<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-40977
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 3728 34-1614845
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH M. SCHWARTZ
EXECUTIVE VICE PRESIDENT
K & F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH A COPY TO:
GEORGE P. O'SULLIVAN, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<PAGE> 2
EXPLANATORY NOTE
THE REGISTRATION STATEMENT TO WHICH THIS POST-EFFECTIVE AMENDMENT
RELATES ORIGINALLY COVERED THE REGISTRATION OF AN AGGREGATE PRINCIPAL AMOUNT OF
$185,000,000 OF 9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007 (THE
"EXCHANGE NOTES") OF K & F INDUSTRIES, INC. THAT WERE OFFERED IN EXCHANGE FOR
EQUAL PRINCIPAL AMOUNTS OF THE COMPANY'S THEN-OUTSTANDING 9 1/4% SENIOR
SUBORDINATED NOTES DUE 2007 (THE "EXCHANGE OFFER"). THAT REGISTRATION STATEMENT
ALSO COVERED THE REGISTRATION OF THE EXCHANGE NOTES FOR RESALE BY LEHMAN
BROTHERS INC. IN MARKET-MAKING TRANSACTIONS. THE EXCHANGE OFFER EXPIRED ON MARCH
6, 1998. THEREFORE, THIS POST-EFFECTIVE AMENDMENT RELATES TO ONLY THE
MARKETING-MAKING TRANSACTIONS OF LEHMAN BROTHERS INC. AND THE PROSPECTUS
CONTAINED HEREIN CONSTITUTES THE MARKET-MAKING PROSPECTUS WITH RESPECT THERETO.
<PAGE> 3
K & F INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
<S> <C> <C>
(1) Forepart of Registration Statement Facing Page of Registration
and Outside Front Cover Page Statement; Cross-Reference Sheet;
of Prospectus Outside Front Cover Page of Prospectus
(2) Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus; Available
Information
(3) Risk Factors, Ratio of Earnings Prospectus Summary; Risk Factors; Selected
to Fixed Charges and Other Historical Consolidated Financial
Information Information
Terms of the Transaction Prospectus Summary;
Description of the Notes
Pro Forma Financial Information Prospectus Summary; Unaudited
Pro Forma Consolidated Financial
Information; Management's Discussion and
Analysis of Financial Condition and Results
of Operations
(6) Material Contacts With the
Company Being Acquired *
Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters *
(8) Interests of Named Experts and
Counsel *
(9) Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities *
(10) Information With Respect to
S-3 Registrants *
(11) Incorporation of Certain
Information by Reference *
(12) Information With Respect to S-2
or S-3 Registrants *
(13) Incorporation of Certain
Information by Reference *
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
<S> <C> <C>
(14) Information With Respect to Prospectus Summary; Risk Factors; Selected
Registrants Other Than S-3 or Historical Consolidated Financial
S-2 Registrants Information; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Description of
Certain Indebtedness
(15) Information With Respect to
S-3 Companies *
(16) Information With Respect to
S-2 or S-3 Companies *
(17) Information With Respect to
Companies Other Than S-3 or
S-2 Companies *
(18) Information if Proxies,
Consents or Authorizations
Are to be Solicited *
(19) Information if Proxies,
Consents or Authorizations
Are Not to be Solicited or in
an Exchange Offer Management; Security Ownership; Certain
Transactions
</TABLE>
<PAGE> 5
PROSPECTUS
$185,000,000
K & F INDUSTRIES, INC.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
The 9 1/4% Series B Senior Subordinated Notes due 2007 (the "New
Notes") of K & F Industries, Inc. ("K & F" or the "Company") were issued in
exchange for the 9 1/4% Senior Subordinated Notes due 2007 (the "Old Notes" and
together with the New Notes, the "Notes") by the Company.
Interest on the New Notes is payable in cash semi-annually in arrears
on April 15 and October 15 of each year, commencing April 15, 1998. The New
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after October 15, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or before October 15, 2000, the Company may, at its option, redeem
up to an aggregate of $65.0 million in aggregate principal amount of the New
Notes at the redemption price set forth herein, in each case plus accrued and
unpaid interest through the redemption date, with the net proceeds of one or
more underwritten public offerings of common stock of the Company, provided at
least $120.0 million in aggregate principal amount of the New Notes shall remain
outstanding after the occurence of each such redemption. The New Notes are not
subject to any mandatory sinking fund.
In the event of a Change of Control (as defined), each holder of the
New Notes will have the right, at the holder's option, to require the Company to
purchase such holder's Notes, in whole or in part, at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest to the
date of purchase. See "Description of the Notes -- Repurchase at the Option of
Holders."
The New Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Company conducts its operations solely through
its subsidiaries and, accordingly, the New Notes are effectively subordinated to
indebtedness and other liabilities of its subsidiaries, including borrowings
under the New Credit Facility (as defined). As of December 31, 1997, the Company
had approximately $335.6 million of Senior Indebtedness outstanding, the
Company's subsidiaries had other liabilities of approximately $81.0 million
outstanding and the Company had a stockholders' deficiency of approximately
$256.5 million. See "Description of the Notes--Subordination."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS HAS BEEN PREPARED FOR AND IS TO BE USED BY LEHMAN BROTHERS INC.
IN CONNECTION WITH OFFERS AND SALES IN MARKET-MAKING TRANSACTIONS OF THE NEW
NOTES. THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS OF SUCH SALES. LEHMAN
BROTHERS INC. MAY ACT AS A PRINCIPAL OR AGENT IN SUCH TRANSACTIONS. THE NEW
NOTES MAY BE OFFERED IN NEGOTIATED TRANSACTIONS OR OTHERWISE.
LEHMAN BROTHERS
THE DATE OF THIS PROSPECTUS IS MAY 7, 1998
<PAGE> 6
AVAILABLE INFORMATION
THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC") A REGISTRATION STATEMENT ON FORM S-4 UNDER THE SECURITIES ACT FOR THE
REGISTRATION OF THE NEW NOTES (THE "REGISTRATION STATEMENT"). THIS PROSPECTUS,
WHICH CONSTITUTES A PART OF THE REGISTRATION STATEMENT, DOES NOT CONTAIN ALL OF
THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENT, CERTAIN ITEMS OF WHICH
ARE CONTAINED IN EXHIBITS AND SCHEDULES TO THE REGISTRATION STATEMENT AS
PERMITTED BY THE RULES AND REGULATIONS OF THE SEC. FOR FURTHER INFORMATION WITH
RESPECT TO THE COMPANY OR THE NEW NOTES, REFERENCE IS MADE TO THE REGISTRATION
STATEMENT, INCLUDING THE EXHIBITS AND FINANCIAL STATEMENT SCHEDULES THERETO,
WHICH MAY BE INSPECTED WITHOUT CHARGE AT THE PUBLIC REFERENCE FACILITY
MAINTAINED BY THE SEC AT 450 FIFTH STREET, N.W., WASHINGTON, D.C. 20549, AND
COPIES OF WHICH MAY BE OBTAINED FROM THE SEC AT PRESCRIBED RATES. STATEMENTS
MADE IN THIS PROSPECTUS CONCERNING THE CONTENTS OF ANY DOCUMENT REFERRED TO
HEREIN ARE NOT NECESSARILY COMPLETE. WITH RESPECT TO EACH SUCH DOCUMENT FILED
WITH THE SEC AS AN EXHIBIT TO THE REGISTRATION STATEMENT, REFERENCE IS MADE TO
THE EXHIBIT FOR A MORE COMPLETE DESCRIPTION OF THE MATTER INVOLVED, AND EACH
SUCH STATEMENT SHALL BE DEEMED QUALIFIED IN ITS ENTIRETY BY SUCH REFERENCE.
THE COMPANY IS SUBJECT TO THE INFORMATION REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"), AND IN ACCORDANCE
THEREWITH FILES REPORTS AND OTHER INFORMATION WITH THE SEC. SUCH REPORTS AND
OTHER INFORMATION FILED BY THE COMPANY CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES OF THE SEC AT 450 FIFTH STREET, N.W., WASHINGTON, D.C.
20549 AND THE REGIONAL OFFICES OF THE SEC LOCATED AT 7 WORLD TRADE CENTER, NEW
YORK, NEW YORK 10048 AND 500 WEST MADISON STREET, 14TH FLOOR, CHICAGO, ILLINOIS
60661. COPIES OF SUCH MATERIALS MAY BE OBTAINED FROM THE PUBLIC REFERENCE
SECTION OF THE SEC, JUDICIARY PLAZA, 450 FIFTH STREET, N.W., WASHINGTON, D.C.
20549 AND AT ITS PUBLIC REFERENCE FACILITIES IN NEW YORK, NEW YORK AND CHICAGO,
ILLINOIS AT PRESCRIBED RATES. THE SEC MAINTAINS A WORLD WIDE WEB SITE THAT
CONTAINS REPORTS AND OTHER INFORMATION REGARDING REGISTRANTS THAT FILE
ELECTRONICALLY WITH THE SEC. THE ADDRESS OF THE SITE IS HTTP://WWW.SEC.GOV.
SO LONG AS THE COMPANY IS SUBJECT TO THE PERIODIC REPORTING
REQUIREMENTS OF THE EXCHANGE ACT, IT IS REQUIRED TO FURNISH THE INFORMATION
REQUIRED TO BE FILED WITH THE SEC TO STATE STREET BANK AND TRUST COMPANY (THE
"TRUSTEE") AND THE HOLDERS OF THE NEW NOTES. THE COMPANY HAS AGREED THAT, EVEN
IF IT IS NOT REQUIRED UNDER THE EXCHANGE ACT TO FURNISH SUCH INFORMATION TO THE
COMMISSION, IT WILL NONETHELESS CONTINUE TO FURNISH INFORMATION THAT WOULD BE
REQUIRED TO BE FURNISHED BY THE COMPANY BY SECTION 13 OF THE EXCHANGE ACT TO THE
TRUSTEE AND THE HOLDERS OF THE NEW NOTES AS IT IF WERE SUBJECT TO SUCH PERIODIC
REPORTING REQUIREMENTS.
1
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the information set forth under
the heading "Risk Factors." References to worldwide markets and market share
information contained herein have been derived from information compiled by the
Company due to the lack of independently compiled information. Such references
exclude markets formerly controlled by the U.S.S.R. about which accurate
information is not readily available. Effective December 31, 1996, the Company
changed its fiscal year-end from March 31 to December 31.
THE COMPANY
K & F Industries, Inc. (the "Company") is, through its wholly owned
subsidiary, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"),
one of the world's leading manufacturers of aircraft wheels, brakes and
anti-skid systems for commercial, general aviation and military aircraft.
Aircraft Braking Systems' products are marketed internationally through 10 sales
offices located in four countries and are used on over 30,000 commercial,
general aviation and military aircraft. The Company is, through its other wholly
owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), the
leading worldwide manufacturer of aircraft fuel tanks, supplying approximately
90% of the worldwide commercial transport and general aviation market and over
half of the domestic military market for such products. During the year ended
December 31,1997, the Company reported revenues of $304.3 million, of which 88%
were derived from sales made by Aircraft Braking Systems, EBITDA (as defined) of
$74.6 million and a net loss of $13.8 million.
Aircraft Braking Systems
Aircraft Braking Systems is a leading manufacturer of integrated
braking systems for aircraft and replacement parts for those systems. As is
customary in the industry, Aircraft Braking Systems supplies original wheels and
brakes for commercial aircraft to aircraft manufacturers at or substantially
below the production cost of such equipment. Once a manufacturer's wheels and
brakes have been certified and installed on an aircraft, Federal Aviation
Administration ("FAA") regulations and similar requirements in foreign countries
generally require that all replacement parts for such systems be provided by
such manufacturer. The FAA also requires the replacement of such parts at
regular intervals, which for medium- and short-range commercial aircraft
generally averages once or twice a year. Since most modern aircraft have a
useful life of 25 years or longer and require scheduled replacement of certain
components of the braking system, the Company typically recoups its initial
investment in original equipment and generates significant profits from sales of
replacement parts over the life of the aircraft. During the year ended December
31, 1997, approximately 75% of Aircraft Braking Systems' total revenues were
derived from the sale of replacement parts for braking systems previously sold
by Aircraft Braking Systems.
Aircraft Braking Systems also manufactures brake control systems for
use on a variety of commercial, military and general aviation aircraft. These
systems, which are integrated into a total braking system, are designed to
minimize the distance required to stop an aircraft by controlling applied brake
pressure to maximize the braking force while also preventing the wheels from
locking and skidding. Of the three principal competitors in the wheel and brake
industry, Aircraft Braking Systems is the only significant manufacturer of
anti-skid systems. Because of the sensitivity of anti-skid systems to variations
in brake performance, the Company believes that its braking system integration
capability gives Aircraft Braking Systems a competitive advantage over its two
principal competitors. Other products manufactured by Aircraft Braking Systems
include helicopter rotor brakes and brake temperature monitoring equipment for
various types of aircraft.
Aircraft Braking Systems currently sells its products to virtually all
major airframe manufacturers and commercial airlines and to the United States
and certain foreign governments. Since 1989, Aircraft Braking Systems has
carefully directed its efforts toward expanding its presence in the commercial
and general aviation segments of the aircraft industry, focusing particularly on
medium- and short-range commercial aircraft. As a result of these efforts,
during this period, Aircraft Braking Systems has added approximately 1,200
medium- and short-range commercial aircraft to the portfolio of aircraft using
its products. These aircraft typically make more frequent landings than
long-range commercial aircraft and correspondingly require more frequent
replacement of brake parts. Aircraft Braking Systems has been successful in
having its wheels and brakes selected for use on a number of airframe designs
that serve this market, including the Airbus Industries ("Airbus") A-321, the
McDonnell Douglas Corp. ("McDonnell Douglas," acquired by The Boeing Company)
MD-80 and MD-90 programs, the Canadair Regional Jet, the Canadair RJ-700, the
Saab-Scania AB ("Saab") S340 and S2000, the Lear 60 and the Fokker Aircraft
("Fokker") Fo-70 and Fo-100. Aircraft Braking Systems has also been successful
in having its brakes selected for use on certain long-range commercial aircraft
produced by Airbus, specifically the A-330 and A-340. These long-range aircraft
programs enhance the competitive position of Aircraft Braking Systems with
Airbus and commercial airlines utilizing Airbus aircraft. The Company believes
that these new airframes will expand the portfolio of aircraft using Aircraft
Braking Systems' products and that the revenues generated from such aircraft
will
2
<PAGE> 8
eventually replace and exceed the revenues generated by the aircraft programs in
Aircraft Braking Systems' current portfolio as the aircraft in those programs
reach the end of their useful lives.
Engineered Fabrics
With its proprietary technology, Engineered Fabrics is the only
FAA-certified supplier of polyurethane manufactured fuel tanks in the United
States. Certain fuel tanks produced by Engineered Fabrics feature "selfsealing"
technology that significantly reduces the potential for fires, leaks and spilled
fuel following a crash. Recent programs awarded to Engineered Fabrics in which
this technology is being used include production or replacement parts programs
for the U.S. Navy's F-18 C/D and E/F aircraft and F-15, F-16 and C-130 aircraft.
Engineered Fabrics also competes in the nitrile-designed aircraft fuel tank
market and won a three-year requirements contract in 1996 to supply nitrile fuel
tanks to the U.S. Navy for its F-14 aircraft. 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. In addition to producing and supplying fuel tanks, Engineered Fabrics
manufactures and sells iceguards, inflatable oil booms and various other
products made from coated fabrics for commercial and military uses.
The Company is a Delaware corporation formed on March 13, 1989. The
Company is the successor to the businesses of Aircraft Braking Systems and
Engineered Fabrics formed by Goodyear Tire & Rubber Company, Inc. ("Goodyear")
in 1929. The principal executive offices of the Company are located at 600 Third
Avenue, New York, New York 10016 and its telephone number is (212) 297-0900.
3
<PAGE> 9
THE RECAPITALIZATION
On October 15, 1997, concurrently with the closing of the offering of
the Old Notes (the "Offering"), the Company consummated the Recapitalization,
consisting of the following transactions:
1. Pursuant to a Stock Purchase Agreement entered into on
September 15, 1997 (the "Stock Purchase Agreement"), the Company
repurchased approximately 64% of its outstanding capital stock for a
total purchase price, paid in cash, of $230.2 million. Upon giving
effect to the repurchase, Bernard L. Schwartz ("BLS") and certain
merchant banking partnerships (collectively, the "Lehman Investors")
affiliated with Lehman Brothers Holdings Inc.("LBH") each became the
owner of 50% of the capital stock of the Company. The implied aggregate
value of such retained capital stock is $130 million (the "Retained
Equity Interest").
2. The Company repaid all of its outstanding indebtedness
($54.5 million) under the Amended and Restated Credit Agreement dated
as of August 14, 1996, among Aircraft Braking Systems, Engineered
Fabrics, The Chase Manhattan Bank, as agent, and the Lenders signatory
thereto (the "Prior Credit Agreement").
3. The Company made provision for the redemption of the
remaining $70 million outstanding principal amount of its 11 7/8%
Senior Secured Notes Due 2003 (the "11 7/8% Senior Notes") by
irrevocably depositing $77.5 million (representing a price of 105.28%
of the principal amount of the 11 7/8% Senior Notes, plus accrued
interest through the expected redemption date) with the trustee (the
"11 7/8% Senior Notes Trustee") under the indenture governing the
Senior Notes. On November 13, 1997, the 11 7/8% Senior Notes were
redeemed.
4. The Company purchased for cash, all of the $140 million
aggregate principal amount of its 10 3/8% Senior Subordinated Notes due
2004 (the "10 3/8% Notes") pursuant to a tender offer and consent
solicitation (collectively, the "Tender Offer"). The aggregate price
paid for the Existing Notes (including accrued interest and Tender
Offer premiums and related fees and expenses) was $160.9 million.
5. The Company entered into a new credit facility (the "New
Credit Facility") that provides for a term loan facility in an
aggregate principal amount of $322 million (the "Term Loans") and a
revolving credit facility in an aggregate principal amount of up to $50
million (the "Revolving Loan"), of which $23 million was drawn at the
time of the Recapitalization. The Term Loans consists of a Tranche A
term loan ("Term Loan A") in the principal amount of $50 million and a
Tranche B term loan ("Term Loan B") in the principal amount of $272
million. See "Description of Certain Indebtedness--New Credit
Facility."
The Company issued the Old Notes for net proceeds of approximately
$178.4 million (after deducting expenses payable by the Company in connection
with the Offering). The Company used such proceeds, together with borrowings
under the New Credit Facility, to effect the Recapitalization.
4
<PAGE> 10
The following table sets forth the sources and uses of funds in the
Recapitalization.
($ in millions)
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT
---------------- ------
Cash Sources:
<S> <C>
New Credit Facility $345.0
The Offering 185.0
Cash on Hand 5.0
------
Total Cash Sources $535.0
------
Other Sources:
Retained Equity Interest 130.0
------
Total Sources $665.0
======
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS AMOUNT
------------- ------
Cash Uses:
<S> <C>
Repayment of Borrowings under
Existing Credit Agreement(a) $ 54.8
Redemption of Senior Notes(a) 73.1
Purchase of Existing Notes(a) 141.8
Purchase of Equity Interests 230.2
Fees and Expenses(b) 35.1
------
Total Cash Uses $535.0
------
Other Uses:
Retained Equity Interest 130.0
------
Total Uses $665.0
======
</TABLE>
(a) Includes accrued interest.
(b) Includes the redemption premium on the Senior Notes in the amount of
$3.7 million and the Tender Offer premium and related fees and expenses
in the amount of $19.1 million.
The Offering and each of the transactions described in paragraphs 1
through 5 above are collectively referred to herein as the "Recapitalization."
5
<PAGE> 11
SUMMARY DESCRIPTION OF THE NEW NOTES
<TABLE>
<CAPTION>
<S> <C>
THE NEW NOTES $185,000,000 aggregate principal amount of 9 1/4% Senior Subordinated
Notes Due 2007.
MATURITY DATE October 15, 2007.
INTEREST PAYMENT DATES April 15 and October 15
MANDATORY REDEMPTION None.
OPTIONAL REDEMPTION The New Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after October 15, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest
to the date of redemption. In addition, on or before October 15,
2000, the Company may, at its option, redeem up to an aggregate of
$65.0 million in aggregate principal amount of the Notes at a
redemption price of 109.25% of the principal amount thereof, in each
case plus accrued and unpaid interest through the redemption date,
with the net proceeds of one or more underwritten public offerings of
common stock of the Company, provided at least $120.0 million in
aggregate principal amount of the Notes shall remain outstanding
after the occurrence of such redemption. See "Description of the
Notes--Optional Redemption."
CHANGE OF CONTROL In the event of a Change of Control (as defined), each holder of the
Notes will have the right, at the holder's option, to require the
Company to purchase such holder's Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase. See
"Description of the Notes--Repurchase at the Option of Holders."
RANKING The New Notes are general unsecured obligations of the Company and
are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined), including all obligations of the
Company and its subsidiaries under the New Credit Facility (as
defined), and are senior in right of payment to or pari passu with
all other indebtedness of the Company. The Company conducts its
operations solely through its subsidiaries and, accordingly, the New
Notes are effectively subordinated to indebtedness and other
liabilities of its subsidiaries. As of December 31, 1997, the Company
had approximately $335.6 million of Senior Indebtedness outstanding
and the Company's subsidiaries had other liabilities of approximately
$81.0 million outstanding. See "Capitalization" and "Description of
the Notes--Subordination."
CERTAIN COVENANTS The Note Indenture (the "Indenture") contains certain covenants that,
among other things, limit the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, (ii) pay dividends
or make certain other restricted payments, (iii) enter into
transactions with affiliates, (iv) create certain liens, (v) make
certain asset dispositions and (vi) merge or consolidate with, or
transfer substantially all assets to, another person. The Indenture
also limits the ability of the Company's subsidiaries to issue
preferred stock and to create restrictions on the ability of such
subsidiaries to pay dividends or make any other distributions. In
addition, the Company is obligated, under certain circumstances, to
offer to purchase the Notes with the net cash proceeds of certain
sales and other dispositions of assets at a purchase price of 100% of
the principal amount of the Notes, plus accrued and unpaid interest
to the date of purchase. See "Description of the Notes--Repurchase at
the Option of Holders" and "--Certain Covenants."
