<PAGE> 1
[K & F INDUSTRIES LETTERHEAD]
Filed Pursuant to Rule 424 (b)(3) of the
Rules and Regulations Under the
Securities Act of 1933
Registration Statement No. 333-40977
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 11, 1998)
$185,000,000
K & F Industries, Inc.
9 1/4% Senior Subordinated Notes Due 2007
------------------------------------
This Prospectus Supplement, together with Prospectus, is to be used by
Lehman Brothers in connection with offers and sales of the above-referenced
securities in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Lehman Brothers may act as
principal or agent in such transactions.
August 12, 1998
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
K & F Industries, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 34-1614845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number including area code (212) 297-0900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 1, 1998, there were 740,398 shares of common stock outstanding.
<PAGE> 3
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,758,000 $ 4,707,000
Accounts receivable, net 45,542,000 40,014,000
Inventory 68,698,000 65,871,000
Other current assets 685,000 559,000
------------- -------------
Total current assets 119,683,000 111,151,000
------------- -------------
Property, plant and equipment 146,321,000 146,916,000
Less, accumulated depreciation and amortization 77,913,000 76,278,000
------------- -------------
68,408,000 70,638,000
------------- -------------
Deferred charges, net of amortization 26,969,000 28,382,000
Cost in excess of net assets acquired, net of
amortization 185,488,000 190,720,000
Intangible assets, net of amortization 14,919,000 16,497,000
Prepaid pension cost 7,848,000 7,848,000
------------- -------------
$ 423,315,000 $ 425,236,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 13,419,000 $ 17,979,000
Current portion of senior term loans 1,500,000 1,500,000
Interest payable 5,535,000 4,725,000
Other current liabilities 49,166,000 54,994,000
------------- -------------
Total current liabilities 69,620,000 79,198,000
------------- -------------
Postretirement benefit obligation other
than pensions 75,542,000 75,542,000
Other long-term liabilities 7,976,000 7,830,000
Senior revolving loan 3,000,000 14,000,000
Senior term loan A 49,125,000 49,375,000
Senior term loan B 270,250,000 270,750,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Deficit (172,644,000) (191,976,000)
Adjustment to equity for minimum pension
liability (1,213,000) (1,213,000)
Cumulative translation adjustments (89,000) (18,000)
------------- -------------
Total stockholders' deficiency (237,198,000) (256,459,000)
------------- -------------
$ 423,315,000 $ 425,236,000
============= =============
</TABLE>
See notes to consolidated
financial statements.
2
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
June 30, June 30,
1998 1997
------------- -------------
<S> <C> <C>
Sales $ 173,392,000 $ 146,174,000
Costs and expenses 123,657,000 110,797,000
Amortization 5,141,000 5,152,000
------------- -------------
Operating income 44,594,000 30,225,000
Interest and investment income 165,000 121,000
Interest expense (23,039,000) (15,707,000)
------------- -------------
Income before income taxes and
extraordinary charge 21,720,000 14,639,000
Income tax provision (2,388,000) (1,577,000)
------------- -------------
Income before extraordinary charge 19,332,000 13,062,000
Extraordinary charge from early
extinguishment of debt, net of tax -- (1,713,000)
------------- -------------
Net income $ 19,332,000 $ 11,349,000
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 91,004,000 $ 73,564,000
Costs and expenses 59,270,000 55,599,000
Amortization 2,571,000 2,581,000
------------ ------------
Operating income 29,163,000 15,384,000
Interest and investment income 86,000 68,000
Interest expense (11,568,000) (7,739,000)
------------ ------------
Income before income taxes and
extraordinary charge 17,681,000 7,713,000
Income tax provision (1,888,000) (940,000)
------------ ------------
Income before extraordinary charge 15,793,000 6,773,000
Extraordinary charge from early
extinguishment of debt, net of tax -- (1,713,000)
------------ ------------
Net income $ 15,793,000 $ 5,060,000
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 19,332,000 $ 11,349,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 9,947,000 9,790,000
Non-cash interest expense - amortization
of deferred financing charges 966,000 733,000
Deferred income taxes 2,178,000 1,290,000
Extraordinary charge from early
extinguishment of debt -- 1,713,000
Changes in assets and liabilities:
Accounts receivable, net (5,552,000) (1,436,000)
Inventory (2,874,000) (1,493,000)
Other current assets (126,000) 182,000
Accounts payable, interest payable, and
other current liabilities (9,578,000) (1,895,000)
Postretirement benefit obligation other
than pensions -- 510,000
Other long-term liabilities 146,000 3,170,000
------------ ------------
Net cash provided by operating
activities 14,439,000 23,913,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,132,000) (3,127,000)
Deferred charges (62,000) (1,500,000)
------------ ------------
Net cash used in investing activities (3,194,000) (4,627,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan (22,000,000) (21,000,000)
Payments of senior term loans (750,000) (3,500,000)
Payments of long-term debt -- (30,000,000)
Borrowings under senior revolving loan 11,000,000 39,000,000
Premiums paid on early extinguishment of debt -- (1,584,000)
Proceeds from sale and leaseback transaction 556,000 --
------------ ------------
Net cash used by financing activities (11,194,000) (17,084,000)
------------ ------------
Net increase in cash and cash
equivalents 51,000 2,202,000
Cash and cash equivalents, beginning of
period 4,707,000 1,508,000
------------ ------------
Cash and cash equivalents, end of period $ 4,758,000 $ 3,710,000
============ ============
Supplemental cash flow information:
Cash interest paid during period $ 21,263,000 $ 15,754,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company") pursuant
to the rules of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position,
results of operations and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules. The Company believes that the disclosures made
are adequate to make the information presented not misleading. The
consolidated statements of operations for the three and six months ended June
30, 1998 are not necessarily indicative of the results to be expected for the
full year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto included
in the Company's December 31, 1997 Annual Report on Form 10-K.
