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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10–K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission File Number 333-45823

STANADYNE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number including area code (860) 525-0821

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ¨    No  x

As of June 30, 2004, there was no established public trading market for the shares of the Registrant’s common stock and no shares of common stock were held by non-affiliates of the Registrant.

The number of Common Shares of the Company, $0.01 per share par value, outstanding as of March 1, 2005 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE - None

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STANADYNE CORPORATION

FORM 10-K

TABLE OF CONTENTS

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PART I

General

Stanadyne Corporation (“Stanadyne” or the “Company”) is a leading designer and manufacturer of highly engineered, precision manufactured engine components, including fuel injection equipment for diesel engines and hydraulic lash compensating devices primarily for gasoline engines (the latter commonly known as “hydraulic valve lifters”). With over 130 years of machining experience and over 50 years as a supplier of diesel fuel injection equipment and hydraulic valve lifters, Stanadyne’s core competencies in product design, precision machining, and the assembly and testing of complex components have earned the Company a reputation for innovative, high quality products. The Company possesses an extremely broad range of manufacturing technology and know-how and is capable of high-volume production runs, machining high-quality components within tolerances of 20 millionths of an inch on a cost effective basis. In addition to designing and manufacturing, the Company has been successfully pursuing business to manufacture and assemble, on an exclusive contract basis, components designed by other companies.

The Company sells engine components to original equipment manufacturers (“OEMs”) in a variety of applications, including agricultural and construction vehicles and equipment, industrial products, automobiles, light duty trucks and marine equipment. The aftermarket is a core element of the Company’s operations. The Company sells replacement parts and units through all appropriate global channels to service its products, including the service organizations of its OEM customers, its own authorized network of distributors and dealers, and major aftermarket distribution companies. The Company conducts its business through two principal operating segments: the Precision Products and Technologies Group (“Precision Products”) formerly known as the Diesel Systems Group, which accounted for 83% of the Company’s 2004 net sales, and Precision Engine Products Corp. (“Precision Engine”), a wholly-owned subsidiary, which accounted for 17% of the Company’s 2004 net sales. Additional segment and geographic information can be found in Notes 18 and 19 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

The Company, a Delaware corporation formed in 1988 is a wholly-owned subsidiary of Stanadyne Automotive Holding Corp. (“Holdings.”). Holdings is a wholly-owned subsidiary of Stanadyne Holdings, Inc. (“Holdings, Inc.”) formerly known as KSTA Holdings, Inc. and a majority of the outstanding equity of Holdings, Inc. is owned by funds managed by Kohlberg Management IV, L.L.C., an affiliate of Kohlberg and Company L.L.C. (“Kohlberg”). On August 6, 2004, Kohlberg, through a series of transactions (the “Transactions”) purchased the outstanding equity of Holdings from American Industrial Partners Capital Fund II, L.P. (“AIP”) and certain other stockholders (the “Sellers”). AIP had purchased Stanadyne Corporation and Subsidiaries from Metromedia Company (“Metromedia”) on December 11, 1997. The results of operations and cash flows presented herein represent those of Stanadyne Corporation for the period from January 1, 2004 to August 5, 2004 (“218 day period,” the “Predecessor”) and the period from August 6, 2004 to December 31, 2004 (“148 day period,” the “Successor”). The combined periods of the Successor and the Predecessor described above are hereinafter referred to as “2004.” Periods presented prior to 2004 represent the activities of the Predecessor.

PRECISION PRODUCTS

Precision Products is one of only four independent worldwide manufacturers selling to the geographic areas in which the Company competes. Net sales for Precision Products were $288.6 million, $224.8 million, and $203.5 million for 2004, 2003 and 2002, respectively. Operating income for Precision Products was $16.3 million, $21.6 million and $13.2 million for 2004, 2003 and 2002, respectively. Total assets of Precision Products were $461.2 million, $255.9 million and $237.2 million at December 31, 2004, 2003 and 2002, respectively.

Products

Precision Products manufactures its own proprietary products including pumps for gasoline engines and diesel engines (up to 250 horsepower an engine range comprising approximately 90% of all diesel engines

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produced worldwide), injectors and filtration systems for diesel engines and various non-proprietary products manufactured under contract for other companies. Precision Products sells its fuel injection products to its customers on an individual component basis or by complete line. The primary focus of Precision Products is the agricultural and industrial off-highway segments of the market. Fuel pumps and injectors, Precision Products primary products, are the most highly engineered, precision manufactured components on a diesel engine and comprise the core components of a diesel engine’s fuel system. Because fuel system components are so elemental to the proper functioning and optimal performance of a diesel engine, they are essentially custom engineered for a specific engine platform. As a result, the Company typically supplies these components on a sole source basis for the life of engine platforms and enjoys a leading position in the aftermarket. Precision Products also manufactures diesel fuel management systems including fuel filters, fuel heaters and water separators, oil pumps and other precision manufactured components and distributes diesel fuel conditioners, stabilizers and diesel engine diagnostic equipment. Due to its competencies in precision manufacturing, assembly and testing of complex products, the Company has been successfully pursuing business to manufacture and assemble, on an exclusive contract basis, components designed by other companies.

Customers

Precision Products’ primary customers are OEMs of diesel engines. Precision Products’ largest customers, Deere & Company (“Deere”) and General Motors Corporation (“GM”), accounted for approximately $140.7 million, or approximately 48.8% of Precision Products’ 2004 net sales. Precision Products had two customers that accounted for more than 10% of 2004 net sales: Deere accounted for 38.4% and GM accounted for 10.4% of Precision Products’ 2004 net sales, respectively.

Precision Products supports the servicing of its own products through sales of aftermarket units and parts to the service organizations of its OEM customers, through its own global network of authorized distributors and dealers, and through major aftermarket distribution companies. Total shipments to all service market channels in 2004 represented 48.8% of segment sales.

India Business

The Company has a joint venture with Amalgamations Private Limited in the state of Tamil Nadu, India. The joint venture is named Stanadyne Amalgamations Private Limited (“SAPL”) and started manufacturing diesel fuel injection equipment for export markets in the second quarter of 2003. Precision Products holds a 51% controlling share of SAPL.

