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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-29035
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 34-1614845
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
600 THIRD AVENUE, NEW YORK, NY 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 297-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There is no trading market for the Company's common stock. As of March 1,
1999, there were 740,398 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM I. BUSINESS
GENERAL
K & F Industries, Inc. ("K & F" or the "Company") was incorporated in
Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's
leading manufacturers of aircraft wheels, brakes and anti-skid systems for
commercial transport, general aviation and military aircraft. K & F sells its
products to virtually all major airframe manufacturers and most commercial
airlines and to the United States and certain foreign governments. During the
year ended December 31, 1998, approximately 88% of the Company's total revenues
were derived from sales made by Aircraft Braking Systems. In addition, K & F
through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered
Fabrics"), is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 90% of the worldwide general aviation and commercial
transport market and over one-half of the domestic military market for such
products. Engineered Fabrics also manufactures and sells iceguards and specialty
coated fabrics used for storage, shipping, environmental and rescue applications
for commercial and military uses. During the year ended December 31, 1998,
approximately 12% of the Company's total revenues were derived from sales made
by Engineered Fabrics.
Aircraft Braking Systems and its predecessors have been leaders in the
design and development of aircraft wheels, brakes and anti-skid systems,
investing significant resources to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.
Effective December 31, 1996, the Company changed its fiscal year-end from
March 31 to December 31.
On October 15, 1997, the Company completed a recapitalization that
consisted of a refinancing of its indebtedness and the purchase of a portion of
its outstanding capital stock. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Recapitalization.")
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,
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the aircraft customer, such as a major airline, will designate the original
equipment to be installed on the customer's aircraft. Competition among two
certified suppliers for that airline's initial installation decision generally
focuses on such factors as the system's "cost-per-landing," given certain
assumptions concerning the frequency of replacements required and the impact
that the weight of the system has on the airline's ability to load the aircraft
with passengers, freight or fuel, and the technical operating performance
characteristics of the wheel and brake systems. