<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996
REGISTRATION NO. 33-47028
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
3728
(PRIMARY STANDARD 34-1614845
DELAWARE INDUSTRIAL (I.R.S. EMPLOYER
(STATE OF INCORPORATION) CLASSIFICATION CODE) IDENTIFICATION NO.)
</TABLE>
------------------------
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
212-297-0900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
------------------------
KENNETH M. SCHWARTZ
EXECUTIVE VICE PRESIDENT
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
JOHN J. SUYDAM, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
K & F INDUSTRIES, INC.
CROSS REFERENCE SHEET PURSUANT TO
SECTION 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
PROSPECTUS HEADING
REGISTRATION STATEMENT ITEM AND CAPTION OR OTHER LOCATION
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors; Summary
Financial Data
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Plan of Distribution
9. Description of Securities to be
Registered................................. Description of Senior Notes Debentures
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant................................. Prospectus Summary; The Company; Selected
Financial Data; Management's Discussion and
Analysis of Results of Operations and
Financial Condition; Business; Management;
Ownership of Capital Stock; Description of
Certain Indebtedness; Certain Transactions;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Undertakings
</TABLE>
<PAGE> 3
PROSPECTUS
$100,000,000
K & F INDUSTRIES, INC.
11 7/8% SENIOR SECURED NOTES DUE 2003
---------------------------
INTEREST PAYABLE JUNE 1 AND DECEMBER 1
---------------------------
K & F Industries, Inc. ("K & F" or the "Company") offered $100,000,000 (the
"Offering") aggregate principal amount of its 11 7/8% Senior Secured Notes Due
2003 (the "Senior Notes"). Interest on the Senior Notes is payable on June 1 and
December 1, of each year. The Senior Notes are redeemable at the option of the
Company, in whole or in part, on or after June 1, 1997, at the redemption prices
set forth herein plus accrued interest to the date of redemption. The Senior
Notes are not subject to mandatory sinking fund payments. Upon the occurrence of
a Change of Control (as defined herein), each holder of Senior Notes will be
entitled to require the Company to repurchase such holder's Senior Notes at 101%
of the principal amount thereof plus accrued interest to the date of such
repurchase.
The Senior Notes are secured by a pledge of all of the outstanding shares
of capital stock of the Company's subsidiaries. All of the Company's assets are
held through its two wholly-owned subsidiaries, Aircraft Braking Systems
Corporation ("Aircraft Braking Systems") and Engineered Fabrics Corporation
("Engineered Fabrics"). Aircraft Braking Systems and Engineered Fabrics are
currently parties to an Amended and Restated Credit Agreement (the "Amended and
Restated Credit Agreement") providing for a term loan facility (the "Term Loan
Facility") in an aggregate principal amount of $40 million and a revolving
credit facility (the "Revolving Loan Facility") in an aggregate principal amount
of $70 million. The Amended and Restated Credit Agreement is secured by a first
priority lien on the inventory, accounts receivable and certain other tangible
assets of Aircraft Braking Systems and Engineered Fabrics. The Senior Notes are
effectively subordinated to borrowings under the Amended and Restated Credit
Agreement and the claims of the other creditors of the Company's subsidiaries.
As of June 30, 1996, the aggregate amount of indebtedness, including trade
payables and other liabilities, of the Company's subsidiaries to which the
Senior Notes were effectively subordinated, was approximately $102 million. See
"Risk Factors -- Holding Company Structure," "Description of Senior Notes" and
"Description of Certain Indebtedness."
---------------------------
The Company is, and will continue to be, highly leveraged. SEE "RISK
FACTORS" FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The prospectus is to be used by the Underwriter in connection with offers
and sales in market-making transactions of negotiated prices related to
prevailing market prices at the time of the sale. The Underwriter may act as
principal or agent in such transactions.
---------------------------
LEHMAN BROTHERS
October 29, 1996
<PAGE> 4
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass all
amendments, exhibits and schedules thereto) under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Senior Notes being offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, and to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and the exhibits and schedules thereto, as well as such
reports and other information filed by the Company with the Commission, can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the following
regional offices of the Commission: 75 Park Place, New York, New York 10007,
Kluczynski Federal Building, 230 South Dearborn Street, Chicago, Illinois 60604
and Jacob K. Javits Federal Building, 26 Federal Plaza, New York, New York
10278. Copies of such information can also be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
The Company is required under the Indenture governing the Senior Notes to
file periodic reports with the Commission and to distribute copies of such
filings to the holders of the Senior Subordinated Notes.
---------------------------
2
<PAGE> 5
PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the information set forth under
the heading "Risk Factors." References to worldwide markets and market share
information contained herein have been derived from information compiled by the
Company due to the lack of independently compiled information. Such references
exclude markets formerly controlled by the U.S.S.R. about which accurate
information is not readily available.
THE COMPANY
K & F Industries, Inc. ("K & F" or the "Company"), through its wholly owned
subsidiary, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"),
believes it is one of the world's leading manufacturers of aircraft wheels,
brakes and anti-skid systems for commercial, general aviation and military
aircraft, supplying approximately 22% of the worldwide market for these
products. Aircraft Braking Systems' products are marketed internationally
through 10 sales offices located in four countries and are used on approximately
32,000 commercial, general aviation and military aircraft. During the fiscal
year ended March 31, 1996, approximately $233.0 million, or 88%, of the
Company's total revenues were derived from sales made by Aircraft Braking
Systems. Through its other wholly owned subsidiary, Engineered Fabrics
Corporation ("Engineered Fabrics"), the Company believes it is the leading
worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of
the worldwide commercial transport and general aviation market and over half of
the domestic military market. During the fiscal year ended March 31, 1996,
approximately $31.7 million, or 12%, of the Company's total revenues were
derived from sales made by Engineered Fabrics.
Aircraft Braking Systems
Since the late 1920s, Aircraft Braking Systems and its predecessors have
been leaders in the design and development of aircraft wheels, brakes and
anti-skid systems, investing significant resources refining existing braking
systems, developing new technologies and designing braking systems for new
airframes. As is customary in the industry, Aircraft Braking Systems supplies
original wheels and brakes for commercial aircraft to aircraft manufacturers at
or substantially below the production cost of such equipment. Once a
manufacturer's wheels and brakes have been certified and installed on an
aircraft, FAA regulations and similar requirements in foreign countries
generally require that all replacement parts for such systems be provided by
such manufacturer. The FAA also requires the replacement of such parts at
regular intervals, which for medium- and short-range commercial aircraft
generally averages once or twice a year. Since most modern aircraft have a
useful life of 25 years or longer and require scheduled replacement of certain
components of the braking system, the Company typically recoups its initial
investment in original equipment and generates significant profits from sales of
replacement parts over the life of the aircraft. During the three fiscal years
ended March 31, 1996, the Company spent and expensed an aggregate of $108
million for research, development and design and the supply of original wheel
and brake equipment to aircraft manufacturers. During the fiscal year ended
March 31, 1996, approximately 75% of Aircraft Braking Systems' total revenues
were derived from the sale of replacement parts for braking systems previously
sold by Aircraft Braking Systems.
Aircraft Braking Systems also manufactures anti-skid systems for use on a
variety of commercial, military and general aviation aircraft. These 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 believes that the
ability to integrate the design and performance characteristics of its wheels,
brakes and integrated anti-skid systems provides Aircraft Braking Systems with a
competitive
3
<PAGE> 6
advantage over its two largest competitors. Other products manufactured by
Aircraft Braking Systems include helicopter rotor brakes and brake temperature
monitoring equipment for various types of aircraft.
Aircraft Braking Systems currently sells its products to virtually all
major airframe manufacturers and commercial airlines and to the United States
and certain foreign governments. Since 1989, Aircraft Braking Systems has
carefully directed its efforts toward expanding its presence in the commercial
and general aviation segments of the aircraft industry, focusing particularly on
medium- and short-range commercial aircraft. As a result of these efforts,
Aircraft Braking Systems has added approximately 950 medium- and short-range
commercial aircraft to the portfolio of aircraft using its products. These
aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
Aircraft Braking Systems has been successful in having its wheels and brakes
selected for use on a number of recent airframe designs which serve this market,
including the Airbus Industries ("Airbus") A-321, the McDonnell Douglas Corp.
("McDonnell Douglas") MD-80 and MD-90 programs, the Canadair Regional Jet, the
Saab-Scania AB ("Saab") S340 and S2000, the Lear 60 and the Fokker Aircraft
("Fokker") Fo-70 and Fo-100. Aircraft Braking Systems has also been successful
in having its brakes selected for use on certain long-range commercial aircraft
produced by Airbus, specifically the A-330 and A-340. These long-range aircraft
programs enhance the competitive position of Aircraft Braking Systems with
Airbus and commercial airlines utilizing Airbus aircraft. The Company believes
that these new airframes will expand the portfolio of aircraft using Aircraft
Braking Systems' products and that the revenue generated from such aircraft will
eventually replace and exceed the revenues generated by the aircraft programs in
Aircraft Braking Systems' current portfolio as the aircraft in those programs
reach the end of their useful lives.
Over the last several years, the Company has introduced a number of new
programs at Aircraft Braking Systems to enhance manufacturing efficiency and
reduce raw material costs. Among the programs being implemented are cell-based
manufacturing and a major expansion of Aircraft Braking Systems' existing carbon
manufacturing facility. Over the past several years, cell-based manufacturing
has improved productivity, reduced costs and enhanced product quality. Once the
expansion is complete, the carbon facility is expected to satisfy substantially
all of Aircraft Braking Systems' carbon requirements, lower costs and provide
Aircraft Braking Systems with vertical integration of and control over a
critical manufacturing process.
Engineered Fabrics
With its proprietary technology, Engineered Fabrics is the only
FAA-certified supplier of polyurethane manufactured fuel tanks in the United
States. The polyurethane fuel tanks produced by Engineered Fabrics feature
"selfsealing" technology that significantly reduces the potential for fires,
leaks and spilled fuel following a crash. Recent programs awarded to Engineered
Fabrics in which this technology is being used include production or replacement
parts programs for the U.S. Navy's F-18 C/D and E/F aircraft and F-15 and F-16
aircraft. Engineered Fabrics also competes in the nitrile-designed aircraft fuel
tank market and won a three-year requirements contract in 1996 to supply nitrile
fuel tanks to the U.S. Navy for its F-14 aircraft. During the fiscal year ended
March 31, 1996, Engineered Fabrics was selected by the U.S. Army to equip its
new stealth RAH-66 Comanche helicopter with fuel tanks. Other helicopter
programs which have been awarded to Engineered Fabrics include the McDonnell
Douglas MD-600, Bell 412 and Bell/Boeing V/22 Osprey platforms. Engineered
Fabrics also manufactures and sells iceguards, inflatable oil booms and various
other products made from coated fabrics for commercial and military uses.
4
<PAGE> 7
PROCEEDS FROM THE OFFERING
The net proceeds obtained by the Company from the sale of the Senior Notes
were approximately $96.7 million. The Company used such proceeds to prepay in
full its then outstanding senior term loan ($92.5 million) and to reduce its
then outstanding amount of revolving loans. The repayment of the senior term
loan relieved the Company of $92.5 million in principal payments scheduled to be
made through the fiscal year ending March 31, 1998. While the interest rate on
the Senior Notes is higher than the rate that was applicable to the senior term
loan, the elimination of the principal payments on the senior term loan provided
the Company with the option of dedicating more of its cash flow to investments
in original equipment for selected airframes, paying down debt or applying such
cash flow towards other general corporate purposes.
THE OFFERING
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of 11 7/8%
Senior Secured Notes Due 2003, issued pursuant to
the Indenture dated as of June 1, 1992, (the
"Senior Note Indenture") between the Company and
the Bank of New York, as Trustee.
MATURITY DATE.............. December 1, 2003.
INTEREST PAYMENT DATES..... June 1 and December 1.
OPTIONAL REDEMPTION........ The Senior Notes are redeemable at the option of
the Company, in whole or in part, on or after June
1, 1997, at the redemption prices set forth herein
plus accrued interest to the date of redemption.
MANDATORY SINKING FUND..... None.
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of Senior Notes will be entitled to require
the Company to repurchase such holder's Senior
Notes at a price equal to 101% of the principal
amount thereof plus accrued interest to the date of
repurchase.
RANKING.................... The Senior Notes rank senior in right of collateral
to all unsecured indebtedness of the Company and
senior in right of collateral and payment to the
Senior Subordinated Notes (as defined). The Senior
Notes are effectively subordinated to the
borrowings under the Amended and Restated Credit
Agreement and to the claims of other creditors of
Aircraft Braking Systems and Engineered Fabrics.
See "Risk Factors -- Holding Company Structure.
CERTAIN COVENANTS.......... The Senior Note Indenture contains certain
covenants, including but not limited to covenants
limiting the following: (i) the incurrence by the
Company of additional indebtedness; (ii) the
issuance of capital stock by Aircraft Braking
Systems; (iii) the payment of dividends and
interest on and redemption of capital stock and
subordinated debt of the Company and its
subsidiaries; (iv) transactions with shareholders
and affiliates; (v) the application of the proceeds
of certain asset sales; (vi) the incurrence of
liens; (vii) the creation of restrictions on the
ability of the Company's subsidiaries to make
distributions; and (viii) the ability of the
Company and its subsidiaries to engage in certain
mergers or consolidations or to transfer all or
substantially all of their assets to another
person. However, such limitations and prohibitions
are subject to a number of important exemptions.
See "Description of Senior Notes."
COLLATERAL................. The Senior Notes are secured by a pledge of all of
the outstanding capital stock of Aircraft Braking
Systems and Engineered Fabrics. See
5
<PAGE> 8
"Risk Factors -- Holding Company Structure" and
"Description of Senior Notes."
USE OF PROCEEDS............ The Company used the net proceeds received from the
issuance of the Senior Notes (approximately $96.7
million) to repay the amount remaining under its
then outstanding senior term loan ($92.5 million)
and to reduce its then outstanding amount of
revolving loans. See "Use of Proceeds."
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical financial information for
the Company for the three months ended June 30, 1996 and June 30, 1995 and for
each of the fiscal years in the five-year period ended March 31, 1996. The
summary historical financial data for the Company for each fiscal year in the
five-year period ended March 31, 1996 have been derived from the Company's
audited consolidated financial statements. The audited consolidated financial
statements of the Company for each of the years in the three-year period ended
March 31, 1996 are included elsewhere in this Prospectus, together with the
report thereon of Deloitte & Touche LLP, independent auditors. The historical
financial data for the three months ended June 30, 1996 and June 30, 1995 have
been derived from the Company's unaudited financial statements which, in the
opinion of management of the Company, contain all adjustments necessary for a
fair presentation of this information. The historical data with respect to the
results of operations for the three months ended June 30, 1996 should not be
regarded as necessarily indicative of the results that may be expected for the
entire year. This historical data should be read in conjunction with the
consolidated financial statements and notes thereto of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEARS ENDED MARCH 31,
--------------------- -----------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $ 71,537 $ 62,293 $264,736 $238,756 $226,131 $277,107 $295,490
Cost of sales........................... 44,835 43,582 180,435 164,697 159,751 199,002 209,552
------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 26,702 18,711 84,301 74,059 66,380 78,105 85,938
Independent research and development.... 3,225 1,822 9,767 8,363 12,858 11,417 14,130
Selling, general and administrative
expenses.............................. 5,814 5,147 22,564 19,208 22,421 24,154 24,047
Amortization............................ 2,601 2,615 10,415 10,411 10,884 10,258 10,306
------- ------- ------- ------- ------- ------- -------
Operating income...................... 15,062 9,127 41,555 36,077 20,217 32,276 37,455
Interest expense, net(a)................ 9,572 10,426 41,048 46,250 51,953 53,486 52,179
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes.......... 5,490 -- -- -- -- -- --
Income taxes............................ (220) (1,299) 507 (10,173) (31,736) (21,210) (14,724)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
charge and cumulative effect of
accounting changes.................... 5,270 (1,299) 507(b) (10,173) (31,736)(d) (21,210) (14,724)
Extraordinary charge.................... -- -- (1,913)(b) -- -- (2,477)(c) (992)(c)
Cumulative effect of accounting
changes............................... -- -- -- -- (2,305)(d) (73,540)(e) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ 5,270 $ (1,299) $ (1,406) $(10,173) $(34,041) $(97,227) $(15,716)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital......................... $ 38,457 $ 51,210 $ 36,327 $ 48,025 $ 53,091 $ 70,028 $ 77,606
Total assets............................ 422,199 429,567 416,037 429,074 446,880 489,968 518,938
Long-term debt(b)(f).................... 289,657 310,000 294,000 310,000 381,421 379,478 388,571
Stockholders' deficiency(e)(f).......... (34,387) (36,061) (39,701) (34,748) (90,355) (51,868) 48,331
OTHER DATA (FOR THE PERIOD):
EBITDA(g)............................... 19,849 13,932 60,476 54,920 40,744 52,138 56,956
Capital expenditures.................... 4,268 622 10,418 2,824 3,127 4,670 3,986
Depreciation and amortization........... 4,787 4,805 18,921 18,843 20,527 19,862 19,501
</TABLE>
- ---------------
(a) Interest expense, net includes, for the three months ended June 30, 1996 and
1995 and the years ended March 31, 1996, 1995, 1994, 1993 and 1992, non-cash
interest expense (including the amortization of deferred financing costs and
the interest associated with the Convertible Debentures (as defined)) of
$388,000, $375,000, $1,561,000, $5,432,000, $9,923,000, $8,789,000 and
$8,680,000, respectively.
(b) On December 28, 1995, the Company redeemed $30,000,000 principal amount of
the 13 3/4% Senior Subordinated Debentures due 2001 (the "13 3/4%
Debentures") in connection therewith, the Company recorded an extraordinary
charge of $1,913,000. See Note 7 to the consolidated financial statements.
(c) The extraordinary charges of $2,477,000 and $992,000 relate to the
accelerated amortization of unamortized financing costs associated with the
prepayment in full of the Company's senior term loan in fiscal year 1993 and
the partial prepayment of such senior term loan in fiscal year 1992.
(d) Represents the 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.
(e) Includes the cumulative effect of accounting change for Statement of
Financial Accounting Standards ("SFAS") No. 106 and the change in method of
accounting for certain overhead costs in inventory.
(f) On September 2, 1994, the Company retired the $65,400,000 principal amount
of its 14 3/4% Subordinated Convertible Debentures (the "Convertible
Debentures") held by Loral Corporation in exchange for $12,760,000 in cash
and 22.5% of the Company's outstanding capital stock. As a result, the
Company's stockholders' equity was increased by $65,400,000 and long-term
debt was reduced by an equal amount. See Note 9 to the consolidated
financial statements.
(g) EBITDA represents operating income plus depreciation and amortization. While
EBITDA should not be construed as a substitute for operating income or as a
better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with generally accepted accounting
principles, EBITDA is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
EBITDA is included herein because the Company believes that certain
investors find it be a useful tool for measuring the ability to service
debt.
