<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission file number 33-29035
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K & F Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 34-1614845
- -------------------------------------------- ----------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
600 Third Avenue, New York, NY 10016
- -------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 297-0900
------------------
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 report(s)), 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/
There is no trading market for the Company's common stock. As of June 1, 1995
there were 553,344 shares of Class A common stock outstanding and 458,994 shares
of Class B common stock outstanding.
Documents Incorporated by Reference: None
<PAGE> 2
PART I
Item I. Business
General
K & F Industries, Inc. ("K & F" or the "Company") was incorporated in Delaware
on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft Braking
Systems Corporation ("Aircraft Braking Systems"), is one of the world's leading
manufacturers of aircraft wheels, brakes and anti-skid systems for commercial
transport, general aviation and military aircraft. K & F sells its products to
virtually all major airframe manufacturers and most commercial airlines and to
the United States and certain foreign governments. During the fiscal year ended
March 31, 1995, approximately 87% of the Company's total revenues were derived
from sales made by Aircraft Braking Systems. In addition, K & F through its
wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"),
believes it is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 90% of the worldwide general aviation and commercial
transport market and nearly one-half of the domestic military market. Engineered
Fabrics also manufactures and sells iceguards and specialty coated fabrics used
for storage, shipping, environmental and rescue applications for commercial and
military uses. During the fiscal year ended March 31, 1995, approximately 13% of
the Company's total revenues were derived from sales made by Engineered Fabrics.
Aircraft Braking Systems and its predecessors have been leaders in the design
and development of aircraft wheels, brakes and anti-skid systems, investing
significant resources refining existing braking systems, developing new
technologies and designing braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
The Aircraft Wheel and Brake Industry
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for bids
from manufacturers. Selections are made by the manufacturer on the basis of
technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be "dual
sourcing" of wheels and brakes. In such case, an airframe manufacturer may
approve and receive FAA certification to configure a particular airframe with
equipment provided by two or more wheel and brake manufacturers. Where two
suppliers have been certified, the aircraft customer, such as a major airline,
will designate the original equipment to be installed on the customer's
aircraft. Competition among two certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
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<PAGE> 3
In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
equipment below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through
sale of replacement parts. Recovery of pricing concessions and design costs for
each airframe's wheels and brakes is contingent on a number of factors but
generally occurs prior to the end of the useful life of the particular aircraft.
Price concessions on original wheel and brake equipment are not customary in the
military market. Although manufacturers of military aircraft generally select
only one supplier of wheels and brakes for each model, the Government has
approved at times the purchase of specific component replacement parts from
suppliers other than the original supplier of the wheel and brake system.
Products
AIRCRAFT BRAKING SYSTEMS. Aircraft Braking Systems is one of the world's leading
manufacturers of wheels, steel and carbon brakes and anti-skid systems for
commercial transport, general aviation and military aircraft. The Company's
strategic focus is on high-cycle, medium- and short-range commercial aircraft.
These aircraft typically make frequent landings and correspondingly require more
frequent replacement of brake parts. The number of commercial transport
aircraft equipped with the Company's wheels and brakes continued to grow during
fiscal year 1995, due to an increase in the number of new aircraft entering
service, as well as a slower than expected retirement rate of older aircraft.
Airlines have responded to recent FAA regulatory noise abatement requirements
by outfitting their older DC-9 fleets with engine hushkits and aircraft
structural overhauls which effectively add fifteen years of service life to
the aircraft. The Company expects to produce replacement parts for these
refurbished aircraft over this period. Northwest Airlines, USAir and ValuJet
have recently opted for DC-9 life extension refurbishment programs, to meet
capacity needs, in lieu of buying replacement aircraft new. Other airlines are
expected to follow similar strategies, as the economics generally are more
favorable.
Approximately 75% of Aircraft Braking Systems' revenues are derived from the
sale of replacement parts. As of March 31, 1995, the Company's products had been
installed on over 30,000 commercial transport, general aviation and military
aircraft for which Aircraft Braking Systems is the sole-source supplier on the
DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340. In
addition, the Company supplies spare parts for the MD-80 program on a
dual-source wheel and brake program.
Aircraft Braking Systems has been successful in having its wheels and brakes
selected for use on a number of new high-cycle airframe designs. These aircraft
that are just beginning to enter service include the McDonnell Douglas MD-90,
Airbus A-321, A-319, Fokker Fo-70, Canadair Regional Jet, Saab 2000, Lear 60 and
Fairchild Metro 23. In addition, the Company is a supplier of wheels and carbon
brakes for the Airbus A-330 and A-340 wide-body jets.
Aircraft Braking Systems is the sole supplier for wheels, carbon brakes and
anti-skid equipment on the new McDonnell Douglas MD-90 twin-jet. The MD-90 adds
new performance characteristics to a product line that began as the DC-9 model
jet that first flew in 1965 and evolved later into the popular MD-80 series also
furnished with Aircraft Braking Systems' wheels and brakes. A technologically
innovative design, the MD-90 is equipped with an advanced turbofan engine that
complies with the FAA's restrictive Stage III noise restrictions, offering fuel
savings over competing engines. Delta Airlines, the launch customer, has taken
delivery of five MD-90s out of a total order of 31. McDonnell Douglas has
booked orders for over 100 aircraft. Other customers for the MD-90 include Japan
Air System and Saudi Arabia which recently announced orders for 29 of these
aircraft.
Aircraft Braking Systems is a basic supplier of wheels and carbon brakes on the
Airbus A-321, the European consortium's new 186-seat "stretch" version of its
popular A-320 standard body twin-jet. Based on airline selections to date,
Aircraft Braking Systems has captured 85% of the A-321 wheel and brake
requirements including Lufthansa, Alitalia, Austrian Airlines and Swissair.
Airbus has booked orders for over 150 aircraft.
Aircraft Braking Systems is supplying wheels, carbon brakes and anti-skid
equipment on the Fokker Fo-100 and Fo-70 aircraft on a sole-source basis. The
Fo-100 has 276 firm orders of which 262 have been delivered. The Fo-70, the
newest Fokker narrow-body jet has 59 firm orders of which nine have been
delivered. Operators currently using the Fo-100 include American Airlines with
75 aircraft and USAir with 40 aircraft. Customers for the Fo-70 include
Alitalia, British Midland, Air Littoral, Pelita and Sempati Airlines.
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<PAGE> 4
The Company's anti-skid systems, which are integrated into a braking system, are
designed to minimize the distance required to stop an aircraft by utilizing
sensors, mounted on the wheel to maximize the braking force while also
preventing the wheels from locking and skidding. Of the three principal
competitors in the wheel and brake industry, Aircraft Braking Systems is the
only significant manufacturer of anti-skid systems. Because of the sensitivity
of anti-skid systems to variations in brake performance, the Company's
management believes that the ability to control the design and performance
characteristics of the strut, brakes and its integrated anti-skid system gives
Aircraft Braking Systems a competitive advantage over its two largest
competitors. Other products manufactured by the Company include helicopter rotor
brakes and brake temperature monitoring equipment for various types of aircraft.
The following table shows the distribution of sales of aircraft wheels, brakes
and anti-skid systems to total sales of the Company:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Wheels and brakes . . . . . . . . . . . . . . . . . . . . . . . . . 80% 76% 75%
Anti-skid systems . . . . . . . . . . . . . . . . . . . . . . . . . 7% 10% 10%
-- -- --
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87% 86% 85%
== == ==
</TABLE>
ENGINEERED FABRICS. Engineered Fabrics is the largest aircraft fuel tank
manufacturer in the world, serving approximately 90% of the worldwide general
aviation and commercial transport market and nearly one-half of the domestic
military market. For the fiscal year ended March 31, 1995, approximately 13% of
the Company's total revenues were derived from sales made by Engineered Fabrics.
Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the fiscal year ended March 31, 1995, sales of fuel
tanks accounted for approximately 68% of Engineered Fabrics' total revenues. For
military helicopter applications, Engineered Fabrics' fuel tanks feature
encapsulated layers of rubber which expand in contact with fuel thereby sealing
off holes or gashes caused by bullets or other projectiles penetrating the walls
of the fuel tank. The Company uses this "self-sealing" technology to manufacture
crash-resistant fuel tanks for helicopters, military aircraft and race cars that
significantly reduce the potential for fires, leaks and spilled fuel following a
crash. Engineered Fabrics is the only known supplier of polyurethane fuel tanks
for aircraft, which are substantially lighter and more flexible than their metal
or nitrile counterparts and therefore cost-advantageous.
In addition to fuel tanks, Engineered Fabrics produces iceguards, which are
heating systems made out of layered composite materials that are applied on
engine inlets, propellers, rotor blades and tails. Encapsulated in the material
are heating elements which are connected to the electrical system of the
aircraft and, when activated by the pilot, heat the composite to inhibit the
formation of ice.
The Company also produces a variety of products utilizing coated fabrics such as
oil containment booms, towable storage bladders, heavy lift bags and pillow
tanks. Oil containment booms are air-inflated cylinders that are used to confine
oil spilled on the high seas and along coastal waterways. Towable storage
bladders are used for storage and transportation of the recovered oil after
removal from the water. Heavy lift bags, often used in emergency situations, are
inserted into tight spaces and inflated to lift heavy loads short distances.
Pillow tanks are collapsible rubberized containers used as an alternative to
steel drums and stationary storage tanks for the storage of liquids.
Sales and Customers
K & F sells its products to more than 150 airlines, airframe manufacturers,
governments and distributors within each of the commercial transport, general
aviation and military aircraft markets. Sales to the U.S. government represented
approximately 14%, 15% and 23% of total sales for the fiscal years ended March
31, 1995, 1994 and 1993, respectively. No other customer accounted for more than
10% of sales.
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<PAGE> 5
The following table shows the distribution of total Company revenues by
respective market, as a percentage of total revenues:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Commercial transport . . . . . . . . . . . . . . . . . . . . . . . . . 61% 60% 55%
Military (U.S. and foreign) . . . . . . . . . . . . . . . . . . . . . 19% 22% 28%
General aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% 18% 17%
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
=== === ===
</TABLE>
COMMERCIAL TRANSPORT. Customers for the Company's products in the commercial
transport market include most airframe manufacturers and major airlines. The
Company's products are used on a broad range of large commercial transports (60
seats or more) and commuter aircraft (20 to 60 seats). Where multiple braking
systems are certified for a particular aircraft, it is generally the airline and
not the airframe manufacturer that decides which of the approved wheel and brake
suppliers will originally equip such airlines fleet. Some of the Company's
airline customers include American Airlines, Delta Air Lines, Alitalia, Japan
Air Systems, Lufthansa, Swissair, Northwest Airlines, United Airlines and USAir.
The Company provides replacement parts for certain aircraft designed by The
Boeing Company ("Boeing") including the Boeing 707, but does not produce
products for any commercial aircraft currently manufactured by Boeing.
MILITARY. The Company believes it is the largest supplier of wheels, brakes and
fuel tanks to the U.S. military and also supplies the militaries of certain
foreign governments. The Company's products are used on a variety of fighters,
training aircraft, transports, cargo planes, bombers and helicopters. Some of
the military aircraft using these products are the F-4, F-14, F-16, F-117A,
A-10, B-1B and the C-130. Substantially all of the Company's military products
are sold to the Department of Defense or to airframe manufacturers including
Lockheed Martin, McDonnell Douglas, Northrop Grumman, Boeing, Sikorsky, Bell and
Rockwell. Anti-skid systems, manufactured for the military, are used on the
F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and Jaguar
aircraft.
GENERAL AVIATION. The Company believes it is the industry's largest supplier of
wheels, brakes and fuel tanks for general aviation aircraft. This market
includes personal, business and executive aircraft. Customers include airframe
manufacturers, such as Gulfstream, Beech Aircraft, Lear, Canadair, Cessna,
Dassault and distributors, such as Aviall. Anti-skid systems are supplied by the
Company to Gulfstream, Canadair, Dassault and a variety of other aircraft
manufacturers. General aviation aircraft using the Company's equipment
exclusively include the Beech Starship and Beech 400 series of aircraft, the
Lear series 20, 30, 50 and 60 and the Gulfstream G-I, G-II and G-III.
Foreign Customers
The Company supplies products to a number of foreign aircraft manufacturers,
airlines and foreign governments. The following table shows sales of the Company
to both foreign and domestic customers for the last three fiscal years:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62% 63% 68%
Foreign sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38% 37% 32%
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
=== === ===
</TABLE>
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<PAGE> 6
Independent Research and Development
The Company employs scientific, engineering and other personnel to improve its
existing product lines and to develop new products and technologies in the same
or related fields. At March 31, 1995, the Company employed approximately 148
engineers (of whom 30 held advanced degrees); approximately 27 of such engineers
(including 13 holding advanced degrees) devoted all or part of their effort
toward a variety of projects including: refining carbon processing techniques to
create more durable braking systems; upgrading existing braking systems to
provide enhanced performance; and developing new technologies to improve the
Company's products.
The costs incurred relating to independent research and development for the
fiscal years ended March 31, 1995, 1994, and 1993 were $8.4 million, $12.9
million and $11.4 million, respectively.
Patents and Licenses
The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.
Competition
The Company faces substantial competition from a few suppliers in each of its
product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company.
Both significant competitors are larger and have greater financial resources
than the Company. The principal competitor for anti-skid systems is the
Hydro-Aire Division of Crane Co. The principal competitor for fuel tanks is
American Fuel Cell & Coated Fabrics Company.
Backlog
Backlog at March 31, 1995 and 1994 amounted to approximately $151.4 million and
$141.5 million, respectively. Backlog consists of firm orders for the Company's
products which have not been shipped. Approximately 72% of total Company backlog
at March 31, 1995 is expected to be shipped during the fiscal year ended March
31, 1996, with the balance expected to be shipped over the subsequent two-year
period. No significant seasonality exists for sales of the products manufactured
by the Company.
Of the total Company backlog at March 31, 1995, approximately 31% was directly
or indirectly for end use by the United States Government (the "Government"),
substantially all of which was for use by the Department of Defense. For certain
risks associated with Government contracts, see "Government Contracts" discussed
below.
Government Contracts
Recent political developments in some regions of the globe have led to
reconsideration of the United States' military objectives and requirements and a
resultant decline in spending on defense related products. Reduced Government
demand for products supplied by the Company has and may continue to have adverse
effects on sales, income and cash flow. For the fiscal years ended March 31,
1995, 1994 and 1993, approximately 14%, 15%, and 23%, respectively, of the
Company's total sales were made to agencies of the Government or to prime
contractors or subcontractors of the Government.
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<PAGE> 7
All of the Company's defense contracts are firm, fixed-price contracts under
which the Company agrees to perform for a predetermined price. Although the
Company's fixed-price contracts generally permit the Company to keep unexpected
profits if costs are less than projected, the Company does bear the risk that
increased or unexpected costs may reduce profit or cause the Company to sustain
losses on the contract. All domestic defense contracts and subcontracts to which
the Company is a party are subject to audit, various profit and cost controls
and standard provisions for termination at the convenience of the Government.
Upon termination, other than for a contractor's default, the contractor will
normally be entitled to reimbursement for allowable costs and to an allowance
for profit. Foreign defense contracts generally contain comparable provisions
relating to termination at the convenience of the government. To date, no
significant fixed-price contract of the Company has been terminated.
Companies supplying defense-related equipment to the Government are subject to
certain additional business risks peculiar to that industry. Among these risks
are the ability of the Government to unilaterally suspend the Company from new
contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in advance
of design completion. A reduction in expenditures by the Government for aircraft
using products of the type manufactured by the Company, or lower margins
resulting from increasingly competitive procurement policies, or a reduction in
the volume of contracts or subcontracts awarded to the Company or substantial
cost overruns would have an adverse effect on the Company's cash flow.
Supplies and Materials
The principal raw materials used in the Company's wheel and brake manufacturing
operations are steel, aluminum forgings and carbon compounds. The Company
purchases steel and aluminum forgings from several sources. Substantially all of
the Company's carbon is purchased from HITCO, a division of British Petroleum
Company, p.l.c., pursuant to a multi-year supply contract. Aircraft Braking
Systems also operates a continuous carbon furnace in which it internally
manufactures carbon for selected programs. The Company also recently developed a
new European source of carbon to supply a portion of the carbon which will be
used to produce braking systems for use on the A-321. The principal raw
materials used by Engineered Fabrics to manufacture fuel tanks and related
coated fabric products are nylon cloth, forged metal fittings and various
adhesives and coatings, whose formulae are internally developed and proprietary.
