<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM APRIL 1, 1996 TO
DECEMBER 31, 1996
Commission file number 33-29035
K & F Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-1614845
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
600 Third Avenue, New York, NY 10016
----------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 297-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no trading market for the Company's common stock. As of March 1,
1997, there were 553,344 shares of Class A common stock outstanding and
458,994 shares of Class B common stock outstanding.
Documents Incorporated by Reference: None
<PAGE> 2
PART I
Item I. Business
General
K & F Industries, Inc. ("K & F" or the "Company") was incorporated in Delaware
on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft Braking
Systems Corporation ("Aircraft Braking Systems"), is one of the world's leading
manufacturers of aircraft wheels, brakes and anti-skid systems for commercial
transport, general aviation and military aircraft. K & F sells its products to
virtually all major airframe manufacturers and most commercial airlines and to
the United States and certain foreign governments. During the nine months ended
December 31, 1996, approximately 90% of the Company's total revenues were
derived from sales made by Aircraft Braking Systems. In addition, K & F through
its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered
Fabrics"), believes it is the leading worldwide manufacturer of aircraft fuel
tanks, supplying approximately 90% of the worldwide general aviation and
commercial transport market and over one-half of the domestic military market.
Engineered Fabrics also manufactures and sells iceguards and specialty coated
fabrics used for storage, shipping, environmental and rescue applications for
commercial and military uses. During the nine months ended December 31, 1996,
approximately 10% of the Company's total revenues were derived from sales made
by Engineered Fabrics.
Aircraft Braking Systems and its predecessors have been leaders in the design
and development of aircraft wheels, brakes and anti-skid systems, investing
significant resources to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
The Aircraft Wheel and Brake Industry
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for bids
from manufacturers. Selections are made by the manufacturer on the basis of
technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be "dual
sourcing" of wheels and brakes. In such case, an airframe manufacturer may
approve and receive FAA certification to configure a particular airframe with
equipment provided by two or more wheel and brake manufacturers. Where two
suppliers have been certified, the aircraft customer, such as a major airline,
will designate the original equipment to be installed on the customer's
aircraft. Competition among two certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
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In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
equipment below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through
sale of replacement parts. Recovery of pricing concessions and design costs for
each airframe's wheels and brakes is contingent on a number of factors but
generally occurs prior to the end of the useful life of the particular aircraft.
Price concessions on original wheel and brake equipment are not customary in the
military market. Although manufacturers of military aircraft generally select
only one supplier of wheels and brakes for each model, the government has
approved at times the purchase of specific component replacement parts from
suppliers other than the original supplier of the wheel and brake system.
Products
AIRCRAFT BRAKING SYSTEMS. Aircraft Braking Systems is one of the world's leading
manufacturers of wheels, steel and carbon brakes and anti-skid systems for
commercial transport, general aviation and military aircraft. 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. The Company's commercial transport fleet continued to grow
during the nine months ended December 31, 1996, due to an increase in the number
of new aircraft entering service, as well as a slower than expected retirement
rate of older aircraft. Airlines have responded to recent FAA regulatory noise
abatement requirements by outfitting their older DC-9 fleets with engine
hushkits and aircraft structural overhauls which effectively add fifteen years
of service life to the aircraft. The Company expects to produce replacement
parts for these refurbished aircraft over this period. Airlines such as
Northwest Airlines and Continental Airlines 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 December 31, 1996, the Company's products had
been installed on over 30,000 commercial transport, general aviation and
military aircraft . Commercial transport aircraft include the DC-9, DC-10,
Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340 on all of which
Aircraft Braking Systems is the sole-source supplier. In addition, the Company
supplies spare parts for the MD-80 program on a dual-source wheel and brake
program.
Aircraft Braking Systems has been successful in having its wheels and brakes
selected for use on a number of new high-cycle airframe designs. These aircraft
that are just beginning to enter service include the McDonnell Douglas Corp.
('McDonnell Douglas") MD-90, Airbus A-321, Saab 2000, Lear 60 and Fairchild
Metro 23. Most recently, Aircraft Braking Systems has been successful in
winning the RJ-700 continuing our sole-source position on the Regional Jet. The
RJ-700 is a 70 passenger plane which is a stretch version of the 50 passenger
Canadair Regional Jet. 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 16 MD-90s out of a total order of 31. Other customers for the MD-90
include Japan Air System and Saudi Arabia which announced orders for 29 of these
aircraft. McDonnell Douglas has booked orders for over 143 MD-90 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 195
A-321 aircraft. Of the 54 aircraft delivered to date, Aircraft Braking Systems
has provided wheels and brakes for 41 of these aircraft.
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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's management believes that the ability to control the design and
performance characteristics of the strut, brakes and its integrated anti-skid
system gives Aircraft Braking Systems a competitive advantage over its two
largest competitors. Other products manufactured by the Company include
helicopter rotor brakes and brake temperature monitoring equipment for various
types of aircraft.
The following table shows the distribution of sales of aircraft wheels, brakes
and anti-skid systems to total sales of the Company:
<TABLE>
<CAPTION>
Fiscal Years Ended
Nine Months Ended March 31,
December 31, ------------------
1996 1996 1995
------ ------ ------
<S> <C> <C> <C>
Wheels and brakes ......................... 81% 80% 80%
Anti-skid systems ......................... 9% 8% 7%
----- ----- -----
Total ................... 90% 88% 87%
===== ===== =====
</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, F-16 and C-130 aircraft. Engineered Fabrics has been selected by the U.S.
Army to equip its new stealth RAH-66 Comanche helicopter with fuel tanks and by
McDonnell Douglas to supply fuel tanks for the MD-600 program. Engineered
Fabrics has also been awarded the Bell/Boeing V-22 Osprey program. During the
nine months ended December 31, 1996, approximately 10% 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 nine months ended December 31, 1996, sales of fuel
tanks accounted for approximately 68% of Engineered Fabrics' total revenues. For
military helicopter applications, Engineered Fabrics' fuel tanks feature
encapsulated layers of rubber which expand in contact with fuel thereby sealing
off holes or gashes caused by bullets or other projectiles penetrating the walls
of the fuel tank. The Company uses this "self-sealing" technology to manufacture
crash-resistant fuel tanks for helicopters, military aircraft and race cars that
significantly reduce the potential for fires, leaks and spilled fuel following a
crash. Engineered Fabrics is the only known supplier of polyurethane fuel tanks
for aircraft, which are substantially lighter and more flexible than their metal
or nitrile counterparts and therefore cost-advantageous. Engineered Fabrics also
competes in the nitrile-designed 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, the system provides the protection.
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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.
Sales and Customers
K & F 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 U.S. government represented
approximately 12%, 16% and 14% of total sales for the nine months ended December
31, 1996 and for the fiscal years ended March 31, 1996 and 1995, 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
Nine Months Ended March 31,
December 31, ------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial transport ................... 63% 61% 61%
Military (U.S. and foreign) ............ 18% 23% 19%
General aviation ....................... 19% 16% 20%
---- ---- ----
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 airline's fleet. Some of the Company's
airline customers include American Airlines, Delta Air Lines, Alitalia, Japan
Air Systems, Lufthansa, Swissair, Northwest Airlines, United Airlines, US
Airways and Continental Airlines. 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. Aircraft Braking Systems supplies products to McDonnell
Douglas, which has announced a proposed merger with 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.
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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.
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:
<TABLE>
<CAPTION>
Fiscal Years Ended
Nine Months Ended March 31,
December 31, -------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic sales .................... 57% 59% 62%
Foreign sales ..................... 43% 41% 38%
---- ---- ----
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 December 31, 1996, the Company employed approximately 160
engineers (of whom 31 held advanced degrees); approximately 28 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 nine
months ended December 31, 1996 and for the fiscal years ended March 31, 1996 and
1995 were $8.6 million, $9.8 million and $8.4 million, respectively.
Patents and Licenses
The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.
Competition
The Company faces substantial competition from a few suppliers in each of its
product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company.
Both significant competitors are larger and have greater financial resources
than the Company. The principal competitor for anti-skid systems is the
Hydro-Aire Division of Crane Co. The principal competitors for fuel tanks are
American Fuel Cell & Coated Fabrics Company and Aerazur of France, both are
owned by Zodiac S.A., a French Company.
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Backlog
Backlog at December 31, 1996 and 1995 amounted to approximately $167.0 million
and $160.4 million, respectively. Backlog consists of firm orders for the
Company's products which have not been shipped. Approximately 84% of total
Company backlog at December 31, 1996 is expected to be shipped during the fiscal
year ending December 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 December 31, 1996, approximately 27% was
directly or indirectly for end use by the U. S. Government (the "Government"),
substantially all of which was for use by the Department of Defense. For certain
risks associated with Government contracts, see "Government Contracts" discussed
below.
Government Contracts
For the nine months ended December 31, 1996 and for the fiscal years ended March
31, 1996 and 1995, approximately 12%, 16%, and 14%, 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 and
results of operations.
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. In the past,
substantially all of the Company's carbon has been purchased from Hitco
Technologies, Inc. ("Hitco") pursuant to supply arrangements. The Company is in
litigation with Hitco concerning the respective obligations of the Company and
Hitco under supply contracts and purchase orders. (See Item 3, "Legal
Proceedings" and Note 13 to the consolidated financial statements.) The Company
is in the process of expanding its existing carbon manufacturing facility and
has developed an alternative supplier such that the Company believes adequate
supplies of carbon will be available to meet demand despite termination of the
Hitco contract. The principal raw materials used by Engineered Fabrics to
manufacture fuel tanks and related coated fabric products are nylon cloth,
forged metal fittings and various adhesives and coatings, whose formulae are
internally developed and proprietary. The Company has not experienced any
shortage of raw materials to date.
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Personnel
At December 31, 1996, the Company had 1,235 full-time employees, of which 872
were employed by Aircraft Braking Systems (407 hourly and 465 salaried
employees) and 363 were employed by Engineered Fabrics (242 hourly and 121
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.
Item 2. Properties
United States Facilities. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio, and consists of
approximately 770,000 square feet of manfacturing, engineering and office space.
Engineered Fabrics' facility is located in Rockmart, Georgia, and consists of
approximately 564,000 square feet of manufacturing, engineering and office
space. The Company believes that its property and equipment are generally
well-maintained, in good operating condition and adequate for its present needs.
Foreign Facilities. The Company occupies approximately 19,000 square feet of
leased office and warehouse space in Slough, England, under a lease expiring in
2020. The Company also maintains sales and service offices in Rome, Italy 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 agreements to provide for
shared easements and services (including utility, sewer, and steam). In addition
to the 770,000 square feet owned by Aircraft Braking Systems, the Company leases
approximately 433,000 square feet of space within the Lockheed Martin complex
and is subject to annual occupancy payments to Lockheed Martin. During the nine
months ended December 31, 1996 and during the fiscal years ended March 31, 1996
and 1995, Aircraft Braking Systems made occupancy payments to Lockheed Martin of
$1.2 million, $1.5 million and $1.3 million, respectively. Certain access
easements and agreements regarding water, sanitary sewer, storm sewer, gas,
electricity and telecommunication are perpetual. In addition, Lockheed Martin
and Aircraft Braking Systems equally control Valley Association Corporation, an
Ohio corporation, which was formed to establish a single entity to deal with the
City of Akron and utility companies concerning governmental and utility services
which are furnished to Lockheed Martin's and Aircraft Braking Systems'
facilities.
