<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1998
REGISTRATION NO. 333-40977
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3728 34-1614845
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENNETH M. SCHWARTZ
EXECUTIVE VICE PRESIDENT
K & F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
GEORGE P. O'SULLIVAN, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] ___________________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
K & F INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
(1) Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page of Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page of Prospectus
(2) Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus; Available Information
(3) Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Prospectus Summary; Risk Factors; Selected
Historical Consolidated Financial
Information
(4) Terms of the Transaction................... Prospectus Summary; The Exchange Offer;
Description of the Notes
(5) Pro Forma Financial Information............ Prospectus Summary; Capitalization;
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................................. *
(7) Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Plan of Distribution
(8) Interests of Named Experts and Counsel..... *
(9) Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
(10) Information With Respect to S-3
Registrants.............................. *
(11) Incorporation of Certain Information by
Reference................................ *
(12) Information With Respect to S-2 or S-3
Registrants.............................. *
(13) Incorporation of Certain Information by
Reference................................ *
(14) Information With Respect to Registrants
Other Than S-3 or S-2 Registrants........ Prospectus Summary; Risk Factors; Selected
Historical Consolidated Financial
Information; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Description of Certain Indebtedness
(15) Information With Respect to S-3
Companies................................ *
(16) Information With Respect to S-2 or S-3
Companies................................ *
(17) Information With Respect to Companies Other
Than S-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> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
Subject to Completion, dated January 15, 1998
PROSPECTUS
K & F INDUSTRIES, INC.
OFFER TO EXCHANGE UP TO $185,000,000 OF ITS
9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
---------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED.
---------------------------
K & F Industries, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount of 9 1/4% Series B Senior Subordinated Notes
due 2007 (the "New Notes") of the Company for each $1,000 principal amount of
the issued and outstanding 9 1/4% Senior Subordinated Notes due 2007 (the "Old
Notes," and the Old Notes and the New Notes, collectively, the "Notes") of the
Company from the Holders (as defined) thereof. As of the date of this
Prospectus, there is $185,000,000 aggregate principal amount of the Old Notes
outstanding. The terms of the New Notes are identical in all material respects
to the Old Notes, except that the New Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and therefore will
not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined), which provisions will terminate as to all of the Notes
upon the consummation of the Exchange Offer.
Interest on the New Notes will accrue from October 15, 1997 and will be
payable in cash semi-annually in arrears on April 15 and October 15 of each
year, commencing April 15, 1998. No interest will be payable on the Old Notes
accepted for exchange.
The New Notes will be general unsecured obligations of the Company and will
be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. The Company conducts its operations
solely through its subsidiaries and, accordingly, the New Notes will be
effectively subordinated to indebtedness and other liabilities of its
subsidiaries, including borrowings under the New Credit Facility (as defined).
As of September 30, 1997, after giving pro forma effect to the offering of the
Old Notes (the "Offering"), application of the net proceeds therefrom,
borrowings under the New Credit Facility and the other transactions comprising
the recapitalization (the "Recapitalization") of the Company, the Company would
have had approximately $345.0 million of Senior Indebtedness outstanding, the
Company's subsidiaries would have had other liabilities of approximately $81.0
million outstanding and the Company would have had a stockholders' deficiency of
approximately $272.1 million. See "Capitalization" and "Description of the
Notes -- Subordination."
The Old Notes were not registered under the Securities Act in reliance upon
an exemption from the registration requirements thereof. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The New Notes are being offered hereby in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement. Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such New Notes and neither
such holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes. Notwithstanding the foregoing, each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for such Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of one year after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the New Notes. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn as provided herein at
any time prior to the Expiration Date (as defined). The Exchange Offer is
subject to certain customary conditions.
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
---------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 4
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,
supplying approximately 22% of the worldwide market for these products. Aircraft
Braking Systems' products are marketed internationally through 10 sales offices
located in four countries and are used on 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 twelve months ended
September 30, 1997 (the "LTM Period"), the Company reported revenues of $294.5
million, of which 89.3% were derived from sales made by Aircraft Braking
Systems, EBITDA (as defined) of $81.3 million and net income of $23.7 million.
During the LTM Period, after giving pro forma effect to the Recapitalization,
the Company would have had net income of $7.7 million and a stockholders'
deficiency of $272.1 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. From April 1, 1994 through December 31,
1996, the Company spent and expensed an aggregate of approximately $101.0
million for research, development and design and the supply of original wheel
and brake equipment to aircraft manufacturers. During the LTM Period,
approximately 75% of Aircraft Braking Systems' total revenues were derived from
the sale of replacement parts for braking systems previously sold by Aircraft
Braking Systems.
Aircraft Braking Systems also manufactures anti-skid systems for use on a
variety of commercial, military and general aviation aircraft. These systems,
which are integrated into a braking system, are designed to minimize the
distance required to stop an aircraft by utilizing sensors, mounted in the axle
and driven by the wheel, to maximize the braking force while also preventing the
wheels from locking and skidding. Of the three principal competitors in the
wheel and brake industry, Aircraft Braking Systems is the only significant
manufacturer of anti-skid systems. Because of the sensitivity of anti-skid
systems to variations in brake performance, the Company believes that the
ability to integrate the design and performance characteristics of wheels,
brakes and integrated anti-skid systems provides Aircraft Braking Systems with 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.
1
<PAGE> 5
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 recent airframe
designs that serve this market, including the Airbus Industries ("Airbus")
A-321, the McDonnell Douglas Corp. ("McDonnell Douglas," recently 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 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.
RECENT DEVELOPMENTS
Over the last several years, the Company has introduced a number of new
programs at Aircraft Braking Systems to enhance manufacturing efficiency and
reduce raw material costs. In April 1997, the Company completed an $18.0 million
expansion of its carbon disk manufacturing facility in Akron, Ohio, which has
increased annual carbon production capacity sixfold to 200,000 pounds and has
enabled the Company to control the source of material for its carbon brakes. The
Company believes that if operated at or near full capacity and at expected
operating efficiencies, the expanded facility will significantly reduce the
Company's cost of carbon, previously purchased from third parties. While there
can be no assurance that such cost savings will be achieved, management of the
Company estimates that approximately $13.2 million of annualized savings in the
cost of carbon could be achieved by the 1998 fiscal year end. During the LTM
Period, after giving pro forma effect to the Recapitalization, and assuming the
full realization of such estimated cost savings, the Company's adjusted EBITDA
would have been $93.5 million. See "Risk Factors -- Ability to Achieve
Anticipated Cost Savings." The Company has also implemented cell based
manufacturing, which has improved productivity, reduced costs and enhanced the
quality of Aircraft Braking Systems' products.
2
<PAGE> 6
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 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 $130.0 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 "Existing
Credit Agreement").
3. The Company made provision for the redemption of the remaining
$70.0 million outstanding principal amount of its 11 7/8% Senior Secured
Notes Due 2003 (the "Senior Notes") by irrevocably depositing $77.5 million
(representing a price of 105.28% of the principal amount of the Senior
Notes, plus accrued interest through the expected redemption date) with the
trustee (the "Senior Notes Trustee") under the indenture governing the
Senior Notes. Concurrently with such deposit, the Company caused the Senior
Notes Trustee to send a notice to the holders of the Senior Notes to the
effect that such Senior Notes will be redeemed 30 days from the date of
such notice.
4. In addition to the repayment of its outstanding indebtedness under
the Existing Credit Agreement and provision for the redemption of the
Senior Notes, the Company purchased, for cash, all of the $140 million
aggregate principal amount of its 10 3/8% Senior Subordinated Notes due
2004 (the "Existing 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 $322.0 million (the "Term Loan") and a revolving credit facility
in an aggregate principal amount of up to $50.0 million (the "Revolving
Loan"), of which $23.0 million was drawn at the time of the
Recapitalization. The Term Loan consists of a Tranche A term loan ("Term
Loan A") in the principal amount of $50.0 million and a Tranche B term loan
("Term Loan B") in the principal amount of $272.0 million. See "Description
of Certain Indebtedness -- New Credit Facility."
The Company issued the Old Notes for net proceeds of approximately $178.4
million (after deducting expenses payable by the Company in connection with the
Offering). The Company used such proceeds, together with borrowings under the
New Credit Facility, to effect the Recapitalization.
3
<PAGE> 7
The following table illustrates the sources and uses of funds for the
Recapitalization.
($ 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
======
<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
Estimated 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."
4
<PAGE> 8
THE EXCHANGE OFFER
REGISTRATION RIGHTS
AGREEMENT................ The Old Notes were sold by the Company on October
15, 1997 to Lehman Brothers Inc. and Unterberg
Harris (the "Initial Purchasers"), who placed the
Old Notes with institutional investors, a limited
number of accredited investors and a limited number
of foreign purchasers in offshore transactions. In
connection therewith, the Company and the Initial
Purchasers executed and delivered for the benefit
of the holders of the Old Notes a registration
rights agreement (the "Registration Rights
Agreement") providing, among other things, for the
Exchange Offer.
THE EXCHANGE OFFER......... New Notes are being offered in exchange for a like
principal amount of Old Notes. As of the date
hereof, $185,000,000 aggregate principal amount of
Old Notes are outstanding. The Company will issue
the New Notes to Holders promptly following the
Expiration Date. See "Risk Factors -- Consequences
of Failure to Exchange."
EXPIRATION DATE............ 5:00 p.m., New York City time, on
, unless the Exchange Offer is
extended as provided herein, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
INTEREST................... Each New Note will bear interest from October 15,
1997, the date of original issuance of the Old
Notes. No interest will be paid on the Old Notes
accepted for exchange.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company reserves the right to amend, terminate or
extend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition. See "The Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING
OLD NOTES................ Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, or
an Agent's Message (as defined) in accordance with
the instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Old Notes and any other required documentation to
the exchange agent (the "Exchange Agent") at the
address set forth herein. By executing the Letter
of Transmittal or delivering an Agent's message,
each Holder will represent to the Company, among
other things, that (i) the New Notes acquired
pursuant to the Exchange Offer by the Holder and
any beneficial owners of Old Notes are being
obtained in the ordinary course of business of the
person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner has an arrangement
with any person to participate in the distribution
of such New Notes, (iii) neither the Holder nor
such beneficial owner nor any such other person is
engaging in or intends to engage in a distribution
of such New Notes and (iv) neither the Holder nor
such beneficial owner is an "affiliate," as defined
under Rule 405 promulgated under the Securities
Act, of the Company. Each broker-dealer that
receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired
by such broker-dealer as a result of marketmaking
activities or other trading activities (other than
Old Notes acquired directly from the Company), may
participate in the
5
<PAGE> 9
Exchange Offer but may be deemed an "underwriter"
under the Securities Act and, therefore, must
acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer -- Procedures for Tendering" and "Plan of
Distribution."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial
owner must, prior to completing and executing the
Letter of Transmittal or delivering an Agent's
Message and delivering such beneficial owner's Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
beneficial owner's name or obtain a properly
completed bond power from the registered Holder.
The transfer of registered ownership may take
considerable time. See "The Exchange Offer --
Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or an Agent's Message or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn as provided herein at any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer --
Withdrawal of Tenders."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES.... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
EXCHANGE AGENT............. State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Exchange Agent."
USE OF PROCEEDS............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. Holders of Old Notes who do not exchange their Old
Notes for New Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on
transfer of such Old Notes as set forth in the
legend thereon as a consequence of the issuance of
the Old Notes pursuant to
6
<PAGE> 10
exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act
and applicable state securities laws. In general,
Old Notes may not be offered or sold unless
registered under the Securities Act, except
pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable
state securities laws.
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $185,000,000 aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects to
the Old Notes, except that the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not contain certain provisions providing for the payment of liquidated
damages to the holders of the Old Notes under certain circumstances relating to
the Registration Rights Agreement, which provisions will terminate as to all of
the Notes upon the consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes and, except as set forth in the
immediately preceding sentence, will be entitled to the benefits of the
Indenture, under which both the Old Notes were, and the New Notes will be,
issued. See "Description of the Notes."
THE NEW NOTES.............. $185,000,000 aggregate principal amount of 9 1/4%
Senior Subordinated Notes Due 2007 (the "New
Notes").
MATURITY DATE.............. October 15, 2007.
INTEREST PAYMENT DATES..... April 15 and October 15, commencing April 15, 1998.
MANDATORY REDEMPTION....... None.
OPTIONAL REDEMPTION........ The New Notes will be 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 will be general unsecured obligations
of the Company and will be subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined), including all
obligations of the Company and its subsidiaries
under the New Credit Facility (as defined), and
will be senior in right of payment to or pari passu
with all other indebtedness of the Company. The
Company conducts its operations solely through its
subsidiaries and, accordingly, the New Notes will
be effectively subordinated to indebtedness and
other liabilities of its subsid-
7
<PAGE> 11
iaries. As of September 30, 1997, after giving pro
forma effect to the Recapitalization, the Company
would have had approximately $345.0 million of
Senior Indebtedness outstanding and the Company's
subsidiaries would have had other liabilities of
approximately $81.0 million outstanding. See
"Capitalization" and "Description of the Notes --
Subordination."
CERTAIN COVENANTS.......... The Indenture pursuant to which the Old Notes were,
and the New Notes will be, issued (the "Indenture")
contains certain covenants that, among other
things, limit the ability of the Company and its
subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends or make certain other restricted
payments, (iii) enter into transactions with
affiliates, (iv) create certain liens, (v) make
certain asset dispositions and (vi) merge or
consolidate with, or transfer substantially all
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."
8
<PAGE> 12
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary unaudited pro forma consolidated
financial information for the LTM Period, giving effect to the Recapitalization.
The pro forma income statement and other data give effect to the
Recapitalization as if it had been consummated as of the first day of the period
indicated. The pro forma balance sheet information gives effect to the
Recapitalization as if it had been consummated as of September 30, 1997. The pro
forma income statement and other data do not reflect certain non-recurring
charges related to the Recapitalization, including a $12.0 million charge
relating to the exercise of stock options and other fees, and 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, "Unaudited Pro Forma
Consolidated Financial Information," "Selected Historical Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
INCOME STATEMENT DATA:
Net Sales............................................................................................. $ 294,496
Cost of sales......................................................................................... 186,697
---------
Gross margin........................................................................................ 107,799
Independent research and development.................................................................. 10,452
Selling, general and administrative expenses.......................................................... 25,462
Amortization.......................................................................................... 10,341
---------
Operating income.................................................................................... 61,544
Interest expense(a)................................................................................... 46,688
---------
Income before income taxes and extraordinary charge................................................... 14,856
Income tax provision.................................................................................. (5,466)
---------
Income before extraordinary charge.................................................................... 9,390
Extraordinary charge.................................................................................. (1,713)
---------
Net income.......................................................................................... $ 7,677
=========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital....................................................................................... $ 39,059
Total assets.......................................................................................... 414,715
Long-term debt (including current portion)............................................................ 530,000
Stockholders' deficiency.............................................................................. (272,077)
OTHER DATA (FOR THE PERIOD):
EBITDA(b)............................................................................................. $ 81,270
Cash Interest Expense(c).............................................................................. 45,188
Capital expenditures.................................................................................. 11,600
Depreciation and amortization......................................................................... 19,726
Cash flow provided by operating activities............................................................ 26,610
Cash flow used by investing activities................................................................ (13,382)
Cash flow used by financing activities................................................................ (34,453)
</TABLE>
- ---------------
(a) Interest expense includes an adjustment (at an assumed rate of 8.1% for the
New Credit Facility and the actual rate of 9.25% for the Notes) 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.
(b) 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.
(c) Excludes amortization of deferred financing costs related to the
Recapitalization of $1.5 million.
9
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical consolidated financial
information for the Company for the nine months ended September 30, 1997 and
September 30, 1996, the three months ended March 31, 1996, the nine months ended
December 31, 1996 and December 31, 1995 and the years ended March 31, 1996,
1995, 1994 and 1993. 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 nine months ended December 31, 1996 and for each of the
years ended March 31, 1996, 1995, 1994 and 1993 is derived from the audited
financial statements of the Company. The historical financial information of the
Company for the three months ended March 31, 1996, the nine months ended
September 30, 1997 and September 30, 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 historical financial information for
the nine months ended September 30, 1997 is not necessarily indicative of the
results expected for the full year. 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.
<TABLE>
<CAPTION>
THREE
MONTHS
NINE MONTHS ENDED ENDED NINE MONTHS ENDED
SEPTEMBER 30, MARCH 31, DECEMBER 31,
--------------------- --------- ----------------------
1997 1996 1996 1996 1995
-------- -------- --------- -------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................. $224,296 $207,455 $64,952 $212,703 $199,784
Cost of sales......................... 140,707 134,981 44,158 136,813 136,277
-------- -------- -------- -------- --------
Gross margin........................ 83,589 72,474 20,794 75,890 63,507
Independent research and
development......................... 7,909 9,237 3,157 8,623 6,610
Selling, general and administrative
expenses............................ 19,318 18,339 7,186 17,297 15,378
Amortization.......................... 7,734 7,805 2,602 7,810 7,813
-------- -------- -------- -------- --------
Operating income.................... 48,628 37,093 7,849 42,160 33,706
Interest expense, net(a).............. 22,778 29,064 9,760 27,197 31,288
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes........ 25,850 8,029 (1,911) 14,963 2,418
Income tax (provision) benefit........ (5,767) (220) -- 81 --
-------- -------- -------- -------- --------
Income (loss) before extraordinary
charge and cumulative effect of
accounting changes.................. 20,083 7,809 (1,911) 15,044 2,418
Extraordinary charge.................. (1,713)(b) (9,142)(c) -- (9,142)(c) (1,913)(d)
Cumulative effect of accounting
changes............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)................... $ 18,370 $ (1,333) $(1,911) $ 5,902 $ 505
======== ======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital....................... $ 35,528 $ 41,669 $36,327 $ 34,189 $ 38,938
Total assets.......................... 410,352 423,515 416,037 419,115 412,028
Long-term debt(h)..................... 263,000 300,000 294,000 287,000 293,000
Stockholders' deficiency(g),(h)....... (15,221) (38,994) (39,701) (33,306) (34,327)
OTHER DATA (FOR THE PERIOD):
EBITDA(i)............................. $ 63,307 $ 51,351 $12,510 $ 56,804 $ 47,966
Capital expenditures.................. 6,026 15,592 7,075 14,091 3,343
Depreciation and amortization......... 14,679 14,258 4,661 14,644 14,260
Ratio of earnings to fixed
charges(j).......................... 2.06x 1.25x 1.49x 1.07x
Cash flow provided by operating
activities.......................... $ 37,133 $ 19,140 $ 5,521 $ 23,394 $ 16,780
Cash flow used by investing
activities.......................... (7,807) (16,054) (7,287) (14,341) (3,669)
Cash flow (used) provided by financing
activities.......................... (30,084) (1,057) 1,000 (9,957) (18,426)
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................. $264,736 $238,756 $226,131 $277,107
Cost of sales......................... 180,435 164,697 159,751 199,002
-------- -------- -------- --------
Gross margin........................ 84,301 74,059 66,380 78,105
Independent research and
development......................... 9,767 8,363 12,858 11,417
Selling, general and administrative
expenses............................ 22,564 19,208 22,421 24,154
Amortization.......................... 10,415 10,411 10,884 10,258
-------- -------- -------- --------
Operating income.................... 41,555 36,077 20,217 32,276
Interest expense, net(a).............. 41,048 46,250 51,953 53,486
-------- -------- -------- --------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of accounting changes........ 507 (10,173) (31,736) (21,210)
Income tax (provision) benefit........ -- -- -- --
-------- -------- -------- --------
Income (loss) before extraordinary
charge and cumulative effect of
accounting changes.................. 507 (10,173) (31,736) (21,210)
Extraordinary charge.................. (1,913)(d) -- -- (2,477)(e)
Cumulative effect of accounting
changes............................. -- -- (2,305)(f) (73,540)(g)
-------- -------- -------- --------
Net income (loss)................... $ (1,406) $(10,173) $(34,041) $(97,227)
======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital....................... $ 36,327 $ 48,025 $ 53,091 $ 70,028
Total assets.......................... 416,037 429,074 446,880 489,968
Long-term debt(h)..................... 294,000 310,000 381,421 379,478
Stockholders' deficiency(g),(h)....... (39,701) (34,748) (90,355) (51,868)
OTHER DATA (FOR THE PERIOD):
EBITDA(i)............................. $ 60,476 $ 54,920 $ 40,744 $ 52,138
Capital expenditures.................. 10,418 2,824 3,127 4,670
Depreciation and amortization......... 18,921 18,843 20,527 19,862
Ratio of earnings to fixed
charges(j).......................... 1.01x
Cash flow provided by operating
activities.......................... $ 22,301 $ 17,353 $ 8,963 $ 35,570
Cash flow used by investing
activities.......................... (10,956) (3,187) (3,053) (4,412)
Cash flow (used) provided by financing
activities.......................... (17,426) (10,000) (4,504) (29,875)
</TABLE>
Footnotes appear on following page.
10
<PAGE> 14
(a) Interest expense, net includes for the nine months ended September 30, 1997
and 1996, for the three months ended March 31, 1996, for the nine months
ended December 31, 1996 and 1995 and for the years ended March 31, 1996,
1995, 1994 and 1993, non-cash interest expense (including amortization of
deferred financing costs and interest associated with the Company's 14 3/4%
Subordinated Convertible Debentures (the "Convertible Debentures")) of
$1,072,000, $1,130,000, $410,000, $1,101,000, $1,151,000, $1,561,000,
$5,432,000, $9,923,000 and $8,789,000, respectively.
(b) On June 1, 1997, the Company redeemed $30,000,000 principal amount of the
Senior Notes. In connection therewith, the Company recorded an
extraordinary charge of $1,713,000 (net of income tax benefit of $553,000).
See Note 2 to the interim consolidated financial statements included
elsewhere in this Prospectus.
(c) During the nine months ended December 31, 1996, the Company redeemed
$180,000,000 principal amount of the Company's 13 3/4% Senior Subordinated
Debentures (the "13 3/4% Debentures"). In connection therewith, the Company
recorded an extraordinary charge of $9,142,000. See Note 7 to the audited
consolidated financial statements included elsewhere in this Prospectus.
(d) On December 28, 1995, the Company redeemed $30,000,000 principal amount of
the 13 3/4% Debentures. In connection therewith, the Company recorded an
extraordinary charge of $1,913,000. See Note 7 to the audited consolidated
financial statements included elsewhere in this Prospectus.
(e) The extraordinary charge of $2,477,000 relates to the accelerated
amortization of unamortized financing costs associated with the prepayment
of a senior term loan in fiscal year 1993.
(f) Represents the cumulative effect of the change in method of accounting for
the discounting of liabilities for workers' compensation losses.
(g) Includes a charge for the cumulative effect of accounting change for
Statement of Financial Accounting Standards ("SFAS") No. 106 ($77,902,000)
and a benefit for the change in method of accounting for certain overhead
costs in inventory ($4,362,000).
(h) On September 2, 1994, the Company retired the $65,400,000 principal amount
of the Convertible Debentures held by Loral Corporation in exchange for
$12,760,000 in cash and 22.5% of the Company's outstanding capital stock.
As a result, the Company's stockholders' equity was increased by
$65,400,000 and long-term debt was reduced by an equal amount. See Note 9
to the audited consolidated financial statements included elsewhere in this
Prospectus.
(i) 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.
(j) 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 $2,016,000, $10,173,000, $31,736,000
and $21,210,000 for the three months ended March 31, 1996 and for the years
ended March 31, 1995, 1994 and 1993, respectively. Non-cash charges
included in the ratio of earnings to fixed charges and deficiency of
earnings available to cover fixed charges for the nine months ended
September 30, 1997 and 1996, for the three months ended March 31, 1996, for
the nine months ended December 31, 1996 and 1995 and the fiscal years ended
March 31, 1996, 1995, 1994, 1993 were $15,751,000, $15,388,000, $5,071,000,
$15,745,000, $15,411,000, $20,482,000, $24,275,000, $30,450,000 and
$28,651,000, respectively. Non-cash charges consist of depreciation,
amortization, non-cash interest on the Convertible Debentures and
amortization of deferred financing costs.
11
<PAGE> 15
RISK FACTORS
Prospective purchasers of the New Notes should consider carefully the
following matters, as well as the other information contained in this
Prospectus, before making a decision to tender their Old Notes in the Exchange
Offer.