The Company has not experienced any difficulty obtaining sources of supplies or
adequate supplies of these raw materials, and believes that sufficient supplies
and alternative sources of supply will be available in the foreseeable future.
Personnel
At March 31, 1995, the Company had 1,173 full-time employees, of which 799 were
employed by Aircraft Braking Systems (369 hourly and 430 salaried employees) and
374 were employed by Engineered Fabrics (253 hourly and 121 salaried employees).
All 369 of Aircraft Braking Systems' hourly employees are represented by the
United Auto Workers' Union and all 253 of Engineered Fabrics' hourly employees
are represented by the United Textile Workers' Union.
Engineered Fabrics has entered into a three-year contract with its union that
expires on February 5, 1998. Aircraft Braking Systems' three-year contract with
the United Auto Workers' Union expired on August 10, 1991. Aircraft Braking
Systems has not had a ratified collective bargaining agreement since August 10,
1991, but has operated under Company implemented terms and conditions of
employment.
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<PAGE> 8
Item 2. Properties
United States Facilities. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio, and consists of
approximately 754,000 square feet of manufacturing, engineering and office
space. Engineered Fabrics' facility is located in Rockmart, Georgia, and
consists of approximately 564,000 square feet of manufacturing, engineering and
office space. The Company believes that its property and equipment are generally
well-maintained, in good operating condition and adequate for its present needs.
Foreign Facilities. The Company occupies approximately 19,000 square feet of
leased office and warehouse space in Slough, England, under a lease expiring in
2020. The Company also maintains sales and service offices in Rome and Toulouse,
France.
Akron Facility Arrangements. The Aircraft Braking Systems manufacturing plant
acquired from Loral Corporation ("Loral") (the "Acquisition") was a part of a
larger complex owned and operated by Loral. Since complete physical separation
of the Aircraft Braking Systems facility from the balance of the complex was
impractical at the time of the Acquisition, Loral and Aircraft Braking Systems
entered into various agreements covering occupancy arrangements and shared
easements and services (including utility services). As an occupant of space
within the Loral complex of approximately 433,000 square feet, Aircraft Braking
Systems is subject to annual occupancy payments to Loral. During the fiscal year
ended March 31, 1995 Aircraft Braking Systems made occupancy payments to Loral
of $1.3 million. While most of the agreements are temporary (having terms
ranging from two to 10 years from the closing date of the Acquisition), certain
access easements and easements regarding water, sanitary sewer, storm sewer,
gas, electricity and telecommunication are perpetual. In addition, as a
condition to obtaining governmental approval to divide the real property
following the Acquisition, Loral and Aircraft Braking Systems jointly formed and
equally control Valley Association Corporation, an Ohio corporation, thereby
establishing a single legal entity to deal with the City of Akron and utility
companies concerning governmental and utility services furnished to Loral's and
Aircraft Braking Systems' facilities and to receive and comply with remedial
requests issued by such institutions.
Item 3. Legal Proceedings
Aircraft Braking Systems is a defendant in a patent infringement suit filed on
January 31, 1991, by the B.F. Goodrich Company in the United States District
Court for the District of Delaware. The suit alleges infringement by Aircraft
Braking Systems of two Goodrich patents related to the structure and method of
overhaul of aircraft brake assemblies and seeks damages of approximately $75
million. On November 10, 1994, the court issued its decision in favor of
Aircraft Braking Systems and dismissed the plaintiff's claims. The court held
that the patents were invalid and that the Company's brake assemblies did not
infringe the patents. The plaintiff has appealed the decision, however,
management believes based on the court's decision and its own assessment of the
facts and circumstances, as well as advice from counsel, that it is remote that
the Company would suffer a material liability as a result of the above mentioned
lawsuit.
In addition to the foregoing, there are various lawsuits and claims pending
against the Company incidental to its business. Although the final results in
such suits and proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate liability, if any, will not have a material adverse
effect on the Company.
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<PAGE> 9
Environmental Matters
The Company's manufacturing operations are subject to regulation by various
federal, state and local agencies concerned with environmental control. The
Company believes that its manufacturing facilities are in substantial compliance
with all existing federal, state and local environmental regulations. The
Company does not believe that its environmental expenditures, if any, will have
a material adverse effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<PAGE> 10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters
There is no trading market for the Company's common stock. All of the Class A
common stock of the Company except one share (which is owned by CBC Capital
Partners, Inc., an affiliate of Chemical Banking Corporation) are owned by
Bernard L. Schwartz ("BLS"), Chairman of the Company. All of the Class B common
stock are owned by Loral. See Note 7 to the consolidated financial statements
for a description of the Amended and Restated Revolving Credit Agreement (the
"Revolving Loan"), the 11 7/8% Senior Secured Notes due 2003 (the "Senior
Notes"), and the 13 3/4% Senior Subordinated Debentures due 2001 (the
"Subordinated Debentures"). (See "Security Ownership of Certain Beneficial
Owners and Management.")
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<PAGE> 11
Item 6. Selected Financial Data
The selected financial data has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ..................................... $ 238,756 $ 226,131 $ 277,107 $ 295,490 $ 314,635
Cost of sales ................................. 164,697 159,751 199,002 209,552 223,360
Independent research and development .......... 8,363 12,858 11,417 14,130 11,781
Selling, general and administrative expenses .. 19,208 22,421 24,154 24,047 25,345
Amortization .................................. 10,411 10,884 10,258 10,306 10,233
--------- --------- --------- --------- ---------
Operating income .............................. 36,077 20,217 32,276 37,455 43,916
Interest expense, net ......................... 46,250 51,953 53,486 52,179 54,196
--------- --------- --------- --------- ---------
Loss before extraordinary charge and cumulative
effect of accounting changes ................ (10,173) (31,736) (21,210) (14,724) (10,280)
Extraordinary charge (a) ...................... -- -- (2,477) (992) --
Cumulative effect of accounting changes ....... -- (2,305)(b) (73,540)(c) -- --
--------- --------- --------- --------- ---------
Net loss ...................................... $ (10,173) $ (34,041) $ (97,227) $ (15,716) $ (10,280)
========= ========= ========= ========= =========
BALANCE SHEET DATA (at end of period):
Working capital ............................... $ 48,025 $ 53,091 $ 70,028 $ 77,606 $ 52,312
Total assets .................................. 429,074 446,880 489,968 518,938 536,781
Long-term obligations (d) ..................... 406,933 484,407 480,580 405,111 404,871
Stockholders' equity (deficiency) (c) (d) ..... (34,748) (90,355) (51,868) 48,331 38,172
OTHER DATA (for the period):
Capital expenditures, net ..................... 2,824 3,127 4,670 3,986 8,718
Depreciation and amortization ................. 18,843 20,527 19,862 19,501 18,683
Non-cash interest - Convertible Debentures (d). 3,950 8,443 7,282 6,213 5,237
Non-cash interest - financing costs ........... 1,482 1,480 1,507 2,467 1,692
</TABLE>
(a) The extraordinary charge of $2,477 and $992 relates to the accelerated
amortization of unamortized financing costs associated with the
prepayment in full of the senior term loan in fiscal year 1993 and the
partial prepayment of the senior term loan in fiscal year 1992. (See
Note 7 to the consolidated financial statements.)
(b) Represents cumulative effect of the change in method of accounting for
the discounting of liabilities for workers' compensation losses. (See
Note 2 to the consolidated financial statements.)
(c) Includes cumulative effect of accounting change for SFAS No. 106 and the
change in method of accounting for certain overhead costs in inventory.
(See Notes 11 and 4 to the consolidated financial statements.)
(d) On September 2, 1994, K & F retired the $65.4 million principal amount
of Convertible Debentures held by Loral, in exchange for $12.76 million
in cash and 22.5% of equity. As a result, K & F stockholders' equity was
increased by $65.4 million and long-term debt was reduced by an equal
amount. (See Notes 7 and 9 to the consolidated financial statements.)
-11-
<PAGE> 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Aircraft Braking Systems generates approximately 75% of its revenues through the
sale of replacement parts for wheels and braking systems previously manufactured
by the Company and its predecessors and installed on over 30,000 commercial,
general aviation and military aircraft. As is customary in the industry,
Aircraft Braking Systems incurs substantial expenditures to research, develop,
design and supply original wheel and brake equipment to aircraft manufacturers
at or below the cost of production ("program investments"). Such expenditures
are charged to operations when incurred, or in the case of program investments,
when delivered to the aircraft manufacturer. Since most modern aircraft have a
useful life of 25 years or longer and require periodic replacement of certain
components of the braking system, the Company typically recoups its initial
investment in original equipment and generates significant profits from the
sales of replacement parts over the life of the aircraft. The Company has
invested and will continue to invest significant resources to have its products
selected for use on new commercial airframes, focusing particularly on medium-
and short-range aircraft. During the three years ended March 31, 1995, the
Company spent an aggregate of $103 million for research, development, design and
program investments. As a result of these efforts, the Company has been selected
as a basic supplier of wheels and carbon brakes on the Airbus A-321, the sole
supplier of wheels, carbon brakes and anti-skid systems on the MD-90, Fo-100 and
Fo-70, the sole supplier of wheels and brakes for the Saab 2000, the Canadair
Regional Jet, the Lear 60, the Fairchild Metro 23 and as a supplier of wheels
and carbon brakes for the Airbus A-330 and A-340. These programs are in the
early stages of their life cycles and represent significant future growth
opportunities for the Company.
The Company believes that Department of Defense budget reductions have resulted
in a general reduction in the use and deployment of military aircraft. Sales to
the United States military were 14%, 15% and 23% of the Company's total sales
during the fiscal years ended March 31, 1995, 1994 and 1993, respectively. Based
on current backlog and anticipated orders, the Company does not anticipate any
further significant reduction in sales to the United States military from their
fiscal year 1995 levels.
Results of Operations
Fiscal Year 1995 Compared with Fiscal Year 1994
SALES. Sales for fiscal year 1995 totaled $238.8 million reflecting an increase
of $12.6 million or 5.6% compared with the prior year. This increase was due to
higher commercial sales of wheels and brakes for both commercial transport and
general aviation aircraft of $21.3 million, primarily on the DC-9, DC-10,
Fo-100, MD-90 and Beech programs. The Company experienced strong demand over
substantially all of its commercial programs during fiscal year 1995. Partially
offsetting this increase were lower military sales of $3.3 million primarily on
the F-16 program and lower shipments of commercial oil containment booms of $5.4
million.
GROSS MARGIN. The gross margin for fiscal year 1995 was 31.0% compared with
29.4% for fiscal year 1994. This increase was primarily due to a favorable sales
mix, operating efficiencies and the overhead absorption effect relating to the
higher sales volume.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs
were $8.4 million in fiscal year 1995 compared with $12.9 million in fiscal year
1994 or 3.5% and 5.7% of sales for fiscal years 1995 and 1994, respectively.
This decrease was primarily due to the incurrance of lower costs associated with
the MD-90 and A-321 programs. The majority of the design and development efforts
relating to these programs has already been completed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $3.2 million in fiscal year 1995 compared with
fiscal year 1994. This decrease is primarily due to cost reductions implemented
during fiscal year 1994.
-12-
<PAGE> 13
INTEREST EXPENSE, NET. Net interest expense decreased $5.7 million in fiscal
year 1995 compared with the prior year. This decrease was due to the retirement
of the 14 3/4% Subordinated Convertible Debentures (the "Convertible
Debentures") on September 2, 1994 (see Notes 7 and 9 to the consolidated
financial statements) and due to a lower average principal balance on the
Revolving Loan.
Fiscal Year 1994 Compared with Fiscal Year 1993
SALES. Sales for fiscal year 1994 totaled $226.1 million compared with $277.1
million in the prior year. Military sales decreased $27.2 million primarily on
the F-16, F-14A, S-3A, F-117A and Saab J-35 and J-37 programs, reflecting the
overall decline in government procurements. Commercial sales decreased $23.8
million, of which approximately $7.0 million was attributable to replacement
parts of aircraft wheels and brakes, principally on the DC-10 program.
Additionally, demand for original equipment on the MD-11 and various Gulfstream
programs was down and sales of oil spill containment booms were also below prior
year levels.
GROSS MARGIN. The gross margin for fiscal year 1994 was 29.4% compared with
28.2% for fiscal year 1993. This increase was due primarily to lower
postretirement health care and life insurance costs in fiscal year 1994
resulting from various plan amendments (see Note 11 to the consolidated
financial statements) and a favorable sales mix, whereby higher
margin-commercial sales comprised a higher percentage of total sales, partially
offset by the overhead absorption effect relating to lower sales volume.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs
were $12.9 million in fiscal year 1994 compared with $11.4 million in fiscal
year 1993 or 5.7% and 4.1% of sales for fiscal years 1994 and 1993,
respectively. This increase was primarily due to the incurrence of higher costs
associated with the design and development of wheels and brakes for the CL-604,
Saab 2000 and Japan's FSX programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.7 million in fiscal year 1994 compared with
fiscal year 1993. This decrease was primarily due to the Company's continuous
cost containment efforts and lower postretirement health care and life insurance
costs due to various plan amendments. (See Note 11 to the consolidated financial
statements.)
INTEREST EXPENSE, NET. Net interest expense decreased $1.5 million in fiscal
year 1994 compared with the prior year primarily due to a lower average
principal balance on the Revolving Loan. Partially offsetting this decrease was
a higher principal balance on the Convertible Debentures. The Company issued
$8.4 million and $7.3 million in additional Convertible Debentures during fiscal
years 1994 and 1993, respectively, in payment of non-cash interest. (See Notes 7
and 9 to the consolidated financial statements.)
Effective April 1, 1993, the Company changed its method of accounting for the
discounting of liabilities for workers' compensation losses, to use a risk-free
rate rather than its incremental borrowing rate. The cumulative effect for
periods prior to April 1, 1993, of this change amounted to $2.3 million, and is
included as an increase to the net loss for the fiscal year ended March 31,
1994. (See Note 2 to the consolidated financial statements.)
Effective April 1, 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires accrual of these benefits during an
employee's service period. The effect of adopting SFAS No. 106 was a cumulative
charge of $77.9 million. (See Note 11 to the consolidated financial statements.)
Liquidity and Financial Condition
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations and
borrowings under the Revolving Loan. The Company's long-term indebtedness
decreased from $381.4 million at March 31, 1994 to $310.0 million at March 31,
1995. This decrease was due to the retirement of the Convertible Debentures (see
Notes 7 and 9 to the consolidated financial statements) and payment of all
outstanding balances on the Revolving Loan from cash flows generated from
operations.
-13-
<PAGE> 14
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral, in exchange for $12.76 million in cash and
458,994 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. As a result, K & F's
stockholders' equity was increased by $65.4 million and long-term debt was
reduced by an equal amount. (See Notes 7 and 9 to the consolidated financial
statements.)
The Company expects that its principal use of funds for the next several years
will be to pay interest and principal on indebtedness, fund capital expenditures
and make investments in equipment for new airframes. Debt principal amortization
commences August 1, 1999. The Company's management believes that it will have
adequate resources to meet its cash requirements through funds generated from
operations and borrowings under its $70 million Revolving Loan (maturing April
27, 1997 which is subject to a borrowing base of eligible accounts receivable
and inventory). At March 31, 1995, the Company had $53.6 million available to
borrow under its Revolving Loan. At March 31, 1995 there were no borrowings
under the Revolving Loan.
Capital Expenditures
The Company had additions to fixed assets of $2.8 million and $3.1 million for
the fiscal years ended March 31, 1995 and 1994, respectively. These additions
were primarily for manufacturing equipment. Capital spending for fiscal year
1996 is expected to be approximately $6.0 million.
Inflation
The effect of inflation on the Company's sales and earnings is minimal because a
majority of the Company's sales are conducted through long-term contracts or
established price lists. The selling prices of such contracts and price lists,
established for deliveries in the future, generally reflect estimated costs to
be incurred in these future periods. In addition, some contracts provide for
price adjustments through escalation clauses.
Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of," which
establishes accounting standards for the recognition of an impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company is currently evaluating
the impact, if any, of SFAS No. 121. (See Note 2 to the consolidated financial
statements.)
Item 8. Financial Statements and Supplementary Data
See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-16 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-14-
<PAGE> 15
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages and positions of the directors and executive
officers of the Company. All directors hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified, and all executive officers hold office at the pleasure of the Board
of Directors. The following executive officers or directors of the Company are
related by blood or marriage: Kenneth M. Schwartz is the nephew of Bernard L.
