<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1994
-----------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
--------
K & F Industries, Inc.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
------- -------
As of February 1, 1995, there were 5,533,437 shares of Class A common stock
outstanding and 4,589,938 shares of Class B common stock outstanding. All of
the Class A common stock of the Company except ten shares are owned by the
Chairman of the Company, all of the Class B common stock are owned by Loral
Corporation and all of the preferred stock except 44,999 shares are owned by
four limited partnerships of Lehman Brothers Holdings Inc.
<PAGE> 2
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 10,145,000 $ 4,327,000
Accounts receivable, net 34,076,000 32,783,000
Inventory 63,500,000 67,613,000
Other current assets 1,012,000 1,196,000
------------ ------------
Total current assets 108,733,000 105,919,000
------------ ------------
Property, plant and equipment 113,240,000 111,882,000
Less, accumulated depreciation and
amortization 49,815,000 43,142,000
------------ ------------
63,425,000 68,740,000
------------ -----------
Deferred charges, net of amortization 26,575,000 28,050,000
Cost in excess of net assets acquired,
net of amortization 209,755,000 214,340,000
Intangible assets, net of amortization 27,278,000 29,831,000
------------ ------------
$435,766,000 $446,880,000
============ ============
LIABILITIES and STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 9,660,000 $ 9,028,000
Interest payable 13,021,000 8,818,000
Other current liabilities 33,992,000 34,982,000
------------ ------------
Total current liabilities 56,673,000 52,828,000
------------ ------------
Postretirement benefit obligation other
than pensions 78,445,000 80,150,000
Other long-term liabilities 25,541,000 22,836,000
Senior revolving loan -- 10,000,000
11 7/8% senior secured notes due 2003 100,000,000 100,000,000
13 3/4% senior subordinated debentures
due 2001 210,000,000 210,000,000
14 3/4% convertible debentures due 2004 -- 61,421,000
Stockholders' Deficiency:
Preferred stock, $.01 par value-
authorized 1,500,000 and 900,000
shares; issued and outstanding
1,027,635 and 899,999 shares
(liquidation preference of
$60,110,000 and $76,154,000) 10,000 9,000
Common stock, Class B, $.01 par value-
authorized 4,600,000 shares;
issued and outstanding 4,589,938
shares (liquidation preference of
$26,848,000) 46,000 --
Common stock, Class A, $.01 par value-
authorized 21,000,000 and 5,350,000
shares; issued and outstanding
5,533,437 and 4,846,164 shares 55,000 48,000
Additional paid-in capital 155,260,000 89,943,000
Deficit (182,414,000) (172,470,000)
Adjustment to equity for minimum pension
liability (7,467,000) (7,467,000)
Cumulative translation adjustment (383,000) (418,000)
------------ ------------
Total stockholders' deficiency (34,893,000) (90,355,000)
------------ ------------
$435,766,000 $446,880,000
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Sales $175,089,000 $170,491,000
Costs and expenses 141,560,000 147,373,000
Amortization 7,823,000 7,967,000
------------ ------------
Operating income 25,706,000 15,151,000
Interest and investment income 218,000 83,000
Interest expense (1) (35,868,000) (39,013,000)
------------ ------------
Loss before cumulative effect of change
in accounting principle (9,944,000) (23,779,000)
Cumulative effect of change in method
of accounting for the discounting
of certain liabilities - (2,305,000)
------------ ------------
Net loss $ (9,944,000) $(26,084,000)
============ ============
</TABLE>
Note (1): Includes non-cash interest expense on the convertible debentures
and financing costs of $4,955,000 and $7,308,000 for the nine
months ended December 31, 1994 and 1993, respectively. (See Note 7
to the consolidated financial statements.)
See notes to consolidated financial statements.
3
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
December 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
Sales $59,946,000 $54,718,000
Costs and expenses 48,213,000 48,135,000
Amortization 2,593,000 2,655,000
----------- -----------
Operating income 9,140,000 3,928,000
Interest and investment income 140,000 48,000
Interest expense (1) (10,619,000) (12,983,000)
----------- -----------
Net loss $(1,339,000) $(9,007,000)
=========== ===========
</TABLE>
Note (1): Includes non-cash interest expense on the convertible debentures
and financing costs of $342,000 and $2,537,000 for the three months
ended December 31, 1994 and 1993, respectively. (See Note 7 to the
consolidated financial statements.)
See notes to consolidated financial statements.
