<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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission file number 33-29035
K & F Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-1614845
State or other jurisdiction of (I.R.S. Employer
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, 1996,
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, 1996, approximately 88% 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 over 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, 1996, approximately 12% 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 to refine existing braking systems, develop new
technologies and design 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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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 Company's commercial transport fleet
continued to grow during fiscal year 1996, 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. Airlines such as
Northwest Airlines and USAir have 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, 1996, the Company's products had been
installed on over 30,000 commercial transport, general aviation and military
aircraft. Commercial transport aircraft include the DC-9, DC-10, Fokker Fo-100,
Fokker F-28, Canadair Regional Jet and Saab 340 on all of which Aircraft Braking
Systems is the sole-source supplier. 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, 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 12 MD-90s out of a total order of 31. Other customers for the MD-90
include Japan Air System and Saudi Arabia which announced orders for 29 of these
aircraft. McDonnell Douglas has booked orders for over 130 MD-90 aircraft. It's
anticipated that this program will result in approximately 500 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. Airbus has booked orders for over 160
A-321 aircraft. Of the 48 aircraft delivered to date, Aircraft Braking Systems
has provided wheels and brakes for 40 of these aircraft.
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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 in the axle and driven by 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,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Wheels and brakes................ 80% 80% 76%
Anti-skid systems................ 8% 7% 10%
-- -- --
Total.............. 88% 87% 86%
== == ==
</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 over one-half of the domestic
military market. Major program wins have included the F/A-18C/D, F/A-18E/F and
the F-14 aircraft, along with the V-22 and RAH-66 helicopter platforms. For the
fiscal year ended March 31, 1996, approximately 12% 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, 1996, sales of fuel
tanks accounted for approximately 70% 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.
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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 16%, 14% and 15% of total sales for the fiscal years ended March
31, 1996, 1995 and 1994, respectively. No other customer accounted for more
than 10% of sales.
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,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial transport.................... 61% 61% 60%
Military (U.S. and foreign)............. 23% 19% 22%
General aviation........................ 16% 20% 18%
--- --- ---
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.
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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,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Domestic sales...................... 59% 62% 63%
Foreign sales....................... 41% 38% 37%
--- --- ---
Total............................ 100% 100% 100%
=== === ===
</TABLE>
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, 1996, the Company employed approximately 156
engineers (of whom 31 held advanced degrees); approximately 29 of such engineers
(including 14 holding advanced degrees) devoted all or part of their efforts
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, 1996, 1995 and 1994 were $9.8 million, $8.4 million
and $12.9 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 competitors for fuel tanks are
American Fuel Cell & Coated Fabrics Company and Aerazur of France.
Backlog
Backlog at March 31, 1996 and 1995 amounted to approximately $150.5 million and
$151.4 million, respectively. Backlog consists of firm orders for the Company's
products which have not been shipped. Approximately 84% of total Company backlog
at March 31, 1996 is expected to be shipped during the fiscal year ended March
31, 1997, 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, 1996, approximately 24% 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.
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Government Contracts
For the fiscal years ended March 31, 1996, 1995 and 1994, approximately 16%,
14%, and 15%, respectively, of the Company's total sales were made to agencies
of the Government or to prime contractors or subcontractors of the Government.
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 has been purchased from Hitco Technologies, Inc. ("Hitco")
pursuant to supply arrangements. The Company is in litigation with Hitco
concerning the respective obligations of the Company and Hitco under supply
contracts and purchase orders. (See Item 3, "Legal Proceedings" and Note 13 to
the consolidated financial statements.) The Company is in the process of
expanding its existing carbon manufacturing facility as well as developing an
alternative supplier such that upon termination of the Hitco contract adequate
supplies of carbon will be available to meet demand. 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.
Personnel
At March 31, 1996, the Company had 1,160 full-time employees, of which 834 were
employed by Aircraft Braking Systems (383 hourly and 451 salaried employees) and
326 were employed by Engineered Fabrics (203 hourly and 123 salaried employees).
All of Aircraft Braking Systems' hourly employees are represented by the United
Auto Workers' Union and all 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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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. The Company is currently expanding this facility by an additional 21,000
square feet, to be used for the production of carbon materials. 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 manufacturing facilities owned by Aircraft
Braking Systems are part of a larger complex formerly owned and operated by
Loral Corporation and now owned by Lockheed Martin Corporation ("Lockheed
Martin"). Aircraft Braking Systems and Lockheed Martin have various occupancy
and service agreements to provide for shared easements and services (including
utility, sewer, and steam). In addition to the 754,000 square feet owned by
Aircraft Braking systems, the Company leases space within the Lockheed Martin
complex of approximately 433,000 square feet . Aircraft Braking Systems is
subject to annual occupancy payments to Lockheed Martin. During the fiscal year
ended March 31, 1996, Aircraft Braking Systems made occupancy payments to Loral
Corporation of $1.5 million. Certain access easements and agreements regarding
water, sanitary sewer, storm sewer, gas, electricity and telecommunication are
perpetual. In addition, Lockheed Martin and Aircraft Braking Systems equally
control Valley Association Corporation, an Ohio corporation, which was formed to
establish a single entity to deal with the City of Akron and utility companies
concerning governmental and utility services which are furnished to Lockheed
Martin's and Aircraft Braking Systems' facilities.
Item 3. Legal Proceedings
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. after Hitco threatened to breach existing supply
contracts unless prices were renegotiated. Hitco has been the principal supplier
of the carbon used by Aircraft Braking Systems for its carbon brakes. Hitco
claimed that Aircraft Braking Systems breached the supply arrangements by
electing to begin to expand its own carbon production facility. The Aircraft
Braking Systems' complaint, as amended, seeks damages in excess of $47 million,
injunctive relief and specific performance requiring Hitco to perform its
obligations pursuant to existing contracts and purchase orders. Hitco has
counterclaimed in the matter seeking, among other things, damages up to $130
million for the alleged breach by Aircraft Braking Systems of alleged long-term
contracts to purchase carbon. The Ohio court has issued a preliminary injunction
ordering Hitco to perform its obligations pursuant to existing contracts and
purchase orders without change in terms. Hitco is presently seeking to have the
injunction vacated or modified, and/or a declaratory judgment terminating
Hitco's obligation to supply Aircraft Braking Systems at prices previously
pertaining. In a related action, Hitco commenced suit in Superior Court, Los
Angeles County, California against Aircraft Braking Systems seeking
substantially the same relief as is asserted in the Ohio action, and the
California case has been stayed.
Trial of the Ohio action is presently scheduled for January 1997 and discovery
has been ongoing. Management intends to vigorously seek dismissal of the
California action and to proceed in the Ohio case to maintain the preliminary
injunction and otherwise to protect Aircraft Braking Systems' carbon supply as
well as to seek damages from Hitco. Based upon the court's opinion to date,
advice of counsel and its own assessment of the matters in dispute, management
does not expect the outcome of the litigation to be unfavorable to the Company.
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Aircraft Braking Systems has defended 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 alleged infringement by Aircraft
Braking Systems of two Goodrich patents related to the structure and method of
overhaul of aircraft brake assemblies. On November 10, 1994, the court dismissed
the plaintiff's claims and held that the patents were invalid and that the
Company's brake assemblies did not infringe the patents. This decision was also
upheld on appeal.
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.
Environmental Matters
The Company's manufacturing operations are subject to various environmental laws
and regulations administered by federal, state and local agencies. Management
continually assesses its obligations and compliance with respect to these
requirements. Based upon these assessments, the Company believes that its
manufacturing facilities are in substantial compliance with all applicable
existing federal, state and local environmental laws and regulations. New
environmental protection laws that will be effective in 1997 and thereafter, may
require the installation of air pollution and wastewater treatment control
equipment at the Company's manufacturing facilities. However, the Company does
not believe that its environmental expenditures, if any, will have a material
adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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) is owned by
Bernard L. Schwartz ("BLS"), Chairman of the Company. All of the Class B common
stock is owned by Loral Space & Communications Ltd. ("Loral Space"), a newly
formed public company spun-off from Loral Corporation . All of the preferred
stock (except 44,999 shares owned by CBC Capital Partners, Inc.) is owned by
four limited partnerships of Lehman Brothers Holdings Inc. ("LBH"). (See
"Security Ownership of Certain Beneficial Owners and Management.")
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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,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................................... $264,736 $238,756 $226,131 $277,107 $295,490
Cost of sales...................................... 180,435 164,697 159,751 199,002 209,552
-------- -------- -------- -------- --------
Gross Margin 84,301 74,059 66,380 78,105 85,938
Independent research and development............... 9,767 8,363 12,858 11,417 14,130
Selling, general and administrative expenses....... 22,564 19,208 22,421 24,154 24,047
Amortization....................................... 10,415 10,411 10,884 10,258 10,306
-------- -------- -------- -------- --------
Operating income................................... 41,555 36,077 20,217 32,276 37,455
Interest expense, net.............................. 41,048 46,250 51,953 53,486 52,179
-------- -------- -------- -------- --------
Income (loss) before extraordinary charge and
cumulative effect of accounting changes....... 507 (10,173) (31,736) (21,210) (14,724)
Extraordinary charge............................... (1,913)(a) -- -- (2,477)(b) (992)(b)
Cumulative effect of accounting changes ........... -- -- (2,305)(c) (73,540)(d) --
-------- -------- -------- -------- --------
Net loss........................................... $ (1,406) $(10,173) $(34,041) $(97,227) $(15,716)
======== ======== ======== ======== ========
BALANCE SHEET DATA (at end of period):
Working capital.................................... $ 36,327 $ 48,025 $ 53,091 $ 70,028 $ 77,606
Total assets....................................... 416,037 429,074 446,880 489,968 518,938
Long-term obligations (a)(e)....................... 390,261 406,933 484,407 480,580 405,111
Stockholders' equity (deficiency) (d)(e)........... (39,701) (34,748) (90,355) (51,868) 48,331
OTHER DATA (for the period):
Capital expenditures, net.......................... 10,418 2,824 3,127 4,670 3,986
Depreciation and amortization...................... 18,921 18,843 20,527 19,862 19,501
Non-cash interest - Convertible Debentures (e)..... -- 3,950 8,443 7,282 6,213
Non-cash interest - financing costs................ 1,561 1,482 1,480 1,507 2,467
</TABLE>
(a) On December 28, 1995, the Company redeemed $30 million principal amount of
the 13 3/4% Senior Subordinated Debentures. In connection therewith, the
Company recorded an extraordinary charge of $1.913 million. (See Note 7 to
the consolidated financial statements.)
(b) The extraordinary charge of $2.477 million and $.992 million 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.
(c) 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.)
(d) Includes cumulative effect of accounting change for Statement of Financial
Accounting Standards No. 106 and the change in method of accounting for
certain overhead costs in inventory.
(e) 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 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 Note 9 to the consolidated financial
statements.)
10
<PAGE> 11
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. Research, development and design
expenditures are charged to operations when incurred. Original wheel and brake
equipment supplied to aircraft manufacturers at or below the cost of production
("Program Investments") are charged to operations when delivered to the aircraft
manufacturers. 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, 1996, the Company spent an aggregate of
$108 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, 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 revenue opportunities for the Company.