</TABLE>
6
<PAGE> 12
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical consolidated financial
information for the Company for the years ended December 31, 1997 and 1996, the
nine months ended December 31, 1996 and 1995 and the years ended March 31, 1996,
1995, and 1994. Effective December 31, 1996, the Company changed its fiscal
year-end from March 31 to December 31. The historical financial information of
the Company for the year ended December 31,1997, the nine months ended December
31, 1996 and for each of the years ended March 31, 1996, 1995 and 1994 is
derived from the audited financial statements of the Company. The historical
financial information of the Company for the year ended December 31, 1996 and
the nine months ended December 31, 1995 is derived from the Company's unaudited
financial statements which, in the opinion of management of the Company, contain
all adjustments necessary for a fair presentation of this information. The
financial information set forth below should be read in conjunction with the
historical consolidated financial statements of the Company and the related
notes thereto, "Selected Historical Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," all included elsewhere in this Prospectus.
7
<PAGE> 13
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Fiscal Year Ended
December 31, December 31, March 31,
------------ ------------
1997 1996 1996 1995 1996
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales .............................. $ 304,331 $ 277,655 $ 212,703 $ 199,784 $ 264,736
Cost of sales .......................... 188,001 180,971 136,813 136,277 180,435
--------- --------- --------- --------- ---------
Gross Margin ........................... 116,330 96,684 75,890 63,507 84,301
Independent research and
development ......................... 10,873 11,781 8,623 6,610 9,767
Selling, general and administrative
expenses ........................... 40,182 (a) 24,482 17,297 15,378 22,564
Amortization ........................... 10,316 10,412 7,810 7,813 10,415
--------- --------- --------- --------- ---------
Operating income ....................... 54,959 50,009 42,160 33,706 41,555
Interest expense, net .................. 34,091 36,957 27,197 31,288 41,048
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes ....... 20,868 13,052 14,963 2,418 507
Income tax (provision) benefit ......... (5,184) 81 81 -- --
Extraordinary charge ................... (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d) (1,913)(d)
Cumulative effect of accounting changes . -- -- -- -- --
--------- --------- --------- --------- ---------
Net (loss) income ..................... $ (13,829) $ 3,991 $ 5,902 $ 505 $ (1,406)
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital ........................ $ 31,953 $ 34,189 $ 34,189 $ 38,938 $ 36,327
Total assets ........................... 425,236 419,115 419,115 412,028 416,037
Long-term debt ......................... 519,125 (a) 287,000 287,000 293,000 294,000
Stockholders' deficiency ............... (256,459)(a) (33,306) (33,306) (34,327) (39,701)
Other Data (for the period):
EBITDA (f) ............................. $ 74,639 $ 69,314 $ 56,804 $ 47,966 $ 60,476
Capital expenditures ................... 10,016 21,166 14,091 3,343 10,418
Depreciation and amortization .......... 19,680 19,305 14,644 14,260 18,921
Ratio of earnings to fixed charges (g) . 1.57x 1.31x 1.49x 1.07x 1.01x
Cash flow provided by operating
activities .......................... $ 42,513 $ 28,915 $ 23,394 $ 16,780 $ 22,301
Cash flow used by investing activities . (11,797) (21,628) (14,341) (3,669) (10,956)
Cash flow (used) provided by
financing activities ............... (27,517) (8,957) (9,957) (18,426) (17,426)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
---------
1995 1994
---- ----
<S> <C> <C>
Income Statement Data:
Net sales .............................. $ 238,756 $ 226,131
Cost of sales .......................... 164,697 159,751
--------- ---------
Gross Margin ........................... 74,059 66,380
Independent research and
development ......................... 8,363 12,858
Selling, general and administrative
expenses ........................... 19,208 22,421
Amortization ........................... 10,411 10,884
--------- ---------
Operating income ....................... 36,077 20,217
Interest expense, net .................. 46,250 51,953
--------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes ....... (10,173) (31,736)
Income tax (provision) benefit ......... --
Extraordinary charge ................... -- --
Cumulative effect of accounting changes . -- (2,305)(e)
--------- ---------
Net (loss) income ..................... $ (10,173) $ (34,041)
========= =========
Balance Sheet Data (at end of period):
Working capital ........................ $ 48,025 $ 53,091
Total assets ........................... 429,074 446,880
Long-term debt ......................... 310,000 381,421
Stockholders' deficiency ............... (34,748) (90,355)
Other Data (for the period):
EBITDA (f) ............................. $ 54,920 $ 40,744
Capital expenditures ................... 2,824 3,127
Depreciation and amortization .......... 18,843 20,527
Ratio of earnings to fixed charges (g) .
Cash flow provided by operating
activities .......................... $ 17,353 $ 8,963
Cash flow used by investing activities . (3,187) (3,053)
Cash flow (used) provided by
financing activities ............... (10,000) (4,504)
</TABLE>
(a) On October 15, 1997, the Company completed a recapitalization that
consisted of the refinancing of existing indebtedness and the
repurchase of a portion of its outstanding stock. In connection
therewith, the Company directly increased its stockholders' deficiency
by $218.6 million and recorded an extraordinary charge of $27.8 million
(net of tax) for the write-off of unamortized financing costs and
redemption premiums. In addition, the Company recorded a charge of
$12.4 million to selling, general and administrative expenses, relating
to the exercise of stock options and other fees incurred in connection
with the recapitalization. Financing for the recapitalization was
provided with $185 million of 9 1/4% Senior Subordinated Notes due 2007
and $345 million in borrowings under a new credit facility. (See Notes
1 and 7 to the consolidated financial statements.)
(b) On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of its 11 7/8% Senior Notes at a redemption price of 105.28% of
the principal thereof. In connection therewith, the Company recorded an
extraordinary charge of $1.7 million (net of tax) for the write-off of
unamortized financing costs and redemption premiums. (See Note 7 to the
consolidated financial statements.)
(c) 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 $9.1 million for the write-off of unamortized
financing costs and redemption premiums. (See Note 7 to the
consolidated financial statements.)
(d) 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 $1.9 million for the
write-off of unamortized financing costs and redemption premiums. (See
Note 7 to the consolidated financial statements.)
(e) Represents cumulative effect of the change in method of accounting for
the discounting of liabilities for workers' compensation losses.
(f) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating
income or as a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles, EBITDA is included herein to provide
additional information with respect to the ability of the Company to
meet its future debt service, capital expenditures and working capital
8
<PAGE> 14
requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. EBITDA is included herein because the
Company believes that certain investors find it to be a useful tool for
measuring the ability to service debt.
(g) For purposes of this computation, earnings consist of income (loss)
before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest on indebtedness (including
capitalized interest and amortization of deferred financing costs) plus
that portion of lease rental expense representative of the interest
factor (deemed to be one-third of lease rental expense). The Company's
earnings were insufficient to cover fixed charges by $10,173,000 and
$31,736,000 for the years ended March 31, 1995 and 1994, respectively.
Non-cash charges included in the ratio of earnings to fixed charges and
deficiency of earnings available to cover fixed charges for the years
ended December 31, 1997 and 1996, the nine months ended December 31,
1996 and 1995 and the fiscal years ended March 31, 1996, 1995 and 1994
were $21,187,000, $20,816,000, $15,745,000, $15,411,000, $20,482,000,
$24,275,000 and $30,450,000, respectively. Non-cash charges consist of
depreciation, amortization, non-cash interest on the Convertible
Debentures and amortization of deferred financing costs.
9
<PAGE> 15
RISK FACTORS
HIGHLY LEVERAGED POSITION
Debt to Equity Ratio. The Company is highly leveraged. As of December
31, 1997, the Company had approximately $520.6 million of total indebtedness
outstanding, the Company's subsidiaries had other liabilities of approximately
$81.0 million outstanding, the Company had a stockholders' deficiency of
approximately $256.5 million and during the year ended December 31, 1997, the
Company had a net loss of $13.8 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Selected
Historical Consolidated Financial Information."
Dependence on Future Performance to Make Debt Payments. The Company's
ability to make required principal and interest payments on its indebtedness is
dependent on the future performance of the Company and its subsidiaries. The
Company's performance is subject to a number of factors beyond its control,
including the performance of the global economy and financial markets, worldwide
demand for air travel, legislative pronouncements, performance of the commercial
and military aircraft industries and other factors affecting the Company and its
subsidiaries.
Operating and Financial Restrictions. The Company's level of
indebtedness and the restrictive covenants contained in its debt instruments
could significantly limit the Company's ability to withstand competitive
pressures or adverse economic consequences, including the ability of the Company
to make investments in aircraft programs and capital expenditures. In addition,
borrowings under the New Credit Facility will be floating rate obligations of
the Company's subsidiaries, causing the Company and its subsidiaries to be
sensitive to changes in prevailing interest rates. The Company has entered into
an interest rate swap agreement to reduce the impact of potential increases in
interest rates on the New Credit Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company
currently believes that, based on current levels of operations and anticipated
growth, its cash flow from operations, together with borrowings from time to
time under the New Credit Facility, will be adequate to allow for anticipated
capital expenditures and investments in original equipment for aircraft
programs, to fund working capital requirements and to make required payments of
principal and interest on its debt. However, if the Company is unable to
generate sufficient cash flow from operations in the future, it may be required
to refinance all or a portion of its debt or to obtain additional financing.
There can be no assurance that any such refinancing would be possible or that
any additional financing could be obtained.
Restrictive Covenants. The Indenture imposes certain operating and
financial restrictions on the Company and its subsidiaries. Such restrictions
affect, and in many respects limit or prohibit, among other things, the ability
of the Company and its subsidiaries to incur additional indebtedness, pay
dividends, permit subsidiaries to issue preferred stock, repay certain
indebtedness prior to its stated maturity, create liens, sell assets or engage
in mergers or acquisitions and make certain capital expenditures. These
restrictions, in combination with the leveraged nature of the Company, could
limit the ability of the Company to effect future financings or otherwise
restrict corporate activity. In addition, the New Credit Facility imposes
certain restrictions on the Company's subsidiaries, including limitations on
additional indebtedness, dividend payments and other distributions from Aircraft
Braking Systems and Engineered Fabrics to the Company.
HISTORY OF NET LOSSES; DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company had net income of approximately $5.9 million for the nine
months ended ended December 31, 1996. However, for the year ended December 31,
1997 and for the fiscal year ended March 31, 1996, the Company incurred net
losses of approximately $13.8 million and $1.4 million, respectively. For the
year ended December 31, 1997, for the nine months ended December 31, 1996 and
for the fiscal year ended March 31, 1996, the Company's ratio of earnings to
fixed charges was 1.57, 1.49 and 1.01, respectively. The Company's pro forma
ratio of earnings to fixed charges for the year ended December 31, 1997, after
giving effect to the Recapitalization as if it had been consummated on January
1, 1997, would have been 1.42. See "Selected Historical Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company's cash flow from operations has been
sufficient to meet its debt service obligations for interest and required
principal payments. There can be no assurance that the Company will not have a
deficiency of earnings to cover fixed charges in the future. The Company expects
that, based upon current operations, it will nonetheless be able to meet
required principal and interest payments on the New Notes. However, no assurance
can be given that the Company's operating results will provide sufficient cash
flow to meet its financial obligations, including payment of principal and
interest on the New Notes.
SUBORDINATION
The New Notes are subordinated in right of payment to all Senior
Indebtedness, which includes borrowings under the New Credit Facility. In the
event of a bankruptcy, liquidation or reorganization of the Company, the assets
of the Company will be available to pay obligations on the New Notes only after
all Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the New Notes. In addition,
the Company may not pay principal or premium, if any, or interest on the New
Notes if certain Senior Indebtedness is not paid when due or any other default
on such Senior Indebtedness occurs and the maturity of such Senior Indebtedness
is accelerated in accordance with its terms, unless in either case such amount
has been paid in full or the default has been cured or waived and such
acceleration has been rescinded. In addition, if any default occurs with
10
<PAGE> 16
respect to certain Senior Indebtedness and certain other conditions are
satisfied, the Company may not make any payments on the New Notes for a
designated period of time. As of December 31, 1997, the Company had
approximately $335.6 million of Senior Indebtedness outstanding. See "--Holding
Company Structure" and "Description of the Notes--Subordination."
HOLDING COMPANY STRUCTURE
The Company is the sole obligor on the New Notes. The Company's
operations are conducted through, and substantially all of the Company's assets
are owned by, its directly owned operating subsidiaries, Aircraft Braking
Systems and Engineered Fabrics. As a result, the Company will be dependent on
the earnings and cash flow from Aircraft Braking Systems and Engineered Fabrics
to meet its obligations under the New Notes and to pay its general expenses.
Aircraft Braking Systems and Engineered Fabrics provide funds to the Company
through payments on intercompany indebtedness and dividends. Because the assets
of the Company are held by and will continue to be held by these subsidiaries,
the claims of holders of the New Notes will be subject to the prior claims of
creditors of Aircraft Braking Systems and Engineered Fabrics, including the
claims of the lenders (collectively, the "Lenders") under the New Credit
Facility and the claims of trade creditors. As of December 31, 1997, the
Company's subsidiaries had liabilities (including $335.6 million of Senior
Indebtedness) of approximately $416.6 million outstanding. See "Description of
Certain Indebtedness," "Description of the Notes--Subordination."
Aircraft Braking Systems and Engineered Fabrics are the borrowers under
the New Credit Facility. Aircraft Braking Systems and Engineered Fabrics have
secured their obligations under the New Credit Facility by pledging
substantially all of their assets. In addition, the obligations of the
subsidiaries under the New Credit Facility are guaranteed by the Company and
such guarantee is secured by a pledge of all the issued and outstanding stock of
such subsidiaries and intercompany notes held by the Company. The New Notes are
not secured.
CERTAIN COLLECTIVE BARGAINING MATTERS
All of Aircraft Braking Systems' hourly employees are represented by
the United Auto Workers' Union. Aircraft Braking Systems three-year contract
with the United Auto Workers' Union expired on August 10, 1991. Aircraft Braking
Systems has not had a ratified collective bargaining agreement since August 10,
1991, but has operated under Company implemented terms and conditions of
employment. The Company believes that Aircraft Braking Systems will be able to
negotiate without material disruptions to its business, a satisfactory new
collective bargaining agreement with employees. However, there can be no
assurance that a satisfactory agreement will be reached with Aircraft Braking
Systems' employees, or that discussions regarding such agreement will not be
accompanied by material disruptions to the business.
INTERESTS OF BLS AND THE LEHMAN INVESTORS
BLS owns 50% of the capital stock of the Company and is entitled to
designate a majority of the Board of Directors. In addition, he serves as
Chairman of the Board of Directors and Chief Executive Officer of the Company.
In his capacity as Chairman and Chief Executive Officer, BLS participates in the
material business decisions relating to the Company and its operations. Pursuant
to a Director Advisory Agreement (the "Advisory Agreement"), BLS provides
certain services to the Company, including acting as director and providing
advisory services to the Company and its subsidiaries. Pursuant to the Advisory
Agreement, the Company pays BLS and persons designated at his discretion an
aggregate of $200,000 per month for such services. BLS and certain other
advisors to the Company participate in certain other incentive compensation
plans. See "Management," "Security Ownership" and "Certain Transactions."
The remaining 50% of the capital stock of the Company is owned by the
Lehman Investors. The Lehman Investors are entitled to designate three members
(in addition to one independent director to be designated jointly with BLS) of
the Company's Board of Directors and have veto rights with respect to certain
corporate actions. See "Security Ownership--Stockholders' Agreement". In
addition, in the event BLS dies or is permanently disabled, the Lehman Investors
are entitled to designate 50% of the members of the Board of Directors. An
affiliate of the Lehman Investors has from time to time provided investment
banking, financial advisory and other services to the Company, for which
services such affiliate has received fees. In connection with the
Recapitalization, the Company paid several affiliates of the Lehman Investors
certain transaction fees. LCPI (as defined), an affiliate of the Lehman
Investors, was the Syndication Agent under the New Credit Facility and, in such
capacity, received fees in connection therewith. In addition, Lehman Brothers
received fees for acting as Dealer Manager and Solicitation Agent in connection
with the Tender Offer. See "The Recapitalization," "Security Ownership,"
"Certain Transactions," "Description of Certain Indebtedness--New Credit
Facility" and "Plan of Distribution."
IMPACT OF AIR TRANSPORT ACTIVITY; DELIVERY OF NEW AIRCRAFT
During the year ended December 31, 1997, sales of replacement parts for
braking systems previously installed on aircraft accounted for approximately 75%
of Aircraft Braking Systems' total revenues. The demand for replacement parts
for the Company's wheels and braking systems varies depending upon the number of
aircraft equipped with the Company's products and the number of landings made by
such aircraft. A reduction in airline travel will usually result in reduced
utilization of commercial aircraft, fewer
11
<PAGE> 17
landings, and a corresponding decrease in the Company's sales of replacement
parts and related income and cash flow. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Since original equipment in new commercial aircraft is supplied at or
substantially below the Company's cost of production, delivery of new aircraft
equipped with the Company's products negatively affects cash flow. The Company's
business plan budgets cash needs based on current delivery schedules of new
aircraft and also accommodates certain increases in aircraft deliveries.
However, significant, unanticipated increases in commercial aircraft deliveries
in a given year could have a material adverse impact on the Company's cash flow
in such year.
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. The basis of
Hitco's claim in the litigation is that Aircraft Braking Systems breached the
supply arrangements by electing to expand its own carbon manufacturing facility.
On April 23, 1998, the jury in the Ohio state action awarded Aircraft Braking
Systems $4,528,237 on its claims but awarded Hitco $9,578,000 on its claims. The
Company is reviewing the verdicts and may appeal. There can be no assurance as
to the final outcome of this litigation but management believes payment of the
net amount of the verdicts in the Ohio state case would not materially adversely
affect the Company. See "Business -- Legal Proceedings."
INDUSTRY CONSOLIDATION
The aircraft industry is experiencing a general trend of consolidation.
In August 1997, two customers of the Company, McDonnell Douglas and The Boeing
Company ("Boeing"), merged. References in this Prospectus to McDonnell Douglas
now refer to Boeing. There can be no assurance as to whether or how such
consolidation in the industry might affect the Company.
SIGNIFICANT CUSTOMER
Sales to the United States government (the "Government") or to prime
contractors or subcontractors of the Government were approximately 12%, 12% and
16% of the Company's total sales for the year ended December 31, 1997, the nine
months ended December 31, 1996 and for the fiscal year ended March 31, 1996,
respectively. The loss of all or a substantial portion of such sales could have
an adverse effect on the Company's income and cash flow. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Government Contracts."
POTENTIAL INABILITY TO FUND CHANGE OF CONTROL OFFER
Upon a Change of Control (as defined), each holder of New Notes will
have the right to require the Company to repurchase all or any part of such
holder's New Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of repurchase. However, there can be no
assurance that sufficient funds will be available to the Company at the time of
any Change of Control to make any required repurchases of New Notes tendered.
Moreover, restrictions in the New Credit Facility prohibit the Company from
making such required repurchases. Therefore, any such repurchases would
constitute an event of default under the New Credit Facility. See "Description
of Certain Indebtedness--New Credit Facility."
FRAUDULENT CONVEYANCE STATUTES
Various fraudulent conveyance laws have been enacted for the protection
of creditors and may be utilized by a court of competent jurisdiction to
subordinate or void the New Notes in favor of existing or future creditors of
the Company.
The proceeds from the sale of the Old Notes were used to effect the
Recapitalization. If a court in a lawsuit on behalf of an unpaid creditor of the
Company or a representative of the Company's creditors, such as a trustee in
bankruptcy of the Company as a debtor-in-possession, were to conclude that, at
the time the Company paid the net proceeds of the sale of the Old Notes to the
Company's stockholders, the Company (x) intended to hinder, delay or defraud any
present or future creditor or contemplated insolvency with a design to prefer
one or more creditors to the exclusion in whole or in part of others or (y) did
not receive fair consideration or reasonably equivalent value for issuing the
Old Notes (for example, because the stockholders of the Company and not the
Company received the benefits of the issuance of the Old Notes) and the Company
(i) was insolvent, (ii) was rendered insolvent by reason of such distribution,
(iii) was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its business
or (iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void the Notes.
Alternatively, in such event, claims of the holders of the Notes could be
subordinated to claims of the other creditors of the Company.
Management of the Company believes that the Old Notes and the New Notes
were incurred for proper purposes and in good faith and that the Company is
solvent, has sufficient capital for carrying on its business and is able to pay
its debts as they mature.
12
<PAGE> 18
TRADING MARKET FOR THE NEW NOTES
Although it is not obligated to do so, Lehman Brothers Inc. is making a
market in the New Notes. Any such market-making activity may be discontinued at
any time, for any reasons, without notice at the sole discretion of Lehman
Brothers Inc. No assurance can be given as to the liquidity of or the trading
market for the New Notes.
Lehman Brothers Inc. may be deemed to be an affiliate of the Company
and, as such, may be required to deliver a prospectus in connection with its
market-making activities in the New Notes. Pursuant to the Registration Rights
Agreement, the Company agreed to file and maintain a Registration Statement that
would allow Lehman Brothers Inc. to engage in market-making transactions in the
New Notes. Subject to certain exceptions set forth in the Registration Rights
Agreement, the Registration Statement will remain effective for as long as
Lehman Brothers Inc. may be required to deliver a prospectus in connection with
market-making transactions in the New Notes. The Company has agreed to bear
substantially all the costs and expenses related to such Registration Statement.
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions,
the New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the New
Notes by Lehman Brothers Inc. in market-making transactions. The Company will
not receive any of the proceeds from such transactions.
13
<PAGE> 19
THE RECAPITALIZATION
On October 15, 1997, concurrently with the closing of the Offering, the
Company consummated the Recapitalization, consisting of the following
transactions:
1. Pursuant to the Stock Purchase Agreement, the Company repurchased
approximately 64% of its outstanding capital stock for a total purchase price,
paid in cash, of $230.2 million. Upon giving effect to the repurchase, BLS and
the Lehman Investors each became the owner of 50% of the capital stock of the
Company. The implied aggregate value of the Retained Equity Interest is $130
million.
2. The Company repaid all of its outstanding indebtedness ($54.5
million) under the Prior Credit Agreement.
3. The Company made provision for redemption of the 11 7/8% Senior
Notes by irrevocably depositing $77.5 million (representing a price of 105.28%
of the principal amount of the 11 7/8% Senior Notes, plus accrued interest
through the expected redemption date) with the Senior Notes Trustee. On November
13 1997, the 11 7/8% Senior Notes were redeemed.
4. The Company purchased for cash, all of the 10 3/8% Notes pursuant to
the Tender Offer. The aggregate price paid for the 10 3/8% Notes (including
accrued interest and Tender Offer premiums and related fees and expenses) was
$160.9 million.
