<PAGE> 1
Filed Pursuant to Rule 424 (b)(3) of the
Rules and Regulations Under the
Securities Act of 1933
Registration Statement No. 333-40977
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 7, 1999)
$185,000,000
K & F Industries, Inc.
9 1/4% Senior Subordinated Notes Due 2007
------------------------------------
This Prospectus Supplement, together with Prospectus, is to be used by
Lehman Brothers in connection with offers and sales of the above-referenced
securities in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Lehman Brothers may act as
principal or agent in such transactions.
August 11, 1999
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
K & F INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1614845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 THIRD AVENUE, NEW YORK, NEW YORK 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
--- ---
As of August 1, 1999, there were 740,398 shares of common stock outstanding.
<PAGE> 3
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
ASSETS:
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 3,119,000 $ 6,844,000
Accounts receivable, net 52,848,000 35,990,000
Inventory 75,685,000 70,296,000
Other current assets 867,000 673,000
Deferred tax asset 10,669,000 --
------------- -------------
Total current assets 143,188,000 113,803,000
------------- -------------
Property, plant and equipment 159,803,000 155,867,000
Less, accumulated depreciation and amortization 84,278,000 80,587,000
------------- -------------
75,525,000 75,280,000
------------- -------------
Prepaid pension cost 13,807,000 13,807,000
Deferred charges, net of amortization 24,326,000 25,631,000
Cost in excess of net assets acquired, net of
amortization 174,648,000 179,700,000
Intangible assets, net of amortization 11,122,000 11,878,000
------------- -------------
$ 442,616,000 $ 420,099,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 21,106,000 $ 15,328,000
Current portion of senior term loans 1,500,000 8,000,000
Interest payable 5,120,000 5,133,000
Other current liabilities 46,612,000 46,503,000
------------- -------------
Total current liabilities 74,338,000 74,964,000
------------- -------------
Postretirement benefit obligation other
than pensions 76,156,000 75,956,000
Other long-term liabilities 7,755,000 7,664,000
Senior revolving loan 9,000,000 --
Senior term loan A 48,625,000 48,875,000
Senior term loan B 222,250,000 243,250,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Deficit (117,309,000) (152,616,000)
Accumulated other comprehensive income 53,000 258,000
------------- -------------
Total stockholders' deficiency (180,508,000) (215,610,000)
------------- -------------
$ 442,616,000 $ 420,099,000
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Sales $ 173,031,000 $ 173,392,000
Costs and expenses 120,720,000 123,657,000
Amortization 4,338,000 5,141,000
------------- -------------
Operating income 47,973,000 44,594,000
Interest and investment income 111,000 165,000
Interest expense (20,634,000) (23,039,000)
------------- -------------
Income before income taxes 27,450,000 21,720,000
Income tax benefit (provision) 7,857,000 (2,388,000)
------------- -------------
Net income $ 35,307,000 $ 19,332,000
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 84,200,000 $ 91,004,000
Costs and expenses 58,412,000 59,270,000
Amortization 2,174,000 2,571,000
------------ ------------
Operating income 23,614,000 29,163,000
Interest and investment income 54,000 86,000
Interest expense (10,299,000) (11,568,000)
------------ ------------
Income before income taxes 13,369,000 17,681,000
Income tax benefit (provision) 9,168,000 (1,888,000)
------------ ------------
Net income $ 22,537,000 $ 15,793,000
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income ................................. $ 35,307,000 $ 19,332,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ............ 8,706,000 9,947,000
Non-cash interest expense - amortization
of deferred financing charges ........... 918,000 966,000
Deferred income taxes .................... (8,671,000) 2,178,000
Changes in assets and liabilities:
Accounts receivable, net ................ (16,937,000) (5,552,000)
Inventory ............................... (5,515,000) (2,874,000)
Other current assets .................... (194,000) (126,000)
Accounts payable, interest payable, and
other current liabilities .............. 5,874,000 (9,578,000)
Other long-term liabilities ............. 291,000 146,000
------------ ------------
Net cash provided by operating
activities ................................ 19,779,000 14,439,000
------------ ------------
Cash flows from investing activities:
Capital expenditures ....................... (4,613,000) (3,132,000)
Deferred charges ........................... (141,000) (62,000)
------------ ------------
Net cash used in investing activities ...... (4,754,000) (3,194,000)
------------ ------------
Cash flows from financing activities:
Payments of senior revolving loan .......... (35,000,000) (22,000,000)
Payments of senior term loans .............. (27,750,000) (750,000)
Borrowings under senior revolving loan ..... 44,000,000 11,000,000
Proceeds from sale and leaseback transaction -- 556,000
------------ ------------
Net cash used by financing activities ...... (18,750,000) (11,194,000)
------------ ------------
Net (decrease) increase in cash and cash
equivalents ................................ (3,725,000) 51,000
Cash and cash equivalents, beginning of
period ..................................... 6,844,000 4,707,000
------------ ------------
Cash and cash equivalents, end of period .... $ 3,119,000 $ 4,758,000
============ ============
Supplemental cash flow information:
Interest paid during period ................ $ 19,729,000 $ 21,263,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of
financial position, results of operations and cash flows. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. The consolidated statements of
operations for the three and six months ended June 30, 1999 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, 1998 Annual Report on Form 10-K.