Results of Operations
Fiscal Year 1996 Compared with Fiscal Year 1995
SALES. Sales for fiscal year 1996 totaled $264.7 million reflecting an increase
of $26.0 million or 10.9% compared with the prior year. This increase was due to
higher commercial sales of wheels and brakes for commercial transport aircraft
of $16.6 million, primarily on the DC-9, DC-10, MD-80, MD-90 and Fo-100
programs, partially offset by lower general aviation sales of $4.7 million on
various aircraft. Military sales increased $14.1 million primarily on the F-16
program.
GROSS MARGIN. The gross margin for fiscal year 1996 was 31.8% compared with
31.0% for fiscal year 1995. This increase was primarily due to operating
efficiencies and the overhead absorption effect relating to the higher sales
volume, partially offset by higher shipments of original equipment to airframe
manufacturers at or below the cost of production.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent Research and Development costs
were $9.8 million in fiscal year 1996 compared with $8.4 million in fiscal year
1995 or 3.7% and 3.5% of sales for fiscal years 1996 and 1995, respectively.
This increase was primarily due to higher costs relating to carbon research and
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.4 million in fiscal year 1996 compared with
fiscal year 1995. This increase was primarily due to a provision made against
accounts receivable during fiscal year 1996, higher performance related
incentive compensation and foreign tax related expenses. The provision against
accounts receivable was primarily for two of the Company's customers (Fokker
Aviation and Business Express) who filed for bankruptcy during fiscal year 1996.
INTEREST EXPENSE, NET. Net interest expense decreased $5.2 million in fiscal
year 1996 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 Note 9 to the consolidated financial
statements), and the redemption of $30 million principal amount of the 13 3/4%
Senior Subordinated Debentures (the "Subordinated Debentures ") on December 28,
1995. (See Note 7 to the consolidated financial statements.)
11
<PAGE> 12
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 incurrence 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.
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 Convertible Debentures on September 2, 1994 (see Note 9 to the
consolidated financial statements) and due to a lower average principal balance
on the Senior Revolving Loan (the "Revolving Loan").
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.)
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 borrowing
under the Revolving Loan. The Company's long-term indebtedness decreased from
$310 million at March 31, 1995 to $294 million at March 31, 1996. This decrease
was due to the redemption of $30 million principal amount of the Company's
Subordinated Debentures on December 28, 1995. The Company will apply this
redemption to the mandatory sinking fund payment required to be made on the
Subordinated Debentures on August 1, 1999. The Company used cash on hand and
borrowing from the Revolving Loan to redeem the Subordinated Debentures. In
connection therewith, the Company recorded an extraordinary charge of $1.913
million, consisting of redemption premiums and the write-off of unamortized
financing costs. (See Note 7 to the consolidated financial statements.)
On September 2, 1994, K & F retired the $65.4 million principal amount of
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. 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 Note 9 to the consolidated financial
statements.)
12
<PAGE> 13
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 borrowing under its $70 million Revolving Loan (maturing April
27, 1997 and which is subject to a borrowing base of eligible accounts
receivable and inventory). At March 31, 1996, the Company had $40.6 million
available to borrow under its Revolving Loan.
Contingency
Aircraft Braking Systems has been purchasing substantially all of the carbon for
its carbon brakes from Hitco under supply arrangements. The contracts and
commitments between Aircraft Braking Systems and Hitco are now the subject of
litigation. (See Item 3, "Legal Proceedings" and Note 13 to the consolidated
financial statements.) During fiscal year 1996, Hitco threatened to interrupt
deliveries of carbon unless prices were renegotiated. Hitco claimed that
Aircraft Braking Systems breached the supply arrangements by electing to begin
to expand its own carbon manufacturing facilities. Hitco has been preliminarily
enjoined from refusing to supply Aircraft Braking Systems with carbon pursuant
to the existing contracts and purchase orders. It is anticipated that Hitco's
obligation to continue to supply carbon will terminate by the latter of December
1996 or such time as the alleged breaches of contract by Hitco are remedied.
The Company has commenced a major expansion of its existing carbon manufacturing
facility in Akron, Ohio, which will provide a five-fold increase in the
Company's own carbon production capacity. The project is expected to be
completed during the first quarter of calendar year 1997 and, when fully
operational, will provide the Company with sufficient capacity to meet
substantially all, if not all, of its requirements for carbon brake production
at the current level of business. The Company is also developing an alternate
supplier for carbon. A loss of carbon supply for the carbon brakes manufactured
by Aircraft Braking Systems would have a material, adverse affect on the
Company's business and financial condition. Because of the injunction obtained
in the litigation with Hitco, management does not anticipate that the Company's
supply of carbon from Hitco will be interrupted prior to the first quarter of
calendar year 1997.
Capital Expenditures
The Company had additions to fixed assets of $10.4 million and $2.8 million for
the fiscal years ended 1996 and 1995, respectively. The increase during fiscal
year 1996 as compared with fiscal year 1995 was primarily due to construction of
a 21,000 square foot expansion to the carbon manufacturing building at the
Company's Akron, Ohio facility. Capital spending for fiscal year 1997 is
expected to be approximately $15.0 million which will principally be used for
the completion of this new carbon facility.
Inflation
A majority of the Company's sales are conducted through annually established
price lists and long-term contracts. The effect of inflation on the Company's
sales and earnings is minimal because the selling prices of such price lists and
contracts, 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 Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for 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 has determined the
effect of SFAS No. 121, upon adoption, to be immaterial to its results of
operations and financial position. (See Note 2 to the consolidated financial
statements.)
13
<PAGE> 14
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which encourages (but does not
require) adoption of the fair value method of accounting for stock-based
compensation plans. Entities may continue to measure compensation costs for
those plans using the intrinsic method of accounting, but must make pro forma
disclosures about the impact on results of operations as if the fair value
method of accounting had been applied. The Company is currently evaluating the
impact, if any, of SFAS No. 123. (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-17 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* 70 Chairman of the Board
and Chief Executive Officer
Herbert R. Brinberg* 70 Director
Ronald H. Kisner* 47 Director
John R. Paddock* 42 Director
James A. Stern** 45 Director
A. Robert Towbin** 60 Director
Alan H. Washkowitz** 55 Director
Donald E. Fogelsanger 70 President
Kenneth M. Schwartz 45 Executive Vice President
Dirkson R. Charles 32 Chief Financial Officer
</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 Space & Communications Ltd. since April 1996. From 1972 to
April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of Loral
Corporation. Mr. Schwartz is Chairman and Chief Executive Officer of Globalstar
Telecommunications Limited, Vice Chairman of the Board of Directors of Lockheed
Martin Corporation, a Director of Reliance Group Holdings, Inc. and certain
subsidiaries, a Director of First Data Corporation and a 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. 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.
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 President of the Georgia Psychological Association
(1993-1994), 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. Currently, he is visiting
Associate Professor of Psychology at Emory, and holds positions as Adjunct
Clinical Assistant Professor in the Department of Psychiatry at Emory, and is
Adjunct Professor of Psychology at Georgia Institute of Technology.
Mr. Stern is Chairman of The Cypress Group L.L.C., 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.
15
<PAGE> 16
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., Lear Seating Corporation and Cinemark USA, Inc.
Mr. Towbin joined Unterberg Harris in September of 1995 as a Managing Director.
From January 1994 to September 1995, he was President and Chief Executive
Officer of the Russian-American Enterprise Fund and Vice Chairman of its
successor fund, The U.S. Russia Investment Fund. Mr. Towbin was a Managing
Director at Lehman Brothers High Technology Investment Banking Group from
January 1987 until January of 1994. 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 is also a Director of Bradley
Real Estate Trust, Columbus New Millennium Fund, Gerber Scientific, Inc. and
Globalstar Telecommunications Limited.
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 is also a
director of Illinois Central Corporation and Lear Seating Corporation.
Mr. Fogelsanger has been President of the Company since January 1996. From April
1989 to January 1996, Mr. Fogelsanger was the President of Aircraft Braking
Systems Corporation. From 1987 to 1989 he was President of Loral Corporation's
Aircraft Braking Systems Division. From 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.
Mr. Kenneth M. Schwartz has been Executive Vice President of the Company since
January 1996. From June 1989 to January 1996, Mr. Schwartz held the positions of
Chief Financial Officer, Treasurer and Secretary. Previously he was the
Corporate Director of Internal Audit for Loral Corporation 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 LLP.
Mr. Charles has been Chief Financial Officer of the Company since May 1996. From
May 1993 to May 1996, Mr. Charles was the Controller of the Company. Previously
he was the Manager of Accounting and Financial Planning. Prior to employment
with the Company in 1989, Mr. Charles held various other positions with the
accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984.
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.
Aircraft Braking Systems Corporation
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald E. Welsch 61 President
Frank P. Crampton 52 Vice President-Marketing
Richard W. Johnson 52 Vice President-Finance and Controller
James J. Williams 40 Vice President-Manufacturing
</TABLE>
16
<PAGE> 17
Engineered Fabrics Corporation
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger C. Martin 59 President
Terry L. Lindsey 51 Vice President-Marketing
Anthony G. McCann 36 Vice President-Operations
John A. Skubina 41 Vice President-Finance
</TABLE>
Mr. Welsch has been President of Aircraft Braking Systems Corporation since
January 1996. From November 1994 to January 1996, Mr. Welsch held the positions
of Executive Vice President and Chief Operating Officer. From September 1993 to
November 1994, he was Executive Vice President. 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.
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. 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. 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 Corporation'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. 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. Williams was named Vice President of Manufacturing at Aircraft Braking
Systems in May 1992. He had been Director of Manufacturing since joining
Aircraft Braking Systems in September 1989. Previously from April 1985 to August
1989 he was Branch Manager of Refurbishment Operations at United Technologies
responsible for the refurbishment process of the Solid Rocket Boosters on the
Shuttle Program. Mr. Williams started his aviation career in 1975 in the Air
Force as a Hydraulic Systems Specialist. He was Superintendent, Manufacturing at
Fairchild Republic Company from 1979 to 1983, followed by Manager, B-1B
Manufacturing Operations at Rockwell International Corporation from 1983 to
1985.
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
Corporation and K & F for the past 34 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. Lindsey has served as Vice President of Business Development since 1989. He
has been with Goodyear Aerospace Corporation, Loral Corporation and K & F 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.
17
<PAGE> 18
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.
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.
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.
<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 1996 1,770,500(b) -- -- -- --
Chairman of the Board and Chief 1995 1,779,500(b) -- -- -- --
Executive Officer 1994 1,859,800(b) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Kenneth M. Schwartz 1996 321,815(b) 115,000 -- 13,333 4,196
Executive Vice President of K & F 1995 283,600(b) 105,000 -- -- 3,565
Industries, Inc. 1994 176,418 37,500 -- -- 3,404
- ------------------------------------------------------------------------------------------------------------------
Donald E. Fogelsanger 1996 196,000 125,000 -- 13,333 22,829
President of K & F Industries, Inc. 1995 198,538 120,000 -- -- 19,442
1994 185,000 -- -- -- 18,949
- ------------------------------------------------------------------------------------------------------------------
Ronald E. Welsch(c) 1996 172,000 70,000 -- 10,000 38,533
President of Aircraft Braking 1995 162,769 78,000 -- -- 3,806
Systems 1994 90,359 -- 500 -- 2,026
- ------------------------------------------------------------------------------------------------------------------
Roger C. Martin 1996 136,674 55,000 -- 8,333 11,489
President of Engineered Fabrics 1995 132,767 55,500 -- -- 10,520
Corporation 1994 127,000 -- -- -- 10,545
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the following: (i) Company contributions to individual 401(k) plan
accounts for fiscal years 1996, 1995 and 1994, respectively: Mr. K.