7
<PAGE> 10
THE COMPANY
GENERAL
K & F, through its wholly owned subsidiary, Aircraft Braking Systems,
believes it 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
$233.0 million, or 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, 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 $31.7 million, or 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 refining existing braking systems, developing
new technologies and designing braking systems for new airframes. The Company
has carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
The Company is a Delaware corporation formed on March 13, 1989. The Company
is the successor to the businesses of Aircraft Braking Systems and Engineered
Fabrics formed by Goodyear Tire & Rubber Company, Inc. ("Goodyear") in 1929.
Unless the context otherwise requires, references herein to the "Company" refer
to K & F Industries, Inc. and its consolidated subsidiaries. The principal
executive offices of the Company are located at 600 Third Avenue, New York, New
York 10016 and its telephone number is (212) 297-0900.
RECENT DEVELOPMENTS
On August 1, 1996, the Company redeemed approximately $9.7 million
aggregate principal amount of the 13 3/4% Debentures. On August 14, 1996,
Aircraft Braking Systems and Engineered Fabrics entered into the Amended and
Restated Credit Agreement with the lenders thereunder, consisting of a $40
million Term Loan Facility and a $70 million Revolving Loan Facility. On August
15, 1996, the Company consummated the New Offering (as defined) and deposited
the net proceeds therefrom with the trustee under the indenture governing the
Company's outstanding 13 3/4% Debentures. The Company used the net proceeds from
the New Offering, together with borrowings under the Amended and Restated Credit
Agreement, to redeem the remaining $170 million outstanding principal amount of
the 13 3/4% Debentures on September 13, 1996. Upon completion of the New
Offering, the Company recorded an extraordinary charge of approximately $9.2
million for the writeoff of unamortized financing costs and redemption premiums
relating to such redemption.
On August 15, 1996, the Company issued (the "New Offering") $140,000,000
principal amount of 10 3/8% Senior Subordinated Notes due 2004 (the "Old Senior
Subordinated Notes"). On September 13, 1996, the Company offered to exchange
(the "Exchange Offer") $1,000 principal amount of 10 3/8% Series B Senior
Subordinated Notes due 2004 (the "Senior Subordinated Notes") of the Company for
each $1,000 principal amount of issued and outstanding Old Senior Subordinated
Notes. The terms of the Senior Subordinated Notes are identical in all material
respects to the Old Senior Subordinated Notes, except that the Senior
Subordinated Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and therefore do not bear legends restricting
their transfer. On October 15, the Company extended the Exchange Offer to 5:00
p.m. on Friday, October 25, 1996 unless further extended.
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<PAGE> 11
RISK FACTORS
Purchasers of the Senior Notes offered hereby should consider the specific
factors set forth below as well as the other information set forth in this
Prospectus.
HIGHLY LEVERAGED POSITION
Debt to Equity Ratio. The Company is highly leveraged. As of June 30,
1996, after giving pro forma effect to the New Offering, application of the net
proceeds therefrom and borrowings under the Amended and Restated Credit
Agreement, the Company would have had approximately $392 million of aggregate
indebtedness, including trade payables and other liabilities, and the Company
had a stockholders' deficiency. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Selected Consolidated
Financial Information."
Dependence on Future Performance to Make Debt Payments. The Company will
be required to pay all principal plus accrued interest on the Senior Notes in
2003. In addition, the Company's subsidiaries will be required to make scheduled
payments pursuant to the Amended and Restated Credit Agreement beginning in 1997
and ending in 2002. The Company's ability to make required principal and
interest payments on its indebtedness is dependent on the future performance of
the Company and its subsidiaries. The Company's performance is subject to a
number of factors beyond its control, including the performance of the global
economy and financial markets, worldwide demand for air travel, legislative
pronouncements, performance of the commercial and military aircraft industries
and other factors affecting the Company and its subsidiaries.
Operating and Financial Restrictions. The Company's level of indebtedness
and the restrictive covenants contained in its debt instruments could
significantly limit the Company's ability to withstand competitive pressures or
adverse economic consequences, including the ability of the Company to make
investments in aircraft programs and capital expenditures. In addition, the
borrowings under the Amended and Restated Credit Agreement are floating rate
obligations of the Company's subsidiaries, causing the Company and its
subsidiaries to be sensitive to changes in prevailing interest rates. The
Company currently believes that, based on current levels of operations and
anticipated growth, its cash flow from operations, together with the borrowings
from time to time under the Amended and Restated Credit Agreement, will be
adequate to allow for anticipated capital expenditures and investments in
original equipment for aircraft programs, to fund working capital requirements
and to make required payments of principal and interest on its debt. However, if
the Company is unable to generate sufficient cash flow from operations in the
future, it may be required to refinance all or a portion of its debt or to
obtain additional financing. There can be no assurance that any such refinancing
would be possible or that any additional financing could be obtained.
Restrictive Covenants. The Senior Note Indenture and the indenture
governing the Senior Subordinated Notes (the "Senior Subordinated Note
Indenture") impose certain operating and financial restrictions on the Company
and its subsidiaries. Such restrictions affect, and in many respects limit or
prohibit, among other things, the ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends, permit subsidiaries to issue
preferred stock, repay certain indebtedness prior to its stated maturity, create
liens, sell assets or engage in mergers or acquisitions and make certain capital
expenditures. These restrictions, in combination with the leveraged nature of
the Company, could limit the ability of the Company to effect future financings
or otherwise restrict corporate activity. In addition, the Amended and Restated
Credit Agreement imposes certain restrictions on the Company's subsidiaries,
including limitations on additional indebtedness, dividend payments and other
distributions from Aircraft Braking Systems and Engineered Fabrics to the
Company and investments in original equipment for new airframe programs.
The Company's redemption of the 13 3/4% Debentures may, under certain
circumstances, have constituted a "Restricted Payment" under the Senior Note
Indenture and, therefore, could only be effected in compliance with the Senior
Note Indenture. On September 2, 1994 the Company retired $65.4 million aggregate
principal amount of its Convertible Debentures in exchange for $12,760,000 of
cash and 458,994 shares of capital stock. The Company believes that the exchange
of its Convertible Debentures for its capital stock constituted a "Permitted
Payment" under the Senior Note Indenture. The determination of whether the
exchange constituted a "Permitted Payment" depends on whether it is viewed as a
retirement of the Convertible Debentures with the proceeds of the issuance of
capital stock.
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<PAGE> 12
"Permitted Payments" do not constitute "Restricted Payments" under the
Senior Note Indenture and do not reduce the Company's ability to make future
"Restricted Payments" under the Senior Note Indenture. As a "Permitted Payment",
the exchange transaction had the effect of increasing the Company's ability to
make "Restricted Payments" under the Senior Note Indenture by $52.0 million.
Absent such increase, the Company would not have had sufficient "Restricted
Payment" capacity under the Senior Note Indenture to effect the redemption of
the 13 3/4% Debentures consummated in December 1995, the redemption effected in
August 1996 and the redemption effected with the proceeds of borrowings under
the Amended and Restated Credit Agreement in connection with the New Offering.
If a holder of Senior Notes or the trustee under the Senior Note Indenture were
to raise the issue, there can be no assurance that a court reviewing the Senior
Note Indenture would find that the redemption of the 13 3/4% Debentures was in
accordance with the terms of the Senior Note Indenture. In the event that a
court determined that the redemption of the 13 3/4% Debentures violated the
Senior Note Indenture, and the Company is unable to cure such violation by
obtaining consents or retiring the Senior Notes, holders of the Senior Notes and
the Lenders under the Amended and Restated Credit Agreement would have the right
to accelerate the maturity of the indebtedness then outstanding thereunder.
HISTORY OF NET LOSSES; DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company had net income of $5.3 million for the three months ended June
30, 1996. However, for the three months ended June 30, 1995 and the fiscal years
ended March 31, 1996, 1995 and 1994, the Company incurred net losses of
approximately $1.3 million, $1.4 million, $10.2 million and $34.0 million,
respectively. For the three months ended June 30, 1996 and the fiscal year ended
March 31, 1996, the Company's ratio of earnings to fixed charges was 1.53 and
1.01, respectively. For the three months ended June 30, 1995 and the fiscal
years ended March 31, 1995 and 1994, the Company's deficiency of earnings
available to cover fixed charges was approximately $1.3 million, $10.2 million
and $31.7 million, respectively. See "Selected Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company's cash flow from operations has been
sufficient to meet its debt service obligations for interest and required
principal payments. Although not currently anticipated, the Company may have a
future deficiency of earnings to cover fixed charges. Under such circumstances,
the Company expects that, based upon current operations, it will be able to meet
required principal and interest payments on the Senior Subordinated Notes.
However, no assurance can be given that the Company's operating results will
provide sufficient cash flow to meet its financial obligations, including
payment of principal and interest on the Senior Subordinated Notes.
HOLDING COMPANY STRUCTURE
The Company is the sole obligor on the Senior Notes. The Company's
operations are conducted through, and substantially all of the Company's assets
are owned by, its directly owned operating subsidiaries, Aircraft Braking
Systems and Engineered Fabrics. As a result, the Company will be dependent on
the earnings and cash flow from Aircraft Braking Systems and Engineered Fabrics
to meet its obligations under the Senior Notes and, the Senior Subordinated
Notes and to pay its general expenses. Aircraft Braking Systems and Engineered
Fabrics provide funds to the Company through payments on intercompany
indebtedness and dividends. Because the assets of the Company are held by and
will continue to be held by these subsidiaries, the claims of holders of the
Senior Notes will be subject to the prior claims of creditors of Aircraft
Braking Systems and Engineered Fabrics, including the claims of the lenders
(collectively, the "Lenders") under the Amended and Restated Credit Agreement
and the claims of trade creditors. As of June 30, 1996, the aggregate amount of
indebtedness, including trade payables and other liabilities of the Company's
subsidiaries to which the Senior Notes would effectively be subordinated, was
approximately $102 million. See "Description of Senior Notes -- Certain
Covenants."
Pursuant to a Pledge Agreement between the Company and The Bank of New
York, as collateral trustee (the "Collateral Trustee"), the Company has assigned
and pledged to the Collateral Trustee, for the benefit of the holders of the
Senior Notes, a security interest in all of the capital stock of Aircraft
Braking Systems and Engineered Fabrics to secure performance by the Company of
its obligations under the Senior Note Indenture and the Senior Notes. The value
of the collateral securing the Senior Notes will depend upon the value of the
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<PAGE> 13
equity of Aircraft Braking Systems and Engineered Fabrics at any given time. No
assurance can be given that the value of the equity of Aircraft Braking Systems
and Engineered Fabrics will be sufficient to satisfy the Company's obligations
with respect to the Senior Notes.
CERTAIN COLLECTIVE BARGAINING MATTERS
All of Aircraft Braking Systems' hourly employees are represented by the
United Auto Workers' Union. In 1991, Aircraft Braking Systems' collective
bargaining agreement with the United Auto Workers' Union expired and a new
collective bargaining agreement was not ratified by the employees of Aircraft
Braking Systems but was implemented by Aircraft Braking Systems unilaterally. As
a result, all employees that would have otherwise been covered by such agreement
have been employed since that time by Aircraft Braking Systems without any
collective bargaining agreement. The Company believes that Aircraft Braking
Systems will be able to negotiate, without material disruptions to its business,
a satisfactory new collective bargaining agreement with its employees and
discussions regarding this matter are currently ongoing with union
representatives. However, there can be no assurance that a satisfactory
agreement will be reached with any of its employees or that the current
discussions regarding such agreement will not be accompanied by material
disruptions to its business.
LITIGATION
Aircraft Braking Systems has been purchasing substantially all of the
carbon for its carbon brakes from Hitco Technologies, Inc. ("Hitco ") under
supply arrangements. The contracts and commitments between Aircraft Braking
Systems and Hitco are now the subject of litigation. 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. 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, the Company does not anticipate that its supply of carbon
from Hitco will be interrupted prior to the first quarter of calendar year 1997.
See "Business -- Legal Proceedings."
ADDITIONAL INDEBTEDNESS
The Senior Note Indenture limits but does not prohibit the incurrence by
the Company or its operating subsidiaries of additional indebtedness. See
"Description of Senior Notes -- Certain Covenants."
INTEREST OF BLS, LEHMAN BROTHERS AND ITS AFFILIATES
Bernard L. Schwartz ("BLS") owns 27.12% of the capital stock of the Company
and has operating control of the Company by reason of certain stockholder
arrangements. In addition, BLS serves as Chairman of the Board of Directors and
Chief Executive Officer of the Company. In his capacity as Chairman and Chief
Executive Officer, BLS participates in the material business decisions relating
to the Company and its operations but does not participate in the ordinary day
to day operations of the Company. BLS is also the Chairman and Chief Executive
Officer of Loral Space & Communications Ltd. ("Loral Space") which owns 22.5% of
the capital stock of K & F. BLS and certain other executive officers of Loral
Space provide, pursuant to a Director Advisory Agreement (the "Advisory
Agreement"), certain services to the Company, including acting as directors of
and providing advisory services to the Company and its subsidiaries. The Company
pays BLS and persons designated at his discretion an aggregate of $200,000 per
month for such services. BLS and certain other advisors to the Company
participate in certain other incentive compensation plans. See "Management,"
"Ownership of Capital Stock" and "Certain Transactions."
Certain merchant banking partnerships (collectively, the "Lehman
Investors") controlled by Lehman Brothers Holdings Inc. ("LBH") own 48.17% of
the capital stock of the Company. The Lehman Investors have the right pursuant
to certain stockholders arrangements to designate three members of the Company's
Board of Directors. In addition, in the event BLS dies or is disabled or owns
less than a specified number of shares of capital stock of the Company, the
Lehman Investors will be entitled to designate a majority of the
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<PAGE> 14
directors of the Company. Pursuant to a financial advisory agreement between
Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial
adviser to the Company. Lehman Brothers has performed investment banking
services for the Company in connection with the Senior Note Offering, the
offering of the 13 3/4% Debenture and the New Offering. In connection with the
Senior Note Offering, the offering of the 13 3/4% Debenture and the New
Offering, Lehman Brothers received discounts and commissions of $2.25 million,
$7.35 million and $2.57 million, respectively. The Senior Note Offering was made
in compliance with the requirements of Schedule E to the By-Laws ("Schedule E")
of the National Association of Securities Dealers, Inc. ("NASD"). Ladenburg,
Thalmann & Co. Inc. acted as a "qualified independent underwriter" within the
requirements of Schedule E. See "Certain Transactions," "Ownership of Capital
Stock" and "Plan of Distribution."
IMPACT OF AIR TRANSPORT ACTIVITY; DELIVERY OF NEW AIRCRAFT
During fiscal year 1996, sales of replacement parts for braking systems
previously installed on aircraft accounted for approximately 75% of Aircraft
Braking Systems' total revenues. The demand for replacement parts for the
Company's wheels and braking systems varies depending upon the number of
aircraft equipped with the Company's products and the number of landings made by
such aircraft. A reduction in airline travel will usually result in reduced
utilization of commercial aircraft, fewer landings, and a corresponding decrease
in the Company's sales of replacement parts and related income and cash flow.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business."
Since original equipment in new commercial aircraft is supplied at or
substantially below the Company's cost of production, delivery of new aircraft
equipped with the Company's products negatively affects cash flow. The Company's
business plan budgets cash needs based on current delivery schedules of new
aircraft and also accommodates certain increases in aircraft deliveries.
However, significant, unanticipated increases in commercial aircraft deliveries
in a given year could have a material adverse impact on the Company's cash flow
in such year.
SIGNIFICANT CUSTOMER
Sales to the United States government (the "Government") or to prime
contractors or subcontractors of the Government were approximately 16%, 14% and
15% of the Company's total sales for the fiscal years ended March 31, 1996, 1995
and 1994, respectively. The loss of all or a substantial portion of such sales
could have an adverse effect on the Company's income and cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Government Contracts."
TRADING MARKET FOR THE DEBENTURES
Lehman Brothers currently makes a market in the Senior Notes. However, it
is not obligated to do so, and any such market making activity may be
discontinued at any time without notice, at its sole discretion. Therefore, no
assurance can be given as to the liquidity of, or the trading market for, the
Senior Notes. In addition, in the recent past the market for "high yield"
securities (of which the Senior Notes may be deemed a part) has been
characterized by certain periods of relative instability and illiquidity. No
assurance can be given as to the status of the market for "high yield"
securities in the future or whether an active trading market will develop for
the Senior Notes.
USE OF PROCEEDS
The net proceeds received by the Company from the sale of the Senior Notes,
after the payment of fees and expenses in connection with the Offering and
certain related transactions were approximately $96.7 million. The Company used
the net proceeds from the Offering to repay in full its then outstanding senior
term loan and to reduce its then outstanding amount of revolving loans. The
repayment of the senior term loan relieved the Company of approximately $92.5
million in principal payments scheduled to be made through the fiscal year
ending March 31, 1998. While the interest rate on the Senior Notes is higher
than that applicable to the senior term loan, the elimination of the principal
payments on the senior term loan provided the Company with the option of
dedicating more of its cash flow to investments in original equipment for
selected airframes, paying down debt or applying such cash flow towards other
general corporate purposes.
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<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for the Company for the three months ended June 30, 1996 and June 30, 1995 and
for each of the fiscal years in the five-year period ended March 31, 1996. The
selected historical financial data for the Company for each year in the five-
year period ended March 31, 1996 have been derived from the Company's audited
consolidated financial statements. The audited consolidated financial statements
of the Company for each of the years in the three-year period ended March 31,
1996 are included elsewhere in this Prospectus, together with the report thereon
of Deloitte & Touche LLP, independent auditors. The historical financial data
for the three months ended June 30, 1996 and June 30, 1995 have been derived
from the Company's unaudited financial statements which, in the opinion of
management of the Company, contain all adjustments necessary for a fair
presentation of this information. The historical data with respect to the
results of operations for the three months ended June 30, 1996 should not be
regarded as necessarily indicative of the results that may be expected for the
entire year. This historical data should be read in conjunction with the
consolidated financial statements and notes thereto of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEARS ENDED MARCH 31,
--------------------- ------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $ 71,537 $ 62,293 $264,736 $238,756 $226,131 $277,107 $295,490
Cost of sales......................... 44,835 43,582 180,435 164,697 159,751 199,002 209,552
------- ------- ------- ------- ------- ------- -------
Gross margin........................ 26,702 18,711 84,301 74,059 66,380 78,105 85,938
Independent research and development.. 3,225 1,822 9,767 8,363 12,858 11,417 14,130
Selling, general and administrative
expenses............................ 5,814 5,147 22,564 19,208 22,421 24,154 24,047
Amortization.......................... 2,601 2,615 10,415 10,411 10,884 10,258 10,306
------- ------- ------- ------- ------- ------- -------
Operating income...................... 15,062 9,127 41,555 36,077 20,217 32,276 37,455
Interest expense, net(a).............. 9,572 10,426 41,048 46,250 51,953 53,486 52,179
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes........ 5,490 (1,299) 507 (10,173) (31,736) (21,210) (14,724)
Income taxes.......................... (220) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
charge and cumulative effect of
accounting changes.................. 5,270 (1,299) 507 (10,173) (31,736) (21,210) (14,724)
Extraordinary charge.................. -- -- (1,913)(b) -- -- (2,477)(c) (992)(c)
Cumulative effect of accounting
changes............................. -- -- -- -- (2,305)(d) (73,540)(e) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ 5,270 $ (1,299) $ (1,406) $(10,173) $(34,041) $(97,227) $(15,716)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital....................... $ 38,457 $ 51,210 $ 36,327 $ 48,025 $ 53,091 $ 70,028 $ 77,606
Total assets.......................... 422,199 429,567 416,037 429,074 446,880 489,968 518,938
Long-term debt(b)(f).................. 289,657 310,000 294,000 310,000 381,421 379,478 388,571
Stockholders' deficiency(e)(f)........ (34,387) (36,061) (39,701) (34,748) (90,355) (51,868) 48,331
OTHER DATA (FOR THE PERIOD):
EBITDA(g)............................. 19,849 13,932 60,476 54,920 40,744 52,138 56,956
Capital expenditures.................. 4,268 622 10,418 2,824 3,127 4,670 3,986
Depreciation and amortization......... 4,787 4,805 18,921 18,843 20,527 19,862 19,501
Ratio of earnings to fixed charges(h). 1.53x 1.01x
</TABLE>
- ---------------
(a) Interest expense, net includes, for the three months ended June 30, 1996 and
1995 and the years ended March 31, 1996, 1995, 1994, 1993 and 1992, non-cash
interest expense (including amortization of deferred financing costs and the
interest associated with the Convertible Debentures) of $388,000, $375,000,
$1,561,000, $5,432,000, $9,923,000, $8,789,000 and $8,680,000, respectively.