2. Receivables are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable, principally
from commercial customers $ 40,456,000 $ 36,506,000
Accounts receivable, on U. S
Government and other long-term
contracts 5,481,000 3,904,000
Allowances (395,000) (396,000)
------------ ------------
$ 45,542,000 $ 40,014,000
============ ============
</TABLE>
3. Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials and work-in-process $44,593,000 $43,236,000
Finished goods 12,587,000 11,726,000
Inventoried costs related to U.S.
Government and other long-term
contracts 11,518,000 10,909,000
----------- -----------
$68,698,000 $65,871,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below
cost as an investment in a new airframe which is expected to be
recovered through the subsequent sale of replacement parts. These
commercial investments (losses) are recognized when original equipment
is shipped. Losses on U.S. Government contracts are immediately
recognized in full when determinable.
6
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
4. Other current liabilities consist of the following:
June 30, December 31,
1998 1997
----------- ----------
Accrued payroll costs $13,619,000 $17,399,000
Accrued taxes 7,610,000 7,895,000
Accrued costs on long-term contracts 8,243,000 7,590,000
Accrued warranty costs 7,632,000 7,496,000
Customer credits 3,169,000 4,172,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 6,893,000 8,442,000
----------- -----------
$49,166,000 $54,994,000
=========== ===========
5. Contingencies
On December 15, 1995, the Company's Aircraft Braking Systems
subsidiary commenced an action in the Court of Common Pleas, Summit
County, Ohio against Hitco Technologies, Inc. (now known as SGL Carbon
Composites, Inc.) ("Hitco") after Hitco threatened to breach an
existing supply contract unless prices were renegotiated. Hitco had
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, sought injunctive relief and damages
for various breaches of contract. Hitco counterclaimed in the matter
seeking, among other things, damages for discounted lost profits for
the alleged breach by Aircraft Braking Systems of alleged long-term
contracts to purchase carbon. Because Hitco was enjoined from refusing
to perform its obligations pursuant to existing contracts and purchase
orders, Hitco continued to supply carbon to the Company through
mid-December 1996. Aircraft Braking Systems was awarded $4,528,000 on
its claims but Hitco was awarded $9,578,000 on its claims after trial.
After pre-judgment interest was awarded to the parties, a net judgment
of $4,354,000 was entered against Aircraft Braking Systems. Both the
Company and Hitco have filed appeals.
In a related action, 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 state action,
has been stayed.
7
<PAGE> 9
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 1, 1998, Hitco commenced an action against Aircraft Braking
Systems in the Federal District Court in the Central District of
California. This suit, which is at a preliminary stage, alleges unfair
competition and violations of antitrust laws in the sale of products
to certain customers and seeks unspecified compensatory damages,
treble damages, punitive damages and injunctive relief. Aircraft
Braking Systems has filed an answer to the complaint in the California
federal action, denying all of the material allegations of the
complaint and asserting various defenses.
Management intends to vigorously advocate its interest in all
lawsuits. There can be no assurance, however, as to the final outcome
of the litigation with Hitco. Payment of the judgment on appeal in
Ohio has been bonded, and should the appeal not be successful,
management believes payment of the judgment amount, plus interest
thereon, would not materially adversely affect the Company.
In addition to the foregoing, there are various lawsuits and claims
pending against the Company incidental to its business. Although the
final results in suits and proceedings cannot be predicted with
certainty, in the opinion of the Company's management, the ultimate
liability, if any, will not have a material adverse effect on the
Company.
6. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 15,793,000 $ 5,060,000
Other comprehensive income:
Cumulative translation adjustments (52,000) (7,000)
------------ ------------
Comprehensive income $ 15,741,000 $ 5,053,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 19,332,000 $ 11,349,000
Other comprehensive income:
Cumulative translation adjustments (71,000) (156,000)
------------ ------------
Comprehensive income $ 19,261,000 $ 11,193,000
============ ============
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Six Months Ended June 30, 1998 and
June 30, 1997
Sales for the six months ended June 30, 1998 totaled $173,392,000, reflecting an
increase of $27,218,000, or 18.6%, compared with $146,174,000 for the same
period in the prior year. This increase was due to higher sales of wheels and
brakes for commercial transport and general aviation aircraft of $21,975,000,
primarily on the Boeing MD-90, DC-9 and MD-80 programs. Military sales were
higher by $5,243,000 on various programs.