Item 3. Legal Proceedings
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. after Hitco threatened to breach existing supply
contracts unless prices were renegotiated. Hitco has been the principal supplier
of the carbon used by Aircraft Braking Systems for its carbon brakes. Hitco
claimed that Aircraft Braking Systems breached the supply arrangements by
electing to begin to expand its own carbon production facility. The Aircraft
Braking Systems' complaint, as amended, seeks damages in excess of $47 million,
injunctive relief and specific performance requiring Hitco to perform its
obligations pursuant to existing contracts and purchase orders. Hitco has
counterclaimed in the matter seeking, among other things, damages up to $130
million for the alleged breach by Aircraft Braking Systems of alleged long-term
contracts to purchase carbon. Hitco was enjoined from refusing to perform its
obligations pursuant to existing contracts and purchase orders without change in
terms. Hitco has sought to have the injunction vacated or modified.
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To date, the preliminary injunction has not been vacated or modified, although
Hitco argues it expired on December 13, 1996. Through January 1997, Hitco
continued to supply carbon to the Company, although Hitco failed to acknowledge
certain purchase orders. Aircraft Braking Systems has sought to hold Hitco in
contempt of the court's injunction. Hitco has sought an injunction requiring
that the Company turn over technology allegedly jointly developed and owned
under the prior contractual arrangements. Hearings have been concluded on both
the Company's contempt motion and Hitco's motion seeking technology but neither
has been decided by the court.
In related actions, a suit filed by Hitco in Superior Court, Los Angeles County,
California against Aircraft Braking Systems seeking substantially the same
relief as is asserted in the Ohio action, has been stayed. Hitco also filed suit
in the Federal District Court in the Northern District of Ohio for damages and
injunctive relief against a third party claiming that such party, in supplying
certain carbon to Aircraft Braking Systems, has acquired trade secrets of Hitco
from Aircraft Braking Systems and has misappropriated trade secrets and
technology developed under the same research and development contracts between
Hitco and Aircraft Braking Systems which are the subject of the Ohio case and
the California case. Aircraft Braking Systems has been granted leave to
intervene and the other party has moved to dismiss the Federal action.
Management intends to vigorously advocate its interest in all lawsuits, to seek
dismissal of the California action and to proceed in the Ohio case to enforce
the preliminary injunction and otherwise to protect Aircraft Braking Systems'
carbon supply as well as to seek damages from Hitco. Based upon the proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
There is no trading market for the Company's common stock. All of the Class A
common stock of the Company except one share (which is owned by Chase Capital
Partners, an affiliate of The Chase Manhattan Bank) is owned by Bernard L.
Schwartz ("BLS"), Chairman of the Company. All of the Class B common stock is
owned by Loral Space & Communications Ltd. ("Loral Space"). All of the preferred
stock (except 44,999 shares owned by Chase Capital Partners) is owned by four
limited partnerships of Lehman Brothers Holdings Inc. ("LBH"). (See "Security
Ownership of Certain Beneficial Owners and Management.")
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Item 6. Selected Financial Data
The selected financial data has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements. The
selected financial data for the nine months ended December 31, 1995 is
unaudited. Effective December 31, 1996, the Company changed its fiscal year-end
from March 31 to December 31.
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------------
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Income Statement Data:
Net sales .................................. $ 212,703 $ 199,784
Cost of sales .............................. 136,813 136,277
--------- ---------
Gross Margin ............................... 75,890 63,507
Independent research and development ....... 8,623 6,610
Selling, general and administrative expenses 17,297 15,378
Amortization ............................... 7,810 7,813
--------- ---------
Operating income ........................... 42,160 33,706
Interest expense, net ...................... 27,197 31,288
--------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative effect
of accounting changes ................... 14,963 2,418
Income tax benefit ......................... 81 --
Extraordinary charge ....................... (9,142)(a) (1,913)(b)
Cumulative effect of accounting changes .... -- --
--------- ---------
Net income (loss) .......................... $ 5,902 $ 505
========= =========
Balance Sheet Data (at end of period):
Working capital ............................ $ 34,189 $ 38,938
Total assets ............................... 419,115 412,028
Long-term debt (a)(b)(f) ................... 287,000 293,000
Stockholders' deficiency (e)(f) ............ (33,306) (34,327)
Other Data (for the period):
Capital expenditures ....................... 14,091 3,343
Depreciation and amortization .............. 14,644 14,260
<CAPTION>
For the Years Ended
March 31,
------------------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
(In Thousands)
Income Statement Data:
<S> <C> <C> <C> <C>
Net sales .................................. $ 264,736 $ 238,756 $ 226,131 $ 277,107
Cost of sales .............................. 180,435 164,697 159,751 199,002
--------- --------- --------- ---------
Gross Margin ............................... 84,301 74,059 66,380 78,105
Independent research and development ....... 9,767 8,363 12,858 11,417
Selling, general and administrative expenses 22,564 19,208 22,421 24,154
Amortization ............................... 10,415 10,411 10,884 10,258
--------- --------- --------- ---------
Operating income ........................... 41,555 36,077 20,217 32,276
Interest expense, net ...................... 41,048 46,250 51,953 53,486
--------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative effect
of accounting changes ................... 507 (10,173) (31,736) (21,210)
Income tax benefit ......................... -- -- -- --
Extraordinary charge ....................... (1,913)(b) -- -- (2,477)(c)
Cumulative effect of accounting changes .... -- -- (2,305)(d) (73,540)(e)
--------- --------- --------- ---------
Net income (loss) .......................... $ (1,406) $ (10,173) $ (34,041) $ (97,227)
========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital ............................ $ 36,327 $ 48,025 $ 53,091 $ 70,028
Total assets ............................... 416,037 429,074 446,880 489,968
Long-term debt (a)(b)(f) ................... 294,000 310,000 381,421 379,478
Stockholders' deficiency (e)(f) ............ (39,701) (34,748) (90,355) (51,868)
Other Data (for the period):
Capital expenditures ....................... 10,418 2,824 3,127 4,670
Depreciation and amortization .............. 18,921 18,843 20,527 19,862
</TABLE>
(a) During the nine months ended December 31, 1996, the Company redeemed $180
million principal amount of the 13 3/4% Senior Subordinated Debentures. In
connection therewith, the Company recorded an extraordinary charge of
$9.142 million. (See Note 7 to the consolidated financial statements.)
(b) On December 28, 1995, the Company redeemed $30 million principal amount of
the 13 3/4% Senior Subordinated Debentures. In connection therewith, the
Company recorded an extraordinary charge of $1.913 million. (See Note 7 to
the consolidated financial statements.)
(c) The extraordinary charge of $2.477 million relates to the accelerated
amortization of unamortized financing costs associated with the prepayment
of a senior term loan in fiscal year 1993.
(d) Represents cumulative effect of the change in method of accounting for the
discounting of liabilities for workers' compensation losses.
(e) Includes a charge for the cumulative effect of accounting change for
Statement of Financial Accounting Standards No. 106 ($77.9 million) and a
benefit for the change in method of accounting for certain overhead costs
in inventory ($4.4 million).
(f) On September 2, 1994, K & F retired the $65.4 million principal amount of
14 3/4% Subordinated Convertible Debentures, held by Loral Corporation in
exchange for $12.76 million in cash and 22.5% of equity. As a result, K & F
stockholders' equity was increased by $65.4 million and long-term debt was
reduced by an equal amount. (See Note 9 to the consolidated financial
statements.)
11
<PAGE> 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Aircraft Braking Systems generates approximately 75% of its revenues through the
sale of replacement parts for wheels and braking systems previously manufactured
by the Company and its predecessors and installed on over 30,000 commercial,
general aviation and military aircraft. As is customary in the industry,
Aircraft Braking Systems incurs substantial expenditures to research, develop,
design and supply original wheel and brake equipment to aircraft manufacturers
at or below the cost of production. 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 nine months ended December 31, 1996 and during the two years ended
March 31, 1996, the Company spent an aggregate of approximately $101 million for
research, development, design and Program Investments. 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 MD-90, the sole
supplier of wheels and brakes for the Saab 2000, the Canadair Regional Jet, 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
Nine Months Ended December 31, 1996 Compared with the Nine Months Ended December
31, 1995
SALES. Sales for the nine months ended December 31, 1996 totaled $212.7 million
reflecting an increase of $12.9 million or 6.5% compared with $199.8 million for
same period in the prior year. This increase was due to higher commercial sales
of wheels and brakes for commercial transport aircraft of $11.8 million,
primarily on the DC-9, DC-10, MD-90 and Canadair Regional Jet programs, and
higher general aviation sales of $7.4 million primarily on the Beech, Lear and
Gulfstream aircraft. Partially offsetting this increase were lower military
sales of $6.3 million on various programs.
GROSS MARGIN. The gross margin for the nine months ended December 31, 1996 was
35.7% compared with 31.8% for the same period in the prior year. This increase
was 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.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs
were $8.6 million for the nine months ended December 31, 1996 compared with $6.6
million for the same period in the prior year. This increase was primarily due
to higher costs associated with the A-319 and MD-90 programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $17.3 million for the nine months ended December
31, 1996 compared with $15.4 million for the same period in the prior year. This
increase was primarily due to higher performance related incentive compensation
and legal fees incurred in connection with the Hitco litigation. (See Note 13 to
the consolidated financial statements.)
INTEREST EXPENSE, NET. Interest expense, net was $27.2 million for the nine
months ended December 31, 1996 compared with $31.3 million for the same period
in the prior year. This decrease was primarily due to a lower average principal
balance on the 13 3/4% Senior Subordinated Debentures due 2001 (the "13 3/4%
Debentures") and lower interest rates as a result of refinancing the 13 3/4%
Debentures with $140 million principal amount of 10 3/8% Senior Subordinated
Notes due 2004 (the "10 3/8% Notes") on August 15, 1996, and borrowings under
the Amended and Restated Credit Agreement. This decrease was
12
<PAGE> 13
partially offset by the need to keep both the 13 3/4% Debentures and the 10 3/8%
Notes outstanding during the redemption notification period of 30 days. (See
Note 7 to the consolidated financial statements.)
Fiscal Year 1996 Compared with Fiscal Year 1995
SALES. Sales for fiscal year 1996 totaled $264.7 million reflecting an increase
of $26.0 million or 10.9% compared with the prior year. This increase was due to
higher commercial sales of wheels and brakes for commercial transport aircraft
of $16.6 million, primarily on the DC-9, DC-10, MD-80, MD-90 and Fo-100
programs, partially offset by lower general aviation sales of $4.7 million on
various aircraft. Military sales increased $14.1 million primarily on the F-16
program.
GROSS MARGIN. The gross margin for fiscal year 1996 was 31.8% compared with
31.0% for fiscal year 1995. This increase was primarily due to operating
efficiencies and the overhead absorption effect relating to the higher sales
volume, partially offset by higher shipments of original equipment to airframe
manufacturers at or below the cost of production.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs
were $9.8 million in fiscal year 1996 compared with $8.4 million in fiscal year
1995 or 3.7% and 3.5% of sales for fiscal years 1996 and 1995, respectively.
This increase was primarily due to higher costs relating to carbon research and
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.4 million in fiscal year 1996 compared with
fiscal year 1995. This increase was primarily due to a provision made against
accounts receivable during fiscal year 1996, higher performance related
incentive compensation and foreign tax related expenses. The provision against
accounts receivable was primarily for two of the Company's customers (Fokker
Aviation and Business Express) who filed for bankruptcy during fiscal year 1996.