5. The Company entered into the New Credit Facility that provides for
$322 million of Term Loans and a $50 million Revolving Loan, of which $23
million was drawn at the time of the Recapitalization. The Term Loans consists
of Term Loan A in the principal amount of $50 million and Term Loan B in the
principal amount of $272 million. See "Description of Certain Indebtedness--New
Credit Facility."
The Company issued the Old Notes for net proceeds of approximately
$178.4 million (after deducting expenses payable by the Company in connection
with the Offering). The Company used such proceeds, together with borrowings
under the New Credit Facility, to effect the Recapitalization.
14
<PAGE> 20
SOURCES AND USES OF FUNDS
The following table sets forth the sources and uses of funds in the
Recapitalization.
($ in millions)
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT
---------------- ------
<S> <C>
Cash Sources:
New Credit Facility $345.0
The Offering 185.0
Cash on Hand 5.0
------
Total Cash Sources $535.0
------
Other Sources:
Retained Equity Interest 130.0
------
Total Sources $665.0
======
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS AMOUNT
------------- ------
<S> <C>
Cash Uses:
Repayment of Borrowings under Existing Credit Agreement(a) $ 54.8
Redemption of Senior Notes(a) 73.1
Purchase of Existing Notes(a) 141.8
Purchase of Equity Interests 230.2
Fees and Expenses(b) 35.1
------
Total Cash Uses $535.0
------
Other Uses:
Retained Equity Interest 130.0
------
Total Uses $665.0
======
</TABLE>
(a) Includes accrued interest.
(b) Includes the redemption premium on the Senior Notes in the amount of
$3.7 million and the Tender Offer premium and related fees and expenses
in the amount of $19.1 million.
15
<PAGE> 21
REPURCHASE OF CAPITAL STOCK AND POST-RECAPITALIZATION EQUITY OWNERSHIP
The following table sets forth (i) the ownership of the shares of
capital stock repurchased as part of the Recapitalization, (ii) the aggregate
purchase price paid therefor and (iii) the ownership of the retained shares of
capital stock. All retained shares of capital stock were, in connection with
consummation of the Recapitalization, reclassified as shares of new common stock
of the Company.
<TABLE>
<CAPTION>
PURCHASED SHARES RETAINED SHARES
NAME NUMBER PRICE NUMBER IMPLIED VALUE(a)
<S> <C> <C> <C> <C>
BLS 112,644 $ 19,778,159.81 370,199 $ 65,000,000
The Lehman Investors 612,437 107,532,421.20 370,199 65,000,000
CBC Capital Partners, Inc. 45,000 7,901,154.60 0 0
Loral Space &
Communications Ltd. 458,994 80,590,723.46 0 0
Optionholders(b)
BLS Options(c) 70,500 12,378,475.54 0 0
Company Options 11,250 1,975,288.65 0 0
--------- --------------- ------- ------------
Total 1,310,825 $230,156,223.26 740,398 $130,000,000
========= =============== ======= ============
</TABLE>
(a) The implied value of the retained capital stock is based solely on the
price per share paid for the capital stock repurchased in the
Recapitalization.
(b) All issued and outstanding options were exercised prior to giving
effect to the Recapitalization.
(c) Certain individuals held options to purchase shares of the Company's
capital stock owned by BLS at a per share exercise price of $40.
16
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma income statement and other data of the Company,
are presented for the year ended December 31, 1997, give effect to the
Recapitalization as if it had been consummated as of January 1, 1997. The pro
forma income statement and other data is not necessarily indicative of the
results that actually would have been achieved had the Recapitalization been
consummated as of the dates indicated or that might be achieved in current or
future periods. The financial information set forth below should be read in
conjunction with the historical consolidated financial statements of the Company
and the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere in this
Prospectus.
17
<PAGE> 23
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AND OTHER DATA
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales.................................................... $304,331 $304,331
Cost of sales................................................ 188,001 188,001
-------- --------
Gross margin................................................. 116,330 116,330
Independent research and development......................... 10,873 10,873
Selling, general and administrative expenses................. 40,182 $(12,441)(a) 27,741
Amortization................................................. 10,316 10,316
------ ------
Operating income............................................. 54,959 67,400
Interest expense, net........................................ 34,091 12,597(b) 46,688
------ ------
Income before income taxes and extraordinary charge.......... 20,868 20,712
Income tax provision......................................... (5,184) (5,184)
------ ------
Income before extraordinary charge........................... 15,684 15,528
Extraordinary charge......................................... (29,513) 27,800(c) (1,713)
------- ------
Net (loss) income.......................................... $(13,829) $ 13,815
======== ========
OTHER DATA (FOR THE PERIOD):
EBITDA(d).................................................... $ 74,639 $ 74,639
Capital expenditures......................................... 10,016 10,016
Depreciation and amortization................................ 19,680 19,680
Ratio of earnings to fixed charges(e)........................ 1.57x 1.42x
Cash flow provided (used) by operating activities............ $ 42,513 (156)(f) $ 42,357
Cash flow used by investing activities....................... (11,797) (11,797)
Cash flow used by financing activities....................... (27,517) (27,517)
</TABLE>
- ------------
(a) To eliminate a one-time charge relating to the exercise of stock
options and other fees in connection with the Recapitalization.
(b) Reflects interest expense (at assumed rates as indicated below)
associated with the borrowings under the New Credit Facility and the
Notes, the amortization of deferred financing costs and the elimination
of historical interest expense related to the Recapitalization.
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Revolving Loan at 8.0%.......................................................... $ 1,840
Term Loan A at 8.0%............................................................. 4,000
Term Loan B at 8.125%........................................................... 22,100
Notes at 9.25%.................................................................. 17,113
Amortization of deferred financing costs........................................ 1,500
Other fees...................................................................... 135
Elimination of historical interest expense...................................... (34,091)
--------
$ 12,597
========
</TABLE>
A change in the assumed interest rate used in the calculation of
interest expense on the New Credit Facility by 1/4% would change
interest expense and net income by $863.
(c) To eliminate a one-time charge relating to the write-off of unamortized
financing costs and redemption premiums as a result of the
Recapitalization.
(d) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating
income or as a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles, EBITDA is included herein to provide
additional information with respect to the ability of the Company to
meet its future debt service, capital expenditures and working capital
requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. EBITDA is included herein because the
Company believes that certain investors find it to be a useful tool for
measuring the ability to service debt.
18
<PAGE> 24
(e) For purposes of this computation, earnings consist of income (loss)
before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest on indebtedness (including
capitalized interest and amortization of deferred financing costs) plus
that portion of lease rental expense representative of the interest
factor (deemed to be one-third of lease rental expense).
(f) The adjustment to cash flow provided (used) by operating activities
consists of an increase of $12,441 for the elimination of a one-time
charge relating to the exercise of stock options and other fees in
connection with the Recapitalization, offset by a decrease of $12,597
for the incremental interest expense associated with the
Recapitalization.
19
<PAGE> 25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information for the Company for the years ended December 31, 1997 and 1996, the
nine months ended December 31, 1996 and 1995 and the years ended March 31, 1996,
1995 and 1994. Effective December 31, 1996, the Company changed its fiscal
year-end from March 31 to December 31. The historical financial information of
the Company for the year ended December 31,1997, the nine months ended December
31, 1996 and for each of the years ended March 31, 1996, 1995 and 1994 is
derived from the audited financial statements of the Company. The historical
financial information of the Company for the year ended December 31, 1996 and
the nine months ended December 31, 1995 is derived from the Company's unaudited
financial statements which, in the opinion of management of the Company, contain
all adjustments necessary for a fair presentation of this information. The
financial information set forth below should be read in conjunction with the
historical consolidated financial statements of the Company and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all included elsewhere in this Prospectus.
20
<PAGE> 26
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, December 31,
------------ ------------
1997 1996 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales .......................................... $ 304,331 $ 277,655 $ 212,703 $ 199,784
Cost of sales ...................................... 188,001 180,971 136,813 136,277
--------- --------- --------- ---------
Gross Margin ....................................... 116,330 96,684 75,890 63,507
Independent research and
development ..................................... 10,873 11,781 8,623 6,610
Selling, general and administrative
expenses ....................................... 40,182 (a) 24,482 17,297 15,378
Amortization ....................................... 10,316 10,412 7,810 7,813
--------- --------- --------- ---------
Operating income ................................... 54,959 50,009 42,160 33,706
Interest expense, net .............................. 34,091 36,957 27,197 31,288
--------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes ................... 20,868 13,052 14,963 2,418
Income tax (provision) benefit ..................... (5,184) 81 81 --
Extraordinary charge ............................... (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d)
Cumulative effect of accounting changes ............ -- -- -- --
--------- --------- --------- ---------
Net (loss) income ................................. $ (13,829) $ 3,991 $ 5,902 $ 505
========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital .................................... $ 31,953 $ 34,189 $ 34,189 $ 38,938
Total assets ....................................... 425,236 419,115 419,115 412,028
Long-term debt ..................................... 519,125 (a) 287,000 287,000 293,000
Stockholders' deficiency ........................... (256,459)(a) (33,306) (33,306) (34,327)
Other Data (for the period):
EBITDA (f) ......................................... $ 74,639 $ 69,314 $ 56,804 $ 47,966
Capital expenditures ............................... 10,016 21,166 14,091 3,343
Depreciation and amortization ...................... 19,680 19,305 14,644 14,260
Ratio of earnings to fixed charges (g) ............. 1.57x 1.31x 1.49x 1.07x
Cash flow provided by operating
activities ...................................... $ 42,513 $ 28,915 $ 23,394 $ 16,780
Cash flow used by investing activities ............. (11,797) (21,628) (14,341) (3,669)
Cash flow (used) provided by
financing activities ........................... (27,517) (8,957) (9,957) (18,426)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Net sales .......................................... $ 264,736 $ 238,756 $ 226,131
Cost of sales ...................................... 180,435 164,697 159,751
-------- --------- ---------
Gross Margin ....................................... 84,301 74,059 66,380
Independent research and
development ..................................... 9,767 8,363 $ 12,858
Selling, general and administrative
expenses ....................................... 22,564 19,208 22,421
Amortization ....................................... 10,415 10,411 10,884
-------- --------- ---------
Operating income ................................... 41,555 36,077 20,217
Interest expense, net .............................. 41,048 46,250 51,953
-------- --------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes ................... 507 (10,173) (31,736)
Income tax (provision) benefit ..................... -- -- --
Extraordinary charge ............................... (1,913)(d) -- --
Cumulative effect of accounting changes ............. -- -- (2,305)(e)
-------- --------- ---------
Net (loss) income ................................. $ (1,406) $ (10,173) $ (34,041)
======== ========= =========
Balance Sheet Data (at end of period):
Working capital .................................... $ 36,327 $ 48,025 $ 53,091
Total assets ....................................... 416,037 429,074 446,880
Long-term debt ..................................... 294,000 310,000 381,421
Stockholders' deficiency ........................... (39,701) (34,748) (90,355)
Other Data (for the period):
EBITDA (f) ......................................... $ 60,476 $ 54,920 $ 40,744
Capital expenditures ............................... 10,418 2,824 3,127
Depreciation and amortization ...................... 18,921 18,843 20,527
Ratio of earnings to fixed charges (g) ............. 1.01x
Cash flow provided by operating
activities ...................................... $ 22,301 $ 17,353 8,963
Cash flow used by investing activities ............. (10,956) (3,187) (3,053)
Cash flow (used) provided by
financing activities ........................... (17,426) (10,000) (4,504)
</TABLE>
(a) On October 15, 1997, the Company completed a recapitalization that
consisted of the refinancing of existing indebtedness and the
repurchase of a portion of its outstanding stock. In connection
therewith, the Company directly increased its stockholders' deficiency
by $218.6 million and recorded an extraordinary charge of $27.8 million
(net of tax) for the write-off of unamortized financing costs and
redemption premiums. In addition, the Company recorded a charge of
$12.4 million to selling, general and administrative expenses, relating
to the exercise of stock options and other fees incurred in connection
with the recapitalization. Financing for the recapitalization was
provided with $185 million of 9 1/4% Senior Subordinated Notes due 2007
and $345 million in borrowings under a new credit facility. (See Notes
1 and 7 to the consolidated financial statements.)
(b) On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of its 11 7/8% Senior Notes at a redemption price of 105.28% of
the principal thereof. In connection therewith, the Company recorded an
extraordinary charge of $1.7 million (net of tax) for the write-off of
unamortized financing costs and redemption premiums. (See Note 7 to the
consolidated financial statements.)
(c) 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 $9.1 million for the write-off of unamortized
financing costs and redemption premiums. (See Note 7 to the
consolidated financial statements.)
(d) 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 $1.9 million for the
write-off of unamortized financing costs and redemption premiums. (See
Note 7 to the consolidated financial statements.)
(e) Represents cumulative effect of the change in method of accounting for
the discounting of liabilities for workers' compensation losses.
(f) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating
income or as a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles, EBITDA is included herein to provide
additional information with respect to the ability of the Company to
meet its future debt service, capital expenditures and working capital
21
<PAGE> 27
capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. EBITDA is included herein
because the Company believes that certain investors find it to be a
useful tool for measuring the ability to service debt.
(g) For purposes of this computation, earnings consist of income (loss)
before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest on indebtedness (including
capitalized interest and amortization of deferred financing costs) plus
that portion of lease rental expense representative of the interest
factor (deemed to be one-third of lease rental expense). The Company's
earnings were insufficient to cover fixed charges by $10,173,000 and
$31,736,000 for the years ended March 31, 1995 and 1994, respectively.
Non-cash charges included in the ratio of earnings to fixed charges and
deficiency of earnings available to cover fixed charges for the years
ended December 31, 1997 and 1996, the nine months ended December 31,
1996 and 1995 and the fiscal years ended March 31, 1996, 1995 and 1994
were $21,187,000, $20,816,000, $15,745,000, $15,411,000, $20,482,000,
$24,275,000 and $30,450,000, respectively. Non-cash charges consist of
depreciation, amortization, non-cash interest on the Convertible
Debentures and amortization of deferred financing costs.
22
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Aircraft Braking Systems generates approximately 75% of its revenues through the
sale of replacement parts for wheels and braking systems which are 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 year ended December 31, 1997, the nine months ended December 31, 1996
and the fiscal year ended March 31, 1996, the Company spent an aggregate of
approximately $51.0 million, $43.2 million, and $50.6 million, respectively, for
research, development, design, Program Investments, capital expenditures and
development participation costs. 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.
THE RECAPITALIZATION
On October 15, 1997, the Company consummated a Recapitalization consisting of
the following transactions:
a. The Company repurchased approximately 64% of its outstanding capital stock
for a total purchase price, paid in cash, of $230.2 million. Upon giving effect
to the repurchase, BLS and the Lehman Investors each became the owner of 50% of
the capital stock of the Company.
b. The Company repaid all of its outstanding indebtedness ($54.5 million) under
the Prior Credit Facility.
c. The Company made provision for the redemption of the remaining $70 million
outstanding principal amount of its 11 7/8% Senior Notes by irrevocably
depositing $77.5 million (representing a price of 105.28% of the principal
amount of the 11 7/8% Senior Notes, plus accrued interest through the expected
redemption date) with the trustee under the indenture governing the 11 7/8%
Senior Notes. On November 13, 1997, the 11 7/8% Senior Notes were redeemed.
d. The Company purchased, for cash, all of the $140 million aggregate principal
amount of its 10 3/8% Notes. The aggregate price paid for the 10 3/8% Notes
(including accrued interest and Tender Offer premiums and related fees and
expenses) was $160.9 million.
e. The Company entered into a New Credit Facility for $372 million.
f. The Company issued $185 million of New Notes. The Company used the net
proceeds of the New Notes together with borrowings under the New Credit Facility
to effect the Recapitalization.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
SALES. Sales for the year ended December 31, 1997 totaled $304.3 million,
reflecting an increase of $26.6 million, or 9.6%, compared with $277.7 million
for the same period in the prior year. This increase was due to higher
commercial sales of wheels and brakes for commercial transport aircraft of $20.8
million, primarily on the DC-10, MD-80, Canadair Regional Jet and Fokker FO-100
programs and higher general aviation sales of $6.2 million on the Lear and IAI
Astra and Galaxy aircraft.
GROSS MARGIN. The gross margin for the year ended December 31, 1997 was 38.2%
compared with 34.8% 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 cost savings relating to the in-house production of carbon in the
Company's new carbon facility.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs
were $10.9 million for the year ended December 31, 1997 compared with $11.8
million for the same period in the prior year. This decrease was primarily due
to lower costs associated with the MD-90 Program.
23
<PAGE> 29
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $40.2 million for the year ended December 31, 1997
compared with $24.5 million for the same period in the prior year. This increase
was primarily due to a non-recurring $12.4 million charge relating to the
exercise of stock options and other fees in connection with the Recapitalization
and higher performance-related incentive compensation.
INTEREST EXPENSE, NET. Interest expense, net was $34.1 million for the year
ended December 31, 1997 compared with $37.0 million for the same period in the
prior year. This decrease was due to lower interest rates on outstanding debt as
a result of the refinancing in August 1996 of the 13 3/4% Senior Subordinated
Debentures due 2001 (the "13 3/4% Debentures") with 10 3/8% Notes and borrowings
under the Prior Credit Facility. Partially offsetting this decrease were the
greater interest costs resulting from the Recapitalization on October 15, 1997.
(See Note 7 to the consolidated financial statements.)
EFFECTIVE TAX RATE. The Company's effective tax rate of 24.8% for the year ended
December 31, 1997 differs from the statutory rate of 35% due to utilization of
tax net operating losses offset by a net increase in the valuation allowance and
a $0.9 million charge for foreign taxes. For the same period in the prior year
the effective tax rate of (0.6)% differed from the statutory rate of 35%
primarily due to a net decrease in the valuation allowance and utilization of
tax net operating losses. The increase in the effective rate in 1997 is
primarily due to the charge for foreign taxes and a net change in the valuation
allowance.
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% Debentures and lower interest rates as a result of
refinancing the 13 3/4% Debentures with $140 million principal amount of the 10
3/8% Notes on August 15, 1996, and borrowings under the Prior Credit Facility.
This decrease was 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.)
EFFECTIVE TAX RATE. The Company's effective tax rate of (0.5)% for the nine
months ended December 31, 1996 differs from the statutory rate of 35% primarily
due to a net decrease in the valuation allowance offset by a $0.2 million charge
for foreign taxes. For the same period in the prior year the effective tax rate
of 0.0% differed from the statutory rate of 35% due to a net decrease in the
valuation allowance. The increase in the effective rate in 1996 is primarily due
to the charge for foreign taxes and a net change 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 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 revolving credit facilities.
The Company's total indebtedness increased from $293 million at December 31,
1996 to $520.6 million at December 31, 1997 due to the Recapitalization. (See
Notes 1 and 7 to the consolidated financial statements.)
The New Credit Facility, consisting of $322 million of Term Loans and a $50
million Revolving Loan, bears interest at floating rates selected at the option
of the Company. At December 31, 1997 and 1996, the average interest rate on the
New Credit Facility and Prior Credit Facility was 8.3% and 7.9%, respectively.
As a requirement of the New Credit Facility, the Company entered into an
interest
24
<PAGE> 30
rate swap agreement to reduce the impact of potential increases in
interest rates on the New Credit Facility. This interest rate agreement fixes
the rate at 8.3% on $136 million of borrowings. Any differences paid or received
on the interest rate swap agreement are recognized as adjustments to current
interest expense. Obligations under the New Credit Facility are secured by a
lien on substantially all of the assets of the Subsidiaries and are guaranteed
by K & F.
Term Loan A is a six-year quarterly amortizing facility maturing October 15,
2003, with installments of $500,000 per year in years one to five and
$47,375,000 in year six. Term Loan B is an eight-year quarterly amortizing
facility maturing October 15, 2005, with installments of $1.0 million per year
in years one to seven and $265 million in year eight. The Company will be
required to make mandatory reductions in the New Credit Facility in the event of
certain asset sales, the incurrence of certain additional indebtedness, and
annually from a portion of excess cash flow (as defined).
The New Credit Facility provides for revolving loans not to exceed $50 million,
with up to $20 million available for letters of credit. The Revolving Loan
commitment terminates on October 15, 2003. At December 31, 1997, the Company had
$27.2 million available to borrow under the Revolving Loan.
The New Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guaranty obligations
and material lease obligations. The New Credit Facility also contains certain
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, 1997.
As a result of the Recapitalization, the Company directly increased its
stockholders' deficiency by $218.6 million for the repurchase of a portion of
the capital stock and recorded an extraordinary charge of $27.8 million (net of
tax of $2.0 million) for the write-off of unamortized financing costs,
redemption premiums and Tender Offer payments.
On June 1, 1997, the Company redeemed $30 million aggregate principal amount of
its 11 7/8% Senior Notes at a redemption price of 105.28% of the principal
amount thereof. In connection therewith, the Company recorded an extraordinary
charge of $1.7 million (net of tax of $0.6 million) for the write-off of
unamortized financing costs and redemption premiums.
During the nine months ended December 31, 1996 and the year ended March 31,
1996, the Company redeemed $180 million and $30 million of its 13 3/4% Senior
Subordinated Debentures at redemption prices of 102.5% and 103.75%,
respectively. The Company funded these transactions with the net proceeds from
the issuance of $140 million of 10 3/8% Notes together with borrowings under the
Prior Credit Facility. In connection therewith, the Company recorded an
extraordinary charge of $9.1 million and $1.9 million during the nine months
ended December 31, 1996 and the fiscal year ended March 31, 1996, respectively,
for the write-off of unamortized financing costs and redemption premiums.
Based upon the current level of operations and anticipated improvements,
management believes that the Company's cash flow from operations, together with
available borrowings under the New Credit Facility, will be adequate to meets
its anticipated requirements for working capital, capital expenditures, research
and development expenditures, program and other discretionary investments,
interest payments and scheduled principal payments. There can be no assurance,
however, that the Company's business will continue to generate cash flow at or
above current levels or that currently anticipated improvements will be
achieved. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required to sell assets,
reduce capital expenditures, refinance all or a portion of its existing debt
(including the New Notes) or obtain additional financing. The Company's ability
to make scheduled principal payments of, to pay interest on or to refinance its
indebtedness (including the New Notes) depends on its future performance and
financial results, which, to a certain extent, are subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. There can be no assurance that sufficient funds will be available to
enable the Company to service its indebtedness, including the New Notes, or make
necessary capital expenditures and program and other discretional investments.