HIGHLY LEVERAGED POSITION
Debt to Equity Ratio. The Company is highly leveraged. As of September 30,
1997, after giving pro forma effect to the Recapitalization, the Company would
have had approximately $530.0 million of total indebtedness outstanding, the
Company's subsidiaries would have had other liabilities of approximately $81.0
million outstanding, the Company would have had a stockholders' deficiency of
approximately $272.1 million and net income of $7.7 million. See
"Capitalization," "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 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 $18.4 million and $5.9 million
for the nine months ended September 30, 1997 and for the nine months ended
December 31, 1996, respectively. However, for the nine months ended September
30, 1996, and for the fiscal years ended March 31, 1996 and 1995, the Company
incurred net losses of approximately $1.3 million, $1.4 million and $10.2
million, respectively. For the nine months ended September 30, 1997 and 1996,
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 2.06, 1.25, 1.49
and 1.01, respectively. For the fiscal year ended March 31, 1995, and the three
months ended March 31, 1996, the
12
<PAGE> 16
Company's deficiency of earnings available to cover fixed charges was
approximately $10.2 million and $2.0 million, respectively. The Company's pro
forma ratio of earnings to fixed charges after giving effect to the
Recapitalization would have been 1.37, 1.18 and 1.30 for the nine months ended
September 30, 1997, the nine months ended December 31, 1996, and the LTM Period,
respectively. 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 will be subordinate 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 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
September 30, 1997, after giving pro forma effect to the Recapitalization, the
Company would have had approximately $345.0 million of Senior Indebtedness
outstanding. See "-- Holding Company Structure" and "Description of the
Notes -- Subordination."
HOLDING COMPANY STRUCTURE
The Company will be the sole obligor on the New Notes. The Company's
operations are conducted through, and substantially all of the Company's assets
are owned by, its directly owned operating subsidiaries, Aircraft Braking
Systems and Engineered Fabrics. As a result, the Company will be dependent on
the earnings and cash flow from Aircraft Braking Systems and Engineered Fabrics
to meet its obligations under the 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 September 30, 1997, after
giving pro forma effect to the Recapitalization, the Company's subsidiaries
would have had liabilities (including $345.0 million of Senior Indebtedness) of
approximately $426.0 million outstanding. See "Description of Certain
Indebtedness," "Description of the Notes -- Subordination" and "Capitalization."
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 will
not be secured.
CERTAIN COLLECTIVE BARGAINING MATTERS
All of Aircraft Braking Systems' hourly employees are represented by the
United Auto Workers' Union. In 1991, Aircraft Braking Systems' collective
bargaining agreement with the United Auto Workers' Union
13
<PAGE> 17
expired and a new collective bargaining agreement was not ratified by the
employees of Aircraft Braking Systems but was implemented by Aircraft Braking
Systems unilaterally. As a result, all employees that would have otherwise been
covered by such agreement have been employed by Aircraft Braking Systems without
any collective bargaining agreement. The Company believes that Aircraft Braking
Systems will be able to negotiate, without material disruptions to its business,
a satisfactory new collective bargaining agreement with its employees and there
have been, from time to time, discussions regarding this matter with union
representatives. However, there can be no assurance that a satisfactory
agreement will be reached with any of its employees or that discussions
regarding such agreement will not be accompanied by material disruptions to its
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, is the Syndication Agent under the New Credit Facility and, in such
capacity, is entitled to receive 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 LTM Period, sales of replacement parts for braking systems
previously installed on aircraft accounted for approximately 75% of Aircraft
Braking Systems' total revenues. The demand for replacement parts for the
Company's wheels and braking systems varies depending upon the number of
aircraft equipped with the Company's products and the number of landings made by
such aircraft. A reduction in airline travel will usually result in reduced
utilization of commercial aircraft, fewer landings, and a corresponding decrease
in the Company's sales of replacement parts and related income and cash flow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Since original equipment in new commercial aircraft is supplied at or
substantially below the Company's cost of production, delivery of new aircraft
equipped with the Company's products negatively affects cash flow. The Company's
business plan budgets cash needs based on current delivery schedules of new
aircraft and also accommodates certain increases in aircraft deliveries.
However, significant, unanticipated increases in commercial aircraft deliveries
in a given year could have a material adverse impact on the Company's cash flow
in such year.
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ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Management of the Company estimates that approximately $13.2 million of
annualized savings in the cost of carbon could be achieved by the 1998 fiscal
year-end from the operation at or near full capacity of the Company's new carbon
manufacturing facility. These cost savings estimates were prepared solely by
members of the management of the Company and are necessarily based on a number
of assumptions as to the future operating efficiencies of the facility and
capacity utilizations, as well as other matters, including general industry,
business and economic conditions, many of which are beyond the control of the
Company. All of such forward-looking statements are based on estimates and
assumptions made by management of the Company that, although believed to be
reasonable, are inherently uncertain and difficult to predict. There can be no
assurance that the cost savings anticipated in these forward-looking statements
will be achieved, nor can there be any assurance that unforeseen costs and
expenses or other factors will not offset any estimated or actual cost savings.
LITIGATION
The Company is involved in a contract dispute with Hitco Technologies, 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. Because of the amounts of general damages
alleged, a determination adverse to the Company could be material. While
management does not expect the outcome of the litigation to be unfavorable to
the Company, there can be no assurance as to the outcome of this litigation or
that a judgment against the Company would not materially adversely affect the
Company. Trial of the matters in dispute, in which Aircraft Braking Systems
seeks to defend against the claims against it as well as to recover damages, is
scheduled for July 1998. See "Business -- Supplies and Materials" and "-- 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%, 16% and
14% of the Company's total sales for the nine months ended December 31, 1996 and
for the fiscal years ended March 31, 1996 and 1995, 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."
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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 were, and the New
Notes are being, incurred for proper purposes and in good faith and that the
Company is solvent and will continue to be solvent after issuing the New Notes,
will have sufficient capital for carrying on its business after such issuance
and will be able to pay its debts as they mature.
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes will constitute a new class of securities with no established
trading market. The Company does not intend to list the New Notes on any
national securities exchange or to seek the admission thereof to trading in the
Nasdaq National Market. The Old Notes are designated for trading in the Private
Offerings, Resale and Trading through Automatic Linkages ("PORTAL") market. The
Company has been advised by the Initial Purchasers that the Initial Purchasers
currently intend to make a market in the New Notes. The Initial Purchasers are
not obligated to do so, however, and any market-making activities with respect
to the New Notes may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act, and may be limited during the Exchange
Offer and the pendency of any Shelf Registration Statement. Accordingly, no
assurance can be given that an active public or other market will develop for
the New Notes or as to the liquidity of the trading market for the New Notes. If
a trading market does not develop or is not maintained, holders of the New Notes
may experience difficulty in reselling the New Notes or may be unable to sell
them at all. If a market for the New Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the New Notes,
future trading prices of the New Notes will depend on many factors, including
among other things, prevailing interest rates, the Company's financial condition
and results of operations, and the market for similar notes. Depending on those
and other factors, the New Notes may trade at a discount from their principal
amount.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange the Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the
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Company believes that the New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such New Notes and neither
such holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes. Notwithstanding the foregoing, each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities (other than
Old Notes acquired directly from the Company). The Company has agreed that, for
a period of one year from the date of this Prospectus, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." However, the ability of any Holder to resell
the New Notes is subject to applicable state securities laws as described in
"-- Blue Sky Restrictions on Resale of New Notes" below.
NECESSITY TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Old Notes, Holders of Old Notes must transmit a properly
completed Letter of Transmittal, including all other documents required by such
Letter of Transmittal, to the Exchange Agent at the address set forth below
under "The Exchange Offer -- Exchange Agent" on or prior to the Expiration Date.
In addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
("DTC") pursuant to the procedure for book-entry transfer described herein, must
be received by the Exchange Agent prior to the Expiration Date or (iii) the
Holder must comply with the guaranteed delivery procedures described herein. See
"The Exchange Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on October 15, 1997 to the Initial
Purchasers, who placed the Old Notes with institutional investors, a limited
number of accredited investors and a limited number of foreign purchasers in
offshore transactions. In connection therewith, the Company and the Initial
Purchasers entered into the Registration Rights Agreement, which provides that
(i) the Company will file an Exchange Offer Registration Statement with the
Commission on or prior to 45 days after the Closing Date, (ii) the Company will
use its best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission as soon as possible, but in no event later than 120
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence the
Exchange Offer and use its best efforts to issue on the earliest practicable
date, but not later than 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New Notes
in exchange for all Old Notes tendered prior thereto in the Exchange Offer and
(iv) if obligated to file the Shelf Registration Statement, the Company will use
its best efforts to file the Shelf Registration Statement with the Commission on
or prior to 60 days after such filing obligation arises (and in any event within
120 days after the Closing Date) and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 60 days after such
obligation arises. Promptly after the effectiveness of the Registration
Statement, the Company will offer, pursuant to this Prospectus, to the Holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, to be issued without a restrictive legend and
which may, generally, be reoffered and resold by the holder without restrictions
or limitations under the Securities Act. The term "Holder" with respect to the
Exchange Offer means any person in whose name Old Notes are registered on the
books of the Company or any other person who has obtained a properly completed
bond power from the registered holder.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Instead, based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by any holder of
such New Notes (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 promulgated under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such Holder's business, such Holder has no arrangement or understanding with
any person to participate in the distribution of such New Notes and neither such
Holder nor any other such person is engaging in or intends to engage in a
distribution of such New Notes. Because the Commission has not considered the
Exchange Offer in the context of a no-action letter, there can be no assurance
that the staff of the Commission would make a similar determination with respect
to the Exchange Offer. Any Holder who is an affiliate of the Company or who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Notes cannot rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of one year after the date of this
Prospectus, it will
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make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities notifies the Company within the specified time
period that (A) it is prohibited by law or Commission policy from participating
in the Exchange Offer or (B) that it may not resell the New Notes acquired by it
in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Old Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Old Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to cause
the applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Note until (i) the date on which such Old Note has
been exchanged by a person other than a broker-dealer for a New Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Old Note for a New Note, the date on which such New Note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Old Note is distributed to
the public pursuant to Rule 144 under the Act.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Old Notes, with respect to the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to $0.05 per week per $1,000 principal amount of Old Notes held by
such Holder. The amount of the Liquidated Damages will increase by an additional
$0.05 per week per $1,000 principal amount of Old Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $0.50 per week per $1,000 principal
amount of Old Notes. All accrued Liquidated Damages will be paid by the Company
on each Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. Defined terms used in this section and not
otherwise defined shall have the meanings ascribed thereto in the Registration
Rights Agreement.
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The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, Holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement and such Old Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes have
been registered under the Securities Act and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing for
the payment of liquidated damages to the holders of the Old Notes under certain
circumstances relating to the Registration Rights Agreement, which provisions
will terminate upon the consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture under which the Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $185,000,000 aggregate principal amount
of the Old Notes are outstanding. The Company has fixed the close of business on
as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus, together with the Letter of
Transmittal, will initially be sent. As of such date, there were
registered Holders of the Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law (the "DGCL") or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral notice (confirmed in writing) or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering Holders for the purpose of the exchange of Old Notes.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, without expense, to
the tendering Holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral notice (confirmed in writing) or written notice
and will make a public announcement thereof prior to 9:00 a.m., New York City
time, on the next business day after each previously scheduled expiration date.
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The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under "The Exchange Offer -- Conditions" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral notice
(confirmed in writing) or written notice of such delay, extension or termination
to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five- to 10-business-day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from October 15, 1997, the date of
original issuance of the Old Notes. No interest will be paid on the Old Notes
accepted for exchange.
PROCEDURES FOR TENDERING
The tender of Old Notes by a Holder thereof pursuant to one of the
procedures set forth below and the acceptance thereof by the Company will
constitute a binding agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. This Prospectus, together with the Letter of Transmittal, will
first be sent on or about , to all Holders of Old Notes known to the
Company and the Exchange Agent.
Only a Holder of the Old Notes may tender such Old Notes in the Exchange
Offer. A Holder who wishes to tender any Old Notes for exchange pursuant to the
Exchange Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the Holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the Old Notes, Letter of Transmittal (or an Agent's
Message) and other required documents must be received by the Exchange Agent at
the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgement from the
participant in DTC's book-entry transfer facility tendering Old Notes which are
subject to Book-Entry Confirmation that such party has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against the participant.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED AND PROPER INSURANCE BE
OBTAINED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY.
21
<PAGE> 25
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal (or delivering an Agent's Message) and delivering such beneficial
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such beneficial owner's name or obtain a properly completed
bond power from the registered Holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder
who has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 promulgated under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company, among other
things, that (i) the New Notes acquired by the Holder and any beneficial owners
of Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) neither the
Holder nor such beneficial owner has an arrangement with any person to
participate in the distribution of such New Notes, (iii) neither the Holder nor
such beneficial owner nor any such other person is engaging in or intends to
engage in a distribution of such New Notes and (iv) neither the Holder nor any
such other person is an "affiliate," as defined under Rule 405 promulgated under
the Securities Act, of the Company. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities (other than Old Notes acquired directly from the Company),
may participate in the Exchange Offer but may be deemed
22
<PAGE> 26
an "underwriter" under the Securities Act and, therefore, must acknowledge in
the Letter of Transmittal that it will deliver a prospectus in connection with
any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in DTC's system may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at DTC, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees or an Agent's Message and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "-- Exchange Agent" on or prior to
the Expiration Date or the guaranteed delivery procedures described below must
be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message or any other required documents to the
Exchange Agent prior to the Expiration Date may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) or an Agent's Message together with
the certificate(s) representing the Old Notes, or a Book-Entry
Confirmation, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof)or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the persons withdrawing the tender and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or
23
<PAGE> 27
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawn Old
Notes and otherwise comply with the procedures of DTC. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without cost
to such Holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with DTC for the Old Notes).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
such Old Notes, if:
(a) the Exchange Offer shall violate applicable law or any applicable
interpretation of the staff of the Commission; or
(b) any action or proceeding is instituted or threatened in any court
or by any governmental agency that might materially impair the ability of
the Company to proceed with the Exchange Offer or any material adverse
development has occurred in any existing action or proceeding with respect
to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall deem necessary for the consummation of the Exchange
Offer.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering Holders (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described above, such Old Notes
will be credited to an account maintained with DTC), (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Old Notes
(see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Old Notes which
have not been withdrawn. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the waiver and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five- to 10-business-day period.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of
24
<PAGE> 28
Transmittal and requests for Notices of Guaranteed Delivery should be directed
to the Exchange Agent addressed as follows:
State Street Bank and Trust Company
P.O. Box 778
Boston, Massachusetts 02102-0078
Attention: Kellie Mullen
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal or delivering an Agent's Message, or if
a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized. The expenses of the Exchange Offer and the unamortized expenses
related to the issuance of the Old Notes will be amortized over the term of the
New Notes.
25
<PAGE> 29
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 $130.0 million.
2. The Company repaid all of its outstanding indebtedness ($54.5
million) under the Existing Credit Agreement.
3. The Company made provision for redemption of the Senior Notes by
irrevocably depositing $77.5 million (representing a price of 105.28% of
the principal amount of the Senior Notes, plus accrued interest through the
expected redemption date) with the Senior Notes Trustee. Concurrently with
such deposit, the Company caused the Senior Notes Trustee to send a notice
to the holders of the Senior Notes to the effect that such Senior Notes
will be redeemed 30 days from the date of such notice.
4. In addition to the repayment of its outstanding indebtedness under
the Existing Credit Agreement and provision for the redemption of the
Senior Notes, the Company purchased, for cash, all of the Existing Notes
pursuant to 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 the New Credit Facility that provides for
a $322.0 million Term Loan and a $50.0 million Revolving Loan, of which
$23.0 million was drawn at the time of the Recapitalization. The Term Loan
consists of Term Loan A in the principal amount of $50.0 million and Term
Loan B in the principal amount of $272.0 million. See "Description of
Certain Indebtedness -- New Credit Facility."
The Company issued the Old Notes for net proceeds of approximately $178.4
million (after deducting expenses payable by the Company in connection with the
Offering). The Company used such proceeds, together with borrowings under the
New Credit Facility, to effect the Recapitalization.
26
<PAGE> 30
SOURCES AND USES OF FUNDS
The following table illustrates the sources and uses of funds for the
Recapitalization. The Company will not receive any proceeds from the Exchange
Offer.
($ 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
======
<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
Estimated 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.
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.
27
<PAGE> 31
CAPITALIZATION
The following table sets forth as of September 30, 1997 the actual
capitalization of the Company and the pro forma capitalization of the Company as
adjusted to give effect to the Recapitalization. The table should be read in
conjunction with the "Unaudited Pro Forma Consolidated Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
----------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Existing Credit Agreement............................................ $ 54,500 $ --
Revolving Loan....................................................... -- 23,000(a)
Term Loan A.......................................................... -- 50,000
Term Loan B.......................................................... -- 272,000
11 7/8% Senior Secured Notes due 2003................................ 70,000 --
9 1/4% Senior Subordinated Notes Due 2007............................ -- 185,000
10 3/8% Senior Subordinated Notes due 2004........................... 140,000 --
-------- ---------
Total long-term debt................................................. 264,500 530,000
Stockholders' deficiency............................................. (15,221) (272,077)(b)
-------- ---------
Total capitalization......................................... $249,279 $ 257,923
======== =========
</TABLE>
- ---------------
(a) The $50.0 million Revolving Loan will have remaining borrowing availability
of approximately $18.8 million, net of outstanding letters of credit of $8.2
million.
(b) Gives effect to (i) the write-off of unamortized financing costs and the
redemption premium relating to the redemption of the Senior Notes, (ii) the
write-off of unamortized financing costs, the Tender Offer premium and
related expenses with respect to the Existing Notes and (iii) the repurchase
of equity interests pursuant to the Stock Purchase Agreement.
28
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected unaudited pro forma consolidated
financial information for the nine months ended September 30, 1997, the nine
months ended December 31, 1996 and the LTM Period, in each case giving effect to
the Recapitalization. The pro forma income statement and other data give effect
to the Recapitalization as if it had been consummated as of the first day of the
period indicated. The pro forma balance sheet information gives effect to the
Recapitalization as if it had been consummated as of September 30, 1997. The pro
forma income statement and other data do not reflect certain non-recurring
charges related to the Recapitalization, including a $12.0 million charge
relating to the exercise of stock options and other fees, and 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.
29
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AND OTHER DATA
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $224,296 $ 224,296
Cost of sales........................................... 140,707 140,707
-------- --------
Gross margin......................................... 83,589 83,589
Independent research and development.................... 7,909 7,909
Selling, general and administrative expenses............ 19,318 19,318
Amortization............................................ 7,734 7,734
-------- --------
Operating income..................................... 48,628 48,628
Interest expense, net................................... 22,778 12,238(a) 35,016
-------- --------
Income before income taxes and extraordinary charge..... 25,850 13,612
Income tax provision.................................... (5,767) (5,767)
-------- --------
Income before extraordinary charge...................... 20,083 7,845
Extraordinary charge.................................... (1,713) (1,713)
-------- --------
Net Income........................................... $ 18,370 $ 6,132
======== ========
OTHER DATA (FOR THE PERIOD):
EBITDA(b)............................................... $ 63,307 $ 63,307
Capital expenditures.................................... 6,026 6,026
Depreciation and amortization........................... 14,679 14,679
Ratio of Earnings to Fixed Charges(c)................... 2.06x 1.37x
Cash flow provided (used) by operating activities(d).... $ 37,133 (16,519) $ 20,614
Cash flow used by investing activities.................. (7,807) (7,807)
Cash flow (used) provided by financing activities(d).... (30,084) 3,531 (26,553)
</TABLE>
- ---------------
(a) 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%........................................... $ 1,380
Term Loan A at 8.0%.............................................. 3,000
Term Loan B at 8.125%............................................ 16,575
Notes at 9.25%................................................... 12,835
Amortization of deferred financing costs......................... 1,125
Other fees....................................................... 101
Elimination of historical interest expense....................... (22,778)
-------
$ 12,238
=======
</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 $647.
(b) 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.
(c) 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).
(d) The adjustment to cash flow provided (used) by operating activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Interest expense............................................................. $(12,238)
Interest payable............................................................. (4,281)
--------
$(16,519)
========
</TABLE>
The adjustment to cash flow (used) provided by financing activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Increase in long-term debt................................................... $ 265,500
Purchase of capital stock.................................................... (226,900)
Financing costs relating to the Recapitalization............................. (12,104)
Tender Offer premium, redemption premium and other fees...................... (22,965)
---------
$ 3,531
=========
</TABLE>
30
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AND OTHER DATA
NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $212,703 $ 212,703
Cost of sales........................................... 136,813 136,813
-------- --------
Gross margin......................................... 75,890 75,890
Independent research and development.................... 8,623 8,623
Selling, general and administrative expenses............ 17,297 17,297
Amortization............................................ 7,810 7,810
-------- --------
Operating income..................................... 42,160 42,160
Interest expense, net................................... 27,197 7,819(a) 35,016
-------- --------
Income before income taxes and extraordinary charge..... 14,963 7,144
Income tax benefit...................................... 81 81
-------- --------
Income before extraordinary charge...................... 15,044 7,225
Extraordinary charge.................................... (9,142) (9,142)
-------- --------
Net Income (loss).................................... $ 5,902 $ (1,917)
======== ========
OTHER DATA (FOR THE PERIOD):
EBITDA(b)............................................... $ 56,804 $ 56,804
Capital expenditures.................................... 14,091 14,091
Depreciation and amortization........................... 14,644 14,644
Ratio of Earnings to Fixed Charges(c)................... 1.49x 1.18x
Cash flow provided (used) by operating activities(d).... $ 23,394 (14,508) $ 8,886
Cash flow used by investing activities.................. (14,341) (14,341)
Cash flow (used) provided by financing activities(d).... (9,957) 5,181 (4,776)
</TABLE>
- ---------------
(a) 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%....................................................... $ 1,380
Term Loan A at 8.0%.......................................................... 3,000
Term Loan B at 8.125%........................................................ 16,575
Notes at 9.25%............................................................... 12,835
Amortization of deferred financing costs..................................... 1,125
Other fees................................................................... 101
Elimination of historical interest expense................................... (27,197)
-------
$ 7,819
=======
</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 $647.
(b) 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.
(c) 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).
(d) The adjustment to cash flow provided (used) by operating activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Interest expense............................................................. $ (7,819)
Interest payable............................................................. (6,689)
-------
$(14,508)
=======
</TABLE>
The adjustment to cash flow (used) provided by financing activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Increase in total debt....................................................... $ 237,000
Purchase of capital stock.................................................... (196,750)
Financing costs relating to the Recapitalization............................. (12,104)
Tender Offer premium, redemption premium and other fees...................... (22,965)
-------
$ 5,181
=======
</TABLE>
31
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AND OTHER DATA
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $294,496 $ 294,496
Cost of sales........................................... 186,697 186,697
-------- --------
Gross margin......................................... 107,799 107,799
Independent research and development.................... 10,452 10,452
Selling, general and administrative expenses............ 25,462 25,462
Amortization............................................ 10,341 10,341
-------- --------
Operating income..................................... 61,544 61,544
Interest expense, net................................... 30,671 16,017(a) 46,688
-------- --------
Income before income taxes and extraordinary charge..... 30,873 14,856
Income tax provision.................................... (5,466) (5,466)
-------- --------
Income before extraordinary charge...................... 25,407 9,390
Extraordinary charge.................................... (1,713) (1,713)
-------- --------
Net income........................................... $ 23,694 $ 7,677
======== ========
OTHER DATA (FOR THE PERIOD):
EBITDA(b)............................................... $ 81,270 $ 81,270
Capital expenditures.................................... 11,600 11,600
Depreciation and amortization........................... 19,726 19,726
Ratio of Earnings to Fixed Charges(c)................... 1.93x 1.30x
Cash flow provided (used) by operating activities(d).... $ 46,908 (20,298) $ 26,610
Cash flow used by investing activities.................. (13,382) (13,382)
Cash flow (used) provided by financing activities(d).... (37,984) 3,531 (34,453)
</TABLE>
- ---------------
(a) 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................................... (30,671)
-------
$ 16,017
=======
</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.
(b) 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.
(c) 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).