(b) On December 28, 1995, the Company redeemed $30,000,000 principal amount of
its 13 3/4% Debentures. In connection therewith, the Company recorded an
extraordinary charge of $1,913,000. See Note 7 to the consolidated financial
statements.
(c) The extraordinary charges of $2,477,000 and $992,000 relate to the
accelerated amortization of unamortized financing costs associated with the
prepayment in full of the Company's senior term loan in fiscal year 1993 and
the partial prepayment of such senior term loan in fiscal year 1992.
(d) Represents the 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.
(e) Includes the cumulative effect of accounting change for SFAS No. 106 and the
change in method of accounting for certain overhead costs in inventory.
(f) On September 2, 1994, the Company retired the $65,400,000 principal amount
of its Convertible Debentures held by Loral Corporation in exchange for
$12,760,000 in cash and 22.5% of the Company's capital stock. As a result,
the Company's stockholders' equity was increased by $65,400,000 and long-
term debt was reduced by an equal amount. See Note 9 to the consolidated
financial statements.
(g) EBITDA represents operating income plus depreciation and amortization. While
EBITDA should not be construed as a substitute for operating income or as a
better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with generally accepted accounting
principles, EBITDA is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
EBITDA is included herein because the Company believes that certain
investors find it be a useful tool for measuring the ability to service
debt.
(h) For purposes of this computation, earnings consist of income (loss) before
income taxes plus fixed charges (excluding capitalized interest). Fixed
charges consist of interest on indebtedness (including capitalized interest
and amortization of debt issuance costs) plus that portion of lease rental
expense representative of the interest factor (deemed to be one-third of
lease rental expense). The Company's earnings were insufficient to cover
fixed charges by $1,299,000, $10,173,000, $31,736,000, $21,210,000 and
$14,724,000 for the three months ended June 30, 1995 and the fiscal years
ended March 31, 1995, 1994, 1993 and 1992, respectively. Non-cash charges
included in the ratio of earnings to fixed charges and deficiency of
earnings available to cover fixed charges for the three months ended June
30, 1996 and 1995 and the fiscal years ended March 31, 1996, 1995, 1994,
1993 and 1992 are $5,175,000, $5,180,000, $20,482,000, $24,275,000,
$30,450,000, $28,651,000 and $28,181,000, respectively. Non-cash charges
consist of depreciation, amortization and non-cash interest on the
Convertible Debentures and amortization of deferred financing costs.
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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 approximately
32,000 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 mediumand 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 supplier of wheels
and carbon brakes on the Airbus A-321, the sole supplier of wheels, carbon
brakes and anti-skid systems on the McDonnell Douglas MD-90, the sole supplier
of wheels and brakes for the Canadair Regional Jet, the Saab 2000, and the Lear
60 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
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1995
Sales. Sales for the first three months of fiscal year 1997 totaled $71.5
million reflecting an increase of $9.2 million or 14.8% compared with $62.3
million 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 $6.7
million, primarily on the DC-9, DC-10 and MD-90 programs. General aviation and
military sales were also higher by $1.9 million and $0.6 million, respectively,
on various programs.
Operating Income. Operating income increased 65.0% to $15.1 million or
21.1% of sales for the first three months of fiscal year 1997 compared with $9.1
million 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. Interest expense, net decreased by $0.9 million 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 million
principal amount of the 13 3/4% Debentures on December 28, 1995.
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
14
<PAGE> 17
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 Convertible Debentures on September 2, 1994 and the redemption
of $30 million principal amount of the 13 3/4% Debentures on December 28, 1995.
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 and due to a lower
average principal balance on the senior revolving loan (the "Existing Revolving
Loan") outstanding pursuant to the Existing Revolving Credit Agreement. See
"Description of Certain Indebtedness."
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.
LIQUIDITY AND FINANCIAL RESOURCES
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 Amended and Restated Credit
15
<PAGE> 18
Agreement. The Company's longterm indebtedness decreased from $310 million at
March 31, 1995 to $294 million at March 31, 1996 and $289.7 million at June 30,
1996. This decrease was due to the redemption of $30 million principal amount of
the Company's 13 3/4% Debentures on December 28, 1995. The Company used cash on
hand and borrowings under its credit facilities to redeem the 13 3/4%
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. In May 1996, the Company redeemed $343,000
principal amount of the 13 3/4% Debentures. On August 1, 1996, the Company
redeemed approximately $9.7 million aggregate principal amount of the 13 3/4%
Debentures. The Company used cash on hand and borrowings under the Existing
Revolving Credit Agreement to finance such redemptions. The Company used the net
proceeds from the New Offering, together with borrowings under the Amended and
Restated Credit Agreement, to redeem the remaining $170 million outstanding
principal amount of the 13 3/4% Debentures on September 14, 1996. Upon
completion of the New Offering, the Company recorded an extraordinary charge of
approximately $9.2 million for the write-off of unamortized financing costs and
redemption premiums relating to such redemption.
On September 2, 1994, the Company 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 the Company's capital stock. The cash portion of this transaction was
funded with the proceeds from the sale of capital stock to the Company's
principal stockholders. As a result, the Company's stockholders' equity was
increased by $65.4 million and long-term debt was reduced by an equal amount.
The Company's liquidity needs will arise primarily from debt service on the
indebtedness represented by the Senior Notes, the Senior Subordinated Notes and
the Amended and Restated Credit Agreement, and from the funding of its capital
expenditures and Program Investments. As of June 30, 1996, after giving pro
forma effect to the New Offering, application of the net proceeds therefrom and
borrowings under the Amended and Restated Credit Agreement, the Company would
have had outstanding approximately $310 million of indebtedness, primarily
consisting of $140 million principal amount of the Senior Subordinated Notes,
$100 million principal amount of Senior Notes and $70 million in borrowings
under the Amended and Restated Credit Agreement. See "Risk Factors -- Highly
Leveraged Position."
Principal and interest payments under the Amended and Restated Credit
Agreement and interest payments on the Senior Subordinated Notes and the Senior
Notes will represent significant liquidity requirements for the Company.
Borrowings under the Amended and Restated Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company and
repayable over a six-year period in quarterly installments commencing in June
1997. See "Description of Certain Indebtedness". The Company believes that it
will have adequate resources to meet its cash requirements through funds
generated from operations and borrowings under the Amended and Restated Credit
Agreement.
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. 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 later 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
16
<PAGE> 19
brake production at the current level of business. The Company has made
arrangements for an alternate supplier of carbon in the interim. 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, the
Company does not anticipate that its supply of carbon from Hitco will be
interrupted prior to the first quarter of calendar year 1997. See
"Business -- Legal Proceedings."
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 ("FASB") 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. 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 FASB 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.
17
<PAGE> 20
BUSINESS
GENERAL
K & F, through its wholly owned subsidiary, 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 $233.0
million, or 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, 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 $31.7 million, or 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 refining existing braking systems, developing
new technologies and designing braking systems for new airframes. The Company
has carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
THE AIRCRAFT WHEEL AND BRAKE INDUSTRY
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft
certification process, competition among aircraft wheel and brake suppliers most
often occurs at the time the airframe manufacturer makes its initial
installation decision. Generally, competing suppliers submit proposals in
response to requests for bids from manufacturers. Selections are made by the
manufacturer on the basis of technological superiority, conformity to design
criteria established by the manufacturer and pricing considerations. Typically,
general aviation aircraft manufacturers will select one supplier of wheels and
brakes for a particular aircraft. In the commercial transport market, however,
there will often be "dual sourcing" of wheels and brakes. In such case, an
airframe manufacturer may approve and receive FAA certification to configure a
particular airframe with equipment provided by two or more wheel and brake
manufacturers. Where two suppliers have been certified, the aircraft customer,
such as a major airline, will designate the original equipment to be installed
on the customer's aircraft. Competition among two certified suppliers for that
airline's initial installation decision generally focuses on such factors as the
system's "cost-per-landing," given certain assumptions concerning the frequency
of replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
18
<PAGE> 21
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. Aircraft
Braking Systems' 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 braking
systems produced by Aircraft Braking Systems are either carbon or steel-based.
While steel-based systems typically are sold for less than carbon-based systems,
such systems generally require more frequent replacement because their steel
brake pads tend to wear more quickly. Aircraft Braking Systems' 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 Aircraft
Braking Systems 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 approximately 32,000 commercial transport, general aviation
and military aircraft for which Aircraft Braking Systems is the sole-source
supplier on the DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet
and Saab 340. In addition, the Company supplies spare parts for the MD-80
program on a dual-source wheel and brake program.
Aircraft Braking Systems has been successful in having its wheels and
brakes selected for use on a number of new high-cycle airframe designs. These
aircraft that are just beginning to enter service include the McDonnell Douglas
MD-90, Airbus A-321, A-319, Saab 2000 and Lear 60. 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 DC9 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. McDonnell Douglas has booked
orders for over 130 aircraft. Other customers for the MD-90 include Japan Air
System and Saudi Arabia which recently announced orders for 29 of these
aircraft. It is 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
aircraft. Of the 48 aircraft delivered to date, Aircraft Braking Systems has
provided wheels and brakes for over 40 of these aircraft.
Aircraft Braking Systems' 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 drive by the
19
<PAGE> 22
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 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 Aircraft Braking Systems
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 and
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 half of the domestic military
market. Recent programs awarded to Engineered Fabrics include new production or
replacement parts programs for the U.S. Navy's F-18 C/D and E/F aircraft and
F-15 and F-16 aircraft. During the fiscal year ended March 31, 1996, Engineered
Fabrics was selected by the U.S. Army to equip its new stealth RAH-66 Comanche
helicopter with fuel tanks. Other helicopter programs which have been awarded to
Engineered Fabrics include the McDonnell Douglas MD-600 and Bell 412 platforms.
Engineered Fabrics has also been awarded the Bell/Boeing V-22 Osprey program.
For the fiscal year ended March 31, 1996, approximately $31.7 million, or 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. Engineered Fabrics 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. Engineered Fabrics also competes in the nitriledesigned
aircraft fuel tank market and won a three-year requirements contract in 1996 to
supply nitrile fuel tanks to the U.S. Navy for its F-14 aircraft.
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.
Engineered Fabrics 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.
20
<PAGE> 23
SALES AND CUSTOMERS
The Company sells its products to more than 175 airlines, airframe
manufacturers, governments and distributors within each of the commercial
transport, general aviation and military aircraft markets. Sales to the
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 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-2 (formerly the FS-X), F-4,
F-14, F-15, F-16, F-18, F-117A, A-10, B-1B, B2 and the C-130. Substantially all
of the Company's military products are sold to the Department of Defense,
foreign governments or to airframe manufacturers including the Lockheed Martin
Corporation ("Lockheed Martin"), McDonnell Douglas, Boeing, Sikorsky, Bell, Saab
and AIDC. In March 1996 the Company commenced wheel and brake deliveries to
Lockheed Martin for the upgraded C-130J aircraft. Brake Control Systems
manufactured for the military are used on the F-16, F-117A, B-2, Panavia
Toronado, British Aerospace Hawk, JAS-39 Jaguar and IDF 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, Raytheon Aircraft, Learjet,
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 A/T series of
aircraft, the Lear series 20, 30, 31A, 50 and 60 and the Gulfstream G-I, G-II
and G-III.
The following table is a summary of the principal aircraft platforms
equipped with the Company's Aircraft Braking Systems products:
<TABLE>
<CAPTION>
COMMERCIAL
- --------------------------------
<S> <C>
Airbus: A330/A340
A321
A310/A320
Alenia: ATR-42-300
ATR-42-400/500
Boeing: B707-320 B/C
<CAPTION>
COMMERCIAL
- --------------------------------
<S> <C>
Canadair: Regional Jet
CASA: C-212-200
DeHavilland: DHC-8-400
Dornier: DO228-202
DO228-212
<CAPTION>
COMMERCIAL
- --------------------------------
<S> <C>
Fokker: F-27
F-28
Fokker-50
Fokker-100/70
Lockheed: L-100
L-1011
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
COMMERCIAL
- --------------------------------
<S> <C>
McDonnell DC-3/4/6/8
Douglas: DC-9-
10/15/20/30
DC-9-40/50
DC-10-10/15
DC-10-30/40
MD-11
MD-80
MD-81/82/87
MD-83/88
MD-90 Series
Mitsubishi: YS-11
Saab: SAAB 340A/B
SAAB 2000
</TABLE>
<TABLE>
<CAPTION>
MILITARY
- --------------------------------
<S> <C>
Aerospatiale: SA-360/365
AIDC: IDF
BAE: Jaguar
Hawk
Beech: T-1A
Boeing: E-3A/6A/8A
Canadair: CT-114
CASA: C-101A
Cessna: A-37
A/T-37
DeHavilland: DHC-5
Fairchild: A-10A
Hawker: Siddely Buccaneer
Siddely 1182
Lockheed F-117A
Martin: C-130 Series
C-141 A/B
F-16A/B/C/D
<CAPTION>
MILITARY
- --------------------------------
<S> <C>
McDonnell F-4C/D/E/G
Douglas: A-4 Series
C-9A/B
KC-10A
Northrop F-5E/F
Grumman: B-2
F-14A/A+/D
E-2C Series
OV-1
A-6 Series
Panavia: Tornado
Pilatus: PC-6
Rockwell: T-2
T-33
B-1B
T-39
Saab: J-35
AJ/JA-37
IAS-39
Sikorsky: SH-60
S-70
UH-60
CH-53
Vought: A-7A/B/E
Westland: W30 Lynx
</TABLE>
<TABLE>
<CAPTION>
GENERAL AVIATION
- --------------------------------
<S> <C>
Aerospatiale: SN601
AMD Falcon: 10/100/20/200/50
50EX
<CAPTION>
GENERAL AVIATION
- --------------------------------
<S> <C>
Beech: 90/99/100/200
1900/1900D
Starship
Jet 400/400A/T
Bell: 206/212/230/412
Boeing: Model 324
414/421/441
Canadair: CL600/601/
601-3A/601-3R
CL604
Cessna: Citation I/II
310/401/402
Commander: 690,1121,1123
DeHavilland: DHC-4/6
Dornier: DO-27/28
Fairchild: Metro III
Metro 23
Gulfstream: I/II/IIB/III/IV
1124/1125(Astra)
IAI: Galaxy
Lear: 23/24/25/31/
35/31A/55/
55C/60
Piper: PA31P. T
Sabreliner: 40/60/65/
70/75/80
Swearington: SJ-30-1/-2
</TABLE>
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
22
<PAGE> 25
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 June 30, 1996 and 1995 amounted to approximately $143.1 million
and $146.1 million, respectively. Backlog consists of firm orders for the
Company's products which have not been shipped. Approximately 77% of total
Company backlog at June 30, 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 June 30, 1996, approximately 29% was
directly or indirectly for end use by the Government, substantially all of which
was for use by the Department of Defense. For certain risks associated with
Government contracts, see "-- Government Contracts."
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
23
<PAGE> 26
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 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. 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.
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. Aircraft Braking
Systems and Lockheed Martin have various occupancy and service arrangements 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
24
<PAGE> 27
governmental and utility services which are furnished to Lockheed Martin's and
Aircraft Braking Systems' facilities.
LEGAL PROCEEDINGS
On December 15, 1995, Aircraft Braking Systems commenced an action in the
Court of Common Pleas, Summit County, Ohio against Hitco 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 a change in the terms thereof.
Hitco is presently seeking to have the injunction vacated or modified, and/or a
declaratory judgment issued 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 it 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 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
the Company's 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. The
Company 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.
25
<PAGE> 28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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.
<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**............... 61 Director
Alan H. Washkowitz**............. 56 Director
Donald E. Fogelsanger............ 71 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 (as
defined).
** Designated as director by 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 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, 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. Mr. Kisner's
wife is the niece of Bernard L. Schwartz.
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. Dr.
Paddock's wife is the daughter of Bernard L. Schwartz.
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.
He was a Managing Director of Lehman Brothers Kuhn Loeb,
26
<PAGE> 29
Inc. from 1982 to 1984. Mr. Stern is also a director of Infinity Broadcasting
Corporation, R.P. Scherer Corp., Noel Group Inc., Lear 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 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. 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 the ABS division of Goodyear Aerospace
Corporation ("Goodyear Aerospace"). 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. Kenneth M. Schwartz is the nephew of
Bernard L. Schwartz.
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 AND ENGINEERED FABRICS
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
<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>
27
<PAGE> 30
Engineered Fabrics
<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 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'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,
including one year as the Controller of the wheel and brake division. Mr.
Johnson joined Goodyear Aerospace in 1966. He became Manager of Accounting in
1979 for the Centrifuge Equipment Division of Goodyear Aerospace 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 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 the Company 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, Loral Corporation and the Company
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.
Mr. McCann has been Vice President of Operations at Engineered Fabrics
since June 1993. Prior to that, he was Manager of Production Support from April
1990 to June 1993. He joined Engineered Fabrics 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.
28
<PAGE> 31
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 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.
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>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
--------------------------------- OPTIONS LTIP
FISCAL SALARY BONUS GRANTED PAYOUTS ALL OTHER
YEAR ($) ($) ($) ($) COMPENSATION(A)
------ --------- -------- ------- ------- ----------------
<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 of the Company 1994 1,859,800(b) -- -- -- --
Kenneth M. Schwartz................. 1996 321,815(b) 115,000 -- 13,333 4,196
Executive Vice President of the 1995 283,600(b) 105,000 -- -- 3,565
Company 1994 176,418 37,500 -- -- 3,404
Donald E. Fogelsanger............... 1996 196,000 125,000 -- 13,333 22,829
President of the Company 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 $100,000 of the aggregate advisory fee
be paid to Mr. K. Schwartz, which is included in his fiscal years 1996 and
1995 salaries.
(c) Compensation for fiscal year 1994 for Mr. Welsch reflects less than a full
year, as his employment date was September 8, 1993.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options by the Company, during fiscal year
1996, to the named executive officers.