CASH FLOW
Cash flow from operating activities for the years ended December 31, 1997 and
1996 and for the nine months ended December 31, 1996 and 1995 was $42.5 million,
$28.9 million, $23.4 million and $16.8 million, respectively. Cash flow for the
year ended December 31, 1997 was higher than cash flow for the year ended
December 31, 1996 primarily due to improved profitability before extraordinary
charges, lower inventory, higher accounts payable, partially offset by higher
trade accounts receivable and higher prepaid pension costs. Cash flow for the
nine months ended December 31, 1996 was higher than cash flow for the nine
months ended December 31, 1995 primarily due to improved profitability before
extraordinary charges, partially offset by higher inventory to meet increased
sales levels.
Capital spending for the years ended December 31, 1997 and 1996 and for the nine
months ended December 31,1996 and 1995 was $10.0 million, $21.2 million, $14.1
million and $3.3 million, respectively. The decrease for the year ended December
31, 1997 compared with December 31, 1996, and the increase for the nine months
ended December 31, 1996 compared with December 31, 1995, are both primarily due
to the cost of the expansion to the carbon manufacturing building at the
Company's Akron, Ohio facility that
25
<PAGE> 31
was started in November 1995 and completed in April 1997. Capital spending for
the year ending December 31, 1998 is expected to be approximately $11.0 million.
Net cash outflow from financing activities for the years ended December 31, 1997
and 1996 and for the nine months ended December 31, 1996 and 1995 was $27.5
million, $9.0 million, $10.0 million and $18.4 million, respectively. During the
year ended December 31, 1997, the Company used $218.6 million for the redemption
of equity interests and $36.5 million for refinancing expenditures, partially
offset by increased borrowings of $227.6 million, primarily related to the
Recapitalization. During the year ended December 31, 1996, the Company used
$11.3 million for refinancing expenditures partially offset by $2.3 million of
proceeds received from a sale and leaseback transaction. During the nine months
ended December 31, 1996, $1.0 million was used to pay indebtedness and
approximately $11.3 million was used for refinancing expenditures, partially
offset by $2.3 million of proceeds received from a sale and leaseback
transaction compared with $17.0 million used to pay indebtedness and $1.4
million used for refinancing expenditures during the nine months ended December
31, 1995.
CONTINGENCY
Until 1997, 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 have been
the subject of litigation. On April 23, 1998, the jury in the Ohio state action
awarded Aircraft Braking Systems $4,528,237 on its claims but awarded Hitco
$9,578,000 on its claims. The Company is reviewing the verdicts and may appeal.
There can be no assurance as to the outcome of the litigation, but management
believes payment of the net amount of the verdicts in the Ohio state action
would not materially adversely affect the Company. See "Business -- Legal
Proceedings."
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. This new
standard is effective for fiscal years beginning after December 15, 1997. The
Company will adopt the disclosure requirements of SFAS No.130 in 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. This new standard is effective
for fiscal years beginning after December 15, 1997. The Company is currently
evaluating the impact, if any, on its financial statement disclosures of SFAS
No. 131.
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.
YEAR 2000 MATTERS
The Company has assessed and is continuing to assess year 2000 issues. The
Company has reviewed its own computer programs and believes they are, or will be
made without undue delay or expense, year 2000 compliant. The Company is
surveying others with whom it does business, and is not now aware of specific
year 2000 uncertainties on the part of any of its suppliers, customers or
creditors that would have a material impact on the Company's business, financial
condition or results of operations. However, there can be no assurance that
other companies on which the Company may rely will be timely with their
compliance, or that such failure of compliance by another company would not have
an adverse effect on the Company.
26
<PAGE> 32
BUSINESS
GENERAL
The Company, through its wholly owned subsidiary, Aircraft Braking Systems, is
one of the world's leading manufacturers of aircraft wheels, brakes and
anti-skid systems for commercial transport, general aviation and military
aircraft. The Company sells its products to virtually all major airframe
manufacturers and most commercial airlines and to the United States and certain
foreign governments. During the year ended December 31, 1997, approximately 88%
of the Company's total revenues were derived from sales made by Aircraft Braking
Systems. In addition, the Company through its wholly owned subsidiary,
Engineered Fabrics, 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
for such products. 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 year ended December
31, 1997, approximately 12% of the Company's total revenues were derived from
sales made by Engineered Fabrics.
Aircraft Braking Systems and its predecessors have been leaders in the design
and development of aircraft wheels, brakes and anti-skid systems, investing
significant resources to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
THE AIRCRAFT WHEEL AND BRAKE INDUSTRY
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for bids
from manufacturers. Selections are made by the manufacturer on the basis of
technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be "dual
sourcing" of wheels and brakes. In such case, an airframe manufacturer may
approve and receive FAA certification to configure a particular airframe with
equipment provided by two or more wheel and brake manufacturers. Where two
suppliers have been certified, the aircraft customer, such as a major airline,
will designate the original equipment to be installed on the customer's
aircraft. Competition among two certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
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. Since 1989,
Aircraft Braking Systems has carefully directed its efforts toward expanding its
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on high-cycle, medium- and short-range
commercial aircraft. As a result of this strategic focus, during this period,
Aircraft Braking Systems has added approximately 1,200 medium- and short-range
commercial aircraft to the portfolio of aircraft usings its products. These
aircraft typically make frequent landings and correspondingly require more
frequent replacement of brake
27
<PAGE> 33
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 year ended
December 31, 1997, 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 Air Canada have opted
for DC-9 life extension refurbishment programs, to meet capacity needs, in lieu
of buying replacement aircraft new.
Approximately 75% of Aircraft Braking Systems' revenues are derived from the
sale of replacement parts. As of December 31, 1997, 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-100/70, 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 high-cycle airframe designs. These aircraft
include the 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 its 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 System is the sole supplier for wheels, carbon brakes and
anti-skid equipment on the new McDonnell Douglas MD-90 twin-jet. The MD-90 is an
addition 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. The Boeing Company ("Boeing")
(which acquired McDonnell Douglas in August 1997) has indicated that it plans to
phase out new production of both the MD-80 and the MD-90 after completing
existing orders. At completion of production, the Company expects to have
approximately 150 MD-90 and over 400 MD-80 aircraft equipped with Aircraft
Braking Systems' wheels and brakes.
Aircraft Braking Systems is a basic supplier of wheels and carbon brakes on the
Airbus A-321, the European consortium's 186-seat "stretch" version of its
popular A-320 standard body twin-jet. Airbus has booked orders for over 219
A-321 aircraft. Of the 76 aircraft delivered to date, Aircraft Braking Systems
has provided wheels and brakes for 53 of these aircraft.
Aircraft Braking Systems' brake control systems, which are integrated into a
total braking system, are designed to minimize the distance required to stop an
aircraft by controlling applied brake pressure 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,
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company,
Aircraft Braking Systems is the only significant manufacturer of anti-skid
systems providing approximately 17% of the total market. Because of the
sensitivity of anti-skid systems to variations in brake performance, the
Company's management believes that its braking system integration capability
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>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Wheels and brakes........................................ 80% 81% 80%
Anti-skid systems ...................................... 8% 9% 8%
Total.................................................... 88% 90% 88%
</TABLE>
Engineered Fabrics. The Company believes 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 for such products. 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 year ended December 31, 1997,
approximately 12% of the Company's total revenues were derived from sales made
by Engineered Fabrics.
Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the year ended December 31, 1997, sales of fuel tanks
accounted for approximately 75% 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 manufactures 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
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<PAGE> 34
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 produced from 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.
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%, 12% and 16% of total sales for the year ended December 31,
1997, the nine months ended December 31, 1996 and the fiscal year ended March
31, 1996, respectively. No other customer accounted for more than 10% of total
sales.
The following table shows the distribution of total Company revenues by
respective market, as a percentage of total revenues:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
------------ ------------ ---------
<S> <C> <C> <C>
Commercial transport....................................... 64% 63% 61%
Military (U.S. and foreign)................................ 18% 18% 23%
General aviation ......................................... 18% 19% 16%
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 Boeing aircraft including the Boeing 707, MD-80 and MD-90. The Company
also supplies products on a number of aircraft manufactured by Airbus.
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, C-130 and the C-141.
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 and IDF aircraft.
General Aviation. The Company believes it is the industry's largest supplier of
wheels, brakes and fuel tanks for general aviation aircraft. This market
includes personal, business and executive aircraft. Customers include airframe
manufacturers, such as Gulfstream, Raytheon Aircraft, Learjet, Canadair, Cessna
and Dassault, and distributors, such as Aviall. Anti-skid systems are supplied
by the Company to Gulfstream, Dassault as well as 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, 55 and 60 and the Gulfstream G-I, G-II, G-III and G-IV. During 1997, the
Company was successful in winning the Hawker Horizon contract to supply wheels,
brakes and brake control systems, as a sole-source provider.
FOREIGN CUSTOMERS
The Company supplies products to a number of foreign aircraft manufacturers,
airlines and foreign governments. Substantially all sales to foreign customers
are in U.S. dollars and, therefore, the impact of currency translations is
immaterial to the Company. The following table shows sales of the Company to
both foreign and domestic customers:
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<PAGE> 35
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
------------ ------------ ---------
<S> <C> <C> <C>
Domestic sales...................................... 57% 57% 59%
Foreign sales....................................... 43% 43% 41%
--- --- ---
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, 1997, the Company employed approximately 156
engineers (of whom 29 held advanced degrees); approximately 27 of such engineers
(including 13 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 year
ended December 31, 1997, the nine months ended December 31, 1996 and the fiscal
year ended March 31, 1996 were $10.9 million, $8.6 million and $9.8 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 owned by
Zodiac S.A., a French Company.
BACKLOG
Backlog at December 31, 1997 and 1996 amounted to approximately $172.7 million
and $167.0 million, respectively. Backlog consists of firm orders for the
Company's products which have not been shipped. Approximately 89% of total
Company backlog at December 31, 1997 is expected to be shipped during the year
ending December 31, 1998, 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, 1997, approximately 24% 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 year ended December 31, 1997, the nine months ended December 31, 1996
and the fiscal year ended March 31, 1996, approximately 12%, 12%, and 16%,
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.
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
30
<PAGE> 36
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. In April 1997, the
Company completed the construction of a 21,000 square foot expansion of its
carbon manufacturing facility in Akron, Ohio. This facility has sufficient
capacity to supply substantially all of the Company's current carbon
requirements. Steel and aluminum forgings are purchased from several sources.
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.
PERSONNEL
At December 31, 1997, the Company had 1,354 full-time employees, of which 907
were employed by Aircraft Braking Systems (434 hourly and 473 salaried
employees) and 447 were employed by Engineered Fabrics (327 hourly and 120
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 Food and Commercial Workers'
Union.
Engineered Fabrics' three-year contract with its union expired on February 5,
1998, and workers recently ratified a new, three-year agreement. Aircraft
Braking Systems' three-year contract with the United Auto Workers' Union expired
on August 10, 1991. Aircraft Braking Systems has not had a ratified collective
bargaining agreement since August 10, 1991, but has operated under Company
implemented terms and conditions of employment. The Company believes that
Aircraft Braking Systems will be able to negotiate, without material disruptions
to its business, a satisfactory new collective bargaining agreement with
employees. However, there can be no assurance that a satisfactory agreement will
be reached with Aircraft Braking Systems' employees, or that discussions
regarding such agreement will not be accompanied by material disruptions to the
business.
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 manufacturing, 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 properties 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 year
ended December 31, 1997, the nine months ended December 31, 1996 and the fiscal
year ended March 31, 1996, Aircraft Braking Systems made occupancy payments to
Lockheed Martin of $1.7 million, $1.2 million and $1.5 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.
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 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
which were estimated at up to $51 million. Hitco counterclaimed in the matter
seeking, among other things, damages for discounted lost profits, which Hitco
estimated at up to $40 million (subject to mitigation) 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. Accordingly, through
mid-December 1996, Hitco continued to supply carbon to the Company, although
Hitco failed to fill certain acknowledged purchase orders. Trial of the case
began on March 31,1998. On April 23, 1998, the jury awarded Aircraft Braking
Systems $4,528,237 on its claims but awarded Hitco $9,578,000 on its claims. The
Company is reviewing the verdicts and, among other possible actions, may appeal
the findings against it.
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<PAGE> 37
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.
On May 1, 1998, Aircraft Braking Systems received notice of an action commenced
by SGL Carbon Composites, Inc. (Hitco) in the Federal District Court in the
Central District of California. This suit alleges unfair competition and
violations of antitrust laws in the sale of products to certain customers and
seeks unspecified compensatory damages, punitive damages and injunctive relief.
The matter is at a preliminary stage and management has not yet formulated its
response to the California federal action.
Management intends to vigorously advocate its interest in all lawsuits and to
seek dismissal of the California action . There can be no assurance, as to the
final outcome of the Hitco litigation but management believes payment of the net
amount of the verdicts in the Ohio state case would not materially adversely
affect the Company, and the Company is still reviewing the California action.
In addition to the foregoing, there are various lawsuits and claims pending
against the Company incidental to its business. Although the final results in
such suits and proceedings cannot be predicted with certainty, in the opinion of
the Company's management, the ultimate liability, if any, will not have a
material adverse effect on the Company.
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<PAGE> 38
MANAGEMENT
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.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) DIRECTOR SINCE
- ---- --- ----------- --------------
<S> <C> <C> <C>
Bernard L. Schwartz* 72 Chairman of the Board
and Chief Executive Officer 1989
David J. Brand** 37 Director 1997
Herbert R. Brinberg* 72 Director 1989
Robert B. Hodes* 72 Director 1997
Ronald H. Kisner* 49 Director and Secretary 1989
John R. Paddock* 44 Director 1989
A. Robert Towbin*** 62 Director 1989
Alan H. Washkowitz** 57 Director 1989
Donald E. Fogelsanger 72 President
Kenneth M. Schwartz 46 Executive Vice President
Dirkson R. Charles 34 Chief Financial Officer
</TABLE>
- ----------------------
* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by the Lehman Investors pursuant to the
Stockholders Agreement.
*** Designated as independent director by BLS and the Lehman Investors
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 Ltd., Chairman and Chief Executive Officer of Space
Systems/Loral, Inc., Chief Executive Officer of Globalstar, L.P., 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.
Mr. Brand is a Managing Director of Lehman Brothers and a principal in the
Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology Mergers
and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been
responsible for merger and corporate finance advisory services for many of
Lehman Brothers' technology and defense industry clients. Mr. Brand is a
director of L-3 Communications Corporation.
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. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which he
has been associated since 1949. He is a Director of Aerointernational Inc., W.R.
Berkley Corporation, Crystal Oil Company, Globalstar Telecommunications, Ltd.,
LCH Investments N.V., Loral Space & Communications Ltd., Mueller Industries,
Inc., Restructured Capital Holdings Ltd. And R.V.I. Guaranty Co., Ltd.
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. Since January 1997, Mr. Kisner has
been Secretary of the Company.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994), Director of Training for the Georgia School of Professional
Psychology, Adjunct Associate Professor of Psychology at Emory University,
Assistant Professor of Psychology at Kennesaw State College, and Southern Region
Coordinator for National Employee Assistance Services. Currently, he is visiting
Associate Professor of Psychology at Emory, and holds positions as Adjunct
Clinical Assistant Professor in the Department of Psychiatry at Emory, and is
Adjunct Professor of Psychology at Georgia Institute of Technology.
Mr. Towbin joined C. E. Unterberg Towbin (formerly known as 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
33
<PAGE> 39
of C.E. Unterberg, Towbin Co. Mr. Towbin is also a Director of Bradley Real
Estate Inc., Lancit Media Entertainment Ltd., Columbus New Millennium Fund,
Gerber Scientific, Inc. and Globalstar Telecommunications Ltd.
Mr. Washkowitz is a Managing Director of Lehman Brothers and head of the
Merchant Banking Group, and is responsible for the oversight of Lehman Brothers
Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman
Brothers in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr.
Washkowitz is currently a director of Illinois Central Corporation, L-3
Communications Corporation and McBride plc.
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
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald E. Welsch 62 President
Frank P. Crampton 54 Vice President-Marketing
Richard W. Johnson 54 Vice President-Finance and Controller
James J. Williams 42 Vice President-Manufacturing
</TABLE>
Engineered Fabrics Corporation
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger C. Martin 60 President
Terry L. Lindsey 53 Vice President-Marketing
Anthony G. McCann 38 Vice President-Operations
John A. Skubina 43 Vice President-Finance
</TABLE>
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.
34
<PAGE> 40
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 36 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.
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.
35
<PAGE> 41
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the year ended December 31,
1997, the nine months ended December 31, 1996 (the "Transition Period") and the
fiscal year ended March 31, 1996, 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
----------------------------------- -------------------------------
Fiscal All other
Year or Options LTIP Compen-sation(a)
Transition Salary Bonus Granted Payouts ($)
Name and Principal Position Period * ($) ($) (#) ($)
--------------------------- -------- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz 1997 1,440,000(b) 1,553,200 -- -- --
Chairman of the Board and Chief 1996* 1,477,426(b) 1,247,000 -- -- --
Executive Officer 1996 1,770,500(b) -- -- -- --
Kenneth M. Schwartz 1997 494,038(b) 150,000 2,500 45,000 5,237
Executive Vice President of 1996* 274,231(b) 106,000 -- 28,333 19,331
K & F Industries, Inc. 1996 321,815(b) 115,000 -- 13,333 4,196
Donald E. Fogelsanger 1997 216,000 125,000 2,500 48,333 34,519
President of K & F Industries, Inc. 1996* 170,769 115,000 -- 30,000 42,369
1996 196,000 125,000 -- 13,333 22,829
Ronald E. Welsch 1997 192,500 185,000 2,500 35,333 27,473
President of Aircraft Braking 1996* 145,308 60,000 -- 22,000 25,997
Systems Corporation 1996 172,000 70,000 -- 10,000 38,533
Roger C. Martin 1997 148,059 49,000 1,500 27,333 28,266
President of Engineered Fabrics 1996* 109,757 30,000 -- 17,333 27,229
Corporation 1996 136,674 55,000 -- 8,333 11,489
</TABLE>
(a) Includes the following: (i) Company contributions to individual 401(k)
plan accounts for the year ended December 31, 1997, the nine months
ended December 31, 1996 and the fiscal year ended March 31, 1996,
respectively: Mr. K. Schwartz - $4,275, $2,414 and $3,996; Mr.
Fogelsanger - $4,275, $3,054 and $4,050; Mr. Welsch - $4,078, $3,084
and $4,050; Mr. Martin - $3,927, $3,442 and $4,050; (ii) the value of
supplemental life insurance programs for the year ended December 31,
1997, the nine months ended December 31, 1996 and the fiscal year ended
March 31, 1996, respectively: Mr. K. Schwartz - $962, $16,917 and $200;
Mr. Fogelsanger - $30,244, $39,315 and $18,779; Mr. Welsch - $23,395,
$22,913 and $1,107; Mr. Martin - $24,339, $23,787 and $7,439 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 in exchange for acting as directors of
the Company's subsidiaries and providing advisory services to the
Company and its subsidiaries. BLS has designated that $250,000,
$100,000 and $100,000 of the aggregate annual advisory fee be paid to
Kenneth M. Schwartz, which is included in his salary for the year ended
December 31, 1997, the Transition Period and the fiscal year ended
March 31, 1996, respectively.
36
<PAGE> 42
OPTION GRANTS IN LAST FISCAL YEAR
The following sets forth information relating to the grant of stock options by
the Company during the year ended December 31, 1997 to the named executive
officers. The 1989 Stock Option Plan provides for the grant of non-qualified or
incentive stock options to acquire 50,000 authorized but unissued shares of
common stock. None of the Company's stock is publicly traded. Non-qualified
stock options were granted on November 21, 1997 at the implied value of the
Company's common stock retained by the stockholders following the
Recapitalization. The options are exercisable in four equal installments on the
second, third, fourth and fifth anniversaries of the date of grant, and shall
remain exercisable until expiration of the option, 10 years from the date of the
grant.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
------------------------------------------------------------- -----------------------------
% of Total
Options
Granted to Exercise
Employees or Base
Options in Fiscal Price Expiration
Name Granted (#) year (%) ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- -------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz 0 0 0 0 0 0
Kenneth M. Schwartz 2,500 7.0 175.00 11/21/07 275,141 697,262
Donald E. Fogelsanger 2,500 7.0 175.00 11/21/07 275,141 697,262
Ronald E. Welsch 2,500 7.0 175.00 11/21/07 275,141 697,262
Roger C. Martin 1,500 4.2 175.00 11/21/07 165,085 418,357
</TABLE>
37
<PAGE> 43
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTIONS VALUES
The following sets forth information as to the exercise of stock options
during the year ended December 31, 1997 and the value of unexercised stock
options at year-end.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at at
FY-End (#) FY-End ($)(1)
---------- -------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($)(2) Unexercisable Unexercisable
---- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz 0 0 0/0 0/0
Kenneth M. Schwartz 13,500 1,763,430 0/2,500 0/0
Donald E. Fogelsanger 7,500 905,350 0/2,500 0/0
Ronald E. Welsch 500 45,490 0/2,500 0/0
Roger C. Martin 4,000 475,420 0/1,500 0/0
</TABLE>
(1) None of the Company's stock is currently publicly traded. All options
were granted at an exercise price of $175.00 based upon the implied
value of the capital stock retained by BLS and the Lehman Investors
following the Recapitalization.
(2) Represents net proceeds received upon sale of the shares in the
Recapitalization.
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 year ended December 31, 1997, the nine months ended December 31, 1996 and
the fiscal year ended March 31, 1996, respectively: Mr. K. Schwartz $50,000,
$50,000 and $45,000; Mr. Fogelsanger $55,000, $55,000 and $50,000; Mr. Welsch
$45,000, $40,000 and $36,000; and Mr. Martin $30,000, $30,000 and 27,000.
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.
38
<PAGE> 44
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 $125,000 per participant. Participants are
fully vested in their accrued benefits under the Company Retirement Plan after
five years of credited service with the Company.
The individuals named in the Summary Compensation Table also participate in a
supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of K & F and Aircraft Braking Systems and the supplemental plan are $298,000 for
Mr. K. Schwartz; $124,000 for Mr. Fogelsanger; and $36,000 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 or current age if greater; (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 $96,000 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 year ended December 31,
1997. Members of the Board of Directors are entitled to receive a director's fee
of $12,000 per year. No directors other than Messrs. Brinberg, Kisner and
Paddock received compensation for services as a director during the year ended
December 31, 1997. 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 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 a specified number of 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 and
Stockholders Agreements. All other executive compensation decisions are made by
BLS in accordance with policies established in consultation with the Board of
Directors.