(d) The adjustment to cash flow provided (used) by operating activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Interest expense............................................................. $ (16,017)
Interest payable............................................................. (4,281)
-------
$ (20,298)
=======
</TABLE>
The adjustment to cash flow (used) provided by financing activities consists
of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Increase in long-term debt................................................... $ 265,500
Purchase of capital stock.................................................... (226,900)
Financing costs relating to the Recapitalization............................. (12,104)
Tender Offer premium, redemption premium and other fees...................... (22,965)
-------
$ 3,531
=======
</TABLE>
32
<PAGE> 36
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 750 (750)(a) $ --
Accounts receivable, net.................................................. 40,658 40,658
Inventory................................................................. 65,111 65,111
Other current assets...................................................... 662 662
-------- --------
Total current assets.................................................... 107,181 106,431
-------- --------
Property, Plant and Equipment, net.......................................... 69,067 69,067
Deferred Charges............................................................ 23,961 5,113(b) 29,074
Cost in Excess of Net Assets Acquired....................................... 192,426 192,426
Intangible Assets........................................................... 17,717 17,717
-------- --------
Total Assets........................................................ $410,352 $414,715
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable.......................................................... $ 12,133 $ 12,133
Current portion of long-term debt......................................... 1,500 1,500
Interest payable.......................................................... 4,281 (4,281)(c) --
Other current liabilities................................................. 53,739 53,739
-------- --------
Total current liabilities............................................... 71,653 67,372
-------- --------
Postretirement Benefit Obligation Other Than Pensions....................... 76,301 76,301
Other Long-Term Liabilities................................................. 14,619 14,619
Long-Term Debt.............................................................. 263,000 265,500(d) 528,500
Stockholders' Deficiency.................................................... (15,221) (256,856)(e) (272,077)
-------- --------
Total Liabilities and Stockholders' Deficiency...................... $410,352 $414,715
======== ========
</TABLE>
- ---------------
(a) The net decrease in cash of $.75 million reflects the following:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Sources:
New Credit Facility............................................................................. $345,000
The Offering.................................................................................... 185,000
--------
530,000
Uses:
Repayment of Borrowings under Existing Credit Agreement(1)...................................... $ 54,800
Redemption of Senior Notes(1)................................................................... 72,800
Purchase of Existing Notes(1)................................................................... 141,200
Purchase of Equity Interests.................................................................... 226,900
Estimated Fees and Expenses..................................................................... 35,050
--------
530,750
--------
Net Decrease in Cash........................................................................ $ 750
========
---------------
(1) Includes accrued interest.
</TABLE>
(b) Represents the capitalization of deferred financing costs related to the
Recapitalization, net of the elimination of historical deferred financing
costs:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Financing costs related to the Recapitalization............... $12,104
Elimination of historical financing charges................... (6,991)
-------
$5,113
=======
</TABLE>
(c) Represents indebtedness incurred under (i) the Revolving Loan of $23.0
million, (ii) Term Loan A of $50.0 million, (iii) Term Loan B of $272.0
million and (iv) the Notes of $185.0 million, less the repayment of existing
indebtedness.
(d) Represents the payment of accrued interest on existing indebtedness.
(e) The adjustment to stockholders' deficiency consists of:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Purchase of capital stock..................................... $ (226,900)
Write-off of unamortized financing charges from retirement of
existing debt............................................... (6,991)
Tender Offer premium, redemption premium and other fees....... (22,965)
---------
$ (256,856)
=========
</TABLE>
33
<PAGE> 37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information for the Company for the nine months ended September 30, 1997 and
September 30, 1996, the three months ended March 31, 1996, the nine months ended
December 31, 1996 and December 31, 1995 and the years ended March 31, 1996,
1995, 1994 and 1993. 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 nine months ended December 31, 1996 and for each of the
years ended March 31, 1996, 1995, 1994 and 1993 is derived from the audited
financial statements of the Company. The historical financial information of the
Company for the three months ended March 31, 1996, the nine months ended
September 30, 1997 and September 30, 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 historical financial information for
the nine months ended September 30, 1997 is not necessarily indicative of the
results expected for the full year. 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.
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED ENDED NINE MONTHS ENDED
SEPTEMBER 30, MARCH 31, DECEMBER 31,
-------------------- ------------ -----------------------
1997 1996 1996 1996 1995
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............... $224,296 $207,455 $ 64,952 $212,703 $ 199,784
Cost of sales........... 140,707 134,981 44,158 136,813 136,277
-------- -------- -------- -------- --------
Gross margin.......... 83,589 72,474 20,794 75,890 63,507
Independent research and
development........... 7,909 9,237 3,157 8,623 6,610
Selling, general and
administrative
expenses.............. 19,318 18,339 7,186 17,297 15,378
Amortization............ 7,734 7,805 2,602 7,810 7,813
-------- -------- -------- -------- --------
Operating income...... 48,628 37,093 7,849 42,160 33,706
Interest expense,
net(a)................ 22,778 29,064 9,760 27,197 31,288
-------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary charge
and cumulative effect
of accounting
changes............... 25,850 8,029 (1,911) 14,963 2,418
Income tax (provision)
benefit............... (5,767) (220) -- 81 --
-------- -------- -------- -------- --------
Income (loss) before
extraordinary charge
and cumulative effect
of accounting
changes............... 20,083 7,809 (1,911) 15,044 2,418
Extraordinary charge.... (1,713)(b) (9,142)(c) -- (9,142)(c) (1,913)(d)
Cumulative effect of
accounting changes.... -- -- -- -- --
-------- -------- -------- -------- --------
Net Income (loss)..... $ 18,370 $ (1,333) $ (1,911) $ 5,902 $ 505
======== ======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital......... $ 35,528 $ 41,669 $ 36,327 $ 34,189 $ 38,938
Total assets............ 410,352 423,515 416,037 419,115 412,028
Long-term debt(h)....... 263,000 300,000 294,000 287,000 293,000
Stockholders'
deficiency(g), (h).... (15,221) (38,994) (39,701) (33,306) (34,327)
OTHER DATA (FOR THE
PERIOD):
EBITDA(i)............... $ 63,307 $ 51,351 $ 12,510 $ 56,804 $ 47,966
Capital expenditures.... 6,026 15,592 7,075 14,091 3,343
Depreciation and
amortization.......... 14,679 14,258 4,661 14,644 14,260
Ratio of earnings to
fixed charges(j)...... 2.06x 1.25x 1.49x 1.07x
Cash flow provided by
operating
activities............ $ 37,133 $ 19,140 $ 5,521 $ 23,394 $ 16,780
Cash flow used by
investing
activities............ (7,807) (16,054) (7,287) (14,341) (3,669)
Cash flow (used)
provided by financing
activities............ (30,084) (1,057) 1,000 (9,957) (18,426)
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------
1996 1995 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............... $ 264,736 $238,756 $226,131 $277,107
Cost of sales........... 180,435 164,697 159,751 199,002
-------- -------- -------- --------
Gross margin.......... 84,301 74,059 66,380 78,105
Independent research and
development........... 9,767 8,363 12,858 11,417
Selling, general and
administrative
expenses.............. 22,564 19,208 22,421 24,154
Amortization............ 10,415 10,411 10,884 10,258
-------- -------- -------- --------
Operating income...... 41,555 36,077 20,217 32,276
Interest expense,
net(a)................ 41,048 46,250 51,953 53,486
-------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary charge
and cumulative effect
of accounting
changes............... 507 (10,173) (31,736) (21,210)
Income tax (provision)
benefit............... -- -- -- --
-------- -------- -------- --------
Income (loss) before
extraordinary charge
and cumulative effect
of accounting
changes............... 507 (10,173) (31,736) (21,210)
Extraordinary charge.... (1,913)(d) -- -- (2,477)(e)
Cumulative effect of
accounting changes.... -- -- (2,305)(f) (73,540)(g)
-------- -------- -------- --------
Net Income (loss)..... $ (1,406) $(10,173) $(34,041) $(97,227)
======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital......... $ 36,327 $ 48,025 $ 53,091 $ 70,028
Total assets............ 416,037 429,074 446,880 489,968
Long-term debt(h)....... 294,000 310,000 381,421 379,478
Stockholders'
deficiency(g), (h).... (39,701) (34,748) (90,355) (51,868)
OTHER DATA (FOR THE
PERIOD):
EBITDA(i)............... $ 60,476 $ 54,920 $ 40,744 $ 52,138
Capital expenditures.... 10,418 2,824 3,127 4,670
Depreciation and
amortization.......... 18,921 18,843 20,527 19,862
Ratio of earnings to
fixed charges(j)...... 1.01x
Cash flow provided by
operating
activities............ $ 22,301 $ 17,353 $ 8,963 $ 35,570
Cash flow used by
investing
activities............ (10,956) (3,187) (3,053) (4,412)
Cash flow (used)
provided by financing
activities............ (17,426) (10,000) (4,504) (29,875)
</TABLE>
Footnotes appear on following page.
34
<PAGE> 38
(a) Interest expense, net includes for the nine months ended September 30, 1997
and 1996, for the three months ended March 31, 1996, for the nine months
ended December 31, 1996 and 1995 and for the years ended March 31, 1996,
1995, 1994 and 1993, non-cash interest expense (including amortization of
deferred financing costs and interest associated with the Company's
Convertible Debentures of $1,072,000, $1,130,000, $410,000, $1,101,000,
$1,151,000, $1,561,000, $5,432,000, $9,923,000 and $8,789,000, respectively.
(b) On June 1, 1997, the Company redeemed $30,000,000 principal amount of the
Senior Notes. In connection therewith, the Company recorded an extraordinary
charge of $1,713,000 (net of income tax benefit of $553,000). See Note 2 to
the interim consolidated financial statements included elsewhere in this
Prospectus.
(c) During the nine months ended December 31, 1996, the Company redeemed
$180,000,000 principal amount of the Company's 13 3/4% Debentures. In
connection therewith, the Company recorded an extraordinary charge of
$9,142,000. See Note 7 to the audited consolidated financial statements
included elsewhere in this Prospectus.
(d) On December 28, 1995, the Company redeemed $30,000,000 principal amount of
the 13 3/4% Debentures. In connection therewith, the Company recorded an
extraordinary charge of $1,913,000. See Note 7 to the audited consolidated
financial statements included elsewhere in this Prospectus.
(e) The extraordinary charge of $2,477,000 relates to the accelerated
amortization of unamortized financing costs associated with the prepayment
of a senior term loan in fiscal year 1993.
(f) Represents the cumulative effect of the change in method of accounting for
the discounting of liabilities for workers' compensation losses.
(g) Includes a charge for the cumulative effect of accounting change for SFAS
No. 106 ($77,902,000) and a benefit for the change in method of accounting
for certain overhead costs in inventory ($4,362,000).
(h) On September 2, 1994, the Company retired the $65,400,000 principal amount
of the Convertible Debentures held by Loral Corporation in exchange for
$12,760,000 in cash and 22.5% of the Company's outstanding capital stock. As
a result, the Company's stockholders' equity was increased by $65,400,000
and long-term debt was reduced by an equal amount. See Note 9 to the audited
consolidated financial statements included elsewhere in this Prospectus.
(i) 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.
(j) 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 $2,016,000, $10,173,000, $31,736,000 and $21,210,000 for
the three months ended March 31, 1996 and for the years ended March 31,
1995, 1994 and 1993, respectively. Non-cash charges included in the ratio of
earnings to fixed charges and deficiency of earnings available to cover
fixed charges for the nine months ended September 30, 1997 and 1996, for the
three months ended March 31, 1996, for the nine months ended December 31,
1996 and 1995 and the fiscal years ended March 31, 1996, 1995, 1994, 1993
were $15,751,000, $15,388,000, $5,071,000, $15,745,000, $15,411,000,
$20,482,000, $24,275,000, $30,450,000 and $28,651,000, respectively.
Non-cash charges consist of depreciation, amortization, non-cash interest on
the Convertible Debentures and amortization of deferred financing costs.
35
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Aircraft Braking Systems generates approximately 75% of its revenues
through the sale of replacement parts for wheels and braking systems previously
manufactured by the Company and its predecessors and installed on over 30,000
commercial, general aviation and military aircraft. As is customary in the
industry, Aircraft Braking Systems incurs substantial expenditures to research,
develop, design and supply original wheel and brake equipment to aircraft
manufacturers at or below the cost of production. Research, development and
design expenditures are charged to operations when incurred. Original wheel and
brake equipment supplied to aircraft manufacturers at or below the cost of
production ("Program Investments") are charged to operations when delivered to
the aircraft manufacturers. Since most modern aircraft have a useful life of 25
years or longer and require periodic replacement of certain components of the
braking system, the Company typically recoups its initial investment in original
equipment and generates significant profits from the sales of replacement parts
over the life of the aircraft. The Company has invested and will continue to
invest significant resources to have its products selected for use on new
commercial airframes, focusing particularly on medium- and short-range aircraft.
From April 1, 1994 through December 31, 1996, the Company spent an aggregate of
approximately $101.0 million for research, development, design and Program
Investments. The Company has been selected as a supplier of wheels and carbon
brakes on the Airbus A-321, the sole supplier of wheels, carbon brakes and
anti-skid systems on the MD-90, the sole supplier of wheels and brakes for the
Saab 2000, the Canadair Regional Jet, the Lear 60 and as a supplier of wheels
and carbon brakes for the Airbus A-330 and A-340. These programs are in the
early stages of their life cycles and represent significant future revenue
opportunities for the Company.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared with the Nine Months Ended
September 30, 1996
Sales. Sales for the nine months ended September 30, 1997 totaled $224.3
million, reflecting an increase of $16.8 million, or 8.1%, compared with $207.5
million 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 $19.7 million, primarily on the Fokker Fo-100, Canadair Regional
Jet, McDonnell Douglas MD-80, DC-10 and Lear programs. Partially offsetting this
increase were lower military sales of $2.9 million, primarily on the F-16
program.
Operating Income. Operating income increased 31.1%, or $11.5 million, to
$48.6 million or 21.7% of sales for the nine months ended September 30, 1997
compared with $37.1 million or 17.9% of sales for the same period in the prior
year. Operating margins increased primarily due to the overhead absorption
effect relating to the higher sales volume, a favorable sales mix whereby
commercial sales, with higher margins, comprised a greater percentage of total
sales, lower costs relating to litigation and lower independent research and
development costs relating to the MD-90 program and carbon research.
Interest Expense, Net. Interest expense, net decreased $6.3 million for
the nine months ended September 30, 1997 compared with 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% Debentures with the
Existing Notes and borrowings under the Existing Credit Agreement.
Effective Tax Rate. The Company's effective tax rate of 22.3% for the nine
months ended September 30, 1997, differs from the statutory rate of 35% due to a
net decrease in the valuation allowance and a $.6 million charge for foreign
taxes. For the same period in the prior year, the effective tax rate of 2.7%
differed from the statutory rate of 35% due to a net decrease in the valuation
allowance. The increase in the effective tax rate in 1997 is primarily due to
the charge for foreign taxes and a net change in the valuation allowance.
36
<PAGE> 40
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 the 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.
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
Existing Notes on August 15, 1996, and borrowings under the Existing Credit
Agreement. This decrease was partially offset by the need to keep both the
13 3/4% Debentures and the Existing Notes outstanding during the redemption
notification period of 30 days.
Fiscal Year 1996 Compared with Fiscal Year 1995
Sales. Sales for fiscal year 1996 totaled $264.7 million reflecting an
increase of $26.0 million, or 10.9%, compared with the prior year. This increase
was due to higher commercial sales of wheels and brakes for commercial transport
aircraft of $16.6 million, primarily on the DC-9, DC-10, MD-80, MD-90 and Fo-100
programs, partially offset by lower general aviation sales of $4.7 million on
various aircraft. Military sales increased $14.1 million primarily on the F-16
program.
Gross Margin. The gross margin for fiscal year 1996 was 31.8% compared
with 31.0% for fiscal year 1995. This increase was primarily due to operating
efficiencies and the overhead absorption effect relating to the higher sales
volume, partially offset by higher shipments of original equipment to airframe
manufacturers at or below the cost of production.
Independent Research and Development. Independent research and development
costs were $9.8 million in fiscal year 1996 compared with $8.4 million in fiscal
year 1995, or 3.7% and 3.5% of sales for fiscal years 1996 and 1995,
respectively. This increase was primarily due to higher costs relating to carbon
research and development.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.4 million in fiscal year 1996 compared with
fiscal year 1995. This increase was primarily due to a provision made against
accounts receivable during fiscal year 1996, higher performance-related
incentive compensation and foreign tax-related expenses. The provision against
accounts receivable was primarily for two of the Company's customers (Fokker
Aviation and Business Express) who filed for bankruptcy during fiscal year 1996.
Interest Expense, Net. Net interest expense decreased $5.2 million in
fiscal year 1996 compared with the prior year. This decrease was due to the
retirement of the Convertible Debentures on September 2, 1994, and the
redemption of $30 million principal amount of the 13 3/4% Debentures on December
28, 1995.
37
<PAGE> 41
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 prior credit facilities.
The Company's liquidity needs will arise primarily from debt service on the
indebtedness represented by the Notes and the New Credit Facility, and from the
funding of its capital expenditures and Program Investments. Upon completion of
the Recapitalization, the Company had outstanding approximately $530.0 million
of indebtedness, consisting of $185.0 million principal amount of the Notes and
$345.0 million in borrowings under the New Credit Facility. See "Risk
Factors -- Highly Leveraged Position."
The Company's New Credit Facility consists of a $322.0 million senior Term
Loan and a $50.0 million senior Revolving Loan. The Term Loan consists of Term
Loan A in the principal amount of $50.0 million and Term Loan B in the principal
amount of $272.0 million. All borrowings under the Revolving Loan will mature in
2003. Term Loan A is a six-year amortizing facility maturing in 2003. Term Loan
B is an eight-year amortizing facility maturing in 2005. In addition to
scheduled quarterly principal payments on the Term Loan, 75% to 50% of excess
cash flow (as defined) must be used to prepay the principal. The Company's
subsidiaries, Aircraft Braking Systems and Engineered Fabrics, are the borrowers
under the New Credit Facility. 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. The Company's guarantee is secured by a pledge of all
the issued and outstanding stock of the subsidiaries and intercompany notes held
by the Company.
On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of the 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. In connection with the
Recapitalization, the Company redeemed the remaining $70.0 million aggregate
principal amount of the Senior Notes, purchased all the $140.0 million aggregate
principal amount of the Existing Notes pursuant to the Tender Offer and will
record an extraordinary charge of approximately $29.8 million for the write-off
of unamortized financing costs, redemption premiums and Tender Offer payments.
In addition, the Company will directly increase its stockholders' deficiency by
approximately $218.6 million for the repurchase of a portion of its capital
stock and record a charge to operations of approximately $12.0 million relating
to the exercise of stock options and other fees. All charges will be reflected
in the fourth quarter of 1997.
During the nine months ended December 31, 1996, the Company redeemed the
remaining $180 million of the 13 3/4% Debentures. The Company used the net
proceeds from the $140 million principal amount of Existing Notes, together with
bank borrowings, to redeem the remaining 13 3/4% Debentures at a price of 102.5%
of the principal amount thereof. In connection therewith, the Company recorded
an extraordinary charge of $9.1 million consisting of redemption premiums and
the write-off of unamortized financing costs.
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 meet 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
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 discretionary investments.
38
<PAGE> 42
CASH FLOW
Cash flow from operating activities for the nine months ended September 30,
1997 and 1996, for the nine months ended December 31, 1996 and 1995 and for the
years ended March 31, 1996 and 1995 was $37.1 million, $19.1 million, $23.4
million, $16.8 million, $22.3 million and $17.4 million, respectively. Cash flow
for the nine months ended September 30, 1997 was higher than cash flow for the
nine months ended September 30, 1996 primarily due to improved profitability
before extraordinary charges and lower inventory, partially offset by higher
trade accounts receivable. 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. Cash flow for the year ended
March 31, 1996 was higher than cash flow for the year ended March 31, 1995
primarily due to improved profitability before extraordinary charges, partially
offset by higher inventory to meet increased sales levels.
Capital spending for the nine months ended September 30, 1997 and 1996, for
the nine months ended December 31, 1996 and 1995 and for the years ended March
31, 1996 and 1995 was $6.0 million, $15.6 million, $14.1 million, $3.3 million,
$10.4 million and $2.8 million, respectively. The decrease for the nine months
ended September 30, 1997 compared with September 30, 1996, the increase for the
nine months ended December 31, 1996 compared with December 31, 1995 and the
increase for the year ended March 31, 1996 compared with March 31, 1995 was
primarily due to construction of a 21,000 square foot expansion to the carbon
manufacturing building at the Company's Akron, Ohio facility that was started in
November 1995 and completed in April 1997. Capital spending for the year ended
December 31, 1997 is expected to be approximately $8.0 million.
Net cash outflow for the nine months ended September 30, 1997 and 1996, for
the nine months ended December 31, 1996 and 1995 and for the years ended March
31, 1996 and 1995 was $30.1 million, $1.1 million, $10.0 million, $18.4 million,
$17.4 million and $10.0 million, respectively. The Company used $28.5 million to
pay indebtedness during the nine months ended September 30, 1997 compared with a
$9.0 million increase in debt during the nine months ended September 30, 1996
offset by approximately $11.3 million of refinancing expenditures. $1.0 million
was used to pay indebtedness and approximately $11.3 million was used for
refinancing expenditures during the nine months ended December 31, 1996 compared
with $17.0 million during the nine months ended December 31, 1995. $16.0 million
was used to pay indebtedness during the year ended March 31, 1996 compared with
$10.0 million for the year ended March 31, 1995.
INFLATION
A majority of the Company's sales are conducted through annually
established price lists and long-term contracts. The effect of inflation on the
Company's sales and earnings is minimal because the selling prices of such price
lists and contracts, established for deliveries in the future, generally reflect
estimated costs to be incurred in these future periods. In addition, some
contracts provide for price adjustments through escalation clauses.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 is currently evaluating the
impact, if any, of SFAS No. 130.
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, of SFAS No. 131.
39
<PAGE> 43
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 year 2000
compliant. The Company is surveying others with whom it does business, and is
not now aware of 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.
40
<PAGE> 44
BUSINESS
GENERAL
The Company is, through its wholly owned subsidiary, 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. The
Company sells its products to virtually all major airframe manufacturers and
most commercial airlines and to the United States and certain foreign
governments. In addition, the Company is, through its other wholly owned
subsidiary, Engineered Fabrics, 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 LTM Period, the
Company reported revenues of $294.5 million, of which 89.3% were derived from
sales made by Aircraft Braking Systems, EBITDA of $81.3 million and net income
of $23.7 million.
Aircraft Braking Systems and its predecessors have been leaders in the
design and development of aircraft wheels, brakes and anti-skid systems,
investing significant resources to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
THE AIRCRAFT WHEEL AND BRAKE INDUSTRY
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft
certification process, competition among aircraft wheel and brake suppliers most
often occurs at the time the airframe manufacturer makes its initial
installation decision. Generally, competing suppliers submit proposals in
response to requests for bids from manufacturers. Selections are made by the
manufacturer on the basis of technological superiority, conformity to design
criteria established by the manufacturer and pricing considerations. Typically,
general aviation aircraft manufacturers will select one supplier of wheels and
brakes for a particular aircraft. In the commercial transport market, however,
there will often be "dual sourcing" of wheels and brakes. In such case, an
airframe manufacturer may approve and receive FAA certification to configure a
particular airframe with equipment provided by two or more wheel and brake
manufacturers. Where two suppliers have been certified, the aircraft customer,
such as a major airline, will designate the original equipment to be installed
on the customer's aircraft. Competition among two certified suppliers for that
airline's initial installation decision generally focuses on such factors as the
system's "cost-per-landing," given certain assumptions concerning the frequency
of replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
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<PAGE> 45
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 using its products. These aircraft
typically make frequent landings and correspondingly require more frequent
replacement of brake parts. The braking systems produced by Aircraft Braking
Systems are either carbon or steel-based. While steel-based systems typically
are sold for less than carbon-based systems, such systems generally require more
frequent replacement because their steel brake pads tend to wear more quickly.
The Company's commercial transport fleet continued to grow during the nine
months ended December 31, 1996, due to an increase in the number of new aircraft
entering service, as well as a slower than expected retirement rate of older
aircraft. Airlines have responded to recent FAA regulatory noise abatement
requirements by outfitting their older DC-9 fleets with engine hushkits and
aircraft structural overhauls which effectively add up to 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 U.S. Airways have opted for DC-9 life extension refurbishment
programs, to meet capacity needs, in lieu of buying replacement aircraft new.
Other airlines are expected to follow similar strategies, as the economics
generally are more favorable.
Approximately 75% of Aircraft Braking Systems' revenues are derived from
the sale of replacement parts. As of December 31, 1996, the Company's products
had been installed on over 30,000 commercial transport, general aviation and
military aircraft. Commercial transport aircraft include the DC-9, DC-10, Fokker
Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340 on all of which Aircraft
Braking Systems is the sole-source supplier. In addition, the Company supplies
spare parts for the MD-80 program on a dual-source wheel and brake program.
