<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996
REGISTRATION NO. 333-11047
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3728 34-1614845
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENNETH M. SCHWARTZ
EXECUTIVE VICE PRESIDENT
K&F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
JOHN J. SUYDAM, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this
Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE> 2
K&F INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<S> <C>
(1) Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page of Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page of Prospectus
(2) Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus; Available Information
(3) Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Prospectus Summary; Risk Factors; Selected
Consolidated Financial Information
(4) Terms of the Transaction................... Prospectus Summary; The Exchange Offer;
Description of the Notes
(5) Pro Forma Financial Information............ *
(6) Material Contacts with the Company Being
Acquired................................. *
(7) Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Plan of Distribution
(8) Interests of Named Experts and Counsel..... *
(9) Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
(10) Information With Respect to S-3
Registrants.............................. *
(11) Incorporation of Certain Information by
Reference................................ *
(12) Information With Respect to S-2 or S-3
Registrants.............................. *
(13) Incorporation of Certain Information by
Reference................................ *
(14) Information With Respect to Registrants
Other Than S-2 or S-3 Registrants........ Prospectus Summary; Risk Factors; Selected
Consolidated Financial Information;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Description of
Certain Indebtedness
(15) Information With Respect to S-3
Companies................................ *
(16) Information With Respect to S-2 or S-3
Companies................................ *
(17) Information With Respect to Companies Other
Than S-2 or S-3 Companies................ *
(18) Information if Proxies, Consents or
Authorization Are to be Solicited........ *
(19) Information if Proxies, Consents or
Authorizations Are Not to be Solicited,
or in an Exchange Offer.................. Management; Ownership of Capital Stock;
Certain Transactions
</TABLE>
- ---------------
* Not applicable or answer is in the negative.
<PAGE> 3
PROSPECTUS
K & F INDUSTRIES, INC.
Offer to Exchange up to $140,000,000 of its
10 3/8% Series B Senior Subordinated Notes due 2004
for any and all of its outstanding
10 3/8% Senior Subordinated Notes due 2004
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON OCTOBER 11, 1996, UNLESS EXTENDED.
------------------------
K & F Industries, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount of 10 3/8% Series B Senior Subordinated Notes
due 2004 (the "New Notes") of the Company for each $1,000 principal amount of
the issued and outstanding 10 3/8% Senior Subordinated Notes due 2004 (the "Old
Notes," and the Old Notes and the New Notes, collectively, the "Notes") of the
Company from the Holders (as defined herein) thereof. As of the date of this
Prospectus, there is $140,000,000 aggregate principal amount of the Old Notes
outstanding. The terms of the New Notes are identical in all material respects
to the Old Notes, except that the New Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and therefore will
not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined herein), which provisions will terminate as to all of the
Notes upon the consummation of the Exchange Offer.
Interest on the New Notes will accrue from August 15, 1996 and will be
payable in cash semi-annually in arrears on March 15 and September 15 of each
year, commencing March 15, 1997. No interest will be payable on the Old Notes
accepted for exchange.
The New Notes will be general unsecured obligations of the Company and will
be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. The Company conducts its operations
solely through its subsidiaries, and, accordingly, the New Notes will be
effectively subordinated to indebtedness and other liabilities of its
subsidiaries. As of June 30, 1996, after giving pro forma effect to the offering
of the Old Notes (the "Offering"), application of the net proceeds therefrom and
borrowings under the Amended and Restated Credit Agreement (as defined), the
Company would have had approximately $160 million of Senior Indebtedness
outstanding, and the Company's subsidiaries would have had other liabilities of
approximately $92 million outstanding. See "Capitalization."
The Old Notes were not registered under the Securities Act in reliance upon
an exemption from the registration requirements thereof. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The New Notes are being offered hereby in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement. Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such New Notes and neither
such holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes. Notwithstanding the foregoing, each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for such Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of one year after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the New Notes. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn as provided herein at
any time prior to the Expiration Date (as defined herein). The Exchange Offer is
subject to certain customary conditions.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE 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 date of this Prospectus is September 13, 1996
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the New
Notes being offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted pursuant to the rules and regulations promulgated by the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each such contract, agreement or other document filed or incorporated by
reference as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may also be obtained at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. Such
materials can also be inspected on the Internet at http://www.sec.gov.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such materials filed by the Company with the
Commission may be inspected, and copies thereof obtained, at the places, and in
the manner, set forth above.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so long
as the Notes remain outstanding, it will file with the Commission and distribute
to holders of the Notes copies of the financial information that would have been
contained in annual reports and quarterly reports, including management's
discussion and analysis of financial condition and results of operations, that
the Company would have been required to file with the Commission pursuant to the
Exchange Act. Such financial information will include annual reports containing
consolidated financial statements and notes thereto, together with an opinion
thereon expressed by an independent public accounting firm, as well as quarterly
reports containing unaudited condensed consolidated financial statements for the
first three quarters of each fiscal year. The Company will also make such
reports available to prospective purchasers of the Notes, securities analysts
and broker-dealers upon their request. In addition, the Company has agreed that
for so long as any of the Old Notes remain outstanding it will make available to
any prospective purchaser of the Old Notes or beneficial owner of the Old Notes
in connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act, until such time as the Company has either exchanged
the Old Notes for securities identical in all material respects which have been
registered under the Securities Act or until such time as the holders thereof
have disposed of such Old Notes pursuant to an effective registration statement
filed by the Company.
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. (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 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
3
<PAGE> 6
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
"self-sealing" 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.
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 an amended and
restated credit agreement (the "Amended and Restated Credit Agreement") with the
lenders thereunder, consisting of a term loan facility in an aggregate principal
amount of $40 million and a revolving credit facility in an aggregate principal
amount of $70 million. On August 15, 1996, the Company consummated the Offering
and deposited the net proceeds therefrom with the trustee under the indenture
governing the Company's outstanding 13 3/4% Senior Subordinated Debentures due
2001 (the "13 3/4% Debentures"). Also on such date, the Company sent a notice to
the holders of all outstanding 13 3/4% Debentures that all of such 13 3/4%
Debentures would be redeemed 30 days after the date of such notice.
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.
4
<PAGE> 7
THE EXCHANGE OFFER
Registration Rights
Agreement................... The Old Notes were sold by the Company on
August 15, 1996 to Lehman Brothers Inc. and
Chase Securities Inc. (the "Initial
Purchasers"), who placed the Old Notes with
institutional investors and a limited number of
accredited investors. In connection therewith,
the Company and the Initial Purchasers executed
and delivered for the benefit of the holders of
the Old Notes a registration rights agreement
(the "Registration Rights Agreement")
providing, among other things, for the Exchange
Offer.
The Exchange Offer............ New Notes are being offered in exchange for a
like principal amount of Old Notes. As of the
date hereof, $140,000,000 aggregate principal
amount of Old Notes are outstanding. The
Company will issue the New Notes to Holders
promptly following the Expiration Date. See
"Risk Factors -- Consequences of Failure to
Exchange."
Expiration Date............... 5:00 p.m., New York City time, on October 11,
1996, unless the Exchange Offer is extended as
provided herein, in which case the term
"Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Interest...................... Each New Note will bear interest from August
15, 1996, the date of original issuance of the
Old Notes. No interest will be paid on the Old
Notes accepted for exchange.
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. The Company reserves the right to
amend, terminate or extend the Exchange Offer
at any time prior to the Expiration Date upon
the occurrence of any such condition. See "The
Exchange Offer -- Conditions."
Procedures for Tendering Old
Notes....................... Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
or an Agent's Message (as defined herein) in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any
other required documentation to the exchange
agent (the "Exchange Agent") at the address set
forth herein. By executing the Letter of
Transmittal or delivering an Agent's message,
each Holder will represent to the Company,
among other things, that (i) the New Notes
acquired pursuant to the Exchange Offer by the
Holder and any beneficial owners of Old Notes
are being obtained in the ordinary course of
business of the person receiving such New
Notes, (ii) neither the Holder nor such
beneficial owner has an arrangement with any
person to participate in the distribution of
such New Notes, (iii) neither the Holder nor
such beneficial owner nor any such other person
is engaging in or intends to engage in a
distribution of such New Notes and (iv) neither
the Holder nor such beneficial owner is an
"affiliate," as defined under Rule 405
promulgated under the Securities Act, of the
Company. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by
such broker-dealer as a result of marketmaking
activities or other trading activities (other
5
<PAGE> 8
than Old Notes acquired directly from the
Company), may participate in the Exchange Offer
but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge
in the Letter of Transmittal that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. See "The Exchange
Offer -- Procedures for Tendering" and "Plan of
Distribution."
Special Procedures for
Beneficial Owners........... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to
completing and executing the Letter of
Transmittal or delivering an Agent's Message
and delivering his Old Notes, either make
appropriate arrangements to register ownership
of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power
from the registered Holder. The transfer of
registered ownership may take considerable
time. See "The Exchange Offer -- Procedures for
Tendering."
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
an Agent's Message or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights............. Tenders may be withdrawn as provided herein at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes....... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Exchange Agent................ Fleet National Bank is serving as Exchange
Agent in connection with the Exchange Offer.
See "The Exchange Offer -- Exchange Agent."
Use of Proceeds............... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
6
<PAGE> 9
Consequences of Failure to
Exchange.................... Holders of Old Notes who do not exchange their
Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Notes
as set forth in the legend thereon as a
consequence of the issuance of the Old Notes
pursuant to exemptions from, or in transactions
not subject to, the registration requirements
of the Securities Act and applicable state
securities laws. In general, Old Notes may not
be offered or sold unless registered under the
Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws.
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $140,000,000 aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects to
the Old Notes, except that the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not contain certain provisions providing for the payment of liquidated
damages to the holders of the Old Notes under certain circumstances relating to
the Registration Rights Agreement, which provisions will terminate as to all of
the Notes upon the consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes and, except as set forth in the
immediately preceding sentence, will be entitled to the benefits of the
Indenture, under which both the Old Notes were, and the New Notes will be,
issued. See "Description of Notes."
THE NEW NOTES................. $140,000,000 aggregate principal amount of
10 3/8% Series B Senior Subordinated Notes due
2004.
MATURITY DATE................. September 1, 2004.
INTEREST PAYMENT DATES........ March 1 and September 1, commencing March 1,
1997.
MANDATORY REDEMPTION.......... None.
OPTIONAL REDEMPTION........... The New Notes will be redeemable at the
Company's option in whole or in part, at any
time, on or after September 1, 2000 at the
redemption prices set forth herein, plus
accrued and unpaid interest to the date of
redemption. In addition, in the event that the
Company consummates an initial public offering
of its common stock on or before August 15,
1999, the Company may, at its option, redeem up
to an aggregate of $49 million in principal
amount of New Notes at a redemption price of
110.375% of the principal amount thereof, plus
accrued and unpaid interest through the
redemption date. See "Description of the
Notes -- Optional Redemption."
RANKING....................... The New Notes will be general unsecured
obligations of the Company, will be
subordinated in right of payment to all
existing and future Senior Indebtedness (as
defined in the Indenture) including all
obligations of the Company under the Amended
and Restated Credit Agreement (as defined) and
the Senior Notes (as defined), and will be
senior in right of payment to or pari passu
with all other indebtedness of the Company. The
Company conducts its operations solely through
its subsidiaries and, accordingly, the New
Notes will be effectively subordinated to
indebtedness and other liabilities of such
subsidiaries. As of June 30, 1996, after giving
pro forma effect to the Offering, application
of the net proceeds therefrom and borrowings
under the Amended and Restated Credit
Agreement, the Company would have had
approximately $160 million of Senior
Indebtedness outstanding and the Company's
subsidiaries would have had other liabilities
of approxi-
7
<PAGE> 10
mately $92 million outstanding. See
"Capitalization" and "Description of the
Notes -- Subordination."