Schwartz - $3,996, $3,375 and $3,225; Mr. Fogelsanger - $4,050, $3,475 and
$2,719; Mr. Welsch - $4,050, $3,446 and $1,848; Mr. Martin - $4,050, $3,110
and $3,161; (ii) the value of supplemental life insurance programs for
fiscal years 1996, 1995 and 1994, respectively: Mr. K. Schwartz - $200,
$190 and $179; Mr. Fogelsanger - $18,779, $15,967 and $16,230; Mr. Welsch -
$1,107, $360 and $178; Mr. Martin - $7,439, $7,410 and $7,384; and (iii)
$33,376 paid to Mr. Welsch for moving expenses incurred in connection with
his employment.
(b) 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 Space 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 $100,000 of the aggregate
advisory fee be paid to Kenneth M. Schwartz, which is included in his
fiscal years 1996 and 1995 salaries.
(c) Compensation for fiscal year 1994 for Mr. Welsch reflects less than a full
year, as his employment date was September 8, 1993.
19
<PAGE> 20
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options by the Company, during fiscal year 1996,
to the named executive officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
- ----------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)(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
Kenneth M. Schwartz 0 0 1,125/375 0/0
Donald E. Fogelsanger 0 0 2,250/250 0/0
Ronald E. Welsch 0 0 125/375 0/0
Roger C. Martin 0 0 1,250/250 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. The following awards
were earned for the individuals named in the Summary Compensation Table during
fiscal years 1996 and 1995, respectively: Mr. K. Schwartz $45,000 and $40,000;
Mr. Fogelsanger $50,000 and $40,000; Mr. Welsch $36,000 and $30,000; and Mr.
Martin $27,000 and $25,000.
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 received a favorable 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
The individuals named in the Summary Compensation Table also participate in a
supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of K & F and Aircraft Braking Systems and the supplemental plan, are $200,000
for Mr. K. Schwartz; $109,000 for Mr. Fogelsanger; and $32,000 for Mr. Welsch.
BLS does not participate in either plan. The retirement benefits have been
computed on the assumption that (a) employment will be continued until normal
retirement at age 65; (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; and (c) participation in the
contributory portion of the plan will continue at current levels. The Company
has a similar plan at Engineered Fabrics in which Mr. Martin participates.
Estimated annual benefits for Mr. Martin are $83,000 using the assumptions in
(a), (b) and (c) above.
For purposes of eligibility, vesting and benefit accrual, participants receive
credit for years of service with Loral Corporation 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,
1996. Non-equity 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,
1996. All directors are reimbursed for reasonable out-of-pocket expenses
incurred in that capacity.
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 Space 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.
22
<PAGE> 23
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, 1996.
<TABLE>
<CAPTION>
Number of Shares Number of Shares Number of Shares Percentage
of Class A of Class B of Preferred Ownership of
Common Stock Common Stock Stock(a) Capital Stock(b)
------------ ------------ -------- ----------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz...................... 553,343(c) -- -- 27.12%
*Lehman Brothers Merchant Banking
Portfolio Partnership L.P. ............. -- -- 478,387(d) 23.45
*Lehman Brothers Offshore Investment
Partnership L.P. ....................... -- -- 129,745(e) 6.36
*Lehman Brothers Offshore Investment
Partnership - Japan L.P. ............... -- -- 49,348(e) 2.42
*Lehman Brothers Capital Partners II,
L.P. ................................... -- -- 325,156(f) 15.94
CBC Capital Partners, Inc. .............. 1 44,999 2.21
Loral Space & Communications Ltd. ....... -- 458,994 -- 22.50
------- ------- --------- ------
553,344 458,994 1,027,635 100.00%
======= ======= ========= ======
</TABLE>
*Collectively referred to as the "Lehman Investors."
(a) The preferred stock is convertible into Class A common stock on a
one-for-one basis.
(b) Assumes that the preferred stock has been converted into voting common
stock.
(c) 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.
(d) LBI Group Inc. is the general partner of the limited partnership and is an
indirect wholly owned subsidiary of LBH.
(e) Lehman Brothers Offshore Partners Ltd. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
(f) LBH is the general partner of the limited partnership. 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
Space (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.
23
<PAGE> 24
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 (iii) one
director as long as they own any Common Equivalents. If and for so long as
Loral Space and its affiliates own any shares of voting common stock, at the
request of Loral Space, the number of members of the Board of Directors shall
be increased to 9, Loral Space 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 recapitalization, (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.
24
<PAGE> 25
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 Space. Prior to that he was
Chairman and Chief Executive Officer of Loral Corporation. 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.
In May 1996, K & F purchased $343,000 principal amount of the Company's
Subordinated Debentures from A. Robert Towbin, who is a member of the Board of
Directors of the Company, at a price of 103.65% of the principal thereof plus
accrued interest.
The Company has agreed to pay Ronald H. Kisner, who is a member of the Board of
Directors of the Company, a monthly retainer of $6,000 during fiscal year 1997
for legal services.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral Corporation. (See Note 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 Space 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.
The Company has a bonus plan pursuant to which the Company's Board of Directors
awards bonuses to BLS and other advisors ranging from 5% to 10% of earnings in
excess of $50 million before interest, taxes and amortization. Bonuses earned
under this plan were $200,000 in fiscal year 1996.
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. No payments were made during the three years
ended March 31, 1996.
Pursuant to agreements between K & F and Loral Corporation, the parties provided
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 Corporation were as
favorable to the Company as could have been obtained from unaffiliated parties.
Billings from Loral Corporation were $3.6 million, $3.0 million and $3.0 million
in fiscal years 1996, 1995 and 1994, respectively. Billings to Loral Corporation
were $2.7 million, $.2 million and $1.1 million in fiscal years 1996, 1995 and
1994. Purchases from Loral Corporation were $2.2 million, $1.9 million and $4.2
million in fiscal years 1996, 1995 and 1994. Included in accounts receivable and
accounts payable at March 31, 1996 is $3.5 million and $2.3 million. Included in
accounts receivable and accounts payable at March 31, 1995 is $.7 million and
$1.8 million. K & F will continue these arrangements and reimburse Loral Space
for real property occupancy, benefits administration and legal services.
25
<PAGE> 26
On April 22, 1996, Lockheed Martin acquired the defense electronics and systems
integration businesses of Loral Corporation which included the Akron, Ohio,
facility. The various occupancy and service agreements affecting the Akron,
Ohio, facility will remain in full force and effect. K & F will continue to
reimburse Lockheed Martin for real property occupancy, and costs relating to
shared easements and services.
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, 1996 and 1995 F-2
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Deficiency
for the Years Ended March 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1995 and 1994 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 10.17, 10.18 and
10.20 are management contracts or compensation plans.
(b) No reports on Form 8-K were filed for the three months ended March 31, 1996.
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 (7)
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)
27
<PAGE> 28
(c) Exhibits (continued)
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
Corporation, 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)
10.20 - K & F Industries, Inc. Supplemental Executive Retirement Plan
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 (7)
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 (See Signature Page)
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.
(7) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
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: KENNETH M. SCHWARTZ
--------------------------
Kenneth M. Schwartz
Executive Vice President
Date: June 28, 1996
------------------
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, 1996
- ------------------------ Executive Officer and Director
Bernard L. Schwartz (principal executive officer)
KENNETH M. SCHWARTZ Executive Vice President June 28, 1996
- ------------------------
Kenneth M. Schwartz
DIRKSON R. CHARLES Chief Financial Officer (principal June 28, 1996
- ------------------------ financial and accounting officer)
Dirkson R. Charles
* Director June 28, 1996
- ------------------------
Herbert R. Brinberg
* Director June 28, 1996
- ------------------------
Ronald H. Kisner
* Director June 28, 1996
- ------------------------
John R. Paddock
* Director June 28, 1996
- ------------------------
James A. Stern
* Director June 28, 1996
- ------------------------
A. Robert Towbin
* Director June 28, 1996
- ------------------------
Alan H. Washkowitz
*By: KENNETH M. SCHWARTZ Attorney-in-Fact June 28, 1996
-------------------
Kenneth M. Schwartz
</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, 1996 and 1995,
and the related consolidated statements of operations, stockholders' deficiency,
and cash flows for each of the three years in the period ended March 31, 1996.
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
May 22, 1996
F-1
<PAGE> 32
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 2,412,000 $ 8,493,000
Accounts receivable, net .................................................. 35,228,000 33,548,000
Inventory ................................................................. 63,332,000 61,767,000
Other current assets ...................................................... 832,000 1,106,000
------------- -------------
Total current assets .................................................. 101,804,000 104,914,000
------------- -------------
Property, Plant and Equipment - Net ......................................... 65,044,000 63,132,000
Deferred Charges - Net of amortization of $9,452,000 and
$6,975,000 ............................................................... 24,082,000 26,508,000
Cost in Excess of Net Assets Acquired - Net of amortization of
$42,257,000 and $36,148,000 ............................................... 202,119,000 208,228,000
Intangible Assets - Net of amortization of $24,035,000 and
$20,645,000 ............................................................... 22,988,000 26,292,000
------------- -------------
Total Assets ................................................................ $ 416,037,000 $ 429,074,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable .......................................................... $ 12,485,000 $ 10,345,000
Interest payable .......................................................... 8,217,000 8,771,000
Other current liabilities ................................................. 44,775,000 37,773,000
------------- -------------
Total current liabilities ............................................. 65,477,000 56,889,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions ....................... 75,390,000 77,717,000
Other Long-Term Liabilities ................................................. 20,871,000 19,216,000
Long-Term Debt .............................................................. 294,000,000 310,000,000
Commitments and Contingencies
(Notes 12 and 13)
Stockholders' Deficiency:
Preferred stock, $.01 par value - authorized, 1,050,000 shares; issued and
outstanding, 1,027,635 shares (liquidation
preference of $60,110,000) .............................................. 10,000 10,000
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 5,000
Common stock, Class A, $.01 par value - authorized, 2,100,000
shares; issued and outstanding, 553,344 shares .......................... 6,000 6,000
Additional paid-in capital ................................................ 155,350,000 155,350,000
Deficit ................................................................... (184,049,000) (182,643,000)
Adjustment to equity for minimum pension liability ........................ (10,572,000) (7,192,000)
Cumulative translation adjustment ......................................... (451,000) (284,000)
------------- -------------
Total stockholders' deficiency ........................................ (39,701,000) (34,748,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency .............................. $ 416,037,000 $ 429,074,000
============= =============
</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,
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales .............................................. $ 264,736,000 $ 238,756,000 $ 226,131,000
Cost of sales .......................................... 180,435,000 164,697,000 159,751,000
------------- ------------- -------------
Gross Margin ........................................... 84,301,000 74,059,000 66,380,000
Independent research and development ................... 9,767,000 8,363,000 12,858,000
Selling, general and administrative expenses ........... 22,564,000 19,208,000 22,421,000
Amortization ........................................... 10,415,000 10,411,000 10,884,000
------------- ------------- -------------
Operating income ....................................... 41,555,000 36,077,000 20,217,000
Interest expense, net of interest income of $722,000,
$374,000 and $96,000 ................................. 41,048,000 46,250,000 51,953,000
------------- ------------- -------------
Income (loss) before income taxes, extraordinary
charge and cumulative effect of change in accounting
principle .......................................... 507,000 (10,173,000) (31,736,000)
Income Taxes ........................................... -- -- --
------------- ------------- -------------
Income (loss) before extraordinary charge and
cumulative effect of change in accounting principle .. 507,000 (10,173,000) (31,736,000)
Extraordinary charge from early extinguishment of
debt ................................................. (1,913,000) -- --
Cumulative effect of change in method of accounting
for the discounting of certain liabilities ........... -- -- (2,305,000)
------------- ------------- -------------
Net loss ............................................... $ (1,406,000) $ (10,173,000) $ (34,041,000)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 34
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Class B Class A
Preferred Stock Common Stock Common Stock
--------------- ------------ ------------
Additional
Shares Shares Shares Paid-in
Issued Amount Issued Amount Issued Amount Capital
------ ------- ------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1993....... 899,999 $ 9,000 -- $ -- 484,616 $5,000 $ 89,986,000
Net loss...................