PRECISION ENGINE

Precision Engine is a major independent (non-captive) manufacturer of hydraulic valve lifters primarily for gasoline engines. Net sales for Precision Engine were $58.4 million, $65.4 million and $57.2 million for 2004, 2003 and 2002, respectively. Operating (loss) income for Precision Engine was $(4.1) million, $1.8 million and $(3.2) million for 2004, 2003 and 2002, respectively. Total assets of Precision Engine were $57.3 million, $45.9 million and $47.4 million at December 31, 2004, 2003 and 2002, respectively.

Products

Precision Engine designs and manufactures four types of hydraulic valve lifters: roller rocker arm assemblies, lash adjusters, roller valve lifters and slipper valve lifters. The Company also makes complete valve train actuation assemblies. These products convert the rotary motion of a camshaft into a reciprocating motion and allow for the adjustment of lash (clearance) as valves are opened and closed in the cylinder head of an engine.

Customers

Precision Engine’s primary customers are OEMs. DaimlerChrysler Corp. (“DCX”) and Tritec Motors LTDA. (“Tritec”) accounted for 62.3% and 20.8%, respectively, of Precision Engine’s 2004 net sales. Precision Engine also sells to the service organizations of its OEM customers and to the aftermarket distribution companies.

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COMPETITION

Because of the technical expertise required to design and manufacture the Company’s products to the tolerances required, the existence of longstanding supply relationships in the engine component business and the significant capital expenditures and lead time required to enter the business, there are a limited number of manufacturers selling to the global markets in which the Company operates. The Company competes on the basis of technological innovation, product quality, processing and manufacturing capabilities, service support and price. The Company is smaller in size and therefore has fewer resources relative to its competitors.

The main competitors of Precision Products are divisions of Robert Bosch GmbH and Delphi Corporation (“Delphi”). The main competitors of Precision Engine are INA Walzlager Schaeffler KG, Eaton Corporation and Delphi in the aftermarket.

RAW MATERIALS AND COMPONENT PARTS

The Company’s products are made largely of specially designed metal parts, most of which are designed, purchased, cast or stamped and machined by the Company to its own technical specifications. Metallic raw materials such as steel, aluminum, copper and brass are commodity items readily available from a number of suppliers. Certain parts, such as electronic components, are made to the Company’s specifications. Other parts, such as fasteners, are purchased by the Company from outside suppliers as standardized parts or are made to the Company’s specifications. Although from time to time the Company has experienced temporary supply shortages due to localized conditions, no such shortage has had a material adverse effect on the Company, and no supplier accounted for more than 6% of purchases.

PATENTS AND TRADEMARKS

The Company relies upon patent, trademark and copyright protection as well as upon unpatented technological know-how and other trade secrets for certain products, components, processes and applications. However, the Company’s operations are not dependent upon any single or related group of patents, copyrights or trademarks or their duration. The Company considers its proprietary information important, especially in the maintenance of its competitive position in the aftermarket business, and takes actions to protect its intellectual property rights.

EMPLOYEES

At December 31, 2004, the Company employed 2,123 persons of whom approximately 29% were salaried and 71% were hourly employees. All of the Company’s employees are non-unionized with the exception of those in Stanadyne, S.p.A. (“SpA”). The Company believes its relations with its employees are good.

TECHNOLOGY, RESEARCH AND DEVELOPMENT

Engine manufacturers are required to continually improve engine performance and fuel economy. Accordingly, the Company’s research and development investment is significant. In general, the Company funds its own research and development expenses, although some of those expenses may be customer-funded during the pre-production program phase. Research and development costs incurred for 2004, 2003 and 2002 were $12.0 million, $11.4 million and $11.2 million, respectively, of which $1.3 million, $1.5 million and $1.9 million, respectively, were reimbursed by customers. Precision Products accounted for over 95% of these amounts.

Once an OEM commits to purchasing a product from the Company, which usually occurs one to three years into the development or application process, the Company may need to allocate capital for the machinery, equipment and tooling necessary for engine program launch, ramp-up and product volume increases. Furthermore, given the significant existing capital investment in plant and equipment already made, the Company has on-going programs to maintain, upgrade and replace its investments. In 2004, 2003 and 2002, the Company spent $12.9 million, $12.8 million and $10.9 million, respectively, on capital investments.

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FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES

The Company has manufacturing operations in the United States, Italy, Brazil and India. The products manufactured in the United States and Italy are sold within their respective domestic markets, as well as exported throughout the world. These products are sold to both OEM and aftermarket customers. The products manufactured in Brazil are sold only to an OEM customer in Brazil. The products manufactured in India are exported from India to Company facilities in the United States.

The sales to OEM and aftermarket customers during 2004, 2003 and 2002 were as follows:

Information regarding net sales to geographic areas, operating income (loss) from manufacturing facilities in geographic areas and assets by geographic areas for the years ended December 31, 2004, 2003 and 2002 appear below and in Note 19 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

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The Company’s worldwide operations are subject to the risks normally associated with foreign operations, including but not limited to, the disruption of markets, changes in export or import laws, labor unrest, political instability, restrictions on transfers of funds, unexpected changes in regulatory environments, difficulty in obtaining distribution and support, and potentially adverse tax consequences. In addition, even though the Company generally matches, to the extent possible, related costs and revenues in a single currency, and generally includes exchange rate protections in its sales contracts, the U.S. dollar value of the Company’s foreign sales varies with foreign currency exchange rate fluctuations. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company.

ENVIRONMENTAL MATTERS

The Company’s facilities are subject to federal, state and local environmental requirements, including those governing discharges to the air and water, the handling and disposal of industrial and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. The Company operates under various environmental permits and approvals, the violation of which may subject the Company to fines and penalties. There are no known violations of environmental permits or approvals that may have a material adverse effect to the Company’s financial position or results of operations. The Company’s manufacturing operations involve the use of hazardous substances and, if a release of hazardous substances occurs or has occurred on or from the Company’s facilities, the Company may be held liable and may be required to pay the cost of remedying the condition. The amount of any such liability could be material. Pursuant to the terms of the acquisition on December 11, 1997, Metromedia has agreed to conduct and complete remediation of soil and groundwater contamination at the Company’s Windsor, CT and Jacksonville, NC facilities. While many of these remediations are underway and Metromedia has agreed to complete these remediations and has indemnified the Company with respect to these matters and certain other environmental matters, there can be no assurance that Metromedia has the ability to completely fulfill its obligations to indemnify the Company for such matters. While the Company believes Metromedia would be able to meet its financial obligations, if Metromedia is unable to do so, the Company will be responsible for such matters and the cost could be material. Metromedia’s liability has not changed as result of the Transactions. Additional information can be found in Note 17 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements with respect to the financial condition, results of operations and business of the Company and management’s discussion and analysis of financial condition and results of operations. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “project”, or “continue” or other similar words. All of these forward-looking statements are based on estimates and assumptions made by the management of the Company which, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon such estimates and statements. No assurance can be given that any such estimates will be realized, and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include:

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Many of such factors are beyond the control of the Company and its management. The forward-looking statements contained in this report speak only as of the date on which such statements were made. The Company undertakes no duty or obligation to publicly update or revise any forward-looking statements to reflect new, changing or unanticipated events or circumstances.

The Company’s executive offices are located in Windsor, Connecticut. The Company believes that substantially all of its properties and equipment are in good condition, and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs.

Below is a summary of the existing facilities:

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The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a materially adverse effect on the Company’s consolidated financial position or results of operations.

The Company is subject to potential environmental liability and various claims and legal actions, which are pending or may be asserted against the Company concerning environmental matters. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management’s opinion, the aforementioned claims will be resolved without materially adverse effects on the results of operations, financial position or cash flows of the Company. In conjunction with the acquisition of the Company on December 11, 1997, Metromedia agreed to partially indemnify the Company relating to certain environmental matters. See “Environmental Matters” in Item 1 of this report.

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

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PART II

As of March 1, 2005, Holdings was the holder of record of all the shares of common stock, par value, $.01 per share (the “Common Stock”), of the Company. Also as of March 1, 2005, Holdings Inc. was the holder of record of all the shares of common stock, par value, $.01 per share (the “Holdings Common Stock”), of Holdings. There is no established trading market for the Common Stock or Holdings Common Stock. The Company has never paid or declared a cash dividend on the Common Stock, and Holdings has never paid or declared a cash dividend on the Holdings Common Stock. Furthermore, the Company is restricted from paying dividends under the covenants of its revolving credit and term loan agreements.

The Company does not have any compensation plans under which its equity securities are authorized for issuance.

The following table sets forth selected consolidated historical financial and operating data of the Company and its subsidiaries. The selected consolidated financial data were derived from the consolidated financial statements of the Company. The data presented below should be read in conjunction with the consolidated financial statements and the related footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Certain amounts have been reclassified to conform to the 2004 presentation.

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Change in Control of Company’s Parent:

On August 6, 2004, KSTA Acquisition, LLC (“KSTA”), a Delaware limited liability company, acquired all of the outstanding capital stock of Holdings, the Company’s parent, on the terms and conditions specified in the stock purchase agreement entered into on June 23, 2004. Subsequent to such purchase of stock, KSTA distributed the stock of Holdings to its parent Holdings, Inc. and then immediately merged with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Holdings, which is a wholly-owned subsidiary of Holdings, Inc. As a result of such merger, the Company assumed by operation of law all of the rights and obligations of KSTA. All of the Company’s capital stock is held indirectly by Holdings, Inc., the Company’s new parent. Holdings, Inc. was formed at the direction of an investor group led by Kohlberg Management IV, L.L.C., which now owns a majority of the outstanding common stock of Holdings, Inc. These transactions were financed by a cash equity investment in the Company’s parent by an investor group led by Kohlberg Investors IV, L.P., borrowings under Stanadyne’s senior secured credit facility, and the issuance of notes. The merger and the related transactions, including the issuance of the notes, the entering into of the Company’s new senior secured credit facility, the repayment of certain existing indebtedness, including the tender for and the subsequent redemption of the Company’s senior subordinated unsecured notes, and the payment of related fees and expenses, are collectively referred to as the “Transactions.”

The amounts necessary to consummate the Transactions totaled approximately $330 million, including approximately $221.4 million to pay the then equity holders of Holdings, approximately $88.3 million to repay existing indebtedness, approximately $20.0 million in related fees and expenses, and approximately $0.3 million in net change in cash balances.

The Transactions were financed as follows:

The New Notes bear interest of 10.0%, payable semi-annually and will mature on August 15, 2014. The New Term Loans bear interest at prime plus 2.5% or LIBOR plus 3.5% and principal is repaid in quarterly installments of $0.2 million with a final payment of the unamortized balance due on August 6, 2010. The Company also negotiated a new $35.0 revolving credit facility, which bears interest at prime plus 1.25% or LIBOR plus 2.25% payable on August 6, 2009. This new revolving credit facility requires that the Company maintain a minimum fixed charge coverage ratio if available borrowings fall below $5.0 million. The New Term Loans and revolving credit facility are secured by substantially all of the Company’s domestic accounts receivable, inventory and assets. The New Notes are an obligation of Stanadyne Corporation (the “Parent”) and are guaranteed by Precision Engine (the “Subsidiary Guarantor”). In addition, the New Notes are subject to covenants including limitations on indebtedness, liens, and dividends or other distributions to stockholders.

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Following the Transactions, the Company purchased $54.5 million of its senior subordinated notes (the “Old Notes”) under the terms of a tender offer dated July 19, 2004. The $11.5 million balance of the outstanding Old Notes was called by the Company according to the terms of the original indenture and purchased on September 7, 2004.

In connection with the Transactions, the Company amended the terms of the Management Stock Option Plan to provide for vesting of all unvested options at August 5, 2004 and purchased all of the outstanding stock options requiring a charge in the third quarter of 2004 for approximately $14.3 million in the Predecessor financial statements. Other Transactions related costs totaling $8.4 million were charged to earnings in the third quarter of 2004 in the Predecessor financial statements.

Following the Transactions, the Company’s board of directors was reconstituted. All of the directors serve until a successor is duly elected and qualified or until the earlier of his death, resignation or removal.

BASIS OF PRESENTATION

The following table displays performance details for the periods shown. The year ended December 31, 2004 includes the combined results of the Predecessor through August 5, 2004 and the Successor beginning August 6, 2004. Net sales, cost of goods sold, gross profit, selling, general and administrative expense (“SG&A”), amortization of intangibles, Transactions related costs, management fees, operating income and net income of the Company are presented in thousands of dollars and as a percentage of net sales. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.

Certain amounts have been reclassified to conform to the 2004 presentation.

COMPARISON OF RESULTS OF OPERATIONS

Overview

The historical consolidated year to date financial information for the Predecessor and the Company have been combined for the following presentation of the year to date financial information.

Sales in 2004 totaled $346.6 million and were $56.4 million or 19.4% greater than the prior year. All of this increase occurred in the Precision Products segment where diesel fuel injection equipment supplied to the off-highway markets accounted for 65% of the Company’s total 2004 sales as compared to 60.8% in 2003. Deere is the primary customer for the Company’s off-highway diesel fuel injection products. Sales of on-highway products accounted for 35% of total 2004 revenues, with valve train components supplied to DCX and Tritec, and DS diesel fuel pumps sold to GM representing approximately 62% of this total.

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Sales in 2004 to the original equipment manufacturers (“OEM’s”) and the service markets increased by $33.4 million or 20.6% and $23.0 million or 18.0%, respectively, compared to 2003. Again, all of these increases occurred in the Precision Products segment and were driven by higher demand for the Company’s diesel engine components used in the agricultural, industrial and construction markets. Sales in 2004 in the Precision Engine segment were lower than in 2003 by $7.0 million due to a reduction in service sales of hardenable iron tappets.

Performance by segment in 2004 was mixed, with increases in sales and earnings in the Precision Products segment contrasted by declines in the predominantly on-highway Precision Engine segment.

The Precision Products segment benefited from increased demand in 2004 from the OEM and service markets for its diesel fuel engine components. The ramp up in production of the new Integrated Fuel System (“IFS”) sold to Deere was completed in 2004 and accounted for $5.0 million increased revenues. Preparation continued in this segment during 2004, for the planned production of a gasoline direct injection pump for a major European OEM. This program accounted for capital expenditures of $4.1 million in 2004 and is scheduled to achieve production intent supply status in late 2005.

The Precision Engine segment experienced steady demand in 2004 from DCX and Tritec for valve train components used in vehicle platforms including the Pacifica, the 300 and the Mini Cooper. Aftermarket sales declined by $7.0 million in 2004 due to customer inventory reductions early in the year and added competition from foreign suppliers. During 2004, segment management introduced an Operational Performance Improvement Plan for the business that included several Lean Manufacturing, Six Sigma and global sourcing initiatives. This Plan included the recently announced multi-year arrangements with Madison-Kipp Corporation and Equatorial Enterprises Limited for the supply of certain valve train components. The Company believes these changes will avoid additional capital expenditures, improve product quality and reduce costs in this segment.

Gross Profits in 2004 were negatively impacted by $1.9 million in cost surcharges for purchased materials, with most of this amount occurring in the latter part of the year. The Company continues to resist these cost increases and, when necessary, pursues increases in the selling prices of its products. The degree of success in resisting these cost increases and increasing selling prices is uncertain, and the Company cannot foresee the impact of these cost surcharges on earnings.

The Company reported operating income in 2004 of $12.2 million as compared to net income of $24.3 million in 2003. The 2004 result included an improvement of $10.6 million of higher operating income on increased levels of sales, offset by $22.7 million of Transactions costs related to the Company sale concluded in the third quarter of 2004.

The Period August 6, 2004 through December 31, 2004 for the Company and the Period January 1, 2004 through August 5, 2004 for the Predecessor Compared to 2003

Net Sales. Net sales in 2004 totaled $346.6 million and were $56.4 million or 19.4% higher than the $290.2 million recorded in 2003. Sales by operating segment indicate all of the year-over-year increase took place in the Company’s Precision Products business where 2004 revenues of $288.6 million were 28.4% more than the prior year, while Precision Engine 2004 revenues of $58.4 million were 10.7% less than 2003.

Precision Products sales totaled $288.6 million in 2004, reflecting an increase of $63.8 million or 28.4% from 2003 sales of $224.8 million. Sales to the OEM and service markets, as well as all of the major product lines contributed to the sales increase from the prior year. Sales of fuel pumps, injectors and filtration products in 2004 increased from the prior year by $61.4 million or 29%, lead by an increase in demand for fuel injection equipment from Deere. Year-over-year sales to Deere increased by $36.4 million and included $5.0 million in added sales from the new IFS product. Sales of Precision Components and Assembly (“PCA”) products increased by $2.4 million or 18.4% in 2004, due to higher demand for engine components from Caterpillar Inc (“Caterpillar”). Sales to the OEM markets increased by $33.8 million or 29.7% from 2003, driven by higher demand for fuel injection equipment from Deere, Ford Motor Company (“Ford”), Caterpillar and General Engine Products, Inc. Sales to the service markets were $30.0 million or 27.0% higher in 2004 than in 2003 and included

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increases of $7.9 million in the demand for DS fuel pumps supplied to GM, $10.7 million is sales of replacement fuel filter elements and $2.8 million for fuel pumps supplied to the U.S. military. These increases were only partially offset by declines and $1.9 million and $1.4 million in sales of diesel fuel injection equipment to SISU Diesel and Perkins Engine, respectively.

Precision Engine sales totaled $58.4 million in 2004 and were $7.0 million or 10.7% less than the prior year. Sales in 2004 to OEM customers were relatively unchanged overall from the prior year. Increased demand in 2004 from DCX, primarily for valve–train actuator assemblies (“VTAA’s”) used in their 3.5 liter engine powering the Pacifica and 300 vehicles, resulted in a $4.5 million increase in sales. This increase was offset by $2.4 million lower sales of 1.6 liter engine rocker arm assemblies to Tritec in 2004 due primarily to a customer inventory reduction in the third quarter. This increase was also offset by $2.1 million lower sales of tappets sold to Ford related to the planned phase-out of production of the Escort. Aftermarket sales of hardenable iron tappets in 2004 was $7.0 million lower than the prior year, due to customer inventory reductions early in the year and added competition from foreign suppliers.

Gross Profit. Gross profit for the Company totaled $69.8 million or 20.1% of net sales in 2004 as compared to $56.1 million or 19.3% of net sales in 2003. Gross profit results by operating segment followed the changes in sales reported above, with higher gross profit in Precision Products more than offsetting lower gross profit in Precision Engine.