2. Receivables are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Accounts receivable, principally
from commercial customers $ 46,529,000 $ 32,434,000
Accounts receivable, on U. S
Government and other long-term
contracts 6,562,000 3,803,000
Allowances (243,000) (247,000)
------------ ------------
$ 52,848,000 $ 35,990,000
============ ============
</TABLE>
3. Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials and work-in-process $44,134,000 $46,245,000
Finished goods 21,763,000 14,364,000
Inventoried costs related to U.S.
Government and other long-term
contracts 9,788,000 9,687,000
----------- -----------
$75,685,000 $70,296,000
=========== ===========
</TABLE>
The Company customarily sells original wheel and brake equipment below
cost as an investment in a new airframe which is expected to be recovered
through the subsequent sale of replacement parts. These commercial
investments (losses) are recognized when original equipment is shipped.
Losses on U.S. Government contracts are immediately recognized in full when
determinable.
6
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventory is stated at average cost, not in excess of net realizable
value. In accordance with industry practice, inventoried costs may contain
amounts relating to contracts with long production cycles, a portion of
which will not be realized within one year.
4. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Accrued payroll costs $15,005,000 $17,448,000
Accrued taxes 6,999,000 6,864,000
Accrued costs on long-term contracts 2,712,000 2,342,000
Accrued warranty costs 9,982,000 8,165,000
Customer credits 2,343,000 2,777,000
Postretirement benefit obligation other
than pensions 3,000,000 3,000,000
Other 6,571,000 5,907,000
----------- -----------
$46,612,000 $46,503,000
=========== ===========
</TABLE>
5. Contingencies
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's financial position, results of
operations or cash flows.
6. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Net income $ 22,537,000 $ 15,793,000
Other comprehensive income:
Cumulative translation adjustments (145,000) 52,000
------------ ------------
Comprehensive income $ 22,392,000 $ 15,845,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Net income $ 35,307,000 $ 19,332,000
Other comprehensive income:
Cumulative translation adjustments (205,000) (71,000)
------------ ------------
Comprehensive income $ 35,102,000 $ 19,261,000
============ ============
</TABLE>
7
<PAGE> 9
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Segments
The following represents financial information about the Company's
segments:
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, June 30,
1999 1998
---- ----
Sales:
<S> <C> <C>
Aircraft Braking Systems $ 73,498,000 $ 80,341,000
Engineered Fabrics 10,702,000 10,663,000
------------ ------------
$ 84,200,000 $ 91,004,000
============ ============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $ 26,022,000 $ 32,251,000
Engineered Fabrics 1,703,000 1,888,000
------------ ------------
$ 27,725,000 $ 34,139,000
============ ============
Operating Profits:
Aircraft Braking Systems $ 22,405,000 $ 27,774,000
Engineered Fabrics 1,209,000 1,389,000
------------ ------------
Operating income 23,614,000 29,163,000
Interest expense, net (10,245,000) (11,482,000)
------------ ------------
Income before income taxes $ 13,369,000 $ 17,681,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1999 1998
---- ----
Sales:
<S> <C> <C>
Aircraft Braking Systems $ 151,350,000 $ 154,327,000
Engineered Fabrics 21,681,000 19,065,000
------------- -------------
$ 173,031,000 $ 173,392,000
============= =============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $ 53,108,000 $ 51,796,000
Engineered Fabrics 3,571,000 2,745,000
------------- --------------
$ 56,679,000 $ 54,541,000
============= ==============
Operating Profits:
Aircraft Braking Systems $ 45,407,000 $ 42,854,000
Engineered Fabrics 2,566,000 1,740,000
------------- -------------
Operating income 47,973,000 44,594,000
Interest expense, net (20,523,000) (22,874,000)
------------- -------------
Income before income taxes $ 27,450,000 $ 21,720,000