Schwartz, Ronald H. Kisner's wife is the niece of Bernard L. Schwartz and John
R. Paddock's wife is the daughter of Bernard L. Schwartz. No other executive
officer or director of the Company is related by blood, marriage or adoption.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Bernard L. Schwartz* 69 Chairman of the Board
and Chief Executive Officer
Herbert R. Brinberg* 69 Director
Ronald H. Kisner* 46 Director
John R. Paddock* 41 Director
James A. Stern** 44 Director
A. Robert Towbin** 59 Director
Alan H. Washkowitz** 54 Director
Kenneth M. Schwartz 44 Chief Financial Officer,
Treasurer and Secretary
</TABLE>
- -----------------------
* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by Lehman Brothers Holdings Inc. ("LBH") pursuant
to the Stockholders Agreement.
Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the
Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer
of Loral Corporation since 1972. Mr. Schwartz is a Director of Reliance Group
Holdings, Inc. and certain subsidiaries, Sorema International Holding N.V.,
Globalstar Telecommunications Limited, First Data Corporation and Trustee of New
York University Medical Center.
Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. Dr. Brinberg received an A.B. from Cornell University, an M.S. from
Columbia University and a Ph.D. in Economics from New York University. He is
also currently an Adjunct Professor of Management at Baruch College City
University of New York.
Mr. Kisner has been a member of the law firm of Chekow & Kisner, P.C., since
1984. From 1973 to 1982, he was Associate General Counsel of APL Corporation,
where he held such offices as Secretary, Vice President and Director. From 1982
to 1984, Mr. Kisner was a sole practitioner. Mr. Kisner received a B.A. from
Syracuse University in 1970 and a J.D. from Washington College of Law, American
University, in 1973.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been Director of Training for the Georgia School of
Professional Psychology, Adjunct Associate Professor of Psychology at Emory
University, Assistant Professor of Psychology at Kennesaw State College, and
Southern Region Coordinator for National Employee Assistance Services. Dr.
Paddock received his B.A. from Williams College and his M.A. and Ph.D. in
Clinical Psychology from Emory University. Currently, he has clinical faculty
appointments at both Emory's Department of Psychology and in the medical school.
-15-
<PAGE> 16
Mr. Stern is Chairman of The Cypress Group, a private merchant bank. He was a
Managing Director of Lehman Brothers from 1984 to 1994. From 1989 to 1994, Mr.
Stern was also head of the Merchant Banking Group of Lehman Brothers. He was a
Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1982 to 1984. Mr.
Stern is also a director of Infinity Broadcasting Corporation, R.P. Scherer
Corp., Noel Group Inc. and Lear Seating Corporation.
Mr. Towbin was elected President and Chief Executive Officer of the
Russian-American Enterprise Fund in January of 1994 and has taken a leave of
absence from Lehman Brothers where he had been a Managing Director of the High
Technology Investment Banking Group since 1987. Prior to joining Lehman
Brothers, Mr. Towbin was Vice Chairman, Member of the Executive Committee and
Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to 1987.
From 1983 to 1986, Mr. Towbin was Vice Chairman, and from 1977 to 1983 he was
General Partner of L.F. Rothschild, Unterberg, Towbin. From 1959 to 1977, Mr.
Towbin was General Partner of C.E. Unterberg, Towbin Co. Mr. Towbin received a
B.A. from Dartmouth College in 1957. Mr. Towbin is also a Director of Bradley
Real Estate Trust, Columbus New Millennium Fund, Gerber Scientific, Inc.,
Globalstar Telecommunications Limited, the Russian-American Enterprise Fund, and
several Russian Companies.
Mr. Washkowitz has been a Managing Director of Lehman Brothers since 1984. He
was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1984.
Mr. Washkowitz began in the Corporate Finance Department of Kuhn Loeb & Co. in
1968 and became a general partner of the firm in 1975. Mr. Washkowitz received
an A.B. from Brooklyn College, an M.B.A. from Harvard Business School and a J.D.
from Columbia Law School. Mr. Washkowitz is also a director of Illinois Central
Corporation and Lear Seating Corporation.
Mr. Kenneth M. Schwartz has been Chief Financial Officer, Treasurer and
Secretary of the Company since June 1989. Previously he was the Corporate
Director of Internal Audit for Loral since late 1987. From 1984 to 1987, Mr.
Schwartz held the position of Director of Cost and Schedule Administration for
Loral Electronic Systems. Prior to 1984, Mr. Schwartz held various other
positions with Loral Electronic Systems and the accounting firm of Deloitte &
Touche. Mr. Schwartz received a B.B.A. in accounting from the University of
Miami in 1973.
Executive Officers of Aircraft Braking Systems
Corporation and Engineered Fabrics Corporation
Set forth below are the names, ages and positions of the executive officers of
Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.
<TABLE>
<CAPTION>
Aircraft Braking Systems Corporation
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald E. Fogelsanger 69 President
Ronald E. Welsch 60 Executive Vice President and
Chief Operating Officer
Frank P. Crampton 51 Vice President-Marketing
Richard W. Johnson 51 Vice President-Finance and Controller
</TABLE>
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Engineered Fabrics Corporation
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger C. Martin 58 President
Terry L. Lindsey 50 Vice President-Marketing
Anthony G. McCann 35 Vice President-Operations
John A. Skubina 40 Vice President-Finance
</TABLE>
Mr. Fogelsanger has been President of Aircraft Braking Systems Corporation since
1989. From 1987 to 1989 he was President of Loral's Aircraft Braking Systems
Division. January 1986 to March 1987 he was Vice President and General Manager
of Goodyear Aerospace Corporation's ABS division. From 1980 to 1986 he was
General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr. Fogelsanger
directed Goodyear's development of a crash-resistant fuel system for helicopters
that was credited with saving hundreds of lives during the Vietnam War. He
joined Goodyear in 1951 after graduating from Pennsylvania State University with
a bachelor's degree in industrial engineering.
Mr. Welsch joined Aircraft Braking Systems Corporation in September 1993 as
Executive Vice President. In November 1994, Mr. Welsch was named executive Vice
President and Chief Operating Officer. Prior to joining Aircraft Braking
Systems, Mr. Welsch was General Manager of the GE 90 Commercial Engine program
at General Electric Aircraft Engines and held various positions in management,
including engineering, product support, marketing, product planning and program
management, over the course of 26 years. Mr. Welsch started his aviation career
at Douglas Aircraft in 1958 and joined Northrop Corporation in 1961. He entered
the U.S. Marine Corp Aviation following graduation from Purdue University with a
bachelor's degree in mechanical engineering. Mr. Welsch also attended
Massachusetts Institute of Technology-Sloan School in 1983.
Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems
in March 1987. He had been Director of Business Development for Goodyear
Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that
assignment, he was the divisional manager of Program Operations since 1983. Mr.
Crampton joined Goodyear in 1967 following his graduation from the University of
Akron with a bachelor's degree in electrical engineering. He became Section
Manager in Commercial Sales in 1977, a product marketing manager in 1978 and
Divisional Sales Manager in 1979. In August of 1982, he joined manufacturing as
the manager of the manufacturing process organization. Mr. Crampton completed
the executive management program at Northwestern University in 1982 and received
an M.B.A. from Kent State University in 1983. He also worked for NASA at the
Johnson Space Center, Houston, Texas from 1963 to 1966.
Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989 he was Vice President of
Finance and Controller of Loral's Aircraft Braking Systems Division. Prior to
this assignment, he had spent 22 years with Goodyear Aerospace Corporation,
including one year as the Controller of the wheel and brake division. Mr.
Johnson joined Goodyear Aerospace Corporation in 1966 following his graduation
from Kent State University with a bachelor's degree in accounting. He became
Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear
Aerospace Corporation after holding various positions in the Defense Systems
Division.
Mr. Martin has been President of Engineered Fabrics Corporation since 1987. From
June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics
Division. Mr. Martin has been continuously employed by Goodyear, GAC, Loral and
K & F for the past 33 years. Other positions Mr. Martin held with Goodyear
include General Manager, Program Manager and a number of research positions. He
holds a patent for elastomeric protective coating for metal storage reels. Mr.
Martin received a B.S. and a B.Ch.E. in 1958 and 1962, respectively, from Auburn
University.
-17-
<PAGE> 18
Mr. Lindsey has served as Vice President of Business Development since 1989. He
has been with Goodyear Aerospace Corporation, Loral and K & F Industries since
1977. Prior to this he had 12 years of federal service with the US Army. He
joined GAC as Contract Administrator of the Industrial Brake Operation in Berea,
Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of Contracts.
He received a B.S. in Industrial Technology from Berea College in 1967.
Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production Support
from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August
1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann
worked for Aircraft Braking Systems as Manager of Manufacturing Engineering,
Manager of Assembly and as a Manufacturing Engineer. He received a BSME in 1984
from the University of Akron.
Mr. Skubina has been Vice President of Finance and Administration since February
1991. Prior to that, he was made Vice President of Finance on April 1, 1990. He
joined Engineered Fabrics Corporation in 1988 as Accounting Manager. From 1985
until 1988, Mr. Skubina was the Assistant Controller and Controller of MPD, a
division of M/A-Com. He received a B.S. in Accounting in 1979 from New York
Institute of Technology.
-18-
<PAGE> 19
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the past three years paid to
the chief executive officer and each of the other four most highly compensated
executive officers of the Company and the Company's subsidiaries whose aggregate
current remuneration exceeded $100,000.
<TABLE>
<CAPTION>
----------------------------------------------------
Annual Long-Term
Compensation Compensation
- ------------------------------------------------------- ------------------------- ------------------------ ------------
All Other
Options LTIP Compen-
Fiscal Salary Bonus Granted Payouts sation(a)
Name and Principal Position Year ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz 1995 1,779,500(b)(c) -- -- -- --
Chairman of the Board and Chief 1994 1,859,800(b) -- -- -- --
Executive Officer 1993 1,840,650(b) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Kenneth M. Schwartz 1995 283,600(c) 105,000 -- -- 3,565
Chief Financial Officer - K & F 1994 176,418 37,500 -- -- 3,404
Industries, Inc. 1993 167,809 75,000 750 10,000 3,322
- -----------------------------------------------------------------------------------------------------------------------------
Donald E. Fogelsanger 1995 198,538 120,000 -- -- 19,442
President of Aircraft 1994 185,000 -- -- -- 18,949
Braking Systems 1993 178,340 85,000 500 13,333 19,032
- -----------------------------------------------------------------------------------------------------------------------------
Ronald E. Welsch (d) 1995 162,769 78,000 -- -- 3,806
Executive Vice President and 1994 90,359 -- 500 -- 2,026
Chief Operating Officer 1993 -- -- -- -- --
Aircraft Braking Systems
- -----------------------------------------------------------------------------------------------------------------------------
Roger C. Martin 1995 132,767 55,500 -- -- 10,520
President of Engineered Fabrics 1994 127,000 -- -- -- 10,545
Corporation 1993 120,231 38,000 500 6,667 10,237
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the following Company contributions to individual 401(k) plan
accounts for fiscal years 1995, 1994 and 1993, respectively: Mr. K.
Schwartz - $3,375, $3,225 and $3,152; Mr. Fogelsanger - $3,475, $2,719
and $2,977; Mr. Welsch - $3,446 and $1,848; Mr. Martin - $3,110, $3,161
and $2,985. Also includes the value of supplemental life insurance
programs for fiscal years 1995, 1994 and 1993, respectively: Mr. K.
Schwartz - $190, $179 and $170; Mr. Fogelsanger - $15,967, $16,230 and
$16,055; Mr. Welsch - $360 and $178; Mr. Martin - $7,410, $7,384 and
$7,252.
(b) Comprised of amounts paid to BLS under the Advisory Agreement.
(c) The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and
persons designated by him (including certain other executive officers of
Loral who are active in the management of the Company) in exchange for
acting as directors and providing advisory services to the Company and
its subsidiaries. BLS has designated that $100,000 of the aggregate
advisory fee be paid to Kenneth M. Schwartz, which is included in his
fiscal year 1995 salary.
(d) Information for Mr. Welsch is provided for fiscal years 1995 and 1994
because he was not employed by the Company in fiscal year 1993. In
addition, compensation for fiscal year 1994 for Mr. Welsch reflects less
than a full year, as his employment date was September 8, 1993.
-19-
<PAGE> 20
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options by the Company, during fiscal year
1995, to the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)(1)
-------------------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz 0 0 0/0 0/0
Kenneth M. Schwartz 0 0 938/562 0/0
Donald E. Fogelsanger 0 0 2,125/375 0/0
Ronald E. Welsch 0 0 0/500 0/0
Roger C. Martin 0 0 1,125/375 0/0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) None of the Company's stock is currently publicly traded. All options
were granted at book value computed as of the date of Acquisition.
-20-
<PAGE> 21
LONG-TERM INCENTIVE PLAN AWARDS
Under the Company's long-term incentive plan designed to provide an incentive to
encourage attainment of Company objectives and retain and attract key executives
of the Company, a limited number of persons participate in a Deferred Bonus
Plan. Under the terms of the plan, generally no awards are allocated to any
participant unless the Company has achieved at least a 10% growth in earnings
before interest, taxes and amortization over the prior fiscal year. Awards vest
and are paid (unless deferred by recipient direction) in three equal annual
installments starting on January 15th following each fiscal year-end. All
nonvested amounts are forfeited upon termination of employment for any reason
other than death or disability prior to the vesting date. Awards earned in
fiscal year 1990 were paid in fiscal years 1991, 1992 and 1993. In accordance
with the plan, the Board of Directors has authorized a $200,000 award for fiscal
year 1995; individual awards have not yet been determined.
THE RETIREMENT PLAN
The Company established, effective May 1, 1989, as amended, the K & F Industries
Retirement Plan for Salaried Employees (the "Company Retirement Plan"), a
defined benefit pension plan. The Company has applied for a determination letter
from the Internal Revenue Service that the Company Retirement Plan is a
qualified plan under the Internal Revenue Code. The terms of the Company
Retirement Plan are as follows: a non-contributory benefit and a contributory
benefit. The cost of the former is borne by the Company; the cost of the latter
is borne partly by the Company and partly by the participants. Salaried
employees who have completed at least six months of service and satisfied a
minimum earnings level are eligible to participate in the contributory portion
of the Company Retirement Plan; salaried employees become participants in the
non-contributory portion on their date of hire. The Plan provides a benefit of
$20.00 per month for each year of credited service. For participants who
contribute to the Plan, in addition to the benefit of $20.00 per month for each
year of credited service, the Plan provides an annual benefit equal to the
greater of: 60% of the participant's aggregate contributions; or, average
compensation earned (while contributing) during the last 10 years of employment
in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4%
times years of continuous service up to 10, plus, (b) 1.8% times additional
years of such service up to 20, plus, (c) 1.2% times additional years of such
service up to 30, plus, (d) 0.6% times all additional such service above 30
years.
Effective January 1, 1990, the Plan was amended for eligible employees of the
K & F Industries and Aircraft Braking Systems to provide an annual benefit equal
to (a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (i) for 14 years of continuous
service or less, 1.05% of annual earnings between $19,800 and the Social
Security Wage Base plus 2.25% of annual earnings above the Social Security Wage
Base, (ii) for more than 14 years of continuous service, 1.35% of annual
earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual
earnings above the Social Security Wage Base. In no event will the amount
calculated in (c) above be less than 60% of the participant's aggregate
contributions made on and after January 1, 1990. Benefits are payable upon
normal retirement age at age 65 in the form of single life or joint and survivor
annuity or, at the participant's option with appropriate spousal consent, in the
form of an annuity with a term certain. A participant who has (a) completed at
least 30 years of continuous service, (b) attained age 55 and completed at least
10 years of continuous service, or (c) attained age 55 and the combination of
such participant's age and service equals at least 70 years, is eligible for
early retirement benefits. If a participant elects early retirement before
reaching age 62, such benefits will be reduced except that the non-contributory
benefits of a participant with at least 30 years of credited service will not be
reduced. In addition, employees who retire after age 55 but before age 62 with
at least 30 years of service are entitled to a supplemental non-contributory
benefit until age 62. Annual benefits under the Company Retirement Plan are
subject to a statutory ceiling of $120,000 per participant. Participants are
fully vested in their accrued benefits under the Company Retirement Plan after
five years of credited service with the Company.