CERTAIN COVENANTS............. The indenture pursuant to which the Old Notes
were, and Notes will be, issued (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to (i) incur
additional indebtedness, (ii) pay dividends or
make certain other restricted payments, (iii)
enter into transactions with affiliates, (iv)
create certain liens, (v) make certain asset
dispositions and (vi) merge or consolidate
with, or transfer substantially all of its
assets to, another person. The Indenture also
limits the ability of the Company's
subsidiaries to issue preferred stock and to
create restrictions on the ability of such
subsidiaries to pay dividends or make any other
distributions. In addition, the Company is
obligated, under certain circumstances, to
offer to purchase Notes with the net cash
proceeds of certain sales and other
dispositions of assets at a purchase price of
100% of the principal amount of the Notes, plus
accrued and unpaid interest to the date of
purchase. See "Description of the
Notes -- Repurchase at the Option of Holders"
and "-- Certain Covenants."
CHANGE OF CONTROL............. In the event of a Change of Control (as
defined), each holder of New Notes will have
the right, at the holder's option, to require
the Company to purchase such holder's New Notes
in whole or in part, at a purchase price equal
to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of
purchase. The Amended and Restated Credit
Agreement limits the Company's ability to make
such a purchase. See "Description of the
Notes -- Repurchase at the Option of Holders."
8
<PAGE> 11
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 (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
Pro forma cash interest expense(h)....... 7,914 34,214
Ratio of EBITDA to pro forma cash
interest expense(g)(h)................. 2.51x 1.77x
</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% 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.
(h) Pro forma cash interest expense gives effect to the Offering, application of
the net proceeds therefrom and borrowings under the Amended and Restated
Credit Agreement (and an assumed interest rate of 8.25% on borrowings under
the Amended and Restated Credit Agreement) as if each had occurred on April
1, 1995. See "Capitalization."
9
<PAGE> 12
RISK FACTORS
Holders should consider carefully the following matters, as well as the
other information contained in this Prospectus before making a decision to
tender their Old Notes in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange the Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such holder
has no arrangement with any person to participate in the distribution of such
New Notes and neither such holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of one year from
the date of this Prospectus, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, the ability of any Holder to resell the New Notes is
subject to applicable state securities laws as described in "-- Blue Sky
Restrictions on Resale of New Notes" below.
NECESSITY TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Old Notes, Holders of Old Notes must transmit a properly
completed Letter of Transmittal, including all other documents required by such
Letter of Transmittal, to the Exchange Agent at one of the addresses set forth
below under "The Exchange Offer -- Exchange Agent" on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
("DTC") pursuant to the procedure for book-entry transfer described herein, must
be received by the Exchange Agent prior to the Expiration Date or (iii) the
Holder must comply with the guaranteed delivery procedures described herein. See
"The Exchange Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
10
<PAGE> 13
HIGHLY LEVERAGED POSITION
Debt to Equity Ratio. The Company is highly leveraged. As of June 30,
1996, after giving pro forma effect to the Offering, application of the net
proceeds therefrom and borrowings under the Amended and Restated Credit
Agreement, in addition to the Notes the Company would have had approximately
$160 million of Senior Indebtedness outstanding, the Company's subsidiaries
would have had other liabilities of approximately $92 million outstanding, 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 its outstanding $100
million aggregate principal amount of 11 7/8% Senior Secured Notes due 2003 (the
"Senior Notes") in 2003 and all principal plus accrued interest on the New Notes
in 2004. In addition, the Company's subsidiaries will be required to make
scheduled payments pursuant to the Amended and Restated Credit Agreement, which
consists of a term loan facility in an aggregate principal amount of $40 million
and a revolving credit facility in an aggregate principal amount of $70 million,
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 its ability to withstand competitive pressures or adverse
economic consequences, including its ability to make investments in aircraft
programs and capital expenditures. In addition, borrowings under the Amended and
Restated Credit Agreement will be 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 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 indenture governing the Senior Notes (the
"Senior Note Indenture") and the 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
11
<PAGE> 14
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.
"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 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. In
the event of any such acceleration, holders of the Notes would have the right to
accelerate the maturity of the Notes; however, payment of the Notes is
subordinated to payments in respect of Senior Indebtedness, including the Senior
Notes and Indebtedness under the Amended and Restated Credit Agreement and there
can be no assurance that the Company would have sufficient assets to repay the
Notes after repaying all of such outstanding Indebtedness. See
"-- Subordination" and "-- Holding Company Structure."
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 1.51 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 New 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 New Notes.
SUBORDINATION
The New Notes will be subordinate to all Senior Indebtedness, which
includes the Senior Notes and borrowings under the Amended and Restated Credit
Agreement. In the event of a bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
New Notes only after all Senior Indebtedness has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on any or all of the
New Notes. In addition, the Company may not pay principal or premium, if any, or
interest on the New Notes if certain Senior Indebtedness is not paid when due or
any other default on such Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms, unless in
either case, such amount has been paid in full or the default has been cured or
waived and such acceleration has been rescinded. In addition, if any default
occurs with respect to certain Senior Indebtedness and certain other conditions
are satisfied, the Company may not make any payments on the New Notes for a
designated period of time. As of June 30, 1996, after giving pro forma effect
12
<PAGE> 15
to the Offering, application of the net proceeds therefrom and borrowings under
the Amended and Restated Credit Agreement, the Company would have had
approximately $160 million of Senior Indebtedness outstanding. See "Description
of Certain Indebtedness" and "Description of the Notes -- Subordination."
HOLDING COMPANY STRUCTURE
The Company will be the sole obligor on the New 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, the New 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 or the New 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, after giving pro forma effect to the
Offering, application of the net proceeds therefrom and borrowings under the
Amended and Restated Credit Agreement, the aggregate amount of obligations,
including trade payables and other liabilities, of the Company's subsidiaries to
which the New Notes would effectively be subordinated, would have been
approximately $252 million. See "Description of the Notes" and "Capitalization."
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. In
addition, Aircraft Braking Systems and Engineered Fabrics are the borrowers
under the Amended and Restated Credit Agreement. Aircraft Braking Systems and
Engineered Fabrics have secured their obligations under the Amended and Restated
Credit Agreement by pledging all of their inventory and accounts receivables and
certain other tangible assets. The New Notes will not be secured.
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,
13
<PAGE> 16
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."
INTERESTS OF BLS AND THE LEHMAN INVESTORS
Bernard L. Schwartz ("BLS"), the Chairman of the Board and Chief Executive
Officer of the Company, owns 27.12% of the capital stock of the Company and has
operating control of the Company by reason of certain stockholder arrangements.
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 the Company. 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 Company's capital stock. 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 directors of
the Company.
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 Financial Condition and Results of
Operations" 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."
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes will constitute a new class of securities with no established
trading market. The Company does not intend to list the New Notes on any
national securities exchange or to seek the admission thereof to trading in the
Nasdaq Stock Market's National Market. The Old Notes are designated for trading
in the Private Offerings, Resale and Trading through Automatic Linkages
("PORTAL") market. The Company has been advised by the Initial Purchasers that
the Initial Purchasers currently intend to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
activities with
14
<PAGE> 17
respect to the New Notes may be discontinued at any time without notice. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act, and may be limited during the pendency
of any Shelf Registration Statement. Accordingly, no assurance can be given that
an active public or other market will develop for the New Notes or as to the
liquidity of the trading market for the New Notes. If a trading market does not
develop or is not maintained, holders of the New Notes may experience difficulty
in reselling the New Notes or may be unable to sell them at all. If a market for
the New Notes develops, any such market may be discontinued at any time. If a
public trading market develops for the New Notes, future trading prices of the
New Notes will depend on many factors, including, among other things, prevailing
interest rates, the Company's financial condition and results of operations, and
the market for similar notes. Depending on those and other factors, the New
Notes may trade at a discount from their principal amount.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on August 15, 1996 to the Initial
Purchasers, who placed the Old Notes with institutional investors and a limited
number of accredited investors. In connection therewith, the Company and the
Initial Purchasers entered into the Registration Rights Agreement, which
provides that (i) the Company will file an Exchange Offer Registration Statement
with the Commission on or prior to 30 days after the Issuance Date, (ii) the
Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to 90 days after the
Issuance Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 30 business days after
the date on which the Exchange Offer Registration Statement was declared
effective by the Commission, New Notes in exchange for all Old Notes tendered
prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement (as described below), the Company will use its best
efforts to file the Shelf Registration Statement with the Commission on or prior
to 30 days after such filing obligation arises (and in any event within 120 days
after the Issuance Date) and to cause the Shelf Registration to become effective
by the Commission as promptly as possible after such obligation arises. Promptly
after the effectiveness of the Registration Statement, the Company will offer,
pursuant to this Prospectus, to the Holders of the Old Notes the opportunity to
exchange their Old Notes for a like principal amount of New Notes, to be issued
without a restrictive legend and which may, generally, be reoffered and resold
by the holder without restrictions or limitations under the Securities Act. The
term "Holder" with respect to the Exchange Offer means any person in whose name
Old Notes are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Instead, based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by any holder of
such New Notes (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 promulgated under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such Holder's business, such Holder has no arrangement or understanding with
any person to participate in the distribution of such New Notes and neither such
Holder nor any other such person is engaging in or intends to engage in a
distribution of such New Notes. Because the Commission has not considered the
Exchange Offer in the context of a no-action letter, there can be no assurance
that the staff of the Commission would make a similar determination with respect
to the Exchange Offer. Any Holder who is an affiliate of the Company or who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Notes cannot rely on such interpretations by the staff of the
15
<PAGE> 18
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of one year after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any holder
of Transfer Restricted Securities (as defined below) notifies the Company within
the specified time period that (A) it is prohibited by law or Commission policy
from participating in the Exchange Offer or (B) that it may not resell the New
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Old Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Old Notes by the holders thereof
who satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Old Note until (i) the date on which
such Old Note has been exchanged by a person other than a broker-dealer for a
New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer
in the Exchange Offer of an Old Note for a New Note, the date on which such New
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Old Note is
distributed to the public pursuant to Rule 144 under the Act.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement or (d) the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
liquidated damages to each holder of Old Notes ("Liquidated Damages"), with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Old Notes held by such holder. The amount of the Liquidated Damages
will increase by an additional $.05 per week per $1,000 principal amount of Old
Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.50
per week per $1,000 principal amount of Old Notes. All accrued Liquidated
Damages will be paid by the Company on each interest payment date to the Global
Note Holder in cash. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to
16
<PAGE> 19
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Old Notes included in the Shelf Registration Statement and benefit from
the provisions set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, Holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement and such Old Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes have
been registered under the Securities Act and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing for
the payment of liquidated damages to the holders of the Old Notes under certain
circumstances relating to the Registration Rights Agreement, which provisions
will terminate upon the consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture under which the Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $140,000,000 aggregate principal amount
of the Old Notes are outstanding. The Company has fixed the close of business on
September 9, 1996 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus, together with the Letter of
Transmittal, will initially be sent. As of such date, there were four (4)
registered Holders of the Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law (the "DGCL") or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral notice (confirmed in writing) or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering Holders for the purpose of the exchange of Old Notes.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, without expense, to
the tendering Holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
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<PAGE> 20
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 11, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral notice (confirmed in writing) or written notice
and will make a public announcement thereof prior to 9:00 a.m., New York City
time, on the next business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under "The Exchange Offer -- Conditions" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral notice
(confirmed in writing) or written notice of such delay, extension or termination
to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five- to 10-business-day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from August 15, 1996, the date of original
issuance of the Old Notes. No interest will be paid on the Old Notes accepted
for exchange.
PROCEDURES FOR TENDERING
The tender of Old Notes by a Holder thereof pursuant to one of the
procedures set forth below and the acceptance thereof by the Company will
constitute a binding agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. This Prospectus, together with the Letter of Transmittal, will
first be sent on or about September 13, 1996, to all Holders of Old Notes known
to the Company and the Exchange Agent.
