<PAGE> 1
Filed Pursuant to Rule 424(b)(3) of the
Rules and Regulations Under the
Securities Act of 1933
Registration Statement No. 333-40977
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 11, 1998)
$185,000,000
K & F Industries, Inc.
9 1/4% Senior Subordinated Notes Due 2007
--------------------------
This Prospectus Supplement, together with Prospectus, is to be used by
Lehman Brothers in connection with offers and sales of the above-referenced
securities in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Lehman Brothers may act as
principal or agent in such transactions.
May 14, 1998
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
K & F Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
As of May 1, 1998, there were 740,398 shares of common stock outstanding.
<PAGE> 3
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,764,000 $ 4,707,000
Accounts receivable, net 40,793,000 40,014,000
Inventory 71,402,000 65,871,000
Other current assets 306,000 559,000
------------- -------------
Total current assets 115,265,000 111,151,000
------------- -------------
Property, plant and equipment 146,309,000 146,916,000
Less, accumulated depreciation and amortization 77,933,000 76,278,000
------------- -------------
68,376,000 70,638,000
------------- -------------
Deferred charges, net of amortization 27,707,000 28,382,000
Cost in excess of net assets acquired, net of
amortization 188,805,000 190,720,000
Intangible assets, net of amortization 15,708,000 16,497,000
Prepaid pension cost 7,848,000 7,848,000
------------- -------------
$ 423,709,000 $ 425,236,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 16,337,000 $ 17,979,000
Current portion of senior term loans 1,500,000 1,500,000
Interest payable 10,166,000 4,725,000
Other current liabilities 57,754,000 54,994,000
------------- -------------
Total current liabilities 85,757,000 79,198,000
------------- -------------
Postretirement benefit obligation other
than pensions 75,542,000 75,542,000
Other long-term liabilities 7,703,000 7,830,000
Senior revolving loan 3,000,000 14,000,000
Senior term loan A 49,250,000 49,375,000
Senior term loan B 270,500,000 270,750,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Deficit (188,437,000) (191,976,000)
Adjustment to equity for minimum pension
liability (1,213,000) (1,213,000)
Cumulative translation adjustments (141,000) (18,000)
------------- -------------
Total stockholders' deficiency (253,043,000) (256,459,000)
------------- -------------
$ 423,709,000 $ 425,236,000
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Sales $ 82,388,000 $ 72,610,000
Costs and expenses 64,387,000 55,198,000
Amortization 2,570,000 2,571,000
------------ ------------
Operating income 15,431,000 14,841,000
Interest and investment income 79,000 53,000
Interest expense (11,471,000) (7,968,000)
------------ ------------
Income before income taxes 4,039,000 6,926,000
Income tax provision (500,000) (637,000)
------------ ------------
Net income $ 3,539,000 $ 6,289,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income $ 3,539,000 $ 6,289,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,971,000 4,888,000
Non-cash interest expense - amortization
of deferred financing charges 483,000 372,000
Deferred income taxes 388,000 533,000
Changes in assets and liabilities:
Accounts receivable, net (821,000) (3,093,000)
Inventory (5,612,000) (116,000)
Other current assets 253,000 38,000
Accounts payable, interest payable, and
other current liabilities 6,559,000 740,000
Postretirement benefit obligation other
than pensions -- (250,000)
Other long-term liabilities (127,000) 1,512,000
------------ ------------
Net cash provided by operating
activities 9,633,000 10,913,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (695,000) (1,426,000)
Deferred charges (62,000) (1,500,000)
------------ ------------
Net cash used in investing activities (757,000) (2,926,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan (11,000,000) (11,000,000)
Payments of senior term loans (375,000) (2,500,000)
Borrowings under senior revolving loan -- 8,000,000
Proceeds from sale and leaseback transaction 556,000 --
------------ ------------
Net cash used by financing activities (10,819,000) (5,500,000)
------------ ------------
Net (decrease) increase in cash and cash
equivalents (1,943,000) 2,487,000
Cash and cash equivalents, beginning of
period 4,707,000 1,508,000
------------ ------------
Cash and cash equivalents, end of period $ 2,764,000 $ 3,995,000
============ ============
Supplemental cash flow information:
Cash interest paid during period $ 5,547,000 $ 8,960,000
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission
("SEC") and, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash
flows. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
SEC rules. The Company believes that the disclosures made are adequate
to make the information presented not misleading. The consolidated
statement of operations for the three months ended March 31, 1998 is
not necessarily indicative of the results to be expected for the full
year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the Company's December 31, 1997 Annual Report on Form
10-K.
2. Receivables are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Accounts receivable, principally
from commercial customers $ 37,672,000 $ 36,506,000
Accounts receivable, on U. S
Government and other long-term
contracts 3,576,000 3,904,000
Allowances (455,000) (396,000)
------------ ------------
$ 40,793,000 $ 40,014,000
============ ============
</TABLE>
3. Inventory consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials and work-in-process $46,824,000 $43,236,000
Finished goods 12,778,000 11,726,000
Inventoried costs related to U.S.
Government and other long-term contracts 11,800,000 10,909,000
----------- -----------
$71,402,000 $65,871,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below
cost as an investment in a new airframe which is expected to be
recovered through the subsequent sale of replacement parts. These
commercial investments (losses) are recognized when original equipment
is shipped. Losses on U.S. Government contracts are immediately
recognized in full when determinable.
5
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventory is stated at average cost, not in excess of net realizable
value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a
portion of which will not be realized within one year.
4. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Accrued payroll costs $15,404,000 $17,399,000
Accrued taxes 8,697,000 7,895,000
Accrued costs on long-term contracts 11,361,000 7,590,000
Accrued warranty costs 7,903,000 7,496,000
Customer credits 4,472,000 4,172,000
Postretirement benefit obligation other
than pensions 2,000,000 2,000,000
Other 7,917,000 8,442,000
----------- -----------
$57,754,000 $54,994,000
=========== ===========
</TABLE>
5. Contingencies
On December 15, 1995, the Company's Aircraft Braking Systems
subsidiary commenced an action in the Court of Common Pleas, Summit
County, Ohio against Hitco Technologies, Inc. (now known as SGL Carbon
Composites, Inc.) ("Hitco") after Hitco threatened to breach an
existing supply contract unless prices were renegotiated. Hitco had
been the principal supplier of the carbon used by Aircraft Braking
Systems for its carbon brakes. Hitco claimed that Aircraft Braking
Systems breached the supply arrangements by electing to begin to
expand its own carbon production facility. The Aircraft Braking
Systems' complaint, as amended, sought injunctive relief and damages
for various breaches of contract 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.
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.
6
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 1, 1998, Aircraft Braking Systems received notice of an action
commenced by 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. There can be no assurance, however, as to the final outcome
of the litigation with Hitco. As noted above, Aircraft Braking Systems
may appeal or take action with respect to the verdict in the Ohio case
and, in any event, 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 suits and proceedings cannot be predicted with
certainty, in the opinion of the Company's management, the ultimate
liability, if any, will not have a material adverse effect on the
Company.
6. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Net income $ 3,539,000 $ 6,289,000
Other comprehensive income:
Cumulative translation adjustments (123,000) (149,000)
----------- -----------
Comprehensive income $ 3,416,000 $ 6,140,000
=========== ===========
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Three Months Ended March 31, 1998
and March 31, 1997
Sales for the three months ended March 31, 1998 totaled $82,388,000, reflecting
an increase of $9,778,000, or 13.5%, compared with $72,610,000 for the same
period in the prior year. This increase was due to higher sales of wheels and
brakes for commercial transport and general aviation aircraft of $8,920,000,
primarily on the Boeing MD-90, DC-9, DC-10 and MD-80 programs. Military sales
were higher by $858,000 on various programs.
Operating income increased $590,000 to $15,431,000, or 18.7% of sales for the
three months ended March 31, 1998 compared with $14,841,000, or 20.4% of sales
for the same period in the prior year. Excluding a non-recurring charge of $2
million during the three months ended March 31, 1998 to reflect the outcome of a
lawsuit (see "Litigation"), operating margins increased to 21.2%. Operating
margins increased primarily due to the overhead absorption effect relating to
the higher sales volume partially offset by higher shipments of original
equipment to airframe manufacturers at or below the cost of production of $4.4
million.
Interest expense, net increased by $3,477,000 for the three months ended March
31, 1998 compared with the same period in the prior year. This increase was due
to increased indebtedness resulting from a recapitalization consummated on
October 15, 1997. Partially offsetting this increase was lower interest rates on
the fixed rate portion of the Company's indebtedness.
The Company's effective tax rate of 12.4% and 9.2% for the three months ended
March 31, 1998 and 1997, respectively, differs from the statutory rate of 35%
due to a net decrease in the valuation allowance. The increase in the effective
rate in 1998 is primarily due to the 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 fund capital expenditures, to make investments in new airframes
(which were $11.9 million and $7.5 million for the three months ended March 31,
1998 and 1997, respectively) and to pay interest and principal on indebtedness.
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations and
borrowings under its revolving credit facility. At March 31, 1998, the Company
had $38.2 million available to borrow under its $50 million revolving credit
facility.
Cash Flows
During the three months ended March 31, 1998, cash provided by operating
activities amounted to $9,633,000 and reflected $20,402,000 of earnings before
interest, taxes, depreciation and amortization ("EBITDA"), a decrease in other
working capital requirements of $1,211,000, partially offset by increases in
accounts receivable of $821,000, inventory of $5,612,000 and interest payments
of $5,547,000. During the three months ended March 31, 1997, cash provided by
operating activities totaled $10,913,000 and reflected $19,729,000 of EBITDA, a
decrease in other working capital requirements of $3,353,000, partially offset
by increases in accounts receivable of $3,093,000, inventory of $116,000 and
interest payments of $8,960,000.
8
<PAGE> 10
During the three months ended March 31, 1998, cash used in investing activities
amounted to $757,000 primarily due to capital expenditures. During the three
months ended March 31, 1997, cash used in investing activities totaled
$2,926,000 due to $1,500,000 of program participation payments and $1,426,000 of
capital expenditures.
Cash used for financing activities during the three months ended March 31, 1998
and 1997 was $10,819,000 and $5,500,000, respectively. During the three months
ended March 31, 1998, the Company used $11,375,000 for the repayment of
indebtedness partially offset by $556,000 of proceeds received from a sale and
leaseback transaction. During the three months ended March 31, 1997, the Company
used $5,500,000 for the repayment of indebtedness.
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. Hitco's claim in the Ohio
litigation was 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 that payment of the net amount of the
verdicts in the Ohio state case would not materially adversely affect the
Company. See Note 5 to the consolidated financial statements.
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.
9
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. (now known as SGL Carbon Composites, Inc.) ("Hitco")
after Hitco threatened to breach an existing supply contract unless prices were
renegotiated. Hitco had been the principal supplier of the carbon used by
Aircraft Braking Systems for its carbon brakes. Hitco claimed that Aircraft
Braking Systems breached the supply arrangements by electing to begin to expand
its own carbon production facility. The Aircraft Braking Systems' complaint, as
amended, sought injunctive relief and damages for various breaches of contract
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.
On May 1, 1998, Aircraft Braking Systems received notice of an action commenced
by 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended March 31,
1998.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
/s/ DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: May 14, 1998
11