INTEREST EXPENSE, NET. Net interest expense decreased $5.2 million in fiscal
year 1996 compared with the prior year. This decrease was due to the retirement
of the 14 3/4% Subordinated Convertible Debentures (the "Convertible
Debentures") on September 2, 1994 (see Note 9 to the consolidated financial
statements), and the redemption of $30 million principal amount of the 13 3/4%
Debentures on December 28, 1995. (See Note 7 to the consolidated financial
statements.)
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to pay interest and principal on indebtedness, fund capital expenditures
and make Program Investments. The Company's primary source of funds for
conducting its business activities and servicing its indebtedness has been cash
generated from operations and borrowings under its $70 million revolving loan
facility.
On August 14, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") consisting of a $40 million senior term loan
(the "Term Loan") and a $70 million senior revolving loan (the "Revolving
Loan"). All borrowings under the Revolving Loan mature August 14, 2001. The Term
Loan is a six-year amortizing facility maturing September 30, 2002. In addition
to scheduled quarterly principal payments on the Term Loan, 50% of excess cash
flow (as defined) must be used to prepay the principal. As a result of the
excess cash flow calculation (calculated from August 14, 1996), at December 31,
1996 long-term debt of $2.5 million has been classified as current in addition
to the $3.5 million of scheduled payments to be made during 1997.
During the nine months ended December 31, 1996, the Company redeemed the
remaining $180 million of 13 3/4% Debentures. The Company used the net proceeds
from the $140 million principal amount of 10 3/8% Notes issued on August 15,
1996, together with borrowings under the Credit Agreement, to redeem the
remaining 13 3/4% Debentures at a price of 102.5% of the principal amount
thereof. In connection therewith, the Company recorded an extraordinary charge
of $9.142 million consisting of redemption premiums and the write-off of
unamortized financing costs.
13
<PAGE> 14
The Company's management believes that it will have adequate resources to meet
its cash requirements through funds generated from operations and borrowings
under its Revolving Loan (with availability determined by reference to a
borrowing base of eligible accounts receivable and inventory). At December 31,
1996, the Company had $51.6 million available to borrow under the Revolving
Loan. In addition, the refinancing of the 13 3/4% Debentures with lower interest
rate debt will enable the Company to save between $5 million and $6 million in
annual interest expense, depending on the floating interest rates of the Credit
Agreement.
Contingency
Aircraft Braking Systems had been purchasing substantially all of the carbon for
its carbon brakes under supply arrangements with Hitco. The contracts and
commitments between Aircraft Braking Systems and Hitco are now the subject of
litigation. A loss of carbon supply for carbon brakes manufactured by Aircraft
Braking Systems would have a material, adverse affect on the Company's business
and financial condition. (See Item 3, "Legal Proceedings" and Note 13 to the
consolidated financial statements.) In December 1995, 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 was enjoined from
refusing to supply Aircraft Braking Systems with carbon pursuant to the existing
contracts and purchase orders, and Hitco continued to supply carbon during 1996
while disputing various purchase orders and the scope of the injunction. Because
of the injunction obtained in the litigation with Hitco, the Company's supply of
carbon from Hitco was not interrupted during 1996. Based upon the proceedings to
date, advice of counsel and its own assessment of the matters in the dispute,
management does not expect the outcome of the litigation to be unfavorable to
the Company.
For certain programs, the Company has developed an alternate supplier for
carbon. The Company has also 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. Construction of the facility is
substantially complete and is expected to be fully operational during the second
quarter of calendar year 1997. Aircraft Braking Systems is currently
manufacturing carbon on three of the five new densification furnaces to be
installed. When fully operational, the Company believes it will have sufficient
sources of carbon to meet all of its requirements for carbon brake production at
the current level of business.
Capital Expenditures
The Company had additions to fixed assets of $14.1 million, $10.4 million and
$2.8 million for the nine months ended December 31, 1996 and for the fiscal
years ended March 31, 1996 and 1995, respectively. The increase during the nine
months ended December 31, 1996 as compared with the fiscal year ended March 31,
1996 was primarily due to the completion of construction of a 21,000 square foot
expansion to the carbon manufacturing building at the Company's Akron, Ohio
facility which was started in the beginning of fiscal year of 1996. Capital
spending for the year ending December 31, 1997 is expected to be approximately
$8.0 million.
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.
Item 8. Financial Statements and Supplementary Data
See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-19 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
14
<PAGE> 15
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages and positions of the directors and executive
officers of the Company. All directors hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified, and all executive officers hold office at the pleasure of the Board
of Directors. The following executive officers or directors of the Company are
related by blood or marriage: Kenneth M. Schwartz is the nephew of Bernard L.
Schwartz, Ronald H. Kisner's wife is the niece of Bernard L. Schwartz and John
R. Paddock's wife is the daughter of Bernard L. Schwartz. No other executive
officer or director of the Company is related by blood, marriage or adoption.
NAME AGE POSITION(S)
- ---- --- -----------
Bernard L. Schwartz* 71 Chairman of the Board
and Chief Executive Officer
Herbert R. Brinberg* 71 Director
Ronald H. Kisner* 48 Director
John R. Paddock* 43 Director
James A. Stern** 46 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 33 Chief Financial Officer
- ----------
* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by Lehman Brothers Holdings Inc. ("LBH") pursuant to
the Stockholders Agreement.
Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the
Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer
of Loral Space & Communications Ltd. since April 1996. From 1972 to April 1996
Mr. Schwartz was Chairman and Chief Executive Officer of Loral Corporation. Mr.
Schwartz is Chairman and Chief Executive Officer of Globalstar
Telecommunications Limited, Chairman and Chief Executive Officer of Space
Systems/Loral, Inc., Chief Executive Officer of Globalstar, L.P., Vice Chairman
of the Board of Directors of Lockheed Martin Corporation, a Director of Reliance
Group Holdings, Inc. and certain subsidiaries, a Director of First Data
Corporation and a Trustee of New York University Medical Center.
Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. He is also currently an Adjunct Professor of Management at Baruch College
City University of New York.
Mr. Kisner has been a member of the law firm of Chekow & Kisner, P.C., since
1984. From 1973 to 1982, he was Associate General Counsel of APL Corporation,
where he held such offices as Secretary, Vice President and Director. From 1982
to 1984, Mr. Kisner was a sole practitioner.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994),
15
<PAGE> 16
Director of Training for the Georgia School of Professional Psychology, Adjunct
Associate Professor of Psychology at Emory University, Assistant Professor of
Psychology at Kennesaw State College, and Southern Region Coordinator for
National Employee Assistance Services. Currently, he is visiting Associate
Professor of Psychology at Emory, and holds positions as Adjunct Clinical
Assistant Professor in the Department of Psychiatry at Emory, and is Adjunct
Professor of Psychology at Georgia Institute of Technology.
Mr. Stern is Chairman of The Cypress Group L.L.C., a private merchant bank. He
was a Managing Director of Lehman Brothers from 1984 to 1994. From 1989 to 1994,
Mr. Stern was also head of the Merchant Banking Group of Lehman Brothers. He was
a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1982 to 1984. Mr.
Stern is also a director of R.P. Scherer Corp., Noel Group Inc., Lear
Corporation, Cinemark USA, Inc. and Amtrol, 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 from January 1987 until January of 1994. Mr. Towbin
was Vice Chairman, Member of the Executive Committee and Director of L.F.
Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to 1987 and from 1983 to
1986, Mr. Towbin was Vice Chairman. From 1977 to 1983 he was General Partner of
L.F. Rothschild, Unterberg, Towbin and 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 Inc., 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 Corporation. From 1987 to 1989 he was President of Loral Corporation's
Aircraft Braking Systems Division. From January 1986 to March 1987 he was Vice
President and General Manager of Goodyear Aerospace Corporation's ABS division.
From 1980 to 1986 he was General Manager of Goodyear's Aircraft Tire Operations.
In 1968, Mr. Fogelsanger directed Goodyear's development of a crash-resistant
fuel system for helicopters that was credited with saving hundreds of lives
during the Vietnam War. He joined Goodyear in 1951.
Mr. Kenneth M. Schwartz has been Executive Vice President of the Company since
January 1996. From June 1989 to January 1996, Mr. Schwartz held the positions of
Chief Financial Officer, Treasurer and Secretary. Previously he was the
Corporate Director of Internal Audit for Loral Corporation since late 1987. From
1984 to 1987, Mr. Schwartz held the position of Director of Cost and Schedule
Administration for Loral Electronic Systems. Prior to 1984, Mr. Schwartz held
various other positions with Loral Electronic Systems and the accounting firm of
Deloitte & Touche LLP.
Mr. Charles has been Chief Financial Officer of the Company since May 1996. From
May 1993 to May 1996, Mr. Charles was the Controller of the Company. Previously
he was the Manager of Accounting and Financial Planning. Prior to employment
with the Company in 1989, Mr. Charles held various other positions with the
accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984.
Executive Officers of Aircraft Braking Systems
Corporation and Engineered Fabrics Corporation
Set forth below are the names, ages and positions of the executive officers of
Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.
Aircraft Braking Systems Corporation
------------------------------------
NAME AGE POSITION
---- --- --------
Ronald E. Welsch 62 President
Frank P. Crampton 53 Vice President-Marketing
Richard W. Johnson 53 Vice President-Finance and Controller
James J. Williams 41 Vice President-Manufacturing
16
<PAGE> 17
Engineered Fabrics Corporation
------------------------------
NAME AGE POSITION
---- --- --------
Roger C. Martin 59 President
Terry L. Lindsey 52 Vice President-Marketing
Anthony G. McCann 37 Vice President-Operations
John A. Skubina 42 Vice President-Finance
Mr. Welsch has been President of Aircraft Braking Systems Corporation since
January 1996. From November 1994 to January 1996, Mr. Welsch held the positions
of Executive Vice President and Chief Operating Officer. From September 1993 to
November 1994, he was Executive Vice President. Prior to joining Aircraft
Braking Systems, Mr. Welsch was General Manager of the GE 90 Commercial Engine
program at General Electric Aircraft Engines and held various positions in
management, including engineering, product support, marketing, product planning
and program management, over the course of 26 years. Mr. Welsch started his
aviation career at Douglas Aircraft in 1958 and joined Northrop Corporation in
1961. He entered the U.S. Marine Corp Aviation following graduation from Purdue
University.
Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems
in March 1987. He had been Director of Business Development for Goodyear
Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that
assignment, he was the divisional manager of Program Operations since 1983. Mr.
Crampton joined Goodyear in 1967. He became Section Manager in Commercial Sales
in 1977, a product marketing manager in 1978 and Divisional Sales Manager in
1979. In August of 1982, he joined manufacturing as the manager of the
manufacturing process organization. He also worked for NASA at the Johnson Space
Center, Houston, Texas from 1963 to 1966.
Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989, he was Vice President of
Finance and Controller of Loral Corporation's Aircraft Braking Systems Division.
Prior to this assignment, he had spent 22 years with Goodyear Aerospace
Corporation, including one year as the Controller of the wheel and brake
division. Mr. Johnson joined Goodyear Aerospace Corporation in 1966. He became
Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear
Aerospace Corporation after holding various positions in the Defense Systems
Division.
Mr. Williams was named Vice President of Manufacturing at Aircraft Braking
Systems in May 1992. He had been Director of Manufacturing since joining
Aircraft Braking Systems in September 1989. Previously from April 1985 to August
1989, he was Branch Manager of Refurbishment Operations at United Technologies
responsible for the refurbishment process of the Solid Rocket Boosters on the
Shuttle Program. Mr. Williams started his aviation career in 1975 in the Air
Force as a Hydraulic Systems Specialist. He was Superintendent, Manufacturing at
Fairchild Republic Company from 1979 to 1983, followed by Manager, B-1B
Manufacturing Operations at Rockwell International Corporation from 1983 to
1985.