Aircraft Braking Systems has been successful in having its wheels and
brakes selected for use on a number of new high-cycle airframe designs. These
aircraft that are just beginning to enter service include the McDonnell Douglas
MD-90, Airbus A-321, Saab 2000, Lear 60 and Fairchild Metro 23. Most recently,
Aircraft Braking Systems has been successful in being awarded the RJ-700
program, 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.
To date, Aircraft Braking Systems has been the sole supplier for wheels,
carbon brakes and anti-skid equipment on the new McDonnell Douglas MD-90
twin-jet. The MD-90 adds new performance characteristics to a product line that
began as the DC-9 model jet that first flew in 1965 and later evolved into the
popular MD-80 series also furnished with Aircraft Braking Systems' wheels and
brakes. McDonnell Douglas has booked orders for 154 MD-90 aircraft. However,
Boeing (which acquired McDonnell Douglas in August 1997) has indicated that it
may stop producing the MD-80 and the MD-90 after completing existing orders.
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<PAGE> 46
Aircraft Braking Systems is a basic supplier of wheels and carbon brakes on
the Airbus A-321, the European consortium's new 186-seat "stretch" version of
its popular A-320 standard body twin-jet. Airbus has booked orders for 195 A-321
aircraft. Of the 54 aircraft delivered to date, Aircraft Braking Systems has
provided wheels and brakes for 41 of these aircraft.
Aircraft Braking Systems' anti-skid systems, which are integrated into a
braking system, are designed to minimize the distance required to stop an
aircraft by utilizing sensors, mounted in the axle and driven by the wheel to
maximize the braking force while also preventing the wheels from locking and
skidding. Of the three principal competitors in the wheel and brake industry,
Aircraft Braking Systems, 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 98% of the market share of the
three competitors (and approximately 17% of the total market). Because of the
sensitivity of anti-skid systems to variations in brake performance, the Company
believes that the ability to control the design and performance characteristics
of the brakes and its integrated anti-skid system gives Aircraft Braking Systems
a competitive advantage over its two largest competitors. Other products
manufactured by the Company include helicopter rotor brakes and brake
temperature monitoring equipment for various types of aircraft.
The following table shows the distribution of sales of aircraft wheels,
brakes and anti-skid systems to total sales of the Company:
<TABLE>
<CAPTION>
FISCAL YEARS
NINE MONTHS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -----------------
1996 1996 1995
----------------- ---- ----
<S> <C> <C> <C>
Wheels and brakes.................... 81% 80% 80%
Anti-skid systems.................... 9% 8% 7%
--- --- ---
Total...................... 90% 88% 87%
=== === ===
</TABLE>
Engineered Fabrics. 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 nine months ended December 31, 1996,
approximately 10% of the Company's total revenues were derived from sales made
by Engineered Fabrics.
Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the nine months ended December 31, 1996, sales of fuel
tanks accounted for approximately 68% of Engineered Fabrics' total revenues. For
military 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 therefore
cost-advantageous. Engineered Fabrics also competes in the nitrile-designed fuel
tank market and won a three-year requirements contract in 1996 to supply nitrile
fuel tanks to the U.S. Navy for its F-14 aircraft.
In addition to fuel tanks, Engineered Fabrics produces iceguards, which are
heating systems made out of layered composite materials that are applied on
engine inlets, propellers, rotor blades and tails. Encapsulated in the material
are heating elements which are connected to the electrical system of the
aircraft and, when activated by the pilot, the system provides the protection.
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
43
<PAGE> 47
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
The Company sells its products to more than 175 airlines, airframe
manufacturers, governments and distributors within each of the commercial
transport, general aviation and military aircraft markets. Sales to the
Government represented approximately 12%, 16% and 14% of total sales for the
nine months ended December 31, 1996 and for the fiscal years ended March 31,
1996 and 1995, respectively. No other customer accounted for more than 10% of
sales.
The following table shows the distribution of total Company revenues by
respective market, as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEARS
NINE MONTHS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -----------------
1996 1996 1995
----------------- ---- ----
<S> <C> <C> <C>
Commercial transport............... 63% 61% 61%
Military (U.S. and foreign)........ 18% 23% 19%
General Aviation................... 19% 16% 20%
--- --- ---
Total.................... 100% 100% 100%
=== === ===
</TABLE>
Commercial Transport. Customers for the Company's products in the
commercial transport market include most airframe manufacturers and major
airlines. The Company's products are used on a broad range of large commercial
transports (60 seats or more) and commuter aircraft (20 to 60 seats). Where
multiple braking systems are certified for a particular aircraft, it is
generally the airline and not the airframe manufacturer that decides which of
the approved wheel and brake suppliers will originally equip such airline's
fleet. Some of the Company's airline customers include American Airlines, Delta
Air Lines, Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines,
United Airlines, US Airways and Continental Airlines. The Company provides
replacement parts for certain aircraft designed by Boeing including the Boeing
707, but does not produce products for any commercial aircraft currently
manufactured by Boeing. Aircraft Braking Systems supplies products to McDonnell
Douglas, which merged in August 1997 with Boeing.
Military. The Company is the largest supplier of wheels, brakes and fuel
tanks to the U.S. military and also supplies the militaries of certain foreign
governments. The Company's products are used on a variety of fighters, training
aircraft, transports, cargo planes, bombers and helicopters. Some of the
military aircraft using these products are the F-2 (formerly the FS-X), F-4,
F-14, F-15, F-16, F-18, F-117A, A-10, B-1B, B2 and the C-130. Substantially all
of the Company's military products are sold to the Department of Defense,
foreign governments or to airframe manufacturers including the Lockheed Martin
Corporation ("Lockheed Martin"), McDonnell Douglas, Boeing, Sikorsky, Bell, Saab
and AIDC. In March 1996 the Company commenced wheel and brake deliveries to
Lockheed Martin for the upgraded C-130J aircraft. Brake control systems
manufactured for the military are used on the F-16, F-117A, B-2, Panavia
Toronado, British Aerospace Hawk, JAS-39 Jaguar and IDF aircraft.
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, Canadair, Dassault and a
variety of other aircraft manufacturers. General aviation aircraft using the
Company's equipment exclusively include the Beech Starship and Beech 400 A/T
series of aircraft, the Lear series 20, 30, 31A, 50 and 60 and the Gulfstream
G-I, G-II and G-III. Recently, the aviation industry has marketed "fractional
ownership" of aircraft. The Company believes this innovation could benefit its
business by increasing aircraft utilization.
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<PAGE> 48
The following table is a summary of the principal aircraft platforms
equipped with the Company's Aircraft Braking Systems products:
<TABLE>
<CAPTION>
COMMERCIAL
- ------------------------------------
<S> <C>
Airbus: A330/A340
A321
A310/A320
AI(R): ATR-42-300/320
ATR-42-400/500
Boeing: B707-320 B/C
Canadair: CRJ-100/200
CRJ-700
CASA: C-212-200
DeHavilland: DHC-8-400
Dornier: DO228-202
DO228-212
Fokker: F-27/FH-227
F-28
Fokker-50/60
Fokker-100/70
IPTN: N-250
Lockheed: L-100
L-1011
McDonnell Douglas: DC-3/4/6/8
DC-9-10/15/20/30
DC-9-40/50
DC-10-10/15
DC-10-30/40
MD-11
MD-81/82/87
MD-83/88
MD-95 NW
MD-90 Series
Mitsubishi: YS-11
Saab: SAAB 340 Series
SAAB 2000
<CAPTION>
MILITARY
- ------------------------------------
<S> <C>
Aerospatiale: SA-360/365
AIDC: IDF
BAe: Jaguar
Hawk
Beech: T-1A
C-12
Boeing: E-3 Series
E-6 A
E-8 Series
T-2
T-33
B-1B
Ch 46/47
Canadair: CT-114
CASA: C-101A
Cessna: A-37
A/T-37
DeHavilland: DHC-5
Fairchild: A-10A
Hawker Siddely: Buccaneer
1182
Lockheed Martin: F-117A
C-130 Series
C-141 A/B
F-16 Series
McDonnell Douglas: F-4C/D/E/G
A-4 Series
C-9A/B
KC-10A
Northrop Grumman: B-2
F-5 E/F
F-14 Series
E-2C Series
OV-1
A-6 Series
Panavia: Tornado
Pilatus: PC-6
Saab: J-35
AJ/JA-37
JAS-39 A/B
Sikorsky: SH-60
S-70
UH-60
CH-53
</TABLE>
<TABLE>
<CAPTION>
GENERAL AVIATION
- ----------------------------------------
<S> <C>
Aerospatiale: SN601
Bell: 206/212/230/412
Boeing: Vertol
Model 324
Canadair: CL600/601/601-3A
CL601-3R
CL604
Cessna: Citation I/II
310/401/402
414/421/441
Commander: 690, 1121
Dassault
Falcon: 10/100/20/200/
50/50EX
Fairchild: Metro III
Metro 23
Gulfstream: I/II/IIB/III/IV/IVSP
IAI: 1123/1124/1125
(Astra)
Galaxy
Lear: 23/24/25/31/35/31A/
55/55C/60
Piper: PA31P, T
Raytheon: 90/99/100/200
1900 Series
Starship
Beech Jet 400/400A
Hawker 4000
Sabreliner: 40/60/65/70/75/80
Sikorsky: S-76 Series
Swearingen: SJ-30-1/-2
</TABLE>
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<PAGE> 49
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEARS ENDED
DECEMBER 31, MARCH 31,
----------------- -------------------
1996 1996 1995
----------------- ---- ----
<S> <C> <C> <C>
Domestic Sales....................... 57% 59% 62%
Foreign Sales........................ 43% 41% 38%
---- ---- ----
Total...................... 100% 100% 100%
==== ==== ====
</TABLE>
INDEPENDENT RESEARCH AND DEVELOPMENT
The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in the
same or related fields. At December 31, 1996, the Company employed approximately
160 engineers (of whom 31 held advanced degrees); approximately 28 of such
engineers (including 14 holding advanced degrees) devoted all or part of their
efforts toward a variety of projects including refining carbon processing
techniques to create more durable braking systems, upgrading existing braking
systems to provide enhanced performance, and developing new technologies to
improve the Company's products.
The costs incurred relating to independent research and development for the
nine months ended December 31, 1996 and for the fiscal years ended March 31,
1996 and 1995 were $8.6 million, $9.8 million and $8.4 million, respectively.
PATENTS AND LICENSES
The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.
COMPETITION
The Company faces substantial competition from a few suppliers in each of
its product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company.
Both significant competitors are larger and have greater financial resources
than the Company. The principal competitor for anti-skid systems is the
Hydro-Aire Division of Crane Co. The principal competitors for fuel tanks are
American Fuel Cell & Coated Fabrics Company and Aerazur of France, both of which
are owned by Zodiac S.A., a French company.
BACKLOG
Backlog at September 30, 1997 and 1996 amounted to approximately $160.3
million and $141.8 million, respectively. Backlog consists of firm orders for
the Company's products which have not been shipped. Approximately 48% of total
Company backlog at September 30, 1997 is expected to be shipped during the year
ending December 31, 1997, with the balance expected to be shipped over the
subsequent two-year period. No significant seasonality exists for sales of the
products manufactured by the Company.
Of the total Company backlog at September 30, 1997, approximately 27% was
directly or indirectly for end use by the Government, substantially all of which
was for use by the Department of Defense. For certain risks associated with
Government contracts, see "Government Contracts" discussed below and "Risk
Factors -- Significant Customer."
46
<PAGE> 50
GOVERNMENT CONTRACTS
For the nine months ended December 31, 1996 and for the fiscal years ended
March 31, 1996 and 1995, approximately 12%, 16%, and 14%, respectively, of the
Company's total sales were made to agencies of the Government or to prime
contractors or subcontractors of the Government.
All of the Company's defense contracts are firm, fixed-price contracts
under which the Company agrees to perform for a predetermined price. Although
the Company's fixed-price contracts generally permit the Company to keep
unexpected profits if costs are less than projected, the Company does bear the
risk that increased or unexpected costs may reduce profit or cause the Company
to sustain losses on the contract. All domestic defense contracts and
subcontracts to which the Company is a party are subject to audit, various
profit and cost controls and standard provisions for termination at the
convenience of the Government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for allowable
costs and to an allowance for profit. Foreign defense contracts generally
contain comparable provisions relating to termination at the convenience of the
government. To date, no significant fixed-price contract of the Company has been
terminated.
Companies supplying defense-related equipment to the Government are subject
to certain additional business risks peculiar to that industry. Among these
risks are the ability of the Government to unilaterally suspend the Company from
new contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in advance
of design completion. A reduction in expenditures by the Government for aircraft
using products of the type manufactured by the Company, or lower margins
resulting from increasingly competitive procurement policies, or a reduction in
the volume of contracts or subcontracts awarded to the Company or substantial
cost overruns would have an adverse effect on the Company's cash flow and
results of operations.
SUPPLIES AND MATERIALS
The principal raw materials used in the Company's wheel and brake
manufacturing operations are steel, aluminum forgings and carbon compounds. The
Company purchases carbon for certain programs, steel and aluminum forgings 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.
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
currently anticipated carbon requirements.
PERSONNEL
At December 31, 1996, the Company had 1,235 full-time employees, of which
872 were employed by Aircraft Braking Systems (407 hourly and 465 salaried
employees) and 363 were employed by Engineered Fabrics (242 hourly and 121
salaried employees). All of Aircraft Braking Systems' hourly employees are
represented by the United Auto Workers' Union and all of Engineered Fabrics'
hourly employees are represented by the United Textile Workers' Union.
Engineered Fabrics has entered into a three-year contract with its union
that expires on February 5, 1998. Aircraft Braking Systems' three-year contract
with the United Auto Workers' Union expired on August 10, 1991. Aircraft Braking
Systems has not had a ratified collective bargaining agreement since August 10,
1991, but has operated under Company-implemented terms and conditions of
employment. See "Risk Factors -- Certain Collective Bargaining Matters."
47
<PAGE> 51
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 property and equipment are generally
well-maintained, in good operating condition and adequate for its present needs.
Foreign Facilities. The Company occupies approximately 19,000 square feet
of leased office and warehouse space in Slough, England, under a lease expiring
in 2020. The Company also maintains sales and service offices in Rome, Italy and
Toulouse, France.
Akron Facility Arrangements. The manufacturing facilities owned by
Aircraft Braking Systems are part of a larger complex formerly owned and
operated by Loral Corporation and now owned by Lockheed Martin. Aircraft Braking
Systems and Lockheed Martin have various occupancy and service agreements to
provide for shared easements and services (including utility, sewer, and steam).
In addition to the 770,000 square feet owned by Aircraft Braking Systems, the
Company leases approximately 433,000 square feet of space within the Lockheed
Martin complex and is subject to annual occupancy payments to Lockheed Martin.
During the nine months ended December 31, 1996 and during the fiscal years ended
March 31, 1996 and 1995, Aircraft Braking Systems made occupancy payments to
Lockheed Martin of $1.2 million, $1.5 million and $1.3 million, respectively.
Certain access easements and agreements regarding water, sanitary sewer, storm
sewer, gas, electricity and telecommunication are perpetual. In addition,
Lockheed Martin and Aircraft Braking Systems equally control Valley Association
Corporation, an Ohio corporation formed to establish a single entity to deal
with the City of Akron and utility companies concerning governmental and utility
services that are furnished to Lockheed Martin's and Aircraft Braking Systems'
facilities.
LEGAL PROCEEDINGS
On December 15, 1995, Aircraft Braking Systems commenced an action in the
Court of Common Pleas, Summit County, Ohio against Hitco after Hitco threatened
to breach existing supply contracts unless prices were renegotiated. Until
recently, Hitco was the principal supplier of the carbon used by Aircraft
Braking Systems for its carbon brakes. Hitco claimed that Aircraft Braking
Systems breached the supply arrangements by electing to begin to expand its own
carbon production facility. The Aircraft Braking Systems' complaint, as amended,
seeks injunctive relief and damages for various breaches of contract which have
recently been estimated at up to $57 million. Hitco has counterclaimed in the
matter seeking, among other things, damages for lost profits, which Hitco has
recently estimated at up to $78 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. Aircraft
Braking Systems has sought to hold Hitco in contempt of the court's injunction,
which motion has not been decided by the court. An injunction requested by Hitco
that would require 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 in July 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, has acquired trade secrets
of Hitco from Aircraft Braking Systems and has misappropriated trade secrets and
technology developed under the same research and development contracts between
Hitco and Aircraft Braking Systems which are the subject of the Ohio case and
the California case. Aircraft Braking Systems has been granted leave to
intervene and Hitco has moved to dismiss the Federal action.
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<PAGE> 52
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.
In addition to the foregoing, there are various lawsuits and claims pending
against the Company incidental to its business. Although the final results in
such suits and proceedings cannot be predicted with certainty, in the opinion of
the Company's management, the ultimate liability, if any, will not have a
material adverse effect on the Company.
ENVIRONMENTAL MATTERS
The Company's manufacturing operations are subject to various environmental
laws and regulations administered by federal, state and local agencies. The
Company continually assesses its obligations and compliance with respect to
these requirements. Based upon these assessments, the Company believes that its
manufacturing facilities are in substantial compliance with all applicable
existing federal, state and local environmental laws and regulations. New
environmental protection laws that will be effective in 1997 and thereafter may
require the installation of air pollution and wastewater treatment control
equipment at the Company's manufacturing facilities. However, the Company does
not believe that its environmental expenditures, if any, will have a material
adverse effect on its financial condition or results of operations.
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<PAGE> 53
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors will 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 will hold office at the
pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
----------------------------------- --- -----------------------------------
<S> <C> <C>
Bernard L. Schwartz*............... 72 Chairman of the Board and Chief
Executive Officer
Donald E. Fogelsanger.............. 71 President
Kenneth M. Schwartz................ 46 Executive Vice President
Dirkson R. Charles................. 33 Chief Financial Officer
Ronald H. Kisner*.................. 49 Director and Secretary
Steven J. Berger**................. 41 Director
David J. Brand**................... 36 Director
Herbert R. Brinberg*............... 71 Director
Robert B. Hodes*................... 72 Director
John R. Paddock*................... 44 Director
A. Robert Towbin***................ 62 Director
Alan H. Washkowitz**............... 57 Director
</TABLE>
- ---------------
* Designated as director by BLS pursuant to the Stockholders' Agreement (as
defined).
** Designated 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. ("Loral Space") since April 1996.
From 1972 to April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of
Loral Corporation. Mr. Schwartz is Chairman and Chief Executive Officer of
Globalstar Telecommunications Limited, 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. Fogelsanger has been President of the Company since January 1996. From
April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft
Braking Systems. From 1987 to 1989 he was President of Loral Corporation's
Aircraft Braking Systems Division. From January 1986 to March 1987 he was Vice
President and General Manager of the ABS division of Goodyear Aerospace
Corporation ("GAC"). 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. Schwartz is the nephew of Bernard
L. Schwartz.
Mr. Charles has been Chief Financial Officer of the Company since May 1996.
From May 1993 to May 1996, Mr. Charles was the Controller of the Company.
Previously he was the Manager of Accounting and
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<PAGE> 54
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.
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. Mr. Kisner's wife is the niece of Bernard L.
Schwartz.
Mr. Berger is a Managing Director of Lehman Brothers and Head of the
Merchant Banking Group. Mr. Berger joined Lehman Brothers in 1983 in the
Investment Banking Division and spent the early part of his career working on
principal investment, merger-related advisory and corporate finance
transactions. Mr. Berger became a Managing Director and Head of European
Investment Banking in 1991, Head of the Merchant Banking Group in 1995 and
Co-Head of the Investment Banking Division in 1996, a position he relinquished
in 1997 to concentrate full-time on Lehman Brothers' principal investment
activities. Mr. Berger is a director of L-3 Communications Corporation.
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.
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.
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.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994), Director of Training for the Georgia School of Professional
Psychology, Adjunct Associate Professor of Psychology at Emory University,
Assistant Professor of Psychology at Kennesaw State College, and Southern Region
Coordinator for National Employee Assistance Services. Currently, he is visiting
Associate Professor of Psychology at Emory, and holds positions as Adjunct
Clinical Assistant Professor in the Department of Psychiatry at Emory, and is
Adjunct Professor of Psychology at Georgia Institute of Technology. Dr.
Paddock's wife is the daughter of Bernard L. Schwartz.
Mr. Towbin joined Unterberg Harris in September of 1995 as a Managing
Director. From January 1994 to September 1995, he was President and Chief
Executive Officer of the Russian-American Enterprise Fund and Vice Chairman of
its successor fund, The U.S. Russian Investment Fund. Mr. Towbin was a Managing
Director at Lehman Brothers from January 1987 until January of 1994. Mr. Towbin
was Vice Chairman, Member of the Executive Committee and Director of L.F.
Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to 1987 and from 1983 to
1986, Mr. Towbin was Vice Chairman. From 1977 to 1983 he was General Partner of
L.F. Rothschild, Unterberg, Towbin and from 1959 to 1977, Mr. Towbin was General
Partner of C.E. Unterberg, Towbin Co. Mr. Towbin is also a Director of Bradley
Real Estate Inc., Lancit Media Entertainment, Ltd., Columbus New Millennium
Fund, Gerber Scientific, Inc. and Globalstar Telecommunications Limited.
Mr. Washkowitz has been a Managing Director of Lehman Brothers since 1984.
He was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1984.
Mr. Washkowitz began in the Corporate Finance Department of Kuhn Loeb & Co. in
1968 and became a general partner of the firm in 1975. Mr. Washkowitz is also a
director of Illinois Central Corporation, L-3 Communications Corporation and
McBride plc.
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<PAGE> 55
EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS AND ENGINEERED FABRICS
Set forth below are the names, ages and positions of the executive officers
of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Boards of Directors.
Aircraft Braking Systems
<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.................. 41 Vice President-Manufacturing
</TABLE>
Engineered Fabrics
<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 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 GAC's
Wheel and Brake Division since 1985. Prior to that assignment, he was the
divisional manager of Program Operations since 1983. Mr. Crampton joined
Goodyear in 1967. He became Section Manager in Commercial Sales in 1977, a
product marketing manager in 1978 and Divisional Sales Manager in 1979. In
August of 1982, he joined manufacturing as the manager of the manufacturing
process organization. He also worked for NASA at the Johnson Space Center,
Houston, Texas from 1963 to 1966.
Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989, he was Vice President of
Finance and Controller of Loral Corporation's Aircraft Braking Systems Division.
Prior to this assignment, he had spent 22 years with GAC, including one year as
the Controller of the wheel and brake division. Mr. Johnson joined GAC in 1966.
He became Manager of Accounting in 1979 for the Centrifuge Equipment Division of
GAC after holding various positions in the Defense Systems Division.
Mr. Williams was named Vice President of Manufacturing at Aircraft Braking
Systems in May 1992. He had been Director of Manufacturing since joining
Aircraft Braking Systems in September 1989. Previously from April 1985 to August
1989, he was Branch Manager of Refurbishment Operations at United Technologies
responsible for the refurbishment process of the Solid Rocket Boosters on the
Shuttle Program. Mr. Williams started his aviation career in 1975 in the Air
Force as a Hydraulic Systems Specialist. He was Superintendent, Manufacturing at
Fairchild Republic Company from 1979 to 1983, followed by Manager, B-1B
Manufacturing Operations at Rockwell International Corporation from 1983 to
1985.
Mr. Martin has been President of Engineered Fabrics since 1987. From June
1984 until 1987, he was General Manager of GAC's Engineered Fabrics Division.
Mr. Martin has been continuously employed by
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<PAGE> 56
Goodyear, GAC, Loral Corporation and the Company for the past 35 years. Other
positions Mr. Martin held with Goodyear include General Manager, Program Manager
and a number of research positions. He holds a patent for elastomeric protective
coating for metal storage reels.
Mr. Lindsey has served as Vice President of Business Development since
1989. He has been with GAC, Loral Corporation and the Company since 1977. Prior
to this he had 12 years of service with the U.S. Army. He joined GAC as Contract
Administrator of the Industrial Brake Operation in Berea, Kentucky, and
transferred to Engineered Fabrics in 1979 as Manager of Contracts.
Mr. McCann has been Vice President of Operations at Engineered Fabrics
since June 1993. Prior to that, he was Manager of Production Support from April
1990 to June 1993. He joined Engineered Fabrics in August 1988 as Manager of
Production. From January 1984 to August 1988, Mr. McCann worked for Aircraft
Braking Systems as Manager of Manufacturing Engineering, Manager of Assembly and
as a Manufacturing Engineer.
