<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
K & F Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ___________
As of July 15, 1996, there were 553,344 shares of Class A common stock
outstanding and 458,994 shares of Class B common stock outstanding. All of the
Class A common stock of the Company except one share is owned by the Chairman of
the Company, all of the Class B common stock is owned by Loral Space &
Communications Ltd. and all of the preferred stock except 44,999 shares is owned
by four limited partnerships of Lehman Brothers Holdings Inc.
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, March 31,
1996 1996
---------------- --------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 6,966,000 $ 2,412,000
Accounts receivable, net 35,865,000 35,228,000
Inventory 65,586,000 63,332,000
Other current assets 456,000 832,000
---------------- --------------
Total current assets 108,873,000 101,804,000
---------------- --------------
Property, plant and equipment 129,392,000 125,124,000
Less, accumulated depreciation and amortization 62,266,000 60,080,000
---------------- --------------
67,126,000 65,044,000
---------------- --------------
Deferred charges, net of amortization 23,467,000 24,082,000
Cost in excess of net assets acquired, net of
amortization 200,591,000 202,119,000
Intangible assets, net of amortization 22,142,000 22,988,000
---------------- --------------
$422,199,000 $416,037,000
================ ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 14,634,000 $ 12,485,000
Interest payable 11,419,000 8,217,000
Other current liabilities 44,363,000 44,775,000
---------------- --------------
Total current liabilities 70,416,000 65,477,000
---------------- --------------
Postretirement benefit obligation other
than pensions 74,875,000 75,390,000
Other long-term liabilities 21,638,000 20,871,000
Senior revolving loan 10,000,000 14,000,000
11 7/8% senior secured notes due 2003 100,000,000 100,000,000
13 3/4% senior subordinated debentures due 2001 179,657,000 180,000,000
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 (178,779,000) (184,049,000)
Adjustment to equity for minimum pension
liability (10,572,000) (10,572,000)
Cumulative translation adjustment (407,000) (451,000)
---------------- --------------
Total stockholders' deficiency (34,387,000) (39,701,000)
---------------- --------------
$422,199,000 $416,037,000
================ ==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------------------
June 30, June 30,
1996 1995
-------------- ------------
<S> <C> <C>
Sales $71,537,000 $62,293,000
Costs and expenses 53,874,000 50,551,000
Amortization 2,601,000 2,615,000
-------------- ------------
Operating income 15,062,000 9,127,000
Interest and investment income 48,000 219,000
Interest expense (9,620,000) (10,645,000)
-------------- ------------
Income (loss) before income taxes 5,490,000 (1,299,000)
Income taxes (220,000) --
-------------- ------------
Net income (loss) $ 5,270,000 $(1,299,000)
============== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------------------------
June 30, June 30,
1996 1995
---------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 5,270,000 $ (1,299,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,787,000 4,805,000
Non-cash interest expense - amortization
of deferred financing charges 388,000 375,000
Changes in assets and liabilities:
Accounts receivable, net (619,000) 114,000
Inventory (2,228,000) (3,406,000)
Other current assets 376,000 101,000
Accounts payable, interest payable, and
other current liabilities 4,939,000 1,592,000
Postretirement benefit obligation other than
pensions (515,000) (608,000)
Other long-term liabilities 767,000 822,000
---------------- -----------------
Net cash provided by operating
activities 13,165,000 2,496,000
---------------- -----------------
Cash flows from investing activities:
Capital expenditures (4,268,000) (622,000)
Deferred charges -- 26,000
---------------- -----------------
Net cash used in investing activities (4,268,000) (596,000)
---------------- -----------------
Cash flows from financing activities:
Payments of senior revolving loan (7,000,000) --
Borrowings under senior revolving loan 3,000,000 --
Payment of senior subordinated debentures (343,000) --
Deferred charges-financing costs -- (300,000)
---------------- -----------------
Net cash used in financing activities (4,343,000) (300,000)
---------------- -----------------
Net increase in cash and cash
equivalents 4,554,000 1,600,000
Cash and cash equivalents, beginning of
period 2,412,000 8,493,000
---------------- -----------------
Cash and cash equivalents, end of period $ 6,966,000 $ 10,093,000
================ =================
Supplemental cash flow information:
Cash interest paid during period $ 6,231,000 $ 6,020,000
================ =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of financial
position, results of operations and cash flows. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. The consolidated statement of operations for the three months
ended June 30, 1996 is not necessarily indicative of the results to be
expected for the full year. It is suggested that these financial
statements be read in conjunction with the audited financial statements
and notes thereto included in the Company's March 31, 1996 Annual Report
on Form 10-K.
