income
    
    $
    4,803,000
    
    
    $
    15,066,000
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    8,737,000
    
    
    $
    32,650,000Other comprehensive (loss) income:Cumulative translation adjustments
    
    
    (186,000
    )
    
    
    53,000Comprehensive income
    
    $
    8,551,000
    
    
    $
    32,703,000
 16




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##### Table of Contents



K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 12.
    
    SegmentsThe following tables represent financial information about the Companys segments:
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales:Aircraft Braking Systems
    
    $
    84,022,000
    
    
    $
    75,166,000Engineered Fabrics
    
    
    15,968,000
    
    
    
    15,591,000$
    99,990,000
    
    
    $
    90,757,000Operating Profit:Aircraft Braking Systems
    
    $
    27,413,000
    
    
    $
    24,738,000Engineered Fabrics
    
    
    1,534,000
    
    
    
    2,399,000Operating income
    
    
    28,947,000
    
    
    
    27,137,000Interest expense, net of interest
income
    
    
    (20,021,000
    )
    
    
    (9,691,000
    )Income before income taxes
    
    $
    8,926,000
    
    
    $
    17,446,000
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales:Aircraft Braking Systems
    
    $
    231,683,000
    
    
    $
    213,205,000Engineered Fabrics
    
    
    47,299,000
    
    
    
    44,292,000$
    278,982,000
    
    
    $
    257,497,000Operating Profit:Aircraft Braking Systems
    
    $
    66,998,000
    
    
    $
    65,360,000Engineered Fabrics
    
    
    3,577,000
    
    
    
    7,132,000Operating income
    
    
    70,575,000
    
    
    
    72,492,000Interest expense, net of interest
income
    
    
    (55,474,000
    )
    
    
    (29,195,000
    )Income before income taxes
    
    $
    15,101,000
    
    
    $
    43,297,000
 September 30,
    
    
    December 31,2005
    
    
    2004Total Assets:Aircraft Braking Systems
    
    $
    1,211,351,000
    
    
    $
    1,183,123,000Engineered Fabrics
    
    
    134,522,000
    
    
    
    133,750,000Debt issuance costs not allocated
to segments
    
    
    23,118,000
    
    
    
    28,768,000Corporate assets
    
    
    4,330,000
    
    
    
    9,474,000$
    1,373,321,000
    
    
    $
    1,355,115,000
 17




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##### Table of Contents



K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 13.
    
    Earnings Per ShareComputations of basic and diluted earnings per share for the three and nine months ended
September 30, 2005, give effect to a 133 for one stock split which occurred on August 8,
2005, and are as follows:
 Three Months EndedSeptember 30, 2005Basic Earnings Per Share:Net income
    
    $
    4,839,000Less: preferred stock dividends
    
    $
    (2,084,000
    )Income
applicable to common stockholders (numerator)
    
    $
    2,755,000Weighted average common shares outstanding (denominator)
    
    
    31,786,000Basic earnings per share
    
    $
    0.09Diluted Earnings Per Share:Income
applicable to common stockholders (numerator)
    
    $
    2,755,000Weighted average common shares outstanding
    
    
    31,786,000Effect of dilutive stock options
    
    
    792,000Total diluted weighted average common shares outstanding (denominator)
    
    
    32,578,000Diluted earnings per share
    
    $
    0.08
 Nine Months EndedSeptember 30, 2005Basic Loss Per Share:Net income
    
    $
    8,737,000Less: Preferred stock dividends
    
    $
    (8,931,000
    )Loss
applicable to common stockholders (numerator)
    
    $
    (194,000
    )Weighted average common shares outstanding (denominator)
    
    
    20,724,000Basic loss per share
    
    $
    (0.01
    )Diluted Loss Per Share:Loss
applicable to common stockholders (numerator)
    
    $
    (194,000
    )Weighted average common shares outstanding
    
    
    20,724,000Effect of dilutive stock options
    
    
    Total diluted weighted average common shares
outstanding (denominator)
    