4
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(9,944,000) $(26,084,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in
accounting for the discounting of
certain liabilities - 2,305,000
Depreciation and amortization 14,496,000 15,098,000
Non-cash interest expense 4,955,000 7,308,000
Changes in assets and liabilities:
Accounts receivable, net (1,275,000) 15,310,000
Inventory 4,130,000 3,664,000
Other current assets 184,000 (274,000)
Accounts payable, interest payable,
and other current liabilities 3,845,000 (396,000)
Postretirement benefits other
than pensions (1,705,000) (1,280,000)
Other long-term liabilities 2,705,000 (2,484,000)
------------ ------------
Net cash provided by operating
activities 17,391,000 13,167,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,358,000) (2,326,000)
Deferred charges (215,000) 74,000
------------ ------------
Net cash used in investing activities (1,573,000) (2,252,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan (20,000,000) (36,500,000)
Borrowings of senior revolving loan 10,000,000 24,000,000
Payment of convertible debentures (12,764,000) -
Proceeds from issuance of capital stock 12,764,000 -
Proceeds from sale/leaseback transaction - 1,996,000
------------ ------------
Net cash used by financing activities (10,000,000) (10,504,000)
------------ ------------
Net increase in cash and
cash equivalents 5,818,000 411,000
Cash and cash equivalents, beginning
of period 4,327,000 2,921,000
------------ ------------
Cash and cash equivalents, end of
period $ 10,145,000 $ 3,332,000
============ ============
Supplemental cash flow information:
Cash interest paid during the period $ 26,710,000 $ 27,939,000
============ ============
Supplemental disclosure of non-cash financing activities:
See Note 7 for a discussion of non-cash financing activities
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company") pursuant
to the rules of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position,
results of operations and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules. The Company believes that the disclosures made
are adequate to make the information presented not misleading. The
consolidated statements of operations for the three and nine months ended
December 31, 1994 are not necessarily indicative of the results to be
expected for the full year. It is suggested that these financial statements
be read in conjunction with the audited financial statements and notes
thereto included in the Company's March 31, 1994 Annual Report on Form 10-K.
2. Accounting Change
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires that the costs of
benefits provided to employees after employment but before retirement be
recognized in the financial statements on an accrual basis. The adoption of
SFAS No. 112 did not have a material effect on the Company's financial
position or results of operations.
3. Receivables are summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ -----------
<S> <C> <C>
Accounts receivable, principally from
commercial customers $32,220,000 $29,099,000
Accounts receivable, on U. S. Government
and other long-term contracts 2,585,000 4,379,000
Allowances (729,000) (695,000)
----------- -----------
$34,076,000 $32,783,000
=========== ===========
</TABLE>
4. Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ -----------
<S> <C> <C>
Raw materials and work-in-process $37,712,000 $42,375,000
Finished goods 14,404,000 15,821,000
Inventoried costs related to U.S.
Government and other long-term
contracts 12,138,000 9,823,000
----------- -----------
64,254,000 68,019,000
Less, unliquidated progress payments
received, principally related
to long-term government contracts 754,000 406,000
----------- -----------
$63,500,000 $67,613,000
=========== ===========
</TABLE>
6
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company customarily sells original wheel and brake equipment below cost
as an investment in a new airframe which is expected to be recovered through
the subsequent sale of replacement parts. These commercial investments
(losses) are recognized when original equipment is shipped. Losses on U.S.
Government contracts are immediately recognized in full when determinable.
Inventory is stated at average cost, not in excess of net realizable value.
In accordance with industry practice, inventoried costs may contain amounts
relating to contracts with long production cycles, a portion of which will
not be realized within one year.
5. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------ -----------
<S> <C> <C>
Accrued payroll costs $13,308,000 $11,687,000
Accrued taxes 6,724,000 7,094,000
Accrued costs on long-term contracts 3,818,000 3,415,000
Accrued warranty costs 5,498,000 4,502,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 2,644,000 6,284,000
----------- -----------
$33,992,000 $34,982,000
=========== ===========
</TABLE>
6. Contingencies
There are various lawsuits and claims pending against the Company incidental
to its business. Although the final results in such suits and proceedings
cannot be predicted with certainty, in the opinion of management, the
ultimate liability, if any, will not have a material adverse effect on the
Company.
7. Retirement of Debt
On September 2, 1994, K & F retired the $65,371,000 principal amount of 14
3/4% Subordinated Convertible Debentures due 2004 held by Loral Corporation,
in exchange for $12,764,000 in cash and 4,589,938 shares of Class B common
stock representing 22.5% of equity. The cash portion of this transaction
was funded with the proceeds from the sale of capital stock to K & F's
principal stockholders for which stockholders received a total of 687,273
shares of Class A common stock and 127,636 shares of preferred stock. As a
result, K & F's stockholders' equity was increased by $65,371,000 million
and long-term debt was reduced by an equal amount, resulting in no gain or
loss on the transaction.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Comparison of Results of Operations for the Nine Months Ended December 31, 1994
and December 31, 1993
Sales for the first nine months of fiscal year 1995 totaled $175,089,000
reflecting an increase of $4,598,000 or 2.7% compared with $170,491,000 for the
same period in the prior year. This increase was due to higher commercial
sales of wheels and brakes for both commercial transport and general aviation
aircraft of $13,200,000, primarily on the DC-9, DC-10, Fo-100 and Beech
programs. The Company is experiencing generally stronger demand over
substantially all of its commercial programs and expects this trend to continue
over the near term. Partially offsetting this increase were lower military
sales of $3,700,000 primarily on the F-16 program and lower shipments of
commercial oil containment booms of $5,100,000.