Pension adjustment.........
Cumulative translation
adjustment...............
------- ------- ------- ------- ------- ------ ------------
Balance, March 31, 1994 899,999 9,000 -- -- 484,616 5,000 89,986,000
Net loss...................
Conversion of subordinated
convertible debentures... 458,994 5,000 52,602,000
Issuance of preferred stock 127,636 1,000 10,799,000
Issuance of common stock... 68,728 1,000 1,963,000
Pension adjustment.........
Cumulative translation
adjustment...............
------- ------- ------- ------- ------- ------ ------------
Balance, March 31, 1995...... 1,027,635 10,000 458,994 5,000 553,344 6,000 155,350,000
Net loss.................
Pension adjustment.......
Cumulative translation
adjustment...........
------- ------- ------- ------- ------- ------ ------------
Balance, March 31, 1996...... 1,027,635 $10,000 458,994 $5,000 553,344 $6,000 $155,350,000
========= ======= ======= ====== ======= ====== ============
</TABLE>
<TABLE>
<CAPTION>
Adjustment
to Equity for
Minimum Cumulative
Pension Translation
Deficit Liability Adjustment
------- ----------- ----------
<S> <C> <C> <C>
Balance, April 1, 1993....... $(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 (172,470,000) (7,467,000) (418,000)
Net loss................... (10,173,000)
Conversion of subordinated
convertible debentures...
Issuance of preferred stock
Issuance of common stock...
Pension adjustment......... 275,000
Cumulative translation
adjustment............... 134,000
------------- ------------ ---------
Balance, March 31, 1995...... (182,643,000) (7,192,000) (284,000)
Net loss................. (1,406,000)
Pension adjustment....... (3,380,000)
Cumulative translation
adjustment........... (167,000)
------------- ------------ ---------
Balance, March 31, 1996...... $(184,049,000) $(10,572,000) $(451,000)
============= ============ =========
</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,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss .......................................................... $ (1,406,000) $(10,173,000) $(34,041,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting for the
discounting of certain liabilities .......................... -- -- 2,305,000
Depreciation .................................................. 8,506,000 8,432,000 9,643,000
Amortization .................................................. 10,415,000 10,411,000 10,884,000
Non-cash interest expense-convertible debentures .............. -- 3,950,000 8,443,000
Non-cash interest expense-amortization of deferred
financing charges .......................................... 1,561,000 1,482,000 1,480,000
Provision for losses on accounts receivable ................... 1,548,000 63,000 450,000
Extraordinary charge from early extinguishment of debt ........ 1,913,000 -- --
Changes in assets and liabilities:
Accounts receivable ........................................... (3,296,000) (767,000) 16,797,000
Inventory .................................................. (1,664,000) 5,919,000 9,638,000
Other current assets ....................................... 274,000 90,000 (137,000)
Accounts payable ........................................... 2,140,000 1,317,000 (5,298,000)
Interest payable ........................................... (554,000) (47,000) (438,000)
Other current liabilities .................................. 7,002,000 2,791,000 (2,692,000)
Postretirement benefit obligation other than pensions ...... (2,327,000) (2,433,000) (4,090,000)
Other long-term liabilities ................................ (1,811,000) (3,682,000) (3,981,000)
------------ ------------ ------------
Net cash provided by operating activities .................. 22,301,000 17,353,000 8,963,000
------------ ------------ ------------
Cash Flows From Investing Activities:
Capital expenditures ......................................... (10,418,000) (2,824,000) (3,127,000)
Deferred charges ............................................. (538,000) (363,000) 74,000
------------ ------------ ------------
Net cash used in investing activities ....................... (10,956,000) (3,187,000) (3,053,000)
------------ ------------ ------------
Cash Flows From Financing Activities:
Payments of senior revolving loan ............................... (9,000,000) (20,000,000) (43,500,000)
Borrowings under senior revolving loan .......................... 23,000,000 10,000,000 37,000,000
Payments of senior subordinated debentures ...................... (30,000,000) -- --
Premiums paid on early extinguishment of debt ................... (1,126,000) -- --
Payment of subordinated convertible debentures .................. -- (12,764,000) --
Proceeds from issuance of common and preferred stocks ........... -- 12,764,000 --
Proceeds from sale and lease back transaction ................... -- -- 1,996,000
Deferred charges - financing costs .............................. (300,000) -- --
------------ ------------ ------------
Net cash used in financing activities ....................... (17,426,000) (10,000,000) (4,504,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ................ (6,081,000) 4,166,000 1,406,000
Cash and cash equivalents, beginning of year ........................ 8,493,000 4,327,000 2,921,000
------------ ------------ ------------
Cash and cash equivalents, end of year .............................. $ 2,412,000 $ 8,493,000 $ 4,327,000
============ ============ ============
Supplemental Information:
Interest paid during the year .................................... $ 40,763,000 $ 41,239,000 $ 42,564,000
============ ============ ============
</TABLE>
- --------------------------
Supplemental disclosure of non-cash financing activities:
See Note 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 sells its products to airframe
manufacturers and commercial airlines throughout the world and to the
United States and certain foreign governments. The Company's activities
are conducted through its two wholly owned subsidiaries, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), which derived
approximately 88% of the Company's total revenues during fiscal year
1996 and Engineered Fabrics Corporation (collectively, the
"Subsidiaries"), which derived approximately 12% of the Company's total
revenues during fiscal year 1996.
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.
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 ($7.7 million and $9.7 million, which is net of amortization
(non-cash interest expense) of $6.9 million and $5.4 million in fiscal
years 1996 and 1995, respectively), and program participation costs
($14.5 million and $15.4 million, which is net of amortization of $1.8
million and $1.0 million, in fiscal years 1996 and 1995, 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
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 1996, 1995 and 1994 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 16%, 14% and 15% of total sales for the fiscal years
ended March 31, 1996, 1995 and 1994, 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, 1996 or 1995.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 year ended March 31, 1994 was
not material.
Accounting Pronouncements - In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for 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. This new
standard is effective for fiscal years beginning after December 15,
1995. The Company has determined the effect of SFAS No. 121, upon
adoption, to be immaterial to its results of operations and financial
position.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which encourages
(but does not require) adoption of the fair value method of accounting
for stock-based compensation plans. Entities may continue to measure
compensation costs for those plans using the intrinsic method of
accounting, but must make pro forma disclosures about the impact on
results of operations as if the fair value method of accounting had
been applied. 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. 123.
F-7
<PAGE> 38
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Accounts receivable, principally from commercial
customers................................................... $32,704,000 $30,036,000
Accounts receivable on U.S. Government and other
long-term contracts......................................... 4,136,000 3,871,000
Allowances.................................................... (1,612,000) (359,000)
----------- -----------
Total................................................ $35,228,000 $33,548,000
=========== ===========
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials and work-in-process............................. $39,656,000 $35,819,000
Finished goods................................................ 11,364,000 15,500,000
Inventoried costs related to U.S.
Government and other long-term contracts.................... 12,312,000 11,072,000
----------- -----------
63,332,000 62,391,000
Less: unliquidated progress payments received,
principally related to long-term government
contracts................................................... -- 624,000
----------- -----------
Total................................................ $63,332,000 $61,767,000
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Land.......................................................... $ 661,000 $ 661,000
Buildings and improvements.................................... 29,148,000 27,232,000
Machinery, equipment, furniture and fixtures.................. 95,315,000 86,813,000
----------- -----------
Total................................................ 125,124,000 114,706,000
Less: accumulated depreciation and amortization............... 60,080,000 51,574,000
----------- -----------
Total................................................ $65,044,000 $63,132,000
=========== ===========
</TABLE>
F-8
<PAGE> 39
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Accrued payroll costs......................................... $15,756,000 $13,149,000
Accrued taxes................................................. 7,783,000 6,978,000
Accrued costs on long-term contracts.......................... 5,195,000 6,477,000
Accrued warranty costs........................................ 8,023,000 5,248,000
Postretirement benefit obligation other than pensions . . 2,000,000 2,000,000
Other......................................................... 6,018,000 3,921,000
----------- -----------
Total................................................ $44,775,000 $37,773,000
=========== ===========
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Senior revolving loan (a)..................................... $ 14,000,000 $ --
11 7/8% Senior Secured Notes due 2003 (b)..................... 100,000,000 100,000,000
13 3/4% Senior Subordinated Debentures due 2001 (c)........... 180,000,000 210,000,000
------------ ------------
Total................................................ $294,000,000 $310,000,000
============ ============
</TABLE>
(a) Credit Agreement - The Company has a Revolving Credit Agreement
providing 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 borrowing under the Revolving Loan will mature on
April 27, 1997.
Borrowing under the Revolving Loan bear interest at floating rates. At
March 31, 1996, the interest rate on borrowing under the Revolving Loan
was 8.37%. As part of the total commitment, the Revolving Credit
Agreement provides for the issuance of letters of credit not to exceed
$11 million. As of March 31, 1996 and 1995, the Company had outstanding
letters of credit of $5.8 million and $7.4 million, respectively. At
March 31, 1996 and 1995, the Company had $40.6 million and $53.6
million, respectively, available to borrow under the Revolving Loan.
The 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, 1996.
F-9
<PAGE> 40
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 August 1, 1999 and $52.5 million on August 1, 2000.
The Company may, at its option, receive credit against sinking fund
payments for the principal amount of Subordinated Debentures acquired
or redeemed by the Company. The Subordinated Debentures are currently
callable at a premium of 3.75% of the face value, descending by 1.25%
each year on August 1, until no premium is required after August 1,
1998.
On December 28, 1995, the Company redeemed $30 million principal amount
of the Subordinated Debentures at a redemption price of 103.75% of the
principal amount thereof. The Company used cash on hand and borrowing
from the Revolving Loan to redeem the Subordinated Debentures. In
connection therewith, the Company recorded an extraordinary charge of
$1.913 million, consisting of redemption premiums and the write-off of
unamortized financing costs. The Company will apply this redemption to
the August 1, 1999 mandatory sinking fund payment, reducing the
requirement to $22.5 million.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the
balance sheet at March 31, 1996 and 1995 approximate their fair value,
except as discussed below.