Precision Products gross profit in 2004 of $70.2 million or 24.3% of net sales was significantly higher than the 2003 gross profit of $51.0 million or 22.7% of net sales. All of this improvement was due to additional operating leverage from higher sales volumes in 2004 and a more favorable mix of higher margin aftermarket sales of fuel pump and fuel filter products. Gross profits were unfavorably impacted in 2004 by higher manufacturing costs that included premiums incurred for expedited production ramp up of the new IFS product and higher levels of overtime and inefficiencies associated with the significant increase in demand for virtually all of the segment’s products. Surcharges for materials and purchased components related to the increased global demand for raw materials, negatively impacted gross profit in 2004 by approximately $0.9 million.

Precision Engine gross profit in 2004 was a negative $0.5 million or (0.8%) of net sales as compared to $5.1 million and 7.8% of net sales in 2003. A combination of lower sales volumes, particularly for product sold to the aftermarket, and increased manufacturing and overhead costs in this segment, resulted in the negative gross margin. In the third quarter of 2004, segment management introduced an Operational Performance Improvement Plan for the business that included several Lean manufacturing, Six Sigma and competitive sourcing initiatives scheduled for implementation from late 2004 through 2005. Driven primarily by negative results in the third quarter of 2004, some signs of improved gross profit in the fourth quarter of 2004 were not enough to erase the losses recorded earlier in the year. Material cost surcharges related to the increased global demand for raw materials negatively impacted gross profit in 2004 by approximately $1.0 million.

Selling, General and Administrative Expense (“SG&A”). SG&A in 2004 totaled $31.8 million and 9.2% of net sales as compared to the $29.3 million and 10.1% of net sales reported in 2003. A majority of this $2.5 million increase was concentrated in the Precision Products segment. SG&A cost increases in this segment during 2004 included an additional $0.5 million in employee profit sharing expenses based on higher earnings and $0.9 million in freight on sales associated with increased business levels and expedited delivery during the year. Foreign SG&A increased by $0.3 million due to the impact of the strengthening Euro on the Company’s cost of operations in Italy and France. The SG&A costs in the Precision Engine segment increased by $0.2 million in 2004 due primarily to $0.1 million higher post-retirement healthcare costs and $0.1 million increase in product engineering expenses.

Amortization of Intangibles. Amortization of intangible assets increased to $2.2 million in 2004 from $1.4 million in 2003. This increase reflected the additional amortization resulting from the valuation of the Company’s intangible assets, including technology, trademarks and customer contracts acquired as part of the Transactions.

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Transaction Related Costs. The predecessor company incurred approximately $22.7 million of costs related to the Transactions in the third quarter of 2004. This amount included $16.3 million paid to certain members of management in connection with the settlement of outstanding stock options issued under the Management Stock Option Plan and other compensation related to the change of control; and $6.4 million for professional services and other fees incurred in support of the Transactions.

Operating Income. Operating income in 2004 was $12.2 million or 3.5% of net sales and was significantly less than the $24.3 million and 8.4% of net sales reported in 2003. If Transactions costs incurred in the third quarter of 2004 were excluded, the operating income would have been $34.9 million or 10.1% of net sales. Higher gross profit in the Precision Products segment during 2004 were only partially offset by added SG&A costs, resulting in operating income of $39.0 million after adding back transaction related costs or 11.3% of net sales versus $22.5 million or 10.0% of net sales in 2003. Operating income in the Precision Engine segment was negative $4.1 million or -7.0% of net sales in 2004 as compared to a positive $1.8 million and 2.7% of net sales in 2003. The decline in this segment was due primarily to significantly lower gross profit in 2004 and further reduced by increased SG&A costs.

Net (Loss) Income. The net loss for the Company in 2004 totaled $0.9 million due to $22.7 million of Transactions costs versus $9.1 million of net income in 2003. There was $5.8 million of additional net interest expense due to higher debt in 2004 compared to 2003. The Company’s effective tax rates were 50.6% in 2004 and 43.7% in 2003. These tax rates included ($0.4) million and $1.4 million in taxes in 2004 and 2003 respectively, resulting from expiring foreign net operating losses. Additional information regarding the Company’s taxes can be found in Note 12 of the Notes to Consolidated Financial Statements contained in Item 8 of this Report.

2003 COMPARED TO 2002

Net Sales. A strong rebound in the general economy and the off-highway equipment markets in particular, helped drive an 11.3% increase in net sales for 2003. Sales totaled $290.2 million in 2003 as compared to $260.7 million in 2002, with significant gains reported in both segments.

Precision Products posted sales totaling $224.8 million in 2003, representing an increase of 10.5% from the 2002 sales figure of $203.5 million. All of the major product lines showed sales increases from the prior year. Sales in 2003 of fuel pumps, injectors and filtration products increased by $16.3 million or 8.3%, while sales of PCA products totaled $13.0 million in 2003 or 64.5% more than the prior year, due to added business with Cummins Inc. (“Cummins”) and Caterpillar. Higher demand for products from the OEM markets totaled $13.8 million and included increases in sales to Deere, Cummins, Caterpillar, CNH Global N.V. and General Engine Products, Inc. Year-over-year sales to the service markets were $15.4 million higher in 2003 than in 2002, with a majority of this increase accounted for by the Company’s independent distributor network. These increases were only partially offset by declines of $3.6 million in the service demand for DS fuel pumps supplied to GM and $1.3 million and $3.0 million lower sales of diesel fuel injection equipment to Perkins Engine and SISU Diesel, respectively.

Precision Engine reported sales of $65.4 million for 2003, totaling $8.1 million or 14.3% more than the same period in 2002. A significant portion of this increase, $7.8 million, was due to higher demand from DCX. While sales of individual rocker arm assemblies to DCX for the 3.5 litre LH platform ended as planned in August 2003, Precision Engine replaced these sales through the supply of the fully assembled VTAA, comprised of nine rocker arm assemblies, to the 3.5 litre CS platform for the Pacifica vehicle and the CX platform for sedans. OEM sales to Tritec in Brazil were $1.7 million higher in 2003, as success of the Mini Cooper continued to drive demand for the 1.6 litre gasoline engine that exclusively utilizes Precision Engine roller rocker arm assemblies. These increases were offset partially by the expected decline of $2.4 million in sale of tappets to Ford Motor Company related to the phase-out of production of the Escort.