29
<PAGE> 32
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)(1)
SHARES -------------- -------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz................... 0 0 0 0/0
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 March 13, 1989.
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 "Plan"), a defined
benefit pension plan. The Company has received a favorable determination letter
from the Internal Revenue Service that the Plan is a qualified plan under the
Internal Revenue Code. The terms of the 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 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 the sum
of (i) 2.4% times years of continuous service up to 10; (ii) 1.8% times
additional years of such service up to 20; (iii) 1.2% times additional years of
such service up to 30; and (iv) 0.6% times all additional such service above 30
years.
Effective January 1, 1990, the Plan was amended for eligible employees of
the Company and Aircraft Braking Systems to provide an annual benefit equal to
(i) the accrued benefit described above as of December 31, 1989; (ii) 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; (iii) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (a) 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
30
<PAGE> 33
annual earnings above the Social Security Wage Base, and (b) 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 (iii) 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 (i) completed at least 30 years of continuous
service, (ii) attained age 55 and completed at least 10 years of continuous
service or (iii) 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.
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 the Company and Aircraft Braking Systems and the supplemental plan, are
$200,000 for Mr. 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 (i) employment will be continued until
normal retirement at age 65; (ii) 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 (iii) 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
assumptions (i), (ii) and (iii) 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.
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<PAGE> 34
OWNERSHIP OF CAPITAL STOCK
The following table sets forth the ownership of the capital stock of the
Company as of June 1, 1996.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF NUMBER OF PERCENTAGE
CLASS A CLASS B SHARES OF OWNERSHIP OF
COMMON COMMON PREFERRED CAPITAL
STOCK STOCK STOCK(A) STOCK(B)
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz........................ 553,343(c) -- -- 27.12%
*Lehman Brothers Merchant Bank Portfolio
Partnership L.P.(d)...................... -- -- 478,387 23.45
*Lehman Brothers Offshore Investment
Partnership L.P.(e)...................... -- -- 129,745 6.36
*Lehman Brothers Offshore Investment
Partnership -- Japan L.P.(e)............. -- -- 49,348 2.42
*Lehman Brothers Capital Partners II,
L.P.(f).................................. -- -- 325,156 15.94
CBC Capital Partners, Inc.................. 1 -- 44,999 2.21
Loral Space & Communications Ltd........... -- 458,994 -- 22.50
------- ------- --------- ------
Total............................ 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) LB I 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.
The Stockholders Agreement provides that the Company's Board of Directors
be comprised initially of seven 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
32
<PAGE> 35
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 nine, 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 March 13, 1989 may not be amended
without the consent of the Lehman Investors designated director for so long as
the Lehman Investors or their 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.
33
<PAGE> 36
DESCRIPTION OF SENIOR NOTES
The 11 7/8% Senior Secured Notes Due 2003 (the "Senior Notes") were issued
pursuant to an Indenture dated as of June 1, 1992 (the "Senior Note Indenture")
between the Company and The Bank of New York, as trustee (the "Senior Note
Trustee"). The terms of the Senior Notes include those stated in the Senior Note
Indenture and those made part of the Senior Note Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date
of the Senior Note Indenture. The Senior Notes are subject to all such terms,
and holders of the Senior Notes are referred to the Senior Note Indenture and
the Trust Indenture Act for a statement thereof. Principal of, premium, if any,
and interest on the Senior Notes are payable, and the Senior Notes will be
exchangeable and transferable, at the office or agency of the Company in The
City of New York (which will be the corporate trust office of the Senior Note
Trustee at 101 Barclay Street, New York, New York 10286); provided, however,
that payment of interest may be made at the option of the Company by check
mailed to the Person entitled thereto as shown on the register for the Senior
Notes. No service charge will be made for any registration of transfer or
exchange of Senior Notes, except for any tax or other governmental charge that
may be imposed in connection therewith. The Senior Note Indenture and the Senior
Notes are governed by and construed in accordance with the laws of the State of
New York.
The following is a summary of the material terms and provisions of the
Senior Notes. The summary does not purport to be a complete description of the
Senior Notes and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the Senior Note Indenture (including the definitions
contained therein). A copy of the proposed form of Senior Note Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
GENERAL
The Senior Notes are direct obligations of the Company, secured in the
manner described below, limited to $100,000,000 in aggregate principal amount.
The Senior Notes were issued in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. The Senior Notes will
mature on December 1, 2003, unless redeemed before such date. The Senior Notes
bear interest at the rate shown on the cover page of this Prospectus from the
date of their issuance or from the most recent Interest Payment Date to which
interest has been paid or duly provided for. Interest is payable semi-annually
(to holders of record at the close of business on the May 15 and November 15
immediately preceding the Interest Payment Date) on June 1 and December 1.
REDEMPTION
Optional Redemption. The Senior Notes may not be redeemed prior to June 1,
1997. On or after June 1, 1997 the Company at its option may, at any time,
redeem all, or from time to time any part of, the Senior Notes at the following
prices (expressed as percentages of the outstanding principal amount), together
with accrued interest to the date fixed for redemption. If redeemed during the
12 month period commencing:
<TABLE>
<CAPTION>
JUNE REDEMPTION PRICES
----------------------------------------------------------- -----------------
<S> <C>
1997....................................................... 105.28%
1998....................................................... 103.96%
1999....................................................... 102.64%
2000....................................................... 101.32%
2001 and thereafter........................................ 100.00%
</TABLE>
Selection and Notice of Redemption. Selection of Senior Notes for any
redemption in part will be made by the Senior Note Trustee in such manner as in
its sole discretion it shall deem fair and appropriate. Notice of redemption to
the holders of Senior Notes to be redeemed as a whole or in part shall be given
by mailing notice of such redemption by first-class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to such holders of Senior Notes at their last addresses as they shall appear
34
<PAGE> 37
upon the registry books. On and after the redemption date, interest ceases to
accrue on Senior Notes or portions thereof called for redemption.
Sinking Fund. The Senior Notes are not subject to a sinking fund.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Senior Note Indenture. Reference is made to the Senior Note Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquisition" means the purchase by the Company from Loral Corporation of
substantially all of the assets and the assumption of certain liabilities of the
Principal Subsidiary and EFC.
"Affiliate" means, when used with reference to a specified Person, any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified. For the purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise.
"Agent" means the agent under the Credit Agreement.
"Asset Acquisition" means (i) an investment by the Company or any of its
Subsidiaries in any other Person pursuant to which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with the
Company or any of its Subsidiaries or (ii) the acquisition by the Company or any
of its Subsidiaries of the assets of any Person which constitutes substantially
all of an operating unit or business of such Person.
"Asset Sale" means the sale or other disposition (by merger or otherwise)
by the Company or any of its Subsidiaries (other than to Wholly owned
Subsidiaries) of (i) any of the Capital Stock of any of the Company's
Subsidiaries (other than the Principal Subsidiary) or (ii) substantially all of
the assets which constitute substantially all of an operating unit or business
of the Company or any of its Subsidiaries (other than the Principal Subsidiary).
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such debt security multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bank" or "Banks" means any financial institution(s) extending credit to
the Company pursuant to the Credit Agreement.
"BLS" means Mr. Bernard L. Schwartz.
"BLS Group" means (i) BLS; (ii) BLS's spouse and descendants (collectively,
"relatives"); (iii) a trust of which there are no beneficiaries other than BLS
and the relatives of BLS; (iv) a partnership of which there are no other
partners other than BLS or the relatives of BLS; (v) a corporation of which
there are no stockholders other than BLS or relatives of BLS; and (vi) any other
Affiliate of BLS.
"Business Day" means each day other than Saturdays, Sundays and days when
commercial banks are authorized to be closed for business in New York, New York.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued after the date of the
Senior Note Indenture, including, without limitation, all Common Stock and
Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) the discounted present value of the
rental obligations of such Person as lessee under which, in conformity with
generally accepted accounting principles, is required to be capitalized on the
balance sheet of that Person.
35
<PAGE> 38
"Change of Control" means an event or series of events by which (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
other than a Permitted Investor is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all shares that any such person has the
right to acquire without condition, other than the passage of time, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total power of all classes of stock entitled
to vote for directors of the Company ("Voting Stock") or (ii) the Company
consolidates with or merges into another corporation or conveys, transfers or
leases all or substantially all of its assets to any person, or any corporation
consolidates with or merges into the Company, in any event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction between the Company and a Wholly owned Subsidiary of the Company or
between the Company and any of the Permitted Investors or any transaction in
which the Permitted Investors own, in the aggregate, directly or indirectly, at
least 50% of the Voting Stock of the resulting, surviving or transferee
corporation and have the right to designate a majority of the board of directors
thereof or (iv) the shareholders of the Company shall approve any plan or
proposal for the liquidation or dissolution of the Company.
"Collateral" means all of the shares of capital stock of the Principal
Subsidiary and EFC, which shares have been pledged to the Collateral Trustee
pursuant to the Pledge Agreement and not released pursuant to the terms hereof
and thereof.
"Collateral Trustee" has the meaning set forth in the Pledge Agreement.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations and other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Senior Notes, and includes, without limitation, all
series and classes of such common stock.
"Consolidated Capital Expenditures" means, for any period, the aggregate of
all expenditures Incurred (whether paid in cash or accrued as liabilities), by
the Company and its Consolidated Subsidiaries during such period that, in
conformity with generally accepted accounting principles, are included in the
property, plant or equipment or similar fixed asset account reflected in the
consolidated balance sheet of the Company and its Consolidated Subsidiaries.
"Consolidated Interest Coverage Ratio" means the ratio, on a pro forma
basis, of (i) the aggregate amount of Operating Cash Flow of any Person for the
Reference Period immediately prior to the date of the transaction giving rise to
the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction
Date") to (ii) the aggregate Consolidated Interest Expense of such Person during
such Reference Period; provided that for the purposes of such computation, in
calculating Operating Cash Flow and Consolidated Interest Expense, (1) the
Incurrence of the Debt giving rise to the need to calculate the Consolidated
Interest Coverage Ratio and the application of the proceeds therefrom shall be
assumed to have occurred on the first day of the Reference Period, (2) Asset
Sales and Asset Acquisitions which occur during the Reference Period or
subsequent to the Reference Period and prior to the Transaction Date (but
including any Asset Acquisition occurring in connection with the Incurrence of
Debt pursuant to (1) above) shall be assumed to have occurred on the first day
of the Reference Period, (3) the Incurrence of any Debt during the Reference
Period or subsequent to the Reference Period and prior to the Transaction Date
and the application of the proceeds therefrom shall be assumed to have occurred
on the first day of such Reference Period, (4) Consolidated Interest Expense
attributable to any Debt (whether existing or being Incurred) computed on a pro
forma basis and bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period unless such Person or any of its Subsidiaries is a party to an
Interest Rate Agreement which has the effect of reducing the interest rate below
the rate on the date of computation, in which case such lower rate shall be used
and (5) there shall be excluded from Consolidated Interest Expense any
Consolidated Interest Expense related to any Debt which was outstanding during
and subsequent to the Reference Period but is not outstanding on the Transaction
Date ("Repaid Debt"), unless the Company may again Incur such Repaid Debt in an
amount equal to the weighted average amount of
36
<PAGE> 39
Repaid Debt outstanding during such Reference Period (the "Weighted Average
Amount") pursuant to clauses (i), (iv), (xi)(D), (xii) and (xiii) set forth
under the exceptions to the "Limitation on Debt" covenant, in which case such
Consolidated Interest Expense shall not be excluded (it being understood that if
the Company can again so Incur an amount of Repaid Debt which is less than the
Weighted Average Amount, then a portion of such Consolidated Interest Expense
shall be excluded equivalent to a fraction of which the numerator shall be the
difference between the Weighted Average Amount and the amount of such Repaid
Debt which the Company can again so Incur and of which the denominator shall be
the Weighted Average Amount). For the purposes of making the computation
referred to above, Asset Sales and Asset Acquisitions which have been made by
any Person which has become a Subsidiary of the Company or been merged with or
into the Company or any Subsidiary of the Company during the Reference Period or
subsequent to the Reference Period and prior to the Transaction Date shall be
calculated on a pro forma basis (including all of the calculations referred to
in numbers (1) through (5) above) assuming such Asset Sales or Asset
Acquisitions occurred on the first day of the Reference Period.
"Consolidated Interest Expense" of any Person for any period means interest
expense (including amortization of original issue discount and non-cash interest
payments or accruals and the interest portion of Capitalized Leases) of such
Person and its Consolidated Subsidiaries, all as determined in accordance with
generally accepted accounting principles.
"Consolidated Subsidiary" of any Person means a Subsidiary which for
financial reporting purposes is or, in accordance with generally accepted
accounting principles, should be, accounted for by such Person as a consolidated
subsidiary.
"Credit Agreement" means the Amended and Restated Credit Agreement, dated
as of August 14, 1996, by and among Aircraft Braking Systems, Engineered
Fabrics, Lehman Commercial Paper Inc., as documentation agent, The Chase
Manhattan Bank, as administrative agent, and the lenders named therein,
providing for up to $110 million of borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time with the same or different lenders.
"Cumulative Operating Cash Flow" means, for the period beginning March 31,
1992 through and including the end of the last fiscal quarter (taken as one
accounting period) preceding the date of any proposed Restricted Payment,
Operating Cash Flow for the Company and its Consolidated Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP.
"Cumulative Total Interest Expense" means, for the period beginning March
31, 1992 through and including the end of the last fiscal quarter (taken as one
accounting period) preceding the date of any proposed Restricted Payment,
Consolidated Interest Expense for the Company and its Consolidated Subsidiaries
for such period determined on a consolidated basis in accordance with GAAP.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company against fluctuations in currency values.
"Debt" of any Person means, at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto), (iv) all
obligations of such Person to pay the deferred purchase price of property or
services, except Trade Payables, (v) all obligations of such Person as lessee
under Capitalized Leases, (vi) all Debt of others secured by a Lien on any asset
of such Person, whether or not such Debt is assumed by such Person, (vii) all
Debt of others Guaranteed by such Person and (viii) to the extent not otherwise
included, obligations under Currency Agreements and Interest Rate Agreements.
"EFC" means Engineered Fabrics Corporation, a Delaware corporation or any
successors.
"Excluded Entity" means (i) any Joint Venture or (ii) any Subsidiary that
is subject to consensual restrictions, direct or indirect (other than pursuant
to the Credit Agreement), on the declaration or payment
37
<PAGE> 40
of dividends or similar distributions by that Subsidiary to the Company or any
other Consolidated Subsidiary of the Company.
"generally accepted accounting principles" or "GAAP" means generally
accepted accounting principles in the United States as in effect as of the date
of the Senior Note Indenture, including, without limitation, those set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession; provided that all ratios and computations based on
generally accepted accounting principles contained in the Senior Note Indenture
shall be computed in accordance with generally accepted accounting principles
except that calculations made for the purpose of determining compliance with the
terms of the covenants set forth therein and other provisions of the Senior Note
Indenture shall be made, except as otherwise provided therein, without giving
effect to adjustments in component amounts required or permitted by Accounting
Principles Board Opinions Nos. 16 and 17 as a result of the Acquisition and for
the amortization of any expenses Incurred in connection with the Acquisition or
the financing with respect thereto.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership arrangements,
by agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for the purpose of assuring in any other manner the obligee of such
Debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Incurrence" means the Incurrence, creation, assumption or in any other
manner becoming liable with respect to, or the extension of the maturity of or
becoming responsible for the payment of, any Debt. "Incur" shall have a
comparable meaning.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge arrangement, to or under which the Company or
any of its Subsidiaries is a party or a beneficiary on the date hereof or
becomes a party or a beneficiary hereafter.
"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided
that no Subsidiary of any Person shall be deemed a Joint Venture of such Person.
"Lehman Investor" means (i) LBH, (ii) any Affiliate of LBH and (iii) any
merchant banking limited partnerships affiliated with LBH or any Affiliate of
LBH.
"Lien" means, with respect to any Property, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
Property. For the purposes of this Agreement, the Company shall be deemed to own
subject to a Lien any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, Capital
Lease or other title retention agreement relating to such Property.
"Material Subsidiary" of any Person means, as of any date, any Subsidiary
of such Person (a) the value of whose assets, as such assets would appear on a
consolidated balance sheet of such Subsidiary and its Consolidated Subsidiaries
prepared as of the end of the fiscal quarter next preceding such determination
in accordance with generally accepted accounting principles, is at least 10% of
the value of the assets of such Person and its Consolidated Subsidiaries,
determined as aforesaid, or (b) whose Operating Cash Flow for the most recently
completed fiscal quarter next preceding such date was at least 10% of the
Operating Cash Flow of such Person for such fiscal quarter.
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<PAGE> 41
"Net Cash Proceeds" from a sale, transfer or other disposition of
properties or assets means cash payments received (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received (including
any cash received upon sale or disposition of such note or receivable),
excluding any other consideration received in the form of assumption by the
acquiring Person of Debt or other obligations relating to such properties or
assets or received in any other non-cash form) therefrom, in each case, net of
all legal, title and recording tax expenses, commissions and other fees and
expenses Incurred, and all federal, state, provincial, foreign and local taxes
required to be accrued as a liability under generally accepted accounting
principles, as a consequence of such sale, transfer or other disposition
(including any taxes attributable to the assets sold arising pursuant to any
election or action taken for income tax purposes in connection with or relating
to the Acquisition), and in each case net of appropriate amounts to be provided
by the Company as a reserve, in accordance with generally accepted accounting
principles, against any liabilities associated with such assets and retained by
the Company or any Subsidiary after such sale or other disposition thereof,
including, without limitation, pension and other post-employment benefit
liabilities and liabilities related to environmental matters and the after-tax-
cost of any indemnification payments (fixed and contingent) attributable to
seller's indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such sale or disposition and net of all payments
made on any Debt which is secured by such assets, in accordance with the terms
of any Lien upon or with respect to such assets or which must by its terms, or
in order to obtain a necessary consent to such asset disposition, or by
applicable law be repaid out of the proceeds from such sale, transfer or other
disposition, and net of all distributions and other payments made to minority
interest holders in Subsidiaries or Joint Ventures as a result of such sale,
transfer or other disposition.
"Net Income" of any Person for any period means the net income (loss) of
such Person and its Consolidated Subsidiaries for such period, determined in
accordance with generally accepted accounting principles, except that
extraordinary, unusual and non-recurring gains and losses as determined in
accordance with generally accepted accounting principles shall be excluded.
"Net Worth" of any Person means as of any date the aggregate of capital,
surplus and retained earnings of such person and its Consolidated Subsidiaries
as would be shown on a consolidated balance sheet of such Person and its
Consolidated Subsidiaries prepared as of such date in accordance with generally
accepted accounting principles plus, without duplication, all Capital Stock
(other than Redeemable Stock) not otherwise included in Net Worth in accordance
with generally accepted accounting principles.
"Operating Cash Flow" of any Person means, for any period, the sum of (a)
Net Income of such Person and its Consolidated Subsidiaries for such period,
plus (b) provision for taxes based on income or profits included in computing
Net Income of such Person for such period, plus (c) Consolidated Interest
Expense of such Person for such period, plus (d) other non-cash charges deducted
from consolidated revenues in determining Net Income of such Person for such
period, in each case, determined on a consolidated basis in accordance with
GAAP.
"Permitted Investor" means any Person that is a member of the BLS Group or
a Lehman Investor.
"Permitted Payments" means with respect to the Company or any of its
Subsidiaries (i) any dividend on shares of Capital Stock payable solely in
shares of Capital Stock (other than Redeemable Stock) or in options, warrants or
other rights to purchase Capital Stock (other than Redeemable Stock); (ii) any
dividend or other distribution with respect to Capital Stock payable to the
Company by any of its Subsidiaries or by a Subsidiary to another Subsidiary;
(iii) the repurchase or other acquisition or retirement for value of any shares
of the Company's Capital Stock with additional shares of, or out of the proceeds
of a substantially contemporaneous issuance of, Capital Stock (other than
Redeemable Stock); (iv) any defeasance, redemption, repurchase or other
acquisition for value of any Debt which is subordinate in right of payment to
the Senior Notes with the proceeds from the issuance of (x) Debt which is
subordinate in right of payment to the Senior Notes at least to the extent and
in the manner as the Subordinated Debentures are subordinate to the Senior
Obligations on the date hereof; provided that such new subordinated Debt has a
remaining Average Life equal to or greater than the remaining Average Life of
the Senior Notes and that the agreements or investments creating such new
subordinated Debt do not provide for the redemption or retirement by way of a
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sinking fund, mandatory redemption or otherwise (including defeasance or at the
option of the holder) of more than 25% of the principal amount of such new
subordinated Debt prior to the maturity of the Senior Notes and that the
proceeds of such new subordinated Debt are utilized for such purpose within 90
days of issuance or (y) Capital Stock (other than Redeemable Stock); (v)
investments, loans or advances to Excluded Entities in an aggregate amount at
any time not to exceed $20 million; and (vi) the repurchase of shares of, or
options to purchase shares of, the Company's Common Stock held by employees of
the Company (other than any member of the BLS Group) or any of its subsidiaries
pursuant to the forms of agreements under which such employees purchase, or are
granted the option to purchase, shares of the Company's Common Stock in an
aggregate amount not to exceed $2 million in any fiscal year; provided that the
amount available in any given fiscal year shall be increased by the excess, if
any, of (A) $2 million over (B) the amount used pursuant to this clause (vi) in
the immediately preceding fiscal year.
"Pledge Agreement" means the pledge agreement dated as of June 10, 1992
between the Company and The Bank of New York, as Collateral Trustee, as such
Pledge Agreement shall be amended or supplemented or supplemented from time to
time.
"Principal Subsidiary" means Aircraft Braking Systems Corporation, a
Delaware corporation or any successors.
"Redeemable Stock" means, with respect to any Person, any class or series
of Capital Stock which is redeemable at the option of the holder or is subject
to mandatory redemption prior to December 1, 2003.
"Reference Period" means the four fiscal quarters for which financial
information is available preceding the date of a transaction giving rise to the
need to make a financial calculation.
"Restricted Payment" means with respect to any Person (i) any dividend or
other distribution on any shares of such Person's Capital Stock, (ii) any
payment on account of the purchase, redemption, retirement or other acquisition
of (a) any shares of such Person's Capital Stock or (b) any option, warrant or
other right to acquire shares of such Person's Capital Stock, or (iii) any
defeasance, redemption, repurchase or other acquisition or retirement for value
prior to scheduled maturity of (A) any Debt (other than (x) Debt Incurred under
the Credit Agreement or the Senior Notes or (y) any required payment by way of a
sinking fund or mandatory repurchase in respect of the Subordinated Debentures)
ranked pari passu or subordinate in right of payment to the Senior Notes or (iv)
any investment, loan or advance to any Excluded Entity. Notwithstanding the
foregoing, "Restricted Payment" shall not include any Permitted Payment.
"Senior Obligations" means the Senior Notes and debt Incurred under the
Credit Agreement, collectively.
"Subordinated Debentures" means the 13 3/4% Senior Subordinated Debentures
Due 2001 of the Company.
"Subordinated Debenture Indenture" means the Indenture dated as of August
1, 1989 between the Company and The Connecticut National Bank, as Trustee.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of the Capital Stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person.
"Subsidiary Stock Sale" means a sale, transfer or other disposition of any
Capital Stock of a Subsidiary (including any new issuance of such Capital Stock
by such Subsidiary) other than the Principal Subsidiary.
"Wholly owned Subsidiary" means, at any time, a Subsidiary all of the
Capital Stock of which (except directors' qualifying shares) are at the time
owned directly or indirectly by the Company.
RANKING
The Senior Notes rank senior in right of collateral to all unsecured
indebtedness of the Company and senior in right of collateral and payment to the
New Notes. The Senior Notes are effectively subordinated to
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the Amended and Restated Credit Agreement and to the claims of other creditors
of the Principal Subsidiary and EFC.
As discussed herein, the Company is principally a holding company for the
Principal Subsidiary and EFC with limited operations of its own and limited
assets. Accordingly, the Company is dependent upon the distribution of amounts
from the Principal Subsidiary and EFC, whether in the forms of dividends,
advances or payments on account of intercompany obligations, to service its debt
obligations. See "Risk Factors -- Holding Company Structure."
COLLATERAL AND SECURITY
Pursuant to the Pledge Agreement, the Company has assigned and pledged to
the Collateral Trustee for the benefit of the holders of the Senior Notes a
security interest in all of the capital stock of the Principal Subsidiary and
EFC to secure performance of the Company's obligations under the Senior Note
Indenture and the Senior Notes.
If the Senior Notes become due and payable prior to maturity or are not
paid in full at the maturity, the Senior Note Trustee shall promptly notify the
Collateral Trustee. The Collateral Trustee will thereupon foreclose upon the
Collateral in accordance with instructions received from holders of a majority
in principal amount of the Senior Notes, or in the absence of such instructions,
in such manner as the Collateral Trustee deems appropriate, in each case as
provided in the Pledge Agreement. The proceeds received from the sale of any
Collateral that is the subject of a foreclosure shall be applied first to pay
the expenses of such foreclosure and amounts then payable to the Senior Note
Trustee and the Collateral Trustee and thereafter to pay the principal of and
interest on the Senior Notes. Notwithstanding the above, the Company shall at
all times have the right to vote and receive dividends and distributions on such
Collateral unless and until the Senior Note Trustee shall foreclose upon such
Collateral.
The Collateral was pledged pursuant to the Pledge Agreement between the
Company and the Collateral Trustee. Collateral may be sold or disposed of by the
Company, the Principal Subsidiary or EFC, free and clear of the liens referred
to above in the following circumstances: (i) the sale or other disposition of
the Collateral in accordance with the covenant described above under "Certain
Covenants -- Restrictions on Disposition of Assets of the Company"; and (ii) the
release of additional Collateral in accordance with the terms of the Pledge
Agreement. See "Risk Factors -- Holding Company Structure."
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the
Collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company or the Principal Subsidiary or
EFC prior to the Collateral Agent having repossessed and disposed of the
Collateral. Under Bankruptcy Law, secured creditors are prohibited from
repossessing their security from a debtor in a bankruptcy case, or from
disposing of security repossessed from such debtor without bankruptcy court
approval. Moreover, Bankruptcy Law permits the debtor to continue to retain and
to use collateral even though the debtor is in default under the applicable debt
instruments; provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the Collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the Senior Notes could be delayed following commencement of a
bankruptcy case, whether or when the Collateral Agent could repossess or dispose
of the Collateral or whether or to what extent holders of the Senior Notes would
be compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection."
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CERTAIN COVENANTS
The Senior Note Indenture contains, among others, the following covenants.
Limitation on Debt. The Company shall not, and shall not permit any of its
Subsidiaries to, Incur any Debt if, after giving effect thereto, (i) an Event of
Default or an event that through the passage of time or the giving of notice or
both, would become an Event of Default, shall have occurred and be continuing or
(ii) the Consolidated Interest Coverage Ratio of the Company would be less than
1.70 to 1.
Notwithstanding the foregoing, the Company and its Subsidiaries may Incur
each and all of the following: (i) Debt under or in respect of the Credit
Agreement in an aggregate principal amount not to exceed $110 million; (ii) Debt
evidenced by the Senior Notes; (iii) (A) Debt of the Company to any of its
Wholly owned Subsidiaries; provided that such Indebtedness is subordinated to
the Senior Obligations in a manner no less favorable to the holders of Senior
Obligations than the manner in which the Subordinated Debentures are
subordinated to the Senior Obligations, or (B) Debt of a Wholly owned Subsidiary
to the Company or to a Wholly owned Subsidiary, except that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly owned
Subsidiary ceasing to be a Wholly owned Subsidiary or any transfer of such Debt
by any Wholly owned Subsidiary will, in each case, be deemed an Incurrence of
Debt by the Company or any such Wholly owned Subsidiary; (iv) Debt under
Currency Agreements and Interest Rate Agreements; provided that in the case of
Currency Agreements which relate to Debt (other than Debt Incurred under the
Credit Agreement), such Currency Agreements do not increase the Debt of the
Company or any of its Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder; (v) Debt the proceeds of which
are applied to redeem the Subordinated Debentures or Debt Incurred pursuant to
this clause (v); provided that (A) such Indebtedness is subordinated to Senior
Obligations at least to the extent and in the manner that the Subordinated
Debentures are subordinate to the Senior Obligations on the date hereof, (B) has
a remaining Average Life equal to or greater than the remaining Average Life of
the Senior Notes and (C) the agreements or instruments creating such new
subordinated Debt do not provide for the redemption or retirement by way of a
sinking fund, mandatory redemption or otherwise (including defeasance or at the
option of the holder) of more than 25% of the principal amount of such new
subordinated Debt prior to the maturity of the Senior Notes and that the
proceeds of such new subordinated Debt are utilized for such purpose within 90
days of issuance; (vi) Debt, the proceeds of which are applied to redeem the
Senior Notes; provided that (A) such indebtedness has a remaining Average Life
equal to or greater than the remaining Average Life of the Senior Notes and (B)
the agreements or instruments creating such new Debt do not provide for the
redemption or retirement by way of a sinking fund, mandatory redemption or
otherwise (including defeasance or at the option of the holder) of more than 25%
of the principal amount of such new Subordinated Debt prior to the maturity of
the Senior Notes and that the proceeds of such new Debt are utilized for such
purpose within 90 days of issuance; (vii) Debt the proceeds of which are applied
to repay Debt Incurred under the Credit Agreement; (viii) Debt under Guarantees
in respect of obligations of Excluded Entities in an aggregate principal amount
not to exceed $20 million at any one time; (ix) (A) Debt Incurred to finance the
purchase or construction of property, plant or equipment which will be treated
as Consolidated Capital Expenditures of the Company so long as such Debt is
secured by a Lien on the property, plant or equipment so purchased or
constructed and such Debt does not exceed the value of such property, plant or
equipment so purchased or constructed and such Lien shall not extend to or cover
other assets of the Company or any of its Subsidiaries other than the property,
plant or equipment so purchased or constructed and the real property, if any, on
which the property so constructed or so purchased, is situated and the
accessions, attachments, replacements and improvements thereto or (B) Debt
Incurred in connection with any lease financing transaction in conjunction with
the acquisition of new property; provided that such lease financing transaction
is consummated within 60 days of such acquisition (whether such lease will be
treated as an operating or capital lease in accordance with generally accepted
accounting principles) and the aggregate of the Debt Incurred pursuant to
clauses (A) and (B) does not exceed $15 million during any fiscal year (such
amount is referred to as the "Maximum Amount"); provided that the Maximum Amount
for each year shall be increased by the excess, if any, of (a) $30 million over
(b) Consolidated Capital Expenditures for the immediately preceding two years;
(x) obligations Incurred in the ordinary course of business under (A) trade
letters of credit which are to be
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repaid in full not more than one year after the date on which such Debt is
originally Incurred to finance the purchase of goods by the Company or a
Subsidiary of the Company; (B) standby letters of credit issued for the purpose
of supporting (1) workers' compensation liabilities of the Company or any of its
Subsidiaries as required by law, (2) obligations with respect to leases of the
Company or any of its Subsidiaries, (3) performance, payment, deposit or surety
obligations of the Company or any of its Subsidiaries or (4) environmental
liabilities of the Company or any of its Subsidiaries as required by law, not
exceeding an aggregate amount of $15 million at any one time outstanding in
addition to any amounts required by law; (C) performance bonds and surety bonds,
and refinancings thereof; and (D) Guarantees of Debt Incurred in the ordinary
course of business of suppliers, licensees, franchisees, or customers in an
aggregate amount not to exceed $5 million; (xi) Debt to repurchase shares, or
cancel options to purchase shares, of the Company's Common Stock held by
employees of the Company (other than any member of the BLS Group) or any of its
Subsidiaries pursuant to the forms of agreements under which such employees
purchase shares of the Company's Common Stock; and (xii) Debt (other than Debt
permitted under clauses (i) through (xi) above); provided that the aggregate
principal amount of such Debt shall not exceed $25 million at any time
outstanding, including any extension, renewal or replacement thereof.
For the purpose of determining compliance, (A) in the event that an item of
Debt meets the criteria of more than one of the types of Debt described in the
above clauses, the Company, in its sole discretion, shall classify such item of
Debt and only be required to include the amount and type of such Debt in one of
such clauses, and (B) the amount of Debt issued at a price which is less than
the principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in accordance with generally accepted accounting
principles.
Limitation on Restricted Payments. On and after the date of the Senior
Note Indenture, the Company will not, and will not permit any Subsidiary to,
make any Restricted Payment, if, after giving effect thereto:
(a) an Event of Default, or an event that through the passage of time
or the giving of notice, or both, would become an Event of Default, shall
have occurred and be continuing; or
(b) the aggregate amount of all Restricted Payments (together with any
amounts paid pursuant to clause (vi) of the definition of Permitted
Payments) made by the Company and its Subsidiaries (the amount expended or
distributed for such purposes, if other than in cash, to be valued at its
fair market value as determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a resolution of
the Board of Directors), from and after March 31, 1992 shall exceed the sum
(without duplication) of: (i) an amount equal to the difference (but not
less than zero) between (A) Cumulative Operating Cash Flow and (B) the
product of 1.3 times Cumulative Total Interest Expense; and (ii) the
aggregate net proceeds, including the fair market value of property other
than cash (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the
Board of Directors), received by the Company from the issuance or sale
(other than to a Subsidiary) of its Capital Stock after March 31, 1992
(excluding Redeemable Stock but including Capital Stock other than
Redeemable Stock issued upon conversion of, or exchange for, Redeemable
Stock or securities other than its Capital Stock) and warrants and rights
to purchase its Capital Stock (other than Redeemable Stock), but excluding
the net proceeds from the issuance, sale, exchange, conversion or other
disposition of (x) its Capital Stock convertible (whether at the option of
the Company or the Holder thereof or upon the happening of any event) into
any security other than its Capital Stock; (y) its Capital Stock which may
be mandatorily redeemed (whether at the option of the Company or the Holder
thereof or upon the happening of any event) earlier than payment in full of
the Senior Notes; and (z) its Redeemable Stock; and (iii) $15 million;
provided, that any Restricted Payment described in clauses (i), (ii) and
(iii)(B) of the definition of Restricted Payment provided under "Certain
Definitions" made with respect to any Capital Stock or subordinated Debt
outstanding on the date of the Senior Note Indenture which is otherwise
permissible under clause (b) of the Restricted Payment covenant above,
shall be allowed under such covenant only if in addition to satisfying
clause (b) of such covenant, the Company could Incur $1.00 of Debt pursuant
to the first paragraph of the "Limitation on Debt" covenant after giving
effect to such Restricted Payment on a pro forma basis. The foregoing
clause (b) shall not prevent the payment of any dividend within 60 days
after the date of its
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declaration if such dividend could have been made on the date of its
declaration without violation of the provisions stated herein.
Notwithstanding clause (b)(ii), (x) the aggregate net proceeds received by
the Company from the issuance of its Capital Stock upon the conversion of,
or exchange for, securities evidencing Debt of the Company shall be
calculated on the assumption that the gross proceeds from such issuance are
equal to the aggregate principal amount of the Debt evidenced by such
securities converted or exchanged, (y) the aggregate net proceeds received
by the Company upon the conversion or exchange of other securities of the
Company shall be equal to the aggregate net proceeds of the original sale
of the securities so converted or exchanged if such proceeds of such
original sale were not previously included in any calculation for this
purpose plus any additional sums payable upon conversion or exchange and
(z) in connection with the sale of any Capital Stock for property other
than cash, the Company shall obtain a written opinion of an Independent
Financial Advisor stating that the terms of such transaction are fair to
the Company from a financial point of view.
Restrictions on Disposition of Assets of the Company. Subject to the
provisions as set forth in the Senior Note Indenture, the Company will not, and
will not permit any of its Subsidiaries to, sell, transfer or otherwise dispose
of, in any consecutive 12-month period, any assets (including by way of
sale-and-leaseback or Subsidiary Stock Sale), other than in the ordinary course
of business and other than to the Company or a Wholly owned Subsidiary of the
Company, in any such case, with an aggregate fair market value of greater than
$5,000,000, unless (i) the Company (or the Subsidiary, as the case may be)
receives consideration at the time of such sale or other disposition at least
equal to the fair market value (as determined in good faith by the Board of
Directors) of the shares or assets sold or otherwise disposed of, (ii) not less
than 70% of the consideration received by the Company (or the Subsidiary, as the
case may be) is in the form of cash or Cash Equivalents and (iii) the Net Cash
Proceeds of the sale, transfer or other disposition of such assets or Capital
Stock in excess of $5,000,000 are either (x) invested in the business or
businesses of the Company or any of its Subsidiaries or any business related to
any business then conducted by the Company or any of its Subsidiaries or any
business related to the aircraft industry or are used for working capital
purposes; provided however, that in the case of a Subsidiary Stock Sale, for
purposes of this clause (x), such Net Cash Proceeds may only be invested in the
Principal Subsidiary or in any Wholly owned Subsidiary of the Company (a
"Venture Subsidiary") and in such case, proceeds must be used for any business
directly related to the business of the Principal Subsidiary; provided further
that any investment in a business related to any business then conducted by the
Company or any of its Subsidiaries or any business related to the aircraft
industry shall be made only if (A) the investment is to be made in any Person
and such Person will become a Wholly owned Subsidiary subsequent to such
investment or (B) the Company or one of its Subsidiaries will acquire the assets
of any Person which constitutes substantially all of an operating unit or
business of such Person and (C) in each case, such investment is committed to be
made within 6 months from the later of the date of such sale or the receipt of
the Net Cash Proceeds or (y) to the extent that such Net Cash Proceeds are not
actually applied in accordance with clause (x), or, if after being so applied
there remain Net Cash Proceeds, to the payment of the principal of and interest
on any Senior Obligation of the Company or, in the case of any such sale,
transfer or other disposition by a Subsidiary, any payment of Debt of such
Subsidiary or any other Wholly owned Subsidiary (other than Debt owed to the
Company or another Wholly owned Subsidiary) and in connection with any such
payment, any related loan commitment shall be reduced in an amount equal to the
principal amount so repaid. In the case of (y) above, the Net Cash Proceeds are
to be applied within three months of the expiration of the six month period
referred to in clause (x) above.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary to,
create, assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock; (b) make
payments in respect of any Debt owed to the Company or any of the Company's
Subsidiaries; (c) make loans or advances to the Company or any of the Company's
Subsidiaries; or (d) transfer any of its assets to the Company or any of the
Company's Subsidiaries, other than (i) those required by the Credit Agreement as
in effect on the date of the Senior Notes (or the Senior Note Indenture) or the
Subordinated Debentures (or the Subordinated Debenture Indenture), (ii) terms
relating to the nonassignability of any operating lease, (iii) consensual
encumbrances or restrictions which are no less favorable to the Company than
those required by the Credit Agreement as in
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effect on the date of the Senior Note Indenture in connection with any
refinancing of Debt Incurred under the Credit Agreement, (iv) consensual
encumbrances or restrictions binding upon any Person at the time such Person
becomes a Subsidiary of the Company or (v) any restrictions with respect to a
Subsidiary of the Company imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary.