============= =============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
Total Assets:
<S> <C> <C>
Aircraft Braking Systems $363,130,000 $352,057,000
Engineered Fabrics 56,913,000 57,773,000
------------ ------------
$420,043,000 $409,830,000
============ ============
</TABLE>
8
<PAGE> 10
8. Income Taxes
The income tax benefit for the three months ended June 30, 1999 and the
related deferred tax asset at June 30, 1999, represents a reduction of the
Company's valuation allowance due to the more likely than not utilization
of net operating loss carryforwards through December 31, 1999.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operation for the Six Months Ended June 30, 1999 and
June 30, 1998
Sales for the six months ended June 30, 1999 totaled $173,031,000, reflecting a
decrease of $361,000, compared with $173,392,000 for the same period in the
prior year. Commercial transport and general aviation sales increased $639,000,
primarily for wheels and brakes on the DC-10, MD-80, Fokker 100 and A-321
programs, partially offset by lower sales on the MD-90 and DC-9 programs.
Military sales decreased $1,000,000 due to lower sales of wheels and brakes on
the F-16, partially offset by higher sales of aircraft fuel tanks.
Operating income increased by $3,379,000 to $47,973,000 or 27.7% of sales for
the six months ended June 30, 1999, compared with $44,594,000, or 25.7% of sales
for the same period in the prior year. Operating margins increased primarily
because we had less investment in original equipment for airframe manufacturers
("Program Investments"). However, the reduction in program investments
negatively effected overhead absorption and partially offset the increase in
operating margins.
Interest expense, net decreased by $2,351,000 for the six months ended June 30,
1999 compared with the same period in the prior year. This decrease was due to a
lower average debt balance and lower interest rates on the Company's variable
rate indebtedness.
The Company's effective tax rates of (28.6)% and 11.0% for the six months ended
June 30, 1999 and 1998, respectively, differ from the statutory rate of 35% due
to a net decrease in the valuation allowance in both years. The decrease in the
effective rate in 1999 is primarily due to the recording of a deferred tax asset
to reflect the more likely than not utilization of net operating loss
carryforwards through December 31, 1999.
Comparison of Results of Operations for the Three Months Ended June 30, 1999 and
June 30, 1998
Sales for the three months ended June 30, 1999 totaled $84,200,000, reflecting a
decrease of $6,804,000, compared with $91,004,000 for the same period in the
prior year. This decrease was due to lower commercial transport and general
aviation sales of $4,802,000, primarily for wheels and brakes on the DC-9 and
MD-90 programs, partially offset by higher sales on the DC-10, MD-80 and A-321
programs. Military sales decreased $2,002,000, primarily due to lower sales of
wheels and brakes on the F-16 and F-117 programs.
Operating income decreased by $5,549,000 to $23,614,000 or 28.0% of sales for
the three months ended June 30, 1999, compared with $29,163,000 or 32.0% of
sales for the same period in the prior year. While margins benefitted from lower
Program Investments, operating margins decreased primarily due to the negative
overhead absorption effect of both the lower sales and Program Investments.
Interest expense, net decreased by $1,237,000 for the three month ended June 30,
1999 compared with the same period in the prior year. This decrease is due to a
lower average debt balance and lower interest rates on the Company's variable
rate indebtedness.
The Company's effective tax rates of (68.6)% and 10.7% for the three months
ended June 30, 1999 and 1998, respectively, differ from the statutory rate of
35% due to a net decrease in the valuation allowance in both years. The decrease
in the effective rate in 1999 is primarily due to the recording of a
10
<PAGE> 12
deferred tax asset to reflect the more likely than not utilization of net
operating loss carryforwards through December 31, 1999.