    
    20,724,000Diluted loss per share
    
    $
    (0.01
    )
 Per share data has not been provided for the Predecessor period because the Company was
privately held and its capital structure was not representative of the current capital
structure. Management believes such information would not be meaningful.During the three and nine months ended September 30,
2005, 0 common shares and 792,000 common shares, respectively, have been excluded
from the computation of diluted income (loss) per share because they
were antidilutive.
 18




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##### Table of Contents








K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements
(Unaudited)




|    |                   
|--- | ------------------
|14. | Product Warranties



|                              |  |   |            |  
|----------------------------- |  | - | ---------- | -
|Balance at December 31, 2004  |  | $ | 12,858,000 |  
|Current provisions            |  |   | 5,535,000  |  
|Expenditures                  |  |   | (4,616,000 | )
|                              |  |   |           
|Balance at September 30, 2005 |  | $ | 13,777,000 |  
|                              |  |   |           



|                      |  |               |            |  |              |   |            | 
|--------------------- |  | ------------- | ---------- |  | ------------ | - | ---------- | 
|                      |  | September 30, |            |  | December 31, |  
|                      |  | 2005          |            |  | 2004         |  
|                      |  |               |            |  |              |  
|Current liabilities   |  | $             | 13,180,000 |  |              | $ | 12,261,000 | 
|Long-term liabilities |  |               | 597,000    |  |              |   | 597,000    | 
|                      |  |               |            |  |              |  
|Total                 |  | $             | 13,777,000 |  |              | $ | 12,858,000 | 
|                      |  |               |            |  |              |  



|    |                       
|--- | ----------------------
|15. | Employee Benefit Plans



|                                   |  |                    |            |               |                         |   |            |                    |               |   |                   |   |  |               |            |   |      |   |               |      |  |   |            |   |  |   |           |  |  |   |            |  
|---------------------------------- |  | ------------------ | ---------- | ------------- | ----------------------- | - | ---------- | ------------------ | ------------- | - | ----------------- | - |  | ------------- | ---------- | - | ---- | - | ------------- | ---- |  | - | ---------- | - |  | - | --------- |  |  | - | ---------- | -
|                                   |  | Pension Benefits   |            |               | Postretirement Benefits |  
|                                   |  |                    |            |               |                         |  
|                                   |  | Three Months Ended |            |               | Nine Months Ended       |   |            | Three Months Ended |               |   | Nine Months Ended |  
|                                   |  | September 30,      |            |               | September 30,           |   |            | September 30,      |               |   | September 30,     |  
|                                   |  |                    |            |               |                         |   |            |                    |               |   |                   |  
|                                   |  | 2005               |            |               | 2004                    |   |            | 2005               |               |   | 2004              |   |  | 2005          |            |   | 2004 |   |               | 2005 |  |   | 2004       |  
|                                   |  |                    |            |               |                         |   |            |                    |               |   |                   |   |  |               |            |   |      |   |               |      |  |   |            |  
|                                   |  |                    |            | (Predecessor) |                         |   |            |                    | (Predecessor) |   |                   |   |  | (Predecessor) |            |   |      |   | (Predecessor) |     
|Service cost                       |  | $                  | 836,000    |               |                         | $ | 1,080,000  |                    |               | $ | 2,897,000         |   |  | $             | 3,240,000  |   |      | $ | 478,000       |      |  | $ | 473,000    |   |  | $ | 1,434,000 |  |  | $ | 1,419,000  |  
|Interest cost                      |  |                    | 2,192,000  |               |                         |   | 2,102,000  |                    |               |   | 6,577,000         |   |  |               | 6,306,000  |   |      |   | 1,396,000     |      |  |   | 1,574,000  |   |  |   | 4,188,000 |  |  |   | 4,722,000  |  
|Expected return on plan assets     |  |                    | (2,228,000 | )             |                         |   | (2,267,000 | )                  |               |   | (6,674,000        | ) |  |               | (6,801,000 | ) |      |   |              |      |  |   |           |   |  |   |          |  |  |   |           |  
|Amortization of prior service cost |  |                    |           |               |                         |   | 98,000     |                    |               |   |                  |   |  |               | 294,000    |   |      |   |              |      |  |   | (1,305,000 | ) |  |   |          |  |  |   | (3,915,000 | )
|Recognized actuarial loss          |  |                    |           |               |                         |   | 990,000    |                    |               |   |                  |   |  |               | 2,970,000  |   |      |   |              |      |  |   | 586,000    |   |  |   |          |  |  |   | 1,758,000  |  
|                                   |  |                    |            |               |                         |   |            |                    |               |   |                   |   |  |               |            |   |      |   |               |      |  |   |            |  
|Net periodic benefit cost          |  | $                  | 800,000    |               |                         | $ | 2,003,000  |                    |               | $ | 2,800,000         |   |  | $             | 6,009,000  |   |      | $ | 1,874,000     |      |  | $ | 1,328,000  |   |  | $ | 5,622,000 |  |  | $ | 3,984,000  |  
|                                   |  |                    |            |               |                         |   |            |                    |               |   |                   |   |  |               |            |   |      |   |               |      |  |   |            |  