Limitation on Capital Stock of the Principal Subsidiary or any Venture
Subsidiary. The Company will not permit the Principal Subsidiary or any Venture
Subsidiary (as defined above under "Restrictions on Dispositions of Assets of
the Company") to cease to be a Wholly owned Subsidiary.
Limitation on Liens. The Company will not, and will not permit any of its
Subsidiaries to, create, Incur, assure or suffer to exist any Lien upon any of
its property, assets, income or profits, whether now owned or hereafter
acquired, except for Permitted Liens.
"Permitted Liens" means (1) Liens existing as of the date of issuance of
the Senior Notes and any renewals or extensions thereof, including, without
limitation, Liens securing the Senior Notes; (2) Liens with respect to assets of
a Subsidiary granted by such Subsidiary to the Company to secure debt owing to
the Company; (3) statutory Liens or landlords and carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business; (4) Liens for taxes, assessments, government
charges or claims which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and if a reserve or
other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made therefor; (5) Liens Incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (6) Liens created or
deposits made to secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a like nature Incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (7) easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering in any material respect with the
business of the Company or any Material Subsidiary Incurred in the ordinary
course of business; (8) any attachment or judgment Lien, unless the judgment it
secures shall not, within 60 days after the entry thereof, have been discharged
or execution thereof stayed pending appeal, or shall not have been discharged
within 60 days after the expiration of any such stay; (9) any other Liens
imposed by operation of law which do not materially affect the Company's ability
to perform its obligations under the Senior Notes and the Senior Note Indenture;
(10) rights of banks to set off deposits against debts owed to said bank; (11)
Liens on the assets of any entity existing at the time such assets are acquired
by the Company or any of its Subsidiaries, whether by merger, consolidation,
purchase of assets or otherwise; provided that such Liens (x) are not created,
Incurred or assumed in connection with, or in contemplation of, such assets
being acquired by the Company or any of its subsidiaries and (y) do not extend
to any other Property of the Company or any of its Subsidiaries; (12) Liens
granted pursuant to the Credit Agreement or the Pledge Agreement; (13) Liens
upon specific items of inventory or other goods and proceeds of the Company or
its Subsidiaries securing the Company's or any Subsidiary's obligations in
respect of bankers' acceptances issued or created for the account of any such
Person to facilitate the purchase, shipment or storage of such inventory or
other goods; (14) Liens securing reimbursement obligations with respect to
letters of credit which encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (15) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods; and (16) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or one of its Subsidiaries
relating to such property or assets.
Transactions with Affiliates. So long as any of the Senior Notes remain
outstanding, neither the Company nor any of its Subsidiaries will directly or
indirectly enter into any transaction involving aggregate consideration in
excess of $500,000 with any Affiliate or holder of 5% or more of any class of
Capital Stock of the Company (including any Affiliates of such holders) except
for transactions (including any loans or advances by or to any Affiliate) in
good faith the terms of which are fair and reasonable to the Company or such
Subsidiary, as the case may be, and are at least as favorable as the terms which
could be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's length basis
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with Persons who are not such a Holder, an Affiliate of such Holder or Affiliate
of the Company; provided that any such transaction shall be conclusively deemed
to be on terms which are fair and reasonable to the Company or any of its
Subsidiaries and on terms which are at least as favorable as the terms which
could be obtained on an arm's length basis with Persons who are not such a
Holder, an Affiliate of such Holder or Affiliate of the Company if such
transaction is approved by a majority of the Company's directors (including a
majority of the Company's independent directors, if any); and provided further
that with respect to the purchase or disposition of assets of the Company or any
of its Subsidiaries having a net book value in excess of $5 million, if the
Company does not have any independent directors, in addition to approval of its
board of directors, the Company shall obtain a written opinion of an Independent
Financial Advisor stating that the terms of such transaction are fair and
reasonable to the Company or its Subsidiary, as the case may be, and are at
least as favorable to the Company or such Subsidiary, as the case may be, as
could have been obtained on an arm's length basis with Persons who are not such
a holder, an Affiliate of such holder or Affiliate of the Company. This covenant
shall not apply to (a) any transaction between the Company and LBH, or any
Affiliate thereof relating to the Senior Note Indenture (including the issuance
of the Senior Notes) or the payment of fees to any of the foregoing for
financial and consulting services, (b) transactions between the Company or any
of its Subsidiaries and any employee or director of, or consultant to, the
Company or any of its Subsidiaries that are approved by the Board of Directors,
(c) the payment of reasonable and customary regular fees to directors of the
Company, (d) any transaction between the Company and any of its Wholly owned
Subsidiaries or between any of its Wholly owned Subsidiaries, (e) any
transaction between the Company or any of its Subsidiaries and Loral as required
by the Acquisition Agreement or with respect to the Convertible Debentures, (f)
transactions with or relating to the joint venture between the Principal
Subsidiary and Loral Information Defense Systems Division, which joint venture
may be in partnership, corporate or other business entity form, and any
successor joint venture or (g) any Restricted Payment not otherwise prohibited
by the "Limitation on Restricted Payments" covenant.
Change of Control. (a) Upon a Change of Control, each Holder of the Senior
Notes shall have the right to require that the Company (or its successor or
transferee) repurchase such Holder's Senior Notes at a repurchase price in cash
equal to 101% of the principal amount of the Senior Notes plus, accrued and
unpaid interest, if any, to the date of repurchase, in accordance with the terms
contemplated in paragraph (b) below.
(b) Within 30 days following any Change of Control, the Company (or its
successor or transferee) shall mail a notice to each Holder with a copy to the
Senior Note Trustee stating: (1) that a Change of Control has occurred and that
such Holder has the right to require the Company (or its successor or
transferee) to repurchase such Holder's Senior Notes at a repurchase price in
cash equal to 101% of the principal amount of the Senior Notes plus accrued and
unpaid interest, if any, to the date of repurchase; (2) the circumstance and
relevant facts regarding such Change of Control (including information with
respect to pro forma historical income, cash flow and capitalization after
giving effect to such Change in Control); (3) the repurchase date (which shall
be not earlier than 30 days or later than 60 days from the date such notice is
mailed); and (4) the instructions determined by the Company (or its successor or
transferee), consistent with this Section, that a Holder must follow in order to
have its Senior Notes repurchased.
(c) Holders electing to have Senior Notes repurchased will be required to
surrender the Senior Notes, with an appropriate form duly completed, to the
Company (or its successor or transferee) at the address specified in the notice
at least 10 Business Days prior to the repurchase date. Holders will be entitled
to withdraw their election if the Senior Note Trustee or the Company (or its
successor or transferee) receives not later than three Business Days prior to
the repurchase date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the face amount of the Senior Notes which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Senior Notes repurchased.
(d) On the repurchase date, all Senior Notes repurchased by the Company (or
its successor or transferee) under this Section shall be delivered by the Senior
Note Trustee for cancellation, and the Company (or its successor or transferee)
shall pay the purchase price plus accrued and unpaid interest, if any, to the
Holders entitled thereto.
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MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company shall not consolidate or merge with or into, or sell, lease,
convey or otherwise dispose of all or substantially all of its assets to, any
Person (other than a merger with or into a Wholly owned Subsidiary; provided
that such Wholly owned Subsidiary is not organized in a foreign jurisdiction)
unless: (a) the Corporation formed by or surviving any such consolidation or
merger (if other than the Company), or to which sale, lease, conveyance or other
disposition shall have been made (the "Surviving Entity"), is a corporation
organized and existing under the laws of the United States, any state thereof or
the District of Columbia; (b) the Surviving Entity assumes by supplemental
indenture all the obligations of the Company on the Senior Notes and the Senior
Note Indenture; (c) immediately after the transaction no Event of Default or
event or condition which through the giving of notice or lapse of time or both
would become an Event of Default shall have occurred and be continuing; (d)
immediately after giving effect to such transaction on a pro forma basis, the
Consolidated Net Worth of the Surviving Entity would be at least equal to the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(e) immediately after giving effect to such transaction on a pro forma basis,
the Surviving Entity could Incur at least $1.00 of Debt pursuant to the first
paragraph of the "Limitation on Debt" covenant.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is (a) default in the payment of any interest upon any
of the Senior Notes as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; (b) default in the payment
of all or any part of the principal of (or premium, if any, on) any of the
Senior Notes as and when the same shall become due and payable, either at
maturity, upon any redemption, by declaration or otherwise; provided that, in
the case of any obligation to repurchase the Senior Notes pursuant to the
covenant relating to a Change of Control more than 33 1/3% of the then
outstanding Senior Notes have been surrendered to the Company (or its successor
or transferee) for repurchase and the Company (or its successor or transferee)
has failed to repurchase all of the Senior Notes so surrendered, whether or not
such purchase is prohibited by the Credit Agreement or any other agreement
binding upon the Company; (c) failure on the part of the Company duly to observe
or perform any other covenant or agreement set forth in the Senior Notes or in
the Senior Note Indenture for a period of 45 days after the date on which
written notice specifying such failure, stating that such notice is a "Notice of
Default" hereunder and demanding that the Company remedy the same, shall have
been given by registered or certified mail, return receipt requested, to the
Company by the Senior Note Trustee or to the Company and the Senior Note Trustee
by the Holders of a majority in aggregate principal amount of the Senior Notes
at the time outstanding; (d)(i) the Company and/or any Subsidiary shall have
failed to make any principal payment due at final maturity of $10,000,000 in
principal amount or more individually or in the aggregate and such failure to
pay is continuing for more than 30 days after the payment default has occurred,
or (ii) there shall have occurred with respect to any issue or issues of Debt of
the Company or any Subsidiary having an outstanding principal amount when due of
$10,000,000 individually or in the aggregate for all such issues of all such
persons, an event of default which permits, or with the giving of notice or
lapse of time or both, would permit the holders of such Debt to declare such
Debt to be due and payable prior to the maturity thereof; (e) the Company or any
Subsidiary shall fail to discharge any final judgment not covered by insurance
(from which no further appeal may be taken) in excess of $5,000,000 and such
judgment shall remain in force, undischarged, unsatisfied, unstayed and unbonded
for more than 30 days; (f) certain events of bankruptcy or insolvency of the
Company or any Material Subsidiary; or (g) the Pledge Agreement shall cease to
be in full force and effect in any material respect, or shall cease to give the
Collateral Trustee the Liens, rights, powers and privileges purported to be
created thereby (including, without limitation, a perfected security interest
in, and Lien on, the Collateral) in favor of the Collateral Trustee for the
benefit of the Holders superior to and prior to the rights of all third Persons
and subject to no other Liens (in each case, except as otherwise permitted and
other than as a result of any action on the part of the Collateral Trustee), or
the Company shall default in the due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to the
Pledge Agreement.
If an Event of Default (other than an Event of Default specified in clause
(f) above if the event in question relates to the Company) occurs and is
continuing under the Senior Note Indenture, either the Senior
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<PAGE> 50
Note Trustee or the holders of 25% in aggregate principal amount of the Senior
Notes then outstanding thereunder, by notice in writing to the Company (and to
the Senior Note Trustee if given by Holders) (the "Acceleration Notice"), may
declare all unpaid principal of, and accrued interest on, the Senior Notes to be
due and payable immediately, and the same shall, upon such declaration, become
immediately due and payable. If an Event of Default specified in clause (f)
above occurs with respect to the Company, all unpaid principal of, and accrued
interest on, the Senior Notes shall become and be immediately due and payable
without any declaration or other act on the part of the Senior Note Trustee or
any Holder. The Holders of at least a majority in principal amount of the Senior
Notes, by notice to the Senior Note Trustee, may rescind an acceleration and its
consequences if all existing Events of Default, other than the nonpayment of the
principal of, and accrued interest on, the Senior Notes which became due solely
by such declaration of acceleration, have been cured or waived.
SATISFACTION AND DISCHARGE OF THE SENIOR NOTE INDENTURE; COVENANT DEFEASANCE
If at any time (a) the Company shall have paid or caused to be paid the
principal of and interest on all the Senior Notes outstanding hereunder, as and
when the same shall have become due and payable, or (b) the Company shall have
delivered to the Senior Note Trustee for cancellation all Senior Notes
theretofore authenticated (other than any Senior Notes which shall have been
destroyed, lost or stolen and which shall have been replaced or paid as provided
in the Senior Note Indenture) or (c)(i) the Senior Notes not theretofore
delivered to the Senior Note Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year, or are
to be called for redemption under arrangements satisfactory to the Senior Note
Trustee for the giving of notice of redemption, and (ii) the Company shall have
irrevocably deposited or caused to be deposited with the Senior Note Trustee as
trust funds the entire amount in cash (other than moneys repaid by the Senior
Note Trustee or any paying agent to the Company in accordance with the
provisions of the Senior Note Indenture), sufficient to pay at maturity or upon
redemption all such Senior Notes not theretofore delivered to the Senior Note
Trustee for cancellation, including principal and interest (and premium, if any)
due or to become due to such date of maturity or redemption, as the case may be,
and if, in any such case, the Company shall also pay or cause to be paid all
other sums payable hereunder by the Company, then this Senior Note Indenture
shall cease to be of further effect (except as to (i) rights of registration of
transfer and exchange, and the Company's right of optional redemption, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen Senior
Notes, (iii) rights of holders to receive payments of principal thereof and
interest thereon (and premium, if any,), (iv) the rights, obligations and
immunities of the Senior Note Trustee hereunder and (v) the rights of the
holders as beneficiaries thereof with respect to the property so deposited with
the Senior Note Trustee payable to all or any of them), and the Senior Note
Trustee, on demand of the Company accompanied by an Officers' Certificate and an
Opinion of Counsel and at the cost and expense of the Company, shall execute
proper instruments acknowledging such satisfaction of and discharging this
Senior Note Indenture. The Company has agreed to reimburse the Senior Note
Trustee for any costs or expenses (including the reasonable fees of its counsel)
thereafter reasonably and properly Incurred and to compensate the Senior Note
Trustee for any services thereafter reasonably and properly rendered by the
Senior Note Trustee in connection with the Senior Note Indenture or the Senior
Notes.
The Company shall be deemed to have paid and discharged the entire
indebtedness on all the Outstanding Senior Notes on the 123rd day after the date
of the deposit referred to below, and the provisions of the Senior Note
Indenture, as it relates to such Outstanding Senior Notes, shall no longer be in
effect (and the Senior Note Trustee, at the expense of the Company, shall
execute proper instruments acknowledging the same), except as to (a) rights of
registration of transfer and exchange, and the Company's right of optional
redemption, (b) substitution of apparently mutilated, defaced, destroyed, lost
or stolen Senior Notes, (c) rights of holders to receive payments of principal
thereof and interest thereon (and premium, if any,), (d) the rights, obligations
and immunities of the Senior Note Trustee thereunder and (e) the rights of the
holders as beneficiaries thereof with respect to the property so deposited with
the Senior Note Trustee payable to all or any of them; provided that the
following conditions shall have been satisfied: (A) with reference to this
provision the Company has irrevocably deposited or caused to be irrevocably
deposited with the Senior Note Trustee (or another trustee satisfying the
requirements of the terms of the Senior Note Indenture) as
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<PAGE> 51
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of the Senior Notes, (i) money in an amount, or
(ii) U.S. Government Obligations which through the payment of interest and
principal in respect thereof in accordance with their terms will provide not
later than one day before the due date of any payment referred to in this
subparagraph (A) money in an amount, or (iii) a combination thereof, sufficient,
in the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Senior Note
Trustee, to pay and discharge without consideration of the reinvestment of such
interest and after payment of all Federal, state and local taxes or other
charges and assessments in respect thereof payable by the Senior Note Trustee
the principal of and interest on the Outstanding Senior Notes at the maturity
date of such principal or interest; (B) such deposit shall not cause the Senior
Note Trustee to have a conflicting interest as defined in the Trust Indenture
Act; (C) such deposit will not result in a breach or violation of, or constitute
a default under, the Senior Note Indenture or any other agreement or instrument
to which the Company is a party or by which it is bound; (D) no Event of Default
or event which with notice or lapse of time would become an Event of Default
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after such date; (E) the Company has delivered to
the Senior Note Trustee (i) either (a) a ruling directed to the Senior Note
Trustee received from the Internal Revenue Service to the effect that the
Holders of the Senior Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of the Company's exercise of its option herein
and will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such option had not
been exercised or (b) an Opinion of Counsel to the same effect as the ruling
described in clause (a) and (ii) an Opinion of Counsel to the effect that, after
the passage of 123 days following the deposit, the trust funds will not, with
respect to the Company, be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar law affecting creditors' rights generally;
and (F) the Company has delivered to the Senior Note Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to the defeasance contemplated by this provision
have been complied with.
The Company may omit to comply with any term, provision or condition set
forth in the covenants described under "Certain Covenants" above with respect to
the Senior Notes, if (a) the Company has irrevocably deposited or caused to be
irrevocably deposited with the Senior Note Trustee (or another trustee
satisfying the requirements of the Senior Note Indenture) as trust funds in
trust, specifically pledged as security for, and dedicated solely to, the
benefit of the Holders of the Senior Notes, (i) money in an amount, or (ii) U.S.
Government Obligations which through the payment of interest and principal in
respect thereof in accordance with their terms will provide not later than one
day before the due date of any payment referred to below money in an amount, or
(iii) a combination thereof, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Senior Note Trustee, to pay and discharge
without consideration of the reinvestment of such interest and after payment of
all Federal, state and local taxes or other charges and assessments in respect
thereof payable by the Senior Note Trustee the principal of and each installment
of principal and interest on the Outstanding Senior Notes on the maturity date
of such principal or installment or principal or interest; (b) such deposit
shall not cause the Senior Note Trustee to have a conflicting interest as
defined in the Trust Indenture Act; (c) such deposit will not result in a breach
or violation of, or constitute a default under, the Senior Note Indenture or any
other agreement or instrument (including the Credit Agreement) to which the
Company is a party or by which it is bound; (d) no Event of Default or event
which with notice or lapse of time would become an Event of Default shall have
occurred and be continuing on the date of such deposit; (e) the Company has
delivered to the Senior Note Trustee an Opinion of Counsel to the effect that
(i) the creation of the defeasance trust does not violate the Investment Company
Act of 1940 and (ii) the Holders of the Senior Notes have a valid perfected
first-priority security interest in the trust funds; and (f) the Company has
delivered to the Senior Note Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent herein provided for relating
to the defeasance contemplated herein have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange such holder's Senior Notes in accordance
with the Senior Note Indenture. The Registrar may require a holder, among other
things, to furnish appropriate endorsements and
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<PAGE> 52
transfer documents, and to pay any taxes and fees required by law or permitted
by the Senior Note Indenture. The Registrar is not required to transfer or
exchange any Senior Notes selected for redemption.