Mr. Skubina has been Vice President of Finance and Administration since
February 1991. Prior to that, he was made Vice President of Finance on April 1,
1990. He joined Engineered Fabrics in 1988 as Accounting Manager. From 1985
until 1988, Mr. Skubina was the Assistant Controller and Controller of MPD, a
division of M/A-Com.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the nine months ended
December 31, 1996 and for the fiscal years ended March 31, 1996 and 1995, paid
to the chief executive officer and each of the other four most highly
compensated executive officers of the Company and the Company's subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
NINE MONTHS ENDED COMPENSATION ----------------
DECEMBER 31, ------------------------- OPTIONS LTIP ALL OTHER
1996* SALARY BONUS GRANTED PAYOUTS COMPENSATION(a)
NAME AND PRINCIPAL POSITION OR FISCAL YEAR ($) ($) (#) ($) ($)
- --------------------------- ----------------- ---------- ---------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz........ 1996* 1,477,426(b) 1,247,000 -- -- --
Chairman of the Board 1996 1,770,500(b) -- -- -- --
and Chief Executive 1995 1,779,500(b) -- -- -- --
Officer
Kenneth M. Schwartz........ 1996* 274,231(b) 106,000 -- 28,333 19,331
Executive Vice President 1996 321,815(b) 115,000 -- 13,333 4,196
of K & F Industries, Inc. 1995 283,600(b) 105,000 -- -- 3,565
Donald E. Fogelsanger...... 1996* 170,769 115,000 -- 30,000 42,369
President of K & F 1996 196,000 125,000 -- 13,333 22,829
Industries, Inc. 1995 198,538 120,000 -- -- 19,442
Ronald E. Welsch........... 1996* 145,308 60,000 -- 22,000 25,997
President of Aircraft 1996 172,000 70,000 -- 10,000 38,533
Braking Systems 1995 162,769 78,000 -- -- 3,806
Corporation
Roger C. Martin............ 1996* 109,757 30,000 -- 17,333 27,229
President of Engineered 1996 136,674 55,000 -- 8,333 11,489
Fabrics Corporation 1995 132,767 55,500 -- -- 10,520
</TABLE>
- ---------------
(a) Includes the following: (i) Company contributions to individual 401(k) plan
accounts for the nine months ended December 31, 1996 and for the fiscal
years ended March 31, 1996 and 1995, respectively: Mr. K.
Schwartz -- $2,414, $3,996 and $3,375; Mr. Fogelsanger -- $3,054, $4,050 and
$3,475; Mr. Welsch -- $3,084, $4,050 and $3,446; Mr. Martin -- $3,442,
$4,050 and $3,110; (ii) the value of supplemental life insurance programs
for the nine months ended December 31, 1996 and for the fiscal
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<PAGE> 57
years ended March 31, 1996 and 1995, respectively: Mr. K.
Schwartz -- $16,917, $200 and $190; Mr. Fogelsanger -- $39,315, $18,779 and
$15,967; Mr. Welsch -- $22,913, $1,107 and $360; Mr. Martin -- $23,787,
$7,439 and $7,410; and (iii) $33,376 paid to Mr. Welsch during the fiscal
year ended March 31, 1996, for moving expenses incurred in connection with
his employment.
(b) The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and
persons designated by him (including certain executive officers of Loral
Space who are active in the management of the Company) 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
$100,000 of the aggregate annual advisory fee be paid to Kenneth M.
Schwartz, which is included in his salary for all periods shown.
OPTION GRANTS
There were no grants of stock options by the Company, during the nine
months ended December 31, 1996, to the named executive officers.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END ($)(1)
SHARES -------------- -------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Bernard L. Schwartz................... 0 0 0 0/0
Kenneth M. Schwartz................... 0 0 1,313/187 0/0
Donald E. Fogelsanger................. 0 0 2,375/125 0/0
Ronald E. Welsch...................... 0 0 250/250 0/0
Roger C. Martin....................... 0 0 1,375/125 0/0
</TABLE>
- ---------------
(1) None of the Company's stock has been publicly traded. All Company options
were granted at an exercise price of $84.60, the book value computed as of
April 27, 1989. All issued and outstanding options were exercised prior to
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.
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 nine months ended December 31, 1996 and for the
fiscal years ended March 31, 1996 and 1995, respectively: Mr. K. Schwartz
$50,000, $45,000 and $40,000; Mr. Fogelsanger $55,000, $50,000 and $40,000; Mr.
Welsch $40,000, $36,000 and $30,000; and Mr. Martin $30,000, $27,000 and
$25,000.
THE RETIREMENT PLAN
The Company established, effective May 1, 1989, as amended, the K & F
Retirement Plan for Salaried Employees (the "Company Retirement Plan"), a
defined benefit pension plan. The Company has received a
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<PAGE> 58
favorable determination letter from the Internal Revenue Service that the
Company Retirement Plan is a qualified plan under the Internal Revenue Code. The
terms of the Company Retirement Plan are as follows: a non-contributory benefit
and a contributory benefit. The cost of the former is borne by the Company; the
cost of the latter is borne partly by the Company and partly by the
participants. Salaried employees who have completed at least six months of
service and satisfied a minimum earnings level are eligible to participate in
the contributory portion of the Company Retirement Plan; salaried employees
become participants in the non-contributory portion on their date of hire. The
Plan provides a benefit of $20.00 per month for each year of credited service.
For participants who contribute to the Plan, in addition to the benefit of
$20.00 per month for each year of credited service, the Plan provides an annual
benefit equal to the greater of: 60% of the participant's aggregate
contributions; or, average compensation earned (while contributing) during the
last 10 years of employment in excess of 90% of the Social Security Wage Base
amount multiplied by: (a) 2.4% times years of continuous service up to 10, plus,
(b) 1.8% times additional years of such service up to 20, plus, (c) 1.2% times
additional years of such service up to 30, plus, (d) 0.6% times all additional
such service above 30 years.
Effective January 1, 1990, the Plan was amended for eligible employees of
the Company 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 at age 65 in the form of single life or joint and survivor
annuity or, at the participant's option with appropriate spouse consent, in the
form of an annuity with a term certain. A participant who has (a) completed at
least 30 years of continuous service, (b) attained age 55 and completed at least
10 years of continuous service, or (c) attained age 55 and the combination of
such participant's age and service equals at least 70 years, is eligible for
early retirement benefits. If a participant elects early retirement before
reaching age 62, such benefits will be reduced except that the non-contributory
benefits of a participant with at least 30 years of credited service will not be
reduced. In addition, employees who retire after age 55 but before age 62 with
at least 30 years of service are entitled to a supplemental non-contributory
benefit until age 62. Annual benefits under the Company Retirement Plan are
subject to a statutory ceiling of $120,000 per participant. Participants are
fully vested in their accrued benefits under the Company Retirement Plan after
five years of credited service with the Company.
The individuals named in the Summary Compensation Table also participate in
a supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of the Company and Aircraft Braking Systems and the supplemental plan are
$223,000 for Mr. K. Schwartz; $116,000 for Mr. Fogelsanger; and $35,000 for Mr.
Welsch. BLS does not participate in either plan. The retirement benefits have
been computed on the assumption that (a) employment will be continued until
normal retirement at age 65; (b) current levels of creditable compensation and
the Social Security Wage Base will continue without increases or adjustments
throughout the remainder of the computation period; and (c) participation in the
contributory portion of the plan will continue at current levels. The Company
has a similar plan at Engineered Fabrics in which Mr. Martin participates.
Estimated annual benefits for Mr. Martin are $92,000 using the assumptions in
(a), (b) and (c) above.
For purposes of eligibility, vesting and benefit accrual, participants
receive credit for years of service with Loral Corporation and Goodyear. At
retirement, retirement benefits calculated according to the benefit formula
described above are reduced by any retirement benefits payable from The Goodyear
Tire & Rubber Company Retirement Plan For Salaried Employees.
55
<PAGE> 59
COMPENSATION OF DIRECTORS
The Board of Directors held three meetings during the nine months ended
December 31, 1996. Non-equity members of the Board of Directors receive annual
fees of $12,000 per year. Each of the Company's existing directors designated by
the Lehman Investors pursuant to existing stockholders arrangements has waived
compensation for services as a director. All directors are reimbursed for
reasonable out-of-pocket expenses incurred in that capacity.
ADVISORY AGREEMENT
The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain other executive officers of Loral Space who
are active in the management of the Company) in exchange for acting as directors
and providing advisory services to the Company and its subsidiaries. Such
agreement will continue until BLS dies or is disabled or ceases to own 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 Agreement. All
other executive compensation decisions are made by BLS in accordance with
policies established in consultation with the Board of Directors.
SECURITY OWNERSHIP
The following table sets forth certain information regarding the ownership
of the capital stock of the Company following the Recapitalization. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned. The address for each
stockholder is c/o K & F Industries, Inc., 600 Third Avenue, New York, New York
10016.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF OWNERSHIP OF
NAME 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 L.P.(b).......................... 48,880 6.60
*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
--------------- -------------
Total................................ 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 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 employees of LBH and its affiliates.
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<PAGE> 60
STOCKHOLDERS' AGREEMENT
In connection with consummation of the Recapitalization, BLS and the Lehman
Investors (collectively, the "Stockholders") entered into a Stockholders'
Agreement (the "Stockholders' Agreement"). 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 arrangements. The Stockholders' Agreement will terminate at
such time as more than 75% of the shares of common stock and shares of common
stock issuable upon the exercise of options or rights to acquire common stock or
upon conversion of convertible securities (collectively, "Common Equivalents")
then outstanding have been sold pursuant to one or more public offerings, except
that (i) the registration rights continue as to any common stock held by the
Stockholders as long as they own their shares and (ii) the voting provisions
contained in the Stockholders' Agreement will terminate on the tenth anniversary
thereof.
The Stockholders' Agreement provides that the Company's Board of Directors
will be comprised initially of nine directors. Under the Stockholders'
Agreement, BLS will be entitled to appoint five directors, the Lehman Investors
will be entitled to appoint three directors and BLS and the Lehman Investors
will be 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 that 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
recapitalizations, (ii) issuances of capital stock, (iii) repurchases of and
dividends on capital stock, (iv) issuances of employee options to purchase more
than 50,000 shares of capital stock of the Company, (v) dissolution or
liquidation of the Company, (vi) acquisitions, sales or exchanges of assets in
excess of $5 million, (vii) amendment of the Charter or By-laws of the Company,
(viii) incurrences of debt or liens in excess of $10 million in the aggregate,
(ix) making loans, investments or capital expenditures in an aggregate amount in
excess of $10 million in each case in any single year, (x) transactions with
affiliates, (xi) prepayments of or amendments to any amount of financing in
excess of $10 million, (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
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 of 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.
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<PAGE> 61
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. Because BLS is
Chairman of the Board of Directors and has the right to designate a majority of
the Directors to the Board of Directors of the Company, he has operating control
of the Company. BLS is also Chairman and Chief Executive Officer of Loral Space.
The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain executive officers of Loral Space who are
active in the management of the Company) in exchange for acting as directors and
providing advisory services to the Company and its subsidiaries. Such agreement
will continue until BLS dies or is disabled or ceases to own 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 and persons designated by him (including
employees of the Company and its subsidiaries and certain executive officers of
Loral Space), ranging from 5% to 10% of earnings in excess of $50 million before
interest, taxes and amortization. Bonuses earned and paid under this plan were
$1,247,000 and $200,000 for the nine months ended December 31, 1996 and for the
fiscal year ended March 31, 1996, respectively. BLS did not receive any payments
under this plan for the fiscal year ended March 31, 1996.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. During the nine months ended December 31,
1996, Lehman Brothers received underwriting discounts and commissions in
connection with the offering of the Existing Notes. 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 certain transaction fees in connection with the New Credit
Facility and the Offering. 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 a managing director of 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 a member of the Board of
Directors of the Company, a monthly retainer of $6,000 for legal services.
Pursuant to agreements between the Company and Loral Space (of which BLS is
Chairman and Chief Executive Officer), the Company reimburses Loral Space for
real property occupancy, benefits administration and legal services. The related
charges agreed upon were established to reimburse Loral Space for actual costs
incurred without profit or fee. The Company believes the arrangements are as
favorable to the Company as could have been obtained from unaffiliated parties.
Payments to Loral Space were $0.2 million for the nine months ended December 31,
1996. Included in accounts payable at December 31, 1996 is $0.2 million.
On April 22, 1996, Lockheed Martin acquired the defense electronics and
systems integration businesses of Loral Corporation, which included the Akron,
Ohio facility. The various occupancy and service agreements affecting the Akron,
Ohio facility will remain in full force and effect. The Company reimburses
Lockheed
58
<PAGE> 62
Martin for real property occupancy and costs relating to shared easements and
services pursuant to certain agreements previously entered into with Loral
Corporation as well as pursuant to a two-year Shared Services Agreement with
Lockheed Martin entered into on April 27, 1996.
Pursuant to agreements between the Company and Loral Corporation, the
parties provided services to each other and shared certain expenses relating to
a production program, real property occupancy, benefits administration,
treasury, accounting and legal services. The related charges agreed upon by the
parties were established to reimburse each party on the actual cost incurred
without profit or fee. The Company believes the arrangements with Loral
Corporation were as favorable to the Company as could have been obtained from
unaffiliated parties. Billings from Loral Corporation were $3.6 million and $3.0
million for the fiscal years ended March 31, 1996 and 1995, respectively.
Billings to Loral Corporation were $2.7 million and $0.2 million for the fiscal
years ended March 31, 1996 and 1995. Purchases from Loral Corporation were $2.2
million and $1.9 million for the fiscal years ended March 31, 1996 and 1995.
Included in accounts receivable and accounts payable at March 31, 1996 is $3.5
million and $2.3 million.
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<PAGE> 63
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 a Term Loan in an aggregate principal amount of $322.0 million and a
Revolving Loan in an aggregate principal amount of $50.0 million. The Term Loan
is 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.
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<PAGE> 64
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 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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<PAGE> 65
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to an
Indenture (the "Indenture") between the Company and 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, will not bear legends restricting their
transfer and will not contain provisions providing for the payment of liquidated
damages under certain circumstances relating to the Registration Rights
Agreement, which provisions will terminate upon the consummation of the Exchange
Offer.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference 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
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<PAGE> 66
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:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------- ----------
<S> <C>
2002.............................................. 104.625%
2003.............................................. 103.083%
2004.............................................. 101.542%
2005 and thereafter............................... 100.000%
</TABLE>
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 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
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<PAGE> 67
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.
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.
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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
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)
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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),
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(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 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
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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;
(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
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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
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
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consistent with past practices, (f) purchase money obligations for property,
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, or (g)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly enter into any transaction
involving aggregate consideration in excess of $1,000,000 with any Affiliate or
holder of 5% or more of any class of Capital Stock of the Company (including any
Affiliates of such holders) except for transactions (including any loans or
advances by or to any Affiliate) in good faith the terms of which are fair and
reasonable to the Company or such Subsidiary, as the case may be, and are at
least as favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a comparable transaction made on an arm's
length basis with Persons who are not such a Holder, an Affiliate of such Holder
or Affiliate of the Company; provided that any such transaction shall be
conclusively deemed to be on terms which are fair and reasonable to the Company
or any of its Subsidiaries and on terms which are at least as favorable as the
terms which could be obtained on an arm's length basis with Persons who are not
such a Holder, an Affiliate of such Holder or Affiliate of the Company if such
transaction is approved by a majority of the Company's directors (including a
majority of the Company's disinterested and independent directors, if any); and
provided further that with respect to the purchase or disposition of assets of
the Company or any of its Subsidiaries having a net book value in excess of $5
million, if the Company does not have any disinterested and independent
directors, in addition to approval of its board of directors, the Company shall
obtain a written opinion of an Independent Financial Advisor stating that the
terms of such 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
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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
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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 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
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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 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
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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 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.
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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
Except as set forth below, the New Notes will initially be issued in the
form of one Global Note (the "Global Note"). The Global Note will be deposited
with, or on behalf of, 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").
New Notes that are issued as described below under "-- Certificated Notes"
will be issued in the form of registered definitive certificates (the
"Certificated Notes"). Upon the transfer of Certificated Notes, such
Certificated Notes may, unless the Global Note has previously been exchanged for
Certificated Notes, be exchanged for an interest in the Global Note representing
the principal amount of Notes being transferred. 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 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
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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
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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.
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
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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.
"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.
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"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
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
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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
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attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, without duplication, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"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
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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 (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',
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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 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,
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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.
85
<PAGE> 89
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.
86
<PAGE> 90
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
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.
87
<PAGE> 91
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement with any person to participate
in the distribution of such New Notes and neither such holder nor any such other
person is engaging in or intends to engage in a distribution of such New Notes.
Accordingly, any holder who is an affiliate of the Company or any holder using
the Exchange Offer to participate in a distribution of the New Notes will not be
able to rely on such interpretations by the staff to the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a resale transaction. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of one year from
the date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until (90 days from the date of this
Prospectus), all dealers effecting transactions in the New Notes may be required
to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the from of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker-dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus as required, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of one year from the date of this Prospectus, the Company will
send a reasonable number of additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company will pay all the
expenses incident to the Exchange Offer (which shall not include the expenses of
any holder in connection with resales of the New Notes). The Company has agreed
to indemnify the Initial Purchasers and any broker-dealer participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by O'Sullivan Graev & Karabell, LLP, New York, New York.
88
<PAGE> 92
EXPERTS
The consolidated financial statements as of December 31, 1996 and March 31,
1996 and for the nine months ended December 31, 1996 and for each of the two
years ended March 31, 1995 and March 31, 1996 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report dated January 23, 1997 appearing herein and are included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the Commission. Such material filed by the Company with the Commission may
be inspected by anyone without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may be obtained at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material can also be inspected on the
Internet at http.//www.sec.gov.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so long
as any Notes remain outstanding, it will furnish to the Trustee and deliver or
cause to be delivered to the holders of the Notes copies of (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 and, with respect to annual information only, a report
thereon by the Company's independent public accountants and (ii) all reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports.
89
<PAGE> 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
K & F INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996............ F-2
Consolidated Statements of Operations for the nine months ended September 30, 1997 and
1996................................................................................ F-3
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
1996................................................................................ F-4
Independent Auditors' Report.......................................................... F-8
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996................ F-9
Consolidated Statements of Operations for the nine months ended December 31, 1996 and
the years ended March 31, 1996 and 1995............................................. F-10
Consolidated Statements of Stockholders' Deficiency for the nine months ended December
31, 1996 and the years ended March 31, 1996 and 1995................................ F-11
Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and
the years ended March 31, 1996 and 1995............................................. F-12
Notes to Consolidated Financial Statements............................................ F-13
</TABLE>
F-1
<PAGE> 94
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 750,000 $ 1,508,000
Accounts receivable, net.................................. 40,658,000 36,032,000
Inventory................................................. 65,111,000 68,334,000
Deferred tax asset........................................ -- 1,411,000
Other current assets...................................... 662,000 586,000
------------- -------------
Total current assets.............................. 107,181,000 107,871,000
------------- -------------
Property, plant and equipment............................... 142,926,000 136,900,000
Less, accumulated depreciation and amortization........... 73,859,000 66,914,000
------------- -------------
69,067,000 69,986,000
------------- -------------
Deferred charges, net of amortization....................... 23,961,000 24,674,000
Cost in excess of net assets acquired, net of
amortization.............................................. 192,426,000 196,446,000
Intangible assets, net of amortization...................... 17,717,000 20,138,000
------------- -------------
$ 410,352,000 $ 419,115,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable, trade................................... $ 12,133,000 $ 11,253,000
Current portion of senior term loan....................... 1,500,000 6,000,000
Interest payable.......................................... 4,281,000 6,689,000
Other current liabilities................................. 53,739,000 49,740,000
------------- -------------
Total current liabilities......................... 71,653,000 73,682,000
------------- -------------
Postretirement benefit obligation other than pensions....... 76,301,000 75,439,000
Other long-term liabilities................................. 14,619,000 16,300,000
Senior term loan............................................ 34,000,000 34,000,000
Senior revolving loan....................................... 19,000,000 13,000,000
11 7/8% senior secured notes due 2003....................... 70,000,000 100,000,000
10 3/8% senior subordinated notes due 2004.................. 140,000,000 140,000,000
Stockholders' Deficiency:
Preferred stock, $.01 par value -- authorized, 1,050,000
shares; issued and outstanding, 1,027,635 shares
(liquidation preference of $60,110,000)................ 10,000 10,000
Common stock, Class B, $.01 par value -- authorized,
460,000 shares; issued and outstanding, 458,994 shares
(liquidation preference of $26,848,000)................ 5,000 5,000
Common stock, Class A, $.01 par value -- authorized,
2,100,000 shares; issued and outstanding, 553,344
shares................................................. 6,000 6,000
Additional paid-in capital................................ 155,350,000 155,350,000
Deficit................................................... (159,777,000) (178,147,000)
Adjustment to equity for minimum pension liability........ (10,649,000) (10,649,000)
Cumulative translation adjustment......................... (166,000) 119,000
------------- -------------
Total stockholders' deficiency.................... (15,221,000) (33,306,000)
------------- -------------
$ 410,352,000 $ 419,115,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 95
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER SEPTEMBER
30, 30,
1997 1996
------------ ------------
<S> <C> <C>
Sales........................................................... $224,296,000 $207,455,000
Costs and expenses.............................................. 167,934,000 162,557,000
Amortization.................................................... 7,734,000 7,805,000
------------ ------------
Operating income................................................ 48,628,000 37,093,000
Interest and investment income.................................. 191,000 784,000
Interest expense................................................ (22,969,000) (29,848,000)
------------ ------------
Income before income taxes and extraordinary charge............. 25,850,000 8,029,000
Income tax provision............................................ (5,767,000) (220,000)
------------ ------------
Income before extraordinary charge.............................. 20,083,000 7,809,000
Extraordinary charge from early extinguishment of debt, net of (1,713,000) (9,142,000)
tax...........................................................
------------ ------------
Net income (loss)............................................... $ 18,370,000 $ (1,333,000)
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 96
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER SEPTEMBER
30, 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)............................................. $ 18,370,000 $ (1,333,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 14,679,000 14,258,000
Non-cash interest expense -- amortization of deferred
financing charges........................................ 1,072,000 1,130,000
Deferred income taxes...................................... 1,411,000 --
Extraordinary charge from early extinguishment of debt..... 1,713,000 9,142,000
Changes in assets and liabilities:
Accounts receivable, net................................. (4,782,000) 246,000
Inventory................................................ 3,094,000 (7,684,000)
Other current assets..................................... (76,000) (307,000)
Accounts payable, interest payable, and other current
liabilities........................................... 2,471,000 5,089,000
Postretirement benefit obligation other than pensions.... 862,000 (2,324,000)
Other long-term liabilities.............................. (1,681,000) 923,000
------------ ------------
Net cash provided by operating activities............. 37,133,000 19,140,000
------------ ------------
Cash flows from investing activities:
Capital expenditures.......................................... (6,026,000) (15,592,000)
Deferred charges.............................................. (1,781,000) (462,000)
------------ ------------
Net cash used in investing activities................. (7,807,000) (16,054,000)
------------ ------------
Cash flows from financing activities:
Payments of senior term loan.................................. (4,500,000) --
Payments of senior revolving loan............................. (33,000,000) (49,000,000)
Payments of long-term debt.................................... (30,000,000) (180,000,000)
Borrowings under senior term loan............................. -- 40,000,000
Borrowings under senior revolving loan........................ 39,000,000 58,000,000
Proceeds from issuance of senior subordinated notes........... -- 140,000,000
Deferred charges -- financing costs........................... -- (6,772,000)
Premiums paid on early extinguishment of debt................. (1,584,000) (4,500,000)
Proceeds from sale and leaseback transaction.................. -- 1,215,000
------------ ------------
Net cash used by financing activities................. (30,084,000) (1,057,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents............ (758,000) 2,029,000
Cash and cash equivalents, beginning of period.................. 1,508,000 3,178,000
------------ ------------
Cash and cash equivalents, end of period........................ $ 750,000 $ 5,207,000
============ ============
Supplemental cash flow information:
Cash interest paid during period.............................. $ 24,305,000 $ 34,076,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 97
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company") pursuant
to the rules of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position,
results of operations and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules. The Company believes that the disclosures made
are adequate to make the information presented not misleading. The
consolidated statements of operations for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year. It is suggested that these financial statements
be read in conjunction with the audited financial statements and notes
thereto included in the Company's December 31, 1996 Transition Report on Form
10-K.