Mr. Martin has been President of Engineered Fabrics Corporation since 1987. From
June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics
Division. Mr. Martin has been continuously employed by Goodyear, GAC, Loral
Corporation and K & F for the past 35 years. Other positions Mr. Martin held
with Goodyear include General Manager, Program Manager and a number of research
positions. He holds a patent for elastomeric protective coating for metal
storage reels.
Mr. Lindsey has served as Vice President of Business Development since 1989. He
has been with Goodyear Aerospace Corporation, Loral Corporation and K & F since
1977. Prior to this he had 12 years of federal service with the US Army. He
joined GAC as Contract Administrator of the Industrial Brake Operation in Berea,
Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of Contracts.
17
<PAGE> 18
Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production Support
from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August
1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann
worked for Aircraft Braking Systems as Manager of Manufacturing Engineering,
Manager of Assembly and as a Manufacturing Engineer.
Mr. Skubina has been Vice President of Finance and Administration since February
1991. Prior to that, he was made Vice President of Finance on April 1, 1990. He
joined Engineered Fabrics Corporation in 1988 as Accounting Manager. From 1985
until 1988, Mr. Skubina was the Assistant Controller and Controller of MPD, a
division of M/A-Com.
18
<PAGE> 19
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the nine months ended
December 31, 1996 (the "Transition Period") and for the fiscal years ended March
31, 1996 and 1995, paid to the chief executive officer and each of the other
four most highly compensated executive officers of the Company and the Company's
subsidiaries.
<TABLE>
<CAPTION>
------------------------------ -----------------------
Annual Long-Term
Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Tran- All other
sition Options LTIP Compen-
Period* Salary Bonus Granted Payouts sation(a)
Name and Principal Position or ($) ($) (#) ($) ($)
Fiscal
Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz 1996* 1,477,426(b) (c) -- -- --
Chairman of the Board and 1996 1,770,500(b) -- -- -- --
Chief Executive Officer 1995 1,779,500(b) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth M. Schwartz 1996* 274,231(b) (d) -- 28,333 19,331
Executive Vice President of 1996 321,815(b) 115,000 -- 13,333 4,196
K & F Industries, Inc. 1995 283,600(b) 105,000 -- -- 3,565
- ------------------------------------------------------------------------------------------------------------------------------------
Donald E. Fogelsanger 1996* 170,769 (d) -- 30,000 42,369
President of K & F Industries, 1996 196,000 125,000 -- 13,333 22,829
Inc. 1995 198,538 120,000 -- -- 19,442
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald E. Welsch 1996* 145,308 (d) -- 22,000 25,997
President of Aircraft Braking 1996 172,000 70,000 -- 10,000 38,533
Systems Corporation 1995 162,769 78,000 -- -- 3,806
- ------------------------------------------------------------------------------------------------------------------------------------
Roger C. Martin 1996* 109,757 (d) -- 17,333 27,229
President of Engineered Fabrics 1996 136,674 55,000 -- 8,333 11,489
Corporation 1995 132,767 55,500 -- -- 10,520
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the following: (i) Company contributions to individual 401(k) plan
accounts for the nine months ended December 31, 1996 and for the fiscal
years ended March 31, 1996 and 1995, respectively: Mr. K. Schwartz -
$2,414, $3,996 and $3,375; Mr. Fogelsanger - $3,054, $4,050 and $3,475; Mr.
Welsch - $3,084, $4,050 and $3,446; Mr. Martin - $3,442, $4,050 and $3,110;
(ii) the value of supplemental life insurance programs for the nine months
ended December 31, 1996 and for the fiscal years ended March 31, 1996 and
1995, respectively: Mr. K. Schwartz - $16,917, $200 and $190; Mr.
Fogelsanger - $39,315, $18,779 and $15,967; Mr. Welsch - $22,913, $1,107
and $360; Mr. Martin - $23,787, $7,439 and $7,410; and (iii) $33,376 paid
to Mr. Welsch during the fiscal year ended March 31, 1996, 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 annual
advisory fee be paid to Kenneth M. Schwartz, which is included in his
salary for all periods shown.
19
<PAGE> 20
(c) 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 $50 million before interest, taxes and
amortization. Bonuses for the nine months ended December 31, 1996 have not
yet been determined nor approved by the Company's Board of Directors.
(d) Bonus amounts for the nine months ended December 31, 1996 have not yet been
determined nor approved by the Company's Board of Directors. It is expected
that these amounts will be in line with prior years.
OPTION GRANTS
There were no grants of stock options by the Company, during the nine months
ended December 31, 1996, to the named executive officers.
AGGREGATED OPTION EXERCISES
AND YEAR-END OPTIONS VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)(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 1,313/187 0/0
Donald E. Fogelsanger 0 0 2,375/125 0/0
Ronald E. Welsch 0 0 250/250 0/0
Roger C. Martin 0 0 1,375/125 0/0
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) None of the Company's stock is currently publicly traded. All options were
granted at book value computed as of April 27, 1989.
20
<PAGE> 21
LONG-TERM INCENTIVE PLAN AWARDS
Under the Company's long-term incentive plan designed to provide an incentive to
encourage attainment of Company objectives and retain and attract key executives
of the Company, a limited number of persons participate in a Deferred Bonus
Plan. Under the terms of the plan, generally no awards are allocated to any
participant unless the Company has achieved at least a 10% growth in earnings
before interest, taxes and amortization over the prior fiscal year. Awards vest
and are paid (unless deferred by recipient direction) in three equal annual
installments starting on January 15th following each fiscal year-end. All
amounts not vested 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
the fiscal years ended March 31, 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. Awards for the nine months ended
December 31, 1996 have not yet been determined nor approved by the Company's
Board of Directors. It is expected that these amounts will be in line with prior
years.
THE RETIREMENT PLAN
The Company established, effective May 1, 1989, as amended, the K & F Industries
Retirement Plan for Salaried Employees (the "Company Retirement Plan"), a
defined benefit pension plan. The Company has received a favorable determination
letter from the Internal Revenue Service that the Company Retirement Plan is a
qualified plan under the Internal Revenue Code. The terms of the Company
Retirement Plan are as follows: a non-contributory benefit and a contributory
benefit. The cost of the former is borne by the Company; the cost of the latter
is borne partly by the Company and partly by the participants. Salaried
employees who have completed at least six months of service and satisfied a
minimum earnings level are eligible to participate in the contributory portion
of the Company Retirement Plan; salaried employees become participants in the
non-contributory portion on their date of hire. The Plan provides a benefit of
$20.00 per month for each year of credited service. For participants who
contribute to the Plan, in addition to the benefit of $20.00 per month for each
year of credited service, the Plan provides an annual benefit equal to the
greater of: 60% of the participant's aggregate contributions; or, average
compensation earned (while contributing) during the last 10 years of employment
in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4%
times years of continuous service up to 10, plus, (b) 1.8% times additional
years of such service up to 20, plus, (c)1.2% times additional years of such
service up to 30, plus, (d) 0.6% times all additional such service above 30
years.
Effective January 1, 1990, the Plan was amended for eligible employees of K & F
Industries and Aircraft Braking Systems to provide an annual benefit equal to
(a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (i) for 14 years of continuous
service or less, 1.05% of annual earnings between $19,800 and the Social
Security Wage Base plus 2.25% of annual earnings above the Social Security Wage
Base, and (ii) for more than 14 years of continuous service, 1.35% of annual
earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual
earnings above the Social Security Wage Base. In no event will the amount
calculated in (c) above be less than 60% of the participant's aggregate
contributions made on and after January 1, 1990. Benefits are payable upon
normal retirement age at age 65 in the form of single life or joint and survivor
annuity or, at the participant's option with appropriate spouse consent, in the
form of an annuity with a term certain. A participant who has (a) completed at
least 30 years of continuous service, (b) attained age 55 and completed at least
10 years of continuous service, or (c) attained age 55 and the combination of
such participant's age and service equals at least 70 years, is eligible for
early retirement benefits. If a participant elects early retirement before
reaching age 62, such benefits will be reduced except that the non-contributory
benefits of a participant with at least 30 years of credited service will not be
reduced. In addition, employees who retire after age 55 but before age 62 with
at least 30 years of service are entitled to a supplemental non-contributory
benefit until age 62. Annual benefits under the Company Retirement Plan are
subject to a statutory ceiling of $120,000 per participant. Participants are
fully vested in their accrued benefits under the Company Retirement Plan after
five years of credited service with the Company.
21
<PAGE> 22
The individuals named in the Summary Compensation Table also participate in a
supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of K & F and Aircraft Braking Systems and the supplemental plan are $223,000 for
Mr. K. Schwartz; $116,000 for Mr. Fogelsanger; and $35,000 for Mr. Welsch. BLS
does not participate in either plan. The retirement benefits have been computed
on the assumption that (a) employment will be continued until normal retirement
at age 65; (b) current levels of creditable compensation and the Social Security
Wage Base will continue without increases or adjustments throughout the
remainder of the computation period; and (c) participation in the contributory
portion of the plan will continue at current levels. The Company has a similar
plan at Engineered Fabrics in which Mr. Martin participates. Estimated annual
benefits for Mr. Martin are $92,000 using the assumptions in (a), (b) and (c)
above.
For purposes of eligibility, vesting and benefit accrual, participants receive
credit for years of service with Loral Corporation and Goodyear. At retirement,
retirement benefits calculated according to the benefit formula described above
are reduced by any retirement benefits payable from The Goodyear Tire & Rubber
Company Retirement Plan For Salaried Employees.
COMPENSATION OF DIRECTORS
The Board of Directors held three meetings during the nine months ended December
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 nine months ended December 31,
1996. All directors are reimbursed for reasonable out-of-pocket expenses
incurred in that capacity.
ADVISORY AGREEMENT
The Company has an Advisory Agreement with BLS which provides for the payment of
an aggregate of $200,000 per month of compensation to BLS and persons designated
by him (including certain other executive officers of Loral Space who are active
in the management of the Company) in exchange for acting as directors and
providing advisory services to the Company and its subsidiaries. Such agreement
will continue until BLS dies or is disabled or ceases to own at least 135,000
shares of common stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not in the past used a compensation committee to determine
executive officer compensation. The payments to BLS, the Company's Chairman and
Chief Executive Officer, are paid in accordance with the Advisory Agreement. All
other executive compensation decisions are made by BLS in accordance with
policies established in consultation with the Board of Directors.
22
<PAGE> 23
PART IV
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the ownership of the capital stock of the Company
as of December 31, 1996.
<TABLE>
<CAPTION>
Number of
Number of Shares Number of 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. ................... -- -- 478,387(d) 23.45
*Lehman Brothers Offshore
Investment Partnership L.P. .......................... -- -- 129,745(e) 6.36
*Lehman Brothers Offshore
Investment Partnership - Japan L.P. .................. -- -- 49,348(e) 2.42
* Lehman Brothers Capital Partners
II, L.P. ............................................. -- -- 325,156(f) 15.94
Chase Capital Partners .................................. 1 -- 44,999 2.21
Loral Space & Communications Ltd. ....................... -- 458,994 -- 22.50
---------- ------------ ----------- ------------
553,344 458,994 1,027,635 100.00%
========== ============ =========== ============
</TABLE>
*Collectively referred to as the "Lehman Investors."
(a) The preferred stock is convertible into Class A common stock on a
one-for-one basis.
(b) Assumes that the preferred stock has been converted into voting common
stock.
(c) BLS has granted options to officers and directors of the Company and its
subsidiaries, at a per share exercise price of $40, for an aggregate of
30,500 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 current and former employees of LBH.