The fair value of the Company's total debt based on quoted market
prices or on current rates for similar debt with the same maturities,
was approximately $311 million and $306 million at March 31, 1996 and
1995, respectively.
F-10
<PAGE> 41
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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. The Company has a 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,
------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year.......... 11,500 12,000 13,750
Granted................................... -- -- 500
Canceled................................. -- (500) (2,250)
------ ------ ------
Outstanding at end of year................ 11,500 11,500 12,000
====== ====== ======
Exercisable options outstanding........... 9,625 8,938 6,563
====== ====== ======
Available for future grant................ 38,500 38,500 38,000
====== ====== ======
</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 hourly and salaried pension plans. 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,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the
period........................................... $ 1,562,000 $ 1,590,000 $ 1,361,000
Interest cost on projected benefit obligation...... 4,901,000 4,224,000 4,033,000
Actual (return) loss on plan assets................ (9,940,000) 954,000 (3,683,000)
Net amortization and deferral...................... 6,988,000 (3,869,000) 809,000
----------- ----------- -----------
Net pension cost................................ $ 3,511,000 $ 2,899,000 $ 2,520,000
=========== =========== ===========
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation .................. $ 65,642,000 $ 51,770,000
============ ============
Accumulated benefit obligation ............. $ 65,987,000 $ 52,189,000
Effect of projected future salary increases 2,113,000 860,000
------------ ------------
Projected benefit obligation ............... 68,100,000 53,049,000
Plan assets at fair market value ............. 55,100,000 42,626,000
------------ ------------
Unfunded projected benefit obligation ........ 13,000,000 10,423,000
Unrecognized prior service cost .............. (2,185,000) (2,389,000)
Unrecognized net loss ........................ (12,685,000) (7,761,000)
Adjustment for minimum liability ............. 12,757,000 9,290,000
------------ ------------
Accrued pension cost recognized in the
consolidated balance sheet ................. $ 10,887,000 $ 9,563,000
============ ============
</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
under funded 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, 1996, the Company's
additional minimum liability was $12,757,000 with a corresponding
equity reduction of $10,572,000 and intangible asset of $2,185,000. 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.
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,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate ............................. 7.50% 8.50% 7.75%
Rate of increase in compensation levels ... 4.50 4.50 4.50
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 $687,000, $532,000 and $568,000 for the
fiscal years ended March 31, 1996, 1995 and 1994, 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.
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,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
period................................................... $ 619,000 $ 400,000 $ 458,000
Interest cost on accumulated postretirement benefit
obligation............................................... 3,474,000 3,543,000 2,749,000
Net amortization and deferral.............................. (4,332,000) (3,732,000) (4,677,000)
----------- ----------- -----------
Net periodic postretirement benefit cost................... $ (239,000) $ 211,000 $(1,470,000)
=========== =========== ===========
</TABLE>
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,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ...................................... $30,172,000 $28,066,000
Fully eligible active plan participants........ 2,838,000 2,983,000
Other active plan participants................. 16,304,000 12,653,000
----------- -----------
Total accumulated postretirement benefit obligation.. 49,314,000 43,702,000
Unrecognized net loss.............. (14,105,000) (10,843,000)
Unrecognized prior service cost related to plan
amendments ....................................... 42,181,000 46,858,000
----------- -----------
Accrued postretirement benefit costs ................ $77,390,000 $79,717,000
=========== ===========
</TABLE>
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 12.2% in fiscal year 1996 and will be 11.2% in
fiscal year 1997. 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, 1996 by $5,000,000 and the aggregate of the service and
interest cost components of net postretirement benefit cost for the
fiscal year ended March 31, 1996 by $900,000. The weighted average
discount rate used in determining the accumulated postretirement
benefit obligation as of March 31, 1996 and 1995 was 7.50% and 8.50%,
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>
1997 $ 4,268,000
1998 4,298,000
1999 4,334,000
2000 4,090,000
2001 2,854,000
Thereafter 5,491,000
</TABLE>
Rental expense was $4,758,000, $4,641,000 and $4,190,000 for the fiscal
years ended March 31, 1996, 1995 and 1994, respectively.
13. CONTINGENCIES
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio
against Hitco Technologies, Inc. ("Hitco") after Hitco threatened to
breach existing supply contracts unless prices were renegotiated. Hitco
claimed that Aircraft Braking Systems breached the supply arrangements
by electing to begin to expand its own carbon production facility. The
Aircraft Braking Systems' complaint, as amended, seeks damages in
excess of $47 million, injunctive relief and specific performance
requiring Hitco to perform its obligations pursuant to existing
contracts and purchase orders. Hitco has counterclaimed in the matter
seeking, among other things, damages up to $130 million for the alleged
breach by Aircraft Braking Systems of alleged long-term contracts to
purchase carbon. The Ohio court has issued a preliminary injunction
ordering Hitco to perform its obligations pursuant to existing
contracts and purchase orders without change in terms. Hitco is
presently seeking to have the injunction vacated or modified, and/or a
declaratory judgment terminating Hitco's obligation to supply Aircraft
Braking Systems at prices previously pertaining. In a related action,
Hitco commenced suit in Superior Court, Los Angeles County, California
against Aircraft Braking Systems seeking substantially the same relief
as is asserted in the Ohio action, and the California case has been
stayed.
Trial of the Ohio action is presently scheduled for January 1997 and
discovery has been ongoing. Management intends to vigorously seek
dismissal of the California action and to proceed in the Ohio case to
maintain the preliminary injunction and otherwise to protect Aircraft
Braking Systems' carbon supply as well as to seek damages from Hitco.
Based upon the court's opinion to date, advice of counsel and its own
assessment of the matters in dispute, management does not expect the
outcome of the litigation to be unfavorable to the Company.
F-15
<PAGE> 46
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aircraft Braking Systems has been purchasing substantially all of the
carbon for its carbon brakes from Hitco under supply arrangements. It
is anticipated that Hitco's obligation to continue to supply carbon
will terminate by the latter of December 1996 or such time as the
alleged breaches of contract by Hitco are remedied. A loss of carbon
supply for the carbon brakes manufactured by Aircraft Braking Systems
would have a material, adverse effect on the Company's business and
financial condition. The Company has commenced a major expansion of its
existing carbon manufacturing facility in Akron, Ohio, which is
expected to be completed during the first quarter of calendar year 1997
and, when fully operational, will provide the Company with sufficient
capacity to meet substantially all, if not all, of its requirements for
brake production at the current level of business.
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
The components of the net deferred tax benefit are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Tax net operating loss carryforwards................ $ 42,321,000 $ 42,280,000
Temporary differences:
Postretirement and other employee benefits....... 35,861,000 38,746,000
Intangibles ................................... 29,106,000 32,237,000
Program participation costs .................... (6,348,000) (6,215,000)
Other .......................................... 7,165,000 7,656,000
------------ ------------
Deferred tax benefit ............................. 108,105,000 114,704,000
Valuation allowance .............................. (108,105,000) (114,704,000)
------------ ------------
Net deferred tax benefit ......................... $ 0 $ 0
============ ============
</TABLE>
Realization of any deferred tax benefit is dependent on generating
sufficient taxable income prior to expiration of the loss
carryforwards. The amount of the deferred tax asset considered
realizable could be increased at such time when future taxable income
is projected during the carryforward period.
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 $51 million and $57 million, respectively.
The Company's effective tax rate of zero percent differs from the
federal statutory rate (benefit of 35%) due to the partial-utilization
of tax net operating losses of $4.0 million and non-recognition of
temporary differences.
The Company has tax net operating loss carryforwards of approximately
$111 million at March 31, 1996. The tax net operating losses expire
from 2005 through 2011, with $12 million of carryforwards expiring in
2005.
F-16
<PAGE> 47
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Space & Communications Ltd. ("Loral Space"). Prior to that he was
Chairman and Chief Executive Officer of Loral Corporation. 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.
In May 1996, K & F purchased $343,000 principal amount of the Company's
Subordinated Debentures from A. Robert Towbin, who is a member of the
Board of Directors of the Company, at a price of 103.65% of the
principal thereof plus accrued interest.
The Company has agreed to pay Ronald H. Kisner, who is a member of the
Board of Directors of the Company, a monthly retainer of $6,000 during
fiscal year 1997 for legal services.
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS and other advisors ranging from 5% to
10% of earnings in excess of $50 million before interest, taxes and
amortization. Bonuses earned under this plan were $200,000 in fiscal
year 1996.
On September 2, 1994, K & F retired the $65.4 million principal amount
of Convertible Debentures held by Loral Corporation. (See Note 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. No payments
were made during the three years ended March 31, 1996.
Pursuant to agreements between K & F and Loral Corporation, the parties
provided 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 Corporation were as favorable to the Company as
could have been obtained from unaffiliated parties. Billings from Loral
Corporation were $3.6 million, $3.0 million and $3.0 million in fiscal
years 1996, 1995 and 1994, respectively. Billings to Loral Corporation
were $2.7 million, $.2 million and $1.1 million in fiscal years 1996,
1995 and 1994. Purchases from Loral Corporation were $2.2 million, $1.9
million and $4.2 million in fiscal years 1996, 1995 and 1994. Included
in accounts receivable and accounts payable at March 31, 1996 is $3.5
million and $2.3 million. Included in accounts receivable and accounts
payable at March 31, 1995 is $.7 million and $1.8 million. K & F will
continue these arrangements and reimburse Loral Space for real property
occupancy, benefits administration and legal services.
On April 22, 1996, Lockheed Martin acquired the defense electronics and
systems integration businesses of Loral Corporation which included the
Akron, Ohio, facility. The various occupancy and service agreements
affecting the Akron, Ohio, facility will remain in full force and
effect. K & F will continue to reimburse Lockheed Martin for real
property occupancy, and costs relating to shared easements and
services.
F-17
<PAGE> 48
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 (7)
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
Corporation, 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)
<PAGE> 49
EXHIBIT INDEX (continued)
-------------------------
10.20 - K & F Industries, Inc. Supplemental Executive Retirement Plan
10.21 - Securities Purchase Agreement dated as of July 22, 1991 among the
Registrant, BLS and the Lehman Investors (4)
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 (7)
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 (See Signature Page)
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.
(7) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.