2. On October 15, 1997, the Company completed a recapitalization involving the
repayment of all existing indebtedness as well as the repurchase of a portion
of its outstanding capital stock. Financing was provided with $185 million of
9 1/4% Senior Subordinated Notes due 2007 and $345 million in borrowings
under a new credit facility.
The new credit facility consists of $322 million of term loans and a $50
million revolving credit facility. The revolving credit facility matures in
2003. The term loans consist of a $50 million Tranche A term loan and a $272
million Tranche B term loan. The Tranche A term loan is a six-year amortizing
facility maturing in 2003. The Tranche B term loan is an eight-year
amortizing facility maturing in 2005. The Company will be required to make
mandatory reductions in the credit facility in the event of certain asset
sales, the incurrence of certain additional indebtedness and from a portion
of excess cash flow (as defined).
In connection with the repurchase of a portion of the outstanding capital
stock and the repayment of all existing indebtedness, the Company will
directly increase its stockholders' deficiency by approximately $218.6
million and record an extraordinary charge of approximately $29.8 million
(excluding any related tax benefit) for the write-off of unamortized
financing costs, redemption premiums and tender offer payments. In addition,
the Company will record a charge to operations of approximately $12.0 million
relating to the exercise of stock options and other fees. All charges will be
reflected in the fourth quarter of 1997.
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 $1,713,000 (net of income tax benefit of $553,000)
for the write-off of unamortized financing costs and redemption premiums.
3. Receivables are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accounts receivable, principally from commercial
customers....................................... $ 37,289,000 $ 34,086,000
Accounts receivable, on U. S. Government and other
long-term contracts............................. 3,729,000 2,359,000
Allowances........................................ (360,000) (413,000)
----------- -----------
$ 40,658,000 $ 36,032,000
=========== ===========
</TABLE>
F-5
<PAGE> 98
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and work-in-process................. $ 43,947,000 $ 46,742,000
Finished goods.................................... 9,969,000 10,821,000
Inventoried costs related to U.S. Government and
other long-term contracts....................... 11,195,000 10,771,000
----------- -----------
$ 65,111,000 $ 68,334,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below cost
as an investment in a new airframe which is expected to be recovered through
the subsequent sale of replacement parts. These commercial investments
(losses) are recognized when original equipment is shipped. Losses on U.S.
Government contracts are immediately recognized in full when determinable.
Inventory is stated at average cost, not in excess of net realizable value.
In accordance with industry practice, inventoried costs may contain amounts
relating to contracts with long production cycles, a portion of which will
not be realized within one year.
5. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accrued payroll costs............................. $ 15,689,000 $ 15,170,000
Accrued taxes..................................... 7,567,000 6,504,000
Accrued costs on long-term contracts.............. 5,876,000 5,744,000
Accrued warranty costs............................ 9,580,000 6,695,000
Customer credits.................................. 4,901,000 7,483,000
Postretirement benefit obligation other than
pensions........................................ 2,000,000 2,000,000
Other............................................. 8,126,000 6,144,000
----------- -----------
$ 53,739,000 $ 49,740,000
=========== ===========
</TABLE>
6. Contingencies
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco Technologies, Inc. ("Hitco") after Hitco threatened to breach existing
supply contracts unless prices were renegotiated. Until recently, Hitco was
the principal supplier of the carbon used by Aircraft Braking Systems for its
carbon brakes. Hitco claimed that Aircraft Braking Systems breached the
supply arrangements by electing to begin to expand its own carbon production
facility. The Aircraft Braking Systems' complaint, as amended, seeks
injunctive relief and damages for various breaches of contract which have
recently been estimated at up to $57 million. Hitco has counterclaimed in the
matter seeking, among other things, damages for lost profits, which Hitco has
recently estimated at up to $78 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. Aircraft Braking Systems has sought to hold Hitco in contempt of the
court's injunction, which motion has not been decided by the court. An
injunction requested by Hitco that would require 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 in January 1998.
F-6
<PAGE> 99
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In related actions, a suit filed by Hitco in Superior Court, Los Angeles
County, California against Aircraft Braking Systems seeking substantially the
same relief as is asserted in the Ohio action, has been stayed. Hitco also
filed suit in the Federal District Court in the Northern District of Ohio for
damages and injunctive relief against a third party claiming that such party,
in supplying certain carbon to Aircraft Braking Systems, has acquired trade
secrets of Hitco from Aircraft Braking Systems and has misappropriated trade
secrets and technology developed under the same research and development
contracts between Hitco and Aircraft Braking Systems which are the subject of
the Ohio case and the California case. Aircraft Braking Systems has been
granted leave to intervene and Hitco has moved to dismiss the Federal action.
Management intends to vigorously advocate its interest in all lawsuits, to
seek dismissal of the California action and to proceed in the Ohio case to
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.
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.
7. Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 is currently evaluating the impact, if any, of SFAS No. 130.
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, of SFAS No. 131.
F-7
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
K & F Industries, Inc.:
We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
March 31, 1996, and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for the nine months ended December 31,
1996 and for each of the two years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of December 31, 1996 and March 31, 1996, and the results of
their operations and their cash flows for the nine months ended December 31,
1996 and for each of the two years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
January 23, 1997
F-8
<PAGE> 101
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 1,508,000 $ 2,412,000
Accounts receivable, net..................................... 36,032,000 35,228,000
Inventory.................................................... 68,334,000 63,332,000
Deferred tax asset........................................... 1,411,000 --
Other current assets......................................... 586,000 832,000
------------- -------------
Total current assets...................................... 107,871,000 101,804,000
------------- -------------
Property, Plant and Equipment -- Net........................... 69,986,000 65,044,000
Deferred Charges -- Net of amortization of $3,741,000 and
$9,452,000................................................... 24,674,000 24,082,000
Cost in Excess of Net Assets Acquired -- Net of amortization of
$46,839,000 and $42,257,000.................................. 196,446,000 202,119,000
Intangible Assets -- Net of amortization of $26,576,000 and
$24,035,000.................................................. 20,138,000 22,988,000
------------- -------------
Total Assets......................................... $ 419,115,000 $ 416,037,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable............................................. $ 11,253,000 $ 12,485,000
Current portion of long-term debt............................ 6,000,000 --
Interest payable............................................. 6,689,000 8,217,000
Other current liabilities.................................... 49,740,000 44,775,000
------------- -------------
Total current liabilities................................. 73,682,000 65,477,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions.......... 75,439,000 75,390,000
Other Long-Term Liabilities.................................... 16,300,000 20,871,000
Long-Term Debt................................................. 287,000,000 294,000,000
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Deficiency:
Preferred stock, $.01 par value -- authorized, 1,050,000
shares; issued and outstanding, 1,027,635 shares
(liquidation preference of $60,110,000)................... 10,000 10,000
Common stock, Class B, $.01 par value -- authorized, 460,000
shares; issued and outstanding, 458,994 shares
(liquidation preference of $26,848,000)................... 5,000 5,000
Common stock, Class A, $.01 par value -- authorized,
2,100,000 shares; issued and outstanding, 553,344
shares.................................................... 6,000 6,000
Additional paid-in capital................................... 155,350,000 155,350,000
Deficit...................................................... (178,147,000) (184,049,000)
Adjustment to equity for minimum pension liability........... (10,649,000) (10,572,000)
Cumulative translation adjustment............................ 119,000 (451,000)
------------- -------------
Total stockholders' deficiency............................ (33,306,000) (39,701,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency....... $ 419,115,000 $ 416,037,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 102
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, ---------------------------
1996 1996 1995
----------------- ------------ ------------
<S> <C> <C> <C>
Net sales.......................................... $ 212,703,000 $264,736,000 $238,756,000
Cost of sales...................................... 136,813,000 180,435,000 164,697,000
------------ ------------ ------------
Gross margin....................................... 75,890,000 84,301,000 74,059,000
Independent research and development............... 8,623,000 9,767,000 8,363,000
Selling, general and administrative expenses....... 17,297,000 22,564,000 19,208,000
Amortization....................................... 7,810,000 10,415,000 10,411,000
------------ ------------ ------------
Operating income................................... 42,160,000 41,555,000 36,077,000
Interest expense, net of interest income of
$787,000, $722,000 and $374,000.................. 27,197,000 41,048,000 46,250,000
------------ ------------ ------------
Income (loss) before income taxes and extraordinary
charge........................................... 14,963,000 507,000 (10,173,000)
Income tax benefit................................. 81,000 -- --
------------ ------------ ------------
Income (loss) before extraordinary charge.......... 15,044,000 507,000 (10,173,000)
Extraordinary charge from early extinguishment of
debt............................................. (9,142,000) (1,913,000) --
------------ ------------ ------------
Net income (loss).................................. $ 5,902,000 $ (1,406,000) $(10,173,000)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 103
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED DECEMBER 31, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
CLASS B CLASS A ADJUSTMENT
PREFERRED STOCK COMMON STOCK COMMON STOCK TO EQUITY FOR
------------------ --------------- --------------- ADDITIONAL MINIMUM CUMULATIVE
SHARES SHARES SHARES PAID-IN PENSION TRANSLATION
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT LIABILITY ADJUSTMENT
--------- ------- ------- ------ ------- ------ ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1,
1994............ 899,999 $ 9,000 -- -- 484,616 $5,000 $ 89,986,000 $(172,470,000) $ (7,467,000) $ (418,000)
Net loss........ (10,173,000)
Conversion of
subordinated
convertible
debentures.... 458,994 5,000 52,602,000
Issuance of
preferred
stock......... 127,636 1,000 10,799,000
Issuance of
common
stock......... 68,728 1,000 1,963,000
Pension
adjustment.... 275,000
Cumulative
translation
adjustment.... 134,000
--------- ------- ------- ------ ------- ------- ------------ ------------- ------------ --------
Balance, March 31,
1995............ 1,027,635 10,000 458,994 5,000 553,344 6,000 155,350,000 (182,643,000) (7,192,000) (284,000)
Net loss........ (1,406,000)
Pension
adjustment.... (3,380,000)
Cumulative
translation
adjustment.... (167,000)
--------- ------- ------- ------ ------- ------- ------------ ------------- ------------ --------
Balance, March 31,
1996............ 1,027,635 10,000 458,994 5,000 553,344 6,000 155,350,000 (184,049,000) (10,572,000) (451,000)
Net income...... 5,902,000
Pension
adjustment.... (77,000)
Cumulative
translation
adjustment.... 570,000
--------- ------- ------- ------ ------- ------- ------------ ------------- ------------ --------
Balance, December
31, 1996........ 1,027,635 $10,000 458,994 $5,000 553,344 $6,000 $155,350,000 $(178,147,000) $ (10,649,000) $ 119,000
========= ======= ======= ====== ======= ======= ============ ============= ============ ========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 104
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, ---------------------------
1996 1996 1995
----------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).................................................. $ 5,902,000 $ (1,406,000) $(10,173,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation................................................... 6,834,000 8,506,000 8,432,000
Amortization................................................... 7,810,000 10,415,000 10,411,000
Non-cash interest expense -- convertible debentures............ -- -- 3,950,000
Non-cash interest expense -- amortization of deferred financing
charges..................................................... 1,101,000 1,561,000 1,482,000
Provision for losses on accounts receivable.................... 2,000 1,548,000 63,000
Extraordinary charge from early extinguishment of debt......... 9,142,000 1,913,000 --
Deferred tax benefit........................................... (320,000) -- --
Changes in assets and liabilities:
Accounts receivable......................................... (552,000) (3,296,000) (767,000)
Inventory................................................... (4,686,000) (1,664,000) 5,919,000
Other current assets........................................ 246,000 274,000 90,000
Accounts payable............................................ (1,232,000) 2,140,000 1,317,000
Interest payable............................................ (1,528,000) (554,000) (47,000)
Other current liabilities................................... 4,965,000 7,002,000 2,791,000
Postretirement benefit obligation other than pensions....... 49,000 (2,327,000) (2,433,000)
Other long-term liabilities................................. (4,339,000) (1,811,000) (3,682,000)
------------- ------------ ------------
Net cash provided by operating activities................. 23,394,000 22,301,000 17,353,000
------------- ------------ ------------
Cash Flows From Investing Activities:
Capital expenditures............................................... (14,091,000) (10,418,000) (2,824,000)
Deferred charges................................................... (250,000) (538,000) (363,000)
------------- ------------ ------------
Net cash used in investing activities..................... (14,341,000) (10,956,000) (3,187,000)
------------- ------------ ------------
Cash Flows From Financing Activities:
Payments of senior revolving loan.................................. (49,000,000) (9,000,000) (20,000,000)
Borrowings under senior revolving loan............................. 48,000,000 23,000,000 10,000,000
Borrowings under senior term loan.................................. 40,000,000 -- --
Proceeds from issuance of senior subordinated notes................ 140,000,000 -- --
Payments of senior subordinated debentures......................... (180,000,000) (30,000,000) --
Premiums paid on early extinguishment of debt...................... (4,500,000) (1,126,000) --
Deferred charges -- financing costs................................ (6,772,000) (300,000) --
Payment of subordinated convertible debentures..................... -- -- (12,764,000)
Proceeds from issuance of common and preferred stocks.............. -- -- 12,764,000
Proceeds from sale and lease back transaction...................... 2,315,000 -- --
------------- ------------ ------------
Net cash used in financing activities..................... (9,957,000) (17,426,000) (10,000,000)
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents................. (904,000) (6,081,000) 4,166,000
Cash and cash equivalents, beginning of period....................... 2,412,000 8,493,000 4,327,000
------------- ------------ ------------
Cash and cash equivalents, end of period............................. $ 1,508,000 $ 2,412,000 $ 8,493,000
============= ============ ============
- ------------------------------------------
Supplemental Information:
Interest paid during the period.................................... $ 28,411,000 $ 40,763,000 $ 41,239,000
============= ============ ============
Income taxes paid during the period................................ $ 344,000 $ -- $ --
============= ============ ============
Supplemental disclosure of non-cash financing activities:
See Note 9 for a discussion of non-cash financing activities.
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 105
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and anti-skid systems for commercial, military
and general aviation aircraft, and the manufacture of materials for fuel tanks,
iceguards, inflatable oil booms and various other products made from coated
fabrics for military and commercial uses. The Company serves the aerospace
industry (which is experiencing some consolidation) and sells its products to
airframe manufacturers and commercial airlines throughout the world and to the
United States and certain foreign governments. The Company's activities are
conducted through its two wholly owned subsidiaries, Aircraft Braking Systems
Corporation ("Aircraft Braking Systems"), which generated approximately 90% of
the Company's total revenues during the nine months ended December 31, 1996 and
Engineered Fabrics Corporation (collectively, the "Subsidiaries"), which
generated approximately 10% of the Company's total revenues during the nine
months ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Year-End Change -- Effective December 31, 1996, the Company changed its
fiscal year-end from March 31 to December 31. Accordingly, the accompanying
financial statements include audited financial statements for the nine months
ended December 31, 1996.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company. All material intercompany accounts and
transactions between these entities have been eliminated.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash,
commercial paper and other investments that are readily convertible into cash
and have original maturities of three months or less.
Revenue and Expense Recognition -- Sales are recorded as units are shipped.
The Company customarily sells original wheel and brake equipment below cost as
an investment in a new airframe which is expected to be recovered through the
subsequent sale of replacement parts. These commercial investments (losses) are
recognized when original equipment is shipped. For the nine months ended
December 31, 1996 and for the fiscal years ended March 31, 1996 and 1995,
investments were $20.2 million, $29.9 million and $23.9 million, respectively.
Losses on U.S. government contracts are immediately recognized in full when
determinable.
Inventory -- Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a portion of
which will not be realized within one year.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed when incurred; renewals and
betterments are capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation are eliminated from the accounts, and any
gain or loss is included in the results of operations. Depreciation is provided
on the straight-line method over the estimated useful lives of the related
assets as follows: buildings and improvements -- 8 to 40 years; machinery,
equipment, furniture and fixtures -- 3 to 25 years; leasehold improvements --
over the life of the applicable lease or 10 years, whichever is shorter.
Deferred Charges -- Deferred charges consist primarily of financing costs
($8.7 million and $7.7 million, which is net of amortization (non-cash interest
expense) of $1.3 million and $6.9 million at December 31, 1996 and March 31,
1996, respectively), and program participation costs ($13.9 million and $14.5
million, which is net of amortization of $2.4 million and $1.8 million, at
December 31, 1996 and March 31, 1996, respectively) paid in connection with the
sole-source award of wheels, brakes and anti-skid equipment on the McDonnell
Douglas Corporation's MD-90 twin-jet program. Program participation costs are
being amortized on a straight-line method over a period of 20 years. Deferred
financing charges are primarily being amortized on an effective interest method
over periods of 5 to 8 years.
F-13
<PAGE> 106
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cost in Excess of Net Assets Acquired -- Cost in excess of net assets
acquired is being amortized on the straight-line method over a period of 40
years. The Company reviews the cost in excess of net assets acquired for
recoverability on an on-going basis using undiscounted cash flows. Impairments
would be recognized in operating results.
Intangible Assets -- Intangible assets consist of patents, licenses and
computer software which are stated at cost and are being amortized on a
straight-line method over periods of 5 to 30 years.
Evaluation of Long-Lived Assets -- Long-lived assets are assessed for
recoverability on an on-going basis in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121. In evaluating the value and future benefits
of long-lived assets, their carrying value would be reduced by the excess, if
any, of the long-lived asset over management's estimate of the anticipated
discounted future net cash flows of the related long-lived asset. There were no
adjustments to the carrying amount of long-lived assets during the nine months
ended December 31, 1996 and during the fiscal years ended March 31, 1996 and
1995, resulting from the Company's evaluations.
Warranty -- Estimated costs of product warranty are accrued when individual
claims arise with respect to a product. When the Company becomes aware of such
defects, the estimated costs of all potential warranty claims arising from such
defects are fully accrued.
Business and Credit Concentrations -- The Company's customers are
concentrated in the airline industry but are not concentrated in any specific
region. The U.S. government accounted for approximately 12%, 16% and 14% of
total sales for the nine months ended December 31, 1996 and for the fiscal years
ended March 31, 1996 and 1995, respectively. No other single customer accounted
for 10% or more of consolidated revenues for the nine months and fiscal years
then ended, and there were no significant accounts receivable from a single
customer, except the U. S. government, at December 31, 1996 and March 31, 1996.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting and Reporting Changes -- Effective April 1, 1996, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the recognition of an impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS No. 121 did not have a material effect on the
Company's financial position or results of operations.
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages (but does not require)
adoption of the fair value based method of accounting for stock-based
compensation plans. Entities may continue to measure compensation costs for
those plans using the intrinsic value based method of accounting, but must make
pro forma disclosures of net income (loss) as if the accounting provisions of
SFAS No. 123 had been adopted. The Company has elected to continue the intrinsic
value method of accounting for stock-based compensation plans and provide the
required pro forma disclosures. As a result, the adoption of SFAS No. 123 had no
effect on the Company's financial position or results of operations. (See Note
9.)
Reclassifications -- Certain amounts in the prior years' financial
statements have been reclassified to conform to the current period presentation.
F-14
<PAGE> 107
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
<S> <C> <C>
Accounts receivable, principally from commercial
customers....................................... $ 34,086,000 $32,704,000
Accounts receivable on U.S. government and other
long-term contracts............................. 2,359,000 4,136,000
Allowances........................................ (413,000) (1,612,000)
---------- ----------
Total................................... $ 36,032,000 $35,228,000
========== ==========
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
<S> <C> <C>
Raw materials and work-in-process................. $ 46,742,000 $39,656,000
Finished goods.................................... 10,821,000 11,364,000
Inventoried costs related to U.S. government and
other long-term contracts....................... 10,771,000 12,312,000
---------- ----------
$ 68,334,000 $63,332,000
========== ==========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
<S> <C> <C>
Land............................................ $ 661,000 $ 661,000
Buildings and improvements...................... 33,961,000 29,148,000
Machinery, equipment, furniture and fixtures.... 102,278,000 95,315,000
---------- ----------
Total................................. 136,900,000 125,124,000
Less accumulated depreciation and
amortization.................................. 66,914,000 60,080,000
---------- ----------
Total................................. $ 69,986,000 $ 65,044,000
========== ==========
</TABLE>
During the nine months ended December 31, 1996, the Company sold and leased
back assets with a net book value of $2,315,000.
6. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
<S> <C> <C>
Accrued payroll costs............................. $ 15,170,000 $15,756,000
Accrued taxes..................................... 6,504,000 7,783,000
Accrued costs on long-term contracts.............. 5,744,000 5,195,000
Accrued warranty costs............................ 6,695,000 8,023,000
Customer credits.................................. 7,483,000 3,230,000
Postretirement benefit obligation other than
pensions........................................ 2,000,000 2,000,000
Other............................................. 6,144,000 2,788,000
---------- ----------
Total................................... $ 49,740,000 $44,775,000
========== ==========
</TABLE>
F-15
<PAGE> 108
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
<S> <C> <C>
Senior revolving loan(a)........................ $ 13,000,000 $ 14,000,000
Senior term loan(a)............................. 40,000,000 --
11 7/8% Senior Secured Notes due 2003(b)........ 100,000,000 100,000,000
10 3/8% Senior Subordinated Notes due 2004(c)... 140,000,000 --
13 3/4% Senior Subordinated Debentures due
2001(d)....................................... -- 180,000,000
------------ ------------
Total................................. 293,000,000 294,000,000
Less current maturities(a)...................... 6,000,000 --
------------ ------------
Total................................. $287,000,000 $294,000,000
============ ============
</TABLE>
(a) Credit Agreement -- In August 1996, the Company entered into an Amended
and Restated Credit Agreement (the "Credit Agreement") consisting of a $40
million senior term loan (the "Term Loan") and a $70 million revolving loan
facility (the "Revolving Loan"). The proceeds from the Revolving Loan were used
to repay outstanding indebtedness under the Company's 1992 revolving credit
facility. Both loans bear interest at varying interest rates selected at the
option of the Company. At December 31, 1996, the interest rate on the Term Loan
was 7.875%. At December 31, 1996 and March 31, 1996, the interest rate on the
Revolving Loan was 7.875% and 8.37%, respectively. Obligations under the Credit
Agreement are secured by a lien on the inventory, accounts receivable and
certain other tangible assets. All borrowings under the Revolving Loan mature
August 14, 2001. The Term Loan is a six-year amortizing facility maturing
September 30, 2002.
Scheduled debt maturities of the Term Loan for the five years subsequent to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------------- ----------
<S> <C>
1997............................................................. $3,500,000
1998............................................................. 6,000,000
1999............................................................. 6,500,000
2000............................................................. 8,000,000
2001............................................................. 8,500,000
</TABLE>
In addition to scheduled quarterly payments, the net proceeds from certain
asset sales, new equity or debt offerings and 50% of excess cash flow (as
defined) must be used to prepay the Term Loan. As a result of the excess cash
flow calculation (calculated from August 14, 1996), at December 31, 1996
additional long-term debt of $2.5 million has been classified as current.
The Credit Agreement provides for Revolving Loans not to exceed $70
million, with availability determined by reference to a borrowing base of
eligible accounts receivable and inventory. The revolving loan facility provides
for the issuance of up to $15 million of letters of credit subject to the unused
portion of the borrowing base. At December 31, 1996 and March 31, 1996, the
Company had $51.6 million and $40.6 million, respectively, available to borrow
under the revolving loan facility. At December 31, 1996 and March 31, 1996, the
Company had outstanding letters of credit of $5.4 million and $5.8 million,
respectively.
The Credit Agreement contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, dividend
payments, capital expenditures and other distributions from the Subsidiaries to
K & F and contains financial ratio requirements including a cash interest
coverage ratio, a leverage ratio and maintenance of a minimum adjusted net
worth. The Company was in compliance with all covenants at December 31, 1996.
F-16
<PAGE> 109
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) 11 7/8% Senior Secured Notes -- On June 10, 1992, the Company issued
$100 million of 11 7/8% Senior Secured Notes which mature on December 1, 2003
(the "Senior Notes"). The Senior Notes are not subject to a sinking fund. The
Senior Notes may not be redeemed prior to June 1, 1997. On and after June 1,
1997, the Company may redeem the Senior Notes at descending premiums ranging
from 5.28% in June 1997 to no premium after June 2001.
(c) 10 3/8% Senior Subordinated Notes -- On August 15, 1996, the Company
issued $140 million of 10 3/8% Senior Subordinated Notes which mature on
September 1, 2004 (the "10 3/8% Notes"). The 10 3/8% Notes are not subject to a
sinking fund. The 10 3/8% Notes may not be redeemed prior to September 1, 2000.
On and after September 1, 2000, the Company may redeem the 10 3/8% Notes at
descending premiums ranging from 5.19% in September 2000 to no premium after
September 2003.