39
<PAGE> 45
SECURITY OWNERSHIP
The following table sets forth the ownership of the capital stock of the Company
as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Shares Percentage
of Ownership of
Common Stock Capital Stock
------------ -------------
<S> <C> <C>
Bernard L. Schwartz 370,199 50.00%
*Lehman Brothers Merchant Banking Portfolio
Partnership L.P.(a) 180,228 24.34
*Lehman Brothers Offshore Investment Partnership 6.60
L.P.(b) 48,880
*Lehman Brothers Offshore Investment Partnership -
Japan L.P. (b) 18,591 2.51
*Lehman Brothers Capital Partners II, L.P.(c) 122,500 16.55
------- -----
740,398 100.00%
======= ======
</TABLE>
- ----------------
*Collectively referred to as the "Lehman Investors."
(a) LBI Group Inc. is the general partner of the limited partnership and is
an indirect wholly owned subsidiary of Lehman Brothers Holdings Inc.
("LBH").
(b) Lehman Brothers Offshore Partners Ltd. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
(c) LBH is the general partner of the limited partnership. The limited
partnership is a fund for current and former employees of LBH.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, BLS and the Lehman Investors
(collectively, the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement") dated as of October 15, 1997. The Stockholders
Agreement contains certain restrictions with respect to the transferability of
the Company's capital stock, subject to certain exceptions. The Stockholders
Agreement also includes provisions regarding designation of members of the Board
of Directors and other voting arrangments. 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 (collectively, "Common
Equivalents") then outstanding have been sold pursuant to one or more public
offerings, except that the registration rights continue as to any common stock
held by the Stockholders as long as they own their shares, and the voting
provisions contained in the Stockholders Agreement terminate on October 15,
2007.
The Stockholders Agreement provides that the Company's Board of Directors be
comprised initially of nine directors. Under the Stockholders Agreement, BLS is
entitled to appoint five directors, the Lehman Investors are entitled to appoint
three directors and BLS and the Lehman Investors are entitled to designate
jointly one independent director. Upon the death, retirement or resignation as
Chairman or Chief Executive Officer or permanent disability of BLS, the Lehman
Investors and the BLS Group (as defined in the Stockholders Agreement) will each
be entitled to designate 50% of the members of the Board of Directors. The
Company's by-laws provide for so long as there is a director designated by the
Lehman Investors, certain corporate actions will require the vote of at least
one director designated by the Lehman Investors, including (with certain
exceptions) (i) mergers, consolidations or recapitalization, (ii) issuances of
capital stock (iii) repurchases of and dividends on capital stock, (iv) issuance
of employee options to purchase more than 50,000 shares of capital stock, (v)
dissolution or liquidation of the Company, (vi) acquisition, sale or exchange of
assets in excess of $5 million, (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 in each case in any single year,
(ix) transactions with affiliates, (x) prepayments of or amendments to any
amount of financing in excess of $10 million, (xi) amendment of the Charter and
By-laws of the Company, (xii) engaging in new businesses or ventures and (xiii)
certain employee compensation and other matters.
The Stockholders Agreement provides that any time after the earlier of (i) the
fifth anniversary of the Recapitalization, (ii) six months following the death
of BLS or (iii) upon the resignation or retirement of BLS as Chairman or Chief
Executive Officer; either the BLS Group 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 transferees' 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, or arrange for the purchase by a
third party of, such capital stock. If the other party is unable or chooses not
40
<PAGE> 46
to arrange for and consummate the purchase of such capital stock, the BLS Group
and the Lehman Investors shall cause the Company to be sold as an entirety if
such sale can be arranged for a price at least equal to the Appraised Value
(subject to reduction by no more than 10% under specified circumstances). 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.
Notwithstanding other restrictions on transfer set forth in the Stockholders
Agreement, from and after March 3, 2001, the Lehman Investors will have the
right to transfer capital stock to a third party, subject to specified
conditions. The put-sale rights of the Lehman Investors described above and the
rights of the Lehman Investors to designate 50% of the members of the Board of
Directors upon the death, retirement, resignation or disability of BLS will
terminate upon any such transfer.
The Stockholders Agreement provides certain first offer and tag-along rights
with respect to certain transfers and common stock or Common Equivalents.
The Stockholders Agreement grants the Stockholders demand and incidental
registration rights with respect to shares of capital stock held by them, which
rights will be exercisable at any time after an initial public offering of the
Company's common stock approved by the Board of Directors. The Stockholders
Agreement contains customary terms and provisions with respect to such
registration rights.
CERTAIN TRANSACTIONS
GENERAL
BLS owns 50% 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 & Communications Ltd.
("Loral Space"). 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.
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 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 a specified number of 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 ranging from 5% to 10% of earnings in excess of $50
million before interest, taxes and amortization. Bonuses earned under this plan
were $1,553,200, $1,247,000 and $200,000 for the year ended December 31, 1997,
the nine months ended December 31, 1996 and the fiscal year ended March 31,
1996, respectively.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The Agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. During the year ended December 31, 1997,
Lehman Brothers received underwriting discounts and commissions of $4.6 million
and $2.6 million in connection with the offering of the 9 1/4% Notes and 10 3/8%
Notes, respectively. In connection with the Tender Offer, Lehman Brothers
received a customary fee for acting as Dealer Manager and Solicitation Agent. In
addition, one or more affiliates of Lehman Brothers received underwriting
commissions of $4.7 million in connection with the New Credit Facility. The
Lehman Investors own 50% of the outstanding capital stock of the Company and are
entitled to elect three directors (in addition to one independent director
jointly designated by BLS and the Lehman Investors) to the Company's Board of
Directors. The Lehman Investors have the benefit of certain additional rights
under the Stockholders Agreement and the Company's By-laws.
In May 1996, the Company purchased $343,000 principal amount of 13 3/4%
Debentures from A. Robert Towbin, who is a director of the Company and who is
managing director of C. E. Unterberg Towbin (formerly Unterberg Harris). The
Company purchased such 13 3/4% Debentures 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 thereof. In connection with the
Recapitalization, the Company paid Unterberg Harris a fee of $1.0 million for
investment banking services.
The Company pays Ronald H. Kisner, who is Secretary and a member of the Board of
Directors of the Company, a monthly retainer of $6,000 for legal services. In
addition, Mr. Kisner received bonuses and other compensation of $176,000 and
$41,000 during the year ended December 31, 1997 and nine months ended December
31, 1996, respectively. Mr. Kisner also received 1,750 stock options during
1997.
Pursuant to agreements between the Company and Loral Space (of which BLS is
Chairman and Chief Executive Officer), the Company reimburses Loral Space for
benefits administration and legal services. The related charges agreed upon were
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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
$0.5 million and $0.2 million for the year ended December 31, 1997 and the nine
months ended December 31, 1996, respectively. Included in accounts payable at
December 31, 1997 and 1996 is $0.3 million and $0.2 million, respectively.
In connection with the Recapitalization, the Company paid Loral Space $80.6
million for the redemption of its 22.5% equity interest in the Company.
Pursuant to agreements between K & F and Loral Corporation (the predecessor
Company to Loral Space), 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 for the fiscal year ended March 31, 1996. Billings to Loral
Corporation were $2.7 million for the fiscal year ended March 31, 1996.
Purchases from Loral Corporation were $2.2 million for the fiscal year ended
March 31, 1996.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
In connection with the Recapitalization, the Company and the Lenders
entered into a credit facility, with Aircraft Braking Systems and Engineered
Fabrics as borrowers (each, a "Borrower" and together, the "Borrowers") on the
terms and subject to the conditions set forth below. The New Credit Facility
consists of Term Loans in an aggregate principal amount of $322.0 million and a
Revolving Loans in an aggregate principal amount of $50.0 million. The Term
Loans are comprised of Term Loan A in the principal amount of $50.0 million and
Term Loan B in the principal amount of $272.0 million. The obligations under the
New Credit Facility are secured by a lien on substantially all of the assets of
the Borrowers and are guaranteed by the Company. Such guarantee is secured by a
pledge of all the issued and outstanding stock of the Borrowers and intercompany
notes held by the Company.
Term Loan A is repayable over a six-year period in 21 quarterly
installments of $125,000 and, thereafter, four quarterly installments of
$11,843,750. Term Loan B is repayable over an eight-year period in 28 quarterly
installments of $250,000 and, thereafter, four quarterly installments of $66.25
million. The Company is required to make mandatory prepayments in the event of
certain asset sales, upon the incurrence of additional indebtedness and from a
portion of excess cash flow. Up to $20 million of the Revolving Loan is
available for standby and commercial letters of credit. The Revolving Loan
commitment will terminate six years after the closing under the New Credit
Facility.
Borrowings under the New Credit Facility bear interest, at the option
of the Borrowers, at a rate equal to (a) the highest of (i) the publicly
announced prime rate of Citibank, N.A. ("Citibank"), (ii) the secondary market
rate for three-month certificates of deposit plus 1% and (iii) the federal funds
rate plus 1/2 of 1%, plus an applicable margin or (b) the rate at which
eurodollar deposits for one, two, three or six months (as selected by the
Borrowers) are offered in the interbank eurodollar market plus an applicable
margin. Overdue amounts under the New Credit Facility bear interest at a rate
equal to the rate then in effect with respect to such borrowings, plus 2% per
annum.
The Company paid LCPI, an affiliate of the Lehman Investors, a
commitment fee for the period from the date of the commitment letter to the
closing of the New Credit Facility and certain upfront fees. In addition, the
Company is obligated to pay a quarterly commitment fee initially equal to 1/2 of
1% per annum of the unused portion of the Revolving Loan commitment of $50.0
million, provided that such commitment fee will decrease to 3/8 of 1% per annum
if the consolidated leverage ratio is less than 5.0 to 1 but greater than or
equal to 4.5 to 1 and will decrease to 1/4 of 1% per annum if the consolidated
leverage ratio is less than 4.5 to 1. The Company is also obligated to pay a
commission on all outstanding letters of credit in the amount of an applicable
margin then in effect with respect to eurodollar loans as well as fronting fees
on the face amount of each letter of credit.
The New Credit Facility contains customary representations and
warranties, covenants and conditions to borrowing. There can be no assurance
that the conditions to borrowing under the New Credit Facility will be
satisfied.
The New Credit Facility contains a number of negative covenants that
limit the Company's subsidiaries from, among other things, incurring other
indebtedness, entering into merger or consolidation transactions, disposing of
all or substantially all of their assets, making certain restricted payments,
creating any liens on the Borrowers' assets, creating guarantee obligations and
material lease obligations and entering into sale and leaseback transactions and
transactions with affiliates. In addition, the New Credit Facility limits the
ability of the Company to redeem the Notes.
The New Credit Facility also requires the maintenance of certain
quarterly financial and operating ratios, including: (i) a consolidated cash
interest coverage ratio, (ii) a subsidiary cash interest coverage ratio and
(iii) a consolidated leverage ratio. Capital expenditures are limited to $20.0
million in fiscal 1997 and 1998 and $17.0 million in any fiscal year thereafter.
In addition, the New Credit Facility requires the Company to maintain a
specified minimum consolidated adjusted net worth.
The New Credit Facility also contains customary events of default,
including default upon the nonpayment of principal, interest, fees or other
amounts or the occurrence of a change of control.
The Company used funds initially drawn under the New Credit Facility to
refinance indebtedness under the Existing Credit Agreement, which terminated
upon the completion of the offering and sale of the Old Notes, and, together
with the net proceeds from the issuance of the Old Notes, to fund the
Recapitalization.
SETTLEMENT AGREEMENT
On October 15, 1997, the Company entered into the Settlement Agreement
with the Pension Benefit Guaranty Corporation (the "PBGC") regarding payment of
the Company's unfunded pension liabilities. Pursuant to the Settlement
Agreement, the Company is committed to contribute to its pension plans $4.5
million this year and thereafter to make scheduled contributions to its pension
plans equal to the minimum amount of cash required under statutory funding
obligations. In order to secure performance of its obligations under the
Settlement Agreement, the PBGC holds a $4.5
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million letter of credit for the benefit of the pension plans and the Company
granted the PBGC a second lien on the same assets securing the New Credit
Facility.
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes, and the New Notes were issued pursuant to an Indenture (the
"Indenture") between the Company and State Street Bank and Trust Company, as
trustee (the "Trustee"). The terms of the New Notes are identical in all
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act and, therefore, do not bear legends restricting their
transfer and do not contain provisions providing for the payment of liquidated
damages under certain circumstances relating to the Registration Rights
Agreement, which provisions terminated upon the consummation of the Exchange
Offer.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference Indenture, including the definitions therein of certain terms used
below. A copy of each of the Indenture and Registration Rights Agreement is
available as set forth under "Available Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions."
The Notes rank senior to or pari passu in right of payment with all
subordinated Indebtedness of the Company. The Notes are subordinated in right of
payment to all Senior Indebtedness of the Company, including all obligations of
the Company under the New Credit Facility.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $185.0 million and
will mature on October 15, 2007. Interest on the Notes accrues at the rate of 9
1/4% per annum and is payable semi-annually in arrears, in cash on April 15 and
October 15, commencing on April 15, 1998, to Holders of record on the
immediately preceding April 1 and October 1. Interest on the Notes accrues from
the most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments with respect to Notes the Holders
of which have given wire transfer instructions to the Company are required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes are issued in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to October 15,
2002. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2002........................................................ 104.625%
2003........................................................ 103.083%
2004........................................................ 101.542%
2005 and thereafter......................................... 100.000%
Notwithstanding the foregoing, on or prior to October 15, 2000, the
Company may redeem up to an aggregate of $65.0 million in aggregate principal
amount of Notes at a redemption price of 109.25% of the principal amount
thereof, in each case plus accrued and unpaid interest thereon to the redemption
date, with the net proceeds of one or more
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underwritten public offerings of common stock of the Company; provided that at
least $120.0 million in aggregate principal amount of Notes remain outstanding
immediately after the occurrence of such redemption; and provided, further, that
such redemption shall occur within 45 days of the date of the closing of such
underwritten public offering of common stock of the Company.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment Date").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event within
90 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of the Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility limits the ability of the Company to purchase any
Notes and also provides that certain change of control events with respect to
the Company would constitute a default thereunder. Any future credit agreements
or other agreements relating to Senior Indebtedness to which the Company becomes
a party may contain similar restrictions and provisions. In the event a Change
of Control occurs at a time when the Company is prohibited from purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to the Holders of Notes.
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The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 70% of the consideration therefor received by the Company
or such Subsidiary is in the form of cash or Cash Equivalents; provided that the
amount of (x) any liabilities (as shown on the Company's or such Subsidiary's
most recent balance sheet) of the Company or any Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets and (y) any notes, securities or other obligations received by the
Company or any such Subsidiary from such transferee that are immediately
(subject to normal settlement periods) converted by the Company or such
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
The Company may apply such Net Proceeds, at its option, within 360 days
after the receipt of any Net Proceeds from an Asset Sale, (a) to permanently
reduce (x) Senior Indebtedness or (y) Indebtedness of the Company's Subsidiaries
or (b) to invest in the business or businesses of the Company or any of its
Subsidiaries or any business directly related to any business then conducted by
the Company or any of its Subsidiaries or any business related to the aircraft
industry or used for working capital purposes. Pending the final application of
any such Net Proceeds, the Company may temporarily reduce Senior Revolving
Indebtedness or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness, whether outstanding on the date of
the Indenture or thereafter.
Upon any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness (including any interest accruing under the New Credit
Facility subsequent to an event of bankruptcy whether or not such interest is an
allowed claim in such proceeding) shall first be paid in full in cash or Cash
Equivalents, or payment provided for in cash or Cash Equivalents, before the
Holders or the Trustee on behalf of the Holders shall be entitled to receive any
payment by the Company of the principal of, premium, if any, or interest on the
Notes, or to acquire or redeem any of the Notes for cash or property (except
that Holders of Notes may receive securities that are subordinated at least to
the same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for such securities). Before any payment may be made by, or on behalf
of, the Company of the principal of, premium, if any, or interest on the Notes
upon any such dissolution, winding up, liquidation or reorganization, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the Holders of the Notes or
the Trustee on their behalf would be entitled, but for the subordination
provisions of the Indenture, shall be made by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, directly to the holders of the Senior Indebtedness (pro
rata to such holders on the basis of the respective amounts of Senior
Indebtedness held by such holders) or their representatives or to the trustee or
trustees under any indenture pursuant to which any of such Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
necessary to pay all such Senior Indebtedness in full in cash or Cash
Equivalents after giving effect to any concurrent payment, distribution or
provision therefor, to or for the holders of such Senior Indebtedness.
If any default in the payment of any principal of or interest on any
Senior Indebtedness outstanding under any Specified Senior Indebtedness or any
Designated Senior Indebtedness when due and payable, whether at maturity, upon
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any redemption, by declaration or otherwise, occurs and is continuing, no
payment shall be made by the Company with respect to the principal of, premium,
if any, or interest on, or other amounts owing with respect to, the Notes or to
redeem or acquire any of the Notes for cash or property or otherwise. If any
event of default occurs and is continuing under any Designated Senior
Indebtedness other than a default in payment of the principal of or interest on
any Designated Senior Indebtedness (or if such an event of default would occur
upon any payment of any kind or character with respect to the Notes), as such
event of default is defined in such Designated Senior Indebtedness, permitting
the holders thereof to accelerate the maturity thereof and if the holder or
holders or a representative of such holder or holders gives written notice of
the event of default to the Company and the Trustee (a "Default Notice"), then,
unless and until such event of default has been cured or waived or has ceased to
exist or the Trustee receives notice from the holder or holders of the relevant
Designated Senior Indebtedness (or a representative of such holder or holders)
terminating the Blockage Period (as defined below), during the 179 day period
after the delivery, of such Default Notice (the "Blockage Period"), the Company,
or any person acting on its behalf shall not, (x) make any payment or
distribution of or with respect to the principal of, premium, if any, or
interest on, or other amounts owing with respect to the Notes, or (y) acquire
any of the Notes for cash or property or otherwise. At the expiration of such
Blockage Period, the Company shall, as set forth in the Indenture, promptly pay
to the Trustee all sums which the Company would have been obligated to pay
during such Blockage Period but for this paragraph. Only one such Blockage
Period may be commenced with any 360 consecutive days. For all purposes of this
paragraph, no event of default which existed or was continuing with respect to
the Designated Senior Indebtedness to which the Blockage Period relates on the
date such Blockage Period commenced shall be or be made the basis for the
commencement of any subsequent Blockage Period by the holder or holders of such
Designated Senior Indebtedness (or a representative of such holder or holders)
unless such event of default is cured or waived for a period of not less than 90
consecutive days.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. As of September
30, 1997, after giving pro forma effect to the Recapitalization, the principal
amount of Senior Indebtedness outstanding would have been approximately $345.0
million. The Indenture limits, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Indebtedness, that the Company and its
subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's Equity Interests in their capacity
as such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock), dividends or distributions payable to the
Company or any Subsidiary of the Company or dividends or distributions payable
by a Subsidiary of the Company to its shareholders on a pro rata basis); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any direct or indirect parent of the Company (other than any
such Equity Interests owned by the Company); (iii) make any principal payment
on, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except at stated maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) with respect to Restricted Payments described in clauses (i) and
(ii) of the immediately preceding paragraph, the Company would, at the
time of such Restricted Payment and after giving pro forma effect thereto
as if such Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (including the Restricted Payments permitted by
the next paragraph, but excluding Restricted Payments permitted by clauses
(ii), (iii), (iv), (v) and (vi) of the next paragraph), is less than the
sum of (i) an amount equal to the difference (but not less than zero)
between (A) Cumulative Operating Cash Flow and (B) the product of 1.3
times Cumulative Total Interest Expense, plus (ii) 100% of the aggregate
net proceeds, including the fair market value of property other than cash
as determined
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in good faith by the Board of Directors whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee, received by
the Company from the issue or sale after the date of the Indenture of
Equity Interests of the Company or of debt securities of the Company that
have been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or debt securities issued
subsequent to the date of the Indenture that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) $15 million.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption
or repurchase of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or the substantially concurrent
issuance (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iv) investments, loans or advances to joint ventures of
the Company or any of its Subsidiaries in an aggregate amount at any time not to
exceed $20 million; and (v) the repurchase of shares of, or options to purchase
shares of, the Company's common stock held by employees of the Company (other
than any member of the BLS Group) or any of its Subsidiaries pursuant to the
forms of agreements under which such employees purchase, or are granted the
option to purchase, shares of such common stock in an aggregate amount not to
exceed $3 million in any fiscal year; provided that the amount available in any
given fiscal year shall be increased by the excess, if any, of (A) $3 million
over (B) the amount used pursuant to this clause (v) in the immediately
preceding fiscal year and (vi) distributions made by the Company on the date of
the Indenture provided that the proceeds of such distributions were used solely
to consummate the Recapitalization.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by the Board of Directors, which
determination shall be conclusive and evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) on the
date of the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "Incur") any Indebtedness (including
Acquired Debt) or Disqualified Stock and will not permit any of its Subsidiaries
to issue any shares of preferred stock; provided, however, that the Company or
any of its Subsidiaries may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock and the Subsidiaries may issue shares of
preferred stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock or preferred stock is issued
would have been at least 2.0 to 1.0, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or preferred stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The foregoing provisions do not apply to:
(i) the incurrence by the Company or its Subsidiaries of
Indebtedness and letters of credit pursuant to the New Credit Facility
(with letters of credit being deemed to have a principal amount equal to
the maximum potential liability of the Company or its Subsidiaries
thereunder) in an aggregate principal amount not to exceed $372.0 million,
less the aggregate amount of all proceeds of Assets Sales that have been
applied since the date of the Indenture to permanently reduce the
outstanding amount of such Indebtedness pursuant to the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset
Sales;"
(ii) Existing Indebtedness;
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(iii) the incurrence by the Company, or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinate to the
payment in full of all Obligations with respect to the Notes and (ii)(A)
any subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Subsidiary shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Subsidiary, as the case may be;
(v) Indebtedness under Guarantees in respect of obligations of joint
ventures of the Company or any of its Subsidiaries in aggregate principal
amount not to exceed $20 million at any one time;
(vi)(A) Indebtedness incurred to finance the purchase or
construction of property, plant or equipment which will be treated as
Consolidated Capital Expenditures of the Company so long as such
Indebtedness is secured by a Lien on the property, plant or equipment so
purchased or constructed and such Indebtedness does not exceed the value
of such property, plant or equipment so purchased or constructed and such
Lien shall not extend to or cover other assets of the Company or any of
its Subsidiaries other than the property, plant or equipment so purchased
or constructed and the real property, if any, on which the property so
constructed or so purchased, is situated and the accessions, attachments,
replacements and improvements thereto or (B) Indebtedness incurred in
connection with any lease financing transaction in conjunction with the
acquisition of new property; provided that such lease financing
transaction is consummated within 60 days of such acquisition (whether
such lease will be treated as an operating or capital lease in accordance
with GAAP) and the aggregate of the Indebtedness incurred pursuant to
clauses (A) and (B) does not exceed $15 million during any fiscal year
(such amount is referred to as the "Maximum Amount"); provided that the
Maximum Amount for each year shall be increased by the excess, if any, of
(a) $30 million over (b) Consolidated Capital Expenditures for the
immediately preceding two years;
(vii) Indebtedness incurred in connection with any sale and
leaseback transaction, provided that the aggregate of the Indebtedness
incurred pursuant to this clause (vii) shall not exceed $30.0 million;
(viii) obligations incurred in the ordinary course of business under
(A) trade letters of credit which are to be repaid in full not more than
one year after the date on which such Indebtedness is originally incurred
to finance the purchase of goods by the Company or a Subsidiary of the
Company; (B) standby letters of credit issued for the purpose of
supporting (1) workers' compensation liabilities of the Company or any of
its Subsidiaries as required by law, (2) obligations with respect to
leases of the Company or any of its Subsidiaries, (3) performance,
payment, deposit or surety obligations of the Company or any of its
Subsidiaries or (4) environmental liabilities of the Company or any of its
Subsidiaries as required by law, not exceeding an aggregate amount of $15
million at any one time outstanding in addition to any amounts required by
law; (C) performance bonds and surety bonds, and refinancings thereof, and
(D) Guarantees of Indebtedness incurred in the ordinary course of business
of suppliers, licensees, franchisees, or customers in an aggregate amount
not to exceed $5 million;
(ix) Indebtedness to repurchase shares, or cancel options to
purchase shares, of the Company's common stock held by employees of the
Company (other than any member of the BLS Group) or any of its
Subsidiaries pursuant to the forms of agreements under which such
employees purchase shares of the Company's common stock;
(x) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the Indenture to be outstanding; and
(xi) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding not to exceed $25 million.