Operating income increased $14,369,000 to $44,594,000, or 25.7% of sales for the
six months ended June 30, 1998 compared with $30,225,000, or 20.7% of sales for
the same period in the prior year. Excluding a non-recurring charge of $2
million during the first quarter of 1998 to reflect the outcome of a lawsuit
(see "Litigation"), operating margins increased to 26.9%. Operating margins
increased primarily due to the overhead absorption effect relating to the higher
sales volume and operating efficiencies. Partially offsetting this increase in
margins was higher shipments of original equipment to airframe manufacturers at
or below the cost of production.
Interest expense, net increased by $7,288,000 for the six months ended June 30,
1998 compared with the same period in the prior year. This increase was due to
increased indebtedness resulting from a recapitalization consummated on October
15, 1997. Partially offsetting this increase was lower interest rates on the
fixed rate portion of the Company's indebtedness.
The Company's effective tax rate of 11.0% and 10.8% for the six months ended
June 30, 1998 and 1997, respectively, differs from the statutory rate of 35% due
to a net decrease in the valuation allowance.
Comparison of Results of Operations for the Three Months Ended June 30, 1998 and
June 30, 1997
Sales for the three months ended June 30, 1998 totaled $91,004,000, reflecting
an increase of $17,440,000, or 23.7%, compared with $73,564,000 for the same
period in the prior year. This increase was due to higher sales of wheels and
brakes for commercial transport and general aviation aircraft of $13,056,000,
primarily on the Boeing DC-9, MD-90 and MD-80 programs. Military sales were
higher by $4,384,000 on various programs.
Operating income increased $13,779,000 to $29,163,000, or 32.0% of sales for the
three months ended June 30, 1998 compared with $15,384,000, or 20.9% of sales
for the same period in the prior year. Operating margins increased primarily due
to the overhead absorption effect relating to the higher sales volume and
operating efficiencies.
Interest expense, net increased $3,811,000 for the three months ended June 30,
1998 compared with the same period in the prior year. This increase was due to
the increased indebtedness resulting from a recapitalization consummated on
October 15, 1997. Partially offsetting this increase was lower interest rates on
the fixed rate portion of the Company's indebtedness.
9
<PAGE> 11
The Company's effective tax rate of 10.7% and 12.2% for the three months ended
June 30, 1998 and 1997, respectively, differs from the statutory rate of 35% due
to a net decrease in the valuation allowance.
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, to make investments in new airframes
(which were $18.0 million and $14.2 million for the six months ended June 30,
1998 and 1997, respectively) and to pay interest and principal on indebtedness.
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 revolving credit facility. At June 30, 1998, the Company
had $37.1 million available to borrow under its $50 million revolving credit
facility.
Cash Flows
During the six months ended June 30, 1998, cash provided by operating activities
amounted to $14,439,000 and reflected $54,541,000 of earnings before interest,
taxes, depreciation and amortization ("EBITDA"), partially offset by increases
in accounts receivable of $5,552,000, inventory of $2,874,000, other working
capital of $5,853,000, a decrease in accounts payable of $4,560,000 and interest
payments of $21,263,000. During the six months ended June 30, 1997, cash
provided by operating activities totaled $23,913,000 and reflected $40,015,000
of EBITDA, a decrease in other working capital requirements of $2,581,000,
partially offset by increases in accounts receivable of $1,436,000, inventory of
$1,493,000 and interest payments of $15,754,000.
During the six months ended June 30, 1998, cash used in investing activities
amounted to $3,194,000 primarily due to capital expenditures. During the six
months ended June 30, 1997, cash used in investing activities totaled $4,627,000
due to $1,500,000 of program participation payments and $3,127,000 of capital
expenditures.
Cash used by financing activities during the six months ended June 30, 1998 and
1997 was $11,194,000 and $17,084,000, respectively. During the six months ended
June 30, 1998, the Company used $11,750,000 for the repayment of indebtedness
partially offset by $556,000 of proceeds received from a sale and leaseback
transaction. During the six months ended June 30, 1997, the Company used
$15,500,000 for the repayment of indebtedness and $1,584,000 for premiums paid
on the early extinguishment of debt.
Litigation
The Company has been in litigation with Hitco Technologies, Inc. (now known as
SGL Carbon Composites, Inc.) ("Hitco"), a former supplier of the carbon used by
Aircraft Braking Systems to manufacture carbon brakes. See Note 5 to the
consolidated financial statements.
10
<PAGE> 12
Collective Bargaining Matters
All of Aircraft Braking Systems' hourly employees are represented by the United
Auto Workers' Union. On May 31, 1998 workers at Aircraft Braking Systems
ratified a new, four-year contract.
11
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the Company's Quarterly Report on Form 10-Q for the three months ended March
31, 1998 and Note 5 to the consolidated financial statements included in this
report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended June 30,
1998.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: August 12, 1998
13