-21-
<PAGE> 22
Estimated annual benefits upon retirement for the individuals named in the
Summary Compensation Table, who are participants in the amended plan of K & F
and Aircraft Braking Systems, are $11,455 for Mr. K. Schwartz (does not
currently participate in contributory portion of plan); $94,806 for Mr.
Fogelsanger; and $20,123 for Mr. Welsch. BLS does not participate in this plan.
The retirement benefits have been computed on the assumption that (a) employment
will be continued until normal retirement at age 65; and (b) current levels of
creditable compensation and the Social Security Wage Base will continue without
increases or adjustments throughout the remainder of the computation period. The
Company has a similar plan at Engineered Fabrics for which Mr. Martin
participates. Estimated annual benefits for Mr. Martin are $68,607 using the
assumptions in (a) and (b) above.
For purposes of eligibility, vesting and benefit accrual, participants receive
credit for years of service with Loral and Goodyear. At retirement, retirement
benefits calculated according to the benefit formula described above are reduced
by any retirement benefits payable from The Goodyear Tire & Rubber Company
Retirement Plan For Salaried Employees.
COMPENSATION OF DIRECTORS
The Board of Directors held four meetings during the fiscal year ended March 31,
1995. Nonequity members of the Board of Directors receive annual fees of $12,000
per year. Messrs. Towbin, Washkowitz and Stern (three directors designated by
LBH pursuant to the Stockholders Agreement) waived any compensation for services
as a director for the fiscal year ended March 31, 1995. All directors are
reimbursed for reasonable out-of-pocket expenses incurred in that capacity.
-22-
<PAGE> 23
ADVISORY AGREEMENT
The Company has an Advisory Agreement with BLS which provides for the payment of
an aggregate of $200,000 per month of compensation to BLS and persons designated
by him (including certain other executive officers of Loral who are active in
the management of the Company) in exchange for acting as directors and providing
advisory services to the Company and its subsidiaries. Such agreement will
continue until BLS dies or is disabled or ceases to own at least 135,000 shares
of common stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not in the past used a compensation committee to determine
executive officer compensation. The payments to BLS, the Company's Chairman and
Chief Executive Officer, are paid in accordance with the Advisory Agreement. All
other executive compensation decisions are made by BLS in accordance with
policies established in consultation with the Board of Directors.
-23-
<PAGE> 24
PART IV
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the ownership of the capital stock of the Company
as of June 1, 1995
<TABLE>
<CAPTION>
Number of Shares Number of Shares of Number of Shares Percentage
of Class A Class B of Preferred Ownership of
Common Stock(a) Common Stock(a)(b) Stock(c) Capital Stock(d)
---------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz ............... 553,343(e) -- -- 27.12%
*Lehman Brothers Merchant Banking
Portfolio Partnership L.P ........ -- -- 478,387(f) 23.45
*Lehman Brothers Offshore Investment
Partnership L.P .................. -- -- 129,745(g) 6.36
*Lehman Brothers Offshore Investment
Partnership - Japan L.P .......... -- -- 49,348(g) 2.42
*Lehman Brothers Capital Partners
II, L.P .......................... -- -- 325,156(h) 15.94
CBC Capital Partners, Inc ......... 1 -- 44,999 2.21
Loral Corporation ................. -- 458,994 -- 22.50
------- ------- --------- ------
553,344 458,994 1,027,635 100.00%
======= ======= ========= ======
</TABLE>
*Collectively referred to as the "Lehman Investors."
(a) On February 15, 1995, the Board of Directors approved a one-for-ten
reverse common stock split for all holders of Class A and Class B common
stock on such date. (See Note 9 to the consolidated financial
statements.)
(b) On September 2, 1994, K & F retired the $65.4 million principal amount
of Convertible Debentures held by Loral, in exchange for $12.76 million
in cash and 458,994 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 68,728 shares of
Class A common stock and 127,636 shares of preferred stock. (See Notes 7
and 9 to the consolidated financial statements.)
(c) The preferred stock is convertible into Class A common stock on a
one-for-one basis.
(d) Assumes that the preferred stock has been converted into voting common
stock.
(e) BLS has granted options to officers and directors of the Company and its
subsidiaries, at a per share exercise price of $40, for an aggregate of
50,500 shares of the voting common stock owned by BLS. The agreements
pursuant to which such options are issued (i) provide that the option is
exercisable in whole or in part at any time prior to the tenth
anniversary of the date of such agreement and (ii) restrict the transfer
of the option and any shares purchased upon exercise of the option. The
option agreements further provide that BLS will retain all voting rights
with respect to shares sold to an option holder upon exercise of an
option.
(f) Lehman Brothers Merchant Banking Partners Inc. is the general partner of
the limited partnership and is an indirect wholly owned subsidiary of
LBH.
(g) Lehman Brothers Offshore Partners Ltd. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
(h) Lehman Brothers II Investment Inc. is the general partner of the limited
partnership and is an indirect wholly owned subsidiary of LBH. The
limited partnership is a fund for employees of LBH and its affiliates.
Stockholders Agreement
The Company, BLS, the Lehman Investors, CBC Capital Partners, Inc. and Loral
(each, a "Stockholder") entered into an Amended and Restated Stockholders
Agreement (the "Stockholders Agreement") dated as of September 2, 1994, which
contains certain restrictions with respect to the transferability of the
Company's capital stock, certain rights granted by the Company with respect to
such shares and certain voting and other arrangements. The Stockholders
Agreement will terminate as of such time as more than 75% of the shares of
common stock and shares of common stock issuable upon the exercise of options or
rights to acquire common stock or upon conversion of convertible securities
("Common Equivalents") then outstanding have been sold pursuant to one or more
public offerings, except that the registration rights continue as to any common
stock held by parties thereto as long as they own their shares, and the voting
provisions contained in the Stockholders Agreement terminate on September 2,
2004.
-24-
<PAGE> 25
The Stockholders Agreement provides that the Company's Board of Directors be
comprised initially of 7 directors. BLS is entitled to (i) appoint a majority of
the directors as long as he and his affiliates own at least 135,000 shares of
common stock, (ii) three directors as long as he and his affiliates own at least
100,000 shares of common stock, and (iii) one director as long as he and his
affiliates own any shares of common stock. The Lehman Investors are entitled to
(i) appoint three directors as long as they collectively own at least 100,000
Common Equivalents, (ii) a majority of the directors if (a) they own at least
135,000 shares of common stock and (b) BLS dies or becomes disabled or owns less
than 135,000 shares of Common Equivalents and (c) one director as long as they
own any Common Equivalents. If and for so long as Loral and its affiliates own
any shares of voting common stock, at the request of Loral, the number of
members of the Board of Directors shall be increased to 9, Loral shall be
entitled to designate one member of the Board of Directors, and the remaining
member shall be designated by the stockholder which at such time has the right
to designate a majority of the Board of Directors. The Company's by-laws provide
that the following corporate actions will require the vote of at least one
Lehman Investor designated director including (with certain limited exceptions)
(i) mergers, consolidations or recapitalizations, (ii) issuances of capital
stock or preferred stock, (iii) repurchases of and dividends on capital stock,
(iv) issuance of employee options representing more than 50,000 shares of common
stock, (v) dissolution or liquidation of the Company, (vi) acquisition, sale or
exchange of assets in excess of $5,000,000, (vii) the incurrence of debt or
liens in excess of $10 million in the aggregate, (viii) the making of loans,
investments or capital expenditures in excess of $10 million, (ix) transactions
with affiliates and (x) prepayments of or amendments to any amount of financing
in excess of $10 million. The Stockholders Agreement provides that the Charter
and By-laws of the Company in effect on the closing date of the Acquisition may
not be amended without the consent of the Lehman Investors designated director
for so long as the Lehman Investors or its affiliates own at least 100,000
shares of the outstanding capital stock.
The Stockholders Agreement provides each Stockholder with a right of first
refusal with respect to certain transfers of Common Stock or Common Equivalents.
In addition, subject to certain limitations, if any Stockholder or group of
Stockholders proposes to transfer securities representing more than 15% of the
Common Equivalents, then each other Stockholder is permitted to transfer to the
proposed transferee their pro rata share of Common Equivalents at the price and
on the other terms of the proposed transfer.
The Stockholders Agreement provides that either BLS or the Lehman Investors (the
"Put Party") may request an appraisal of the value of the capital stock of the
Company (the "Appraised Value") and may notify the other party of its desire to
sell all of its and its transferee's capital stock for a pro rata share of such
Appraised Value. The other party may elect to purchase such capital stock,
arrange for the purchase of such capital stock by a third party or notify the
Put Party that it does not intend to purchase such capital stock. If such
election is made such party must use its best efforts to purchase or arrange for
the purchase of such capital stock. If such capital stock is not purchased
within a specified period, BLS and the Lehman Investors shall cause the Company
to be sold if such sale can be arranged for a price at least equal to the
Appraised Value. Any sale of the Company as an entirety shall include all
Stockholders and the proceeds thereof shall be allocated among the Stockholders
in accordance with their stock ownership.
Stockholders of specified percentages of capital stock may demand registration
rights. The Stockholders Agreement also grants the Stockholders incidental
registration rights with respect to shares of capital stock held by them;
provided that the Stockholders not exercising such rights have the right to
purchase the shares which are the subject of such registration rights pursuant
to the right of first offer provided in the Stockholders Agreement. The
Stockholders Agreement contains customary terms and provisions with respect to
such registration rights.
Pursuant to the Stockholders Agreement, Stockholders have certain preemptive
rights, subject to certain exceptions, with respect to future issuances of
shares or share equivalents of capital stock so that such Stockholders may
maintain their proportional equity ownership interest in the Company.
-25-
<PAGE> 26
Item 13. Certain Relationships and Related Transactions
General
BLS owns 27.12% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral. Because BLS is Chairman of the
Board of Directors and has the right to designate a majority of the Directors to
the Board of the Company, he has operating control of the Company.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral. (See Notes 7 and 9 to the consolidated
financial statements.)
The Company has an Advisory Agreement with BLS which provides for the payment of
an aggregate of $200,000 per month of compensation to BLS and persons designated
by him (including certain other executive officers of Loral who are active in
the management of the Company) in exchange for acting as directors and providing
advisory services to the Company and its subsidiaries. Such agreement will
continue until BLS dies or is disabled or ceases to own at least 135,000 shares
of common stock of the Company.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. In connection with the Senior Note offering on
June 10, 1992, Lehman Brothers received underwriting discounts and commissions
of $2.25 million.
During the fiscal year ended March 31, 1995, the Company invested excess cash in
commercial paper with an affiliate of Lehman Brothers. Total interest received
during the fiscal year ended March 31, 1995 was $19,000. The total amount of
commercial paper held at March 31, 1995 was $6.0 million.
Pursuant to agreements between K & F and Loral, the parties provide services to
each other and share certain expenses relating to a production program, real
property occupancy, benefits administration, treasury, accounting and legal
services. The related charges agreed upon by the parties were established to
reimburse each party on the actual cost incurred without profit or fee. The
Company believes the arrangements with Loral are as favorable to the Company as
could have been obtained from unaffiliated parties. Billings from Loral were
$3.0 million, $3.0 million and $3.7 million in fiscal years 1995, 1994 and 1993,
respectively. Billings to Loral were $.2 million, $1.1 million and $1.1 million
in fiscal years 1995, 1994 and 1993. Purchases from Loral were $1.9 million,
$4.2 million and $3.7 million in fiscal years 1995, 1994 and 1993. Included in
accounts receivable and accounts payable at March 31, 1995 is $.7 million and
$1.8 million. Included in accounts receivable and accounts payable at March 31,
1994 is $.6 million and $2.0 million.
-26-
<PAGE> 27
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) Index to Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
K & F Industries, Inc. - Consolidated Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the Years Ended
March 31, 1995, 1994 and 1993 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended March 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
All other schedules and separate financial statements are omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.08 through 10.13 and exhibits 10.17
and 10.18 are management contracts or compensation plans.
(b) No reports on Form 8-K were filed for the three months ended March 31, 1995.
Exhibits: See exhibit index below.
(c) Exhibits
2.01 - Agreement for Sale and Purchase of Assets dated March 26, 1989
between Loral Corporation and the Registrant (1)
3.01 - Amended and Restated Certificate of Incorporation of the
Registrant
3.02 - Amended and Restated By-Laws of the Registrant (6)
4.01 - Indenture for the 13 3/4% Senior Subordinated Debentures due
2001 (1)
4.02 - Indenture for the 14 3/4% Subordinated Convertible Debentures
Due 2004 (1)
4.03 - First Supplemental Indenture dated as of July 22, 1991, to
Convertible Debenture Indenture (4)
4.04 - Form of Indenture dated as of June 10, 1992 for the 11 7/8%
Senior Secured Notes Due 2003 (5)
4.05 - Form of 11 7/8% Senior Secured Notes due 2003 (5)
-27-
<PAGE> 28
(c) Exhibits (continued)
4.06 - Form of Second Supplemental Indenture dated as of June 10,
1992, to Convertible Debenture Indenture (5)
9.01 - Stockholders Agreement dated April 27, 1989 among the
Registrant, Lehman Brothers Holdings Inc. ("LBH") and Bernard L.
Schwartz ("BLS") (1)
10.01 - Credit Agreement dated as of April 27, 1989 among the
Registrant, Chemical Banking Corporation, as Agent and the Banks
named therein (1)
10.02 - Revolving Credit Agreement dated as of April 27, 1989, among
Aircraft Braking Systems Corporation, Engineered Fabrics
Corporation, the Agent and the Banks (1)
10.03 - Securities Purchase Agreement dated as of April 27, 1989,
among the Registrant, BLS and LBH (1)
10.04 - Assumption Agreement dated as of April 27, 1989 (1)
10.07 - Shared Services Agreement dated April 27, 1989, among Loral,
the Registrant, Aircraft Braking Systems Corporation and
Engineered Fabrics Corporation (1)
10.08 - Director Advisory Agreement dated as of April 27, 1989, among
the Registrant and BLS (1)
10.09 - Non-Competition Agreement dated as of April 27, 1989, between
the Registrant and BLS (1)
10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees
(5)
10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees (5)
10.12 - Goodyear Aerospace Corporation Supplemental Unemployment
Benefits Plan for Salaried Employees - Plan A (1)
10.13 - The Loral Systems Group Release and Separation Allowance Plan
(1)
10.14 - Letter Agreement dated April 27, 1989, between the Registrant
and Lehman Brothers Inc. (1)
10.15 - Amendment and Waiver dated as of July 14, 1989 (1)
10.16 - Amendment to Credit Agreement dated as of July 31, 1989,
between K & F Industries, the Subsidiaries and the banks (2)
10.17 - K & F Industries, Inc. 1989 Stock Option Plan (2)
10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.19 - Amendment to the Credit Agreement dated as of June 26, 1991 (3)
10.21 - Securities Purchase Agreement dated as of July 22, 1991, among
the Registrant, BLS and the Lehman Investors (4)
-28-
<PAGE> 29
(c) Exhibits (continued)
10.24 - Securities Purchase Agreement among K & F Industries, Inc.,
BLS and the Lehman Brothers Partnerships dated, September 2,
1994 (6)
10.25 - Amended and Restated Stockholders Agreement dated as of
September 2, 1994, By and Among K & F Industries, Inc., BLS, the
Lehman Brothers Partnerships, CBC Capital Partners, Inc. and
Loral Corporation (6)
10.26 - Agreement dated as of September 2, 1994, between K & F
Industries, Inc. and Loral Corporation (6)
10.27 - Form of Amended and Restated Revolving Credit Agreement dated
as of June 10, 1992, among Chemical Bank, the Banks named
therein, Aircraft Braking Systems Corporation and Engineered
Fabrics Corporation (5)
10.28 - Waiver and Consent dated as of August 26, 1994 (6)
10.29 - Amendment of Stockholders Agreement dated November 8, 1994 (6)
10.30 - Securities Conversion Agreement among K & F Industries, Inc.
and the Converting Stockholders, dated November 8, 1994 (6)
10.31 - First Amendment, dated April 6, 1995 to the Amended and
Restated Revolving Credit Agreement
12.01 - Statement of computations of ratio of earnings to fixed
charges (5)
12.02 - Statement of computation of pro forma deficiency ratio of
earnings to fixed charges (5)
21.01 - Subsidiaries of the Registrant (1)
24.01 - Powers of Attorney
27.01 - Financial Data Schedule
- -------------------------
(1) Previously filed, as an exhibit to the Company's Registration Statement
on Form S-1, No. 33-29035.
(2) Previously filed, as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1990.
(3) Previously filed, as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1991.