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Gross Profit. Gross profit for the Company totaled $56.1 million or 19.3% of net sales in 2003 as compared to $45.3 million or 17.4% of net sales in 2002. Gross profit results by operating segment followed the changes in sales reported above.

Gross profit in the Precision Products segment increased by $9.3 million in 2003 from 2002 and improved as a percentage of net sales to 22.7% from 20.5%. This change resulted from a combination of improved operating leverage from higher sales levels, stronger sales to the higher margin service market, and lower manufacturing costs in the U.S.-based facilities. Gross profit was negatively impacted in 2003 by higher manufacturing costs related to the launch of new PCA products for Cummins and Caterpillar.

Gross profit in the Precision Engine segment in 2003 totaled $5.1 million or 7.8% of net sales and was $1.5 million higher than the $3.6 million or 6.4% reported in 2002. Although some improvement was realized, additional gross margin on the year-over-year increase in sales volumes was depressed by higher manufacturing and factory overhead costs in 2003. Operating inefficiencies in both the Tallahassee, Florida and Windsor, Connecticut facilities have been addressed through a reorganization of segment management.

Selling, General and Administrative Expense (“SG&A”). SG&A in 2003 was $29.3 million or 10.1% of net sales and was $1.4 million lower than the $30.7 million or 11.8% reported in 2002. There were two major components to this reduction. First, on June 1, 2003, the Company implemented changes to the retiree health benefit plans by standardizing cost sharing guidelines for all U.S. retirees participating in the Company’s retiree health plan. The impact of this change reduced the Company’s year-to-year expense for retiree health benefits by approximately $2.6 million. The second major component to the year-to-year reduction in SG&A costs was a change in direction for foreign exchange differences on Precision Engine operations in Brazil; $0.7 million in gains during 2003 versus $1.8 million in losses during 2002. SG&A cost increases during 2003 included an additional $1.4 million in employee profit sharing plan expenses based on higher earnings, $0.2 million in freight on sales associated with increased business levels and $0.3 million in professional fees. Approximately $0.4 million of bank debt origination costs related to the replacement senior credit facility entered into in the fourth quarter were charged to 2003 SG&A. Foreign SG&A increased by $1.2 million due to additional costs in the joint-venture in India and the impact of the strengthening Euro on the Company’s cost of operations in Italy and France.

Amortization of Intangibles. Amortization of intangible assets decreased to $1.4 million in 2003 from $2.4 million in 2002. This reduction reflected the conclusion of the amortization of the Company’s old business systems software that was replaced by the new Enterprise Resource Planning (“ERP”) system in 2002.

Operating Income. Operating income in 2003 was $24.3 million and 8.4% of net sales versus $11.1 million and 4.2% of net sales in 2002. Higher sales in both segments generated $10.8 million in additional gross profits which, when combined with $1.4 million in lower SG&A costs and $1.0 million in lower amortization expense, resulted in the significant improvement from the prior year.

Net Income. Net income for the Company grew to $9.1 million in 2003 as compared to $1.1 million in 2002. This $8.0 million increase resulted from the $13.3 million improvement in 2003 operating income, a $0.7 million gain on repurchases of a portion of the Company’s Old Notes, $1.1 million less interest expense on lower debt and reduced borrowing rates, all partially offset by a $7.1 million increase in income taxes. The Company’s effective tax rates were 43.7% and (23.6)% in 2003 and 2002, respectively. The 2003 tax rate included $1.4 million in taxes resulting from expiring foreign net operating losses. The negative tax rate in 2002 was due to the effect of foreign and state taxes on net losses. Additional information can be found in Note 12 of the Notes to Consolidated Financial Statements contained in Item 8 of this Report.

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LIQUIDITY AND CAPITAL RESOURCES

Although the Company carries a significant amount of debt as a result of the Transactions, its demonstrated ability to annually produce strong cash flows has historically enabled it to consistently reduce its outstanding debt ahead of all scheduled amortization. Principal sources of liquidity are cash on hand and cash flows from operations supplemented by a U.S.-based revolving credit facility under which $28.2 million was available for borrowing at December 31, 2004. The Company occasionally utilizes capital leasing, and for its foreign operations in Italy and India, maintains a combination of overdraft and term loan facilities with local financial institutions on an as-needed basis. In addition, subject to the restrictions in the Company’s lending agreements, supplemental senior or other indebtedness may be incurred from time to time to finance acquisitions, capital expenditures or other general corporate purposes.

Indebtedness as of December 31, 2004, totaled $228.7 million and was comprised of $160.0 million of New Notes, $64.8 million in domestic term loans, no borrowings under the domestic revolving credit lines and for the foreign subsidiaries, overdraft facilities of $2.7 million with local financial institutions and $1.2 million of foreign term debt. The Company had cash on hand at December 31, 2004 of $18.4 million.

Cash flows in 2004 were significantly impacted by $23.1 million of cash disbursements made in connection with the Transactions. The major elements of the Transactions cash flows were $6.8 million to prepare and market the sale of the Company and $16.3 million to certain members of management and employees of the Company to settle stock option awards and compensate for sale-related activities.

Cash Flows from Operating Activities. Net cash flows provided by operating activities totaled $16.6 million, $36.1 million and $23.3 million in 2004, 2003 and 2002, respectively. The 2004 cash flows included $23.1 million of disbursements associated with the Transactions, which, if removed, would reflect cash from operating activities of $39.7 million. Representing a $3.6 million increase from 2003 levels, the stronger 2004 cash flows from operations were driven by a combination of $12.7 million higher net income after adding back Transactions related costs, partially offset by $7.5 million of additional net cash requirements from changes to asset and liability accounts.

Changes in asset and liability accounts to support higher business levels in 2004 consumed $1.6 million in cash. Growth in 2004 accounts receivable of $5.0 million and 2004 inventory levels of $5.6 million were only partially offset by $9.6 million in higher accounts payable and other accrued liabilities. Although these higher levels of working capital were required to support the growth in business in 2004, the Company continues to aggressively manage both the accounts receivable and inventory levels in both segments. Accounts receivable days sales outstanding averaged 49.8 days in 2004, reflecting an improvement from the 53.2 days reported in 2003. Inventory turnover averaged 8.4 turns in 2004 as compared to 8.1 turns recorded in 2003, with most of this improvement traceable to the lean manufacturing efforts in the Precision Engine segment where average turnover improved to 9.4 turns in 2004 from 8.6 turns in 2003.