2. Redemption of Debt
In May 1996, the Company redeemed $343,000 principal amount of its 13 3/4%
Senior Subordinated Debentures due 2001 (the "13 3/4% 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 amount thereof plus accrued
interest. In May 1996, the 13 3/4% Debentures were callable at a price
of 103.75% of the principal amount.
In July 1996, the Company called $9,657,000 principal amount of its 13
3/4% Debentures at a price of 102.5% of the principal amount thereof,
effective August 1, 1996.
The Company intends to redeem the remaining $170 million principal balance
of its 13 3/4% Debentures in August 1996. The Company plans to offer $140
million of Senior Subordinated Notes due 2004 (the "New Notes") and amend
and restate its credit agreement (the "Amended Credit Agreement") to
provide for a $110 million facility. The proceeds from the sale of the New
Notes and borrowings under the Amended Credit Agreement will be used to
fund the redemption of the 13 3/4% Debentures. The Company would record an
extraordinary charge of approximately $9.7 million for the write-off of
unamortized financing costs and redemption premiums relating to the
redemption of the 13 3/4% Debentures upon completion of the above
contemplated transaction.
3. Recently Adopted Financial Accounting Pronouncements
Effective April 1, 1996, the Company adopted 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." SFAS No.
121 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 adoption of SFAS
No. 121 did not have a material effect on the Company's financial position
or results of operations.
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages (but does not require)
adoption of the fair value based method of accounting for stock-based
compensation plans. Entities may continue to measure compensation costs
for those plans using the intrinsic value based method of accounting, but
must
5
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
make pro forma disclosures of net income (loss) as if the accounting provisions
of SFAS No. 123 had been adopted. The Company has elected to continue the
intrinsic value method of accounting for stock-based compensation plans and
provide the required pro forma disclosures. As a result, the adoption of SFAS
No. 123 had no effect on the Company's financial position or results of
operations.
4. Receivables are summarized as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
---- ----
<S> <C> <C>
Accounts receivable, principally
from commercial customers $34,666,000 $32,704,000
Accounts receivable, on U. S.
Government and other long-term contracts 2,809,000 4,136,000
Allowances (1,610,000) (1,612,000)
----------- -----------
$35,865,000 $35,228,000
============ ===========
</TABLE>
5. Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
----------- --------
<S> <C> <C>
Raw materials and work-in-process $42,141,000 $39,656,000
Finished goods 9,809,000 11,364,000
Inventoried costs related to U.S.
Government and other long-term
contracts 13,636,000 12,312,000
----------- -----------
$65,586,000 $63,332,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below cost
as an investment in a new airframe which is expected to be recovered through
the subsequent sale of replacement parts. These commercial investments
(losses) are recognized when original equipment is shipped. Losses on U.S.
Government contracts are immediately recognized in full when determinable.
Inventory is stated at average cost, not in excess of net realizable value.
In accordance with industry practice, inventoried costs may contain amounts
relating to contracts with long production cycles, a portion of which will
not be realized within one year.
6. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
---- ----
<S> <C> <C>
Accrued payroll costs $14,770,000 $15,756,000
Accrued taxes 7,337,000 7,783,000
Accrued costs on long-term contracts 6,054,000 5,195,000
Accrued warranty costs 7,117,000 8,023,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 7,085,000 6,018,000
----------- -----------
$44,363,000 $44,775,000
=========== ===========
</TABLE>
6
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. 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. Aircraft Braking Systems 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, the Company does not expect the
outcome of the litigation to be unfavorable to Aircraft Braking Systems.
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. 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. The
Company is also developing an alternate supplier for carbon. While 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, because of the injunction obtained in the
litigation with Hitco, and based on the development of an alternate
supply source and the expansion of the Company's existing carbon
facility, management does not believe that the Company's supply of carbon
will be interrupted so as to cause a material disruption to the Company's
business.
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits
andeve proceedings cannot be predicted with certainty, in the opinion of
the Company's management, the ultimate liability, if any, will not have a
material adverse effect on the Company.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Three Months Ended June 30, 1996 and
June 30, 1995
Sales for the first three months of fiscal year 1997 totaled $71,537,000
reflecting an increase of $9,244,000 or 14.8% compared with $62,293,000 for the
same period in the prior year. This increase was primarily due to higher sales
of wheels and brakes for commercial transport aircraft of $6,690,000, primarily
on the DC-9, DC-10 and MD-90 programs. General aviation and military sales were
also higher by $1,899,000 and $655,000, respectively, on various programs.
Operating income increased 65.0% to $15,062,000 or 21.1% of sales for the first
three months of fiscal year 1997 compared with $9,127,000 or 14.7% of sales for
the same period in the prior year. Operating margins increased primarily due to
the overhead absorption effect relating to the higher sales volume and lower
shipments of original equipment to airframe manufacturers at or below the cost
of production.