(d) 13 3/4% Senior Subordinated Debentures -- During the nine months ended
December 31, 1996, the Company redeemed the remaining $180 million of the $210
million of 13 3/4% Senior Subordinated Debentures which were to mature on August
1, 2001 (the "13 3/4% Debentures"). The Company used the net proceeds from the
10 3/8% Notes together with borrowings under the Credit Agreement, to redeem the
remaining 13 3/4% Debentures at a price of 102.5% of the principal amount
thereof. In connection therewith, the Company recorded an extraordinary charge
of $9.142 million, consisting of redemption premiums and the write-off of
unamortized financing costs.
On December 28, 1995, the Company redeemed $30 million principal amount of
the 13 3/4% Debentures at a redemption price of 103.75% of the principal amount
thereof. The Company used cash on hand and borrowings from the revolving credit
facility to redeem the 13 3/4% Debentures. In connection therewith, the Company
recorded an extraordinary charge of $1.913 million, consisting of redemption
premiums and the write-off of unamortized financing costs.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the balance
sheet at December 31, 1996 and March 31, 1996 approximate their fair value,
except as discussed below.
The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was approximately
$308 million and $311 million at December 31, 1996 and March 31, 1996,
respectively.
9. CAPITAL STOCK
a. On February 15, 1995, the Board of Directors approved a one-for-ten
reverse common stock split for all holders of Class A and Class B common stock
on such date. All references in the financial statements to number of shares and
stock option data have been restated to reflect this stock split.
b. On September 2, 1994, K & F retired the $65.4 million principal amount
of 14 3/4% Subordinated Convertible Debentures held by Loral Corporation, in
exchange for $12.76 million in cash and 458,994 shares of Class B common stock
representing 22.5% of equity. The cash portion of this transaction was funded
with the proceeds from the sale of capital stock to K & F's principal
stockholders for which stockholders received a total of 68,728 shares of Class A
common stock and 127,636 shares of preferred stock. As a result, K & F's
stockholders' equity was increased by $65.4 million and long-term debt was
reduced by an equal amount, resulting in no gain or loss on the transaction.
c. The preferred stock is convertible into Class A voting common stock on a
one-for-one basis. The preferred stock and Class B common stock are entitled to
vote on all matters on which the Class A common stock will vote and are entitled
to one vote per share.
F-17
<PAGE> 110
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d. The Company has a Stock Option Plan which provides for the grant of
non-qualified or incentive stock options to acquire 50,000 authorized but
unissued shares of Class A common stock. The options are exercisable in four
equal installments on the second, third, fourth and fifth anniversaries of the
date of grant, and shall remain exercisable until the expiration of the option,
10 years from the date of the grant, at an exercise price of $84.60.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
NINE MONTHS ENDED MARCH 31
DECEMBER 31, -----------------
1996 1996 1995
----------------- ------ ------
<S> <C> <C> <C>
Outstanding at beginning of year................. 11,500 11,500 12,000
Granted.......................................... -- -- --
Canceled......................................... (250) -- (500)
------ ------ ------
Outstanding at end of year....................... 11,250 11,500 11,500
====== ====== ======
Exercisable options outstanding.................. 10,375 9,625 8,938
====== ====== ======
Available for future grant....................... 38,750 38,500 38,500
====== ====== ======
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1996 was 2.8 years.
e. In April 1996, Loral Space (which owns 22.5% of the outstanding capital
stock of K & F) granted options to certain officers and employees of K & F to
purchase 265,000 shares of Loral Space common stock at $10.50 per share. Such
exercise price was equal to the market price at grant date. These options expire
ten years from the date of grant and become exercisable ratably over a five-year
period.
K & F is obligated to pay annual interest at LIBOR plus two percent to
Loral Space on the balance of options issued but not exercised, times $10.50. At
December 31, 1996, the amount due to Loral Space is $140,000 which has been
charged to operations.
As described in Note 2, K & F accounts for its stock-based compensation
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation"
requires the disclosure of pro forma net income (loss) had K & F adopted the
fair value method as of the beginning of 1995. SFAS No. 123 requires that equity
instruments granted to an employee by a principal stockholder be included as
part of the disclosure. However, disclosure has been omitted because the pro
forma incremental effect of these options on net income (loss) required to be
disclosed under SFAS No. 123 is not material to K & F's results of operations.
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.
F-18
<PAGE> 111
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost included the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, ---------------------------
1996 1996 1995
----------------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during
the period............................ $ 1,521,000 $ 1,562,000 $ 1,590,000
Interest cost on projected benefit
obligation............................ 3,980,000 4,901,000 4,224,000
Actual (return) loss on plan assets..... (5,439,000) (9,940,000) 954,000
Net amortization and deferral........... 2,512,000 6,988,000 (3,869,000)
----------- ----------- -----------
Net pension cost.............. $ 2,574,000 $ 3,511,000 $ 2,899,000
=========== =========== ===========
</TABLE>
The table below sets forth the funded status of the plans as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation............................. $ 70,371,000 $ 65,642,000
============ ============
Accumulated benefit obligation........................ $ 70,496,000 $ 65,987,000
Effect of projected future salary increases........... 2,624,000 2,113,000
------------ ------------
Projected benefit obligation.......................... 73,120,000 68,100,000
Plan assets at fair market value........................ 63,268,000 55,100,000
------------ ------------
Unfunded projected benefit obligation................... 9,852,000 13,000,000
Unrecognized prior service cost......................... (1,876,000) (2,185,000)
Unrecognized net loss................................... (13,273,000) (12,685,000)
Adjustment for minimum liability........................ 12,525,000 12,757,000
------------ ------------
Accrued pension cost recognized in the consolidated
balance sheet......................................... $ 7,228,000 $ 10,887,000
============ ============
</TABLE>
SFAS No. 87 requires recognition in the balance sheet of an additional
minimum pension liability for underfunded plans with accumulated benefit
obligations in excess of plan assets. A corresponding amount is recognized as an
intangible asset or a reduction of equity. At December 31, 1996, the Company's
additional minimum liability was $12,525,000 with a corresponding equity
reduction of $10,649,000 and intangible asset of $1,876,000. At March 31, 1996,
the Company's additional minimum liability was $12,757,000 with a corresponding
equity reduction of $10,572,000 and intangible asset of $2,185,000.
Investments held by the Company's pension plans consist primarily of
Fortune 500 equity securities and investment grade fixed income securities.
The assumptions used in accounting for the plans are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, -------------
1996 1996 1995
----------------- ---- ----
<S> <C> <C> <C>
Discount rate........................................ 7.75% 7.50% 8.50%
Rate of increase in compensation levels.............. 4.50 4.50 4.50
Expected long-term rate of return on assets.......... 9.50 9.50 9.50
</TABLE>
Eligible employees having one year of service also participate in one of
the Company's Savings Plans (hourly or salaried). Under one of these plans, the
Company matches 45% of a participating employee's contributions, up to 6% of
compensation. The employer contributions generally vest to participating
employees after five years of service. The matching contributions were $572,000,
$687,000 and $532,000 for the nine months ended December 31, 1996 and for the
fiscal years ended March 31, 1996 and 1995, respectively.
F-19
<PAGE> 112
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
NINE MONTHS ENDED YEARS ENDED MARCH 31,
DECEMBER 31, ---------------------------
1996 1996 1995
----------------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits attributed to
service............................... $ 873,000 $ 619,000 $ 400,000
Interest cost on accumulated
postretirement benefit................ 3,176,000 3,474,000 3,543,000
Net amortization and deferral........... (2,442,000) (4,332,000) (3,732,000)
----------- ----------- -----------
Net periodic postretirement benefit
cost.................................. $ 1,607,000 $ (239,000) $ 211,000
=========== =========== ===========
</TABLE>
Presented below are the total obligations and amounts recognized in the
Company's consolidated balance sheets, inclusive of the current portion:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
-------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................ $ 34,042,000 $ 30,172,000
Fully eligible active plan participants............. 2,247,000 2,838,000
Other active plan participants...................... 22,558,000 16,304,000
------------ ------------
Total accumulated postretirement benefit obligation... 58,847,000 49,314,000
Unrecognized net loss................................. (20,081,000) (14,105,000)
Unrecognized prior service cost related to plan....... 38,673,000 42,181,000
------------ ------------
Accrued postretirement benefit cost................... $ 77,439,000 $ 77,390,000
============ ============
</TABLE>
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 11% during the nine months ended December 31, 1996 and
will be 10.3% during the fiscal year ending December 31, 1997. The rate was
assumed to decrease gradually to 6.5% by fiscal year 2002 and remain at that
level thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. A change in the assumed health care trend rates
by 1% in each year would change the accumulated postretirement benefit
obligation at December 31, 1996 by $8,000,000 and the aggregate of the service
and interest cost components of net postretirement benefit cost for the nine
months ended December 31, 1996 by $1,100,000. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation as of
December 31, 1996 and March 31, 1996 was 7.75% and 7.50%, respectively.
F-20
<PAGE> 113
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS
The Company is party to various noncancellable operating leases which are
longer than a one-year term for certain data processing, and other equipment and
facilities with minimum rental commitments payable as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------------- ----------
<S> <C>
1997............................................................. $4,707,000
1998............................................................. 4,810,000
1999............................................................. 4,823,000
2000............................................................. 4,352,000
2001............................................................. 1,745,000
Thereafter....................................................... 6,565,000
</TABLE>
Rental expense was $3,491,000, $4,758,000 and $4,641,000 for the nine
months ended December 31, 1996 and for the fiscal years ended March 31, 1996 and
1995, respectively.
13. CONTINGENCIES
In the past, Aircraft Braking Systems had been purchasing substantially all
of the carbon for its carbon brakes under supply arrangements with Hitco
Technologies, Inc. ("Hitco"). As described below Aircraft Braking Systems and
Hitco are in litigation. A loss of carbon supply for the carbon brakes
manufactured by Aircraft Braking Systems would have a material, adverse effect
on the Company's business and financial condition. However, for certain
programs, the Company has developed an alternate supplier and also has commenced
a major expansion of its existing carbon manufacturing facility in Akron, Ohio.
Construction of the facility is substantially complete and is expected to be
fully operational during the second quarter of calendar year 1997. Aircraft
Braking Systems is currently manufacturing carbon on three of the five new
densification furnaces to be installed. When fully operational, the Company
believes it will have sufficient sources of carbon to meet all of its
requirements for brake production at the current level of business.
On December 15, 1995, the Company's Aircraft Braking Systems subsidiary
commenced an action in the Court of Common Pleas, Summit County, Ohio against
Hitco after Hitco threatened to breach existing supply contracts unless prices
were renegotiated. Hitco has been the principal supplier of carbon used by
Aircraft Braking Systems for its carbon brakes. Hitco claimed that Aircraft
Braking Systems breached the supply arrangements by electing to begin to expand
its own carbon production facility. The Aircraft Braking Systems' complaint, as
amended, seeks damages in excess of $47 million, injunctive relief and specific
performance requiring Hitco to perform its obligations pursuant to existing
contracts and purchase orders. Hitco has counterclaimed in the matter seeking,
among other things, damages up to $130 million for the alleged breach by
Aircraft Braking Systems of alleged long-term contracts to purchase carbon.
Hitco was enjoined from refusing to perform its obligations pursuant to existing
contracts and purchase orders without change in terms. Hitco has sought to have
the injunction vacated or modified, and/or a declaratory judgment terminating
Hitco's obligation to supply Aircraft Braking Systems at prices previously
pertaining. To date, the preliminary injunction has not been vacated or
modified, although Hitco argues it expired on December 13, 1996. Through January
1997, Hitco continued to supply carbon to the Company, although Hitco failed to
acknowledge certain purchase orders. Aircraft Braking Systems has sought to hold
Hitco in contempt of the court's injunction. Hitco has sought an injunction
requiring that the Company turn over technology allegedly jointly developed and
owned under the prior contractual arrangements. Hearings have been concluded on
both the Company's contempt motion and Hitco's motion seeking technology but
neither has been decided by the court.
F-21
<PAGE> 114
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In related actions, a suit filed by Hitco in Superior Court, Los Angeles
County, California against Aircraft Braking Systems seeking substantially the
same relief as is asserted in the Ohio action has been stayed. Hitco also filed
suit in the Federal District Court in the Northern District of Ohio for damages
and injunctive relief against a third party claiming that such party, in
supplying certain carbon to Aircraft Braking Systems, has acquired trade secrets
of Hitco from Aircraft Braking Systems and has misappropriated trade secrets and
technology developed under the same research and development contracts between
Hitco and Aircraft Braking Systems which are the subject of the Ohio case and
the California case. Aircraft Braking Systems has been granted leave to
intervene and the other party has moved to dismiss the Federal action.
Management intends to vigorously advocate its interest in all lawsuits, to
seek dismissal of the California action and to proceed in the Ohio case to
enforce the preliminary injunction and otherwise to protect Aircraft Braking
Systems' carbon supply as well as to seek damages from Hitco. Based upon the
proceedings to date, advice of counsel and its own assessment of the matters in
dispute, management does not expect the outcome of the litigation to be
unfavorable to the Company.
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate liability, if any, will not have a material adverse effect on the
Company.
14. INCOME TAXES
The components of the net deferred tax benefit and corresponding valuation
allowance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------- -------------
<S> <C> <C>
Tax net operating loss carryforwards.................. $ 71,051,000 $ 68,233,000
Temporary differences:
Postretirement and other employee benefits.......... 33,708,000 35,861,000
Intangibles......................................... 55,124,000 58,997,000
Program participation costs......................... (6,109,000) (6,348,000)
Other............................................... 6,802,000 7,165,000
------------- -------------
Deferred tax benefit.................................. 160,576,000 163,908,000
Valuation allowance................................... (159,165,000) (163,908,000)
------------- -------------
Net deferred tax asset................................ $ 1,411,000 $ --
============= =============
</TABLE>
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets which are not likely to be realized. The Company has established a
valuation allowance against the majority of these benefits given the uncertain
nature of their ultimate realization. The change in the valuation allowance
reflects the extent that taxable income has been projected during the
carryforward period.
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced by $75
million and $56 million, respectively. The realization of these benefits would
reduce future income tax payments by $159 million. At December 31, 1996 goodwill
has been reduced by $1.1 million as a result of the reduction in the valuation
allowance.
The Company's benefit for income taxes for the nine months ended December
31, 1996 consists of:
<TABLE>
<S> <C>
Current domestic provision.................................... $ 1,330,000
Foreign provision............................................. 170,000
Domestic utilization of net operating loss carryforwards...... (1,581,000)
-----------
Income tax benefit............................................ $ (81,000)
===========
</TABLE>
F-22
<PAGE> 115
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate of 0.5% benefit for the nine months ended
December 31, 1996 differs from the federal statutory rate (benefit of 35%) due
to the partial-utilization of tax net operating losses of $3.5 million and the
change in the valuation allowance. For the fiscal years ended March 31, 1996 and
1995 the Company's effective tax rate of zero percent differed from the federal
statutory rate (benefit of 35%) due to the change in the valuation allowance.
The Company has tax net operating loss carryforwards of approximately $185
million at December 31, 1996. The tax net operating losses expire from 2005
through 2011, with $23 million of carryforwards expiring in 2005.
15. RELATED PARTY TRANSACTIONS
Bernard L. Schwartz ("BLS") owns 27.12% of the common stock of the Company
and serves as Chairman of the Board of Directors and Chief Executive Officer.
BLS is also Chairman and Chief Executive Officer of Loral Space & Communications
Ltd. ("Loral Space"). Prior to that he was Chairman and Chief Executive Officer
of Loral Corporation. The Company has an Advisory Agreement with BLS which
provides for the payment of an aggregate of $200,000 per month of compensation
to BLS and persons designated by him (including certain other executive officers
of Loral Space who are active in the management of the Company) in exchange for
acting as directors and providing advisory services to the Company and its
subsidiaries. Such agreement will continue until BLS dies or is disabled or
ceases to own at least 135,000 shares of common stock of the Company.
In May 1996, K & F purchased $343,000 principal amount of the Company's
13 3/4% Debentures from A. Robert Towbin, who is a member of the Board of
Directors of the Company, at a price of 103.65% of the principal thereof plus
accrued interest. In May 1996, the 13 3/4% Debentures were callable at a price
of 103.75% of the principal amount.
The Company pays Ronald H. Kisner, who is a member of the Board of
Directors of the Company, a monthly retainer of $6,000 for legal services.
On September 2, 1994, K & F retired the $65.4 million principal amount of
Convertible Debentures held by Loral Corporation. (See Note 9.)
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS and other advisors ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization.
Bonuses earned under this plan were $200,000 for the fiscal year ended March 31,
1996 and paid to certain executive officers of Loral Space. BLS did not receive
any payments under this plan for the fiscal year ended March 31, 1996. Bonuses
for the nine months ended December 31, 1996 have not yet been determined nor
approved by the Company's Board of Directors.
Lehman Brothers has from time to time provided investment banking,
financial advisory and other services to the Company, for which services Lehman
Brothers has received fees. As the beneficial owners of 48.17% of the
outstanding capital stock, the Lehman Investors are able to elect three
directors to the Company's Board of Directors and have the benefit of certain
rights under the Stockholders Agreement and the Company's By-laws. During the
nine months ended December 31, 1996, Lehman Brothers received underwriting
discounts and commissions of $2.6 million in connection with the offering of the
10 3/8% Notes.
Pursuant to agreements between the Company and Loral Space (which owns
22.5% of the outstanding capital stock), the Company reimburses Loral Space for
real property occupancy, benefits administration and legal services. The related
charges agreed upon were established to reimburse Loral Space for actual costs
incurred without profit or fee. The Company believes the arrangements are as
favorable to the Company as could have been obtained from unaffiliated parties.
Payments to Loral Space were $0.2 million for the nine months ended December 31,
1996. Included in accounts payable at December 31, 1996 is $0.2 million.
F-23
<PAGE> 116
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to agreements between K & F and Loral Corporation, the parties
provided services to each other and shared certain expenses relating to a
production program, real property occupancy, benefits administration, treasury,
accounting and legal services. The related charges agreed upon by the parties
were established to reimburse each party on the actual cost incurred without
profit or fee. The Company believes the arrangements with Loral Corporation were
as favorable to the Company as could have been obtained from unaffiliated
parties. Billings from Loral Corporation were $3.6 million and $3.0 million for
the fiscal years ended March 31, 1996 and 1995, respectively. Billings to Loral
Corporation were $2.7 million and $0.2 million for the fiscal years ended March
31, 1996 and 1995. Purchases from Loral Corporation were $2.2 million and $1.9
million for the fiscal years ended March 31, 1996 and 1995. Included in accounts
receivable and accounts payable at March 31, 1996 is $3.5 million and $2.3
million.
On April 22, 1996, Lockheed Martin acquired the defense electronics and
systems integration businesses of Loral Corporation which included the Akron,
Ohio facility. The various occupancy and service agreements affecting the Akron,
Ohio facility will remain in full force and effect. K & F will continue to
reimburse Lockheed Martin for real property occupancy, and costs relating to
shared easements and services.
F-24
<PAGE> 117
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 12
The Exchange Offer..................... 18
The Recapitalization................... 26
Capitalization......................... 28
Unaudited Pro Forma Consolidated
Financial Information................ 29
Selected Historical Consolidated
Financial Information................ 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 36
Business............................... 41
Management............................. 50
Security Ownership..................... 56
Certain Transactions................... 58
Description of Certain Indebtedness.... 60
Description of the Notes............... 62
Certain United States Federal Tax
Considerations For Non-United States
Holders.............................. 86
Plan of Distribution................... 88
Legal Matters.......................... 88
Experts................................ 89
Available Information.................. 89
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
$185,000,000
K & F INDUSTRIES, INC.
9 1/4% SERIES B
SENIOR SUBORDINATED
NOTES DUE 2007
----------------------------------------
PROSPECTUS
----------------------------------------
, 1998
======================================================
<PAGE> 118
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation of
the Registrant provides that the directors of the Registrant, individually or
collectively, shall not be held personally liable to the Registrant or its
stockholders for monetary damages for breaches of fiduciary duty as directors,
except that any director shall remain liable (1) for any breach of the
director's fiduciary duty of loyalty to the Registrant or its stockholders, (2)
for acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (3) for liability under Section 174 of the General
Corporation Law of the State of Delaware or (4) for any transaction from which
the director derived an improper personal benefit. The by-laws of the Registrant
provide for indemnification of its officers and directors to the full extent
authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<C> <C> <S>
**1.01 -- Purchase Agreement dated as of October 9, 1997 between the Company and Lehman
Brothers Inc. and Unterberg Harris
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
**2.03 -- First Amendment to Stock Purchase Agreement dated as of October 15, 1997 among
the Company and the Securityholders named therein
**3.01 -- Amended and Restated Certificate of Incorporation of the Company
**3.02 -- Amended and Restated By-Laws of the Company
**4.01 -- Indenture dated as of October 15, 1997 for the Notes between the Company and
State Street Bank and Trust Company, as trustee
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
10.01 -- 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)
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)
</TABLE>
II-1
<PAGE> 119
<TABLE>
<C> <C> <S>
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
10.16 -- 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)
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
**10.28 -- Guarantee and Collateral Agreement dated as of October 15, 1997 among the
Company, ABS, EFC, certain subsidiaries named therein and FNBC, as Collateral
Agent
**10.29 -- Form of Term Note dated as of October 15, 1997 to be executed by each of ABS and
EFC in favor of FNBC
**10.30 -- Form of Revolving Credit Note dated as of October 15, 1997 to be executed by each
of ABS and EFC in favor of FNBC
**10.31 -- Subordination Agreement dated as of October 15, 1997 between ABS and FNBC
**10.32 -- Subordination Agreement dated as of October 15, 1997 between EFC and FNBC
**10.33 -- Intercreditor Agreement dated as of October 15, 1997 among the Pension Benefit
Guaranty Corporation ("PBGC"), FNBC, ABS, EFC and the Company
**10.34 -- K & F Agreement dated as of October 15, 1997 executed by the Company in favor of
FNBC
**10.35 -- Settlement Agreement dated as of October 15, 1997 between the Company and PBGC
</TABLE>
II-2
<PAGE> 120
<TABLE>
<C> <C> <S>
**10.36 -- Registration Rights Agreement dated as of October 15, 1997 between the Company
and Lehman Brothers Inc. and Unterberg Harris
**10.37 -- Dealer Manager Agreement dated as of September 15, 1997 between Lehman Brothers
Inc. and the Company
**10.38 -- Amended and Restated Director Advisory Agreement dated as of October 15, 1997
between the Company and BLS
**10.39 -- Stockholders' Agreement dated as of October 15, 1997 between the Company and the
Stockholders identified therein
**12.01 -- Statement of computation of ratio of earnings (deficiency) to fixed charges
**12.02 -- Statement of computation of pro forma earnings to fixed charges
21.01 -- Subsidiaries of the Registrant(1)
*23.01 -- Consent of O'Sullivan Graev and Karabell, LLP (included in Exhibit 5)
*23.02 -- Consent of Deloitte & Touche LLP
24.01 -- Powers of Attorney (included on signature page)
**25.01 -- Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939
of State Street Bank and Trust Company, as Trustee
*99.1 -- Form of Letter of Transmittal
*99.2 -- Form of Notice of Guaranteed Delivery
*99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees
*99.4 -- Form of Letter to Clients
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-47028 and incorporated herein by reference.
(5) 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.
(6) 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.
(7) 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.
(8) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 filed on August 29, 1996.
* Filed herewith.
** Previously filed as an exhibit hereto.
(b) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in financial statements or notes thereto.
II-3
<PAGE> 121
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.
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.
II-4
<PAGE> 122
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-5
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, state of New York, on the 15th day of January, 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 Amendment
No. 1 to this Registration Statement on Form S-4 has been signed on January 15,
1998 by or on behalf of the following persons in the capacity indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ------------------------------
<C> <S> <C>
* Chairman of the Board, Chief
- ------------------------------------------ Executive Officer and
Bernard L. Schwartz 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
- ------------------------------------------
Steven J. Berger
* Director
- ------------------------------------------
David J. Brand
* Director
- ------------------------------------------
Herbert R. Brinberg
* Director
- ------------------------------------------
Robert B. Hodes
</TABLE>
II-6
<PAGE> 124
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ------------------------------
<C> <S> <C>
* Director
- ------------------------------------------
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
</TABLE>
II-7
<PAGE> 1
Exhibit 5.01
[LETTERHEAD OF O'SULLIVAN GRAEV & KARABELL, LLP]
January 15, 1998
K & F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
Ladies and Gentlemen:
We have acted as counsel to K & F Industries, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") of the Registration
Statement of the Company on Form S-4, as amended (File No. 333-40977) (as so
amended, the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation G-K under the Act.