Notwithstanding the foregoing, the accretion or amortization of original
issue discount under any Indebtedness, the payment of interest in additional
Indebtedness or the accretion of the liquidation preference of Disqualified
Stock or preferred stock, shall not be deemed an incurrence of Indebtedness,
Disqualified Stock or preferred stock; provided, however, that such accretion or
amortization or payment of interest is included in Fixed Charges.
Liens
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The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) the New Credit Facility as in effect as of the date of
the Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the New Credit Facility as in effect on the date of the Indenture,
(b) the Indenture and the Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (e) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property, acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly enter into any transaction
involving aggregate consideration in excess of $1,000,000 with any Affiliate or
holder of 5% or more of any class of Capital Stock of the Company (including any
Affiliates of such holders) except for transactions (including any loans or
advances by or to any Affiliate) in good faith the terms of which are fair and
reasonable to the Company or such Subsidiary, as the case may be, and are at
least as favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a comparable transaction made on an arm's
length basis with Persons who are not such a Holder, an Affiliate of such Holder
or Affiliate of the Company; provided that any such transaction shall be
conclusively deemed to be on terms which are fair and reasonable to the Company
or any of its Subsidiaries and on terms which are at least as favorable as the
terms which could be obtained on an arm's length basis with Persons who are not
such a Holder, an Affiliate of such Holder or Affiliate of the Company if such
transaction is approved by a majority of the Company's directors (including a
majority of the Company's disinterested and independent directors, if any); and
provided further that with respect to the purchase or disposition of assets of
the Company or any
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of its Subsidiaries having a net book value in excess of $5 million, if the
Company does not have any disinterested and independent directors, in addition
to approval of its board of directors, the Company shall obtain a written
opinion of an Independent Financial Advisor stating that the terms of such
transaction are fair and reasonable to the Company or its Subsidiary, as the
case may be, and are at least as favorable to the Company or such Subsidiary, as
the case may be, as could have been obtained on an arm's length basis with
Persons who are not such a holder, an Affiliate of such holder or Affiliate of
the Company. This covenant shall not apply to (a) any transaction between the
Company or any Affiliate thereof and any Lehman Investors, including, without
limitation, the payment of fees to any Lehman Investor for financial and
consulting services, (b) transactions between the Company or any of its
Subsidiaries and any employee or director of, or consultant to, the Company or
any of its Subsidiaries that are approved by the Board of Directors, (c) the
payment of reasonable and customary regular fees to directors of the Company,
(d) any transaction between the Company and any of its Subsidiaries or between
any of its Subsidiaries, (e) any Restricted Payment not otherwise prohibited by
the "Restricted Payments" covenant or (f) transactions with Loral Space pursuant
to agreements in effect on the date of the Indenture (as such agreements are in
effect on such date).
No Senior Subordinated Indebtedness
The Indenture provides that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Indebtedness and senior in any
respect in right of payment to the Notes.
Payments for Consent
The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, they will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company for
45 days after notice to comply with any of its other agreements in the Indenture
or the Notes; (iv) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10 million or more; (v) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $10
million, which judgments are not paid, discharged or stayed for a period of 60
days; and (vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, that so long
as the New Credit Facility is in effect, such declaration shall not become
effective until the earlier of (i) five days after receipt
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of notice of such acceleration by the Agent and the Company or (ii) an
acceleration of obligations under the New Credit Facility. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
October 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to October 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income
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tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred; (iv)
no Default or Event of Default shall have occurred and be continuing on the date
of such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Notes issued thereunder, when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust and thereafter repaid to the Company) have been delivered to
the Trustee for cancellation; or (ii) all such Notes not theretofore delivered
to such Trustee for cancellation have become due and payable by reason of the
making of a notice of redemption or otherwise or will become due and payable
within one year and the Company has irrevocably deposited or caused to be
deposited with such Trustee as trust funds in trust solely for the benefit of
the Holders, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation for
principal, premium, if any, and accrued interest to the date of maturity or
redemption; (b) no Default or Event of Default with respect to the Indenture or
the Notes shall have occurred and be continuing on the date of such deposit or
shall occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company is a party or by which the Company is bound; (c) the Company
has paid or caused to be paid all sums payable by it under such Indenture; and
(d) the Company has delivered irrevocable instructions to the Trustee under such
Indenture to apply the deposited money toward the payment of such Notes at
maturity or the redemption date, as the case may be. In addition, the Company
must deliver an Officers' Certificate and an opinion of counsel to the Trustee
stating that all conditions precedent to satisfaction and discharge have been
satisfied.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or
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the rights of Holders of Notes to receive payments of principal of or premium,
if any, or interest on the Notes, (vii) waive a redemption payment with respect
to any Note (other than a payment required by one of the covenants described
above under the caption "--Repurchase at the Option of Holders") or (viii) make
any change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 10 of the Indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes were issued in the form of one Global Note (the "Global
Note"). The Global Note was deposited on behalf of DTC (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "Global Note Holder").
Transfer of beneficial interests in the Global Note will be subject to the
applicable rules and procedures of the Depositary and its direct or indirect
participants, including, if applicable, those of Euroclear (as defined) and
CEDEL (as defined), which may change from time to time. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar.
The Depositary has advised the Company that the Depositary is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of Participants. The Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations.
Access to the Depositary's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Participants or Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of the Depositary are recorded on the records of the Participants and
Indirect Participants.
The Depositary has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depositary will
credit the accounts of Participants with portions of the principal amount of the
Global Note and (ii) ownership of such interests in the Global Note will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Note).
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer a beneficial interest in the Global Note to such persons may
be limited to that extent. Because the Depositary can act only on behalf of
Participants, which in turn act on behalf of Indirect
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Participants and certain banks, the ability of a person having a beneficial
interest in the Global Note to pledge such interest to persons or entities that
do not participate in the Depositary system, or otherwise take actions in
respect of such interests, may be affected by the lack of physical certificate
evidencing such interest.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS, OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, premium, if any, and interest on
the Global Note registered in the name of the Depositary or its nominee will be
payable by the Trustee to the Depositary or its nominee in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of the Depositary's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Note, or for maintaining, supervising or reviewing any
of the Depositary's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Note or
(ii) any other matter relating to the actions and practices of the Depositary or
any of its Participants or Indirect Participants.
The Depositary has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of the Depositary.
Payments by Participants and the Indirect Participants to the beneficial owners
of Notes will be governed by standing instructions and customary practices and
will not be the responsibility of the Depositary, the Trustee or the Company.
Neither the Company nor the Trustee will be liable for any delay by the
Depositary or its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Depositary or its nominee as the
registered owner of the Notes for all purposes.
Except for trades involving only the Euroclear System ("Euroclear") and
Cedel Bank, S.A. ("CEDEL") Participants, interests in the Global Note will trade
in the Depositary's Same-Day Funds Settlement System and secondary market
trading activity in such interests will, therefore, settle in immediately
available funds, subject in all cases to the rules and procedures of the
Depositary and its Participants.
Transfers between Participants in the Depositary will be effective in
accordance with the Depositary's procedures, and will be settled in same-day
funds. Transfers between Participants in Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Cross-market transfers between Participants in the Depositary, on the one
hand, and Euroclear or CEDEL Participants, on the other hand, will be effected
through the Depositary in accordance with the depository's rules on behalf of
Euroclear or CEDEL, as the case may be, by its respective depository; however,
such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the Global Note in the Depositary, and
making or receiving payment in accordance with normal procedures for same-day
fund settlement applicable to the Depositary. Euroclear Participants and CEDEL
Participants may not deliver instructions directly to the depositories for
Euroclear or CEDEL.
Due to time zone differences, the securities accounts of a Euroclear or
CEDEL Participant purchasing an interest in the Global Note from a Participant
in the Depositary will be credited, and any such crediting will be reported to
the relevant Euroclear or CEDEL Participant, during the securities settlement
processing day (which must be a business day for Euroclear or CEDEL) immediately
following the settlement date of the Depositary. Cash received in Euroclear or
CEDEL as a result of sales of interests in the Global Note by or through a
Euroclear or CEDEL Participant to a Participant in the Depositary will be
received with value on the settlement date of the Depositary but will be
available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the Depositary's settlement date.
The Depositary has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or more
Participants to whose account the Depositary interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Notes, the
Depositary reserves the right to exchange Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
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The information in this section concerning the Depositary, Euroclear and
CEDEL and their book-entry systems has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility for the
accuracy thereof. Although the Depositary, Euroclear and CEDEL have agreed to
the foregoing procedures to facilitate transfers of interests in the Global Note
among Participants in the Depositary, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by the Depositary, Euroclear or
CEDEL or their respective Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
Exchange of Book-Entry Notes for Certificated Notes
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depositary notifies the Company that it is (A)
unwilling or unable to continue as depository for the Global Note and the
Company thereupon fails to appoint a successor depository or (B) has ceased to
be a clearing agency registered under the Exchange Act or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause issuance of
the Notes in certificated form. In addition, beneficial interests in the Global
Note may be exchanged for certificated Notes upon request but only upon at least
20 days prior written notice given to the Trustee by or on behalf of the
Depositary in accordance with customary procedures. In all cases, certificated
Notes delivered in exchange for the Global Note or beneficial interest therein
will be registered in names, and issued in any approved denominations, requested
by or on behalf of the Depositary (in accordance with its customary procedures).
Certificated Notes
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of certificated Notes. Upon any such issuance,
the Trustee is required to register such certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of any
thereof). In addition, if (i) the Company notifies the Trustee in writing that
the Depositary is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of certificated Notes under the Indenture,
then, upon surrender by the Global Note Holder of its Global Note, Notes in such
form will be issued to each person that the Global Note Holder and the
Depository identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be made
by wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to certificated Notes, the Company will make
all payments of principal, premium, if any, and interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
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"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback, other
than sale and leaseback transactions so long as the present value of the rental
obligations of the Company and its Subsidiaries thereunder do not exceed $30.0
million in the aggregate since the Issue Date) other than sales of inventory in
the ordinary course of business consistent with past practices (provided that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company and its Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "--Change
of Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5.0 million or (b)
for net proceeds in excess of $5.0 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Company to a Subsidiary or by a Subsidiary to the
Company or to another Subsidiary, (ii) an issuance of Equity Interests by a
Subsidiary to the Company or to another Subsidiary, and (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"--Restricted Payments" will not be deemed to be Asset Sales.
"Bank" means any financial institution extending credit under the New
Credit Facility.
"BLS" means Bernard L. Schwartz.
"BLS Group" means (i) BLS, (ii) BLS's spouse and descendants
(collectively, "relatives"), (iii) a trust of which there are no beneficiaries
other than BLS, or relatives of BLS, or a charitable institution or
organization, (iv) a partnership, corporation or limited liability company of
which there are no other partners, stockholders or members, as applicable, other
than BLS or the relatives of BLS, (v) a legal representative or guardian of BLS
or a relative of BLS if BLS or such relative becomes mentally incompetent, (vi)
any person succeeding BLS or a relative of BLS by will or by the laws of
descent, (vii) any individual who is employed by, a consultant to or a director
of the Company or any of its subsidiaries, and (viii) any individual who is a
consultant or advisor to BLS with respect to the investment by BLS in the
Company.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than twelve
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and (v)
commercial paper having a rating of at least A-3 from Moody's Investors Service,
Inc. or P-3 from Standard & Poor's Corporation and in each case maturing within
six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Permitted Investors, (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Permitted Investors, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the voting stock of the Company or (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors. For purposes of this definition, any transfer of an Equity
Interest of an entity that was formed for the purpose of acquiring voting stock
of the Company will be deemed to be a transfer of such portion of such voting
stock as corresponds to the portion of the equity of such entity that has been
so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any net loss realized in connection with an Asset Sale (to the extent
such losses were deducted in computing such Consolidated Net Income), plus (ii)
provision for taxes based on income or profits of such Person and its
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Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Subsidiaries for such period, whether
paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations but excluding amortization
of deferred financing fees incurred in connection with the Recapitalization), to
the extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash charges
were deducted in computing such Consolidated Net Income, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Interest Expense" of any Person for any period means
interest expense (including amortization of original issue discount and non-cash
interest payments or accruals and the interest portion of Capitalized Leases but
excluding amortization of deferred financing fees incurred in connection with
the Recapitalization) of such Person and its Consolidated Subsidiaries, all as
determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as
of such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of the Company who (i) was a member of such Board on the date of
the Indenture or (ii) was nominated for election or elected to such Board with
the approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
"Cumulative Operating Cash Flow" means, for the period beginning September
30, 1997 through and including the end of the last fiscal quarter (taken as one
accounting period) preceding the date of any proposed Restricted Payment,
Operating Cash Flow for the Company and its Consolidated Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP.
"Cumulative Total Interest Expense" means, for the period beginning
September 30, 1997 through and including the end of the last fiscal quarter
(taken as one accounting period) preceding the date of any proposed Restricted
Payment, Consolidated Interest Expense for the Company and its Consolidated
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
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"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) Indebtedness under the New
Credit Facility and (ii) if there is no Indebtedness outstanding or active
commitments to issue Indebtedness under the New Credit Facility, any other
Indebtedness constituting Senior Indebtedness which, at the time of
determination has an aggregate principal amount outstanding of at least $25
million and is specifically designated in the instrument evidencing such Senior
Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock so long as it is a debt
security).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, including the Notes, until such amounts
are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations but excluding amortization of deferred financing fees incurred in
connection with the Recapitalization) and (ii) the consolidated interest of such
Person and its Subsidiaries that was capitalized during such period and (iii)
any interest expense on Indebtedness of another Person that is Guaranteed by
such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all cash dividend payments (and
non-cash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, without duplication, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Lehman Investors" means those certain merchant banking partnerships
affiliated with Lehman Brothers Holdings Inc.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"New Credit Facility" means that certain New Credit Facility, dated as of
October 15, 1997, by and among Aircraft Braking Systems, Engineered Fabrics,
Lehman Brothers, as arranger, Lehman Commercial Paper Inc., as syndication
agent, The First National Bank of Chicago, as administrative agent, and the
lenders named therein, providing for up to $372.0 million of borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time with the
same or different lenders.
"Obligations" means any principal, interest, penalties, fees, expenses,
indemnifications, reimbursements, obligations, damages and other liabilities or
other amounts payable under the documentation governing any Indebtedness.
"Operating Cash Flow" of any Person means, for any period, the sum of (a)
Net Income of such Person and its consolidated Subsidiaries for such period,
plus (b) provision for taxes based on income or profits included in computing
Net Income of such Person for such period, plus (c) Consolidated Interest
Expense of such Person for such period, plus
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(d) other non-cash charges deducted from consolidated revenues in determining
Net Income of such Person for such period, in each case, determined on a
consolidated basis in accordance with GAAP.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Subsidiary of the Company in a Person,
if as a result of such Investment (i) such Person becomes a Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company; and (d) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
"Permitted Investor" means (i) any Person that is a member of the BLS
Group or (ii) any Lehman Investor.
"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries that secure Senior Indebtedness permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens existing on the date of the Indenture and any extensions
or renewals thereof, provided that such Liens do not extend to or cover any
other property or assets of the Company or any Subsidiary; (vi) statutory Liens
or landlords and carriers', warehouseman's, mechanics', suppliers',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business; (vii) Liens for taxes, assessments, government charges or claims which
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted and if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (ix) Liens created or deposits made to secure the performance
of tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (x) easements,
rights-of-way, restrictions and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any
Significant Subsidiary incurred in the ordinary course of business; (xi) any
attachment or judgment Lien, unless the judgment it secures shall not, within 60
days after the entry thereof, have been discharged or execution thereof stayed
pending appeal, or shall not have been discharged within 60 days after the
expiration of any such stay; (xii) any other Liens imposed by operation of law
which do not materially affect the Company's ability to perform its obligations
under the Notes and the Indenture; (xiii) rights of banks to set off deposits
against debts owed to said bank; (xiv) Liens upon specific items of inventory or
other goods and proceeds of the Company or its Subsidiaries securing the
Company's or any Subsidiary's obligations in respect of bankers' acceptances
issued or created for the account of any such Person to facilitate the purchase,
shipment or storage of such inventory or other goods; (xv) Liens securing
reimbursement obligations with respect to letters of credit which encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvii) Liens encumbering property or assets under
construction arising from progress or partial payments by a customer of the
Company or one of its Subsidiaries relating to such property or assets; (xviii)
Liens on the property or assets of the Company or its Subsidiaries in favor of
the PBGC in respect of unfunded pension obligations or similar obligations
pursuant to any agreement existing on the date of the Indenture as in effect on
the date of the Indenture; and (xix) Liens incurred in the ordinary course of
business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $5 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of accrued and unpaid interest
thereon, reasonable expenses incurred in connection therewith and any associated
redemption premium); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such
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Indebtedness is incurred either by the Company or by the Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Indebtedness" means (i) all Indebtedness and other monetary
obligations (whether now existing or hereafter incurred) of the Company and its
Subsidiaries on, under or in respect of, the New Credit Facility and including
all fees, expenses (including reasonable fees and expenses of counsel), claims,
charges, indemnity obligations and interest accruing on or subsequent to the
filing of a petition initiating any proceeding in bankruptcy, insolvency or like
proceeding whether or not such interest is an allowed claim in such proceeding;
(ii) all other Indebtedness of the Company (other than the Notes and the
Existing Notes), whether presently outstanding or hereafter created, incurred or
assumed, unless such Indebtedness, by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to or pari passu
with the Notes and (iii) any Hedging Obligations; provided that the term Senior
Indebtedness shall not include (a) any Indebtedness of the Company which when
incurred and without respect to any election under Section 11(b) of the
Bankruptcy Code, was without recourse to the Company, (b) any Indebtedness of
the Company to any of its Subsidiaries or Affiliates, (c) any Indebtedness of
the Company not otherwise permitted by the covenants described under the
captions "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" and "--Subordination--No Senior Subordinated Debt," (d)
Indebtedness to any employee of the Company, (e) any liability for taxes and (f)
trade payables.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Specified Senior Indebtedness" means any Indebtedness constituting Senior
Indebtedness which, at the time of determination has an aggregate principal
amount outstanding of at least $25 million and is specifically designated in the
instrument evidencing such Senior Indebtedness as "Specified Senior
Indebtedness."
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Notes by an initial beneficial owner of Notes that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). This discussion is based upon the United States federal tax law now in
effect, which is subject to change, possibly retroactively. For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof, an estate whose income is includible in gross income for
United States federal income tax purposes regardless of its source or a trust,
if a U.S. court is able to exercise primary supervision over the administration
of the trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust. This rule on trusts is effective for tax
years beginning after December 31, 1996, or in some cases earlier by election.
The tax treatment of the holders of the Notes may vary depending upon their
particular situations. U.S. persons acquiring the Notes are subject to different
rules than those discussed below. In addition, certain other holders (including
insurance companies, tax exempt organizations, financial institutions and
broker-dealers) may be subject to special rules not discussed below. Prospective
investors are urged to consult their tax advisors regarding the United States
federal tax consequences of acquiring, holding and disposing of Notes, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.
New final regulations dealing with withholding tax on income paid to
foreign persons and related matters (the "New Withholding Regulations") were
issued by the Treasury Department on October 6, 1997, and are expected to be
published in the near future in the Federal Register. In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements, but unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Accordingly, payments made on or
before December 31, 1998 will continue to be subject to the regulations that
existed before the New Withholding Regulations were issued. THE NEW WITHHOLDING
REGULATIONS ARE QUITE COMPLEX. NON-U.S. HOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States Holder
(i) does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the United States Internal Revenue Code of 1986 (the
"Code") and (iii) certifies, under penalties of perjury, that such holder is not
a United States person and provides such holder's name and address. For payments
made after December 31, 1998, the New Withholding Regulations specify that the
statement must be made on Form W-8 and provided prior to payment.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and certain other
requirements are met.
FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For payments made on or before December 31, 1998, the Company will, where
required, report to the holders of Notes and the Internal Revenue Service the
amount of any interest paid on the Notes in each calendar year and the amounts
of tax withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States holders,
temporary Treasury regulations provide that the 31% backup withholding tax and
certain information reporting will not apply to such payments with respect to
which either the requisite certification, as described above, has been received
or an exemption has otherwise been established; provided that neither the
Company nor its payment agent has actual knowledge that the holder is a United
States person
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or that the conditions of any other exemption are not in fact satisfied. Under
temporary Treasury regulations, these information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
Non-United States Holder on the disposition of the Notes by or through a United
States office of a United States or foreign broker, unless the holder certifies
to the broker under penalties of perjury as to its name, address and status as a
foreign person or the holder otherwise establishes an exemption. Information
reporting requirements, but not backup withholding, will also apply to a payment
of the proceeds of a disposition of the Notes by or through a foreign office of
a United States broker or foreign brokers with certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the holder of the Notes is not a United States person, and such broker has no
actual knowledge to the contrary, or the holder establishes an exemption.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Recently, the Treasury Department has issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. If finalized in their current form,
the proposed regulations would generally be effective for payments made after
December 31, 1997, subject to certain transition rules.