<PAGE> 1
SERP-KF.2 EXHIBIT 10.20
K&F INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
Informally Known As
The K&F SERP
Effective April 1, 1995
<PAGE> 2
Table of Contents
Page
INTRODUCTION............................................................iii
Article I - Definitions................................................. 1
1.1 Annuity Starting Date............................. 1
1.2 Basic Plan........................................ 2
1.3 Basic Plan Benefit................................ 2
1.4 Beneficiary....................................... 2
1.5 Board............................................. 2
1.6 Code.............................................. 2
1.7 Committee......................................... 2
1.8 ERISA............................................. 3
1.9 Investment Committee.............................. 3
1.10 K&F............................................... 3
1.11 Participant....................................... 3
1.12 Plan.............................................. 3
1.13 Proper Application................................ 4
1.14 QDRO or Qualified Domestic Relations
Order............................................. 4
1.15 Trust Agreement or Trust.......................... 4
1.16 Trustee........................................... 4
Article II - Benefits................................................... 5
2.1 Amount of Benefits................................ 5
2.1.1 Formula Benefit................................... 5
2.1.2 Actual Benefit ..................... 6
2.2 Post-Retirement Death Benefits.................... 6
2.3 Pre-Retirement Death Benefits..................... 7
2.4 Special Rules..................................... 7
2.4.1 Small Benefit Cashout............................. 7
2.4.2 Lump Sum Benefit Limitation....................... 8
2.4.3 No Insured Death Benefit.......................... 8
2.5 Benefits under Multiple Qualified Plans........... 9
2.5.1 Different Annuity Starting Dates.................. 9
2.5.2 Same Annuity Starting Dates....................... 9
2.5.3 Death Benefits.................................... 10
Article III - Administration; Accrued Benefits; Right to
Amend .................................................. 11
3.1 Committee's Discretionary Power to
Interpret and Administer the Plan................. 11
3.1.1 Appointment....................................... 11
3.1.2 Role under ERISA.................................. 11
3.1.3 Committee establishes Plan procedures............. 11
3.1.4 Role of Human Resource and Benefits
Personnel......................................... 11
i
<PAGE> 3
3.1.5 Discretionary Power to Interpret Plan............. 12
3.2 Rules of the Committee............................ 12
3.3 Claims Procedure.................................. 14
3.4 QDRO Claim........................................ 16
3.5 Indemnification of Committee and
Investment Committee Members...................... 17
3.6 Power to Execute Plan and Other
Documents......................................... 17
3.7 Conclusiveness of Records......................... 17
3.8 No Personal Liability............................. 18
3.9 How Plan Benefits are Accrued..................... 18
3.10 Right to Amend.................................... 18
3.10.1 General Power to Amend........................... 18
3.10.2 No Cut-Back of Accrued Benefits.................. 19
3.11 Investment Committee.............................. 19
3.11.1 Appointment of Investment Committee.............. 19
3.11.2 Powers of the Investment Committee............... 19
Article IV - Vesting and Forfeiture..................................... 22
4.1 Vesting........................................... 22
4.2 Dismissed for Cause............................... 23
4.3 Forfeiture after Plan Benefits have
Commenced......................................... 23
4.4 Determinations by Committee....................... 23
Article V - General Provisions.......................................... 24
5.1 No Assignment or Alienation of Benefits........... 24
5.2 Withholding Taxes................................. 24
5.3 No Right to Continue Employment................... 24
5.4 Unfunded Plan..................................... 25
5.5 Governing Law..................................... 25
5.6 Payment of Benefits............................... 25
5.7 Section Headings.................................. 25
5.8 Payment to a Minor or Incompetent................. 26
5.9 Doubt as to Right to Payment...................... 27
5.10 Missing Payees.................................... 27
5.11 Mistaken Payments................................. 28
5.12 Receipt and Release for Payments.................. 28
5.13 Illegality of Particular Provisions............... 29
5.14 Discharge of Liability............................ 29
ii
<PAGE> 4
INTRODUCTION
In response to certain limitations under the Internal Revenue
Code, as amended, on the maximum amount of compensation that can be taken into
account and the maximum amount of benefits that can be paid from a qualified
defined benefit plan, K&F Industries, Inc. ("K&F") has adopted this Plan
effective April 1, 1995 to permit employees and their beneficiaries to be able
to enjoy the benefits that would have been provided to them but for these
limitations. The Plan shall be known as the K&F Industries, Inc. Supplemental
Executive Retirement Plan, or the K&F SERP, and reads as follows:
iii
<PAGE> 5
Article I - Definitions
The following terms shall have the designated meaning, unless a
different meaning is clearly required by the context:
1.1 Annuity Starting Date.
Subject to Section 2.5, "Annuity Starting Date" shall
mean:
(a) generally, the "Annuity Starting Date" defined in the Basic
Plan, provided that the Participant is fully vested under
Article IV, and Proper Application has been made.
(b) With respect to any lump sum, the first day of the month
coincident with or next following the date as of which the
Participant is both (1) eligible to receive Plan payment
and (2) has completed his Proper Application.
(c) With respect to any one of a series of payments over the
life or life expectancy of one or more distributees, the
first day of the month for which the Plan benefit is paid,
even if this date is not the date of actual payment.
(d) The term "Annuity Starting Date" shall be determined with
respect to Plan payments made to the Participant, rather
than with respect to any survivor benefit payments.
(e) The term "Annuity Starting Date" shall, in all events, be
defined by Code Regulation Section
<PAGE> 6
1.401(a)-20.
1.2 Basic Plan.
The qualified defined benefit pension plan sponsored
by K&F (or its subsidiaries or affiliates) in which an employee participates. If
an employee has an interest in more than one such plan, then the term "Basic
Plan" shall refer to such plans collectively except as the context shall
otherwise require.
1.3 Basic Plan Benefit.
The amount accrued by a Participant from a Basic Plan.
1.4 Beneficiary.
Beneficiary means the person, trust, estate, or other entity
entitled to receive benefits (if any) after the Participant's death under the
Plan, which Beneficiary shall be the same as such Participant's beneficiary
under the Basic Plan.
1.5 Board.
The Board of Directors of K&F Industries, Inc.
1.6 Code.
The Internal Revenue Code of 1986, as amended from time to time,
and all appropriate regulations and administrative guidance.
1.7 Committee.
The administrative Committee appointed to administer the Plan
pursuant to Article III.
2
<PAGE> 7
1.8 ERISA.
The Employee Retirement Income Security Act of 1974, as amended,
and all appropriate regulations and administrative guidance.
1.9 Investment Committee.
The group of one or more persons created, at the discretion of the
Board, having investment authority over Trust assets, as described in Section
3.11
1.10 K&F.
K&F Industries, Inc., and depending on the context, its
subsidiaries or affiliates. K&F shall act by resolution of the Board.
1.11 Participant.
A Participant in a Basic Plan who accrues benefits thereunder on
or after April 1, 1995 and whose Basic Plan Benefit is limited by Section 415 of
the Code or whose compensation for purposes of calculating a Basic Plan Benefit
is limited by Section 401(a)(17) of the Code. As context demands, the term
"Participant" shall also include a former Participant.
1.12 Plan.
This K&F Industries, Inc. Supplemental Executive Retirement Plan,
as amended, and as from time to time in effect.
3
<PAGE> 8
1.13 Proper Application.
For all Plan purposes, making any election, granting any consent,
giving any notice or information, and making any communication whatsoever to the
Committee or its delegates, in compliance with all Plan procedures, on forms
provided by the Committee, and providing all information required by the
Committee. A Proper Application will be deemed to have been made only if it is
properly completed, as determined by the Committee.
1.14 QDRO or Qualified Domestic Relations Order.
A QDRO shall mean an order as defined in Code Section 414(p) and
ERISA Section 206(d)(3), and shall be subject to all administrative rules
established under the Basic Plan. The Committee shall have full discretionary
authority to determine whether any court order is a QDRO.
1.15 Trust Agreement or Trust.
The document executed by K&F and by the Trustee fixing the rights
and liabilities of each with respect to holding assets to be used to pay Plan
benefits, should any such assets be held in the Trust. The Trust is established
pursuant to K&F's intention that the Plan shall be an unfunded plan, as detailed
in Section 5.4.
1.16 Trustee.
The trustee or trustees that may, from time to time, be in office,
pursuant to the Trust Agreement.
4
<PAGE> 9
Article II - Benefits
2.1 Amount of Benefits.
The benefit payable from this Plan shall be in the form of a
monthly annuity equal to the amount determined under Section 2.1.1 minus the
amount determined under Section ?. Subject to Section 2.2, such benefit shall be
payable as of the Participant's Annuity Starting Date and continue for the
remainder of the Participant's life.
2.1.1 Formula Benefit. The benefit that would be payable to a
Participant under the Basic Plan, in the form elected by the
Participant pursuant to the provisions of the Basic Plan, irrespective
of any limitations imposed by Section 415 or Section 401(a)(17) of the
Code.
2.1.1.1 Notwithstanding the preceding paragraph, the benefit
payable under this Section 2.1.1 shall be calculated to credit any
deferred compensation that is paid after retirement, even if such
deferred compensation would not be credited under the Basic Plan.
That is, such deferred compensation shall, for the purposes of the
preceding paragraph, be deemed to be credited by the Basic Plan,
for the purposes of Section 2.1.1 (so as to augment the benefit
payable by this Plan).
5
<PAGE> 10
2.1.2 Actual Benefit. The Basic Plan Benefit actually paid to
the Participant in whichever form he elects, after compliance with
SectionSection 415 and 401(a)(17) of the Code, plus any additional
benefits paid to the Participant under any non-qualified defined
benefit plan (besides this Plan) sponsored by K&F or any of its
subsidiaries or affiliates.
2.1.2.1 Deferred compensation paid after retirement which is
not credited under the Basic Plan, shall not be considered to be a
Basic Plan Benefit that is actually paid, for the purposes of
Section 2.1.2 (even if such deferred compensation is credited
under Section 2.1.1.1.) Thus, such deferred compensation paid
after retirement will never be used to reduce benefits calculated
under this Section 2.1, if such deferred compensation is not
credited under the Basic Plan.
If benefits under the Basic Plan are increased as a result of a change in the
law that "raises the ceiling" in the limitations under Code SectionSection 415
or 401(a)(17) (or corresponding provisions of applicable law), benefits under
this Plan shall be reduced by the amount of any such increase.
2.2 Post-Retirement Death Benefits.
Upon the death of the Participant after his Annuity Starting Date,
benefits will continue to be paid to such Participant's Beneficiary in an amount
equal to the benefit
6
<PAGE> 11
determined under Section 2.1 multiplied by a fraction, the numerator of which is
the benefit payable from the Basic Plan after the Participant's death, and the
denominator of which is the benefit payable from the Basic Plan immediately
before the Participant's death. No amount will be paid after the Participant's
death under this Plan if no such benefits are paid under the Basic Plan.
2.3 Pre-Retirement Death Benefits.
Upon the death of the Participant prior to his Annuity Starting
Date, his Beneficiary shall receive a benefit equal to the difference between
the benefit received by such Beneficiary under the Basic Plan and the benefit
that would have been paid under the Basic Plan irrespective of any limitations
imposed by SectionSection 415 or 401(a)(17) of the Code. No amount will be paid
under this Plan on account of the Participant's death prior to his Annuity
Starting Date unless such benefits are paid under the Basic Plan.
2.4 Special Rules.
The following rules shall apply notwithstanding any other
provision of this Plan.
2.4.1 Small Benefit Cashout. If the actuarial present value
(utilizing the assumptions set forth in the small benefit cashout
provisions of the Basic Plan) of a Participant's benefit under Section
2.1 or a Beneficiary's benefit under Section 2.3 is $3,500 or less,
payment will be
7
<PAGE> 12
made from this Plan in a single lump sum as soon as practicable after
the Annuity Starting Date (with respect to a benefit paid pursuant to
Section 2.1) and the death of the Participant (with respect to a
benefit paid pursuant to Section 2.3).
2.4.2 Lump Sum Benefit Limitation. Unless special approval of
the Committee is obtained, and except for benefits paid pursuant to
Section 2.4.1, no benefits under this Plan shall be paid in a lump sum.