Growth in 2004 accounts payable totaled $1.9 million and was primarily in support of higher business levels. Other accrued liability and other noncurrent liability accounts increased during 2004 by $7.8 million, again driven by higher business levels including associated expenses recorded for employee related costs for wages and benefits.

Cash Flows from Investing Activities. The Company’s capital expenditures totaled $12.9 million, $12.8 million and $10.9 million in 2004, 2003 and 2002, respectively. These amounts reflect cash outlays for the purchase of machinery and equipment and the maintenance of existing facilities. Management estimates that the Company has historically spent, and will continue to spend, approximately $5.0 to $6.0 million annually on maintenance of plant and equipment. The remaining non-maintenance capital expenditures represent cash outlays for equipment, machinery or plant expansion in order to support new product and new customer opportunities, to effect cost reductions through process improvements, and to increase capacity to support increased production volumes for existing products. Capital expenditures in 2004 included approximately $6.9 million for new product

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programs including $1.7 million for the Deere IFS and $4.1 million for the GDI pump. Investments to increase capacity for the production of replacement filter elements required $0.3 million in 2004, bringing the total for this project to $1.2 million since 2003. This program will increase the Company’s automated filter element assembly capacity by approximately 50% at a total cost of $1.6 million and is expected to begin production in early 2005.

Cash Flows From Financing Activities. Cash flows from financing activities resulted in net increases (reductions) in cash of $222.0 million, ($9.2) million and ($9.7) million in 2004, 2003 and 2002, respectively.

With respect to its U.S. indebtedness, in 2004 the Company established new financing facilities as a result of the Transactions. In August of 2004, there was $105.0 million in contributions of capital from the new equity owners, $160.0 million in New Notes, $65.0 million in New Term Loans and $35 million of availability in revolving credit facilities. A portion of these proceeds were applied to retire $86.5 million in term loans and Old Notes. The Company incurred and capitalized $16.0 million in loan origination costs as a result of the new debt from the Transactions.

In the fourth quarter of 2003, the Company replaced the domestic senior bank credit facility. The new senior bank facility was structured as $25.0 million of term loans and $40.0 million in revolving credit notes. The Company incurred and capitalized $1.5 million in debt issuance costs related to this new facility. During 2003, the Company paid down domestic term debt of $34.8 million with proceeds from refinancing and cash provided from operations. In 2002, principal payments of long-term debt totaled $5.6 million and $5.4 million in the revolving credit facility. Also during 2003, the Company retired $10.0 million in Old Notes and realized a $715 gain after the write off of unamortized debt issuance costs of $225.

With respect to its foreign indebtedness, borrowings against SpA’s overdraft facilities totaled $2.6 million at both December 31, 2004 and 2003, reflecting a decrease in borrowings of $0.3 million in 2004 and an increase in borrowings of $0.5 million in 2003. Combined borrowings against SAPL’s term loans and overdraft facilities totaled $1.3 million and $1.5 million at December 31, 2004 and 2003, respectively, reflecting a decrease in borrowings of $0.2 million in 2004 and an increase in borrowings of $1.5 million in 2003. Investments in the share capital of SAPL by the minority partner provided an additional $0.3 million and $0.5 million in cash during 2003 and 2002, respectively.

Management believes that cash flows from operations and availability of additional borrowings under the revolving credit facility will provide adequate funds for the Company’s foreseeable working capital needs, planned capital expenditures and debt service obligations including scheduled amortization totaling $0.7 million in 2005. At December 31, 2004, the Company had $35 million in the revolving credit line available through August 6, 2009, of which $6.8 million was used for standby letters of credit. The Company’s ability to fund its operations, make planned capital expenditures, make scheduled debt payments, refinance indebtedness and remain in compliance with all of the financial covenants under its debt agreements will depend on its future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond its control.

Pension Plans. The Company maintains a qualified defined benefit pension plan (the “Qualified Plan”), which covers substantially all domestic hourly and salary employees, except for Tallahassee hourly employees, and an unfunded nonqualified plan to provide benefits in excess of amounts permitted to be paid under the provisions of the tax law to participants in the Qualified Plan.

The expected long-term rate of return on assets assumption is developed with reference to historical returns, forward-looking return expectations, the Qualified Plan’s investment allocation, and peer comparisons. The Company selected the 8.75% expected return assumption used for 2004 net periodic pension expense with input from the Qualified Plan investment advisor. The investment advisor analyzed actual historical returns and future expected returns of asset class benchmarks appropriate to the Qualified Plan’s target investment allocation. The

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analysis also reflected asset return premiums anticipated as a result of active portfolio management, as appropriate for each benchmark asset class. Based on these considerations, the Company used 8.75% for 2004 and 2003. This assumption is primarily due to future expected return of the Qualified Plan’s fixed income portfolio, and reflects the low yields currently available on investment-grade fixed income investments. Since the expected return on assets assumption is long-term in nature, changes in this assumption are made less frequently than changes in the discount rate assumption.

The assumed average salary compensation increase was reduced to 4% for the 2004 and 2003 measurement to reflect the current economic conditions. No compensation increase rate is applicable for the hourly plans, as they are flat pay for each year of service (regardless of compensation earned).

The discount rate used to value the pension obligation was developed with reference to a number of factors, including the current interest rate environment, benchmark fixed-income yields, peer comparisons, and expected future pension benefit payments. The discount rate of 6.00% set at December 31, 2004, represented a reduction of 25 basis points from the 6.25% set at December 31, 2003, reflected a decline of approximately 0.25% during 2004 in a weighted average of Moody’s Baa and Aaa rates which represented a proxy for the Moody’s Aa rate.

The value of the Qualified Plan assets increased to $53.5 million at December 31, 2004 from $48.2 million at December 31, 2003. Despite a strong recovery in 2004 investment performance, declining discount rates resulted in an increase in the Qualified Plan unfunded benefit obligation. Contributions to the Qualified Plan for the 2004 plan year are expected to be approximately $11.0 million to achieve a current liability funding level of 90% compared to $1.8 million and a current liability funding level of 80% for 2003. Additional information can be found in Note 10 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.