|    |                 
|--- | ----------------
|16. | Subsequent Event





|    |            
|--- | -----------
|   
|17. | Restatement
|   

Uncertainties Related to Income Taxes in a Purchase
Business Combination




As PreviouslyReported
    
    
    Adjustment
    
    
    As RestatedCondensed Consolidated Balance SheetSeptember 30, 2005:Deferred
income taxes and other current assets
    
    $
    
    
    
    $
    19,065
    
    
    $
    19,065Other
current assets
    
    
    3,638
    
    
    
    (3,638
    )
    
    
    Total
current assets
    
    
    136,144
    
    
    
    15,427
    
    
    
    151,571Goodwill
    
    
    858,807
    
    
    
    (12,253
    )
    
    
    846,554Total assets
    
    
    1,370,147
    
    
    
    3,174
    
    
    
    1,373,321Income taxes payable
    
    
    15,701
    
    
    
    (6,761
    )
    
    
    8,940Deferred
income tax liabilities
    
    
    24,091
    
    
    
    13,619
    
    
    
    37,710Retained earnings
    
    
    10,643
    
    
    
    (3,684
    )
    
    
    6,959Total
stockholders equity
    
    
    335,188
    
    
    
    (3,684
    )
    
    
    331,504Condensed Consolidated Statement of OperationsThree months ended September 30, 2005Income tax provision
    
    
    (403
    )
    
    
    (3,684
    )
    
    
    (4,087
    )Net income
    
    
    8,523
    
    
    
    (3,684
    )
    
    
    4,839Income
applicable to common stockholders
    
    
    6,439
    
    
    
    (3,684
    )
    
    
    2,755Basic earnings per common share
    
    
    0.20
    
    
    
    (0.11
    )
    
    
    0.09Diluted earnings per common share
    
    
    0.20
    
    
    
    (0.12
    )
    
    
    0.08Condensed
Consolidated Statement of OperationsNine months ended September 30, 2005Income tax provision
    
    
    (2,680
    )
    
    
    (3,684
    )
    
    
    (6,364
    )Net income (loss)
    
    
    12,421
    
    
    
    (3,684
    )
    
    
    8,737Income
(loss) applicable to common stockholders
    
    
    3,490
    
    
    
    (3,684
    )
    
    
    (194
    )Basic earnings (loss) per common share
    
    
    0.17
    
    
    
    (0.18
    )
    
    
    (0.01
    )Diluted earnings (loss) per common share
    
    
    0.16
    
    
    
    (0.17
    )
    
    
    (0.01
    )


19



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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
  Initial Public Offering and Other Financing Developments
      20




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##### Table of Contents



The Acquisition
      21




---



##### Table of Contents



Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    4,839,000
    
    
    $
    15,075,000Adjustments:Depreciation and amortization expense
    
    
    6,105,000
    
    
    
    2,992,000Interest expense, net of interest income
    
    
    20,021,000
    
    
    
    9,691,000Income tax provision
    
    
    4,087,000
    
    
    
    2,371,000EBITDA
    
    $
    35,052,000
    
    
    $
    30,129,000
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    8,737,000
    
    
    $
    32,650,000Adjustments:Depreciation and amortization expense
    
    
    18,474,000
    
    
    
    8,874,000Interest expense, net of interest income
    
    
    55,474,000
    
    
    