Interest expense, net decreased by $845,000 for the first three months of fiscal
year 1997 compared with the same period in the prior year. This decrease was
primarily due to the redemption of $30,000,000 principal amount of the Company's
13 3/4% Senior Subordinated Debentures due 2001 (the "13 3/4% Debentures") on
December 28, 1995.
Approximately 380 hourly employees of the Company's Aircraft Braking Systems
subsidiary are represented by the United Auto Workers' Union. Aircraft Braking
Systems' three-year contract with the United Auto Workers' Union expired on
August 10, 1991. Aircraft Braking Systems has not had a ratified collective
bargaining agreement since August 10, 1991, but has operated under Company
implemented terms and conditions of employment. The Company is currently
involved in discussions with union representatives regarding a new collective
bargaining agreement. The Company believes that, whether or not a satisfactory
agreement is reached, there will be no material disruption to the business of
Aircraft Braking Systems.
Liquidity and Financial Condition
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. The Company's primary
source of funds for conducting these activities has been cash generated from
operations and borrowing under its $70 million revolving credit facility
(maturing April 27, 1997, and subject to a borrowing base of a portion of
eligible accounts receivable and inventory). At June 30, 1996, the Company had
$48.5 million available under this revolving credit facility.
In May 1996 the Company redeemed $343,000 principal amount of its 13 3/4%
Debentures. In July 1996, the Company called $9,657,000 principal amount of its
13 3/4% Debentures at a price of 102.5% of the principal amount thereof,
effective August 1, 1996.
The Company intends to redeem the remaining $170 million principal balance of
its 13 3/4% Debentures in August 1996. The Company plans to offer $140 million
of Senior Subordinated Notes due 2004 (the "New Notes") and amend and restate
its credit agreement (the "Amended Credit Agreement") to provide for a $110
million facility. The proceeds from the sale of the New Notes and borrowings
under the Amended Credit Agreement will be used to fund the redemption of the
13 3/4% Debentures.
8
<PAGE> 9
The Company believes that it will have adequate resources to meet its cash
requirements under its current debt structure. Upon completion of the above
contemplated transaction the Company expects to save between $5 million and $6
million in annual interest expense, dependent upon the interest rates of the New
Notes and the floating interest rates of the Amended Credit Agreement. In
addition, upon completion of the above contemplated transaction the Company
would record an extraordinary charge of approximately $9.7 million for the
write-off of unamortized financing costs and redemption premiums relating to the
redemption of the 13 3/4% Debentures.
Recently Adopted Financial Accounting Pronouncements
Effective April 1, 1996, the Company adopted 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." SFAS No. 121 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 adoption of SFAS No. 121 did not have a material effect on
the Company's financial position or results of operations.
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages (but does not require)
adoption of the fair value based method of accounting for stock-based
compensation plans. Entities may continue to measure compensation costs for
those plans using the intrinsic value based method of accounting, but must make
pro forma disclosures of net income (loss) as if the accounting provisions of
SFAS No. 123 had been adopted. The Company has elected to continue the intrinsic
value method of accounting for stock-based compensation plans and provide the
required pro forma disclosures. As a result, the adoption of SFAS No. 123 had no
effect on the Company's financial position or results of operations.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated July 30, 1996, under
Item 5 (Other Events) reporting the Company's press release
announcing a private offering of $140 million Senior Subordinated
Notes due 2004 and its intention to amend its existing credit
facility.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
DIRKSON R. CHARLES
----------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: July 30, 1996
11
<PAGE> 12
EXHIBITS INDEX
EXHIBIT No. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1997
<PERIOD-END> JUN-30-1996
<CASH> 6966000
<SECURITIES> 0
<RECEIVABLES> 37475000
<ALLOWANCES> 1610000
<INVENTORY> 65586000
<CURRENT-ASSETS> 108873000
<PP&E> 129392000
<DEPRECIATION> 62266000
<TOTAL-ASSETS> 422199000
<CURRENT-LIABILITIES> 70416000
<BONDS> 289657000
0
10000
<COMMON> 11000
<OTHER-SE> (34408000)
<TOTAL-LIABILITY-AND-EQUITY> 422199000
<SALES> 71537000
<TOTAL-REVENUES> 71537000
<CGS> 44835000
<TOTAL-COSTS> 44835000
<OTHER-EXPENSES> 4771000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9620000
<INCOME-PRETAX> 5490000
<INCOME-TAX> 220000
<INCOME-CONTINUING> 5270000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5270000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