For payments made after December 31, 1998, the New Withholding Regulations
provide that to the extent a Non-United States Holder certifies on Form W-8 (or
a permitted substitute form) as to such holder's status as a foreign person, the
backup withholding provisions and the information reporting provisions will
generally not apply. If a Non-United States Holder fails to provide such
certification, such holder may be subject to certain information reporting and
the 31% backup withholding tax.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
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PLAN OF DISTRIBUTION
This prospectus is to be used by Lehman Brothers Inc. in connection with
offers and sales of the New Notes in market-making transactions effected from
time to time. Lehman Brothers Inc. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or negotiated prices.
Affiliates of Lehman Brothers Inc. currently own 50% of the Company's
Common Stock. See "Ownership of Capital Stock." Lehman Brothers Inc. has
informed the Company that it does not intend to confirm sales of the New Notes
to any accounts over which it exercises discretionary authority without the
prior specific written approval of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to make
a market in the New Notes. However, Lehman Brothers Inc. is not obligated to do
so and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors -- Trading Market for the New Notes."
Lehman Brothers Inc. has provided investment banking services to the
Company in the past and may provide such services and financial advisory
services to the Company in the future. Lehman Brothers Inc. acted as one of two
purchasers in connection with the initial sale of the Notes and received an
underwriting discount of approximately $4.6 million in connection therewith. See
"Certain Transactions."
Lehman Brothers Inc. and the Company have entered into a registration
rights agreement with respect to the use by Lehman Brothers Inc. of this
Prospectus. Pursuant to such agreement, the Company agreed to bear all
registration expenses incurred under such agreement, and the Company agreed to
indemnify Lehman Brothers Inc. against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Notes was passed upon for the Company by O'Sullivan
Graev & Karabell, LLP, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996 included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
K & F INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the year ended December 31, 1997,
the nine months ended December 31, 1996 and the year ended March 31, 1996 F-4
Consolidated Statements of Stockholders' Deficiency for the year ended
December 31, 1997, for the nine months ended December 31, 1996 and the year
ended March 31, 1996 F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1997,
the nine months ended December 31, 1996 and the year ended March 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
</TABLE>
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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, 1997 and
1996, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for the year ended December 31, 1997, the nine months
ended December 31, 1996, and the fiscal year 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, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997, the nine
months ended December 31, 1996 and the fiscal year ended March 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
January 23, 1998
F-2
<PAGE> 75
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................................... $ 4,707,000 $ 1,508,000
Accounts receivable, net .......................................... 40,014,000 36,032,000
Inventory ......................................................... 65,871,000 68,334,000
Deferred tax asset ................................................ -- 1,411,000
Other current assets .............................................. 559,000 586,000
------------- -------------
Total current assets ........................................... 111,151,000 107,871,000
------------- -------------
Property, Plant and Equipment - Net .................................. 70,638,000 69,986,000
Deferred Charges - Net of amortization of $4,502,000 and
$4,365,000 28,382,000 24,674,000
Cost in Excess of Net Assets Acquired - Net of amortization
of $52,933,000 and $46,839,000 .................................... 190,720,000 196,446,000
Intangible Assets - Net of amortization of $29,804,000
and $26,576,000 .................................................. 16,497,000 20,138,000
Prepaid Pension Cost ................................................. 7,848,000 --
------------- -------------
Total Assets ......................................................... $ 425,236,000 $ 419,115,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable ................................................. $ 17,979,000 $ 11,253,000
Current portion of long-term debt ................................ 1,500,000 6,000,000
Interest payable ................................................. 4,725,000 6,689,000
Other current liabilities ........................................ 54,994,000 49,740,000
------------- -------------
Total current liabilities ............................................ 79,198,000 73,682,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions ................ 75,542,000 75,439,000
Other Long-Term Liabilities .......................................... 7,830,000 16,300,000
Long-Term Debt ....................................................... 519,125,000 287,000,000
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
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
Common stock, Class A, $.01 par value - authorized, 2,100,000
shares; issued and outstanding, 553,344 shares .................. -- 6,000
Common stock, $.01 par value - authorized, 1,000,000 shares;
issued and outstanding, 740,398 shares .......................... 7,000 --
Additional paid-in capital ......................................... (63,259,000) 155,350,000
Deficit ............................................................ (191,976,000) (178,147,000)
Adjustment to equity for minimum pension liability ................. (1,213,000) (10,649,000)
Cumulative translation adjustments ................................. (18,000) 119,000
------------- -------------
Total stockholders' deficiency ....................................... (256,459,000) (33,306,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency ....................... $ 425,236,000 $ 419,115,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 76
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .................................... $ 304,331,000 $ 212,703,000 $ 264,736,000
Cost of sales ................................ 188,001,000 136,813,000 180,435,000
------------- ------------- -------------
Gross margin ................................. 116,330,000 75,890,000 84,301,000
Independent research and development ......... 10,873,000 8,623,000 9,767,000
Selling, general and administrative expenses . 40,182,000 17,297,000 22,564,000
Amortization ................................. 10,316,000 7,810,000 10,415,000
------------- ------------- -------------
Operating income ............................. 54,959,000 42,160,000 41,555,000
Interest expense, net of interest income of
$621,000, $787,000 and $722,000 .......... 34,091,000 27,197,000 41,048,000
------------- ------------- -------------
Income before income taxes and extraordinary
charge ................................... 20,868,000 14,963,000 507,000
Income tax (provision) benefit ............... (5,184,000) 81,000 --
------------- ------------- -------------
Income before extraordinary charge ........... 15,684,000 15,044,000 507,000
Extraordinary charge from early extinguishment
of debt, net of tax ...................... (29,513,000) (9,142,000) (1,913,000)
------------- ------------- -------------
Net (loss) income ............................ $ (13,829,000) $ 5,902,000 $ (1,406,000)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 77
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND
YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Class B Class A
Preferred Stock Common Stock Common Stock Common Stock
--------------- ------------ ------------ ------------
Shares Shares Shares Shares
Issued Amount Issued Amount Issued Amount Issued Amount
--------- ------- -------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1995 ........ 1,027,635 $10,000 458,994 $ 5,000 553,344 $ 6,000 -- $ --
Net loss ..................
Pension adjustment ........
Cumulative translation
adjustments ...............
--------- ------- -------- ------- -------- ------- ------- -------
Balance, March 31, 1996 ....... 1,027,635 10,000 458,994 5,000 553,344 6,000 -- --
Net income ................
Pension adjustment ........
Cumulative translation
adjustments .............
--------- ------- -------- ------- -------- ------- ------- -------
Balance, December 31, 1996 .... 1,027,635 10,000 458,994 5,000 553,344 6,000 -- --
Issuance pursuant to stock
option plan ........... 11,250
Redemption of capital
stock ................. (657,436) (7,000) (458,994) (5,000) (194,395) (2,000)
Conversion to common
stock ................. (370,199) (3,000) (370,199) (4,000) 740,398 7,000
Net loss ..................
Pension adjustment ........
Cumulative translation
adjustments .............
--------- ------- -------- ------- -------- ------- ------- -------
Balance, December 31, 1997 .... -- $ -- -- $ -- -- $ -- 740,398 $ 7,000
========= ======= ======== ======= ======== ======= ======= =======
<CAPTION>
Adjustment
to Equity for
Additional Minimum Cumulative
Paid-in Pension Translation
Capital Deficit Liability Adjustments
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, April 1, 1995 ........ $155,350,000 $(182,643,000) $ (7,192,000) $ (284,000)
Net loss .................. (1,406,000)
Pension adjustment ........ (3,380,000)
Cumulative translation
adjustments ............... (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
adjustments ............. 570,000
------------ ------------- ------------ ----------
Balance, December 31, 1996 .... 155,350,000 (178,147,000) (10,649,000) 119,000
Issuance pursuant to stock
option plan ........... 952,000
Redemption of capital
stock ................. (219,561,000)
Conversion to common
stock .................
Net loss .................. (13,829,000)
Pension adjustment ........ 9,436,000
Cumulative translation
adjustments ............. (137,000)
------------ ------------- ------------ ----------
Balance, December 31, 1997 .... $(63,259,000) $(191,976,000) $ (1,213,000) $ (18,000)
============ ============= ============ ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 78
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income .................................................... $ (13,829,000) $ 5,902,000 $ (1,406,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ...................................................... 9,364,000 6,834,000 8,506,000
Amortization ...................................................... 10,316,000 7,810,000 10,415,000
Non-cash interest expense-amortization of deferred
financing charges ................................................ 1,507,000 1,101,000 1,561,000
Provision for losses on accounts receivable ........................ 27,000 2,000 1,548,000
Extraordinary charge from early extinguishment of debt ............ 29,513,000 9,142,000 1,913,000
Deferred income taxes ............................................. 3,621,000 (320,000) --
Changes in assets and liabilities:
Accounts receivable .............................................. (4,060,000) (552,000) (3,296,000)
Inventory ........................................................ 2,377,000 (4,686,000) (1,664,000)
Other current assets ............................................. 27,000 246,000 274,000
Prepaid pension costs ............................................ (7,848,000) -- --
Accounts payable ................................................. 6,726,000 (1,232,000) 2,140,000
Interest payable ................................................. (1,964,000) (1,528,000) (554,000)
Other current liabilities ........................................ 5,254,000 4,965,000 7,002,000
Postretirement benefit obligation other than pensions ............ 103,000 49,000 (2,327,000)
Other long-term liabilities ...................................... 1,379,000 (4,339,000) (1,811,000)
------------- ------------- -------------
Net cash provided by operating activities ...................... 42,513,000 23,394,000 22,301,000
------------- ------------- -------------
Cash Flows From Investing Activities:
Capital expenditures ................................................. (10,016,000) (14,091,000) (10,418,000)
Deferred charges ..................................................... (1,781,000) (250,000) (538,000)
------------- ------------- -------------
Net cash used in investing activities .......................... (11,797,000) (14,341,000) (10,956,000)
------------- ------------- -------------
Cash Flows From Financing Activities:
Payments of senior revolving loan .................................... (61,000,000) (49,000,000) (9,000,000)
Borrowings under senior revolving loan ............................... 62,000,000 48,000,000 23,000,000
Proceeds from issuance of long-term debt ............................. 507,000,000 180,000,000 --
Payments on long-term debt ........................................... (280,375,000) (180,000,000) (30,000,000)
Premiums paid on early extinguishment of debt ........................ (24,418,000) (4,500,000) (1,126,000)
Deferred charges - financing costs ................................... (12,101,000) (6,772,000) (300,000)
Redemption of equity interests ....................................... (218,623,000) -- --
Proceeds from sale and leaseback transaction ......................... -- 2,315,000 --
------------- ------------- -------------
Net cash used in financing activities ......................... (27,517,000) (9,957,000) (17,426,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ................... 3,199,000 (904,000) (6,081,000)
Cash and cash equivalents, beginning of period ......................... 1,508,000 2,412,000 8,493,000
------------- ------------- -------------
Cash and cash equivalents, end of period ............................... $ 4,707,000 $ 1,508,000 $ 2,412,000
============= ============= =============
Supplemental Information:
Interest paid during the period ..................................... $ 35,169,000 $ 28,411,000 $ 40,763,000
============= ============= =============
Income taxes paid during the period ................................. $ 136,000 $ 344,000 $ --
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 79
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 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 88% of the Company's total revenues during the year ended
December 31, 1997 and Engineered Fabrics Corporation (collectively, the
"Subsidiaries"), which generated approximately 12% of the Company's total
revenues during the year ended December 31, 1997.
On October 15, 1997, the Company consummated a recapitalization (the
"Recapitalization") consisting of the following transactions:
a. The Company repurchased approximately 64% of its outstanding capital
stock for a total purchase price, paid in cash, of $230.2 million. Upon
giving effect to the repurchase, Bernard L. Schwartz ("BLS") and certain
merchant banking partnerships affiliated with Lehman Brothers Holdings
Inc. (the "Lehman Investors") each became the owner of 50% of the capital
stock of the Company.
b. The Company repaid all of its outstanding indebtedness ($54.5 million)
under the Amended and Restated Credit Agreement dated as of August 14,
1996 (the "Prior Credit Facility").
c. The Company made provision for the redemption of the remaining $70
million outstanding principal amount of its 11 7/8% Senior Secured Notes
Due 2003 (the "11 7/8% Senior Notes") by irrevocably depositing $77.5
million (representing a price of 105.28% of the principal amount of the 11
7/8% Senior Notes, plus accrued interest through the expected redemption
date) with the trustee under the indenture governing the Senior Notes. On
November 13, 1997, the 11 7/8% Senior Notes were redeemed.
d. The Company purchased, for cash, all of the $140 million aggregate
principal amount of its 10 3/8% Senior Subordinated Notes due 2004 (the
"10 3/8% Notes") pursuant to a tender offer and consent solicitation
(collectively, the "Tender Offer"). The aggregate price paid for the 10
3/8% Notes (including accrued interest and tender offer premiums and
related fees and expenses) was $160.9 million.
e. The Company entered into a new credit facility (the "New Credit
Facility") for $372 million.
f. The Company issued $185 million of 9 1/4% Senior Subordinated Notes due
2007 (the "9 1/4% Notes"). The Company used the net proceeds of the 9 1/4%
Notes together with borrowings under the New Credit Facility, to effect
the Recapitalization.
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 K & F Industries, Inc. and its Subsidiaries. All
material intercompany accounts and transactions between these entities
have been eliminated.
F-7
<PAGE> 80
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 year ended December 31, 1997, the nine months ended December 31,
1996 and the fiscal year ended March 31, 1996, investments were $28.3
million, $20.2 million and $29.9 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
($11.7 million and $8.7 million, which is net of amortization (non-cash
interest expense) of $0.4 million and $1.3 million at December 31, 1997
and 1996, respectively), and program participation costs ($13.1 million
and $13.9 million, which is net of amortization of $3.2 million and $2.4
million, at December 31, 1997 and December 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 6 to 10 years.
Cost in Excess of Net Assets Acquired - Cost in excess of net assets
acquired is being amortized on the straight-line method over a period of
40 years. 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 year ended December 31, 1997, the nine
months ended December 31, 1996 and during the fiscal year ended March 31,
1996, resulting from the Company's evaluations.
F-8
<PAGE> 81
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%, 12%
and 16% of total sales for the year ended December 31, 1997, the nine
months ended December 31,1996 and the fiscal year ended March 31, 1996,
respectively. No other single customer accounted for 10% or more of
consolidated revenues for the year and fiscal years then ended, and there
were no significant accounts receivable from a single customer, except the
U. S. government, at December 31, 1997 and December 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.
Stock-Based Compensation Plans - As allowed by SFAS 123, "Accounting for
Stock-Based Compensation," the Company records compensation expense for
its stock-based compensation plans in accordance with the intrinsic-value
method prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees." Intrinsic value is the amount
by which the market price of the underlying stock exceeds the exercise
price of the stock option or award on the measurement date, generally the
date of grant.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. This new standard is
effective for fiscal years beginning after December 15, 1997. The Company
will adopt the disclosure requirements of SFAS No. 130 in 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued
to shareholders. This new standard is effective for fiscal years beginning
after December 15, 1997. The Company is currently evaluating the impact,
if any, on its financial statement disclosures of SFAS No. 131.
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the current period
presentation.
F-9
<PAGE> 82
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, principally from commercial
customers ............................................. $ 36,506,000 $ 34,086,000
Accounts receivable on U.S. government and other long-term 3,904,000
contracts ............................................. 2,359,000
Allowances ............................................... (396,000) (413,000)
------------ ------------
Total ................................................. $ 40,014,000 $ 36,032,000
============ ============
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and work-in-process ........................ $ 43,236,000 $ 46,742,000
Finished goods ........................................... 11,726,000 10,821,000
Inventoried costs related to U.S.
government and other long-term contracts ............... 10,909,000 10,771,000
------------ ------------
$ 65,871,000 $ 68,334,000
============ ============
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Land ..................................................... $ 661,000 $ 661,000
Buildings and improvements ............................... 34,895,000 33,961,000
Machinery, equipment, furniture and fixtures ............. 111,360,000 102,278,000
------------ ------------
Total ................................................. 146,916,000 136,900,000
Less accumulated depreciation and amortization ........... 76,278,000 66,914,000
------------ ------------
Total ................................................. $ 70,638,000 $ 69,986,000
============ ============
</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.
6. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accrued payroll costs .................................... $ 17,399,000 $ 15,170,000
Accrued taxes ............................................ 7,895,000 6,504,000
Accrued costs on long-term contracts ..................... 7,590,000 5,744,000
Accrued warranty costs ................................... 7,496,000 6,695,000
Customer credits ......................................... 4,172,000 7,483,000
Postretirement benefit obligation other than pensions .... 2,000,000 2,000,000
Other .................................................... 8,442,000 6,144,000
------------ ------------
Total ......................................... $ 54,994,000 $ 49,740,000
============ ============
</TABLE>
F-10
<PAGE> 83
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Senior Revolving Loan .................................... $ 14,000,000 $ 13,000,000
Senior Term Loan A ....................................... 49,875,000 --
Senior Term Loan B ....................................... 271,750,000 --
Senior Term Loan ......................................... -- 40,000,000
9 1/4% Senior Subordinated Notes due 2007 ................ 185,000,000 --
11 7/8% Senior Secured Notes due 2003 .................... -- 100,000,000
10 3/8% Senior Subordinated Notes due 2004 ............... -- 140,000,000
------------ ------------
Total .................................................... 520,625,000 293,000,000
Less current maturities .................................. 1,500,000 6,000,000
------------ ------------
Total .................................................... $519,125,000 $287,000,000
============ ============
</TABLE>
On October 15, 1997, the Company entered into a New Credit Facility that
consists of a term loan facility in an aggregate principal amount of up to $322
million (the "Term Loans") and a revolving credit facility in an aggregate
principal amount of up to $50 million (the "Revolving Loan"). The Term Loans
consist of a Tranche A term loan ("Term Loam A") in the principal amount of $50
million and a Tranche B term loan ("Term Loan B") in the principal amount of
$272 million. The interest rate under this facility is, at the Company's option,
either the LIBOR or prime rate, in each case plus a margin. At December 31,1997
and 1996, the average interest rate on the New Credit Facility and Prior Credit
Facility was 8.3% and 7.9%, respectively. As a requirement of the New Credit
Facility, the Company entered into an interest rate swap agreement to reduce the
impact of potential increases in interest rates on the New Credit Facility. The
interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95%
and matures December 11, 2001 with an option for the counterparty to extend the
agreement to December 17, 2003. At December 31, 1997, the notional value on the
interest rate swap agreement was $136 million and the fair value was $0.8
million in favor of the counterparty (taking into account interest rates in
effect at December 31, 1997), representing the amount the Company would pay if
the agreement was terminated. Any differences paid or received on the interest
rate swap agreement are recognized as adjustments to current interest expense.
This interest rate agreement effectively fixes the Company's all in borrowing
rate at 8.3% on $136 million of borrowings. Obligations under the New Credit
Facility are secured by a lien on substantially all of the assets of the
Subsidiaries and are guaranteed by K & F.
Term Loan A is a six-year quarterly amortizing facilty maturing October 15,
2003, with installments of $500,000 per year in years one to five and
$47,375,000 in year six. Term Loan B is an eight-year quarterly amortizing
facility maturing October 15, 2005, with installments of $1.0 million per year
in years one to seven and $265 million in year eight. The Company will be
required to make mandatory reductions in the New Credit Facility in the event of
certain asset sales, the incurrence of certain additional indebtedness, and
annually from a portion of excess cash flow (as defined).
Scheduled debt maturities of the Term Loans for the five years subsequent
to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ------
<S> <C>
1998 $ 1,500,000
1999 1,500,000
2000 1,500,000
2001 1,500,000
2002 1,500,000
</TABLE>
F-11
<PAGE> 84
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The New Credit Facility provides for Revolving Loans not to exceed $50
million, with up to $20 million available for letters of credit. The
Revolving Loan commitment terminates on October 15, 2003. At December 31,
1997 and 1996, the Company had $27.2 million and $51.6 million available
to borrow, respectively. At December 31, 1997 and 1996, the Company had
outstanding letters of credit of $8.8 million and $5.4 million,
respectively.
The New Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales,
making certain restricted payments, capital expenditures, creating
guarantee obligations and material lease obligations. The New Credit
Facility also contains certain 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, 1997.
On October 15, 1997, the Company issued $185 million of 9 1/4% Notes which
mature on October 15, 2007. The 9 1/4% Notes are not subject to a sinking
fund. The 9 1/4% Notes may not be redeemed prior to October 15, 2002. On
or after October 15, 2002, the Company may redeem the 9 1/4% Notes at
descending premiums ranging from 104.625% in October 2002 to no premium
after October 2005.
Proceeds from the New Credit Facility and the 9 1/4% Notes were used to
finance the Recapitalization.
As a result of the Recapitalization, the Company recorded an extraordinary
charge of $27.8 million (net of tax of $2.0 million) for the write-off of
unamortized financing costs, redemption premiums and Tender Offer
payments.
On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of its 11 7/8% Senior Secured Notes at a redemption price of
105.28% of the principal amount thereof. In connection therewith, the
Company recorded an extraordinary charge of $1.7 million (net of tax of
$0.6 million) for the write-off of unamortized financing costs and
redemption premiums.
During the nine months ended December 31, 1996 and the fiscal year ended
March 31, 1996, the Company redeemed $180 million and $30 million of its
13 3/4% Senior Subordinated Debentures at redemption prices of 102.5% and
103.75%, respectively. The Company funded these transactions with the net
proceeds from the issuance of $140 million of 10 3/8% Senior Subordinateed
Notes together with borrowings under the Prior Credit Facility. In
connection therewith, the Company recorded an extraordinary charge of $9.1
million and $1.9 million during the nine months ended December 31, 1996
and the fiscal year ended March 31, 1996, respectively, for the write-off
of unamortized financing costs and redemption premiums.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the balance
sheet at December 31, 1997 and 1996 approximate their fair value, except
as discussed below. See Note 7 for disclosure of the fair value of the
Company's interest rate swap agreement.