Accordingly, if any benefits are paid under the Basic Plan to a
Participant in a lump sum, the amount payable under this Plan pursuant
to the methodology set forth in Section 2.1 shall nevertheless be paid
in the form of a straight life annuity for the Participant, beginning
on the Annuity Starting Date and ending with the payment for the month
in which the Participant dies.
2.4.3 No Insured Death Benefit. No benefit pursuant to Section
2.3 shall be paid with respect to any death benefit under the Basic
Plan which is provided by insurance, to the extent that such benefit
exceeds the minimum benefit required to be provided under the Basic
Plan under Code Section 401(a)(11).
8
<PAGE> 13
2.5 Benefits under Multiple Qualified Plans.
The following rules shall apply if a Participant has a benefit
under more than one Basic Plan:
2.5.1 Different Annuity Starting Dates. Benefits under this
Plan shall be payable as of the Participant's earliest Annuity Starting
Date under all such Basic Plans. In the event that the Participant has
benefits payable under different Basic Plans, with different Annuity
Starting Dates, then the amount of his benefit under this Plan shall
initially be determined based only on the Basic Plans for which the
Participant's Annuity Starting Date has occurred, as though such Plans
were the only Basic Plans in which the Participant had accrued a
benefit. When benefits later begin under the other Basic Plans,
benefits hereunder shall be increased to reflect the intent of this
Plan to fully make up to the Participant the benefits he had not
received under all Basic Plans, as a result of the Code's limitations.
2.5.2 Same Annuity Starting Dates. If a Participant's Annuity
Starting Date is the same under all Basic Plans, then benefits under
this Plan shall generally be payable as of such date, provided the
Participant is fully vested under Article IV, and that Proper
Application has been made.
9
<PAGE> 14
2.5.3 Death Benefits. If benefits are paid under the Basic
Plans in different forms, the death benefits pursuant to Section 2.2
shall be determined with respect to each individual plan.
10
<PAGE> 15
Article III - Administration; Accrued Benefits; Right to Amend
3.1 Committee's Discretionary Power to Interpret and Administer
the Plan
3.1.1 Appointment. The Committee shall be appointed from time
to time by the Board to serve at its pleasure. Any member of the
Committee may resign by delivering his written resignation to the
Board.
3.1.2 Role under ERISA. The Committee is the "named
fiduciary" for operation and administration of the Plan, and the
"administrator" under ERISA. The Committee is designated as agent for
service of legal process.
3.1.3 Committee establishes Plan procedures. The Committee
and its delegates shall from time to time establish rules and
procedures for the administration and interpretation of the Plan and
the transaction of its business.
3.1.4 Role of Human Resource and Benefits Personnel.
Employees of K&F and its subsidiaries and affiliates who are human
resources personnel or benefits representatives are the Committee's
delegates and shall, under the authority of the Committee, perform the
routine administration of the Plan, such as distributing and collecting
forms and providing information about Plan procedures. They shall also
establish Plan rules and procedures.
11
<PAGE> 16
3.1.5 Discretionary Power to Interpret Plan.
3.1.5.1 The Committee has complete discretionary and
final authority to (1) determine all questions concerning
eligibility, elections, contributions, and benefits under the
Plan, (2) construe all terms under the Plan and the Trust,
including any uncertain terms, and (3) determine all questions
concerning Plan administration. All administrative decisions made
by the Committee, and all its interpretations of the Plan
documents, shall be given full deference by any court of law.
3.1.5.2 Information that concerns an interpretation of
the Plan or a discretionary determination, can be properly
provided only by the Committee, and not by any delegate (other
than legal counsel).
3.1.5.3 Should any individual receive oral or written
information concerning the Plan, which is contradicted by a
subsequent determination by the Committee, then the Committee's
final determination shall control.
3.2 Rules of the Committee.
3.2.1 Any act which the Plan authorizes or requires the
Committee to do may be done by a majority of
12
<PAGE> 17
its members. The action of such majority, shall constitute the
action of the Committee and shall have the same effect for all
purposes as if made by all members of the Committee at the time in
office. The Committee may act without any writing that records its
decisions, and need not document its meetings or teleconferences.
The Committee may also act through any authorized representative.
3.2.2 The members of the Committee may authorize one or more
of their number to execute or deliver any instrument, make any payment
or perform any other act which the Plan authorizes or requires the
Committee to do.
3.2.3 The Committee may employ counsel and other agents and
may procure such clerical, accounting, actuarial and other services as
they may require in carrying out the provisions of the Plan. Legal
counsel are authorized as the Committee's delegates.
3.2.4 No member of the Committee shall receive any
compensation for his services as such. All expenses of administering
the Plan, including, but not limited to, fees of accountants, counsel
and actuaries shall be paid by K&F, to the extent that they are not
paid under the Trust.
13
<PAGE> 18
3.2.5 Each member of the Committee may delegate Committee
responsibilities among K&F directors, officers, or employees, and may
consult with or hire outside experts. The expenses of such experts
shall be paid by K&F, to the extent that they are not paid under the
Trust.
3.3 Claims Procedure.
3.3.1 The Committee shall determine Participants' and
Beneficiaries' rights to benefits under the Plan. In the event that a
Participant or Beneficiary disputes an initial determination made by
the Committee, then he may dispute the determination only by filing a
written claim for benefits.
3.3.2 If a claim is wholly or partially denied, the Committee
shall provide the claimant with a notice of denial, generally within 90
days of receipt, written in a manner calculated to be understood by the
claimant and setting forth:
3.3.2.1 The specific reason(s) for such denial;
14
<PAGE> 19
3.3.2.2 Specific references to the pertinent Plan
provisions on which the denial is based;
3.3.2.3 A description of any additional material or
information necessary for the claimant to perfect the claim with
an explanation of why such material or information is necessary
(if applicable); and
3.3.2.4 Appropriate information as to the steps to be
taken if the claimant wishes the Committee to revise its initial
denial. The notice of denial shall be given within a reasonable
time period but no later than 90 days after the claim is received,
unless circumstances require an extension of time for processing
the claim. If such extension is required, written notice shall be
furnished to the claimant within 90 days of the date the claim was
received stating that an extension of time and the date by which a
decision on the claim can be expected, which shall be no more than
180 days from the date the claim was filed.
15
<PAGE> 20
3.3.2.5 If no written notice of denial is provided by
the Committee, then the claim shall be deemed to be denied, and
the claimant may appeal the claim as though the claim had been
denied.
3.3.3 The claimant and/or his representative may appeal the
denied claim and may:
3.3.3.1 Request a review by making a written request to
the Committee provided that such a request is made, within 65 days
of the date of the notification of the denied claim;
3.3.3.2 Review pertinent documents.
3.3.4 Upon receipt of a request for review, the Committee
shall within a reasonable time period but not later than 60 days after
receiving the request, provide written notification of its decision to
the claimant stating the specific reasons and referencing specific plan
provisions on which its decision is based, unless special circumstances
require an extension for processing the review. If such an extension is
required, the Committee shall notify the claimant of the date, no later
than 120 days after receiving the request for review, on which the
Committee will notify the claimant of its decision.
16
<PAGE> 21
3.3.5 In the event of any dispute over benefits under this
Plan, all remedies available to the disputing individual under this
Article must be exhausted, within the specified deadlines, before legal
recourse of any type is sought.
3.4 QDRO Claim.
Claims relating to or affected by a domestic relations order as
defined by Code Section 414(p) ("QDROs") or draft order shall be determined
under the Basic Plan Committee's procedures concerning domestic relations
orders. The claims procedure described in the preceding section shall not apply
to any such domestic relations order claim.
3.5 Indemnification of Committee and Investment Committee Members.
To the fullest extent permitted by law, K&F agrees to indemnify,
to defend, and hold harmless the members of the Investment Committee (if
created) and the Committee and its delegates, individually and collectively,
against any liability whatsoever for any action taken or omitted by them in good
faith in connection with this Plan or their duties hereunder and for any
expenses or losses for which they may become liable as a result of any such
actions or non-actions unless resultant from their own willful misconduct; and
K&F will purchase insurance for the Investment Committee and the Committee and
its delegates to cover any of their potential liabilities with regard to the
Plan.
17
<PAGE> 22
3.6 Power to Execute Plan and Other Documents.
The Chief Financial Officer of K&F Industries, Inc. and the
Committee shall have the authority to execute governmental filings or other
documents relating to the Plan (including the Plan document), or this authority
may be delegated to another officer or employee of K&F or of a K&F subsidiary or
affiliate by either the Chief Financial Officer of K&F Industries, Inc. or the
Board, or the Committee.
3.7 Conclusiveness of Records.
In administering the Plan, the Committee may conclusively rely
upon the Basic Plan employer's payroll and personnel records maintained in the
ordinary course of business.
3.8 No Personal Liability
No Committee member or delegate shall be personally liable by
reason of any contract or other instrument executed by him or on his behalf in
his capacity as a member or delegate of a Committee nor for any mistake of
judgment made in good faith, and K&F shall indemnify and hold harmless each
member of the Committee and each other officer, employee, or director of K&F to
whom any duty or power relating to the administration or interpretation of the
Plan may be allocated or delegated, against any cost or expenses (including
counsel fees) or liability (including any sum in settlement of a claim with the
approval of the Board) arising out of any act or omission to act in connection
with the Plan unless arising out of such person's own fraud or bad faith.
18
<PAGE> 23
3.9 How Plan Benefits are Accrued.
Benefits that would be accrued under the Basic Plan, but for the
limiting provisions of Code SectionSection 415 and/or 401(a)(17), shall be
deemed to be accrued under the Plan.
3.10 Right to Amend.
3.10.1 General Power to Amend. The Board may at any time
amend the Plan in any respect or suspend or terminate the Plan in whole
or in part without the consent of any Participant or Beneficiary or any
subsidiary of K&F whose employees are covered by this Plan, subject to
Section 3.10.2. Any such amendment, suspension or termination may be
made with or without retroactive effect, save as provided in Section
3.10.2.
3.11 No Cut-Back of Accrued Benefits. Notwithstanding the previous
Section 3.10.1, this Plan may not be amended or terminated in any respect that
has the effect of reducing or eliminating any Plan benefit that had accrued as
of the effective date of the amendment or termination, unless the affected
Participants or Beneficiaries each gives his consent. That is, there shall be no
retroactive cut-backs of accrued Plan benefits, without individual consent.
3.12 Investment Committee.
3.12.1 Appointment of Investment Committee. The Board may,
within its discretion, appoint an Investment Committee, of at least one
person. The appointment of an Investment Committee shall relieve the
Board, K&F, and all other
19
<PAGE> 24
participating employers from all fiduciary responsibility for all Trust
assets under the control of the Investment Committee, or its delegates,
as provided by law. The Investment Committee, if it is created by the
Board, shall be a fiduciary of the Plan, but shall not be the named
fiduciary. The Board may also, within its discretion, decline to create
an Investment Committee, or disband it at any time.
3.12.2 Powers of the Investment Committee. The Investment
Committee, if appointed, has final authority regarding the investment
and management of Trust assets. The Investment Committee may delegate
its responsibilities, appoint investment managers, oversee its
delegates, and each Investment Committee member may execute documents
on behalf of the Investment Committee, with respect to Trust assets.