    29,195,000Income tax provision
    
    
    6,364,000
    
    
    
    10,647,000EBITDA
    
    $
    89,049,000
    
    
    $
    81,366,000
 22




---



##### Table of Contents



Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Non-recurring salary and benefit expense
    
    $
    
    
    
    $
    3,243,000Non-recurring non-cash income
    
    
    
    
    
    
    (1,758,000
    )Program Participation Costs previously expensed
    
    
    
    
    
    
    6,507,000$
    
    
    
    $
    7,992,000
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Non-recurring inventory purchase accounting charge
    
    $
    12,084,000
    
    
    $
    Non-recurring salary and benefit expense
    
    
    
    
    
    
    6,671,000Non-recurring non-cash income
    
    
    
    
    
    
    (2,350,000
    )Program Participation Costs previously expensed
    
    
    
    
    
    
    17,324,000$
    12,084,000
    
    
    $
    21,645,000
 Critical Accounting Policies and Estimates
  23




---



##### Table of Contents



Revenue Recognition.
 Inventory.
  Program Participation Costs.
  24




---



##### Table of Contents



Evaluation of Long-Lived Assets.
 Goodwill and Other Intangible Assets.
    25




---



##### Table of Contents



Warranty.
 Pension
and Other Postretirement Benefits.
    Comparison of Results of Operations for the Nine Months Ended September 30, 2005 and September
30, 2004
   26




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Gross Program Participation Costs
    
    $
    29,217,000
    
    
    $
    25,243,000Amount capitalized during period
    
    
    (18,718,000
    )
    
    
    Amortization of Program Participation Costs
    
    
    1,886,000
    
    
    
    Program Participation Costs expensed in period
    
    $
    12,385,000
    
    
    $
    25,243,000
   27




---



##### Table of Contents



Comparison of Results of Operations for the Three Months Ended September 30, 2005 and
September 30, 2004
    28




---



##### Table of Contents



Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Gross Program Participation Costs
    
    $
    10,286,000
    
    
    $
    9,048,000Amount capitalized during period
    
    
    (6,156,000
    )
    
    
    Amortization of Program Participation Costs
    
    
    696,000
    
    
    
    Program Participation Costs expensed in period
    
    $
    4,826,000
    
    
    $
    9,048,000
      29




---



##### Table of Contents



Liquidity and Capital Resources
       30




---



##### Table of Contents



Cash Flows
    Current Accounting Pronouncements
   31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
    
    a 3 month LIBOR interest rate cap at 4.5% from December 2004 to
December 2005 on $240 million of our term loans;
    
    a 3 month LIBOR interest rate cap at 6% from December 2005 to
December 2007 for an increasing notional amount starting at $144.6
million, increasing to $161.2 million;
    
    a swap arrangement for a portion of our term loans from a variable
3 month LIBOR interest rate to a fixed rate of 4.0375%, beginning
January 24, 2006. The notional amount of the swaps is initially
$95.4 million and declines to $78.8 million on January 24, 2008 at
the termination of the swap agreement; and
    
    a swap arrangement for a portion of our term loans from a variable 3 month LIBOR interest rate to a fixed rate of 4.506%, beginning January 24, 2006. The notional amount of the swaps is initially $47.7 million and declines
 32




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##### Table of Contents



to $39.4 million on January 24, 2008 at the termination of the swap agreement.
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   
    We engaged an outside accounting and tax consulting firm to assist management in our review of accounting and reporting
for income taxes, both quarterly and at year-end, and
 
    We are considering enhanced training of our personnel in the income tax function.
   33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 6. Exhibits.
 Exhibits
 31.1 -
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)of the Securities Exchange Act, as amended.31.2 -
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)of the Securities Exchange Act, as amended.32.1 -
    
    Certification of Chief Executive Office pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 -
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Items 1, 2, 3, and 5 are not applicable and have been omitted.
 34




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##### Table of Contents



SIGNATURES
  K&F INDUSTRIES HOLDINGS, INC.Registrant/s/
    
    DIRKSON R. CHARLESDirkson R. CharlesExecutive Vice President andChief Financial OfficerandRegistrants AuthorizedOfficer
  35