As of December 31, 2004, the fair value of assets of the Company’s pension plan was more than the accumulated benefit obligation of the plan. As a result, the Company was no longer required to record an additional minimum pension liability in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”). As of December 31, 2003, the fair value of assets of the Company’s pension plan was less than the accumulated benefit obligation of the plan. As a result, the Company was required to record an additional minimum pension liability in accordance with SFAS No. 87. This resulted in an additional minimum liability of $3.0 million, an intangible asset of $1.6 million (representing the amount of unrecognized prior service cost), a non-cash charge to accumulated other comprehensive income of $1.4 million offset by a deferred tax asset of $0.6 million. As of December 31, 2002, the Company recorded an additional minimum liability of $5.2 million, an intangible asset of $1.8 million, a non-cash charge to accumulated other comprehensive income of $3.4 million offset by a deferred tax asset of $1.3 million in excess of the expected rate of return. The $2.0 million incremental decrease in accumulated other comprehensive loss from December 31, 2002 to December 31, 2003 was driven primarily by the pension trust fund’s asset favorable performance during 2003. The improvement would have been greater except for the negative impact of a continued decline in market interest rates, which increased the present value of the plan’s liabilities. Since the investment market environment and the significant decline in market interest rates over the last several years are the primary driving forces behind recognition of additional minimum pension liabilities, a continued market recovery and/or an increase in market interest rates could reverse all or a portion of these items in future periods. No additional liabilities were required to be recognized for the nonqualified supplemental retirement plans because the accrued benefit cost of that unfunded plan exceeded the accumulated benefit obligation.

Off Balance-Sheet Obligations

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

As of December 31, 2004, the Company had the following obligations and commitments:

CRITICAL ACCOUNTING POLICIES

We prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: product warranty reserves, inventory reserves for excess or obsolescence, pension and postretirement benefit liabilities and self-insurance reserves.

Product Warranty Reserves. The Company provides a limited warranty for specific products and recognizes the projected cost for this warranty in the period the products are sold. Liability reserves are determined by applying historical warranty experience rates to current period product sales. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available. The Company’s warranty experience has been relatively stable for the past several years.

Inventory Reserves. The Company maintains its inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (“LIFO”) basis for its domestic inventory and on a first-in, first-out (“FIFO”) basis for its foreign inventory. When conditions warrant (usually highlighted by slow-moving product or products with pricing constraints), reserves are established to reduce the value of inventory to net realizable values. Annually, the Company reviews and identifies all inventories in excess of three years sales requirements. The Company reserves for this “slow moving” inventory as it has no realizable value. If business conditions change during the year, this evaluation is conducted more frequently.

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Pension and Other Postretirement Benefits. The Company provides for pension and other postretirement benefits and makes assumptions with the assistance of independent actuaries about discount rates, expected long-term rates of return on plan assets and health care cost trends to determine its net periodic pension and postretirement health care cost. These estimates are based on the Company’s best judgment, including consideration of both current and future market conditions. The Company considers both internal and external evidence to determine the appropriate assumptions. In the event a change in any of the assumptions is warranted, future pension cost as determined under SFAS No. 87.

Self-Insurance Reserves. The Company is self-insured for a substantial portion of its health care and workers’ compensation insurance programs. With advice and assistance from outside experts, reserves are established using estimates based on, among other factors, reported claims to date, prior claims history, and projections of claims incurred but not reported. Future medical cost trends are incorporated in the projected costs to settle existing claims. If actual results in any of these areas change from prior periods, adjustments to recorded reserves may be required.

NEW ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact SFAS No. 151 will have on its consolidated financial statements.

In December 2004, the FASB also issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This statement is effective for the Company beginning July 1, 2005. The Company believes that adoption of this statement will not have any material impact on its consolidated financial condition or results of operations.

The Company is exposed to market risks including changes in interest rates and changes in foreign currency exchange rates as measured against the U.S. dollar.

Interest Rate Risk. The carrying values of the Company’s revolving credit line and term loans approximate fair value. The revolving credit line is priced daily and the term loans are primarily LIBOR borrowings and are re-priced approximately every month based on prevailing market rates. A 10% change in the interest rate on the revolving credit line and term loans would have increased or decreased the 2004 interest expense by $0.2 million. The New Notes bear interest at a fixed rate of 10.00% and, therefore, are not sensitive to interest rate fluctuation. The fair value of the New Notes based on bid-side prices at December 31, 2004 was approximately $172.8 million.

Foreign Currency Risk. The Company has operating subsidiaries in Italy, Brazil and India and a branch office in France, thereby creating exposures to changes in foreign currency exchange rates. Changes in exchange rates may positively or negatively affect the Company’s sales, gross margins, and retained earnings. Historically, these locations have contributed less than 15% of the Company’s net sales and retained earnings, with most of these sales attributable to the Italian and Brazilian subsidiaries. The Company also sells its products from the United States to foreign customers for payment in foreign currencies as well as dollars. Foreign currency exchange gains totaled $0.3 million in 2004 and $0.8 million in 2003. A majority of the foreign currency exchange gains in 2004 and 2003 are related to the Company’s operations in Brazil. Effective with the beginning of the third quarter of 2002, the Company determined that $2.2 million of intercompany debt between Precision Engine Products Corp. (“PEPC”) and PEPL should be considered a long-term-investment. Foreign exchange related gains and losses on this intercompany debt are excluded from operating income and included in other comprehensive income (loss). The Company does not hedge against foreign currency risk.

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Index to Financial Statements and Supplementary Data

STANADYNE CORPORATION AND SUBSIDIARIES

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Stanadyne Corporation

We have audited the accompanying consolidated balance sheets of Stanadyne Corporation and subsidiaries (the “Company”) as of December 31, 2004 (the “Successor”) and December 31, 2003 (the “Predecessor”) and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for the period from August 6, 2004 to December 31, 2004 (the “Successor”, “148 days”) and for the period from January 1, 2004 to August 5, 2004 (the “Predecessor”, “218 days”) and for each of the two years in the period ended December 31, 2003 (Predecessor). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stanadyne Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the period from August 6, 2004 to December 31, 2004 and for the period from January 1, 2004 to August 5, 2004 and for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 5 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets.

/s/ Deloitte & Touche LLP

Hartford, Connecticut

March 23, 2005

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STANADYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

See accompanying notes to consolidated financial statements.

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STANADYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

See accompanying notes to consolidated financial statements.

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STANADYNE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)