Operating income increased 69.7% to $25,706,000 or 14.7% of sales for the first
nine months of fiscal year 1995 compared with $15,151,000 or 8.9% of sales for
the same period in the prior year. Operating margins increased primarily due
to a favorable sales mix (whereby higher-margin commercial sales comprised a
higher percentage of total sales), the favorable overhead absorption effect
relating to the higher sales volume, lower shipments of original equipment to
airframe manufacturers at or below the cost of production and cost reductions
implemented during fiscal year 1994.
Interest expense decreased $3,145,000 for the first nine months of fiscal year
1995 compared with the same period in the prior year. This decrease was
primarily due to the retirement of the convertible debentures on September 2,
1994 (see Note 7 to the consolidated financial statements) and a lower average
principal balance on the senior revolving loan.
Approximately 360 hourly employees of the Company's Aircraft Braking Systems
subsidiary are represented by the United Auto Workers' Union. Aircraft Braking
Systems' three-year contract with the United Auto Workers' Union expired on
August 10, 1991. Aircraft Braking Systems has not had a ratified collective
bargaining agreement since August 10, 1991, but has operated under Company
implemented terms and conditions of employment.
Comparison of Results of Operations for the Three Months Ended December 31,
1994 and December 31, 1993
Sales for the third quarter of fiscal year 1995 totaled $59,946,000 reflecting
an increase of $5,228,000 or 9.6% compared with $54,718,000 for the same period
in the prior year. This increase was due to higher commercial sales of wheels
and brakes of $6,400,000 primarily on the DC-9, DC-10 and Canadair CL600
programs. Partially offsetting this increase were lower military sales of
$500,000 and lower shipments of commercial oil containment booms of $700,000.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Operating income more than doubled to $9,140,000 or 15.2% of sales for the
third quarter of fiscal year 1995 compared with $3,928,000 or 7.2% of sales for
the same period in the prior year. Operating margins increased primarily due
to a favorable sales mix (whereby higher-margin commercial sales comprised a
higher percentage of total sales), the favorable overhead absorption effect
relating to the higher sales volume and cost reductions implemented during
fiscal year 1994.
Interest expense decreased $2,364,000 for the third quarter of fiscal year 1995
compared with the same period in the prior year. This decrease was primarily
due to the retirement of the convertible debentures on September 2, 1994. (See
Note 7 to the consolidated financial statements.)
Financial Condition
The Company expects that its principal use of funds for the next
several years will be to pay interest on indebtedness, fund capital
expenditures and make investments in original equipment for new airframes.
Debt amortization commences August 1, 1999. The Company's management believes
that it will have adequate resources to meet its cash requirements through
funds generated from operations and borrowings under its $80 million revolving
credit facility (maturing April 27, 1997 and subject to a borrowing base of a
portion of eligible accounts receivable and inventory). At December 31, 1994,
the Company had $55.3 million available to borrow under its revolving credit
facility.
On September 2, 1994, K & F retired the $65,371,000 principal amount of 14 3/4%
Convertible Debentures due 2004 held by Loral Corporation, in exchange for
$12,764,000 in cash and 4,589,938 shares of Class B common stock representing
22.5% of equity. The retirement of the convertible debentures has reduced the
Company's future cash requirements by approximately $195 million had the
debentures been outstanding until maturity. (See Note 7 to the consolidated
financial statements.)
Accounting Change
Effective April 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits."
The adoption of SFAS No. 112 did not have a material effect on the Company's
financial position or results of operations. (See Note 2 to the consolidated
financial statements.)
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended December 31,
1994.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
KENNETH M. SCHWARTZ
-----------------------
Kenneth M. Schwartz
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: February 8, 1995
11
<PAGE> 12
EXHIBIT INDEX
-------------
Exhibit No. 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 10,145,000
<SECURITIES> 0
<RECEIVABLES> 34,805,000
<ALLOWANCES> 729,000
<INVENTORY> 63,500,000
<CURRENT-ASSETS> 108,733,000
<PP&E> 113,240,000
<DEPRECIATION> 49,815,000
<TOTAL-ASSETS> 435,766,000
<CURRENT-LIABILITIES> 56,673,000
<BONDS> 310,000,000
<COMMON> 101,000
0
10,000
<OTHER-SE> (35,004,000)
<TOTAL-LIABILITY-AND-EQUITY> 435,766,000
<SALES> 175,089,000
<TOTAL-REVENUES> 175,089,000
<CGS> 120,892,000
<TOTAL-COSTS> 120,892,000
<OTHER-EXPENSES> 12,803,000
<LOSS-PROVISION> 34,000
<INTEREST-EXPENSE> 35,868,000
<INCOME-PRETAX> (9,944,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,944,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,944,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