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 $525 million and $308 million at December 31, 1997 and 1996,
respectively.
F-12
<PAGE> 85
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK
a. In connection with the Recapitalization, the Company purchased all but
740,398 shares of its capital stock at a per share price of $175.58. All
purchased shares were retired and cancelled. The 740,398 retained shares
were reclassified as common stock. In connection with the purchase of the
capital stock, the Company directly increased its stockholders' deficiency
by $218.6 million.
b. 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 common stock. On November 21, 1997, non-qualified
options for 35,550 shares were granted to certain persons. 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 $175.00 per share.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year 11,250 11,500 11,500
Granted 35,550 -- --
Exercised (11,250) -- --
Cancelled -- (250) --
------- ------- -------
Outstanding at end of year 35,550 11,250 11,500
======= ======= =======
Exercisable options outstanding -- 10,375 9,625
======= ======= =======
Available for future grant 3,200 38,750 38,500
======= ======= =======
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1997 was 9.9 years.
All Company options issued prior to October 15, 1997 were granted at a per
share exercise price of $84.60. All such options were exercised prior to
the consummation of the Recapitalization and the common stock issued upon
exercise of such options was purchased as part of the Recapitalization at
a per share price of $175.58. In connection therewith, the Company
recorded a charge to operations of $1.0 million.
In addition to the Stock Option Plan as described above, certain
individuals held options to purchase 70,500 shares of the Company's
capital stock owned by BLS at a per share exercise price of $40. All such
options were exercised prior to the consummation of the Recapitalization
and the common stock issued upon exercise of such options was purchased as
part of the Recapitalization at a per share price of $175.58. In
connection therewith, the Company recorded a charge to operations of $9.6
million.
F-13
<PAGE> 86
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
c. The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective April 1, 1996. As permitted by SFAS No. 123, the
Company accounts for its stock-based compensation using the intrinsic
value method in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 123 requires the disclosure of pro forma
net income (loss) had the Company adopted the fair value method. However,
disclosure has been omitted because the pro forma effect on net income
(loss) required to be disclosed under SFAS No. 123 is not material to the
Company's results of operations.
d. In April 1996, Loral Space & Communications Ltd. ("Loral Space") (which
then owned 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 semi-annual interest at LIBOR plus two percent
to Loral Space on the balance of options issued but not exercised, times
$10.50. During the year ended December 31, 1997 and during the nine months
ended December 31, 1996, the amount charged against income was $0.2 and
$0.1 million, respectively.
As described above, the Company accounts for its stock-based compensation
using the intrinsic value method in accordance with APB Opinion No. 25.
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 the Company's results of operations.
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 ("ERISA"). In connection
with the Recapitalization, the Company entered into an agreement with the
Pension Benefit Guaranty Corporation ("PBGC") regarding its unfunded
pension plan liability. Such agreement provided for the payment in 1997 of
$4.5 million and thereafter to make scheduled contributions equal to the
minimum amounts required by ERISA without considering the $10 million
credit balance accumulated by the Company per ERISA calculations.
F-14
<PAGE> 87
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net pension cost included the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 1,970,000 $ 1,521,000 $ 1,562,000
Interest cost on projected benefit obligation 5,662,000 3,980,000 4,901,000
Actual return on plan assets ................. (9,598,000) (5,439,000) (9,940,000)
Net amortization and deferral ................ 4,277,000 2,512,000 6,988,000
----------- ----------- -----------
Net pension cost .......................... $ 2,311,000 $ 2,574,000 $ 3,511,000
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation .................... $ 73,356,000 $ 70,371,000
============ ============
Accumulated benefit obligation ............... $ 78,155,000 $ 70,496,000
Effect of projected future salary increases .. 3,397,000 2,624,000
------------ ------------
Projected benefit obligation ................. 81,552,000 73,120,000
Plan assets at fair market value ............... 78,676,000 63,268,000
------------ ------------
Unfunded projected benefit obligation .......... 2,876,000 9,852,000
Unrecognized prior service cost ................ (1,463,000) (1,876,000)
Unrecognized net loss .......................... (11,937,000) (13,273,000)
Adjustment for minimum liability ............... 2,676,000 12,525,000
------------ ------------
(Prepaid) accrued pension cost recognized in the
consolidated balance sheet ................... $ (7,848,000) $ 7,228,000
============ ============
</TABLE>
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, 1997, the Company's additional
minimum liability was $2,676,000 with a corresponding equity reduction of
$1,213,000 and intangible asset of $1,463,000. 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.
Investments held by the Company's pension plans consist primarily of Fortune 500
equity securities and investment grade fixed income securities.
F-15
<PAGE> 88
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assumptions used in accounting for the plans are as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31 December 31 March 31,
1997 1996 1996
----------- ----------------- ----------
<S> <C> <C> <C>
Discount rate ........................................ 7.25% 7.75% 7.50%
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 $782,000, $572,000 and $687,000 for the year
ended December 31, 1997, the nine months ended December 31, 1996 and the
fiscal year ended March 31, 1996, 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.
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits attributed to service
during the period ...................... $ 1,242,000 $ 873,000 $ 619,000
Interest cost on accumulated postretirement
benefit obligation ..................... 4,422,000 3,176,000 3,474,000
Net amortization and deferral ............. (3,365,000) (2,442,000) (4,332,000)
----------- ----------- -----------
Net periodic postretirement benefit cost .. $ 2,299,000 $ 1,607,000 $ (239,000)
=========== =========== ===========
</TABLE>
F-16
<PAGE> 89
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................. $ 33,842,000 $ 34,042,000
Fully eligible active plan participants .............. 3,564,000 2,247,000
Other active plan participants ....................... 28,038,000 22,558,000
------------ ------------
Total accumulated postretirement benefit obligation ...... 65,444,000 58,847,000
Unrecognized net loss .................................... (21,898,000) (20,081,000)
Unrecognized prior service cost related to plan amendments 33,996,000 38,673,000
------------ ------------
Accrued postretirement benefit costs ..................... $ 77,542,000 $ 77,439,000
============ ============
</TABLE>
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 9.03% during the year ended December 31, 1997 and will
be 8.27% during the year ending December 31, 1998. The rate is assumed to
decrease gradually to 5.25% 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, 1997 by $8,374,000 and the aggregate of the service and interest
cost components of net postretirement benefit cost for the year ended December
31, 1997 by $1,367,000. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation as of December 31, 1997 and
1996 was 7.25% and 7.75%, respectively.
12. COMMITMENTS
The Company is party to various non-cancelable 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>
1998 $ 5,260,000
1999 5,492,000
2000 4,915,000
2001 2,262,000
2002 1,536,000
Thereafter 6,644,000
</TABLE>
Rental expense was $5,060,000, $3,491,000 and $4,758,000 for the fiscal
year ended December 31, 1997, the nine months ended December 31, 1996 and the
fiscal year ended March 31, 1996, respectively.
F-17
<PAGE> 90
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. (now known as SGL Carbon Composites, Inc.) ("Hitco")
after Hitco threatened to breach an existing supply contract unless prices were
renegotiated. Until 1997, Hitco was 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, sought injunctive relief and now seeks damages for various breaches of
contract which have been recently estimated at up to $51 million. Hitco has
counterclaimed in the matter seeking, among other things, damages for discounted
lost profits which Hitco has recently estimated at up to $40 million (subject to
mitigation) 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. Accordingly, through mid-December 1996, 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. A preliminary injunction requested by Hitco, that
would have required the Company to turn over to Hitco technology allegedly
jointly developed and owned under the prior contractual arrangements, has been
denied. The case is presently scheduled for trial to commence on March 31, 1998.
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, had 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. The Federal action was recently withdrawn by Hitco.
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 seek
damages from Hitco. Based upon the proceedings to date, management does not
expect the outcome of the litigation to be unfavorable to the Company. There can
be no assurance, however, as to the outcome of the litigation, or that a
judgment against the Company would not materially adversely affect 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.
F-18
<PAGE> 91
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES
The components of the net deferred tax asset and corresponding valuation
allowance are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Tax net operating loss carryforwards ........ $ 72,270,000 $ 71,051,000
Temporary differences:
Postretirement and other employee benefits 32,772,000 33,708,000
Intangibles .............................. 39,929,000 55,124,000
Program participation costs .............. (6,409,000) (6,109,000)
Other .................................... 13,083,000 6,802,000
------------- -------------
Deferred tax benefit ........................ 151,645,000 160,576,000
Valuation allowance ......................... (151,645,000) (159,165,000)
------------- -------------
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 these benefits given the uncertain nature of their
ultimate realization.
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced by $80
million and $72 million, respectively. The realization of these benefits would
reduce future income tax payments by $159 million.
The Company's provision (benefit) for income taxes before extraordinary
charges consists of:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current domestic provision ............................. $ 8,001,000 $ 1,330,000 $ 194,000
Foreign provision ...................................... 908,000 170,000 --
Domestic utilization of net operating loss carryforwards (5,136,000) (1,581,000) --
Change in net deferred tax asset ....................... 1,411,000 -- --
Change in valuation allowance .......................... -- -- (194,000)
----------- ----------- -----------
Income tax provision (benefit) ......................... $ 5,184,000 $ (81,000) $ --
=========== =========== ===========
</TABLE>
F-19
<PAGE> 92
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ................ 35.0% 35.0% 35.0%
Change in the valuation allowance ................ 8.0 (29.4) (38.3)
Utilization of tax net operating losses .......... (25.9) (10.6) --
State tax ........................................ 3.3 3.4 3.3
Foreign subsidiaries tax provision ............... 4.4 1.1 --
---- ---- ----
Effective income tax rate ........................ 24.8% (0.5)% 0.0%
==== ==== ====
</TABLE>
The Company has tax net operating loss carryforwards of approximately $188
million at December 31, 1997. The tax net operating losses expire from 2005
through 2012, with $26 million of carryforwards expiring in 2005.
15. RELATED PARTY TRANSACTIONS
BLS owns 50% 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. 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.
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 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 a specified number of 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 ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $1,553,200, $1,247,000 and $200,000 for the year ended December 31,
1997, the nine months ended December 31, 1996 and the fiscal year ended March
31, 1996, respectively.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The Agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. During the year ended December 31, 1997,
Lehman Brothers received underwriting discounts and commissions of $4.6 million
and $2.6 million in connection with the offering of the 9 1/4% Notes and 10 3/8%
Notes, respectively. In connection with the Tender Offer, Lehman Brothers
received a customary fee for acting as Dealer Manager and Solicitation Agent. In
addition, one or more affiliates of Lehman
F-20
<PAGE> 93
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Brothers received underwriting commissions of $4.7 million in connection with
the New Credit Facility. The Lehman Investors own 50% of the outstanding capital
stock of the Company and are entitled to elect three directors (in addition to
one independent director jointly designated by BLS and the Lehman Investors) to
the Company's Board of Directors. The Lehman Investors have the benefit of
certain additional rights under the Stockholders' Agreement and the Company's
By-laws.
In May 1996, the Company purchased $343,000 principal amount of 13 3/4%
Debentures from A. Robert Towbin, as trustee, who is a director of the Company
and who is managing director of C. E. Unterberg Towbin (formerly Unterberg
Harris). The Company purchased such 13 3/4% Debentures 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 thereof. In
connection with the Recapitalization, the Company paid Unterberg Harris a fee of
$1.0 million for investment banking services.
The Company pays Ronald H. Kisner, who is Secretary and a member of the
Board of Directors of the Company, a monthly retainer of $6,000 for legal
services. In addition, Mr. Kisner received bonuses and other compensation of
$176,000 and $41,000 during the year ended December 31, 1997 and nine months
ended December 31, 1996, respectively. Mr. Kisner also received 1,750 stock
options during 1997.
Pursuant to agreements between the Company and Loral Space (of which BLS
is Chairman and Chief Executive Officer), the Company reimburses Loral Space for
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
$0.5 million and $0.2 million for the year ended December 31, 1997 and the nine
months ended December 31, 1996, respectively. Included in accounts payable at
December 31, 1997 and 1996 is $0.3 million and $0.2 million, respectively.
In connection with the Recapitalization, the Company paid Loral Space
$80.6 million for the redemption of its 22.5% equity interest in the Company.
Pursuant to agreements between K & F and Loral Corporation (the
predecessor Company to Loral Space), 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 for the fiscal year ended March 31, 1996. Billings
to Loral Corporation were $2.7 million for the fiscal year ended March 31, 1996.
Purchases from Loral Corporation were $2.2 million for the fiscal year ended
March 31, 1996.
F-21
<PAGE> 94
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMPARATIVE RESULTS (UNAUDITED)
The following financial information for the year ended December 31, 1997
and 1996 and for the nine months ended December 31, 1996 and 1995 is presented
for comparative purposes. The financial information for the year ended December
31, 1996 and nine months ended December 31, 1995 is unaudited.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, December 31,
------------------------------- ------------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................... $ 304,331,000 $ 277,655,000 $ 212,703,000 $ 199,784,000
Gross margin ................. 116,330,000 96,684,000 75,890,000 63,507,000
Operating income ............. 54,959,000 50,009,000 42,160,000 33,706,000
Income before income taxes and
extraordinary charge ....... 20,868,000 13,052,000 14,963,000 2,418,000
Income before
extraordinary charge ....... 15,684,000 13,133,000 15,044,000 2,418,000
Net (loss) income ............ (13,829,000) 3,991,000 5,902,000 505,000
</TABLE>
F-22
<PAGE> 95
$185,000,000
K & F INDUSTRIES, INC.
9 1/4%
SENIOR SUBORDINATED
NOTES DUE 2007
PROSPECTUS
May 7, 1998
<PAGE> 96
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PAGE
----
Available Information 1
Prospectus Summary 2
Risk Factors 10
Use of Proceeds 13
The Recapitalization 14
Unaudited Pro Forma Consolidated Financial Information 17
Selected Historical Consolidated Financial Information 20
Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
Business 27
Management 33
Security Ownership 40
Certain Transactions 41
Description of Certain Indebtedness 43
Description of the Notes 45
Certain United States Federal Tax Considerations For Non-United
States Holders 64
Plan of Distribution 66
Legal Matters 67
Experts 67
Index to Consolidated Financial Statements F-1
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation of
the Registrant provides that the directors of the Registrant, individually or
collectively, shall not be held personally liable to the Registrant or its
stockholders for monetary damages for breaches of fiduciary duty as directors,
except that any director shall remain liable (1) for any breach of the
director's fiduciary duty of loyalty to the Registrant or its stockholders, (2)
for acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (3) for liability under Section 174 of the General
Corporation Law of the State of Delaware or (4) for any transaction from which
the director derived an improper personal benefit. The by-laws of the Registrant
provide for indemnification of its officers and directors to the full extent
authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
1.01 -- Purchase Agreement dated as of October 9, 1997 between the
Company and Lehman Brothers Inc. and Unterberg Harris (10)
2.01 -- Agreement for Sale and Purchase of Assets dated March 26, 1989
between Loral Corporation and the Company (1)
2.02 -- Stock Purchase Agreement dated September 15, 1997 among the
Company and the Stockholders of the Company (10)
2.03 -- First Amendment to Stock Purchase Agreement dated as of October
15, 1997 among the Company and the Securityholders named therein
(10)
3.01 -- Amended and Restated Certificate of Incorporation of the Company
(10)
3.02 -- Amended and Restated By-Laws of the Company (10)
4.01 -- Indenture dated as of October 15, 1997 for the Notes between the
Company and State Street Bank and Trust Company, as trustee (10)
4.02 -- Indenture dated as of August 15, 1996 for the 10 3/8% Senior
Subordinated Notes between the Company and Fleet National Bank,
as trustee (8)
5.01 -- Opinion of O'Sullivan Graev & Karabell, LLP (10)
10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among
the Company, BLS and LBH (1)
10.02 -- Assumption Agreement dated as of April 27, 1989 (1)
10.03 -- Non-Competition Agreement dated as of April 27, 1989, between the
Company and BLS (1)
II-1
<PAGE> 98
10.04 -- K & F Industries, Inc. Retirement Plan for Salaried Employees (4)
10.05 -- K & F Industries, Inc. Savings Plan for Salaried Employees (4)
10.06 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits
Plan for Salaried Employees Plan A (1)
10.07 -- The Loral Systems Group Release and Separation Allowance Plan (1)
10.08 -- Letter Agreement dated April 27, 1989, between the Company and
Shearson Lehman Brothers Inc. (1)
10.09 -- K & F Industries, Inc. 1989 Stock Option Plan (2)
10.10 -- K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.11 -- Securities Purchase Agreement dated as of July 22, 1991, among
the Company, BLS and the Lehman Investors (3)
10.12 -- Securities Purchase Agreement among the Company, BLS and the
Lehman Investors dated September 2, 1994 (5)
10.13 -- Agreement dated as of September 2, 1994 between the Company and
Loral (5)
10.14 -- Securities Conversion Agreement among the Company and the
Converting Stockholders, dated November 8, 1994 (5)
10.15 -- Shared Services Agreement dated as of April 27, 1996 between
Lockheed Martin Tactical Defense Systems--Akron and ABS (10)
10.16 -- K & F Industries, Inc. Supplemental Executive Retirement Plan (7)
10.17 -- Amended and Restated Credit Agreement dated as of August 14, 1996
among Aircraft Braking Systems Corporation ("ABS"), Engineered
Fabrics Corporation ("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") (8)
10.18 -- Amended and Restated Security Agreement dated as of August 14,
1996 between ABS and Chase (8)
10.19 -- Amended and Restated Security Agreement dated as of August 14,
1996 between EFC and Chase (8)
10.20 -- Revolving Credit Note dated as of August 14, 1996 executed by
each of ABS and EFC in favor of NBD Bank (8)
10.21 -- Facility A Notes dated as of August 14, 1996 executed by each of
ABS and EFC in favor of NBD Bank (8)
10.22 -- Amended and Restated K & F Agreement dated as of August 14, 1996
between the Company and Chase (8)
10.23 -- Amended and Restated Subordination Agreement dated as of August
14, 1996 between ABS and Chase (8)
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<PAGE> 99
10.24 -- Amended and Restated Subordination Agreement dated as of August
14, 1996 between EFC and Chase (8)
10.25 -- Purchase Agreement dated August 12, 1996 among the Company,
Lehman Brothers Inc. and Chase Securities Inc. (8)
10.26 -- Registration Rights Agreement dated as of August 15, 1996 among
the Company, Lehman Brothers Inc. and Chase Securities Inc. (8)
10.27 -- Credit Agreement dated as of October 15, 1997 among ABS, EFC, the
Lenders (as defined therein), Lehman Commercial Paper, Inc., as
Documentation Agent and The First National Bank of Chicago
("FNBC"), as Administrative Agent (10)
10.28 -- Guarantee and Collateral Agreement dated as of October 15, 1997
among the Company, ABS, EFC, certain subsidiaries named therein
and FNBC, as Collateral Agent (10)
10.29 -- Form of Term Note dated as of October 15, 1997 to be executed by
each of ABS and EFC in favor of FNBC (10)
10.30 -- Form of Revolving Credit Note dated as of October 15, 1997 to be
executed by each of ABS and EFC in favor of FNBC (10)
10.31 -- Subordination Agreement dated as of October 15, 1997 between ABS
and FNBC (10)
10.32 -- Subordination Agreement dated as of October 15, 1997 between EFC
and FNBC (10)
10.33 -- Intercreditor Agreement dated as of October 15, 1997 among the
Pension Benefit Guaranty Corporation ("PBGC"), FNBC, ABS, EFC and
the Company (10)
10.34 -- K & F Agreement dated as of October 15, 1997 executed by the
Company in favor of FNBC (10)
10.35 -- Settlement Agreement dated as of October 15, 1997 between the
Company and PBGC (10)
10.36 -- Registration Rights Agreement dated as of October 15, 1997
between the Company and Lehman Brothers Inc. and Unterberg Harris
(10)
10.37 -- Dealer Manager Agreement dated as of September 15, 1997 between
Lehman Brothers Inc. and the Company (10)
10.38 -- Amended and Restated Director Advisory Agreement dated as of
October 15, 1997 between the Company and BLS (10)
10.39 -- Stockholders' Agreement dated as of October 15, 1997 between the
Company and the Stockholders identified therein (10)
12.01 -- Statement of computation of ratio of earnings (deficiency) to
fixed charges (12)
12.02 -- Statement of computation of pro forma earnings to fixed
charges(12)
21.01 -- Subsidiaries of the Registrant (1)
23.01 -- Consent of O'Sullivan Graev and Karabell, LLP (included in
Exhibit 5) (10)
II-3
<PAGE> 100
23.02 -- Consent of Deloitte & Touche LLP
24.01 -- Powers of Attorney (included on signature page)
25.01 -- Statement of Eligibility and Qualifications under the Trust
Indenture Act of 1939 of State Street Bank and Trust Company, as
Trustee (10)
27.01 -- Financial Data Schedule (11)
99.1 -- Form of Letter of Transmittal (10)
99.2 -- Form of Notice of Guaranteed Delivery (10)
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees (10)
99.4 -- Form of Letter to Clients (10)
(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.
(10) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-40977 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated herein by
reference.
(12) Previously filed as an exhibit to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-4, No. 333-40977 and
incorporated herein by reference.
II-4
<PAGE> 101
(b) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 102
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-6
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 2 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, state of New York, on the 7th day of
May, 1998.
K & F INDUSTRIES, INC.
By: /s/ KENNETH M. SCHWARTZ
Kenneth M. Schwartz
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to this Registration Statement on Form S-4 has
been signed on May 7, 1998 by or on behalf of the following persons in the
capacity indicated:
SIGNATURE TITLE
--------- -----
* Chairman of the Board, Chief Executive
Bernard L. Schwartz Officer and Director (principal executive officer)
/S/ KENNETH M. SCHWARTZ Executive Vice President
Kenneth M. Schwartz
* Chief Financial Officer (principal financial and
Dirkson R. Charles accounting officer)
* Director
David J. Brand
* Director
Herbert R. Brinberg
* Director
Robert B. Hodes
* Director and Secretary
Ronald H. Kisner
* Director
John R. Paddock
* Director
A. Robert Towbin
* Director
Alan H. Washkowitz
*BY /S/ KENNETH M. SCHWARTZ
Kenneth M. Schwartz
Attorney-in-fact
II-7
<PAGE> 1
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to
Registration Statement No. 333-40977 of K & F Industries, Inc. of our report
dated January 23, 1998, appearing in the Prospectus, which is a part of such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
May 6, 1998