Stockholders Agreement
The Company, BLS, the Lehman Investors, Chase Capital Partners 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 at such time as more than 75% of the shares of common
stock and shares of common stock issuable upon the exercise of options or rights
to acquire common stock or upon conversion of convertible securities ("Common
Equivalents") then outstanding have been sold pursuant to one or more public
offerings, except that the registration rights
23
<PAGE> 24
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 7 directors. BLS is entitled to (i) appoint a majority of
the directors as long as he and his affiliates own at least 135,000 shares of
common stock, (ii) three directors as long as he and his affiliates own at least
100,000 shares of common stock, and (iii) one director as long as he and his
affiliates own any shares of common stock. The Lehman Investors are entitled to
(i) appoint three directors as long as they collectively own at least 100,000
Common Equivalents, (ii) a majority of the directors if (a) they own at least
135,000 shares of common stock and (b) BLS dies or becomes disabled or owns less
than 135,000 shares of Common Equivalents, and (iii) one director as long as
they own any Common Equivalents. If and for so long as Loral Space and its
affiliates own any shares of voting common stock, at the request of Loral Space,
the number of members of the Board of Directors shall be increased to 9, Loral
Space shall be entitled to designate one member of the Board of Directors, and
the remaining member shall be designated by the stockholder which at such time
has the right to designate a majority of the Board of Directors. The Company's
by-laws provide that the following corporate actions will require the vote of at
least one Lehman Investor designated director including (with certain limited
exceptions) (i) mergers, consolidations or recapitalization, (ii) issuances of
capital stock or preferred stock, (iii) repurchases of and dividends on capital
stock, (iv) issuance of employee options representing more than 50,000 shares of
common stock, (v) dissolution or liquidation of the Company, (vi) acquisition,
sale or exchange of assets in excess of $5,000,000, (vii) the incurrence of debt
or liens in excess of $10 million in the aggregate, (viii) the making of loans,
investments or capital expenditures in excess of $10 million, (ix) transactions
with affiliates and (x) prepayments of or amendments to any amount of financing
in excess of $10 million. The Stockholders Agreement provides that the Charter
and By-laws of the Company then in effect may not be amended without the consent
of the Lehman Investors designated director for so long as the Lehman Investors
or its affiliates own at least 100,000 shares of the outstanding capital stock.
The Stockholders Agreement provides each Stockholder with a right of first
refusal with respect to certain transfers of Common Stock or Common Equivalents.
In addition, subject to certain limitations, if any Stockholder or group of
Stockholders proposes to transfer securities representing more than 15% of the
Common Equivalents, then each other Stockholder is permitted to transfer to the
proposed transferee their pro rata share of Common Equivalents at the price and
on the other terms of the proposed transfer.
The Stockholders Agreement provides that either BLS or the Lehman Investors (the
"Put Party") may request an appraisal of the value of the capital stock of the
Company (the "Appraised Value") and may notify the other party of its desire to
sell all of its and its transferee's capital stock for a pro rata share of such
Appraised Value. The other party may elect to purchase such capital stock,
arrange for the purchase of such capital stock by a third party or notify the
Put Party that it does not intend to purchase such capital stock. If such
election is made such party must use its best efforts to purchase or arrange for
the purchase of such capital stock. If such capital stock is not purchased
within a specified period, BLS and the Lehman Investors shall cause the Company
to be sold if such sale can be arranged for a price at least equal to the
Appraised Value. Any sale of the Company as an entirety shall include all
Stockholders and the proceeds thereof shall be allocated among the Stockholders
in accordance with their stock ownership.
Stockholders of specified percentages of capital stock may demand registration
rights. The Stockholders Agreement also grants the Stockholders incidental
registration rights with respect to shares of capital stock held by them;
provided that the Stockholders not exercising such rights have the right to
purchase the shares which are the subject of such registration rights pursuant
to the right of first offer provided in the Stockholders Agreement. The
Stockholders Agreement contains customary terms and provisions with respect to
such registration rights. Pursuant to the Stockholders Agreement, Stockholders
have certain preemptive rights, subject to certain exceptions, with respect to
future issuances of shares or share equivalents of capital stock so that such
Stockholders may maintain their proportional equity ownership interest in the
Company.
24
<PAGE> 25
Item 13. Certain Relationships and Related Transactions
General
BLS owns 27.12% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral Space. Prior to that he was
Chairman and Chief Executive Officer of Loral Corporation. Because BLS is
Chairman of the Board of Directors and has the right to designate a majority of
the Directors to the Board of the Company, he has operating control of the
Company.
In May 1996, K & F purchased $343,000 principal amount of the Company's 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. In May 1996, the 13 3/4% Debentures were callable at a price of
103.75% of the principal amount.
The Company pays Ronald H. Kisner, who is a member of the Board of Directors of
the Company, a monthly retainer of $6,000 for legal services.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral Corporation. (See Note 9 to the
consolidated financial statements.)
The Company has an Advisory Agreement with BLS which provides for the payment of
an aggregate of $200,000 per month of compensation to BLS and persons designated
by him (including certain other executive officers of Loral Space who are active
in the management of the Company) in exchange for acting as directors and
providing advisory services to the Company and its subsidiaries. Such agreement
will continue until BLS dies or is disabled or ceases to own at least 135,000
shares of common stock of the Company.
The Company has a bonus plan pursuant to which the Company's Board of Directors
awards bonuses to BLS and other advisors ranging from 5% to 10% of earnings in
excess of $50 million before interest, taxes and amortization. Bonuses earned
under this plan were $200,000 for the fiscal year ended March 31, 1996 and paid
to certain executive officers of Loral Space. BLS did not receive any payments
under this plan for the fiscal year ended March 31, 1996. Bonuses for the nine
months ended December 31, 1996 have not yet been determined nor approved by the
Company's Board of Directors.
Lehman Brothers has from time to time provided investment banking, financial
advisory and other services to the Company, for which services Lehman Brothers
has received fees. As the beneficial owners of 48.17% of the outstanding capital
stock, the Lehman Investors are able to elect three directors to the Company's
Board of Directors and have the benefit of certain rights under the Stockholders
Agreement and the Company's By-laws. During the nine months ended December 31,
1996, Lehman Brothers received underwriting discounts and commissions of $2.6
million in connection with the offering of the 10 3/8% Notes.
Pursuant to agreements between the Company and Loral Space (which owns 22.5% of
the outstanding capital stock), the Company reimburses Loral Space for real
property occupancy, benefits administration and legal services. The related
charges agreed upon were established to reimburse Loral Space for actual costs
incurred without profit or fee. The Company believes the arrangements are as
favorable to the Company as could have been obtained from unaffiliated parties.
Payments to Loral Space were $0.2 million for the nine months ended December 31,
1996. Included in accounts payable at December 31, 1996 is $0.2 million.
Pursuant to agreements between K & F 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 and $3.0 million for the
fiscal years ended March 31, 1996 and 1995, respectively. Billings to Loral
Corporation were $2.7 million and $0.2 million for the fiscal years ended March
31, 1996 and 1995. Purchases from Loral Corporation
25
<PAGE> 26
were $2.2 million and $1.9 million for the fiscal years ended March 31, 1996 and
1995. Included in accounts receivable and accounts payable at March 31, 1996 is
$3.5 million and $2.3 million.
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. (See Item 2, "Properties.")
26
<PAGE> 27
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) Index to Financial Statements:
Page
----
K & F Industries, Inc. - Consolidated Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996 F-2
Consolidated Statements of Operations for the Nine Months Ended
December 31, 1996 and the Years Ended March 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Deficiency for the Nine
Months Ended December 31, 1996 and the Years Ended March 31, 1996
and 1995 F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1996 and the Years Ended March 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
All other schedules and separate financial statements are omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.04 through 10.09 and 10.11, 10.12 and
10.19 are management contracts or compensation plans.
(b) Reports on Form 8-K: A report on Form 8-K was filed on November 22, 1996 to
report the change of the Company's fiscal year-end from March 31 to
December 31.
Exhibits: See exhibit index below.
(c) Exhibits
2.01- Agreement for Sale and Purchase of Assets dated March 26, 1989
between Loral Corporation and the Registrant (1)
3.01- Amended and Restated Certificate of Incorporation of the Company
(7)
3.02- Amended and Restated By-Laws of the Company (6)
4.01- Indenture dated as of August 15, 1996 for the 10 3/8% Senior
Subordinated Notes due 2004 (including the form of Senior
Subordinated Notes as Exhibit A thereto) between the Company and
Fleet National Bank, as trustee (9)
4.04- Indenture dated as of June 1, 1992 for the 11 7/8% Senior
Secured Notes Due 2003 (including the form of Senior Notes)
between the Company and the Bank of New York, as trustee (5)
4.07- Pledge Agreement dated as of June 10, 1992 between the Company
and the Bank of New York, as collateral trustee (5)
27
<PAGE> 28
(c) Exhibits (continued):
10.01 - Securities Purchase Agreement dated as of April 27, 1989, among
the Company, Bernard L. Schwartz ("BLS") and Lehman Brothers
Holdings Inc. ("LBH") (1)
10.02 - Assumption Agreement dated as of April 27, 1989 (1)
10.03 - Shared Services Agreement dated April 27, 1989, among Lockheed
Martin, 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
LBH (1)
10.11 - K & F Industries, Inc. 1989 Stock Option Plan (2)
10.12 - K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.13 - Securities Purchase Agreement dated as of July 22, 1991 among
the Company, BLS and the Lehman Investors (4)
10.14 - Securities Purchase Agreement among the Company, BLS and the
Lehman Investors dated September 2, 1994 (6)
10.15 - Amended and Restated Stockholders Agreement dated as of
September 2, 1994, By and Among the Company, BLS, the Lehman
Investors, Chase Capital Partners and Loral Space (6)
10.16 - Agreement dated as of September 2, 1994, between the Company
and Loral Space (6)
10.17 - Amendment of Stockholders Agreement dated November 8, 1994 (6)
10.18 - Securities Conversion Agreement among the Company and the
Converting Stockholders, dated November 8, 1994 (6)
10.19 - K & F Industries, Inc. Supplemental Executive Retirement Plan
(8)
10.20 - Amended and Restated Credit Agreement dated as of August 14,
1996, among ABS, EFC, the Lenders (as defined therein), Lehman
Commercial Paper, Inc., as Documentation Agent and Chase
Securities Inc., individually and as agent for the Lenders
("Chase") (9)
10.21 - Amended and Restated Security Agreement dated as of August 14,
1996, between ABS and Chase (9)
10.22 - Amended and Restated Security Agreement dated as of August 14,
1996, between EFC and Chase (9)
28
<PAGE> 29
(c) Exhibits (continued):
10.23 - Revolving Credit Note dated as of August 14, 1996 executed by each of
ABS and EFC in favor of NBD Bank (9)
10.24 - Facility A Notes dated as of August 14, 1996 executed by each of ABS
and EFC in favor of NBD Bank (9)
10.25 - Amended and Restated K & F agreement dated as of August 14, 1996,
between the Company and Chase (9)
10.26 - Amended and Restated Subordination Agreement dated as of August 14,
1996, between ABS and Chase (9)
10.27 - Amended and Restated Subordination Agreement dated as of August 14,
1996, between EFC and Chase (9)
10.28 - Purchase Agreement dated August 12, 1996 among the Company, Lehman
Brothers Inc. and Chase Securities Inc. (9)
10.29 - Registration Rights Agreement dated as of August 15, 1996 among the
Company, Lehman Brothers Inc. and Chase Securities Inc. (9)
12.01 - Statement of computations of ratio of earnings to fixed charges (9)
21.01 - Subsidiaries of the Registrant (1)
24.01 - Powers of Attorney (included on signature page)
27.01 - Financial Data Schedule
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991 and incorporated herein by
reference.