Only a Holder of the Old Notes may tender such Old Notes in the Exchange
Offer. A Holder who wishes to tender any Old Notes for exchange pursuant to the
Exchange Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the Holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the Old Notes, Letter of Transmittal (or an Agent's
Message) and other required documents must be received by the Exchange Agent at
the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgement from the
participant in DTC's book-entry transfer facility tendering Old Notes which are
18
<PAGE> 21
subject to Book-Entry Confirmation that such party has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against the participant.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED AND PROPER INSURANCE BE
OBTAINED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal or deliver an Agent's Message and delivering such beneficial owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in such beneficial owner's name or obtain a properly completed bond power
from the registered Holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 promulgated under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
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<PAGE> 22
By tendering, each Holder will represent to the Company, among other
things, that (i) the New Notes acquired by the Holder and any beneficial owners
of Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner has an arrangement with any person to
participate in the distribution of such New Notes, (iii) neither the Holder nor
such beneficial owner nor any such other person is engaging in or intends to
engage in a distribution of such New Notes and (iv) neither the Holder nor any
such other person is an "affiliate," as defined under Rule 405 promulgated under
the Securities Act, of the Company. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
may participate in the Exchange Offer but may be deemed an "underwriter" under
the Securities Act and, therefore, must acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in DTC's system may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at DTC, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees or an Agent's Message and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "-- Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message or any other required documents to the
Exchange Agent prior to the Expiration Date may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) or an Agent's Message together with
the certificate(s) representing the Old Notes, or a Book-Entry
Confirmation, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof)or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
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<PAGE> 23
WITHDRAWAL OF TENDERS
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the persons withdrawing the tender and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at DTC to be credited with the withdrawn Old Notes and otherwise comply with the
procedures of DTC. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole discretion, which determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without cost
to such Holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with DTC for the Old Notes).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
such Old Notes, if:
(a) the Exchange Offer shall violate applicable law or any applicable
interpretation of the staff of the Commission; or
(b) any action or proceeding is instituted or threatened in any court
or by any governmental agency that might materially impair the ability of
the Company to proceed with the Exchange Offer or any material adverse
development has occurred in any existing action or proceeding with respect
to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall deem necessary for the consummation of the Exchange
Offer.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering Holders (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described above, such Old Notes
will be credited to an account maintained with DTC), (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Old Notes
(see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Old Notes which
have not been withdrawn. If such waiver constitutes a material change to
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<PAGE> 24
the Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the waiver and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five- to 10-business-day period.
EXCHANGE AGENT
Fleet National Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
If by Mail or Overnight Mail: If by Hand:
Fleet National Bank Fleet National Bank
Corporate Trust Operations Corporate Trust Operations
777 Main Street CTMO0224 777 Main Street, Lower Level
Hartford, Connecticut 06115 Hartford, Connecticut 06115
</TABLE>
<TABLE>
<S> <C>
By Telecopier: Confirm By Telephone:
(860) 986-1271
(860) 986-7908 Attention: Patricia Williams
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal or delivering an Agent's Message, or if
a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized. The expenses of the Exchange Offer and the unamortized expenses
related to the issuance of the Old Notes will be amortized over the term of the
New Notes.
22
<PAGE> 25
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
The net proceeds to the Company from the Offering were approximately $135
million after deducting expenses payable by the Company in connection with the
Offering. The Company used such proceeds, together with borrowings under the
Amended and Restated Credit Agreement, to redeem $170 million aggregate
principal amount of 13 3/4% Debentures, for an aggregate purchase price,
inclusive of related fees and expenses, of approximately $175 million. The net
proceeds of the Offering were irrevocably deposited with the trustee under the
13 3/4% Debenture Indenture immediately following the closing of the Offering
for the sole purpose of effecting the redemption. Concurrently with such
deposit, the Company sent a notice to the holders of the 13 3/4% Debentures to
the effect that such 13 3/4% Debentures would be redeemed 30 days after the date
of such notice.
23
<PAGE> 26
CAPITALIZATION
The following table sets forth as of June 30, 1996 the actual
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the sale of the Old Notes and the application of the net
proceeds therefrom (after deduction of discounts and commissions payable to the
Initial Purchasers and estimated Offering expenses), together with borrowings
under the Amended and Restated Credit Agreement. The table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Existing Revolving Credit Agreement(a)........................ $ 10,000 $ --
Amended and Restated Credit Agreement(b)...................... -- 60,000
11 7/8% Senior Secured Notes due 2003......................... 100,000 100,000
13 3/4% Senior Subordinated Debentures due 2001(c)............ 179,657 --
10 3/8% Senior Subordinated Notes due 2004.................... -- 140,000
-------- --------
Total long-term debt...................................... 289,657 300,000
-------- --------
Stockholders' deficiency........................................ (34,387) (43,588)(d)
-------- --------
Total capitalization.................................. $255,270 $ 256,412
======== ========
</TABLE>
- ---------------
(a) Refers to the Revolving Credit Agreement dated as of April 27, 1989, as
amended and restated, among Aircraft Braking Systems, Engineered Fabrics,
Manufacturers Hanover Trust Company (a predecessor by merger of The Chase
Manhattan Bank), as agent for a syndicate of banks, and such banks. The
Existing Revolving Credit Agreement will be amended and restated as the
Amended and Restated Credit Agreement concurrently with the Offering.
(b) The Amended and Restated Credit Agreement will provide for a term loan
facility in an aggregate principal amount of $40 million and a revolving
credit facility in an aggregate principal amount of $70 million.
(c) As of June 30, 1996, approximately $179.7 million aggregate principal amount
of 13 3/4% Debentures were outstanding. On August 1, 1996, the Company
redeemed approximately $9.7 million aggregate principal amount of its
13 3/4% Debentures. The Company used cash on hand and borrowings under the
Existing Revolving Credit Agreement to finance such redemption.
(d) Gives effect to the write-off of unamortized financing costs and redemption
premiums relating to the redemption of the 13 3/4% Debentures.
24
<PAGE> 27
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
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 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.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Aircraft Braking Systems generates approximately 75% of its revenues
through the sale of replacement parts for wheels and braking systems previously
manufactured by the Company and its predecessors and installed on 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 medium- and short-range aircraft.
During the three years ended March 31, 1996, the Company spent an aggregate of
$108 million for research, development, design and Program Investments. As a
result of these efforts, the Company has been selected as a 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
26
<PAGE> 29
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 Existing Revolving Loan. The Company's
long-term 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
27
<PAGE> 30
hand and borrowings from the Existing Revolving Loan 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 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 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 Notes, the Senior 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
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 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 New Notes and the Senior Notes will
represent significant liquidity requirements for the Company. Borrowings under
the Amended and Restated Credit Agreement will bear interest at floating rates
based upon the interest rate option elected by the Company and are expected to
be 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 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."
28
<PAGE> 31
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.
29
<PAGE> 32
BUSINESS
GENERAL
The Company, 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. The Company 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, through its other wholly owned
subsidiary, Engineered Fabrics, the Company 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 to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
THE AIRCRAFT WHEEL AND BRAKE INDUSTRY
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft
certification process, competition among aircraft wheel and brake suppliers most
often occurs at the time the airframe manufacturer makes its initial
installation decision. Generally, competing suppliers submit proposals in
response to requests for bids from manufacturers. Selections are made by the
manufacturer on the basis of technological superiority, conformity to design
criteria established by the manufacturer and pricing considerations. Typically,
general aviation aircraft manufacturers will select one supplier of wheels and
brakes for a particular aircraft. In the commercial transport market, however,
there will often be "dual sourcing" of wheels and brakes. In such case, an
airframe manufacturer may approve and receive FAA certification to configure a
particular airframe with equipment provided by two or more wheel and brake
manufacturers. Where two suppliers have been certified, the aircraft customer,
such as a major airline, will designate the original equipment to be installed
on the customer's aircraft. Competition among two certified suppliers for that
airline's initial installation decision generally focuses on such factors as the
system's "cost-per-landing," given certain assumptions concerning the frequency
of replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
30
<PAGE> 33
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 during the first half 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,
governments have 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, Aircraft Braking Systems'
products had been installed on approximately 32,000 commercial transport,
general aviation and military aircraft. Commercial transport aircraft include
the DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340
on all of which Aircraft Braking Systems is the sole-source supplier. In
addition, Aircraft Braking Systems supplies spare parts for the McDonnell
Douglas 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 Airbus A-321,
Airbus A-319, McDonnell Douglas MD-90, 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 DC-9 model
jet that first flew in 1965 and evolved later into the popular MD-80 series also
furnished with Aircraft Braking Systems' wheels and brakes. A technologically
innovative design, the MD-90 is equipped with an advanced turbofan engine that
complies with the FAA's restrictive Stage III noise restrictions, offering fuel
savings over competing engines. Delta Airlines, the launch customer, has taken
delivery of 12 MD-90s out of a total order of 31. Other customers for the MD-90
include Japan Air System and Saudi Arabia, which has announced orders for 29 of
these aircraft. McDonnell Douglas has booked orders for over 130 MD-90 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
A-321 aircraft. Of the 48 aircraft delivered to date, Aircraft Braking Systems
has provided wheels and brakes for 40 of these aircraft.
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<PAGE> 34
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 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 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 $31.8 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 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.
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.
32
<PAGE> 35
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.
33
<PAGE> 36
The following table is a summary of the principal aircraft platforms
equipped with the Company's Aircraft Braking Systems products:
<TABLE>
<S> <C>
COMMERCIAL
Airbus: A330/A340
A321
A310/A320
Alenia: ATR-42-300
ATR-42-400/500
Boeing: B707-320 B/C
Canadair: Regional Jet
CASA: C-212-200
DeHavilland: DHC-8-400
Dornier: DO228-202
DO228-212
Fokker: F-27
F-28
Fokker-50
Fokker-100/70
Lockheed: L-100
L-1011
McDonnell
Douglas: DC-3/4/6/8
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
MILITARY
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
Martin: F-117A
C-130 Series
C-141 A/B
F-16A/B/C/D
McDonnell
Douglas: F-4C/D/E/G
A-4 Series
C-9A/B
KC-10A
Northrop
Grumman: F-5E/F
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
JAS-39
Sikorsky: SH-60
S-70
UH-60
CH-53
Vought: A-7A/B/E
Westland: W30 Lynx
GENERAL AVIATION
Aerospatiale: SN601
AMD Falcon: 10/100/20/200/50
50EX
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
IAI: 1124/1125 (Astra)
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>
34
<PAGE> 37
FOREIGN CUSTOMERS
The Company supplies products to a number of foreign aircraft
manufacturers, airlines and foreign governments. The following table shows sales
of the Company to both foreign and domestic customers for the last three fiscal
years:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
MARCH 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Domestic sales.................................................. 59% 62% 63%
Foreign sales................................................... 41 38 37
--- --- ---
Total................................................. 100% 100% 100%
=== === ===
</TABLE>
INDEPENDENT RESEARCH AND DEVELOPMENT
The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in the
same or related fields. At March 31, 1996, the Company employed approximately
156 engineers (of whom 31 held advanced degrees); approximately 29 of such
engineers (including 14 holding advanced degrees) devoted all or part of their
efforts toward a variety of projects including: refining carbon processing
techniques to create more durable braking systems; upgrading existing braking
systems to provide enhanced performance; and developing new technologies to
improve the Company's products.
The costs incurred relating to independent research and development for the
fiscal years ended March 31, 1996, 1995 and 1994 were $9.8 million, $8.4 million
and $12.9 million, respectively.
PATENTS AND LICENSES
The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.
COMPETITION
The Company faces substantial competition from a few suppliers in each of
its product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company.
Both significant competitors are larger and have greater financial resources
than the Company. The principal competitor for anti-skid systems is the
Hydro-Aire Division of Crane Co. The principal competitors for fuel tanks are
American Fuel Cell & Coated Fabrics Company and Aerazur of France.
BACKLOG
Backlog at 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."
35
<PAGE> 38
GOVERNMENT CONTRACTS
For the fiscal years ended March 31, 1996, 1995 and 1994, approximately
16%, 14%, and 15%, respectively, of the Company's total sales were made to
agencies of the Government or to prime contractors or subcontractors of the
Government.
All of the Company's defense contracts are firm, fixed-price contracts
under which the Company agrees to perform for a predetermined price. Although
the Company's fixed-price contracts generally permit the Company to keep
unexpected profits if costs are less than projected, the Company does bear the
risk that increased or unexpected costs may reduce profit or cause the Company
to sustain losses on the contract. All domestic defense contracts and
subcontracts to which the Company is a party are subject to audit, various
profit and cost controls and standard provisions for termination at the
convenience of the Government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for allowable
costs and to an allowance for profit. Foreign defense contracts generally
contain comparable provisions relating to termination at the convenience of the
government. To date, no significant fixed-price contract of the Company has been
terminated.
Companies supplying defense-related equipment to the Government are subject
to certain additional business risks peculiar to that industry. Among these
risks are the ability of the Government to unilaterally suspend the Company from
new contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in advance
of design completion. A reduction in expenditures by the Government for aircraft
using products of the type manufactured by the Company, or lower margins
resulting from increasingly competitive procurement policies, or a reduction in
the volume of contracts or subcontracts awarded to the Company or substantial
cost overruns would have an adverse effect on the Company's cash flow.
SUPPLIES AND MATERIALS
The principal raw materials used in the Company's wheel and brake
manufacturing operations are steel, aluminum forgings and carbon compounds. The
Company purchases steel and aluminum forgings from several sources.
Substantially all of the Company's carbon has been purchased from Hitco 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
36
<PAGE> 39
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 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
37
<PAGE> 40
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.
38
<PAGE> 41
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,
39
<PAGE> 42
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>
40
<PAGE> 43
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.
41
<PAGE> 44
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
ANNUAL COMPENSATION
COMPENSATION -----------------
------------------------------ OPTIONS LTIP ALL OTHER
FISCAL SALARY BONUS GRANTED PAYOUTS COMPENSATION(a)
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)
- ------------------------------------ ------ --------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz................. 1996 1,770,500(b) -- -- -- --
Chairman of the Board and Chief 1995 1,779,500(b) -- -- -- --
Executive Officer 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 $100,000 of the aggregate
advisory fee be paid to Mr. K. Schwartz, which is included in his fiscal
years 1996 and 1995 salaries.
(c) Compensation for fiscal year 1994 for Mr. Welsch reflects less than a full
year, as his employment date was September 8, 1993.
42
<PAGE> 45
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options by the Company, during fiscal year
1996, to the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)(1)
SHARES ------------- -------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz...................... 0 0 0 0/0
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.
43
<PAGE> 46
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 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.
44
<PAGE> 47
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.
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 NUMBER OF
SHARES SHARES SHARES PERCENTAGE
OF CLASS A OF CLASS B OF PREFERRED OWNERSHIP OF
COMMON STOCK COMMON STOCK STOCK(a) CAPITAL STOCK(b)
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz....................... 553,343(c) -- -- 27.12%
*Lehman Brothers Merchant Banking
Portfolio Partnership L.P.(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
45
<PAGE> 48
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 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.
46
<PAGE> 49
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 Space. Prior to that he was
Chairman and Chief Executive Officer of Loral Corporation. Because BLS is
Chairman of the Board of Directors and has the right to designate a majority of
the Directors to the Board of the Company, he has operating control of the
Company.
In May 1996, the Company purchased $343,000 principal amount of 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, the Company retired the $65.4 million principal
amount of Convertible Debentures held by 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 (including certain other executive officers of Loral Space who
are active in the management of the Company) in exchange for acting as directors
and providing advisory services to the Company and its subsidiaries. Such
agreement will continue until BLS dies or is disabled or ceases to own at least
135,000 shares of common stock of the Company.
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS and other advisors ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization.
Bonuses earned under this plan were $200,000 in 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.
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to an
Indenture (the "Indenture") between the Company and Fleet National Bank, as
trustee (the "Trustee"), in a private transaction that is not subject to the
registration requirements of the Securities Act. See "Notice to Investors." The
terms of the New Notes are identical in all material respects to the Old Notes,
except that the New Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not contain
provisions providing for the payment of Liquidated Damages under certain
circumstances relating to the Registration Rights Agreement, which provisions
will terminate upon the consummation of the Exchange Offer.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and Holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the proposed form of Indenture and Registration Rights
Agreement is available as set forth under "-- Available Information." The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
The Notes rank senior to or pari passu in right of payment with all
subordinated Indebtedness of the Company. The Notes are subordinated in right of
payment to all Senior Indebtedness of the Company, including all obligations of
the Company under the Amended and Restated Credit Agreement and the Senior
Notes.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $140 million and
will mature on September 1, 2004. Interest on the Notes accrues at the rate of
10 3/8% per annum and is payable semi-annually in arrears, in cash on March 1
and September 1, commencing on March 1, 1997, to Holders of record on the
immediately preceding February 15 and August 15. Interest on the Notes accrues
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest is computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest on the Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments with respect to Notes the Holders
of which have given wire transfer instructions to the Company will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes are issued in denominations of $1,000 and
integral multiples thereof.
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<PAGE> 51
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to September 1,
2000. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption 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>
Notwithstanding the foregoing, at any time on or prior to August 15, 1999,
the Company may redeem up to an aggregate of $49 million in principal amount of
Notes at a redemption price of 110.375% of the principal amount thereof, in each
case plus accrued and unpaid interest thereon to the redemption date, with the
net proceeds of an initial public offering of common stock of the Company;
provided that at least $91 million in aggregate principal amount of Notes remain
outstanding immediately after the occurrence of such redemption; and provided,
further, that such redemption shall occur within 45 days of the date of the
closing of such initial public offering of common stock of the Company.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment Date").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the
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<PAGE> 52
Paying Agent an amount equal to the Change of Control Payment in respect of all
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
Notes so tendered the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Indebtedness to permit
the repurchase of the Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Amended and Restated Credit Agreement limits the ability of the Company
to purchase any Notes and also provides that certain change of control events
with respect to the Company would constitute a default thereunder. In addition,
the Senior Notes restrict the ability of the Company to purchase or redeem the
Notes. Any future credit agreements or other agreements relating to Senior
Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek the
consent of its lenders to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited from
purchasing Notes. In such case, the Company's failure to purchase tendered Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Amended and Restated Credit Agreement and the
Senior Note Indenture. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 70% of the consideration therefor received by the Company
or such Subsidiary is in the form of cash or Cash Equivalents; provided that the
amount of (x) any liabilities (as shown on the Company's or such Subsidiary's
most recent balance sheet), of the Company or any Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets and (y) any notes, securities or other obligations received by the
Company or any such Subsidiary from such transferee that are immediately
(subject to normal settlement periods) converted by the Company or such
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
The Company may apply such Net Proceeds, at its option, within 360 days
after the receipt of any Net Proceeds from an Asset Sale, (a) to permanently
reduce Senior Indebtedness or (b) to invest in the business or businesses of the
Company or any of its Subsidiaries or any business directly related to any
business then
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<PAGE> 53
conducted by the Company or any of its Subsidiaries or any business related to
the aircraft industry or used for working capital purposes. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Revolving Indebtedness or otherwise invest such Net Proceeds in any manner that
is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the 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 Indenture or thereafter.
Upon any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness (including in certain instances any interest accruing
subsequent to an event of bankruptcy whether or not such interest is an allowed
claim enforceable against the debtor under the United States bankruptcy code)
shall first be paid in full in cash or Cash Equivalents, or payment provided for
in cash or Cash Equivalents, before the Holders or the Trustee on behalf of the
Holders shall be entitled to receive any payment by the Company of the principal
of, premium, if any, or interest on the Notes, or to acquire or redeem any of
the Notes for cash or property (except that, if there is no Senior Indebtedness
outstanding under the Senior Notes, Holders of Notes may receive securities that
are subordinated at least to the same extent as the Notes to Senior Indebtedness
and any securities issued in exchange for such securities). Before any payment
may be made by, or on behalf of, the Company of the principal of, premium, if
any, or interest on the Notes upon any such dissolution, winding up, liquidation
or reorganization, any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to which the Holders
of the Notes or the Trustee on their behalf would be entitled, but for the
subordination provisions of the Indenture, shall be made by the Company or by
any receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, directly to the holders of the Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to the
trustee or trustees under any indenture pursuant to which any of such Senior
Indebtedness may have been issued, as their respective interests may appear, to
the extent necessary to pay all such Senior Indebtedness in full in cash or Cash
Equivalents after giving effect to any concurrent payment, distribution or
provision therefor, to or for the holders of such Senior Indebtedness.
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 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 Notes
or to redeem or acquire any of the 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
51
<PAGE> 54
respect to the 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 to the Company and the
Trustee (a "Default Notice"), then, unless and until such event of default has
been cured or waived or has ceased to exist or the 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 Notes, or (y) acquire
any of the 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 Indenture, promptly pay to the
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.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. As of June 30,
1996, after giving pro forma effect to the Offering, application of the net
proceeds therefrom and borrowings under the Amended and Restated Credit
Agreement, the principal amount of Senior Indebtedness outstanding would have
been approximately $160 million. The Indenture limits, subject to certain
financial tests, the amount of additional Indebtedness, including Senior
Indebtedness, that the Company and its subsidiaries can incur. See " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock."
No Senior Subordinated Debt. The Indenture provides that the Company will
not incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any
Indebtedness and senior in any respect in right of payment to the Notes.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's Equity Interests in their capacity
as such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock), dividends or distributions payable to the
Company or any Subsidiary of the Company or dividends or distributions payable
by a Subsidiary of the Company to its shareholders on a pro rata basis); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any direct or indirect parent of the Company (other than any
such Equity Interests owned by the Company); (iii) make any principal payment
on, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except at stated maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
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<PAGE> 55
(b) with respect to Restricted Payments described in clauses (i) and
(ii) of the immediately preceding paragraph, the Company would, at the time
of such Restricted Payment and after giving pro forma effect thereto as if
such Restricted Payment had been made at the beginning of the applicable
four-quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described below under
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (including the Restricted Payments permitted by the next
paragraph, but excluding Restricted Payments permitted by clauses (ii),
(iii) and (iv) of the next paragraph), is less than the sum 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, plus (ii) 100% of 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 set
forth in an Officers' Certificate delivered to the Trustee, received by the
Company from the issue or sale since the date of the Indenture of Equity
Interests of the Company or of debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities issued subsequent to the date of
the Indenture that have been converted into Disqualified Stock), plus (iii)
to the extent that any Restricted Investment that was made after the date
of the Indenture is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) $15 million.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c) (ii) of the preceding paragraph; (iii) the defeasance,
redemption or repurchase of pari passu or subordinated Indebtedness with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness or the
substantially concurrent issuance (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph; (iv) investments, loans or advances
to joint ventures of the Company or any of its Subsidiaries in an aggregate
amount at any time not to exceed $20 million; and (v) the repurchase of shares
of, or options to purchase shares of, the Company's common stock or the common
stock of Loral Space 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 such 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 (v) in the immediately preceding fiscal year.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by the Board of Directors, which
determination shall be conclusive and evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) on the
date of the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
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<PAGE> 56
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) or Disqualified Stock and will not permit any of its Subsidiaries
to issue any shares of preferred stock; provided, however, that the Company or
any of its Subsidiaries may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock and the Company's subsidiaries may issue
shares of Preferred Stock if the Fixed Charge Coverage Ratio 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 or such Disqualified Stock or preferred stock is issued
would have been at least 1.7 to 1, determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or preferred stock had
been issued, as the case may be, at the beginning of such four-quarter period;
The foregoing provisions do not apply to:
(i) the incurrence by the Company or its Subsidiaries of Indebtedness
and letters of credit pursuant to the Amended and Restated Credit Agreement
(with letters of credit being deemed to have a principal amount equal to
the maximum potential liability of the Company or its Subsidiaries
thereunder) in an aggregate principal amount not to exceed $110 million,
less the aggregate amount of all proceeds of Assets Sales that have been
applied since the date of the Indenture to permanently reduce the
outstanding amount of such Indebtedness pursuant to the covenant described
above under the caption "-- Asset Sales;"
(ii) Existing Indebtedness;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinate to the
payment in full of all Obligations with respect to the Notes and (ii)(A)
any subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Subsidiary shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Subsidiary, as the case may be;
(v) Indebtedness under Guarantees in respect of obligations of joint
ventures of the Company or any of its Subsidiaries in an aggregate
principal amount not to exceed $20 million at any one time;
(vi) (A) Indebtedness 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 Indebtedness is secured
by a Lien on the property, plant or equipment so purchased or constructed
and such Indebtedness 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) Indebtedness 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 GAAP) and the aggregate of the Indebtedness
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
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<PAGE> 57
shall be increased by the excess, if any, of (a) $30 million over (b)
Consolidated Capital Expenditures for the immediately preceding two years;
(vii) obligations incurred in the ordinary course of business under
(A) trade letters of credit which are to be repaid in full not more than
one year after the date on which such Indebtedness 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 Indebtedness incurred in the ordinary course of business of
suppliers, licensees, franchisees, or customers in an aggregate amount not
to exceed $5 million;
(viii) Indebtedness to repurchase shares, or cancel options to the
purchase shares, of the Company's common stock or the common stock of Loral
Space 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;
(ix) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the Indenture to be outstanding; and
(x) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $25 million.
Notwithstanding the foregoing, the accretion or amortization of original
issue discount under any Indebtedness, the payment of interest in additional
Indebtedness or the accretion of the liquidation preference of Disqualified
Stock or preferred stock, shall not be deemed an incurrence of Indebtedness,
Disqualified Stock or preferred stock; provided, however, that such accretion or
amortization or payment of interest is included in Fixed Charges.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) the Amended and Restated Credit Agreement as in effect
as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Amended and Restated Credit
Agreement as in effect on the date of the Indenture, (b) the Indenture and the
Notes, (c) applicable law, (d) any instrument
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governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (e) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly enter into any transaction
involving aggregate consideration in excess of $1,000,000 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 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 disinterested and 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 disinterested and 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
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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 does not apply to (a) any transaction between the
Company or any Affiliate thereof and any Lehman Investor, including, without
limitation, the payment of fees to any Lehman Investor 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 Subsidiaries or between
any of its Subsidiaries, (e) any transaction between the Company or any of its
Subsidiaries and Loral Space as required by the Acquisition Agreement or (f) any
Restricted Payment not otherwise prohibited by the "Restricted Payments"
covenant.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Old Notes
remain outstanding, they will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company for 45 days after notice to comply
with any of its other agreements in the Indenture or the Notes; (iv) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Subsidiaries (or the payment of which is guaranteed
by the Company or any of its Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10 million or more;
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(v) failure by the Company or any of its Subsidiaries to pay final judgments
aggregating in excess of $10 million, which judgments are not paid, discharged
or stayed for a period of 60 days; and (vi) certain events of bankruptcy or
insolvency with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, that so long
as the Amended and Restated Credit Agreement is in effect, such declaration
shall not become effective until the earlier of (i) five days after receipt of
notice of such acceleration by the Agent and the Company or (ii) an acceleration
of obligations under the Amended and Restated Credit Agreement. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
September 1, 2000 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to September 1, 2000, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in
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connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) or any
of the related definitions will require the consent of the Holders of at least
75% in aggregate principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes will initially be
issued in the form of one Global Note (the "Global Note"). The Global Note will
be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
Notes that are issued as described below under "-- Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only thorough the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants with portions of the principal amount of the Global
Note and (ii) ownership of the Notes evidenced by the Global Note will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the Depositary's
Participants), the Depositary's Participants and the Depositary's Indirect
Participants. Prospective purchasers are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Notes evidenced
by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
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Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Notes in the form of Certificated Securities
under the Indenture, then, upon surrender by the Global Note Holder of its
Global Note, Notes in such form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Securities, the Company will
make all payments of principal, premium, if any, and interest, by wire transfer
of immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Amended and Restated Credit Agreement" means that certain 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.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback, other
than a sale and leaseback of Aircraft Braking Systems' carbon manufacturing
facilities so long as the present value of the rental obligations of the Company
and its
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Subsidiaries thereunder do not exceed $15 million) other than sales of inventory
in the ordinary course of business consistent with past practices (provided that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company and its Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "-- Change
of Control" and/or the provisions described above under the caption "-- Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5 million or (b)
for net proceeds in excess of $5 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Company to a Subsidiary or by a Subsidiary to the
Company or to another Subsidiary, (ii) an issuance of Equity Interests by a
Subsidiary to the Company or to another Subsidiary, and (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"-- Restricted Payments" will not be deemed to be Asset Sales.
"Bank" means any financial institution extending credit under the Amended
and Restated Credit Agreement.
"BLS" means Bernard L. Schwartz.
"BLS Group" means (i) 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.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than twelve
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations with
a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and (v)
commercial paper having a rating of at least A-3 from Moody's Investors Service,
Inc. or P-3 from Standard & Poor's Corporation and in each case maturing within
six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Permitted Investors, (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Permitted Investors, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the voting stock of the Company or (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors. For purposes of this definition, any transfer of an Equity
Interest of an entity that was formed for the purpose of acquiring voting stock
of the Company will be deemed to be a transfer of such portion of such voting
stock as corresponds to the portion of the equity of such entity that has been
so transferred.
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"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any net loss realized in connection with an Asset Sale (to the extent
such losses were deducted in computing such Consolidated Net Income), plus (ii)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Subsidiaries for such period, whether
paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash charges (excluding any such non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"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
GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Subsidiary thereof, (ii) the Net Income of any Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that Net Income is not at the date
of determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or
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a consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in
each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Cumulative Operating Cash Flow" means, for the period beginning June 30,
1996 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 June
30, 1996 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.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) Indebtedness under the Amended
and Restated Credit Agreement and (ii) if there is no Indebtedness outstanding
or active commitments to issue Indebtedness under the Amended and Restated
Credit Agreement, any other Indebtedness constituting Senior Indebtedness which,
at the time of determination has an aggregate principal amount outstanding of at
least $25 million and is specifically designated in the instrument evidencing
such Senior Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock so long as it is a debt
security).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Amended and Restated Credit
Amendment) in existence on the date of the Indenture, including the Notes, until
such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest of such Person and its
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all cash dividend payments (and non-cash dividend payments in
the case of a Person that is a Subsidiary) on any series of preferred stock of
such Person, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
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Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"GAAP" means generally accepted accounting principles 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 have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, without duplication, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
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"Lehman Brothers" means Lehman Brothers Inc.
"Lehman Investor" means (i) Lehman Brothers, (ii) any Affiliate of Lehman
Brothers and (iii) any merchant banking limited partnership affiliated with
Lehman Brothers or any Affiliate of Lehman Brothers.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Loral Space" means Loral Space & Communications Ltd.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"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 Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Subsidiary of the Company in a Person,
if as a result of such Investment (i) such Person becomes a Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company; (d) any Investment in common
stock of Loral Space, provided that such common stock is awarded to employees of
the Company or any of its Subsidiaries (either directly or indirectly pursuant
to options or similar arrangements) as compensation in the ordinary course of
business and provided further that the aggregate amount of such Investments does
not exceed $2 million in any fiscal year and (e) any Restricted Investment made
as a result of the receipt of non-cash consideration from an Asset Sale that was
made pursuant to and in compliance with the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales."
"Permitted Investor" means (i) any Person that is a member of the BLS Group
or a Lehman Investor or (ii) Loral Space or any Subsidiary thereof.
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"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries that secure Senior Indebtedness permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens existing on the date of the Indenture and any extensions
or renewals thereof, provided that such Liens do not extend to or cover any
other property or assets of the Company or any Subsidiary; (vi) 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; (vii) 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;
(viii) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (ix) 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); (x) 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
Significant Subsidiary incurred in the ordinary course of business; (xi) 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; (xii) any other Liens imposed by operation of law
which do not materially affect the Company's ability to perform its obligations
under the Notes and the Indenture; (xiii) rights of banks to set off deposits
against debts owed to said bank; (xiv) 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; (xv) 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; (xvi) 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; (xvii) 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 and
(xviii) Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $5
million at any one time outstanding and that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith and any associated redemption premium); (ii) except in
the case of Permitted Refinancing Indebtedness incurred to refinance the Senior
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Senior
Notes on terms
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at least as favorable to the Holders of Senior Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Indebtedness" means (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 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 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 Notes and (iii) any
Hedging Obligations; 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," (d) Indebtedness to any
employee of the Company, (e) any liability for taxes and (f) trade payables.
"Senior Notes" means the Company's 11 7/8 Senior Secured Notes due 2003.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Specified Senior Indebtedness" means any Indebtedness constituting Senior
Indebtedness which, at the time of determination has an aggregate principal
amount outstanding of at least $25 million and is specifically designated in the
instrument evidencing such Senior Indebtedness as "Specified Senior
Indebtedness."
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"13 3/4% Debentures" means the Company's 13 3/4% Senior Subordinated
Debentures due 2001.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
69
<PAGE> 72
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company and its
subsidiaries that will be available or outstanding upon completion of the
Offering 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.
70
<PAGE> 73
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.
SENIOR NOTES
General. $100,000,000 aggregate principal amount of the Company's Senior
Notes were issued pursuant to the Senior Note Indenture between the Company and
The Bank of New York, as trustee (the "Senior Note Trustee"). 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 mature
on December 1, 2003, unless redeemed before such date. The Senior Notes bear
interest at the rate of 11 7/8% from June 1, 1992 or from the most recent
Interest Payment Date (as defined in the Senior 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 May 15 and November 15
immediately preceding the interest payment date) on June 1 and December 1.
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>
Sinking Fund. The Senior Notes are not subject to a sinking fund.
Change of Control. Upon the occurrence of a Change of Control (as defined
in the Senior Note Indenture), each holder of Senior Notes is 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 13 3/4% Debentures and will rank senior in right of collateral
and payment to the Notes. The Senior Notes will be effectively subordinated to
borrowings under the Amended and Restated Credit Agreement, and to the claims of
other creditors of the Aircraft Braking Systems and Engineered Fabrics.
Collateral and Security. Pursuant to a Pledge Agreement between the
Company and the Senior Note Trustee, as 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 of the Company's
obligations under the Senior Note Indenture and the Senior Notes.
Certain Covenants; Limitation on Debt. Under the Senior Note Indenture,
subject to certain exceptions the Company is prohibited from, and shall not
permit any of its subsidiaries to, incurring any indebtedness if, after giving
effect thereto, (i) an Event of Default (as defined in the Senior Note
Indenture) or an event that through the passage of time or the giving of notice
or both, would become an Event of Default, shall have
71
<PAGE> 74
occurred and be continuing or (ii) the Consolidated Interest Coverage Ratio (as
defined in the Senior Note Indenture) of the Company would be less than 1.70 to
1.
Certain Covenants; Limitation on Restricted Payments. Under the Senior
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 (other than those payments required
under the 13 3/4% Debenture Indenture) and certain payments to affiliates), if,
after giving effect thereto:
(a) an Event of Default shall have occurred and be continuing under
the Senior Note Indenture; and
(b) the aggregate amount of all such restricted payments made by the
Company and its subsidiaries 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 (as defined
in the Senior Note Indenture) and (B) the product of 1.3 times Cumulative
Total Interest Expense (as defined in the Senior 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 (as defined in the Senior Note Indenture) after March 31,
1992 and (iii) $15 million.
Additional Covenants. The Senior 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 Note Indenture contains default provisions
typically found in secured financings. If an Event of Default is continuing
under the Senior Note Indenture, either the Senior Note Trustee or the holders
of 25% in aggregate principal amount of the Senior Notes then outstanding may
declare all unpaid principal of, and accrued interest on, the Senior Notes to be
due and payable immediately.
72
<PAGE> 75
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement with any person to participate
in the distribution of such New Notes and neither such holder nor any such other
person is engaging in or intends to engage in a distribution of such New Notes.
Accordingly, any holder who is an affiliate of the Company or any holder using
the Exchange Offer to participate in a distribution of the New Notes will not be
able to rely on such interpretations by the staff to the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a resale transaction. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company.) The Company has agreed that, for a period of one year from
the date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until December 11, 1996 (90 days from the date of this
Prospectus), all dealers effecting transactions in the New Notes may be required
to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker-dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus as required, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of one year from the date of this Prospectus, the Company will
send a reasonable number of additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company will pay all the
expenses incident to the Exchange Offer (which shall not include the expenses of
any holder in connection with resales of the New Notes). The Company has agreed
to indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by O'Sullivan Graev & Karabell, LLP, New York, New York.
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.
73
<PAGE> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 2,412,000 $ 8,493,000
Accounts receivable, net........................................ 35,228,000 33,548,000
Inventory....................................................... 63,332,000 61,767,000
Other current assets............................................ 832,000 1,106,000
------------ ------------
Total current assets.................................... 101,804,000 104,914,000
------------ ------------
Property, Plant and Equipment -- Net.............................. 65,044,000 63,132,000
Deferred Charges -- Net of amortization of $9,452,000 and
$6,975,000...................................................... 24,082,000 26,508,000
Cost in Excess of Net Assets Acquired -- Net of amortization of
$42,257,000 and $36,148,000..................................... 202,119,000 208,228,000
Intangible Assets -- Net of amortization of $24,035,000 and
$20,645,000..................................................... 22,988,000 26,292,000
----------- ------------
Total Assets...................................................... $416,037,000 $429,074,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable................................................ $ 12,485,000 $ 10,345,000
Interest payable................................................ 8,217,000 8,771,000
Other current liabilities....................................... 44,775,000 37,773,000
------------ ------------
Total current liabilities............................... 65,477,000 56,889,000
------------ ------------
Postretirement Benefit Obligation Other Than Pensions............. 75,390,000 77,717,000
Other Long-Term Liabilities....................................... 20,871,000 19,216,000
Long-Term Debt.................................................... 294,000,000 310,000,000
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Deficiency:
Preferred stock, $.01 par value -- authorized, 1,050,000 shares;
issued and outstanding, 1,027,635 shares (liquidation
preference of $60,110,000)................................... 10,000 10,000
Common stock, Class B, $.01 par value -- authorized, 460,000
shares; issued and outstanding, 458,994 shares
(liquidation preference of $26,848,000)...................... 5,000 5,000
Common stock, Class A, $.01 par value -- authorized, 2,100,000
shares; issued and outstanding, 553,344 shares............... 6,000 6,000
Additional paid-in capital...................................... 155,350,000 155,350,000
Deficit......................................................... (184,049,000) (182,643,000)
Adjustment to equity for minimum pension liability.............. (10,572,000) (7,192,000)
Cumulative translation adjustment............................... (451,000) (284,000)
------------ ------------
Total stockholders' deficiency.......................... (39,701,000) (34,748,000)
------------ ------------
Total Liabilities and Stockholders' Deficiency.................... $416,037,000 $429,074,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 85
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> 86
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> 87
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
============ ============ ============
Supplemental disclosure of non-cash financing activities:
See Note 9 for a discussion of non-cash financing activities.
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 88
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> 89
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> 90
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> 91
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> 92
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>
F-17
<PAGE> 93
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company provides pension benefits to substantially all employees
through hourly and salaried pension plans. The plans provide benefits based
primarily on the participant's years of service. The salaried plan also includes
voluntary employee contributions. Net pension cost included the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period.................................. $1,562,000 $1,590,000 $1,361,000
Interest cost on projected benefit
obligation.............................. 4,901,000 4,224,000 4,033,000
Actual (return) loss on plan assets....... (9,940,000) 954,000 (3,683,000)
Net amortization and deferral............. 6,988,000 (3,869,000) 809,000
---------- ---------- ----------
Net pension cost.......................... $3,511,000 $2,899,000 $2,520,000
========== ========== ==========
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation........................... $65,642,000 $51,770,000
----------- -----------
Accumulated benefit obligation...................... $65,987,000 $52,189,000
Effect of projected future salary increases......... 2,113,000 860,000
----------- -----------
Projected benefit obligation........................ 68,100,000 53,049,000
Plan assets at fair market value...................... 55,100,000 42,626,000
----------- -----------
Unfunded projected benefit obligation................. 13,000,000 10,423,000
Unrecognized prior service cost....................... (2,185,000) (2,389,000)
Unrecognized net loss................................. (12,685,000) (7,761,000)
Adjustment for minimum liability...................... 12,757,000 9,290,000
----------- -----------
Accrued pension cost recognized in the consolidated
balance sheet....................................... $10,887,000 $ 9,563,000
=========== ===========
</TABLE>
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>
F-18
<PAGE> 94
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Eligible employees having one year of service also participate in one of
the Company's Savings Plans (hourly or salaried). Under one of these plans, the
Company matches 45% of a participating employee's contributions, up to 6% of
compensation. The employer contributions generally vest to participating
employees after five years of service. The matching contributions were $687,000,
$532,000 and $568,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance benefits
for all eligible employees and their dependents active at April 27, 1989 and
thereafter, and postretirement life insurance benefits for retirees prior to
April 27, 1989. Participants are eligible for these benefits when they retire
from active service and meet the eligibility requirements of the Company's
pension plans. The health care plans are generally contributory and the life
insurance plans are generally noncontributory.
During the first quarter of fiscal year 1994, the Company adopted various
plan amendments which had the effect of reducing the accumulated postretirement
benefit obligation. This reduction is being amortized as prior service cost over
the average remaining years of service to full eligibility of active plan
participants.
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
F-19
<PAGE> 95
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
12. COMMITMENTS
The Company is party to various noncancelable operating leases which are
longer than a one-year term for certain data processing, and other equipment and
facilities with minimum rental commitments payable as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, AMOUNT
------------------------------------------------- ---------
<S> <C>
1997............................................. $4,268,000
1998............................................. 4,298,000
1999............................................. 4,334,000
2000............................................. 4,090,000
2001............................................. 2,854,000
Thereafter....................................... 5,491,000
</TABLE>
Rental expense was $4,758,000, $4,641,000 and $4,190,000 for the fiscal
years ended March 31, 1996, 1995 and 1994, respectively.
13. CONTINGENCIES
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. ("Hitco") after Hitco threatened to breach existing
supply contracts unless prices were renegotiated. Hitco claimed that Aircraft
Braking Systems breached the supply arrangements by electing to begin to expand
its own carbon production facility. The Aircraft Braking Systems' complaint, as
amended, seeks damages in excess of $47 million, injunctive relief and specific
performance requiring Hitco to perform its obligations pursuant to existing
contracts and purchase orders. Hitco has counterclaimed in the matter seeking,
among other things, damages up to $130 million for the alleged breach by
Aircraft Braking Systems of alleged long-term contracts to purchase carbon. The
Ohio court has issued a preliminary injunction ordering Hitco to perform its
obligations pursuant to existing contracts and purchase orders without change in
terms. Hitco is presently seeking to have the injunction vacated or modified,
and/or a declaratory judgment terminating Hitco's obligation to supply Aircraft
Braking Systems at prices previously pertaining. In a related action, Hitco
commenced suit in Superior Court, Los Angeles County, California against
Aircraft Braking Systems seeking substantially the same relief as is asserted in
the Ohio action, and the California case has been stayed.
Trial of the Ohio action is presently scheduled for January 1997 and
discovery has been ongoing. Management intends to vigorously seek dismissal of
the California action and to proceed in the Ohio case to maintain the
preliminary injunction and otherwise to protect Aircraft Braking Systems' carbon
supply as well as to seek damages from Hitco. Based upon the court's opinion to
date, advice of counsel and its own assessment of the matters in dispute,
management does not expect the outcome of the litigation to be unfavorable to
the Company.
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
F-20
<PAGE> 96
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company with sufficient capacity to meet substantially all, if not all, of its
requirements for brake production at the current level of business.
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate liability, if any, will not have a material adverse effect on the
Company.
14. INCOME TAXES
The components of the net deferred tax benefit are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 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.
F-21
<PAGE> 97
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has agreed to pay Ronald H. Kisner, who is a member of the
Board of Directors of the Company, a monthly retainer of $6,000 during fiscal
year 1997 for legal services.
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS and other advisors ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization.
Bonuses earned under this plan were $200,000 in fiscal year 1996.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral Corporation. (See Note 9.)
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. No payments were made during the three years
ended March 31, 1996.
Pursuant to agreements between K & F and Loral Corporation, the parties
provided services to each other and share certain expenses relating to a
production program, real property occupancy, benefits administration, treasury,
accounting and legal services. The related charges agreed upon by the parties
were established to reimburse each party on the actual cost incurred without
profit or fee. The Company believes the arrangements with Loral Corporation were
as favorable to the Company as could have been obtained from unaffiliated
parties. Billings from Loral Corporation were $3.6 million, $3.0 million and
$3.0 million in fiscal years 1996, 1995 and 1994, respectively. Billings to
Loral Corporation were $2.7 million, $.2 million and $1.1 million in fiscal
years 1996, 1995 and 1994. Purchases from Loral Corporation were $2.2 million,
$1.9 million and $4.2 million in fiscal years 1996, 1995 and 1994. Included in
accounts receivable and accounts payable at March 31, 1996 is $3.5 million and
$2.3 million. Included in accounts receivable and accounts payable at March 31,
1995 is $.7 million and $1.8 million. K & F will continue these arrangements and
reimburse Loral Space for real property occupancy, benefits administration and
legal services.
On April 22, 1996, Lockheed Martin acquired the defense electronics and
systems integration businesses of Loral Corporation which included the Akron,
Ohio, facility. The various occupancy and service agreements affecting the
Akron, Ohio, facility will remain in full force and effect. K & F will continue
to reimburse Lockheed Martin for real property occupancy, and costs relating to
shared easements and services.
F-22
<PAGE> 98
- ------------------------------------------------------
- ------------------------------------------------------
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
Risk Factors.......................... 10
The Exchange Offer.................... 15
Use of Proceeds....................... 23
Capitalization........................ 24
Selected Consolidated Financial
Information......................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 30
Management............................ 39
Ownership of Capital Stock............ 45
Certain Transactions.................. 47
Description of the Notes.............. 48
Description of Certain Indebtedness... 70
Plan of Distribution.................. 73
Legal Matters......................... 73
Experts............................... 73
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$140,000,000
K & F INDUSTRIES, INC.
10 3/8% SERIES B
SENIOR SUBORDINATED
NOTES DUE 2004
---------------------------
PROSPECTUS
---------------------------
SEPTEMBER 13, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 99
ITEM 20. 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 indemnification of its officers and directors to the full extent
authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<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 Notes (including the form of New
Note as Exhibit A thereto) between the Company and Fleet National Bank, as
trustee
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
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)
</TABLE>
II-1
<PAGE> 100
<TABLE>
<S> <C>
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").
**10.21 -- Amended and Restated Security Agreement dated as of August 14, 1996 between ABS
and Chase.
**10.22 -- Amended and Restated Security Agreement dated as of August 14, 1996 between EFC
and Chase.
**10.23 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC
in favor of NBD Bank.
**10.24 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in
favor of NBD Bank.
**10.25 -- Amended and Restated K & F Agreement dated as of August 14, 1996 between the
Company and Chase.
**10.26 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
ABS and Chase.
**10.27 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between
EFC and Chase.
**10.28 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc.
and Chase Securities Inc.
**10.29 -- Registration Rights Agreement dated as of August 15, 1996 among the Company,
Lehman Brothers Inc. and Chase Securities Inc.
**12.01 -- Statement of computation of ratio of earnings (deficiency) to fixed charges
21.01 -- Subsidiaries of the Registrant(1)
23.01 -- Consent of O'Sullivan Graev and Karabell (included in Exhibit 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
*99.1 -- Form of Letter of Transmittal
*99.2 -- Form of Notice of Guaranteed Delivery
*99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees
*99.4 -- Form of Letter to Clients
</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.
II-2
<PAGE> 101
(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 to the Company's Registration Statement on
Form S-1, No. 33-47028 and incorporated herein by reference.
(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.
* Filed herewith.
** Previously filed as an exhibit hereto.
(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
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.
II-3
<PAGE> 102
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.