In connection with this opinion, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of rendering the opinions set forth below including, without
limitation, (i) the Registration Statement, (ii) the Indenture dated as of
October 15, 1997 (the "Indenture") between the Company and State Street Bank and
Trust Company, as trustee, (iii) the Amended and Restated Certificate of
Incorporation of the Company, as amended through the date hereof; (iv) the
Amended and Restated By-laws of the Company, as amended through the date hereof
and (v) the resolutions adopted by the Board of Directors of the Company at a
meeting held on September 10, 1997 and by unanimous written consent in lieu of a
meeting dated as of October 8, 1997. As to certain questions of fact material to
the opinions contained herein, we have relied upon certificates or statements of
officers of the Company and certificates of public officials.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
to authentic originals of all documents submitted to us as certified or
photostatic copies. In making our examination of documents executed by parties
other than the Company, we have assumed that such parties had the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and
<PAGE> 2
execution and delivery by such parties of such documents and the
validity and binding effect thereof.
Based upon the foregoing, we are of the opinion as follows:
1. The Company is a validly existing corporation under the laws of the
State of Delaware.
2. The 9 1/4% Series B Senior Subordinated Notes Due 2007 of the Company
have been duly authorized and, when issued upon consummation of the Exchange
Offer (as defined in the Registration Statement) as contemplated by the
Registration Statement and the Indenture, will be validly issued.
Members of our firm are admitted to the Bar of the State of New York and
we express no opinion as to the laws of any other jurisdiction other than the
Delaware General Corporation Law.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under "Legal Matters" in the Registration Statement. In giving this
consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ O'Sullivan Graev & Karabell, LLP
<PAGE> 1
Exhibit 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration
Statement No. 333-40977 of K & F Industries, Inc. of our report dated January
23, 1997, 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
January 14, 1998
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
OF
K & F INDUSTRIES, INC.
PURSUANT TO THE PROSPECTUS DATED , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
To: State Street Bank and Trust Company, as Exchange Agent
<TABLE>
<S> <C>
If by Mail: If by Overnight Courier or Hand:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, MA 02102-0178 Boston, MA 02110
Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
<TABLE>
<S> <C>
By Telecopier: Confirm by Telephone:
(617) 664-5395 (617) 664-5587
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission via a facsimile number other than the one listed above will not
constitute a valid delivery. The instructions accompanying this Letter of
Transmittal should be read carefully before this Letter of Transmittal is
completed.
The undersigned acknowledges that he or she has received the Prospectus,
dated , 1998 (the "Prospectus"), of K & F Industries, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange its
9 1/4% Series B Senior Subordinated Notes due 2007 (the "New Notes") for an
equal principal amount of its 9 1/4% Senior Subordinated Notes due 2007 (the
"Old Notes" and, together with the New Notes, the "Notes"). The terms of the New
Notes are identical in all material respects to the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, therefore, will not bear legends restricting their
transfer and will not contain certain provisions providing for the payment of
liquidated damages to the holders of the Old Notes under certain circumstances
relating to the Registration Rights Agreement (as defined in the Prospectus).
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Exchange Offer is extended as provided in the Prospectus,
in which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Capitalized terms used but not defined
herein have the meanings given to them in the Prospectus.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or an Agent's Message (as defined in the Prospectus) or any other
documents required by this Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Old Notes according to the guaranteed
delivery procedures set forth under the caption "The Exchange Offer--Guaranteed
Delivery Procedures" in the Prospectus. See Instruction 5.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the
<PAGE> 2
undersigned desires to take with respect to the Exchange Offer. Holders who wish
to tender their Old Notes must complete this Letter of Transmittal in its
entirety.
If the undersigned is a broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company), the
undersigned may be deemed to be an "underwriter" under the Securities Act and
the undersigned acknowledges, therefore, that it will deliver a prospectus in
connection with any resale of such New Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THIS LETTER OF TRANSMITTAL
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DESCRIPTION OF 9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
- ---------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT
NAME(S) AND PRINCIPAL TENDERED (MUST BE
ADDRESS(ES) OF AMOUNT IN INTEGRAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED MULTIPLES
(PLEASE FILL IN, IF BLANK) NUMBER(S) BY CERTIFICATE(S) OF $1,000)*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by the column labeled "Aggregate
Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the certificate numbers
and principal amounts on a separate signed schedule and affix such
schedule to this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount. All other
tenders must be in integral multiples of $1,000.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING (SEE INSTRUCTION 5):
Name(s) of Registered Holder(s)
Window Ticket Number (if any)
Date of Execution of Notice of Guaranteed Delivery
Name of Institution which Guaranteed Delivery
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO AND COMPLETE THE FOLLOWING:
Name: ________________________
Address: ________________________
- --------------------------------------------------------------------------------
<PAGE> 3
SPECIAL REGISTRATION INSTRUCTIONS
(SEE INSTRUCTIONS 7, 8 AND 9)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Notes issued in exchange for Old Notes accepted for
exchange, are to be issued in the name of someone other than the undersigned.
Issue certificate(s) to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 7, 8 AND 9)
To be completed ONLY if certificates for Old Notes in a principal amount
not tendered, or New Notes issued in exchange for Old Notes accepted for
exchange, are to be sent to someone other than the undersigned, or to the
undersigned at an address other than that shown above.
Deliver certificate(s) to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
<PAGE> 4
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Old Notes tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order of, the Company
all right, title and interest in and to the Old Notes tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
its agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Old Notes with
full power of substitution (i) to deliver certificates for such Old Notes to the
Company and deliver all accompanying evidences of transfer and authenticity to,
or upon the order of, the Company and (ii) to present such Old Notes for
transfer on the books of the Company, all in accordance with the terms of the
Exchange Offer. The power of attorney granted in this paragraph shall be deemed
to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes tendered hereby further
represent and warrant that (i) the New Notes acquired by the undersigned and any
such beneficial owner of Old Notes pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, (ii) neither the undersigned nor any such beneficial owner has an
arrangement with any person to participate in the distribution of such New
Notes, (iii) neither the undersigned nor any such beneficial owner nor any such
other person is engaging in or intends to engage in a distribution of such New
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate," as defined under Rule 405 promulgated under the Securities Act, of
the Company. The undersigned and each beneficial owner acknowledge and agree
that any person who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction of the New Notes
acquired by such person and may not rely on the position of the staff of the
Securities and Exchange Commission set forth in the no-action letters discussed
in the Prospectus under the caption "The Exchange Offer -- Purpose and Effect of
the Exchange Offer." The undersigned and each beneficial owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
notice (confirmed in writing) or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer because of an invalid tender, the occurrence of certain other
events set forth in the Prospectus or otherwise, any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown below
or at a different address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders."
Unless otherwise indicated under "Special Registration Instructions,"
please issue the certificates representing the New Notes issued in exchange for
the Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged, in the name(s) of the undersigned. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please send the
certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as
<PAGE> 5
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Registration Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the New Notes issued in exchange for the Old Notes accepted for
exchange in the name(s) of, and return any certificates for Old Notes not
tendered or not exchanged to, the person(s) so indicated. The undersigned
understands that the Company has no obligation pursuant to the "Special
Registration Instructions" and "Special Delivery Instructions" to transfer any
Old Notes from the name of the registered Holder(s) thereof if the Company does
not accept for exchange any of the Old Notes so tendered.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or an Agent's Message and any other documents required by this
Letter of Transmittal to the Exchange Agent prior to the Expiration Date may
tender their Old Notes according to the guaranteed delivery procedures set forth
in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." See Instruction 5.
<PAGE> 6
- --------------------------------------------------------------------------------
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X _____________________________________ Date: ___________________________
X _____________________________________ Date: ___________________________
Signature(s) of Registered Holder(s) or Authorized Signatory
Area Code and Telephone Number: ___________________________________________
The above lines must be signed by the registered holder(s) as his or
her name(s) appear(s) on the Old Notes or by person(s) authorized to
become registered holder(s) by a properly completed bond power from the
registered holder(s), a copy of which must be transmitted with this Letter
of Transmittal. If the Old Notes to which this Letter of Transmittal
relate are held of record by two or more joint holders, then all such
holders must sign this Letter of Transmittal. If this Letter of
Transmittal or any Old Notes or bond powers are signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative
capacity, such person must (i) so indicate and set forth his or her full
title below and (ii) unless waived by the Company, submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 7.
Name(s): -----------------------------------------------------------------
(Please Print)
--------------------------------------------------------------------------
Capacity: ----------------------------------------------------------------
Address: -----------------------------------------------------------------
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 7)
--------------------------------------------------------------------------
(Authorized Signature)
--------------------------------------------------------------------------
(Title)
--------------------------------------------------------------------------
(Name of Form)
Date: ____________ , 1998
- --------------------------------------------------------------------------------
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Procedures for Tendering. This Letter of Transmittal or a facsimile
hereof, properly completed and duly executed, or an Agent's Message and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for tendered
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at DTC pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date or (iii) the Holder must comply with the guaranteed
delivery procedures described below.
The method of delivery of Old Notes and this Letter of Transmittal and any
other required documents to the Exchange Agent is at the election and risk of
the Holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. Instead of delivery by
mail, it is recommended that the Holder use an overnight or hand delivery
service. In the case of physical delivery of Old Notes, if sent by mail, it is
recommended that registered mail, return receipt requested, be used and proper
insurance be obtained. In all cases, sufficient time should be allowed to assure
delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Old Notes should be sent to the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall be
under any duty to give any such notification, nor shall any of them incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
2. Tender by Holder. Only a Holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such beneficial owner's own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
3. Partial Tenders. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 9 1/4% Senior
Subordinated Notes due 2007" above. The entire principal amount of any Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Old Notes is not
tendered, then Old Notes for the principal amount of Old Notes not tendered and
a certificate or certificates representing New Notes issued in exchange for any
Old Notes accepted will be sent to the Holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Old Notes are accepted for exchange.
<PAGE> 8
4. Book-Entry Transfer. Any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account at DTC in accordance
with DTC's procedures for transfer. However, although delivery of Old Notes may
be effected through book-entry transfer at DTC, an Agent's Message must be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with. See "The Exchange Offer -- Procedures for Tendering" in the Prospectus.
5. Guaranteed Delivery Procedures. Holders who wish to tender their Old
Notes and (i) whose Old Notes are not immediately available or (ii) who cannot
deliver their Old Notes, this Letter of Transmittal or an Agent's Message or any
other documents required hereby to the Exchange Agent prior to the Expiration
Date must tender their Old Notes according to the guaranteed delivery procedures
set forth in the Prospectus. Pursuant to such procedure: (a) such tender must be
made through an Eligible Institution (as defined below); (b) prior to the
Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five New York Stock Exchange trading days
after the Expiration Date, this Letter of Transmittal (or facsimile hereof) or
an Agent's Message together with the certificate(s) representing the Old Notes,
or a Book-Entry Confirmation, and any other required documents will be deposited
by the Eligible Institution with the Exchange Agent; and (c) such properly
completed and executed Letter of Transmittal (or facsimile hereof) or an Agent's
Message, as well as the certificate(s) representing all tendered Old Notes in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
all other documents required by this Letter of Transmittal must be received by
the Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date, all as provided in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures." Any Holder who wishes to
tender his or her Old Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
6. Withdrawal of Tenders. To withdraw a tender of Old Notes in the Exchange
Offer, a written or facsimile transmission notice of withdrawal must be received
by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the name of the
persons withdrawing the tender and (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at DTC to be credited with the withdrawn Old Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, which determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one of
the procedures described above in Instruction 1, under Procedures for Tendering,
at any time prior to the Expiration Date.
7. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
<PAGE> 9
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for New Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
holder or holders and neither the "Special Delivery Instructions" nor the
"Special Registration Instructions" has been completed, then such holder or
holders need not and should not endorse any tendered Old Notes, nor provide a
separate bond power. In any other case, such holder or holders must either
properly endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal with the signatures on the
endorsement or bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person must so indicate when signing, and,
unless waived by the Company, submit evidence satisfactory to the Company of
such person's authority to so act with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 7 must be guaranteed by an Eligible Institution which is a member of
(a) the Securities Transfer Agents Medallion Program, (b) the New York Stock
Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an "Eligible
Institution"). Signatures on this Letter of Transmittal need not be guaranteed
if (a) this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered herewith and such holder(s) have not completed the box set
forth herein entitled "Special Registration Instructions" or the box set forth
herein entitled "Special Delivery Instructions" or (b) such Old Notes are
tendered for the account of an Eligible Institution.
8. Special Registration and Delivery Information. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address of
the person singing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
9. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of the Old
Notes tendered hereby, or if tendered Old Notes are registered in the name of
any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or on any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
Except as provided in this Instruction 9, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
10. Waiver of Conditions. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange Offer
in the case of any Old Notes tendered.
11. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent by telephone at (617) 664-5587 or by facsimile at (617) 664-
5395.
12. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified herein. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE> 10
IMPORTANT TAX INFORMATION
The Holder is required to give the Exchange Agent the social security
number or employer identification number of the Holder of the Notes. If the
Notes are in more than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
PAYER'S NAME: K & F INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Name of Holder (if joint, list first and circle the name of the person or
entity whose number you enter in Part I below).
- --------------------------------------------------------------------------------
Address (if Holder does not complete, signature below will constitute a
certification that the above address is correct.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- PART II -- FOR PAYEES
Form W-9 Please provide your TIN in Social Security EXEMPT FROM BACKUP
Department of the Treasury the box at right and certify Number WITHHOLDING, SEE THE
Internal Revenue Service by signing and dating below. or ENCLOSED GUIDELINES
Payer's Request for If you do not have a number, Employer FOR CERTIFICATION OF
Taxpayer Identification see How to Obtain a "TIN" in Identification TAXPAYER
Number (TIN) the enclosed Guidelines. Number IDENTIFICATION NUMBER
ON SUBSTITUTE FORM
_______________ W-9.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have
been notified by the IRS that you are subject to backup withholding
because of underreported interest or dividends on your tax return.
However, if after being notified by the IRS that you were subject to
backup withholding you received another notification from the IRS that you
are no longer subject to backup withholding, do not cross out item (2).
(Also see instructions in the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.)
SIGNATURE __________________________________________ DATE _________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU UNDER THE NOTES.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
- --------------------------------------------------------------------------------
(DO NOT WRITE IN SPACE BELOW)
Certificate Surrendered Old Notes Tendered Old Notes Accepted
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Delivery Prepared By _____________ Checked By _____________ Date _____________
<PAGE> 11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.
- -------------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF --
- -------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account or,
if combined funds,
the first individual
on the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. Adult and minor (joint account) The adult or, if
the minor is the
only contributor,
the minor(1)
5. Account in the name of guardian The ward, minor,
or committee for a designated or incompetent
ward, minor, or incompetent person(3)
person
6. a. The usual revocable savings The grantor-
trust account (grantor is trustee(1)
also trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid trust
under State law
7. Sole proprietorship account The Owner(4)
- -------------------------------------------------------------
- -------------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF --
- -------------------------------------------------------------
8. A valid trust, estate, or Legal entity (Do
pension trust not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated in
the account title)(5)
9. Corporate account The corporation
10. Religious, charitable, or The organization
educational organization
account
11. Partnership account held in The partnership
the name of the business
12. Association, club, or other The organization
tax-exempt organization
13. A broker or registered nominee The broker or nominee
14. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as a
State or local government,
school district or prison) that
receives agricultural program
payments
- -------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
If only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner, but also enter business or "doing business as"
name. Use either the owner's social security number or employer
identification number.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 12
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments include the
following:
- -- A Corporation.
- -- A financial institution.
- -- An organization exempt from tax under section 501(a), or an individual
retirement plan.
- -- The United States or any agency or instrumentality thereof.
- -- A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
- -- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- -- An international organization or any agency, or instrumentality thereof.
- -- A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
- -- A real estate investment trust.
- -- A common trust fund operated by a bank under section 584(a).
- -- An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a)(1).
- -- An entity registered at all times under the investment Company Act of 1940.
- -- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- -- Payments to nonresident aliens subject to withholding under section 1441.
- -- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- -- Payments of patronage dividends where the amount received is not paid in
money.
- -- Payments made by certain foreign organizations.
- -- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- -- Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you
have not provided your correct taxpayer identification number to the payer.
- -- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- -- Payments described in section 6049(b)(5) to non-resident aliens.
- -- Payments on tax-free covenant bonds under section 1451.
- -- Payments made by certain foreign organizations.
- -- Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041(a),
6045, and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
underpayment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CIVIL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE> 1
EXHIBIT 99.2
K & F INDUSTRIES, INC.
NOTICE OF GUARANTEED DELIVERY
OF
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
As set forth in the Prospectus dated , 1998 (the "Prospectus"),
of K & F Industries, Inc. (the "Company") under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures," this form must be used to accept the
Company's offer to exchange its 9 1/4% Series B Senior Subordinated Notes due
2007 (the "New Notes") for an equal principal amount of its 9 1/4% Senior
Subordinated Notes due 2007 (the "Old Notes"), by Holders who wish to tender
their Old Notes and (i) whose Old Notes are not immediately available or (ii)
who cannot deliver their Old Notes, the Letter of Transmittal or an Agent's
Message (as defined in the Prospectus) or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date. This
form must be delivered by an Eligible Institution by mail or hand delivery or
transmitted, via facsimile, to the Exchange Agent at its address set forth below
not later than the Expiration Date. All capitalized terms used herein but not
defined herein shall have the meanings ascribed to them in the Prospectus.
The Exchange Agent is:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<S> <C>
If by Mail: If by Overnight Courier or Hand:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, MA 02112-0078 Boston, MA 02110
Attention: Kellie Mullen Attention: Kellie Mullen
By Telecopier: Confirm by Telephone:
(617) 664-5395 (617) 664-5587
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission via a facsimile number other than one listed above will not
constitute a valid delivery.
Ladies and Gentlemen:
The undersigned hereby tenders for exchange to the Company, upon the terms
and subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1998, unless extended by
the Company. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on , 1998, unless the Exchange Offer is extended as provided in
the Prospectus, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
<PAGE> 2
- --------------------------------------------------------------------------------
SIGNATURE
__________________________________________ Date: __________________________
__________________________________________ Date: __________________________
Signature(s) of Holder(s) or Authorized Signatory
Area Code and Telephone Number: ___________________________________________
Name(s): __________________________________________________________________
(Please Print)
Capacity (full title), if signing in a fiduciary or representative capacity:
___________________________________________________________________________
Address: __________________________________________________________________
(including Zip Code)
Taxpayer Identification
or Social Security No.: ___________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Amount of Old Notes Tendered (must be in integral multiples of
$1,000): $_______________
Certificate Number(s) of Old Notes (if available):
____________________________________________________________
Aggregate Principal Amount
Represented by Certificate(s): $_______________
IF TENDERED OLD NOTES WILL BE DELIVERED BY BOOK-ENTRY TRANSFER, PROVIDE
THE DEPOSITORY TRUST COMPANY ("DTC") ACCOUNT NO. AND TRANSACTION CODE
NUMBER (if available):
Account No.: ______________________________________________________________
Transaction Number: _______________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of a properly
completed and executed Letter of Transmittal (or facsimile thereof) or an
Agent's Message, as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC as
described in the Prospectus under the caption "The Exchange
Offer -- Book-Entry Transfer" and any other documents required by the
Letter of Transmittal, all by 5:00 p.m., New York City time, on the fifth
New York Stock Exchange trading day following the Expiration Date.
<TABLE>
<S> <C>
Name of Eligible Institution: ___________________ Authorized Signature
Address: ________________________________________ Name: _________________
Title: ________________
Area Code and Telephone No.: ____________________ Date: _________________
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE. ACTUAL SURRENDER OF OLD
NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF
TRANSMITTAL.
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2
<PAGE> 1
EXHIBIT 99.3
K & F INDUSTRIES, INC.
OFFER TO EXCHANGE UP TO $185,000,000 OF ITS
9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, ____________, 1998
Trust Companies and Other Nominees:
K & F Industries, Inc., a Delaware corporation (the "Company"), is
offering, upon the terms and subject to the conditions set forth in the
Prospectus dated , 1998 (the "Prospectus") and the accompanying
Letter of Transmittal enclosed herewith (which together constitute the "Exchange
Offer"), to exchange its 9 1/4% Series B Senior Subordinated Notes due 2007
(the "New Notes") for an equal principal amount of its 9 1/4% Senior
Subordinated Notes due 2007 (the "Old Notes" and together with the New Notes,
the "Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined in the Prospectus).
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE "THE
EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated , 1998;
2. the Letter of Transmittal for your use (unless Old Notes are
tendered by an Agent's Message) and for the information of your
clients (facsimile copies of the Letter of Transmittal may be used
to tender Old Notes);
3. a form of letter which may be sent to your clients for whose
accounts you hold Old Notes registered in your name or in the name
of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer;
4. a Notice of Guaranteed Delivery;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
6. a return envelope addressed to State Street Bank and Trust Company,
the Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. PLEASE
FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU
HOLD OLD NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE AS QUICKLY
AS POSSIBLE.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, or a Book-Entry Confirmation (as
defined in the Prospectus), as the case may be, (b) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, or an Agent's
Message and (c) any other required documents.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message and in either case together with any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their
<PAGE> 2
Old Notes according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Company will, however, upon request, reimburse you for customary clerical
and mailing expenses incurred by you in forwarding any of the enclosed materials
to your clients. The Company will pay or cause to be paid any transfer taxes
payable on the transfer of Notes to it, except as otherwise provided in
Instruction 9 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent by telephone at (617) 664-5587 or by facsimile at (617) 664-5395.
Very truly yours,
K & F INDUSTRIES, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
EXHIBIT 99.4
K & F INDUSTRIES, INC.
OFFER TO EXCHANGE UP TO $185,000,000 OF ITS
9 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998 UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus dated , 1998
(the "Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by K & F Industries, Inc. (the
"Company") to exchange its 9 1/4% Series B Senior Subordinated Note due 2004
(the "New Notes") for an equal principal amount of its 9 1/4% Senior
Subordinated Notes due 2007 (the "Old Notes" and together with the New Notes,
the "Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Registration Rights
Agreement (as defined in the Prospectus). Old Notes may be tendered only in
integral multiples of $1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Old Notes carried by us for your account or benefit but not registered in your
name. An exchange of any Old Notes may only be made by us as the registered
Holder and pursuant to your instructions. Therefore, the Company urges
beneficial owners of Old Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee to contact such Holder promptly
if they wish to exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m., New
York City time, on , 1998, unless extended. The term "Expiration Date"
shall mean 5:00 p.m., New York City time, on , 1998, unless the
Exchange Offer is extended as provided in the Prospectus, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. A tender of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount
of the New Notes for each $1,000 principal amount of the Old Notes, of
which $185,000,000 aggregate principal amount was outstanding as of
, 1998. The terms of the New Notes are identical in all
respects to the Old Notes, except that the New Notes have been registered
under the Securities Act of 1933, as amended, and therefore will not bear
legends restricting their transfer and will not contain certain provisions
providing for the payment of liquidated damages to the holders of the Old
Notes under certain circumstances relating to the Registration Rights
Agreement.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE
"THE EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on , 1998, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
<PAGE> 2
5. Any transfer taxes incident to the transfer of Old Notes from the
tendering Holder to the Company will be paid by the Company, except as
provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and returning
to us the attached instruction form. The accompanying Letter of Transmittal is
furnished to you for informational purposes only and may not be used by you to
exchange Old Notes held by us and registered in our name for your account or
benefit.
2
<PAGE> 3
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INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the
enclosed material referred to therein relating to the Exchange Offer of
K & F Industries, Inc.
This will instruct you to tender for exchange the aggregate principal
amount of Old Notes indicated below (or, if no aggregate principal amount
is indicated below, all Old Notes) held by you for the account or benefit
of the undersigned, pursuant to the terms of and conditions set forth in
the Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Old Notes to be
tendered for exchange:
$_________________
* I (we) understand that if I (we) sign this instruction form without
indicating an aggregate principal amount of Old Notes in the space
above, all Old Notes held by you for my (our) account will be tendered
for exchange.
__________________________________________________________________________
__________________________________________________________________________
Signature(s)
__________________________________________________________________________
Capacity (full title), if signing in a fiduciary or representative
capacity
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Name(s) and address, including zip code
Date: __________________________________________________________________
__________________________________________________________________________
Area Code and Telephone Number
__________________________________________________________________________
Taxpayer Identification or Social Security No.
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3