The registered holder of a Senior Note may be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
The Senior Note Indenture contains provisions permitting the Company and
the Senior Note Trustee, with the consent of the Holders of not less than a
majority in aggregate principal amount of Senior Notes at the time outstanding,
to amend or supplement such Senior Note Indenture or any supplemental indenture
or modify the rights of the relevant holders; provided that no such
modifications may, (a) extend the final maturity of any Senior Notes, or reduce
the principal amount thereof, or reduce the rate or extend the time of payment
of interest thereon, or reduce any amount payable on redemption thereof, or
impair or affect the right of any Senior Note holder to institute suit for the
payment thereof without the consent of the holder of each Senior Note so
affected, or (b) reduce the aforesaid percentage of Senior Notes, the consent of
the holders of which is required for any such supplemental indenture, without
the consent of the holders of all Senior Notes then outstanding; or (c) consent
to the assignment or transfer by the Company of any of its rights and
obligations under the Senior Note Indenture or to the release of any Collateral
from the lien created by the Pledge Agreement except in accordance with the
Pledge Agreement and the Senior Note Indenture.
CONCERNING THE SENIOR NOTE TRUSTEE
The Senior Note Indenture provides that except during the continuance of an
Event of Default, the Senior Note Trustee thereunder will perform only such
duties as are specifically set forth in such Senior Note Indenture. During the
existence of an Event of Default, such Senior Note Trustee will exercise such
rights and powers vested in it under the Senior Note Indenture and use the same
degree of care and skill in their exercise, as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs. The Company may
remove the Senior Note Trustee at any time for any reason.
The Senior Note Indenture and provisions of the Trust Indenture Act contain
limitations on the rights of the Senior Note Trustee thereunder, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Senior Note Trustee is permitted to engage in
other transactions; provided, that if it acquires any conflicting interest (as
defined) it must eliminate such conflict or resign.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company and its
subsidiaries and is qualified in its entirety by reference to the definitive
agreements and instruments governing such indebtedness, copies of which are
available upon request from the Company.
THE AMENDED AND RESTATED CREDIT AGREEMENT
General. Aircraft Braking Systems and Engineered Fabrics (each, a
"Borrower" and together, the "Borrowers") and the Lenders entered into the
Amended and Restated Credit Agreement on August 14, 1996 on the terms and
subject to the conditions set forth below. The Amended and Restated Credit
Agreement provides for a term loan facility (the "Term Loan Facility") in an
aggregate principal amount of $40 million and a revolving credit facility (the
"Revolving Loan Facility") in an aggregate principal amount of $70 million. The
Amended and Restated Credit Agreement is secured by a lien on the inventory,
accounts receivable and certain other tangible assets of the Borrowers.
The Term Loan Facility is repayable over a six-year period in quarterly
installments commencing in June 1997. The Company is required to make mandatory
prepayments in the event of certain asset sales, upon the incurrence of
additional indebtedness, the issuance of certain securities and from excess cash
flow.
The ability of the Borrowers to borrow under the Revolving Credit Facility
is based on the sum the "Borrowing Base" of stated percentages of their eligible
accounts receivable and eligible inventory; provided that until September 30,
1998 the Borrowers will be able to borrow 120% of the Borrowing Base. Up to $15
million of the Revolving Credit Facility is available for standby and commercial
letters of credit. The Revolving Credit Facility commitment will terminate on
August 14, 2001.
Borrowings under the Amended and Restated Credit Agreement bear interest,
at the option of the Borrowers, at a rate equal to (a) the highest of (i) the
publicly announced prime rate of The Chase Manhattan Bank ("Chase Manhattan"),
(ii) the secondary market rate for three-month certificates of deposit plus 1%
and (iii) the federal funds rate plus 1/2 of 1%, plus an applicable margin,
initially 1.75% per annum or (b) the rate at which eurodollar deposits for one,
two, three or six months (as elected by the Borrowers) are offered by Chase
Manhattan in the interbank eurodollar market plus an applicable margin,
initially 2.25% per annum. Overdue amounts under the Amended and Restated Credit
Agreement will bear interest at a rate equal to the rate then in effect with
respect to such borrowings, plus 2% per annum.
The Company paid to Chase Manhattan and Lehman Commercial Paper Inc.
("LCP") a commitment fee for the period from the date of the commitment letter
to the closing of the Amended and Restated Credit Agreement in an amount equal
to 0.50% per annum on $110 million and certain upfront fees. In addition, the
Company will pay to the Lenders a quarterly commitment fee initially equal to
0.50% per annum of the unused portion of the Amended and Restated Credit
Agreement; provided that such commitment fee will decrease to 3/8 of 1% per
annum if the Company's consolidated leverage ratio is less than 3.50 to 1.00.
The Company will pay a commission on all outstanding letters of credit of 2.50%
per annum of the face amount of each letter of credit.
The Amended and Restated Credit Agreement contains customary
representations and warranties, covenants and conditions to borrowing. There can
be no assurance that the conditions to borrowing under the Amended and Restated
Credit Agreement will be satisfied.
The Amended and Restated Credit Agreement contains a number of negative
covenants which restrict the Company's subsidiaries from, among other things,
incurring other indebtedness, entering into merger or consolidation
transactions, disposing of all or substantially all of its assets, making
certain restricted payments (other than dividends and such restricted payments
by subsidiaries of the Company to the Company to enable the Company to make
payments in respect of certain indebtedness and to make certain capital
expenditures), creating any liens on the Borrowers' assets, creating guarantee
obligations and material lease obligations and entering into sale and leaseback
transactions and transactions with affiliates. In addition, the Amended and
Restated Credit Agreement limits the ability of the Company to redeem the Senior
Notes.
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The Amended and Restated Credit Agreement also requires the maintenance of
certain quarterly financial and operating ratios, including: (i) a consolidated
cash interest coverage ratio, (ii) a subsidiary interest coverage ratio and
(iii) a consolidated leverage ratio. Capital expenditures will be limited to $20
million in fiscal 1997 and $10 million in any fiscal year thereafter. In
addition, the Amended and Restated Credit Agreement requires the Company to
maintain a minimum consolidated adjusted net worth of not less than an amount
equal to the sum of $22 million and 50% of annual consolidated net income.
The Amended and Restated Credit Agreement also contains customary events of
default, including default upon the nonpayment of principal, interest, fees or
other amounts or the occurrence of a change of control.
In connection with the execution and delivery of the Amended and Restated
Credit Agreement, the Company entered into the K & F Agreement with the Lenders
which contains limitations on the incurrence by the Company of additional
indebtedness and limitations on annual operating expenses.
SENIOR SUBORDINATED NOTES
General. $140,000,000 aggregate principal amount of the Company's Old
Senior Subordinated Notes were issued on August 15, 1996 pursuant to the Senior
Subordinated Note Indenture (the "Senior Subordinated Note Indenture") between
the Company and Fleet National Bank, as trustee (the "Senior Subordinated Note
Trustee"). On September 13, 1996, the Company offered to exchange $1,000
principal amount of 10 3/8% Series B Senior Subordinated Notes Due 2004 (the
"Senior Subordinated Notes") of the Company for each $1,000 principal amount of
the Old Notes outstanding. The terms of the Senior Subordinated Notes are
identical in all material respects to the Old Notes except that the Senior
Subordinated Notes have been registered under the Securities Act and therefore
do not bear legends restricting their transfer. The Senior Subordinated Notes
are general unsecured obligations of the Company and are subordinated to
indebtedness of the Company and are subordinated to indebtedness of the Company
under the Amended and Restated Credit Agreement and the Senior Notes. The Senior
Subordinated Notes mature on September 1, 2004, unless redeemed before such
date. The Senior Subordinated Notes bear interest at the rate of 10 3/8% from
March 1, 1997 or from the most recent Interest Payment Date (as defined in the
Senior Subordinated Note Indenture) to which interest has been paid or duly
provided for. Interest is payable semi-annually (to holders of record at the
close of business on the February 15 and August 15 immediately preceding the
interest payment date) on March 1 and September 1.
Redemption. The Senior Subordinated Notes may not be redeemed prior to
September 1, 2000. On or after September 1, 2000 the Company at its option may,
at any time, redeem all, or from time to time any part of, the Senior
Subordinated Notes at the following prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on September 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------------------ ----------
<S> <C>
2000.............................................................. 105.188%
2001.............................................................. 103.458%
2002.............................................................. 101.729%
2003 and thereafter............................................... 100.000%
</TABLE>
Sinking Fund. The Senior Subordinated Notes are not subject to a sinking
fund.
Subordination. The payment of principal of, premium, if any, and interest
on the Senior Subordinated Notes is subordinated in right of payment as set
forth in the Indenture, to the prior payment in full of all Senior Indebtedness,
whether outstanding on the date of the Senior Subordinated Note Indenture or
thereafter. "Senior Indebtedness" is defined in the Senior Subordinated Note
Indenture as (i) all indebtedness and other monetary obligations (whether now
existing or hereafter incurred) of the Company on, under or in respect of, the
Amended and Restated Credit Agreement and including all fees, expenses
(including reasonable fees and expenses of counsel), claims, charges, indemnity
obligations and interest accruing
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subsequent to the filing of a petition initiating any proceeding in bankruptcy,
insolvency or like proceeding whether or not such interest is an allowed claim
enforceable against the debtor in a bankruptcy case under Title 11 of the United
States Code; (ii) all other indebtedness of the Company (other than the Senior
Subordinated Notes), whether presently outstanding or hereafter created,
incurred or assumed, unless such indebtedness, by its terms or the terms of the
instrument creating or evidencing it is subordinate in right of payment to or
pari passu with the Senior Subordinated Notes and (iii) any Hedging Obligations
(as such term is defined in the Senior Subordinated Note Indenture); provided
that the term Senior Indebtedness shall not include (a) any indebtedness of the
Company which when incurred and without respect to any election under Section
11(b) of the Bankruptcy Code, was without recourse to the Company, (b) any
indebtedness of the Company to any of its Subsidiaries or Affiliates, (c) any
indebtedness of the Company not otherwise permitted by the covenants described
under the captions "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock" and "-- Subordination -- No Senior Subordinated Debt," in
the Company's Registration Statement on Form S-4 No. 333-11047, (d) indebtedness
to any employee of the Company, (e) any liability for taxes and (f) trade
payables.
If any default in the payment of any principal of or interest on any Senior
Indebtedness outstanding under the Senior Notes, any Specified Senior
Indebtedness or any Designated Senior Indebtedness (as such terms are defined in
the Senior Subordinated Note Indenture) when due and payable, whether at
maturity, upon any redemption, by declaration or otherwise, occurs and is
continuing, no payment shall be made by the Company with respect to the
principal of or interest on, or other amounts owing with respect to, the Senior
Subordinated Notes or to redeem or acquire any of the Senior Subordinated Notes
for cash or property or otherwise (except, in each case, if there is no Senior
Indebtedness outstanding under the Senior Notes, payments made in such
subordinated securities). If any event of default occurs and is continuing under
any Designated Senior Indebtedness other than a default in payment of the
principal of or interest on any Designated Senior Indebtedness (or if such an
event of default would occur upon any payment of any kind or character with
respect to the Senior Subordinated Notes), as such event of default is defined
in such Designated Senior Indebtedness, permitting the holders thereof to
accelerate the maturity thereof and if the holder or holders or a representative
of such holder or holders gives written notice of the event of default (a
"Default Notice") to the Company and the Senior Subordinated Note Trustee (as
such term is defined below), then, unless and until such event of default has
been cured or waived or has ceased to exist or the Senior Subordinated Note
Trustee receives notice from the holder or holders of the relevant Designated
Senior Indebtedness (or a representative of such holder or holders) terminating
the Blockage Period (as defined below), during the 179 day period after the
delivery of such Default Notice (the "Blockage Period"), the Company, or any
person acting on its behalf, shall not, (x) make any payment of or with respect
to the principal of or interest on, or other amounts owing with respect to the
Senior Subordinated Notes, or (y) acquire any of the Senior Subordinated Notes
for cash or property or otherwise (except, if there is no Senior Indebtedness
outstanding, under the Senior Notes, in each case, payments made in such
subordinated securities). At the expiration of such Blockage Period, the Company
shall, as set forth in the Senior Subordinated Note Indenture, promptly pay to
the Senior Subordinated Note Trustee all sums which the Company would have been
obligated to pay during such Blockage Period but for this paragraph. Only one
such Blockage Period may be commenced with any 360 consecutive days. For all
purposes of this paragraph, no event of default which existed or was continuing
with respect to the Designated Senior Indebtedness to which the Blockage Period
relates on the date such Blockage Period commenced shall be or be made the basis
for the commencement of any subsequent Blockage Period by the holder or holders
of such Designated Senior Indebtedness (or a representative of such holder or
holders) unless such event of default is cured or waived for a period of not
less than 90 consecutive days.
Change of Control. Upon the occurrence of a Change of Control (as defined
in the Senior Subordinated Note Indenture), each holder of Senior Subordinated
Notes is entitled to require the Company to repurchase such holder's Senior
Subordinated Notes at a price equal to 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
Limitation on Debt. Under the Senior Subordinated Note Indenture, subject
to certain exceptions, the Company is prohibited from, and shall not permit any
of its Subsidiaries to, incur any indebtedness or
53
<PAGE> 56
Disqualified Stock (as such term is defined in the Senior Subordinated Note
Indenture) and will not permit any of its Subsidiaries to issue any shares of
preferred stock unless the Fixed Charge Coverage Ratio (as such term is defined
in the Senior Subordinated Note Indenture) for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional indebtedness is incurred
would have been at least 1.70 to 1.
Limitation on Restricted Payments. Under the Senior Subordinated Note
Indenture, subject to certain exceptions, the Company is prohibited from, and
will not permit any Subsidiary to, make any restricted payment (which includes
dividends or other distributions on shares of capital stock, the purchase,
redemption, retirement or other acquisition of shares of capital stock, options,
warrants, or indebtedness and certain payments to affiliates), if (a) an event
of default has occurred and is continuing under the Senior Subordinated Note
Indenture; and (b) the aggregate amount of all such restricted payments made by
the Company and its Subsidiaries from and after the date of the Senior
Subordinated Indenture exceeds the sum (without duplication) of: (i) an amount
equal to the difference (but not less than zero) between (A) Cumulative
Operating Cash Flow (as defined in the Senior Subordinated Note Indenture) and
(B) the product of 1.3 times Cumulative Total Interest Expense (as defined in
the Senior Subordinated Note Indenture); and (ii) the aggregate net proceeds,
including the fair market value of property other than cash, received by the
Company from the issuance or sale of its capital stock after the date of the
Senior Subordinated Note Indenture and (iii) $15 million.
Additional Covenants. The Senior Subordinated Note Indenture contains
certain covenants, including but not limited to covenants limiting the
following: (i) the issuance of capital stock by Aircraft Braking Systems, (ii)
the application of proceeds of certain asset sales, (iii) the incurrence of
liens, (iv) the creation of restrictions on the ability of the Company's
subsidiaries to make distributions and (v) the ability of the Company and its
subsidiaries to engage in certain mergers or consolidations or to transfer all
or substantially all of their assets to another person.
Events of Default. The Senior Subordinated Note Indenture contains default
provisions typically found in unsecured financings. If an Event of Default is
continuing under the Senior Subordinated Note Indenture, either the Senior
Subordinated Note Trustee or the holders of 25% in aggregate principal amount of
the Senior Subordinated Notes then outstanding may declare all unpaid principal
of, and accrued interest on, the Senior Subordinated Notes to be due and payable
immediately.
THE 13 3/4% DEBENTURES
The net proceeds to the Company from the New Offering were approximately
$135 million after deducting expenses payable by the Company in connection with
the New Offering. The Company used such proceeds, together with borrowings under
the Amended and Restated Credit Agreement, to redeem $170 million aggregate
principal amount of the 13 3/4% Debentures, for an aggregate purchase price,
inclusive of related fees and expenses, of approximately $175 million. The net
proceeds of the New Offering were irrevocably deposited with the trustee under
the Senior Subordinated Debenture Indenture immediately following the closing of
the New Offering for the sole purpose of effecting the redemption. The
redemption was effected on September 13, 1996.
CONVERTIBLE DEBENTURES
On September 2, 1994 K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral, in exchange for $12.76 million in cash and
458,994 shares of Class B common stock representing 22.5% of equity. The cash
portion of this transaction was funded with the proceeds from the sale of
capital stock to K & F's principal stockholders for which stockholders received
a total of 68,728 shares of Class A common stock and 127,636 shares of preferred
stock. As a result, K & F stockholders' equity was increased by $65.4 million
and long-term debt was reduced by an equal amount.
54
<PAGE> 57
CERTAIN TRANSACTIONS
GENERAL
BLS owns 27.12% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral. Because BLS is Chairman of the
Board of Directors and has the right to designate a majority of the Directors to
the Board of the Company, he has operating control of the Company.
In May 1996, the Company purchased $343,000 principal amount of 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 thereof plus accrued
interest.
The Company has agreed to pay Ronald H. Kisner, 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.
The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain other executive officers of Loral who are
active in the management of the Company) in exchange for acting as directors and
providing advisory services to the Company and its subsidiaries. Such agreement
will continue until BLS dies or is disabled or ceases to own at least 135,000
shares of common stock of the Company.
The Company has a bonus plan pursuant to which the Company's board of
directors awards bonuses to BLS and other advisers 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 the aggregate 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 the Company and Loral Corporation, the
parties provided services to each other and shared 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, $0.2 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 $0.7 million and $1.8 million. The Company 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. The Company will continue
to reimburse Lockheed Martin for real property occupancy, and costs relating to
shared easements and services.
55
<PAGE> 58
PLAN OF DISTRIBUTION
This Prospectus is to be used by Lehman Brothers in connection with offers
and sales of the Senior Notes in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. Lehman Brothers may act
as principal or agent in such transactions and has no obligation to make a
market in the Senior Notes, and may discontinue its market-making activities at
any time without notice, at its sole discretion.
Lehman Brothers acted as an underwriter in connection with the offering of
the Senior Subordinated Notes and received underwriting discounts and
commissions of $2.57 million in connection therewith.
Lehman Brothers acted as underwriter in connection with the original
offering of the Senior Notes and received underwriting discounts and commissions
of $2.25 million in connection therewith.