II-4
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 13th day of September, 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 Amendment
No. 1 to this Registration Statement on Form S-4 has been signed on September
13, 1996 by or on behalf of the following persons in the capacity indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, Chief Executive
- --------------------------------------------- Officer and Director (principal executive
Bernard L. Schwartz officer)
/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
*By /s/ KENNETH M. SCHWARTZ
- ---------------------------------------------
Kenneth M. Schwartz
Attorney-in-fact
</TABLE>
II-5
<PAGE> 104
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
5.01 Opinion of O'Sullivan Graev & Karabell, LLP
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees
99.4 Form of Letter to Clients
<PAGE> 1
EXHIBIT 5.01
[Letterhead of O'Sullivan Graev & Karabell, LLP]
September 13, 1996
K & F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
Ladies and Gentlemen:
We have acted as counsel to K & F Industries, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") of the Registration
Statement of the Company on Form S-4, as amended (File No. 333-11047) (as so
amended, the "Registration Statement"), under the Securities Act of 1933, as
amended.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In connection with this opinion, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of rendering the opinions set forth below including, without
limitation, (i) the Registration Statement, (ii) the Indenture dated as of
August 15, 1996 (the "Indenture") between the Company and Fleet National Bank,
as trustee, (iii) the Amended and Restated Certificate of Incorporation of the
Company, as amended through the date hereof; (iv) the Amended and Restated
By-laws of the Company, as amended through the date hereof and (v) resolutions
adopted by the Board of Directors of the Company by unanimous written consent in
lieu of a meeting dated September 11, 1996. As to certain questions of fact
material to the opinions contained herein, we have relied upon certificates or
statements of officers of the Company and certificates of public officials.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
authentic originals of all documents submitted to us as certified or photostatic
copies. In making our examination of document executed by parties other than the
Company, we have assumed that such parties had the power, corporate or other, to
enter into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such parties of such documents and the validity and binding effect
thereof.
Based upon the foregoing, we are of the opinion as follows:
1. The Company is a validly existing corporation under the laws of the
State of Delaware.
2. The 10 3/8% Series B Senior Subordinated Notes Due 2004 of the
Company have been duly authorized and, when issued upon consummation of the
Exchange Offer (as defined in the Registration Statement) as contemplated
by the Registration Statement and the Indenture, will be validly issued.
Members of our firm are admitted to the Bar of the State of New York and we
express no opinion as to the laws of any other jurisdiction other than the
Delaware General Corporation Law.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under "Legal Matters" in the Registration Statement. In giving this
consent, we do not thereby admit that we are included in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ O'Sullivan Graev & Karabell, LLP
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
10 3/8% SENIOR SUBORDINATED NOTES DUE 2004
OF
K & F INDUSTRIES, INC.
PURSUANT TO THE PROSPECTUS DATED SEPTEMBER 13, 1996
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 11, 1996, UNLESS EXTENDED.
To: Fleet National Bank, as Exchange Agent
<TABLE>
<S> <C>
If by Regular or Overnight Mail: If by Hand:
Fleet National Bank Fleet National Bank
Corporate Trust Operations Corporate Trust Operations
777 Main Street CTMO0224 777 Main Street, Lower Level
Hartford, Connecticut 06115 Hartford, Connecticut 06115
</TABLE>
<TABLE>
<S> <C>
By Telecopier: Confirm by Telephone:
(860) 986-7908 (860) 986-1271
Attn: Patricia Williams
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission via a facsimile number other than the one listed above will not
constitute a valid delivery. The instructions accompanying this Letter of
Transmittal should be read carefully before this Letter of Transmittal is
completed.
The undersigned acknowledges that he or she has received the Prospectus,
dated September 13, 1996 (the "Prospectus"), of K & F Industries, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange its
10 3/8% Series B Senior Subordinated Notes due 2004 (the "New Notes") for an
equal principal amount of its 10 3/8% Senior Subordinated Notes due 2004 (the
"Old Notes" and, together with the New Notes, the "Notes"). The terms of the New
Notes are identical in all material respects to the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, therefore, will not bear legends restricting their
transfer and will not contain certain provisions providing for the payment of
liquidated damages to the holders of the Old Notes under certain circumstances
relating to the Registration Rights Agreement (as defined in the Prospectus).
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on October
11, 1996, unless the Exchange Offer is extended as provided in the Prospectus,
in which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Capitalized terms used but not defined
herein have the meanings given to them in the Prospectus.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or an Agent's Message (as defined in the Prospectus) or any other
documents required by this Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Old Notes according to the guaranteed
delivery procedures set forth under the caption "The Exchange Offer--Guaranteed
Delivery Procedures" in the Prospectus. See Instruction 5.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the
<PAGE> 2
undersigned desires to take with respect to the Exchange Offer. Holders who wish
to tender their Old Notes must complete this Letter of Transmittal in its
entirety.
If the undersigned is a broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company), the
undersigned may be deemed to be an "underwriter" under the Securities Act and
the undersigned acknowledges, therefore, that it will deliver a prospectus in
connection with any resale of such New Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THIS LETTER OF TRANSMITTAL
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DESCRIPTION OF 10 3/8% SENIOR SUBORDINATED NOTES DUE 2004
- ---------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT
NAME(S) AND PRINCIPAL TENDERED (MUST BE
ADDRESS(ES) OF AMOUNT IN INTEGRAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED MULTIPLES
(PLEASE FILL IN, IF BLANK) NUMBER(S) BY CERTIFICATE(S) OF $1,000)*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by the column labeled "Aggregate
Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the certificate numbers
and principal amounts on a separate signed schedule and affix such
schedule to this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount. All other
tenders must be in integral multiples of $1,000.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING (SEE INSTRUCTION 5):
Name(s) of Registered Holder(s)
Window Ticket Number (if any)
Date of Execution of Notice of Guaranteed Delivery
Name of Institution which Guaranteed Delivery
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO AND COMPLETE THE FOLLOWING:
Name: ________________________
Address: ________________________
- --------------------------------------------------------------------------------
<PAGE> 3
SPECIAL REGISTRATION INSTRUCTIONS
(SEE INSTRUCTIONS 7, 8 AND 9)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Notes issued in exchange for Old Notes accepted for
exchange, are to be issued in the name of someone other than the undersigned.
Issue certificate(s) to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 7, 8 AND 9)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Note issued in exchange for Old Notes accepted for
exchange, are to be sent to someone other than the undersigned, or to the
undersigned at an address other than that shown above.
Deliver certificate(s) to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
<PAGE> 4
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Old Notes tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order of, the Company
all right, title and interest in and to the Old Notes tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
its agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Old Notes with
full power of substitution (i) to deliver certificates for such Old Notes to the
Company and deliver all accompanying evidences of transfer and authenticity to,
or upon the order of, the Company and (ii) to present such Old Notes for
transfer on the books of the Company, all in accordance with the terms of the
Exchange Offer. The power of attorney granted in this paragraph shall be deemed
to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes tendered hereby further
represent and warrant that (i) the New Notes acquired by the undersigned and any
such beneficial owner of Old Notes pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, (ii) neither the undersigned nor any such beneficial owner has an
arrangement with any person to participate in the distribution of such New
Notes, (iii) neither the undersigned nor any such beneficial owner nor any such
other person is engaging in or intends to engage in a distribution of such New
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate," as defined under Rule 405 promulgated under the Securities Act, of
the Company. The undersigned and each beneficial owner acknowledge and agree
that any person who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction of the New Notes
acquired by such person and may not rely on the position of the staff of the
Securities and Exchange Commission set forth in the no-action letters discussed
in the Prospectus under the caption "The Exchange Offer -- Purpose and Effect of
the Exchange Offer." The undersigned and each beneficial owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
notice (confirmed in writing) or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer because of an invalid tender, the occurrence of certain other
events set forth in the Prospectus or otherwise, any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown below
or at a different address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders."
Unless otherwise indicated under "Special Registration Instructions,"
please issue the certificates representing the New Notes issued in exchange for
the Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged, in the name(s) of the undersigned. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please send the
certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as
<PAGE> 5
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Registration Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the New Notes issued in exchange for the Old Notes accepted for
exchange in the name(s) of, and return any certificates for Old Notes not
tendered or not exchanged to, the person(s) so indicated. The undersigned
understands that the Company has no obligation pursuant to the "Special
Registration Instructions" and "Special Delivery Instructions" to transfer any
Old Notes from the name of the registered Holder(s) thereof if the Company does
not accept for exchange any of the Old Notes so tendered.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or an Agent's Message and any other documents required by this
Letter of Transmittal to the Exchange Agent prior to the Expiration Date may
tender their Old Notes according to the guaranteed delivery procedures set forth
in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." See Instruction 5.
<PAGE> 6
- --------------------------------------------------------------------------------
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X _____________________________________ Date: ___________________________
X _____________________________________ Date: ___________________________
Signature(s) of Registered Holder(s) or Authorized Signatory
Area Code and Telephone Number: ___________________________________________
The above lines must be signed by the registered holder(s) as his or
her name(s) appear(s) on the Old Notes or by person(s) authorized to
become registered holder(s) by a properly completed bond power from the
registered holder(s), a copy of which must be transmitted with this Letter
of Transmittal. If the Old Notes to which this Letter of Transmittal
relate are held of record by two or more joint holders, then all such
holders must sign this Letter of Transmittal. If this Letter of
Transmittal or any Old Notes or bond powers are signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative
capacity, such person must (i) so indicate and set forth his or her full
title below and (ii) unless waived by the Company, submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 7.
Name(s): -----------------------------------------------------------------
(Please Print)
--------------------------------------------------------------------------
Capacity: ----------------------------------------------------------------
Adress: ------------------------------------------------------------------
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 7)
--------------------------------------------------------------------------
(Authorized Signature)
--------------------------------------------------------------------------
(Title)
--------------------------------------------------------------------------
(Name of Form)
Date: ____________ , 1996
- --------------------------------------------------------------------------------
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Procedures for Tendering. This Letter of Transmittal or a facsimile
hereof, properly completed and duly executed, or an Agent's Message and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for tendered
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at DTC pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date or (iii) the Holder must comply with the guaranteed
delivery procedures described below.
The method of delivery of Old Notes and this Letter of Transmittal and any
other required documents to the Exchange Agent is at the election and risk of
the Holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. Instead of delivery by
mail, it is recommended that the Holder use an overnight or hand delivery
service. In the case of physical delivery of Old Notes, if sent by mail, it is
recommended that registered mail, return receipt requested, be used and proper
insurance be obtained. In all cases, sufficient time should be allowed to assure
delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Old Notes should be sent to the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall be
under any duty to give any such notification, nor shall any of them incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
2. Tender by Holder. Only a Holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such beneficial owner's own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
3. Partial Tenders. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 10 3/8% Senior
Subordinated Notes due 2004" above. The entire principal amount of any Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Old Notes is not
tendered, then Old Notes for the principal amount of Old Notes not tendered and
a certificate or certificates representing New Notes issued in exchange for any
Old Notes accepted will be sent to the Holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Old Notes are accepted for exchange.
<PAGE> 8
4. Book-Entry Transfer. Any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account at DTC in accordance
with DTC's procedures for transfer. However, although delivery of Old Notes may
be effected through book-entry transfer at DTC, an Agent's Message must be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with. See "The Exchange Offer -- Procedures for Tendering" in the Prospectus.
5. Guaranteed Delivery Procedures. Holders who wish to tender their Old
Notes and (i) whose Old Notes are not immediately available or (ii) who cannot
deliver their Old Notes, this Letter of Transmittal or an Agent's Message or any
other documents required hereby to the Exchange Agent prior to the Expiration
Date must tender their Old Notes according to the guaranteed delivery procedures
set forth in the Prospectus. Pursuant to such procedure: (a) such tender must be
made through an Eligible Institution (as defined below); (b) prior to the
Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five New York Stock Exchange trading days
after the Expiration Date, this Letter of Transmittal (or facsimile hereof) or
an Agent's Message together with the certificate(s) representing the Old Notes,
or a Book-Entry Confirmation, and any other required documents will be deposited
by the Eligible Institution with the Exchange Agent; and (c) such properly
completed and executed Letter of Transmittal (or facsimile hereof) or an Agent's
Message, as well as the certificate(s) representing all tendered Old Notes in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
all other documents required by this Letter of Transmittal must be received by
the Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date, all as provided in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures." Any Holder who wishes to
tender his or her Old Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
6. Withdrawal of Tenders. To withdraw a tender of Old Notes in the Exchange
Offer, a written or facsimile transmission notice of withdrawal must be received
by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the name of the
persons withdrawing the tender and (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at DTC to be credited with the withdrawn Old Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, which determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one of
the procedures described above in Instruction 1, under Procedures for Tendering,
at any time prior to the Expiration Date.
7. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
<PAGE> 9
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for New Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
holder or holders and neither the "Special Delivery Instructions" nor the
"Special Registration Instructions" has been completed, then such holder or
holders need not and should not endorse any tendered Old Notes, nor provide a
separate bond power. In any other case, such holder or holders must either
properly endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal with the signatures on the
endorsement or bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person must so indicate when signing, and,
unless waived by the Company, submit evidence satisfactory to the Company of
such person's authority to so act with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 7 must be guaranteed by an Eligible Institution which is a member of
(a) the Securities Transfer Agents Medallion Program, (b) the New York Stock
Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an "Eligible
Institution"). Signatures on this Letter of Transmittal need not be guaranteed
if (a) this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered herewith and such holder(s) have not completed the box set
forth herein entitled "Special Registration Instructions" or the box set forth
herein entitled "Special Delivery Instructions" or (b) such Old Notes are
tendered for the account of an Eligible Institution.
8. Special Registration and Delivery Information. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address of
the person singing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
9. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of the Old
Notes tendered hereby, or if tendered Old Notes are registered in the name of
any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or on any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
Except as provided in this Instruction 9, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
10. Waiver of Conditions. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange Offer
in the case of any Old Notes tendered.
11. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent by telephone at (860) 986-1271 or by facsimile at (860) 986-
7908.
12. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified herein. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE> 10
IMPORTANT TAX INFORMATION
The Holder is required to give the Exchange Agent the social security
number or employer identification number of the Holder of the Notes. If the
Notes are in more than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
PAYER'S NAME: K & F INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Name of Holder (if joint, list first and circle the name of the person or
entity whose number you enter in Part I below).
- --------------------------------------------------------------------------------
Address (if Holder does not complete, signature below will constitute a
certification that the above address is correct.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- PART II -- FOR PAYEES
Form W-9 Please provide your TIN in Social Security EXEMPT FROM BACKUP
Department of the Treasury the box at right and certify Number WITHHOLDING, SEE THE
Internal Revenue Service by signing and dating below. or ENCLOSED GUIDELINES
Payer's Request for If you do not have a number, Employer FOR CERTIFICATION OF
Taxpayer Identification see How to Obtain a "TIN" in Identification TAXPAYER
Number (TIN) the enclosed Guidelines. Number IDENTIFICATION NUMBER
ON SUBSTITUTE FORM
_______________ W-9.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have
been notified by the IRS that you are subject to backup withholding
because of underreported interest or dividends on your tax return.
However, if after being notified by the IRS that you were subject to
backup withholding you received another notification from the IRS that you
are no longer subject to backup withholding, do not cross out item (2).
(Also see instructions in the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.)
SIGNATURE __________________________________________ DATE _________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU UNDER THE NOTES.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
- --------------------------------------------------------------------------------
(DO NOT WRITE IN SPACE BELOW)
Certificate Surrendered Old Notes Tendered Old Notes Accepted
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Delivery Prepared By _____________ Checked By _____________ Date _____________
<PAGE> 1
K & F INDUSTRIES, INC.
NOTICE OF GUARANTEED DELIVERY
OF
10 3/8% SENIOR SUBORDINATED NOTES DUE 2004
As set forth in the Prospectus dated September 13, 1996 (the "Prospectus"),
of K & F Industries, Inc. (the "Company") under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures," this form must be used to accept the
Company's offer to exchange its 10 3/8% Series B Senior Subordinated Notes due
2004 (the "New Notes") for an equal principal amount of its 10 3/8% Senior
Subordinated Notes due 2004 (the "Old Notes"), by Holders who wish to tender
their Old Notes and (i) whose Old Notes are not immediately available or (ii)
who cannot deliver their Old Notes, the Letter of Transmittal or an Agent's
Message (as defined in the Prospectus) or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date. This
form must be delivered by an Eligible Institution by mail or hand delivery or
transmitted, via facsimile, to the Exchange Agent at its address set forth below
not later than the Expiration Date. All capitalized terms used herein but not
defined herein shall have the meanings ascribed to them in the Prospectus.
The Exchange Agent is:
FLEET NATIONAL BANK
<TABLE>
<S> <C>
If by Regular or Overnight Mail: If by Hand:
Fleet National Bank Fleet National Bank
Corporate Trust Operations Corporate Trust Operations
777 Main Street CTMO0224 777 Main Street, Lower Level
Hartford, Connecticut 06115 Hartford, Connecticut 06115
By Telecopier: Confirm by Telephone:
(860) 986-7908 (860) 986-1271
Attn: Patricia Williams
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission via a facsimile number other than one listed above will not
constitute a valid delivery.
Ladies and Gentlemen:
The undersigned hereby tenders for exchange to the Company, upon the terms
and subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on October 11, 1996, unless extended by
the Company. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on October 11, 1996, unless the Exchange Offer is extended as provided in
the Prospectus, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
<PAGE> 2
- --------------------------------------------------------------------------------
SIGNATURE
__________________________________________ Date: __________________________
__________________________________________ Date: __________________________
Signature(s) of Holder(s) or Authorized Signatory
Area Code and Telephone Number: ___________________________________________
Name(s): __________________________________________________________________
(Please Print)
Capacity (full title), if signing in a fiduciary or capacity:
___________________________________________________________________________
Address: __________________________________________________________________
(including Zip Code)
Taxpayer Identification
or Social Security No.: ___________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Amount of Old Notes Tendered (must be in integral multiples of
$1,000): $_______________
Certificate Number(s) of Old Notes (if available):
____________________________________________________________
Aggregate Principal Amount
Represented by Certificate(s): $_______________
IF TENDERED OLD NOTES WILL BE DELIVERED BY BOOK-ENTRY TRANSFER, PROVIDE
THE DEPOSITORY TRUST COMPANY ("DTC") ACCOUNT NO. AND TRANSACTION CODE
NUMBER (if available):
Account No.: ______________________________________________________________
Transaction Number: _______________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of a properly
completed and executed Letter of Transmittal (or facsimile thereof) or an
Agent's Message, as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC as
described in the Prospectus under the caption "The Exchange
Offer -- Book-Entry Transfer" and any other documents required by the
Letter of Transmittal, all by 5:00 p.m., New York City time, on the fifth
New York Stock Exchange trading day following the Expiration Date.
<TABLE>
<S> <C>
Name of Eligible Institution: ___________________ Authorized Signature
Address: ________________________________________ Name: _________________
Title: ________________
Area Code and Telephone No.: ____________________ Date: _________________
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE. ACTUAL SURRENDER OF OLD
NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF
TRANSMITTAL.
- --------------------------------------------------------------------------------
2
<PAGE> 1
EXHIBIT 99.3
K & F INDUSTRIES, INC.
OFFER TO EXCHANGE UP TO $140,000,000 OF ITS
10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 11, 1996, UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, September 13, 1996
Trust Companies and Other Nominees:
K & F Industries, Inc., a Delaware corporation (the "Company"), is
offering, upon the terms and subject to the conditions set forth in the
Prospectus dated September 13, 1996 (the "Prospectus") and the accompanying
Letter of Transmittal enclosed herewith (which together constitute the "Exchange
Offer"), to exchange its 10 3/8% Series B Senior Subordinated Notes due 2004
(the "New Notes") for an equal principal amount of its 10 3/8% Senior
Subordinated Notes due 2004 (the "Old Notes" and together with the New Notes,
the "Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined in the Prospectus).
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE "THE
EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated September 13, 1996;
2. the Letter of Transmittal for your use (unless Old Notes are
tendered by an Agent's Message) and for the information of your
clients (facsimile copies of the Letter of Transmittal may be used
to tender Old Notes);
3. a form of letter which may be sent to your clients for whose
accounts you hold Old Notes registered in your name or in the name
of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer;
4. a Notice of Guaranteed Delivery;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
6. a return envelope addressed to Fleet National Bank, the Exchange
Agent.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 11, 1996, UNLESS EXTENDED. PLEASE
FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU
HOLD OLD NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE AS QUICKLY
AS POSSIBLE.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, or a Book-Entry Confirmation (as
defined in the Prospectus), as the case may be, (b) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, or an Agent's
Message and (c) any other required documents.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message and in either case together with any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their
<PAGE> 2
Old Notes according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Company will, however, upon request, reimburse you for customary clerical
and mailing expenses incurred by you in forwarding any of the enclosed materials
to your clients. The Company will pay or cause to be paid any transfer taxes
payable on the transfer of Notes to it, except as otherwise provided in
Instruction 9 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent by telephone at (860) 986-1271 or by facsimile at (860) 986-7908.
Very truly yours,
K & F INDUSTRIES, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
EXHIBIT 99.4
K & F INDUSTRIES, INC.
OFFER TO EXCHANGE UP TO $140,000,000 OF ITS
10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 11, 1996, UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus dated September 13, 1996
(the "Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by K & F Industries, Inc. (the
"Company") to exchange its 10 3/8% Series B Senior Subordinated Note due 2004
(the "New Notes") for an equal principal amount of its 10 3/8% Senior
Subordinated Notes due 2004 (the "Old Notes" and together with the New Notes,
the "Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined in the Prospectus). Old Notes may be tendered only in
integral multiples of $1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Old Notes carried by us for your account or benefit but not registered in your
name. An exchange of any Old Notes may only be made by us as the registered
Holder and pursuant to your instructions. Therefore, the Company urges
beneficial owners of Old Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee to contact such Holder promptly
if they wish to exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m., New
York City time, on October 11, 1996, unless extended. The term "Expiration Date"
shall mean 5:00 p.m., New York City time, on October 11, 1996, unless the
Exchange Offer is extended as provided in the Prospectus, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. A tender of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount
of the New Notes for each $1,000 principal amount of the Old Notes, of
which $140,000,000 aggregate principal amount was outstanding as of
September 13, 1996. The terms of the New Notes are identical in all
respects to the Old Notes, except that the New Notes have been registered
under the Securities Act of 1933, as amended, and therefore will not bear
legends restricting their transfer and will not contain certain provisions
providing for the payment of liquidated damages to the holders of the Old
Notes under certain circumstances relating to the Registration Rights
Agreement.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE
"THE EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on October 11, 1996, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
<PAGE> 2
5. Any transfer taxes incident to the transfer of Old Notes from the
tendering Holder to the Company will be paid by the Company, except as
provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and returning
to us the attached instruction form. The accompanying Letter of Transmittal is
furnished to you for informational purposes only and may not be used by you to
exchange Old Notes held by us and registered in our name for your account or
benefit.
2
<PAGE> 3
- --------------------------------------------------------------------------------
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the
enclosed material referred to therein relating to the Exchange Offer of
K & F Industries, Inc.
This will instruct you to tender for exchange the aggregate principal
amount of Old Notes indicated below (or, if no aggregate principal amount
is indicated below, all Old Notes) held by you for the account or benefit
of the undersigned, pursuant to the terms of and conditions set forth in
the Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Old Notes to be
tendered for exchange:
$_________________
* I (we) understand that if I (we) sign this instruction form without
indicating an aggregate principal amount of Old Notes in the space
above, all Old Notes held by you for my (our) account will be tendered
for exchange.
__________________________________________________________________________
__________________________________________________________________________
Signature(s)
__________________________________________________________________________
Capacity (full title), if signing in a fiduciary or representative
capacity
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Name(s) and address, including zip code
Date: __________________________________________________________________
__________________________________________________________________________
Area Code and Telephone Number
__________________________________________________________________________
Taxpayer Identification or Social Security No.
- --------------------------------------------------------------------------------
3