(5) Previously filed as an exhibit 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.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-11047 and incorporated herein by reference.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
K & F INDUSTRIES, INC.
By:/s/KENNETH M. SCHWARTZ
-----------------------------
Kenneth M. Schwartz
Executive Vice President
Date: March 28, 1997
Pursuant to the requirements of The Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board, Chief March 28, 1997
- ------------------------- Executive Officer and Director
Bernard L. Schwartz (principal executive officer)
/s/KENNETH M. SCHWARTZ Executive Vice President March 28, 1997
- -------------------------
Kenneth M. Schwartz
/s/DIRKSON R. CHARLES Chief Financial Officer March 28, 1997
- -------------------------- (principal financial and
Dirkson R. Charles accounting officer)
* Director March 28, 1997
- --------------------------
Herbert R. Brinberg
* Director March 28, 1997
- --------------------------
Ronald H. Kisner
* Director March 28, 1997
- --------------------------
John R. Paddock
* Director March 28, 1997
- --------------------------
James A. Stern
* Director March 28, 1997
- --------------------------
A. Robert Towbin
* Director March 28, 1997
- ---------------------------
Alan H. Washkowitz
*By: /s/KENNETH M. SCHWARTZ Attorney-in-Fact March 28, 1997
---------------------
Kenneth M. Schwartz
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
K & F Industries, Inc.:
We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
March 31, 1996, and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for the nine months ended December 31,
1996 and for each of the two 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 December 31, 1996 and March 31, 1996, and the results of
their operations and their cash flows for the nine months ended December 31,
1996 and for each of the two years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
January 23, 1997
F-1
<PAGE> 32
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents ............................................................. $ 1,508,000 $ 2,412,000
Accounts receivable, net .............................................................. 36,032,000 35,228,000
Inventory ............................................................................. 68,334,000 63,332,000
Deferred tax asset .................................................................... 1,411,000 --
Other current assets .................................................................. 586,000 832,000
------------- -------------
Total current assets ................................................... 107,871,000 101,804,000
------------- -------------
Property, Plant and Equipment - Net ...................................................... 69,986,000 65,044,000
Deferred Charges - Net of amortization of $3,741,000 and
$9,452,000 ............................................................................ 24,674,000 24,082,000
Cost in Excess of Net Assets Acquired - Net of amortization
of $46,839,000 and $42,257,000 ........................................................ 196,446,000 202,119,000
Intangible Assets - Net of amortization of $26,576,000
and $24,035,000 ....................................................................... 20,138,000 22,988,000
------------- -------------
Total Assets ............................................................................. $ 419,115,000 $ 416,037,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable ..................................................................... $ 11,253,000 $ 12,485,000
Current portion of long-term debt .................................................... 6,000,000 --
Interest payable ..................................................................... 6,689,000 8,217,000
Other current liabilities ............................................................ 49,740,000 44,775,000
------------- -------------
Total current liabilities .............................................. 73,682,000 65,477,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions .................................... 75,439,000 75,390,000
Other Long-Term Liabilities .............................................................. 16,300,000 20,871,000
Long-Term Debt ........................................................................... 287,000,000 294,000,000
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 ................................................................................ (178,147,000) (184,049,000)
Adjustment to equity for minimum pension liability ..................................... (10,649,000) (10,572,000)
Cumulative translation adjustment ...................................................... 119,000 (451,000)
------------- -------------
Total stockholders' deficiency ......................................... (33,306,000) (39,701,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency ........................................... $ 419,115,000 $ 416,037,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 33
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended March 31,
December 31, ------------------------------
1996 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ......................................... $ 212,703,000 $ 264,736,000 $ 238,756,000
Cost of sales ..................................... 136,813,000 180,435,000 164,697,000
------------- ------------- -------------
Gross margin ...................................... 75,890,000 84,301,000 74,059,000
Independent research and development .............. 8,623,000 9,767,000 8,363,000
Selling, general and administrative expenses ...... 17,297,000 22,564,000 19,208,000
Amortization ...................................... 7,810,000 10,415,000 10,411,000
------------- ------------- -------------
Operating income .................................. 42,160,000 41,555,000 36,077,000
Interest expense, net of interest income of
$787,000, $722,000 and $374,000 ............... 27,197,000 41,048,000 46,250,000
------------- ------------- -------------
Income (loss) before income taxes and extraordinary
charge ........................................ 14,963,000 507,000 (10,173,000)
Income tax benefit ................................ 81,000 -- --
------------- ------------- -------------
Income (loss) before extraordinary charge ......... 15,044,000 507,000 (10,173,000)
Extraordinary charge from early extinguishment
of debt ....................................... (9,142,000) (1,913,000) --
------------- ------------- -------------
Net income (loss) ................................. $ 5,902,000 $ (1,406,000) $ (10,173,000)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 34
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED DECEMBER 31, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Class B Class A
Preferred Stock Common Stock Common Stock
--------------- ------------ ------------
Shares Shares Shares
Issued Amount Issued Amount Issued Amount
---------- ---------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1994 .......... 899,999 $9,000 -- $ -- 484,616 $5,000
Net loss ......................
Conversion of subordinated
convertible debentures...... 458,994 5,000
Issuance of preferred stock.... 127,636 1,000
Issuance of common stock....... 68,728 1,000
Pension adjustment.............
Cumulative translation
adjustment ..................
---------- ---------- ------- ------- -------- -------
Balance, March 31, 1995......... 1,027,635 10,000 458,994 5,000 553,344 6,000
Net loss .....................
Pension adjustment ...........
Cumulative translation
adjustment................
---------- ---------- ------- ------- -------- -------
Balance, March 31, 1996......... 1,027,635 10,000 458,994 5,000 553,344 6,000
Net income ...................
Pension adjustment ...........
Cumulative translation
adjustment..................
---------- ---------- ------- ------- -------- -------
Balance, December 31, 1996 1,027,635 $10,000 458,994 $5,000 553,344 $6,000
---------- ---------- ------- ------- -------- -------
<CAPTION>
Adjustment
to Equity for
Additional Minimum Cumulative
Paid-in Pension Translation
Capital Deficit Liability Adjustment
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, April 1, 1994 .......... $89,986,000 $(172,470,000) $(7,467,000) $(418,000)
Net loss ...................... (10,173,000)
Conversion of subordinated
convertible debentures...... 52,602,000
Issuance of preferred stock... 10,799,000
Issuance of common stock...... 1,963,000
Pension adjustment............ 275,000
Cumulative translation
adjustment ................. 134,000
------------- -------------- ------------- ------------
Balance, March 31, 1995......... 155,350,000 (182,643,000) (7,192,000) (284,000)
Net loss ..................... (1,406,000)
Pension adjustment ........... (3,380,000)
Cumulative translation
adjustment.................. (167,000)
------------- -------------- ------------- ------------
Balance, March 31, 1996......... 155,350,000 (184,049,000) (10,572,000) (451,000)
Net income ................... 5,902,000
Pension adjustment ........... (77,000)
Cumulative translation
adjustment.................. 570,000
------------- -------------- ------------- ------------
Balance, December 31, 1996 $155,350,000 $(178,147,000) $(10,649,000) $119,000
------------- -------------- ------------- ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 35
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
December 31, March 31,
---------------------------
1996 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ............................................. $ 5,902,000 $(1,406,000) $(10,173,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ............................................. 6,834,000 8,506,000 8,432,000
Amortization ............................................. 7,810,000 10,415,000 10,411,000
Non-cash interest expense-convertible debentures ......... -- -- 3,950,000
Non-cash interest expense-amortization of deferred
financing charges ..................................... 1,101,000 1,561,000 1,482,000
Provision for losses on accounts receivable .............. 2,000 1,548,000 63,000
Extraordinary charge from early extinguishment of debt ... 9,142,000 1,913,000 --
Deferred tax benefit ..................................... (320,000) -- --
Changes in assets and liabilities:
Accounts receivable ................................. (552,000) (3,296,000) (767,000)
Inventory ........................................... (4,686,000) (1,664,000) 5,919,000
Other current assets ................................ 246,000 274,000 90,000
Accounts payable .................................... (1,232,000) 2,140,000 1,317,000
Interest payable .................................... (1,528,000) (554,000) (47,000)
Other current liabilities ........................... 4,965,000 7,002,000 2,791,000
Postretirement benefit obligation other than pensions 49,000 (2,327,000) (2,433,000)
Other long-term liabilities ......................... (4,339,000) (1,811,000) (3,682,000)
------------- ------------- -------------
Net cash provided by operating activities ........... 23,394,000 22,301,000 17,353,000
------------- ------------- -------------
Cash Flows From Investing Activities:
Capital expenditures ....................................... (14,091,000) (10,418,000) (2,824,000)
Deferred charges ........................................... (250,000) (538,000) (363,000)
------------- ------------- -------------
Net cash used in investing activities .............. (14,341,000) (10,956,000) (3,187,000)
------------- ------------- -------------
Cash Flows From Financing Activities:
Payments of senior revolving loan .......................... (49,000,000) (9,000,000) (20,000,000)
Borrowings under senior revolving loan ..................... 48,000,000 23,000,000 10,000,000
Borrowings under senior term loan .......................... 40,000,000 -- --
Proceeds from issuance of senior subordinated notes ........ 140,000,000 -- --
Payments of senior subordinated debentures ................. (180,000,000) (30,000,000) --
Premiums paid on early extinguishment of debt .............. (4,500,000) (1,126,000) --
Deferred charges - financing costs ......................... (6,772,000) (300,000) --
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 .............. 2,315,000 -- --
------------- ------------- -------------
Net cash used in financing activities .............. (9,957,000) (17,426,000) (10,000,000)
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents ............ (904,000) (6,081,000) 4,166,000
Cash and cash equivalents, beginning of period .................. 2,412,000 8,493,000 4,327,000
------------- ------------- -------------
Cash and cash equivalents, end of period ........................ $ 1,508,000 $ 2,412,000 $ 8,493,000
============= ============= =============
Supplemental Information:
Interest paid during the period ............................ $ 28,411,000 $ 40,763,000 $ 41,239,000
============= ============= =============
Income taxes paid during the period ........................ $ 344,000 $ -- $ --
============= ============= =============
</TABLE>
Supplemental disclosure of non-cash financing activities:
See Note 9 for a discussion of non-cash financing
activities.
See notes to consolidated financial statements.
F-5
<PAGE> 36
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and anti-skid systems for commercial,
military and general aviation aircraft, and the manufacture of materials
for fuel tanks, iceguards, inflatable oil booms and various other products
made from coated fabrics for military and commercial uses. The Company
serves the aerospace industry (which is experiencing some consolidation)
and 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 generated approximately 90% of the Company's total
revenues during the nine months ended December 31, 1996 and Engineered
Fabrics Corporation (collectively, the "Subsidiaries"), which generated
approximately 10% of the Company's total revenues during the nine months
ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Year-End Change - Effective December 31, 1996, the Company changed its
fiscal year-end from March 31 to December 31. Accordingly, the accompanying
financial statements include audited financial statements for the nine
months ended December 31, 1996.