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, to make investments in new airframes and
to pay interest and principal on indebtedness. The Company's primary source of
funds for conducting its business activities and servicing its indebtedness has
been cash generated from operations and borrowings under its revolving credit
facility. At June 30, 1999, the Company had $34.2 million available to borrow
under its $50 million revolving credit facility.
Cash Flows
During the six months ended June 30, 1999 cash provided by operating activities
amounted to $19,779,000 and reflected $56,679,000 of earnings before interest,
taxes, depreciation and amortization ("EBITDA"), increases in accounts payable
of $5,778,000, long-term liabilities of $291,000, partially offset by increases
in accounts receivable of $16,937,000, inventory of $5,515,000, other working
capital of $788,000 and interest payments of $19,729,000. Management anticipates
that significant reductions in the carrying amounts of accounts receivable and
inventory will be realized upon the full implementation of its new SAP
enterprise resource planning system which was initially installed at Aircraft
Braking Systems during the second quarter of 1999. During the six months ended
June 30, 1998, cash provided by operating activities amounted to $14,439,000 and
reflected $54,541,000 of EBITDA, increases in long-term liabilities of $146,000,
partially offset by increases in accounts receivable of $5,552,000, inventory of
$2,874,000, other working capital of $5,999,000, decreases in accounts payable
of $4,560,000 and interest payments of $21,263,000.
During the six months ended June 30, 1999 and 1998, net cash used in investing
activities amounted to $4,754,000 and $3,194,000, respectively. These
expenditures were primarily for capital expenditures. The increase in 1999
relates to the timing of purchases.
During the six months ended June 30, 1999, net cash used by financing activities
amounted to $18,750,000 due to the repayment of indebtedness. During the six
months ended June 30, 1998, net cash used by financing activities amounted to
$11,194,000 due to the repayment of indebtedness of $11,750,000, partially
offset by $556,000 of proceeds received from a sale and leaseback transaction.
Year 2000 Issue
We believe the critical technology and other systems that we use in our
businesses are now ready for the date related issues commonly referred to as the
Year 2000 problem. We continue to test our systems and to make modifications or
replacements as required. Most of our effort is now on contingency planning and
verifying that our important suppliers are Year 2000 ready.
We spent approximately $550,000 on our Year 2000 compliance program. We do not
anticipate any large, additional expense.
The most reasonably likely worst-case Year 2000 scenario for us would be if the
public utilities' or telecommunications carriers' systems failed, or if a major
supplier of raw material could not supply us. We have no contingency plans if
11
<PAGE> 13
the delivery of power or other essential services or materials is interrupted
for an extended period of time. We are making plans to cover a brief
interruption in power or communications at our subsidiaries, and we may purchase
some raw materials ahead of schedule as a buffer. No significant customer,
vendor, service provider or other third party has advised us of a specific Year
2000 problem that it does not expect to have remedied on time.
The statements we make about the Year 2000 problem, and our particular
circumstances, are forward looking and are made pursuant to the safe harbor
provisions of the Private Litigation Reform Act of 1995. There are risks and
uncertainties that could change our actual state of readiness, the costs that we
anticipated and our ability to implement contingency plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has approximately $466 million of total debt outstanding at June 30,
1999. Of this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the
balance is borrowed under our credit facility. The interest rate for borrowings
under the credit facility varies with LIBOR or the prime rate at the Company's
option.
The Company entered into an interest rate swap agreement to reduce the impact of
potential increases in interest rates. The interest rate swap agreement fixes
the Company's LIBOR borrowing rate at 5.95% on $132 million at June 30, 1999 and
matures on December 17, 2001 with an option for the counterparty to extend the
agreement to December 17, 2003. Therefore, the Company has effectively fixed the
interest rate on $317 million of its indebtedness at June 30, 1999. Given that
approximately 68% of the Company's borrowings are at fixed interest rates, a
change in rates of 10% would not have a significant impact on fair values, cash
flows or earnings. The Company has no other derivative financial instruments.
12
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended June 30,
1999.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
DIRKSON R. CHARLES
------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: August 11, 1999
14