(4) Previously filed, as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991.
(5) Previously filed, as an exhibit to the Company's Registration Statement
on Form S-1, No. 33-47028.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
The annual report has not been furnished to the holders of the 13 3/4% Senior
Subordinated Debentures and the 11 7/8% Senior Secured Notes. Upon completion,
such report will be sent to the Commission and holders of the aforementioned
debentures.
-29-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
By: /s/ KENNETH M. SCHWARTZ
---------------------------------
Kenneth M. Schwartz
Chief Financial Officer
Date: June 28, 1995
---------------------
Pursuant to the requirements of The Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief June 28, 1995
- ------------------------- Executive Officer and Director
Bernard L. Schwartz (principal executive officer)
/s/ KENNETH M. SCHWARTZ Chief Financial Officer (principal June 28, 1995
- ------------------------- financial and accounting officer)
Kenneth M. Schwartz
* Director June 28, 1995
- -------------------------
Herbert R. Brinberg
* Director June 28, 1995
- -------------------------
Ronald H. Kisner
* Director June 28, 1995
- -------------------------
John R. Paddock
* Director June 28, 1995
- -------------------------
James A. Stern
* Director June 28, 1995
- -------------------------
A. Robert Towbin
* Director June 28, 1995
- -------------------------
Alan H. Washkowitz
*By: /s/ KENNETH M. SCHWARTZ June 28, 1995
--------------------------
Kenneth M. Schwartz
Attorney-in-Fact
</TABLE>
-30-
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
K & F Industries, Inc.:
We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of March 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
March 31, 1995. These 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of March 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective April
1, 1993, the Company changed its method of accounting for discounting of certain
liabilities. As discussed in Notes 4 and 11, respectively, to the consolidated
financial statements, effective April 1, 1992, the Company changed its method of
accounting for certain overhead costs included in inventory and postretirement
benefits other than pensions.
DELOITTE & TOUCHE LLP
New York, New York
May 19, 1995
F-1
<PAGE> 32
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------------------
1995 1994
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 8,493,000 $ 4,327,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 33,548,000 32,783,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,767,000 67,613,000
Other current assets . . . . . . . . . . . . . . . . . . . . . 1,106,000 1,196,000
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . 104,914,000 105,919,000
------------- -------------
Property, Plant and Equipment - Net . . . . . . . . . . . . . . . 63,132,000 68,740,000
Deferred Charges - Net of amortization of $10,708,000 and
$8,328,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 26,508,000 28,050,000
Cost in Excess of Net Assets Acquired - Net of amortization of
$36,148,000 and $30,036,000 . . . . . . . . . . . . . . . . . . 208,228,000 214,340,000
Intangible Assets - Net of amortization of $20,645,000 and
$17,244,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 26,292,000 29,831,000
------------- -------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 429,074,000 $ 446,880,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 10,345,000 $ 9,028,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . 8,771,000 8,818,000
Other current liabilities . . . . . . . . . . . . . . . . . . . 37,773,000 34,982,000
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . 56,889,000 52,828,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions . . . . . . 77,717,000 80,150,000
Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 19,216,000 22,836,000
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 310,000,000 381,421,000
Commitments and Contingencies
(Notes 12 and 13)
Stockholders' Deficiency:
Preferred stock, $.01 par value - authorized, 1,050,000 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, 460,000
shares; issued and outstanding, 458,994 shares (liquidation
preference of $26,848,000) . . . . . . . . . . . . . . . . . . 5,000 --
Common stock, Class A, $.01 par value - authorized, 2,100,000
and 535,000 shares; issued and outstanding, 553,344 and
484,616 shares . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . 155,350,000 89,986,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (182,643,000) (172,470,000)
Adjustment to equity for minimum pension liability . . . . . . (7,192,000) (7,467,000)
Cumulative translation adjustment . . . . . . . . . . . . . . . (284,000) (418,000)
------------- -------------
Total stockholders' deficiency . . . . . . . . . . . . . . . (34,748,000) (90,355,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency . . . . . . . . . $ 429,074,000 $ 446,880,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 33
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $238,756,000 $226,131,000 $277,107,000
Cost of sales . . . . . . . . . . . . . . . . . . . . . 164,697,000 159,751,000 199,002,000
Independent research and development . . . . . . . . . 8,363,000 12,858,000 11,417,000
Selling, general and administrative expenses . . . . . 19,208,000 22,421,000 24,154,000
Amortization . . . . . . . . . . . . . . . . . . . . . 10,411,000 10,884,000 10,258,000
------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . . . 36,077,000 20,217,000 32,276,000
Interest expense, net of interest income of $374,000,
$96,000 and $108,000 . . . . . . . . . . . . . . . . 46,250,000 51,953,000 53,486,000
------------ ------------ ------------
Loss before extraordinary charge and cumulative effect
of changes in accounting principles . . . . . . . . . (10,173,000) (31,736,000) (21,210,000)
Extraordinary charge from early extinguishment
of debt . . . . . . . . . . . . . . . . . . . . . . -- -- (2,477,000)
Cumulative effect of change in method of accounting
for the discounting of certain liabilities . . . . . -- (2,305,000) --
Cumulative effect of change in method of accounting
for postretirement benefits other than pensions . . . -- -- (77,902,000)
Cumulative effect of change in method of accounting
for certain overhead costs in inventory . . . . . . . -- -- 4,362,000
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(10,173,000) $(34,041,000) $(97,227,000)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 34
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Class B Class A
Preferred Stock Common Stock Common Stock
--------------- ------------ ------------
Shares Shares Shares
Issued Amount Issued Amount Issued Amount
--------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1992. . 899,999 $9,000 -- $ -- 484,616 $5,000
Net loss . . . . . . . .
Pension adjustment . . .
Cumulative translation
adjustment . . . . . .
--------- ------- ------- ------ ------- ------
Balance, March 31, 1993 . 899,999 9,000 -- -- 484,616 5,000
Net loss . . . . . . . .
Pension adjustment . . .
Cumulative translation
adjustment . . . . .
--------- ------- ------- ------ ------- ------
Balance, March 31, 1994 . 899,999 9,000 -- -- 484,616 5,000
Net loss . . . . . . . .
Conversion of
subordinated
convertible
debentures . . . . . . 458,994 5,000
Issuance of preferred
stock . . . . . . . . 127,636 1,000
Issuance of common
stock . . . . . . . . 68,728 1000
Pension adjustment . . .
Cumulative translation
adjustment . . . . .
--------- ------- ------- ------ ------- ------
Balance, March 31, 1995 . 1,027,635 $10,000 458,994 $5,000 553,344 $6,000
========= ======= ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Adjustment
to Equity
for
Additional Minimum Cumulative
Paid-in Pension Translation
Capital Deficit Liability Adjustment
------------ -------------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, April 1, 1992 . $89,986,00 $(41,202,000) $(467,000) $ --
Net loss . . . . . . . . (97,227,000)
Pension adjustment . . . (2,585,000)
Cumulative translation
adjustment . . . . . (387,000)
------------ -------------- ------------ ----------
Balance, March 31, 1993 89,986,000 (138,429,000) (3,052,000) (387,000)
Net loss . . . . . . . . (34,041,000)
Pension adjustment . . . (4,415,000)
Cumulative translation
adjustment . . . . . . (31,000)
------------ -------------- ------------ ----------
Balance, March 31, 1994 89,986,000 (172,470,000) (7,467,000) (418,000)
Net loss . . . . . . . . (10,173,000)
Conversion of
subordinated
convertible
debentures . . . . . . 52,602,000
Issuance of preferred
stock . . . . . . . . 10,799,000
Issuance of common
stock . . . . . . . . 1,963,000
Pension adjustment . . . 275,000
Cumulative translation
adjustment . . . . . . 134,000
------------ -------------- ------------ ----------
Balance, March 31, 1995 $155,350,000 $(182,643,000) $(7,192,000) $(284,000)
============ ============== ============ ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 35
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(10,173,000) $(34,041,000) $(97,227,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting for:
Discounting certain liabilities . . . . . . . . . . . . -- 2,305,000 --
Postretirement benefits other than pensions . . . . . . -- -- 77,902,000
Certain overhead costs in inventory . . . . . . . . . -- -- (4,362,000)
Depreciation . . . . . . . . . . . . . . . . . . . . . . 8,432,000 9,643,000 9,604,000
Amortization . . . . . . . . . . . . . . . . . . . . . . 10,411,000 10,884,000 10,258,000
Non-cash interest expense-convertible debentures . . . . 3,950,000 8,443,000 7,282,000
Non-cash interest expense-amortization of deferred
financing charges . . . . . . . . . . . . . . . . . . . 1,482,000 1,480,000 1,507,000
Provision for losses on accounts receivable . . . . . . . 63,000 450,000 190,000
Extraordinary charge from early extinguishment
of debt . . . . . . . . . . . . . . . . . . . . . . . . -- -- 2,477,000
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (767,000) 16,797,000 5,110,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . 5,919,000 9,638,000 12,038,000
Other current assets . . . . . . . . . . . . . . . . . 90,000 (137,000) (262,000)
Accounts payable . . . . . . . . . . . . . . . . . . . 1,317,000 (5,298,000) 1,141,000
Interest payable . . . . . . . . . . . . . . . . . . . (47,000) (438,000) 3,552,000
Other current liabilities . . . . . . . . . . . . . . . 2,791,000 (2,692,000) 4,567,000
Postretirement benefit obligation other
than pensions . . . . . . . . . . . . . . . . . . . (2,433,000) (4,090,000) 6,338,000
Other long-term liabilities . . . . . . . . . . . . . . (3,682,000) (3,981,000) (1,289,000)
Deferred charges - financing costs . . . . . . . . . . -- -- (3,256,000)
----------- ----------- -----------
Net cash provided by operating activities . . . . . . . 17,353,000 8,963,000 35,570,000
----------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . (2,824,000) (3,127,000) (4,670,000)
Deferred charges . . . . . . . . . . . . . . . . . . (363,000) 74,000 258,000
----------- ----------- -----------
Net cash used in investing activities . . . . . . . . (3,187,000) (3,053,000) (4,412,000)
----------- ----------- -----------
Cash Flows From Financing Activities:
Payments of senior revolving loan . . . . . . . . . . . . (20,000,000) (43,500,000) (81,000,000)
Borrowings under senior revolving loan . . . . . . . . . 10,000,000 37,000,000 47,000,000
Payment of convertible debentures . . . . . . . . . . . . (12,764,000) -- --
Proceeds from issuance of common and preferred stocks . . 12,764,000 -- --
Proceeds from sale and leaseback transaction . . . . . . -- 1,996,000 --
Payments of senior term loan . . . . . . . . . . . . . . -- -- (95,875,000)
Proceeds from issuance of senior secured notes . . . . . -- -- 100,000,000
----------- ----------- -----------
Net cash used by financing activities . . . . . . . (10,000,000) (4,504,000) (29,875,000)
----------- ----------- -----------
Net increase in cash and cash equivalents . . . . . . . . . . 4,166,000 1,406,000 1,283,000
Cash and cash equivalents, beginning of year . . . . . . . . 4,327,000 2,921,000 1,638,000
----------- ----------- -----------
Cash and cash equivalents, end of year . . . . . . . . . . . $ 8,493,000 $ 4,327,000 $ 2,921,000
=========== ============ ============
Supplemental Information:
Interest paid during the year . . . . . . . . . . . . . $41,239,000 $ 42,564,000 $ 41,253,000
=========== ============ ============
</TABLE>
Supplemental disclosure of non-cash financing activities:
See Notes 7 and 9 for a discussion of non-cash financing
activities.
See notes to consolidated financial statements.
F-5
<PAGE> 36
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture
and distribution of wheels, brakes and anti-skid systems for commercial,
military and general aviation aircraft, and the manufacture of materials
for fuel tanks, iceguards, inflatable oil booms and various other
products made from coated fabrics for military and commercial uses. The
Company's activities are conducted through its two wholly owned
subsidiaries, Aircraft Braking Systems Corporation ("Aircraft Braking
Systems") and Engineered Fabrics Corporation (collectively the
"Subsidiaries").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company. All material intercompany accounts
and transactions between these entities have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash,
commercial paper and other investments that are readily convertible into
cash and have original maturities of three months or less.
Revenue and Expense Recognition - Sales are recorded as units are
shipped. The Company customarily sells original wheel and brake
equipment below cost as an investment in a new airframe which is
expected to be recovered through the subsequent sale of replacement
parts. These commercial investments (losses) are recognized when
original equipment is shipped. Losses on U.S. Government contracts are
immediately recognized in full when determinable.
Inventory - Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried
costs may contain amounts relating to contracts with long production
cycles, a portion of which will not be realized within one year. During
fiscal year 1993, the Company changed its method of accounting for
certain overhead costs. (See Note 4.)
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed when incurred; renewals
and betterments are capitalized. When assets are retired or otherwise
disposed of, the cost and accumulated depreciation are eliminated from
the accounts, and any gain or loss is included in the results of
operations. Depreciation is provided on the straight-line method over
the estimated useful lives of the related assets as follows: buildings
and improvements - 8 to 40 years; machinery, equipment, furniture and
fixtures - 3 to 25 years; leasehold improvements - over the life of the
applicable lease or 10 years, whichever is shorter.
Deferred Charges - Deferred charges consist primarily of financing costs
($9.7 million and $11.2 million, which is net of amortization (non-cash
interest expense) of $5.4 million and $3.9 million in fiscal years 1995
and 1994, respectively), and program participation costs ($15.4 and
$16.3 million, which is net of amortization of $1.0 million and $.2
million, in fiscal years 1995 and 1994, respectively) paid in connection
with the sole-source award of wheels, brakes and anti-skid equipment on
the McDonnell Douglas Corporation's MD-90 twin-jet program. Program
participation costs are being amortized on a straight-line method over a
period of 20 years. Deferred financing charges are primarily being
amortized on an effective interest method over periods of 8 to 12 years.
Cost in Excess of Net Assets Acquired - Cost in excess of net assets
acquired is being amortized on the straight-line method over a period of
40 years.
F-6
<PAGE> 37
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets - Intangible assets consist of patents, licenses and
computer software which are stated at cost and are being amortized on a
straight-line method over periods of 5 to 30 years.
Evaluation of Long-Lived Assets - Long-lived assets are assessed for
recoverability on an on-going basis. In evaluating the value and future
benefits of long-lived assets, their carrying value would be reduced by
the excess, if any, of the long-lived asset over management's estimate
of the anticipated undiscounted future net cash flows of the related
long-lived asset. There were no adjustments to the carrying amount of
long-lived assets in fiscal years 1995, 1994 and 1993 resulting from the
Company's evaluations.
Warranty - Estimated costs of product warranty are accrued when
individual claims arise with respect to a product. When the Company
becomes aware of such defects, the estimated costs of all potential
warranty claims arising from such defects are fully accrued.
Business and Credit Concentrations - The Company's customers are
concentrated in the airline industry but are not concentrated in any
specific region. The United States Government accounted for
approximately 14%, 15% and 23% of total sales for the fiscal years ended
March 31, 1995, 1994 and 1993, respectively. No other single customer
accounted for 10% or more of consolidated revenues for the fiscal years
then ended, and there were no significant accounts receivable from a
single customer, except the United States Government, at March 31, 1995.
Accounting and Reporting Changes - 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.
Effective April 1, 1993, the Company changed its method of accounting
for the discounting of liabilities for workers' compensation losses, to
use a risk-free rate rather than its incremental borrowing rate. The
cumulative effect for periods prior to April 1, 1993, of this change
amounted to $2,305,000, and is included as an increase to the net loss
for the fiscal year ended March 31, 1994. The effect of the change on
the results of operations for the fiscal years ended March 31, 1994 and
1993 (pro forma) were not material.
Effective April 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." (See Note 14.)
Effective April 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." (See Note
11.)
Accounting Pronouncement - In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," which establishes accounting
standards for the recognition of an impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. This new standard is effective for fiscal
years beginning after December 15, 1995. The Company is currently
evaluating the impact, if any, of SFAS No. 121.
F-7
<PAGE> 38
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
March 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Accounts receivable, principally from commercial
customers . . . . . . . . . . . . . . . . . . . . . . $30,036,000 $29,099,000
Accounts receivable on U.S. Government and other
long-term contracts . . . . . . . . . . . . . . . . . 3,871,000 4,379,000
Allowances . . . . . . . . . . . . . . . . . . . . . . . (359,000) (695,000)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $33,548,000 $32,783,000
=========== ===========
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
March 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Raw materials and work-in-process . . . . . . . . . . . $35,819,000 $42,375,000
Finished goods . . . . . . . . . . . . . . . . . . . . . 15,500,000 15,821,000
Inventoried costs related to U.S.