Should the Investment Committee appoint an investment manager, as that
term is defined in ERISA, then the Investment Committee shall be
relieved of all fiduciary duty with respect to Trust assets under the
control of such an investment manager. The Investment Committee shall
exercise its powers subject to the terms of the Trust.
3.12.2.1 Any act which the Plan or Trust authorizes or
requires the Investment Committee to do may be done by a majority of
its members. The action of such majority, shall constitute the action
of the Investment Committee and shall have the same effect for all
purposes as if made by all members of the Committee at the time in
office. The Investment Committee may act without any writing that
records its decisions, and need not
20
<PAGE> 25
document its meetings or teleconferences. The Investment Committee may
also act through any authorized representative.
3.12.2.2 The members of the Investment Committee may
authorize one or more of their number to execute or deliver any
instrument, make any payment or perform any other act which the Plan
authorizes or requires the Investment Committee to do.
3.12.2.3 The Investment Committee may employ counsel,
outside experts, and other agents and may procure such clerical,
accounting, actuarial and other services as they may require in
carrying out the provisions of the Plan.
3.12.2.4 No member of the Investment Committee shall
receive any compensation for his services as such. All expenses
relating to the Investment Committee's activities, including, but not
limited to, fees of accountants, counsel and actuaries shall be paid by
K&F, to the extent that they are not paid under the Trust.
21
<PAGE> 26
Article IV - Vesting and Forfeiture
4.1 Vesting.
4.1.1. A Participant shall be entitled to a benefit under this
Plan only upon satisfying the vesting requirements set out in this
Section 4.1.
4.1.2. Vesting, as defined by this Section 4.1, shall occur
only when the Participant has (i) satisfied the vesting requirements of
the Basic Plan and made any contributions that are required to receive
benefits under the Basic Plan, (ii) terminated employment with K&F,
(iii) satisfied all eligibility requirements for benefits under this
Plan, and (iv) applied and received Committee approval to receive Plan
benefits, with respect to the forfeiture issues addressed by Section
4.1.3.
4.1.3. A Participant shall not be fully vested under this
Section 4.1 until, following his termination and application for Plan
benefits, the Committee has determined that he is not subject to
forfeiture of his Plan benefits under this Section 4.1. Forfeiture of
all Plan benefits (including death benefits and Plan benefits
previously paid) under this Section 4.1 shall take place,
notwithstanding any contrary Plan provision, if a Participant: (i) is
Dismissed for Cause, as defined in Section 4.2, (ii) becomes employed
by a company in substantial competition with K&F, or (iii) engages in
conduct detrimental or contrary to the best interests of
22
<PAGE> 27
K&F.
4.2 Dismissed for Cause.
"Dismissed for Cause" means termination of employment for (a)
theft, embezzlement, or malicious destruction of K&F's property; (b) fraud or
other wrongdoing against K&F; or (c) improper disclosure of K&F's trade secrets.
4.3 Forfeiture after Plan Benefits have Commenced.
Even though the Committee has made an initial favorable vesting
determination under Section 4.1., it may nevertheless determine that a
Participant's Plan benefits, after payment has commenced, are forfeited, if the
Committee reconsiders the issues addressed in Section 4.1.3 and determines that
forfeiture is in fact warranted. Such a forfeiture shall be effective as of the
date that the Committee determines the events of forfeiture have occurred, as
set out in Section 4.1.3. The Committee may therefore make a retroactive
forfeiture determination. Any Plan benefits that have been paid after the
effective date of the retroactive forfeiture determination shall be considered a
mistaken payment under Section 5.11.
4.4 Determinations by Committee.
The Committee shall have full, final, and discretionary authority
to make determinations under this Article IV. Any forfeiture determination made
by the Committee shall be final, binding, and conclusive upon the Participant
and his Beneficiaries.
23
<PAGE> 28
Article V - General Provisions
5.1 No Assignment or Alienation of Benefits.
Subject to Sections 2.2 and 2.3, and to any QDROs, payment of
benefits pursuant to this Plan shall be made only to Participants. Such benefits
shall not be subject in any manner to the debts or other obligations of the
person to whom they are payable and shall not be subject to transfer,
anticipation, sale, assignment, bankruptcy, pledge, attachment, charge or
encumbrance in any manner, either voluntarily or involuntarily.
5.2 Withholding Taxes.
Whenever under the Plan payment is made to a Participant or
Beneficiary, K&F shall be entitled to require as a condition of payment that the
recipient remit an amount, sufficient in K&F's opinion, to satisfy all FICA,
federal and other withholding tax requirements related thereto. K&F shall be
entitled to deduct such amount from any payment.
5.3 No Right to Continue Employment.
This Plan is voluntary on the part of K&F and shall not be deemed
to constitute an employment contract between K&F and a Participant and/or
consideration for or an inducement for or condition of employment of any
Participant. Nothing in this Plan shall be deemed to give any employee the right
to be retained in the service of K&F or to interfere with the right of K&F to
discharge, terminate or lay off any Participant at any time for any reason.
24
<PAGE> 29
5.4 Unfunded Plan.
The Plan is intended to constitute an unfunded, nonqualified
pension plan for a select group of management or highly compensated employees,
for the purposes of ERISA.
5.5 Governing Law.
It is intended that the Plan conform to and meet the applicable
requirements of ERISA and the Code. Except to the extent preempted by ERISA, the
validity of the Plan or of any of its provisions shall be determined under, and
it shall be construed and administered according to, the laws of the State of
New York (including its statute of limitations and all substantive and
procedural law, and without regard to its conflict of laws provisions).
5.6 Payment of Benefits.
All benefits payable under the Plan shall be paid under the Trust
Agreement. The rights or entitlement of any Participant or Beneficiary shall be
no greater than those of an unsecured general creditor of K&F, subject to the
Trust Agreement.
5.7 Section Headings.
The section headings contained in the Plan are for purposes of
convenience only and are not intended to define or limit the contents of said
sections.
25
<PAGE> 30
5.8 Payment to a Minor or Incompetent.
If any amount is payable under this Plan to a minor or other
legally incompetent person, such amount may be paid in any one or more of the
following ways, as the Committee in its sole discretion shall determine:
5.8.1 To the legal representatives of such minor or other
incompetent person;
5.8.2 Directly to such minor or other incompetent person;
5.8.3 To a parent or guardian of such minor or other
incompetent person, to the person with whom such minor or other
incompetent person shall reside, or to a custodian for such minor under
the Uniform Gifts to Minors Act (or similar statute) of any
jurisdiction. Payment to any person in accordance with the foregoing
provisions shall pro tanto discharge K&F, the members of the Committee,
and any person or corporation making such payment pursuant to the
direction of the Committee, and none of the foregoing shall be required
to see to the proper application of any such payment to such person
pursuant to the provisions of this Section 5.8. Without in any manner
limiting or qualifying the provisions of this Section 5.8, if any
amount is payable under this Plan to a minor or any other legally
incompetent person, the Committee may in its discretion utilize the
procedures described in Section 5.8.
26
<PAGE> 31
5.9 Doubt as to Right to Payment.
If at any time any doubt exists as to the right of any person to
any payment under this Plan or the amount or time of such payment (including,
without limitation, any case of doubt as to identity, or any case in which any
notice has been received from any other person claiming any interest in amounts
payable hereunder, or any case in which a claim from other persons may exist by
reason of community property or similar laws), the Committee shall be entitled,
in its discretion, to direct that such sum be held as a segregated amount in
trust until such right or amount or time is determined or until order of a court
of competent jurisdiction, or to pay such sum into court in accordance with
appropriate rules of law in such case then provided, or to make payment only
upon receipt of a bond or similar indemnification (in such amount and in such
form as is satisfactory to the Committee).
5.10 Missing Payees.
If all or portion of a Participant's vested Plan benefit becomes
payable and the Committee after a reasonable search cannot locate the
Participant (or his Beneficiary if such Beneficiary is entitled to payment),
then, 5 years after the Participant's benefit first became payable under the
Plan, a notice shall be mailed to the last known address of the Participant. If
the Participant does not respond within three months, the Committee may elect,
upon advice of counsel, to remove all records of the Participant's accrued
benefit from the
27
<PAGE> 32
Plan's current records and that benefit shall be used to offset future employer
contributions. If the Participant or his Beneficiary subsequently presents a
valid claim for benefits to the Committee, the Committee shall restore and pay
the appropriate Plan benefit.
5.11 Mistaken Payments.
No Participant or Beneficiary shall have any right to any payment
made (1) in error, (2) in contravention to the terms of the Plan, the Code, or
ERISA, or (3) because the Committee or its delegates were not informed of any
death. The Committee shall have full rights under the law and ERISA to recover
any such mistaken payment, and the right to recover attorney's fees and other
costs incurred with respect to such recovery. Recovery shall be made from future
Plan payments, or by any other available means.
5.12 Receipt and Release for Payments.
Any payment to any Participant, Beneficiary, or to any such
person's legal representative, parent, guardian, or any person or entity
specified by Section 5.8 or under any other Plan provision, shall be in full
satisfaction of all claims that can be made under the Plan against the Trustee
and K&F. The Trustee and K&F may require such Participant, Beneficiary, legal
representative, or any other person or entity described in this Section 5.12, as
a condition precedent to such payment, to execute a receipt and release thereof
in such form as shall be determined by the Trustee or K&F.
28
<PAGE> 33
5.13 Illegality of Particular Provisions.
The illegality of any particular provision of this Plan shall not
affect the other provisions thereof, but the Plan shall be construed in all
respects as if such invalid provision were omitted.
5.14 Discharge of Liability.
If distribution in respect of a Participant is made under this
Plan in a form, or to a person, reasonably believed by the Committee or its
delegate to be proper, the Plan shall have no further liability with respect to
the Participant (or his spouse or Beneficiary) to the extent of such
distribution.
IN WITNESS WHEREOF, K&F INDUSTRIES, INC., on its own behalf
and as agent for each of its subsidiaries, has caused this Plan to be executed
by its duly authorized officer, this 8th day of February, 1996.
K&F INDUSTRIES, INC.
By:KENNETH M. SCHWARTZ
-----------------------------------------
Kenneth M. Schwartz
Title: Chief Financial Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 2,412,000
<SECURITIES> 0
<RECEIVABLES> 36,840,000
<ALLOWANCES> 1,612,000
<INVENTORY> 63,332,000
<CURRENT-ASSETS> 101,804,000
<PP&E> 125,124,000
<DEPRECIATION> 60,080,000
<TOTAL-ASSETS> 416,037,000
<CURRENT-LIABILITIES> 65,477,000
<BONDS> 294,000,000
0
10,000
<COMMON> 11,000
<OTHER-SE> (39,722,000)
<TOTAL-LIABILITY-AND-EQUITY> 416,037,000
<SALES> 264,736,000
<TOTAL-REVENUES> 264,736,000
<CGS> 180,435,000
<TOTAL-COSTS> 180,435,000
<OTHER-EXPENSES> 20,182,000
<LOSS-PROVISION> 1,548,000
<INTEREST-EXPENSE> 41,770,000
<INCOME-PRETAX> 507,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 507,000
<DISCONTINUED> 0
<EXTRAORDINARY> (1,913,000)
<CHANGES> 0
<NET-INCOME> (1,406,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