Lehman Brothers has from time to time provided investment banking,
financial advisory and other services to the Company, for which services Lehman
Brothers has received fees. As the beneficial owners of 48.17% of the
outstanding capital stock, the Lehman Investors are able to elect three
directors to the Company's Board of Directors and have the benefit of certain
rights under the Stockholders Agreement and the Company's By-laws. In addition,
LCP, an affiliate of Lehman Brothers, is a Lender under the Amended and Restated
Credit Agreement and is the documentation agent thereunder. See
"Management -- Directors and Executive Officers of the Company," "Ownership of
Capital Stock," "Certain Transactions" and "Description of Certain
Indebtedness -- The Amended and Restated Credit Agreement."
LEGAL MATTERS
The validity of the Senior Notes was passed upon for the Company by
O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal matters in
connection with the sale of the Senior Notes were passed upon for the
Underwriter by Davis Polk & Wardwell. Davis Polk & Wardwell represented the
Company in connection with the Acquisition and the Financing. Michael B. Targoff
represented the Company in connection with the preparation of this Prospectus.
EXPERTS
The consolidated financial statements as of March 31, 1996 and 1995 and for
the years ended March 31, 1996, 1995 and 1994, included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report dated May 22, 1996 appearing herein and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
56
<PAGE> 59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
K & F INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets as of June 30, 1996 and March 31, 1996................... F-2
Consolidated Statements of Operations for the three months ended June 30, 1996 and
1995............................................................................... F-3
Consolidated Statements of Cash Flows for the three months ended June 30, 1996 and
1995............................................................................... F-4
Notes to Consolidated Financial Statements........................................... F-5
Independent Auditors' Report......................................................... F-8
Consolidated Balance Sheets as of March 31, 1996 and 1995............................ F-9
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and
1994............................................................................... F-10
Consolidated Statements of Stockholders' Deficiency for the years ended March 31,
1996, 1995 and 1994................................................................ F-11
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994............................................................................... F-12
Notes to Consolidated Financial Statements........................................... F-13
</TABLE>
F-1
<PAGE> 60
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1996
------------- -------------
(UNAUDITED)
<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.
F-2
<PAGE> 61
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
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.
F-3
<PAGE> 62
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
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.
F-4
<PAGE> 63
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 elsewhere in this Prospectus.
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 September 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 $9.2 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 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.
F-5
<PAGE> 64
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-6
<PAGE> 65
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-7
<PAGE> 66
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-8
<PAGE> 67
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
============= =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
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-9
<PAGE> 68
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-10
<PAGE> 69
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 ADJUSTMENT
PREFERRED STOCK COMMON STOCK COMMON STOCK TO EQUITY FOR
------------------ --------------- ---------------- ADDITIONAL MINIMUM CUMULATIVE
SHARES SHARES SHARES PAID-IN PENSION TRANSLATION
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT LIABILITY ADJUSTMENT
--------- ------- ------- ------ -------- ------ ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1,
1993............ 899,999 $9,000 -- $ -- 484,616 $5,000 $ 89,986,000 $(138,429,000) $ (3,052,000) $(387,000)
Net loss........ (34,041,000)
Pension
adjustment.... (4,415,000)
Cumulative
translation
adjustment.... (31,000)
--------- ------- ------- ------ -------- ------ ------------ ------------- ------------- ----------
Balance, March 31,
1994............ 899,999 9,000 -- -- 484,616 5,000 89,986,000 (172,470,000) (7,467,000) (418,000)
Net loss........ (10,173,000)
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... 275,000
Cumulative
translation
adjustment... 134,000
--------- ------- ------- ------ -------- ------ ------------ ------------- ------------- ----------
Balance, March 31,
1995............ 1,027,635 10,000 458,994 5,000 553,344 6,000 155,350,000 (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............ 1,027,635 $10,000 458,994 $5,000 553,344 $6,000 $155,350,000 $(184,049,000) $ (10,572,000) $(451,000)
======== ======= ======= ======= ======== ======= =========== ============ ============ ==========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 70
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-12
<PAGE> 71
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.
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.
F-13
<PAGE> 72
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-14
<PAGE> 73
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>
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>
F-15
<PAGE> 74
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 borrowings under the Revolving Loan will
mature on April 27, 1997.
Borrowings under the Revolving Loan bear interest at floating rates. At
March 31, 1996, the interest rate on borrowings 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.
(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.
F-16
<PAGE> 75
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
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>
F-17
<PAGE> 76
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-18
<PAGE> 77
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-19
<PAGE> 78
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>
YEARS 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.
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.
F-20
<PAGE> 79
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-21
<PAGE> 80
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-22
<PAGE> 81
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR INCORPORATED BY
REFERENCE HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................... 2
Prospectus Summary....................... 3
The Company.............................. 8
Recent Developments...................... 8
Risk Factors............................. 9
Use of Proceeds.......................... 12
Selected Consolidated Financial
Information............................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 14
Business................................. 18
Management............................... 26
Ownership of Capital Stock............... 32
Description of Senior Notes.............. 34
Description of Certain Indebtedness...... 51
Certain Transactions..................... 55
Plan of Distribution..................... 56
Legal Matters............................ 56
Experts.................................. 56
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
$100,000,000
K & F INDUSTRIES, INC.
11 7/8%
SENIOR SECURED NOTES
DUE 2003
---------------------------
PROSPECTUS
October 29, 1996
---------------------------
LEHMAN BROTHERS
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses paid by the Company in
connection with the issuance and distribution of the securities being registered
hereby (other than underwriting discounts and commissions).
<TABLE>
<S> <C>
SEC registration fee..................................................... $ 31,250
NASD fee................................................................. 10,500
Printing and engraving expenses.......................................... 44,142
Accounting fees and expenses............................................. 47,575
Legal fees and expenses.................................................. 406,042
Trustee's fees........................................................... 17,624
Qualified Independent Underwriter's fees and expenses.................... 61,913
Rating services registration fees........................................ 60,000
Miscellaneous............................................................ 326,595
----------
Total.................................................................. $1,005,641
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation of
the Registrant provides that the directors of the Registrant, individually or
collectively, shall not be held personally liable to the Registrant or its
stockholders for monetary damages for breaches of fiduciary duty as directors,
except that any director shall remain liable (1) for any breach of the
director's fiduciary duty of loyalty to the Registrant or its stockholders, (2)
for acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (3) for liability under Section 174 of the General
Corporation Law of the State of Delaware or (4) for any transaction from which
the director derived an improper personal benefit. The by-laws of the Registrant
provide for indemnifications of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement and the Independent
Underwriting Agreement, the proposed forms of which were filed herewith as
Exhibits 1.01 and 1.02, respectively, for additional indemnification provisions.
II-1
<PAGE> 83
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Common Stock
On September 2, 1994 the Registrant sold shares of Common Stock and
Convertible Preferred Stock as follows:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
VOTING CONVERTIBLE
COMMON PREFERRED PURCHASE
STOCK STOCK PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Bernard L. Schwartz.............................. 687,273 $ 1,963,636
Lehman Brothers Merchant Banking Portfolio
Partnership, L.P............................... 61,891 5,236,910
Lehman Brothers Offshore Investment Partnership,
L.P............................................ 17,015 1,439,751
Lehman Brothers Offshore Investment
Partnership -- Japan, L.P...................... 6,498 549,839
Lehman Brothers Capital Partners II, L.P......... 42,232 3,573,500
------- ------- -----------
687,273 127,636 $ 12,763,636
======= ======= ===========
</TABLE>
On September 2, 1994, K & F retired the $65.4 million principal amount of
14 3/4% Subordinated Convertible Debentures due 2004 held by Loral Corporation,
in exchange for $12.76 million in cash and 4,589,938 shares of Class B common
stock representing 22.5% of equity. The cash portion of this transaction was
funded with the proceeds from the sale of capital stock to K & F's principal
stockholders for which stockholders received a total of 687,273 shares of Class
A common stock and 127,636 shares of preferred stock. As a result, K & F
stockholders' equity was increased by $65.4 million and long-term debt was
reduced by an equal amount. (See Notes 7 and 9 to the consolidated financial
statements.)
On February 15, 1995, the Board of Directors approved a one-for-ten reverse
Common Stock split for all the holders of Class A and Class B Common Stock on
such date. Total Class A Common Stock, Class B Common Stock and Preferred Stock
outstanding subsequent to the events described above are 553,344, 458,994 and
1,027,635, respectively.
Debt Securities
On August 15, 1996, the Registrant sold $140 million aggregate principal
amount of its Senior Subordinated Notes due 2004 to Lehman Brothers Inc. and
Chase Securities Inc.
The shares of Common Stock and the Preferred Stock and the Senior
Subordinated Notes issued as provided above were not registered under the
Securities Act of 1933 (the "Act"). All of such shares of Common and Preferred
Stock and the Senior Subordinated Notes were issued in reliance on the exemption
from registration provided by Section 4(2) of the Act.
II-2
<PAGE> 84
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<C> <S> <C>
2.01 -- Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral
Corporation and the Company(1)
3.01 -- Amended and Restated Certificate of Incorporation of the Company(7)
3.02 -- Amended and Restated By-Laws of the Company(6)
4.01 -- Indenture dated as of August 15, 1996 for the Senior Subordinated Notes
(including the form of Senior Subordinated Note as Exhibit A thereto) between the
Company and Fleet National Bank, as trustee(9)
4.02 -- Indenture dated as of June 1, 1992 for the 11 7/8% Senior Secured Notes due 2003
(including the form of Senior Note) between The Bank of New York, as trustee(5)
4.03 -- Pledge Agreement dated as of June 10, 1992 between the Company and The Bank of
New York, as collateral trustee(5)
5.01 -- Opinion of O'Sullivan Graev & Karabell, LLP(5)
10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among the Company, BLS
and LBH(1)
10.02 -- Assumption Agreement dated as of April 27, 1989(1)
10.03 -- Shared Services Agreement dated April 27, 1989, among Loral, the Company,
Aircraft Braking Systems Corporation and Engineered Fabrics Corporation(1)
10.04 -- Director Advisory Agreement dated as of April 27, 1989, between the Company and
BLS(1)
10.05 -- Non-Competition Agreement dated as of April 27, 1989, between the Company and
BLS(1)
10.06 -- K & F Industries, Inc. Retirement Plan for Salaried Employees(5)
10.07 -- K & F Industries, Inc. Savings Plan for Salaried Employees(5)
10.08 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for
Salaried Employees Plan A(1)
10.09 -- The Loral Systems Group Release and Separation Allowance Plan(1)
10.10 -- Letter Agreement dated April 27, 1989, between the Company and Shearson Lehman
Brothers Inc.(1)
10.11 -- K & F Industries, Inc. 1989 Stock Option Plan(2)
10.12 -- K & F Industries, Inc. Executive Deferred Bonus Plan(2)
10.13 -- Securities Purchase Agreement dated as of July 22, 1991, among the Company, BLS
and the Lehman Investors(4)
10.14 -- Securities Purchase Agreement among the Company, BLS and the Lehman Investors
dated September 2, 1994(6)
10.15 -- Amended and Restated Stockholders Agreement dated as of September 2, 1994 by and
among the Company, BLS, the Lehman Investors, CBC Capital Partners, Inc. and
Loral(6)
10.16 -- Agreement dated as of September 2, 1994 between the Company and Loral(6)
10.17 -- Amendment of Stockholders Agreement dated November 8, 1994(6)
10.18 -- Securities Conversion Agreement among the Company and the Converting
Stockholders, dated November 8, 1994(6)
10.19 -- K & F Industries, Inc. Supplemental Executive Retirement Plan(8)
10.20 -- Amended and Restated Credit Agreement dated as of August 14, 1996 among ABS, EFC,
the Lenders (as defined therein), Lehman Commercial Paper, Inc., as Documentation
Agent and Chase Securities Inc., individually and as agent for the Lenders
("Chase")(9)
10.21 -- Amended and Restated Security Agreement dated as of August 14, 1996 between ABS
and Chase(9)
10.22 -- Amended and Restated Security Agreement dated as of August 14, 1996 between EFC
and Chase(9)
10.23 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC
in favor of NBD Bank(9)
10.24 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in
favor of NBD Bank(9)
</TABLE>
II-3
<PAGE> 85
<TABLE>
<C> <S> <C>
10.25 -- Amended and Restated K & F Agreement dated as of August 14, 1996 between the
Company and Chase(9)
10.26 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
ABS and Chase(9)
10.27 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
EFC and Chase(9)
10.28 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc.
and Chase Securities Inc(9)
10.29 -- Registration Rights Agreement dated as of August 15, 1996 among the Company,
Lehman Brothers Inc. and Chase Securities Inc.(9)
12.01 -- Statement of computation of ratio of earnings (deficiency) to fixed charges(5)
21.01 -- Subsidiaries of the Registrant(1)
23.01 -- Consent of O'Sullivan Graev and Karabell (included in Exhibit 5)(5)
23.02 -- Consent of Deloitte & Touche LLP*
24.01 -- Powers of Attorney (included on signature page)
25.01 -- Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939
of Fleet National Bank as Trustee(9)
25.02 -- Statement of Eligibility and Qualification under the Trust Indenture Act of
1939of The Bank of New York, with respect to the Indenture for the 11 7/8% Senior
Secured Notes(5)
26.01 -- Financial Data Schedule(8)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991 and incorporated herein by
reference.
(5) Previously filed as an exhibit hereto.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996 and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-11047 and incorporated herein by reference.
* Filed herewith.
(b) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
II-4
<PAGE> 86
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of that time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
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<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 7 to the Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, New York on the 28th day of October,
1996.
K & F INDUSTRIES, INC.
By: /s/ KENNETH M. SCHWARTZ
------------------------------------
Kenneth M. Schwartz
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 to the Registration Statement on Form S-1 has
been signed on October 28, 1996 by the following persons in the capacity
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<C> <S>
* Chairman of the Board, Chief Executive Officer
- ------------------------------------------ and Director (principal executive officer)
Bernard L. Schwartz
/s/ KENNETH M. SCHWARTZ Executive Vice President (principal financial and
- ------------------------------------------ accounting officer)
Kenneth M. Schwartz
* Director
- ------------------------------------------
Herbert R. Brinberg
* Director
- ------------------------------------------
Ronald H. Kisner
* Director
- ------------------------------------------
John R. Paddock
* Director
- ------------------------------------------
James A. Stern
* Director
- ------------------------------------------
A. Robert Towbin
* Director
- ------------------------------------------
Alan H. Washkowitz
* /s/ KENNETH M. SCHWARTZ
- ------------------------------------------
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE> 88
EXHIBIT INDEX
<TABLE>
Exhibit No. Description
- ----------- -----------
<C> <S> <C>
2.01 -- Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral
Corporation and the Company(1)
3.01 -- Amended and Restated Certificate of Incorporation of the Company(7)
3.02 -- Amended and Restated By-Laws of the Company(6)
4.01 -- Indenture dated as of August 15, 1996 for the Senior Subordinated Notes
(including the form of Senior Subordinated Note as Exhibit A thereto) between the
Company and Fleet National Bank, as trustee(9)
4.02 -- Indenture dated as of June 1, 1992 for the 11 7/8% Senior Secured Notes due 2003
(including the form of Senior Note) between The Bank of New York, as trustee(5)
4.03 -- Pledge Agreement dated as of June 10, 1992 between the Company and The Bank of
New York, as collateral trustee(5)
5.01 -- Opinion of O'Sullivan Graev & Karabell, LLP(5)
10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among the Company, BLS
and LBH(1)
10.02 -- Assumption Agreement dated as of April 27, 1989(1)
10.03 -- Shared Services Agreement dated April 27, 1989, among Loral, the Company,
Aircraft Braking Systems Corporation and Engineered Fabrics Corporation(1)
10.04 -- Director Advisory Agreement dated as of April 27, 1989, between the Company and
BLS(1)
10.05 -- Non-Competition Agreement dated as of April 27, 1989, between the Company and
BLS(1)
10.06 -- K & F Industries, Inc. Retirement Plan for Salaried Employees(5)
10.07 -- K & F Industries, Inc. Savings Plan for Salaried Employees(5)
10.08 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for
Salaried Employees Plan A(1)
10.09 -- The Loral Systems Group Release and Separation Allowance Plan(1)
10.10 -- Letter Agreement dated April 27, 1989, between the Company and Shearson Lehman
Brothers Inc.(1)
10.11 -- K & F Industries, Inc. 1989 Stock Option Plan(2)
10.12 -- K & F Industries, Inc. Executive Deferred Bonus Plan(2)
10.13 -- Securities Purchase Agreement dated as of July 22, 1991, among the Company, BLS
and the Lehman Investors(4)
10.14 -- Securities Purchase Agreement among the Company, BLS and the Lehman Investors
dated September 2, 1994(6)
10.15 -- Amended and Restated Stockholders Agreement dated as of September 2, 1994 by and
among the Company, BLS, the Lehman Investors, CBC Capital Partners, Inc. and
Loral(6)
10.16 -- Agreement dated as of September 2, 1994 between the Company and Loral(6)
10.17 -- Amendment of Stockholders Agreement dated November 8, 1994(6)
10.18 -- Securities Conversion Agreement among the Company and the Converting
Stockholders, dated November 8, 1994(6)
10.19 -- K & F Industries, Inc. Supplemental Executive Retirement Plan(8)
10.20 -- Amended and Restated Credit Agreement dated as of August 14, 1996 among ABS, EFC,
the Lenders (as defined therein), Lehman Commercial Paper, Inc., as Documentation
Agent and Chase Securities Inc., individually and as agent for the Lenders
("Chase")(9)
10.21 -- Amended and Restated Security Agreement dated as of August 14, 1996 between ABS
and Chase(9)
10.22 -- Amended and Restated Security Agreement dated as of August 14, 1996 between EFC
and Chase(9)
10.23 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC
in favor of NBD Bank(9)
10.24 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in
favor of NBD Bank(9)
</TABLE>
<PAGE> 89
<TABLE>
Exhibit No. Description
- ----------- -----------
<C> <S> <C>
10.25 -- Amended and Restated K & F Agreement dated as of August 14, 1996 between the
Company and Chase(9)
10.26 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
ABS and Chase(9)
10.27 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
EFC and Chase(9)
10.28 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc.
and Chase Securities Inc(9)
10.29 -- Registration Rights Agreement dated as of August 15, 1996 among the Company,
Lehman Brothers Inc. and Chase Securities Inc.(9)
12.01 -- Statement of computation of ratio of earnings (deficiency) to fixed charges(5)
21.01 -- Subsidiaries of the Registrant(1)
23.01 -- Consent of O'Sullivan Graev and Karabell (included in Exhibit 5)(5)
23.02 -- Consent of Deloitte & Touche LLP*
24.01 -- Powers of Attorney (included on signature page)
25.01 -- Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939
of Fleet National Bank as Trustee(9)
25.02 -- Statement of Eligibility and Qualification under the Trust Indenture Act of
1939of The Bank of New York, with respect to the Indenture for the 11 7/8% Senior
Secured Notes(5)
26.01 -- Financial Data Schedule(8)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991 and incorporated herein by
reference.
(5) Previously filed as an exhibit hereto.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996 and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-11047 and incorporated herein by reference.
* Filed herewith.
<PAGE> 1
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 7 to
Registration Statement No. 33-47028 of K & F Industries, Inc. of our report
dated May 22, 1996, appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Prospectus
Summary -- Summary Consolidated Financial Information", "Selected Consolidated
Financial Information" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
October 22, 1996