Government and other long-term contracts . . . . . . . 11,072,000 9,823,000
----------- -----------
62,391,000 68,019,000
Less: unliquidated progress payments received,
principally related to long-term government
contracts . . . . . . . . . . . . . . . . . . . . . . 624,000 406,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $61,767,000 $67,613,000
=========== ===========
</TABLE>
During the fiscal year ended March 31, 1993, the Company's Aircraft
Braking Systems subsidiary changed its method of accounting, effective
April 1, 1992, to capitalize in inventory certain material related
overhead costs (such as procurement and receiving) at the raw material,
work-in-process and finished goods stages. Historically, these costs
were inventoried only in finished goods.
The cumulative effect of this change in method of accounting for periods
prior to April 1, 1992, amounted to $4,362,000, and is included as a
reduction in the net loss for the fiscal year ended March 31, 1993. The
effect of the change on the results of operations for the fiscal year
ended March 31, 1993 was to increase the loss before extraordinary
charge and cumulative effect of changes in accounting principles by
$1,469,000 and to reduce the net loss by $2,893,000.
F-8
<PAGE> 39
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 661,000 $ 662,000
Buildings and improvements . . . . . . . . . . . . . . . 27,232,000 27,113,000
Machinery, equipment, furniture and fixtures . . . . . . 86,813,000 84,107,000
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . 114,706,000 111,882,000
Less: accumulated depreciation and amortization . . . . 51,574,000 43,142,000
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . $ 63,132,000 $ 68,740,000
============ ============
</TABLE>
During the fiscal year ended March 31, 1994, the Company sold and
leased back assets with a net book value of $1,006,000.
6. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
March 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Accrued payroll costs . . . . . . . . . . . . . . . . . $13,149,000 $11,687,000
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 6,978,000 7,094,000
Accrued costs on long-term contracts . . . . . . . . . . 6,477,000 4,183,000
Accrued warranty costs . . . . . . . . . . . . . . . . . 5,248,000 4,502,000
Postretirement benefit obligation other than pensions . . 2,000,000 2,000,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 3,921,000 5,516,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $37,773,000 $34,982,000
=========== ===========
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Senior revolving loan (a) . . . . . . . . . . . . . . . $ -- $ 10,000,000
11 7/8% Senior Secured Notes due 2003 (b) . . . . . . . 100,000,000 100,000,000
13 3/4% Senior Subordinated Debentures due 2001 (c) . . 210,000,000 210,000,000
14 3/4% Convertible Debentures due 2004 (d) . . . . . . -- 61,421,000
--------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . $ 310,000,000 $ 381,421,000
=============== =============
</TABLE>
(a) Credit Agreements - On April 27, 1989, the Company entered into senior
term loan and senior revolving loan credit agreements (collectively
referred to as the "Credit Agreement") with a syndicate of banks. On
June 10, 1992, the Company issued $100 million aggregate principal
amount of 11 7/8% Senior Secured Notes due 2003 (the "Senior Notes").
The net proceeds from the Senior Notes were used to prepay the senior
term loan in full and reduce the outstanding amount of the senior
revolving loan. The Company recorded an extraordinary charge of
$2,477,000 relating to the accelerated amortization of unamortized
financing costs associated with the prepayment of the senior term loan
in fiscal year 1993.
F-9
<PAGE> 40
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Senior Note offering, the original senior
revolving loan credit agreement was amended and restated pursuant to an
Amended and Restated Revolving Credit Agreement (the "Restated Revolving
Credit Agreement"). The Restated Revolving Credit Agreement provides for
revolving loans (the "Revolving Loan") in an aggregate principal amount
not to exceed $70 million (subject to a borrowing base of a portion of
eligible accounts receivable and inventory). The Company's obligation
under the Revolving Loan is secured by a first priority lien on all
accounts receivable and inventory of the Subsidiaries. All borrowings
under the Revolving Loan will mature on April 27, 1997.
Borrowings under the Revolving Loan bear interest at floating rates. At
March 31, 1995, had there been any borrowings under the Revolving Loan,
the rate would have been 8.44%. At March 31, 1994, the interest rate on
borrowings under the Revolving Loan was 5.81%. As part of the total
commitment, the Restated Revolving Credit Agreement provides for the
issuance of letters of credit not to exceed $11 million. As of March 31,
1995 and 1994, the Company had outstanding letters of credit of $7.4
million and $7.5 million, respectively. At March 31, 1995 and 1994, the
Company had $53.6 million and $45.7 million, respectively, available
under the Revolving Loan.
The Restated Revolving Credit Agreement contains certain covenants and
events of default, including limitations on additional indebtedness,
liens, asset sales, dividend payments and other distributions from the
subsidiaries to K & F and contains financial ratio requirements
including cash interest coverage and consolidated net worth. The Company
was in compliance with all covenants at March 31, 1995.
(b) 11 7/8% Senior Secured Notes - On June 10, 1992, the Company issued $100
million of 11 7/8% Senior Secured Notes which mature on December 1,
2003. The Senior Notes are not subject to a sinking fund. The Senior
Notes may not be redeemed prior to June 1, 1997. On and after June 1,
1997, the Company may redeem the Senior Notes at descending premiums
ranging from 5.28% in June 1997 to no premium after June 2001.
(c) 13 3/4% Senior Subordinated Debentures - On August 10, 1989, the Company
issued $210 million of 13 3/4% Senior Subordinated Debentures which
mature on August 1, 2001 (the "Subordinated Debentures"). The Company is
required to make sinking fund payments of $52.5 million plus accrued
interest on each of August 1, 1999 and August 1, 2000. The Company may,
at its option, receive credit against sinking fund payments for the
principal amount of Subordinated Debentures acquired by the Company. As
of August 1, 1994, the Company may redeem the Subordinated Debentures at
descending premiums ranging from 5% in August 1994 to no premium after
August 1998.
(d) 14 3/4% Convertible Debentures - On September 2, 1994, K & F retired the
$65.4 million principal amount of 14 3/4% Convertible Debentures held by
Loral Corporation. (See Note 9.)
F-10
<PAGE> 41
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the
balance sheet at March 31, 1995 and 1994 approximate their fair value,
except as discussed below.
The fair value of the Company's total debt (excluding the Convertible
Debentures in fiscal year 1994, which were retired in fiscal year 1995)
based on quoted market prices or on current rates for similar debt with
the same maturities, was approximately $306 million and $297 million at
March 31, 1995 and 1994, respectively.
9. CAPITAL STOCK
a. On February 15, 1995, the Board of Directors approved a
one-for-ten reverse common stock split for all holders of Class
A and Class B common stock on such date. Stockholders' equity
has been restated to give retroactive recognition to the stock
split for all periods presented. In addition, all references in
the financial statements to number of shares and stock option
data have been restated.
b. On September 2, 1994, K & F retired the $65.4 million principal
amount of 14 3/4% Subordinated Convertible Debentures held by
Loral Corporation, in exchange for $12.76 million in cash and
458,994 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 68,728 shares of Class A common stock and 127,636 shares of
preferred stock. As a result, K & F's stockholders' equity was
increased by $65.4 million and long-term debt was reduced by an
equal amount, resulting in no gain or loss on the transaction.
c. The preferred stock is convertible into Class A voting common
stock on a one-for-one basis. The preferred stock and Class B
common stock are entitled to vote on all matters on which the
Class A common stock will vote and are entitled to one vote per
share.
d. In November 1989, the Company adopted the 1989 Stock Option
Plan, which provides for the grant of nonqualified or incentive
stock options to acquire 50,000 authorized but unissued shares
of Class A common stock. The options are exercisable in four
equal installments on the second, third, fourth and fifth
anniversaries of the date of grant, and shall remain
exercisable until the expiration of the option, 10 years from
the date of the grant, at an exercise price of $84.60.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year . . . 12,000 13,750 11,600
Granted . . . . . . . . . . . . . . . -- 500 2,750
Cancelled . . . . . . . . . . . . . . (500) (2,250) (600)
------ ------ ------
Outstanding at end of year . . . . . . 11,500 12,000 13,750
====== ====== ======
Exercisable options outstanding . . . 8,938 6,563 5,500
====== ====== ======
Available for future grants . . . . . 38,500 38,000 36,250
====== ====== ======
</TABLE>
F-11
<PAGE> 42
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company provides pension benefits to substantially all employees
through two pension plans (hourly and salaried). The plans provide
benefits based primarily on the participant's years of service. The
salaried plan also includes voluntary employee contributions.
Net pension cost included the following:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the
period . . . . . . . . . . . . . . . . . . . $ 1,590,000 $ 1,361,000 $ 1,407,000
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . . 4,224,000 4,033,000 3,632,000
Actual loss (return) on plan assets . . . . . 954,000 (3,683,000) (2,960,000)
Net amortization and deferral . . . . . . . . (3,869,000) 809,000 315,000
----------- ----------- -----------
Net pension cost . . . . . . . . . . . . . . $ 2,899,000 $ 2,520,000 $ 2,394,000
=========== =========== ===========
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation . . . . . . . . . . . . . . $51,770,000 $53,088,000
=========== ===========
Accumulated benefit obligation . . . . . . . . . . . . $52,189,000 $53,535,000
Effect of projected future salary increases . . . . . 860,000 1,053,000
----------- -----------
Projected benefit obligation . . . . . . . . . . . . . 53,049,000 54,588,000
Plan assets at fair market value . . . . . . . . . . . . 42,626,000 40,347,000
----------- -----------
Unfunded projected benefit obligation . . . . . . . . . 10,423,000 14,241,000
Unrecognized prior service cost . . . . . . . . . . . . (2,389,000) (2,786,000)
Unrecognized net loss . . . . . . . . . . . . . . . . . (7,761,000) (7,971,000)
Adjustment for minimum liability . . . . . . . . . . . . 9,290,000 9,704,000
----------- -----------
Accrued pension cost recognized in the
consolidated balance sheet . . . . . . . . . . . . . . $ 9,563,000 $13,188,000
=========== ===========
</TABLE>
F-12
<PAGE> 43
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 87 requires recognition
in the balance sheet of an additional minimum pension liability for
underfunded plans with accumulated benefit obligations in excess of plan
assets. A corresponding amount is recognized as an intangible asset or a
reduction of equity. At March 31, 1995, the Company's additional minimum
liability was $9,290,000 with a corresponding equity reduction of
$7,192,000 and intangible asset of $2,098,000. At March 31, 1994, the
Company's additional minimum liability was $9,704,000 with a
corresponding equity reduction of $7,467,000 and intangible asset of
$2,237,000.
Investments held by the Company's pension plans consist primarily of
Fortune 500 equity securities and investment grade fixed income
securities.
The assumptions used in accounting for the plans are as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . 8.50% 7.75% 9.00%
Rate of increase in compensation levels . . . . . . 4.50 4.50 5.50
Expected long-term rate of return on assets . . . . 9.50 9.50 9.50
</TABLE>
Eligible employees having one year of service also participate in one of
the Company's Savings Plans (hourly or salaried). Under one of these
plans, the Company matches 45% of a participating employee's
contributions, up to 6% of compensation. The employer contributions
generally vest to participating employees after five years of service.
The matching contributions were $532,000, $568,000 and $582,000 for the
fiscal years ended March 31, 1995, 1994 and 1993, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance
benefits for all eligible employees and their dependents active at
April 27, 1989 and thereafter, and postretirement life insurance
benefits for retirees prior to April 27, 1989. Participants are
eligible for these benefits when they retire from active service and
meet the eligibility requirements of the Company's pension plans. The
health care plans are generally contributory and the life insurance
plans are generally noncontributory. These costs were previously
recognized as claims were paid. Effective April 1, 1992, the Company
adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 requires accrual of these
benefits during an employee's service period. The Company elected to
record the transition obligation of $77,902,000 as a one-time charge
against earnings.
During the first quarter of fiscal year 1994, the Company adopted
various plan amendments which had the effect of reducing the accumulated
postretirement benefit obligation. This reduction is being amortized as
prior service cost over the average remaining years of service to full
eligibility of active plan participants.
F-13
<PAGE> 44
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
period . . . . . . . . . . . . . . . . . . . . . . . $ 400,000 $ 458,000 $2,287,000
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . 3,543,000 2,749,000 7,100,000
Net amortization and deferral . . . . . . . . . . . . . (3,732,000) (4,677,000) --
----------- ----------- ----------
Net periodic postretirement benefit cost . . . . . . . $ 211,000 $(1,470,000) $9,387,000
=========== =========== ==========
</TABLE>
A portion of the net postretiretirement benefit cost is capitalized in
inventory at year end. The net periodic postretirement benefit cost
charged to operations was $(83,000), $443,000 and $7,768,000 for the
fiscal years ended March 31, 1995, 1994 and 1993, respectively.
Presented below are the total obligations and amounts recognized in the
Company's consolidated balance sheets, inclusive of the current portion:
<TABLE>
<CAPTION>
March 31,
---------------------------
1995 1994
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,066,000 $23,989,000
Fully eligible active plan participants . . . . . . . . . . . 2,983,000 2,159,000
Other active plan participants. . . . . . . . . . . . . . . . 12,653,000 11,882,000
------------ -----------
Total accumulated postretirement benefit obligation. . . . . . . . 43,702,000 38,030,000
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . (10,843,000) (7,416,000)
Unrecognized prior service cost related to plan amendments . . . . 46,858,000 51,536,000
------------ -----------
Accrued postretirement benefit costs . . . . . . . . . . . . . . . $ 79,717,000 $82,150,000
============ ===========
</TABLE>
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 13.1% in fiscal year 1995 and will be 12.2% in
fiscal year 1996. The rate was assumed to decrease gradually to 6.5% by
fiscal year 2002 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts
reported. A change in the assumed health care trend rates by 1% in each
year would change the accumulated postretirement benefit obligation at
March 31, 1995 by $5,900,000 and the aggregate of the service and
interest cost components of net postretirement benefit cost for the
fiscal year ended March 31, 1995 by $1,000,000. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation as of March 31, 1995 and 1994 was 8.50% and 7.75%,
respectively.
F-14
<PAGE> 45
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS
The Company is party to various noncancelable operating leases which
are longer than a one-year term for certain data processing, and other
equipment and facilities with minimum rental commitments payable as
follows:
<TABLE>
<CAPTION>
Year Ending March 31, Amount
--------------------- ------
<S> <C>
1996 $ 4,356,000
1997 4,247,000
1998 4,296,000
1999 4,328,000
2000 4,062,000
Thereafter 7,120,000
</TABLE>
Rental expense was $4,641,000, $4,190,000, and $3,941,000 for the
fiscal years ended March 31, 1995, 1994 and 1993, respectively.
13. 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.
14. INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In
connection with such adoption, there was no impact to the financial
statements as the Company has provided a 100 percent valuation
allowance against its net deferred tax benefit.
The components of the net deferred tax benefit are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
--------- ---------
<S> <C> <C>
Tax net operating loss carryforwards . . . . . . . . . . . . . . . $ 42,280,000 $ 43,135,000
Temporary differences:
Postretirement and other employee
benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 38,746,000 37,337,000
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 32,237,000 28,223,000
Program participation costs . . . . . . . . . . . . . . . . . . (6,215,000) (6,651,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,656,000 7,179,000
------------- ------------
Net deferred tax benefit . . . . . . . . . . . . . . . . . . . . . $ 114,704,000 $109,223,000
============= ============
</TABLE>
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced
by approximately $59 million and $56 million, respectively.
F-15
<PAGE> 46
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
The Company's effective tax rate of zero percent results from
non-recognition of tax net operating losses and temporary differences
as compared to the federal statutory rate (benefit of 35%).
15. RELATED PARTY TRANSACTIONS
Bernard L. Schwartz ("BLS") owns 27.12% of the common stock of the
Company and serves as Chairman of the Board of Directors and Chief
Executive Officer. BLS is also Chairman and Chief Executive Officer of
Loral. The Company has an Advisory Agreement with BLS which provides
for the payment of an aggregate of $200,000 per month of compensation
to BLS and persons designated by him. Such agreement will continue
until BLS dies or is disabled or ceases to own at least 135,000 shares
of common stock of the Company.
On September 2, 1994, K & F retired the $65.4 million principal amount
of Convertible Debentures held by Loral. (See Notes 7 and 9.)