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. For
the nine months ended December 31, 1996 and for the fiscal years ended
March 31, 1996 and 1995, investments were $20.2 million, $29.9 million and
$23.9 million, respectively. 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
($8.7 million and $7.7 million, which is net of amortization (non-cash
interest expense) of $1.3 million and $6.9 million at December 31, 1996 and
March 31, 1996, respectively), and program participation costs ($13.9
million and $14.5 million, which is net of amortization of $2.4 million and
$1.8 million, at December 31, 1996 and March 31, 1996, 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 5 to 8 years.
F-6
<PAGE> 37
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company reviews the cost in excess of net assets acquired for
recoverability on an on-going basis using undiscounted cash flows.
Impairments would be recognized in operating results.
Intangible Assets - Intangible assets consist of patents, licenses and
computer software which are stated at cost and are being amortized on a
straight-line method over periods of 5 to 30 years.
Evaluation of Long-Lived Assets - Long-lived assets are assessed for
recoverability on an on-going basis in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121. 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 discounted future net cash flows of the related
long-lived asset. There were no adjustments to the carrying amount of
long-lived assets during the nine months ended December 31, 1996 and during
the fiscal years ended March 31, 1996 and 1995, 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 U. S. government accounted for approximately 12%, 16%
and 14% of total sales for the nine months ended December 31, 1996 and for
the fiscal years ended March 31, 1996 and 1995, respectively. No other
single customer accounted for 10% or more of consolidated revenues for the
nine months and fiscal years then ended, and there were no significant
accounts receivable from a single customer, except the U. S. government, at
December 31, 1996 and March 31, 1996.
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, 1996, the Company
adopted 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. (See Note 9.)
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the current period
presentation.
F-7
<PAGE> 38
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
3. ACCOUNTS RECEIVABLE
December 31, March 31,
1996 1996
------------ ------------
<S> <C> <C>
Accounts receivable, principally from commercial
customers .................................................................. $ 34,086,000 $ 32,704,000
Accounts receivable on U.S. government and other
long-term contracts ........................................................ 2,359,000 4,136,000
Allowances ................................................................... (413,000) (1,612,000)
------------ ------------
Total ...................................................... $ 36,032,000 $ 35,228,000
============ ============
4. INVENTORY
December 31, March 31,
1996 1996
------------ ------------
Raw materials and work-in-process ............................................ $ 46,742,000 $ 39,656,000
Finished goods ............................................................... 10,821,000 11,364,000
Inventoried costs related to U.S. ............................................
government and other long-term contracts ................................... 10,771,000 12,312,000
------------ ------------
$ 68,334,000 $ 63,332,000
============ ============
5. PROPERTY, PLANT AND EQUIPMENT
December 31, March 31,
1996 1996
------------ ------------
Land ......................................................................... $ 661,000 $ 661,000
Buildings and improvements ................................................... 33,961,000 29,148,000
Machinery, equipment, furniture and fixtures ................................. 102,278,000 95,315,000
------------ ------------
Total ...................................................... 136,900,000 125,124,000
Less accumulated depreciation and amortization ............................... 66,914,000 60,080,000
------------ ------------
Total ...................................................... $ 69,986,000 $ 65,044,000
============ ============
</TABLE>
During the nine months ended December 31, 1996, the Company sold and leased
back assets with a net book value of $2,315,000.
F-8
<PAGE> 39
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
6. OTHER CURRENT LIABILITIES
December 31, March 31,
1996 1996
------------ ------------
<S> <C> <C>
Accrued payroll costs ..................................................... $ 15,170,000 $ 15,756,000
Accrued taxes ............................................................. 6,504,000 7,783,000
Accrued costs on long-term contracts ...................................... 5,744,000 5,195,000
Accrued warranty costs .................................................... 6,695,000 8,023,000
Customer credits .......................................................... 7,483,000 3,230,000
Postretirement benefit obligation other than pensions ..................... 2,000,000 2,000,000
Other ..................................................................... 6,144,000 2,788,000
------------ ------------
Total ...................................................... $ 49,740,000 $ 44,775,000
============ =============
7. LONG-TERM DEBT
December 31, March 31,
1996 1996
------------ ------------
Senior revolving loan (a) ................................................. $ 13,000,000 $ 14,000,000
Senior term loan (a) ...................................................... 40,000,000 --
11 7/8% Senior Secured Notes due 2003 (b) ................................. 100,000,000 100,000,000
10 3/8% Senior Subordinated Notes due 2004 (c) ............................ 140,000,000 --
13 3/4% Senior Subordinated Debentures due 2001 (d) ....................... -- 180,000,000
------------ ------------
Total ...................................................... 293,000,000 294,000,000
Less current maturities (a) ............................................... 6,000,000 --
------------ ------------
Total ...................................................... $287,000,000 $294,000,000
============ ============
</TABLE>
a) Credit Agreement - In August 1996, the Company entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") consisting of a $40
million senior term loan (the "Term Loan") and a $70 million revolving loan
facility (the "Revolving Loan"). The proceeds from the Revolving Loan were
used to repay outstanding indebtedness under the Company's 1992 revolving
credit facility. Both loans bear interest at varying interest rates
selected at the option of the Company. At December 31, 1996, the interest
rate on the Term Loan was 7.875%. At December 31, 1996 and March 31, 1996,
the interest rate on the Revolving Loan was 7.875% and 8.37%, respectively.
Obligations under the Credit Agreement are secured by a lien on the
inventory, accounts receivable and certain other tangible assets. All
borrowings under the Revolving Loan mature August 14, 2001. The Term Loan
is a six-year amortizing facility maturing September 30, 2002.
Scheduled debt maturities of the Term Loan for the five years subsequent to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ------
<S> <C>
1997 $3,500,000
1998 6,000,000
1999 6,500,000
2000 8,000,000
2001 8,500,000
</TABLE>
F-9
<PAGE> 40
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to scheduled quarterly payments, the net proceeds from certain
asset sales, new equity or debt offerings and 50% of excess cash flow (as
defined) must be used to prepay the Term Loan. As a result of the excess
cash flow calculation (calculated from August 14, 1996), at December 31,
1996 additional long-term debt of $2.5 million has been classified as
current.
The Credit Agreement provides for Revolving Loans not to exceed $70
million, with availability determined by reference to a borrowing base of
eligible accounts receivable and inventory. The revolving loan facility
provides for the issuance of up to $15 million of letters of credit subject
to the unused portion of the borrowing base. At December 31, 1996 and March
31, 1996, the Company had $51.6 million and $40.6 million, respectively,
available to borrow under the revolving loan facility. At December 31, 1996
and March 31, 1996, the Company had outstanding letters of credit $5.4
million and $5.8 million, respectively.
The Credit Agreement contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales,
dividend payments, capital expenditures and other distributions from the
Subsidiaries to K & F and contains financial ratio requirements including a
cash interest coverage ratio, a leverage ratio and maintenance of a minimum
adjusted net worth. The Company was in compliance with all covenants at
December 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"). 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) 10 3/8% Senior Subordinated Notes - On August 15, 1996, the Company issued
$140 million of 10 3/8% Senior Subordinated Notes which mature on September
1, 2004 (the "10 3/8% Notes"). The 10 3/8% Notes are not subject to a
sinking fund. The 10 3/8% Notes may not be redeemed prior to September 1,
2000. On and after September 1, 2000, the Company may redeem the 10 3/8%
Notes at descending premiums ranging from 5.19% in September 2000 to no
premium after September 2003.
(d) 13 3/4% Senior Subordinated Debentures - During the nine months ended
December 31, 1996, the Company redeemed the remaining $180 million of the
$210 million of 13 3/4% Senior Subordinated Debentures which were to mature
on August 1, 2001 (the "13 3/4% Debentures"). The Company used the net
proceeds from the 10 3/8% Notes together with borrowings under the Credit
Agreement, to redeem the remaining 13 3/4% Debentures at a price of 102.5%
of the principal amount thereof. In connection therewith, the Company
recorded an extraordinary charge of $9.142 million, consisting of
redemption premiums and the write-off of unamortized financing costs.
On December 28, 1995, the Company redeemed $30 million principal amount of
the 13 3/4% Debentures at a redemption price of 103.75% of the principal
amount thereof. The Company used cash on hand and borrowings from the
revolving credit facility 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.
F-10
<PAGE> 41
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the balance
sheet at December 31, 1996 and March 31, 1996 approximate their fair value,
except as discussed below.
The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was
approximately $308 million and $311 million at December 31, 1996 and March
31, 1996, 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
non-qualified 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
Nine Months Ended March 31,
December 31, --------------------
1996 1996 1995
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year ...... 11,500 11,500 12,000
Granted ............................... -- -- --
Canceled .............................. (250) -- (500)
------- ------- -------
Outstanding at end of year ............ 11,250 11,500 11,500
======= ======= =======
Exercisable options outstanding ....... 10,375 9,625 8,938
======= ======= =======
Available for future grant ............ 38,750 38,500 38,500
======= ======= =======
</TABLE>
The weighted-average remaining contractual life of options outstanding
at December 31, 1996 was 2.8 years.
F-11
<PAGE> 42
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
e. In April 1996, Loral Space (which owns 22.5% of the outstanding capital
stock of K & F) granted options to certain officers and employees of K & F
to purchase 265,000 shares of Loral Space common stock at $10.50 per share.
Such exercise price was equal to the market price at grant date. These
options expire ten years from the date of grant and become exercisable
ratably over a five year period.
K & F is obligated to pay annual interest at LIBOR plus two percent to
Loral Space on the balance of options issued but not exercised, times
$10.50. At December 31, 1996, the amount due to Loral Space is $140,000
which has been charged to operations.
As described in Note 2, K & F accounts for its stock-based compensation
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. SFAS No. 123, "Accounting for Stock-Based
Compensation" requires the disclosure of pro forma net income (loss) had K
& F adopted the fair value method as of the beginning of 1995. SFAS No. 123
requires that equity instruments granted to an employee by a principal
stockholder be included as part of the disclosure. However, disclosure has
been omitted because the pro forma incremental effect of these options on
net income (loss) required to be disclosed under SFAS No. 123 is not
material to K & F's results of operations.
F-12
<PAGE> 43
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. The Company's funding policy is
to contribute at least the minimum amount required by the Employee
Retirement Income Security Act of 1974.
Net pension cost included the following:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
December 31, March 31
----------------------------------
1996 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period ......................................................... $ 1,521,000 $ 1,562,000 $ 1,590,000
Interest cost on projected benefit obligation .................... 3,980,000 4,901,000 4,224,000
Actual (return) loss on plan assets .............................. (5,439,000) (9,940,000) 954,000
Net amortization and deferral .................................... 2,512,000 6,988,000 (3,869,000)
----------- ----------- -----------
Net pension cost ............................... $ 2,574,000 $ 3,511,000 $ 2,899,000
=========== =========== ===========
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation ................................................ $ 70,371,000 $ 65,642,000
============ ============
Accumulated benefit obligation ........................................... $ 70,496,000 $ 65,987,000
Effect of projected future salary increases .............................. 2,624,000 2,113,000
------------ ------------
Projected benefit obligation ............................................. 73,120,000 68,100,000
Plan assets at fair market value ........................................... 63,268,000 55,100,000
------------ ------------
Unfunded projected benefit obligation ...................................... 9,852,000 13,000,000
Unrecognized prior service cost ............................................ (1,876,000) (2,185,000)
Unrecognized net loss ...................................................... (13,273,000) (12,685,000)
Adjustment for minimum liability ........................................... 12,525,000 12,757,000
------------ ------------
Accrued pension cost recognized in the
consolidated balance sheet................................................ $ 7,228,000 $ 10,887,000
============ ============
</TABLE>
F-13
<PAGE> 44
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 87 requires recognition in the balance sheet of an additional
minimum pension liability for underfunded plans with accumulated benefit
obligations in excess of plan assets. A corresponding amount is recognized
as an intangible asset or a reduction of equity. At December 31, 1996, the
Company's additional minimum liability was $12,525,000 with a corresponding
equity reduction of $10,649,000 and intangible asset of $1,876,000. 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.