Pursuant to a financial advisory agreement between Lehman Brothers and
the Company, Lehman Brothers acts as exclusive financial adviser to the
Company. The Company pays Lehman Brothers customary fees for services
rendered on an as-provided basis. The agreement may be terminated by
the Company or Lehman Brothers upon certain conditions. In connection
with the Senior Note offering on June 10, 1992, Lehman Brothers
received underwriting discounts and commissions of $2.25 million.
During the fiscal year ended March 31, 1995, the Company invested
excess cash in commercial paper with an affiliate of Lehman Brothers.
Total interest received during the fiscal year ended March 31, 1995 was
$19,000. The total amount of commercial paper held at March 31, 1995
was $6.0 million.
Pursuant to agreements between K & F and Loral, the parties provide
services to each other and share certain expenses relating to a
production program, real property occupancy, benefits administration,
treasury, accounting and legal services. The related charges agreed
upon by the parties were established to reimburse each party on the
actual cost incurred without profit or fee. The Company believes the
arrangements with Loral are as favorable to the Company as could have
been obtained from unaffiliated parties. Billings from Loral were $3.0
million, $3.0 million and $3.7 million in fiscal years 1995, 1994 and
1993, respectively. Billings to Loral were $.2 million, $1.1 million,
and $1.1 million in fiscal years 1995, 1994 and 1993. Purchases from
Loral were $1.9 million, $4.2 million, and $3.7 million in fiscal years
1995, 1994 and 1993. Included in accounts receivable and accounts
payable at March 31, 1995 is $.7 million and $1.8 million. Included in
accounts receivable and accounts payable at March 31, 1994 is $.6
million and $2.0 million.
F-16
<PAGE> 47
EXHIBIT INDEX
2.01 - Agreement for Sale and Purchase of Assets dated March 26, 1989
between Loral Corporation and the Registrant (1)
3.01 - Amended and Restated Certificate of Incorporation of the
Registrant
3.02 - Amended and Restated By-Laws of the Registrant (6)
4.01 - Indenture for the 13 3/4% Senior Subordinated Debentures due
2001 (1)
4.02 - Indenture for the 14 3/4% Subordinated Convertible Debentures
Due 2004 (1)
4.03 - First Supplemental Indenture dated as of July 22, 1991, to
Convertible Debenture Indenture (4)
4.04 - Form of Indenture dated as of June 10, 1992 for the 11 7/8%
Senior Secured Notes Due 2003 (5)
4.05 - Form of 11 7/8% Senior Secured Notes due 2003 (5)
4.06 - Form of Second Supplemental Indenture dated as of June 10,
1992, to Convertible Debenture Indenture (5)
9.01 - Stockholders Agreement dated April 27, 1989 among the
Registrant, Lehman Brothers Holdings Inc. ("LBH") and Bernard L.
Schwartz ("BLS") (1)
10.01 - Credit Agreement dated as of April 27, 1989 among the
Registrant, Chemical Banking Corporation, as Agent and the Banks
named therein (1)
10.02 - Revolving Credit Agreement dated as of April 27, 1989, among
Aircraft Braking Systems Corporation, Engineered Fabrics
Corporation, the Agent and the Banks (1)
10.03 - Securities Purchase Agreement dated as of April 27, 1989,
among the Registrant, BLS and LBH (1)
10.04 - Assumption Agreement dated as of April 27, 1989 (1)
10.07 - Shared Services Agreement dated April 27, 1989, among Loral,
the Registrant, Aircraft Braking Systems Corporation and
Engineered Fabrics Corporation (1)
10.08 - Director Advisory Agreement dated as of April 27, 1989, among
the Registrant and BLS (1)
10.09 - Non-Competition Agreement dated as of April 27, 1989, between
the Registrant and BLS (1)
10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees
(5)
10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees (5)
10.12 - Goodyear Aerospace Corporation Supplemental Unemployment
Benefits Plan for Salaried Employees - Plan A (1)
10.13 - The Loral Systems Group Release and Separation Allowance Plan
(1)
10.14 - Letter Agreement dated April 27, 1989, between the Registrant
and Lehman Brothers Inc. (1)
10.15 - Amendment and Waiver dated as of July 14, 1989 (1)
10.16 - Amendment to Credit Agreement dated as of July 31, 1989,
between K & F Industries, the Subsidiaries and the banks (2)
10.17 - K & F Industries, Inc. 1989 Stock Option Plan (2)
10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.19 - Amendment to the Credit Agreement dated as of June 26, 1991 (3)
10.21 - Securities Purchase Agreement dated as of July 22, 1991, among
the Registrant, BLS and the Lehman Investors (4)
<PAGE> 48
10.24 - Securities Purchase Agreement among K & F Industries, Inc.,
BLS and the Lehman Brothers Partnerships dated, September 2,
1994 (6)
10.25 - Amended and Restated Stockholders Agreement dated as of
September 2, 1994, By and Among K & F Industries, Inc., BLS, the
Lehman Brothers Partnerships, CBC Capital Partners, Inc. and
Loral Corporation (6)
10.26 - Agreement dated as of September 2, 1994, between K & F
Industries, Inc. and Loral Corporation (6)
10.27 - Form of Amended and Restated Revolving Credit Agreement dated
as of June 10, 1992, among Chemical Bank, the Banks named
therein, Aircraft Braking Systems Corporation and Engineered
Fabrics Corporation (5)
10.28 - Waiver and Consent dated as of August 26, 1994 (6)
10.29 - Amendment of Stockholders Agreement dated November 8, 1994 (6)
10.30 - Securities Conversion Agreement among K & F Industries, Inc.
and the Converting Stockholders, dated November 8, 1994 (6)
10.31 - First Amendment, dated April 6, 1995 to the Amended and
Restated Revolving Credit Agreement
12.01 - Statement of computations of ratio of earnings to fixed
charges (5)
12.02 - Statement of computation of pro forma deficiency ratio of
earnings to fixed charges (5)
21.01 - Subsidiaries of the Registrant (1)
24.01 - Powers of Attorney
27.01 - Financial Data Schedule
- -------------------------
(1) Previously filed, as an exhibit to the Company's Registration Statement
on Form S-1, No. 33-29035.
(2) Previously filed, as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1990.
(3) Previously filed, as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1991.
(4) Previously filed, as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991.
(5) Previously filed, as an exhibit to the Company's Registration Statement
on Form S-1, No. 33-47028.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
<PAGE> 1
EXHIBIT 3.01
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
K & F INDUSTRIES, INC.
* * * * *
K & F Industries, Inc., a Delaware corporation, hereby
certifies that this Amended and Restated Certificate of Incorporation,
restating, integrating and amending its Certificate of Incorporation originally
filed by it with the Secretary of State of the State of Delaware on March 13,
1989, under the name Opus Acquisition Corporation, was duly adopted by the
directors and stockholders in accordance with the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware.
FIRST: The name of the Corporation is K & F Industries, Inc.
(the "Corporation").
SECOND: The address of its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may now or hereafter be organized
under the General Corporation Law of the State of Delaware.
FOURTH: (I) The total number of shares of stock which the
Corporation shall have authority to issue is 3,610,000 consisting of (a)
2,560,000 shares of Common Stock, par value $.01 per share (the "Common Stock"),
of which 2,100,000 shares shall be Class A Common Stock (the "Class A Common
Stock"), and 460,000 shares shall be Class B Common Stock (the "Class B Common
Stock") and (b) 1,050,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock"), of which 1,027,635 shares will be designated Series A
Convertible Preferred Stock (the "Series A Preferred Stock").
(II) Preferred Stock may be issued from time to time
in one or more series with such distinctive designations as may be stated in the
resolution or resolutions providing for the issue of such stock from time to
time adopted by the Board of Directors. The resolution or resolutions providing
for the issue of shares of a particular series shall fix, subject to applicable
laws and provisions of this ARTICLE FOURTH, the designation, rights, preferences
and limitations of the shares of each such series. The authority
<PAGE> 2
of the Board of Directors in respect to each series shall include, but not be
limited to, determination of the following:
(a) the consideration for which such Preferred Stock shall be
issued;
(b) the number of shares constituting such series, including
the authority to increase or decrease such number, and the designation of such
series;
(c) the divided rate of the shares of such series, whether the
dividends shall be cumulative and, if so, the date from which they shall be
cumulative, and the relative rights or priority, if any, of payment of dividends
on shares of such series;
(d) the right, if any, of the Corporation to redeem shares of
such series and the terms and conditions of such redemption;
(e) the rights of the shares in case of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of such series;
(f) the obligation, if any, of the Corporation to retire shares
of such series pursuant to a retirement or sinking funds of a similar nature or
otherwise and the terms and conditions of such obligation;
(g) the terms and conditions, if any, upon which shares of such
series shall be convertible into or exchangeable, at the option of the
Corporation or the holder, for shares of stock of any other class or classes or
debt securities of the Corporation, including the price or prices or the rate or
rates of conversion of exchange and terms of adjustment, if any;
(h) the voting rights and requirements, if any, of the shares
of such series, in addition to any voting rights required by law; and
(i) any other rights, preferences or limitations of shares of
such series.
(III) The designations, voting powers, preferences and
relative, participating, optional and other special rights of the shares of the
Series A Preferred Stock, and the qualifications, limitations or restrictions
thereof are as follows:
-2-
<PAGE> 3
(1) Dividends and Distributions.
(A) Subject to the prior and superior rights of the
holders of any shares of any series of preferred stock
ranking prior and superior to the Series A Preferred
Stock with respect to dividends, the holders of shares
of Series A Preferred Stock, in preference to the
shares of Common Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out
of funds legally available for the purpose, dividends
payable in cash or in kind respectively, commencing on
the first issuance of a share or fraction of a share
of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent), subject to the
provision for adjustment hereinafter set forth, equal
to the aggregate per share amount of all cash
dividends, and equal to the aggregate per share amount
(payable in the same form as payment to the holders of
Common Stock) of all non-cash dividends or other
distributions other than a dividend payable in shares
of Common Stock, declared on the Common Stock since
the first issuance of any share or fraction of a share
of Series A Preferred Stock. In the event the
Corporation shall at any time after July 27, 1989 (the
"Original Issue Date") (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount to
which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event shall be
adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in paragraph (A) above
simultaneously with the declaration of a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock) with identical
payment dates. No dividend shall be declared or paid on the Common Stock unless
the immediately preceding sentence shall have been complied with.
-3-
<PAGE> 4
(2) Voting Rights. In addition to any other voting rights
required by law, holders of shares of Series A Preferred Stock shall have only
the following voting rights:
(A) Subject to the provision for adjustment hereinafter
set forth, the holders of Series A Preferred Stock shall have the right to vote
on the election or removal of directors of the Corporation and on all other
matters to be voted on by the holders of Common Stock of the Corporation and
shall be entitled to one vote for each share of Series A Preferred Stock held.
In the event the Corporation shall at any time after the Original Issue Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) Except as set forth herein, holders of Series A
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
(3) Certain Restrictions.
(A) Whenever dividends or distributions payable on the
Series A Preferred Stock as provided in ARTICLE FOURTH (1) are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire
for consideration any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock;
-4-
<PAGE> 5
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except dividends
paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares
of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to
the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A Preferred
Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences
of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this ARTICLE FOURTH (3), purchase or otherwise acquire such shares at such time
and in such manner.
(4) Conversion of Series A Preferred Stock.
(A) Subject to and upon compliance with the provisions of this
Amended and Restated Certificate of Incorporation and subject to the provisions
for adjustment
-5-
<PAGE> 6
hereinafter set forth, each record holder of shares of Series A Preferred Stock
shall be entitled at any time and from time to time to exchange any or all of
the shares of Series A Preferred Stock held by such holder for an equal number
of shares of Class A Common Stock. Each exchange of shares of Series A Preferred
Stock for Class A Common Stock shall be effected by the surrender of the
certificate or certificates evidencing the shares of Series A Preferred Stock to
be exchanged at the principal office of the Corporation (or such other office or
agency of the Corporation as the Corporation may designate by notice in writing
to the holders of the Series A Preferred Stock) at any time during its usual
business hours, together with written notice by the holder of such shares of
Series A Preferred Stock, stating that such holder desires to exchange the
shares, or a stated number of shares, of Series A Preferred Stock evidenced by
such certificate or certificates into shares of Class A Common Stock. Such
notice shall also state the name or names (with addresses) and denominations in
which the certificate or certificates evidencing shares of Class A Common Stock
shall be issued and shall include instructions for delivery thereof. Receipt of
such notice together with the certificates evidencing the shares of Series A
Preferred Stock to be exchanged shall obligate the Corporation to issue shares
of Class A Common Stock as specified in such notice. Promptly after such
surrender and the receipt of such written notice, the corporation shall issue
and deliver in accordance with such instructions the certificate or certificates
evidencing the shares of Class A Common Stock issuable upon such exchange. Such
exchange, to the extent permitted by law, shall be deemed to have been effected
as of the close of business on the date on which such certificate or
certificates shall have been surrendered and such written notice shall have been
received by the Corporation, and at such time the rights of the holder of such
shares of Series A Preferred Stock to be exchanged as such holder shall cease
and the person or persons in whose name or names any certificate or certificates
evidencing shares of Class A Common Stock to be issued upon such exchange shall
be deemed to have become the holder or holders of record of the shares of Class
A Common Stock to be evidenced thereby. The Corporation shall be entitled to
rely conclusively, as to the truth of the statements made therein, on such
written notice, and the Corporation shall not be liable to any person with
respect to any action taken or omitted to be taken by it in connection with such
exchange in reliance on the statements made in such written notice.
(B) Notwithstanding the foregoing, upon (a) the consummation of
a public offering by any of the Corporation, Aircraft Braking Systems
Corporation, a wholly owned subsidiary of the Corporation, or Engineered Fabrics
Corporation, a wholly owned subsidiary of the Corporation, of its shares of
common stock pursuant to the Securities Act of 1933, as
-6-
<PAGE> 7
amended, (b) a merger of the Corporation with or into another person other than
a merger described in ARTICLE FOURTH (8) herein, (c) a sale of all or
substantially all of the assets of the Corporation, any capital reorganization
or any reclassification of the capital stock of the Corporation (other than a
change in par value or as a result of a stock dividend or subdivision, split-up,
combination of shares) or (d) the exercise by the holders of Common Stock or
Series A Preferred Stock of their Put Sale Option or Tag-Along Right as set
forth in the Amended and Restated Stockholders Agreement dated as of September
2, 1994 among the Corporation and the other parties thereto (each such event, an
"Event of Conversion"), all shares of the Series A Preferred Stock, subject to
the adjustment hereinafter set forth, shall, subject to compliance with any
applicable filing requirements (and the expiration of all waiting periods) under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), automatically convert into an equal number of shares of Class A Common
Stock. In the event the Corporation shall at any time after the Original Issue
Date (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
aggregate number of shares of Class A Common Stock issuable upon conversion of a
share of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(C) The Corporation will at all times reserve and keep
available out of its authorized but unissued shares of Class A Common Stock, or
its treasury shares, solely for the purpose of issue upon exchange of the shares
of Series A Preferred Stock, as herein provided, such number of shares of Class
A Common Stock as shall then be issuable upon an exchange of all outstanding
shares of Series A Preferred Stock. The shares of Class A Common Stock so
issuable shall, when so issued, be duly authorized, validly issued, fully paid
and nonassessable.
(D) Shares of Series A Preferred Stock that are exchanged for
shares of Class A Common Stock as provided herein shall not be reissued as
Series A Preferred Stock.
(E) The issue of certificates evidencing shares of Class A
Common Stock upon exchange of shares of Series A Preferred Stock shall be made
without charge to the holders of such shares for any issue tax in respect
thereof, or other cost incurred by the Corporation in connection with such
exchange; provided, however, that the Corporation shall not be
-7-
<PAGE> 8
required to pay any tax that may be payable in respect of any transfer involving
the issue and delivery of any certificate in a name other than that of the
holder or former holder of the Series A Preferred Stock.
(5) Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Series A Preferred Stock and may be reissued as part of a new
series of preferred stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance set
forth in the Amended and Restated Certificate of Incorporation.