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
Nine Months Ended March 31,
December 31, --------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate ................................. 7.75% 7.50% 8.50%
Rate of increase in compensation levels ....... 4.50 4.50 4.50
Expected long-term rate of return on assets ... 9.50 9.50 9.50
</TABLE>
Eligible employees having one year of service also participate in one of
the Company's Savings Plans (hourly or salaried). Under one of these plans,
the Company matches 45% of a participating employee's contributions, up to
6% of compensation. The employer contributions generally vest to
participating employees after five years of service. The matching
contributions were $572,000, $687,000 and $532,000 for the nine months
ended December 31, 1996 and for the fiscal years ended March 31, 1996 and
1995, 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 non-contributory.
F-14
<PAGE> 45
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended March 31,
December 31, ------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
period ............................................. $ 873,000 $ 619,000 $ 400,000
Interest cost on accumulated postretirement benefit
obligation ......................................... 3,176,000 3,474,000 3,543,000
Net amortization and deferral ........................ (2,442,000) (4,332,000) (3,732,000)
----------- ----------- -----------
Net periodic postretirement benefit cost ............. $ 1,607,000 $ (239,000) $ 211,000
=========== =========== ===========
</TABLE>
Presented below are the total obligations and amounts recognized in the
Company's consolidated balance sheets, inclusive of the current portion:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................. $ 34,042,000 $ 30,172,000
Fully eligible active plan participants .............. 2,247,000 2,838,000
Other active plan participants ....................... 22,558,000 16,304,000
------------ ------------
Total accumulated postretirement benefit obligation ...... 58,847,000 49,314,000
Unrecognized net loss .................................... (20,081,000) (14,105,000)
Unrecognized prior service cost related to plan amendments 38,673,000 42,181,000
------------ ------------
Accrued postretirement benefit costs ..................... $ 77,439,000 $ 77,390,000
============ ============
</TABLE>
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 11% during the nine months ended December 31, 1996
and will be 10.3% during the fiscal year ending December 31, 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 December 31, 1996 by $8,000,000 and
the aggregate of the service and interest cost components of net
postretirement benefit cost for the nine months ended December 31, 1996 by
$1,100,000. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation as of December 31, 1996 and
March 31, 1996 was 7.75% and 7.50%, respectively.
F-15
<PAGE> 46
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS
The Company is party to various noncancelable operating leases which are
longer than a one-year term for certain data processing, and other
equipment and facilities with minimum rental commitments payable as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ------
<S> <C>
1997 $4,707,000
1998 4,810,000
1999 4,823,000
2000 4,352,000
2001 1,745,000
Thereafter 6,565,000
</TABLE>
Rental expense was $3,491,000, $4,758,000 and $4,641,000 for the nine
months ended December 31, 1996 and for the fiscal years ended March 31,
1996 and 1995, respectively.
13. CONTINGENCIES
In the past, Aircraft Braking Systems had been purchasing substantially all
of the carbon for its carbon brakes under supply arrangements with Hitco
Technologies, Inc. ("Hitco"). As described below Aircraft Braking Systems
and Hitco are in litigation. 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. However, for
certain programs, the Company has developed an alternate supplier and also
has commenced a major expansion of its existing carbon manufacturing
facility in Akron, Ohio. Construction of the facility is substantially
complete and is expected to be fully operational during the second quarter
of calendar year 1997. Aircraft Braking Systems is currently manufacturing
carbon on three of the five new densification furnaces to be installed.
When fully operational, the Company believes it will have sufficient
sources of carbon to meet all of its requirements for brake production at
the current level of business.
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 after Hitco threatened to breach existing supply contracts
unless prices were renegotiated. Hitco has been the principal supplier of
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. Hitco was enjoined from
refusing to perform its obligations pursuant to existing contracts and
purchase orders without change in terms. Hitco has sought 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. To date, the preliminary injunction has not been vacated or
modified, although Hitco argues it expired on December 13, 1996. Through
January 1997, Hitco continued to supply carbon to the Company, although
Hitco failed to acknowledge certain purchase orders. Aircraft Braking
Systems has sought to hold Hitco in contempt of the court's injunction.
Hitco has sought an injunction requiring that the Company turn over
technology allegedly jointly developed and owned under the prior
contractual arrangements. Hearings have been concluded on both the
Company's contempt motion and Hitco's motion seeking technology but neither
has been decided by the court.
F-16
<PAGE> 47
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In related actions, a suit filed by Hitco in Superior Court, Los Angeles
County, California against Aircraft Braking Systems seeking substantially
the same relief as is asserted in the Ohio action has been stayed. Hitco
also filed suit in the Federal District Court in the Northern District of
Ohio for damages and injunctive relief against a third party claiming that
such party, in supplying certain carbon to Aircraft Braking Systems, has
acquired trade secrets of Hitco from Aircraft Braking Systems and has
misappropriated trade secrets and technology developed under the same
research and development contracts between Hitco and Aircraft Braking
Systems which are the subject of the Ohio case and the California case.
Aircraft Braking Systems has been granted leave to intervene and the other
party has moved to dismiss the Federal action.
Management intends to vigorously advocate its interest in all lawsuits, to
seek dismissal of the California action and to proceed in the Ohio case to
enforce the preliminary injunction and otherwise to protect Aircraft
Braking Systems' carbon supply as well as to seek damages from Hitco. Based
upon the proceedings 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.
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 and corresponding valuation
allowance is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------- -------------
<S> <C> <C>
Tax net operating loss carryforwards .......... $ 71,051,000 $ 68,233,000
Temporary differences:
Postretirement and other employee benefits 33,708,000 35,861,000
Intangibles .............................. 55,124,000 58,997,000
Program participation costs .............. (6,109,000) (6,348,000)
Other .................................... 6,802,000 7,165,000
------------- -------------
Deferred tax benefit .......................... 160,576,000 163,908,000
Valuation allowance ........................... (159,165,000) (163,908,000)
------------- -------------
Net deferred tax asset ........................ $ 1,411,000 $ --
============= =============
</TABLE>
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets which are not likely to be realized. The Company has established a
valuation allowance against the majority of these benefits given the
uncertain nature of their ultimate realization. The change in the valuation
allowance reflects the extent that taxable income has been projected during
the carryforward period.
F-17
<PAGE> 48
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced by
$75 million and $56 million, respectively. The realization of these
benefits would reduce future income tax payments by $159 million. At
December 31, 1996 goodwill has been reduced by $1.1 million as a result of
the reduction in the valuation allowance.
The Company's benefit for income taxes for the nine months ended December
31, 1996 consists of:
<TABLE>
<S> <C>
Current domestic provision ............................. $ 1,330,000
Foreign provision ...................................... 170,000
Domestic utilization of net operating loss carryforwards (1,581,000)
-----------
Income tax benefit ..................................... $ (81,000)
===========
</TABLE>
The Company's effective tax rate of 0.5% benefit for the nine months ended
December 31, 1996 differs from the federal statutory rate (benefit of 35%)
due to the partial-utilization of tax net operating losses of $3.5 million
and the change in the valuation allowance. For the fiscal years ended March
31, 1996 and 1995 the Company's effective tax rate of zero percent differed
from the federal statutory rate (benefit of 35%) due to the change in the
valuation allowance.
The Company has tax net operating loss carryforwards of approximately $185
million at December 31, 1996. The tax net operating losses expire from 2005
through 2011, with $23 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
(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.
In May 1996, K & F purchased $343,000 principal amount of the Company's 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. In May 1996, the 13 3/4% Debentures were callable at
a price of 103.75% of the principal amount.
The Company pays Ronald H. Kisner, who is a member of the Board of
Directors of the Company, a monthly retainer of $6,000 for legal services.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral Corporation. (See Note 9.)
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 for the fiscal
year ended March 31, 1996 and paid to certain executive officers of Loral
Space. BLS did not receive any payments under this plan for the fiscal year
ended March 31, 1996. Bonuses for the nine months ended December 31, 1996
have not yet been determined nor approved by the Company's Board of
Directors.
F-18
<PAGE> 49
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Lehman Brothers has from time to time provided investment banking,
financial advisory and other services to the Company, for which services
Lehman Brothers has received fees. As the beneficial owners of 48.17% of
the outstanding capital stock, the Lehman Investors are able to elect three
directors to the Company's Board of Directors and have the benefit of
certain rights under the Stockholders Agreement and the Company's By-laws.
During the nine months ended December 31, 1996, Lehman Brothers received
underwriting discounts and commissions of $2.6 million in connection with
the offering of the 10 3/8% Notes.
Pursuant to agreements between the Company and Loral Space (which owns
22.5% of the outstanding capital stock), the Company reimburses Loral Space
for real property occupancy, benefits administration and legal services.
The related charges agreed upon were established to reimburse Loral Space
for actual costs incurred without profit or fee. The Company believes the
arrangements are as favorable to the Company as could have been obtained
from unaffiliated parties. Payments to Loral Space were $0.2 million for
the nine months ended December 31, 1996. Included in accounts payable at
December 31, 1996 is $0.2 million.
Pursuant to agreements between K & F 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 and $3.0 million for the fiscal years ended March 31, 1996 and
1995, respectively. Billings to Loral Corporation were $2.7 million and
$0.2 million for the fiscal years ended March 31, 1996 and 1995. Purchases
from Loral Corporation were $2.2 million and $1.9 million for the fiscal
years ended March 31, 1996 and 1995. Included in accounts receivable and
accounts payable at March 31, 1996 is $3.5 million and $2.3 million.
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.
16. COMPARATIVE RESULTS (UNAUDITED)
The following financial information for the nine months ended December 31,
1996 and 1995 and for the 12 months ended December 31, 1996 and 1995 is
presented for comparative purposes. The financial information for the nine
months ended December 31, 1995 and 12 months ended December 31, 1996 and
1995 is unaudited.
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
December 31, December 31,
--------------------------------------- ------------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales ...................................... $212,703,000 $199,785,000 $277,655,000 $263,451,000
Operating income ............................... 42,160,000 33,706,000 50,009,000 44,077,000
Income before income taxes and
extraordinary charge .......................... 14,963,000 2,418,000 13,052,000 2,189,000
Net income ..................................... 5,902,000 505,000 3,991,000 276,000
</TABLE>
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,508,000
<SECURITIES> 0
<RECEIVABLES> 36,445,000
<ALLOWANCES> 413,000
<INVENTORY> 68,334,000
<CURRENT-ASSETS> 107,871,000
<PP&E> 136,900,000
<DEPRECIATION> 66,914,000
<TOTAL-ASSETS> 419,115,000
<CURRENT-LIABILITIES> 73,682,000
<BONDS> 293,000,000
0
10,000
<COMMON> 11,000
<OTHER-SE> (33,327,000)
<TOTAL-LIABILITY-AND-EQUITY> 419,115,000
<SALES> 212,703,000
<TOTAL-REVENUES> 212,703,000
<CGS> 136,813,000
<TOTAL-COSTS> 136,813,000
<OTHER-EXPENSES> 13,954,000
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 27,984,000
<INCOME-PRETAX> 14,963,000
<INCOME-TAX> 81,000
<INCOME-CONTINUING> 15,044,000
<DISCONTINUED> 0
<EXTRAORDINARY> 9,142,000
<CHANGES> 0
<NET-INCOME> 5,902,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