(6) Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation, dissolution or winding up of the Corporation (a "Liquidation"), no
distribution shall be made
(i) to the holders of shares of Common Stock unless,
prior thereto, the holders of shares of Series A Preferred
Stock shall have received the greater of (a) $84.62 per share,
plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of
such payment, and (b) an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal to
the aggregate amount to be distributed per share to the holders
of the Common Stock, or
(ii) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock and
all other such parity stock in proportion to the total amounts
to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
(B) Pursuant to a Letter Agreement (the "Letter Agreement")
dated September 2, 1994, the holders of the Series A Preferred Stock
agreed to make certain payments to the holders of the Class B Common
Stock upon a distribution pursuant to Section (III)(6)(A)(i) above. The
Letter Agreement is hereby incorporated by reference into this Amended
and Restated Certificate of Incorporation. The rights and privileges of
the Class B Common Stock pursuant to the Letter Agreement shall
terminate upon the conversion of all of
-8-
<PAGE> 9
the Series A Preferred Stock pursuant to Section 4 of Article IV of
this Amended and Restated Certificate of Incorporation. All references
to the Loral Shares in the Letter Agreement shall hereby be deemed to
be references to the outstanding shares of Class B Common Stock, and
all references in the Letter Agreement to Section (III)(7)(i)(a) of
Article IV of the Certificate of Incorporation of the Corporation shall
be deemed to refer to Section (III)(6)(A)(i) of Article IV of this
Amended and Restated Certificate of Incorporation. The Corporation
shall take all such actions as are necessary to effect the
distributions to the holders of the Class B Common Stock that are
required to be made by the holders of the Series A Preferred Stock
under the Letter Agreement.
(C) In the event the Corporation shall at any time after
November 8, 1994 (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (b) of Section (III)(6)(A)(i) above shall be
adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(7) Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction
in which the shares of Common Stock are exchanged for or changed into
other stock or securities, cash and/or any other property, then in any
such case the shares of Series A Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share (subject to
the provision for adjustment hereinafter set forth) equal to the
aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Original Issue Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each
such case the amount set forth in the preceding sentence with respect
to the exchange or change of shares of Series A Preferred Stock shall
be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
-9-
<PAGE> 10
(8) No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
(9) Rank. The Series A Preferred Stock shall rank junior with
respect to payment of dividends and on liquidation to all other series
of the Corporation's preferred stock that specifically provide that
they shall rank senior to the Series A Preferred Stock.
(10) Amendment. The Amended and Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner
which would materially alter or change the powers, preferences or
special rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of a majority or
more of the outstanding shares, if any, of Series A Preferred Stock,
voting separately as a class.
(IV) Holders of the Class B Common Stock have certain
rights to receive distributions made to the holders of the Series A
Preferred Stock upon a Liquidation pursuant to Article IV, Section
(III)(6)(B) hereof. Except as provided in Article IV, Section
(III)(6)(B) hereof, or as otherwise expressly provided in this Amended
and Restated Certificate of Incorporation, all outstanding shares of
Common Stock shall be identical and shall entitle the holders thereof
to the same rights and privileges.
(1) When, as and if dividends or distributions are declared on
outstanding shares of Common Stock, whether payable in cash, in
property or in securities of the Corporation (other than shares of
Common Stock), the holders of outstanding shares of Common Stock, shall
be entitled to share equally, share for share, in such dividends and
distributions. If dividends or distributions are declared on
outstanding shares of Common Stock that are payable in shares of, or in
subscription or other rights to acquire shares of, Common Stock, such
dividends shall be declared at the same rate on the outstanding shares
of Class A Common Stock and the outstanding shares of Class B Common
Stock, but shall be payable only in shares or in subscription or other
rights to acquire shares, as the case may be, of Class A Common Stock
to holders of outstanding shares of Class A Common Stock and Class B
Common Stock to holders of outstanding shares of Class B Common Stock.
(2) Upon any Liquidation, the holders of Common Stock shall be
entitled to share equally, share for share, in the assets of the
Corporation to be distributed among the holders of shares of the Common
Stock. Additionally, the holders of outstanding shares of Class B
Common Stock shall have the rights and privileges set forth in Article
IV, Section III(6)(B) hereof.
-10-
<PAGE> 11
(3) If the Corporation shall in any manner subdivide or combine
the outstanding shares of one class of Common Stock, the outstanding
shares of the other class of Common Stock shall be correspondingly
subdivided or combined, as the case may be.
(4) The holders of outstanding shares of Common Stock shall
have the right to vote on the election or removal of the directors of
the Corporation and on all other matters to be voted on by the
stockholders of the Corporation and shall be entitled to one vote for
each share of Common Stock held.
(5) The Amended and Restated Certificate of Incorporation of
the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of
the Class B Common Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the
outstanding shares, if any, of Class B Common Stock voting separately
as a class.
(6) The Corporation shall not authorize or issue any additional
shares of the Class B Common Stock without the affirmative vote of the
holders of a majority or more of the outstanding shares, if any, of the
Series A Preferred Stock.
(7) Any shares of Class B Common Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Class B Common Stock and may be reissued as part of a new series of
common stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set
forth in the Amended and Restated Certificate of Incorporation.
FIFTH: The Board of Directors shall have the power to adopt,
amend or repeal the by-laws of the Corporation to the extent provided
in the by-laws.
SIXTH: (1)(a) A director of the Corporation shall not be liable
to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit.
-11-
<PAGE> 12
(b) If the General Corporation Law of the State of Delaware is
hereafter amended to further eliminate or limit the liability of a
director of a corporation, then a director of the Corporation, in
addition to the circumstances set forth herein, shall not be liable to
the fullest extent permitted by the General Corporation Law of the
State of Delaware as so amended.
(2)(a) Each person who was or is a party or is threatened to be
made a party to, or is involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by applicable law. The
right to indemnification conferred in this ARTICLE SIXTH shall also
include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by applicable law. The
right to indemnification conferred in this ARTICLE SIXTH shall be a
contract right.
(b) The Corporation shall determine the right of any person to
receive indemnification as provided hereunder in accordance with the
provisions of applicable law.
(3) The rights and authority conferred in this ARTICLE SIXTH
shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of this Amended and
Restated Certificate of Incorporation or the by-laws of the
Corporation, agreement, vote of stockholders or disinterested directors
or otherwise.
(4) Neither the amendment nor repeal of this ARTICLE SIXTH nor
the adoption of any provision of this Certificate of Incorporation or
the by-laws of the Corporation or of any statute inconsistent with this
ARTICLE SIXTH shall eliminate or reduce the effect of this ARTICLE
SIXTH in respect of any acts or omissions occurring prior to such
amendment or repeal or such adoption of an inconsistent provision.
SEVENTH: The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and
incurred by him in any
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<PAGE> 13
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of the State of Delaware.
EIGHTH: The Corporation reserves the right to amend this
Amended and Restated Certificate of Incorporation in any manner permitted by the
General Corporation Law of the State of Delaware, as amended from time to time,
and all rights and powers conferred herein on stockholders, directors and
officers, if any, are subject to this reserved power.
-13-
<PAGE> 14
IN WITNESS WHEREOF, said Corporation has caused this Amended
and Restated Certificate to be signed by its Vice President and attested to by
its Assistant Secretary, this 13th day of February, 1995.
K & F INDUSTRIES, INC.
By:/s/ KENNETH M. SCHWARTZ
--------------------------
Kenneth M. Schwartz,
Vice President
ATTEST:/s/ LISA F. STEIN-MCMEEKIN
-----------------------------
Lisa F. Stein-McMeekin
Asst. Secretary
<PAGE> 1
EXHIBIT 10.31
FIRST AMENDMENT
FIRST AMENDMENT, dated as of April 6, 1995 (this " First Amendment"),
to (i) the Amended and Restated Revolving Credit Agreement, dated as of June 10,
1992 (the "Credit Agreement"), among Aircraft Braking Systems Corporation
("ABS") and Engineered Fabrics Corporation ("EF"), each a Delaware corporation
(ABS and EF collectively, the "Borrowers), the several banks and other financial
institutions from time to time parties thereto (the "Banks") and Chemical Bank,
a New York banking corporation, as agent for the Banks (in such capacity, the
"Agent") and (ii) the K&F Agreement, dated as of June 10, 1992 (the "K&F
Agreement"), made by K & F Industries, Inc. ("K&F"), a Delaware corporation, in
favor of the Agent.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Banks have agreed to
make certain extensions of credit to the Borrowers;
WHEREAS, K&F owns directly or indirectly all of the issued and
outstanding capital stock of each of the Borrowers, and K&F executed the K&F
Agreement in order to satisfy a condition precedent to the obligations of the
Banks under the Credit Agreement;
WHEREAS, the Borrowers and K&F have requested, and, upon this First
Amendment becoming effective, the Banks have agreed, to amend the Credit
Agreement and the K&F Agreement in the manner hereinafter set forth;
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. Defined Terms. Capitalized terms defined in the Credit Agreement and
used herein without definition shall have the meanings given to them in the
Credit Agreement.
II. Amendments to Credit Agreement.
1. Subsection 4.19 of the Credit Agreement is hereby amended by
adding the following proviso immediately before the period at the end thereof:
", provided that the proceeds of the Loans may also be
used for the purposes of (i) repaying in part the Intercompany Loans
and (ii) making loans or advances to K&F, in each case to the extent
that, substantially simultaneously with the receipt thereof, K&F uses
such repayment proceeds and/or such amounts loaned or advanced to
redeem or make open market purchases of its 13 3/4% Senior
<PAGE> 2
2
Subordinated Debentures Due 2001 and/or its 11 7/8% Senior Secured
Notes Due 2003 to the extent permitted by the K&F Agreement".
2. Subsection 7.9 of the Credit Agreement is hereby amended by
adding the following proviso immediately before the period at the end thereof:
", provided that the Borrowers may optionally repay the
Intercompany Loans to the extent that, substantially simultaneously
with the receipt thereof, K&F uses the repayment proceeds to redeem or
make open market purchases of its 13 3/4% Senior Subordinated
Debentures Due 2001 and/or its 11 7/8% Senior Secured Notes Due 2003 to
the extent permitted by the K&F Agreement".
III. Amendment of K&F Agreement. Section 2(d) of the Credit Agreement
is hereby amended by adding the following additional proviso immediately before
the period at the end thereof:
"; provided, further, that K&F may redeem or make open
market purchases of up to $40,000,000 of its 13 3/4% Senior
Subordinated Debentures Due 2001" and/or its 11 7/8% Senior Secured
Notes Due 2003".
IV. Conditions to Effectiveness. This First Amendment shall become
effective on the date on which each of the following conditions precedent shall
have been satisfied:
1. The Borrowers, K&F, the Agent and each Bank shall have
executed and delivered to the Agent this First Amendment.
2. No litigation, inquiry, injunction or restraining order
shall be pending, entered or threatened (including any proposed
statute, rule or regulation) which, in the opinion of the Required
Banks, could have a material adverse effect on (a) the business,
assets, operations, condition (financial or otherwise) or prospects of
the Borrowers and their subsidiaries taken as a whole, (b) their
ability to perform their obligations under the loan documents or (c)
the rights and remedies of the Banks.
3. There shall not have occurred any change, or development or
event involving a prospective change, which in either case in the
opinion of the Required Banks could have a material adverse effect on
(a) the business, assets, operations, condition (financial or
otherwise) or prospects of the Borrowers and their subsidiaries taken
as a whole, (b) their ability to perform their obligations under the
loan documents or (c) the rights and remedies of the Banks.
4. The Banks shall have received an audit, prepared by an
institution satisfactory to the Agent, with respect to
<PAGE> 3
3
the accounts receivable and inventory of the Borrowers and their
subsidiaries and the Agent shall be satisfied with the results thereof.
5. The Banks shall have received legal opinions from counsel to
the Borrowers and any special counsel required by the Agent, and such
opinions shall be in form and substance satisfactory to the Agent.
6. The Agent shall have received all fees due and payable to
the Agent and the Banks on the effective date of this First Amendment,
including, without limitation, an amendment fee equal to 0.25% of each
Bank's Revolving Credit Commitment after giving effect to any reduction
of the Revolving Credit Commitments effectuated on or prior to such
effective date; provided that the fees specified in this
paragraph 6 shall not be payable if this First Amendment does not
become effective.
7. The Borrowers shall have permanently reduced the aggregate
Revolving Credit Commitments to $70,000,000 pursuant to irrevocable
notice given to Agent in accordance with subsection 2.5 of the Credit
Agreement.
8. The Banks shall have received such other corporate documents
and other instruments as are customary for transactions of this type or
as the Agent may reasonably request.
V. General.
1. Payment of Expenses. The Borrowers jointly and severally agree to
pay or reimburse the Agent for all of its out-of-pocket costs and reasonable
expenses incurred in connection with this First Amendment, any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Agent.
2. No Other Amendments; Confirmation. Except as expressly set forth
herein, the provisions of the Credit Agreement and the K&F Agreement are and
shall remain in full force and effect.
3. Governing Law. This First Amendment and the rights and obligations
of the parties hereto shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York.
4. Counterparts. This First Amendment may be executed by one or more of
the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This First Amendment may be delivered by facsimile transmission of
the relevant signature pages hereof.
<PAGE> 4
4
5. Representations and Warranties. The Borrowers and K&F hereby
represent and warrant to the Agent and the Banks that as of the date hereof
there does not exist, and after giving effect to this First Amendment there will
not exist, any Default or Event of Default, and the representations and
warranties contained in the Credit Agreement and the K&F Agreement, as
applicable, are, and after giving effect to this First Amendment will be, true
and correct in all material respects.
<PAGE> 5
5
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
CHEMICAL BANK, as Agent and as a Bank
By: /s/ JAMES B. TREGER
--------------------------------
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ EDWARD G. BENEDICT
--------------------------------
Title: Vice President
NATIONAL WESTMINSTER BANK USA
By:
--------------------------------
Title:
THE NIPPON CREDIT BANK, LTD.
By: /s/ JAMES J. PASQUALE
--------------------------------
Title: Senior Manager
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By: /s/ MARK A. THOMPSON
--------------------------------
Title: Vice President and
Deputy General Manager
PILGRIM PRIME RATE TRUST
By: /s/ KATHLEEN LENARCIC
--------------------------------
Title: Senior Credit Analyst
DEN NORSKE BANK AS
By:
--------------------------------
Title:
<PAGE> 6
6
MITSUBISHI TRUST & BANKING
CORPORATION
By:
--------------------------------
Title:
NATIONAL WESTMINSTER BANK NJ
By:
--------------------------------
Title:
LEHMAN COMMERCIAL PAPER INC.
By: /s/ MICHELE SWANSON
--------------------------------
Title: Authorized Signatory
Accepted and agreed to as of
the date first above written:
AIRCRAFT BRAKING SYSTEMS
CORPORATION
By: /s/ KENNETH M. SCHWARTZ
----------------------------------
Title: Vice President
ENGINEERED FABRICS CORPORATION
By: /s/ KENNETH M. SCHWARTZ
----------------------------------
Title: Vice President
K&F INDUSTRIES, INC.
By: /s/ KENNETH M. SCHWARTZ
----------------------------------
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 24.01
POWER OF ATTORNEY
The undersigned, as a Director of K & F Industries, Inc., a Delaware corporation
(the "Company"), and/or, as applicable, as an officer of the Company; does
hereby constitute and appoint Kenneth M. Schwartz to be his agent and
attorney-in-fact; with the power to act fully hereunder and with full power of
substitution to act in the name and on behalf of the undersigned; to sign in the
name and on behalf of the undersigned, as Director of the Company or as Officer
of the Company, and file with the Securities and Exchange Commission, an Annual
Report on Form 10-K for fiscal year 1995; to execute and deliver any agreements,
instruments, certificates or other documents which he shall deem necessary or
proper in connection with the filing of such Report and amendments or
supplements and generally to act for and in the name of the undersigned with
respect to such filing as fully as could be undersigned if then personally
present and acting.
IN WITNESS WHEREOF, the undersigned has executed the Power-of-Attorney
on the date set opposite his respective name.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief May 1, 1995
- ------------------------ Executive Officer and Director
Bernard L. Schwartz
/s/ HERBERT R. BRINBERG Director May 1, 1995
- ------------------------
Herbert R. Brinberg
/s/ RONALD H. KISNER Director May 1, 1995
- ------------------------
Ronald H. Kisner
/s/ JOHN R. PADDOCK Director May 1, 1995
- ------------------------
John R. Paddock
/s/ JAMES A. STERN Director May 1, 1995
- ------------------------
James A. Stern
/s/ A. ROBERT TOWBIN Director May 1, 1995
- ------------------------
A. Robert Towbin
/s/ ALAN H. WASHKOWITZ Director May 1, 1995
- ------------------------
Alan H. Washkowitz
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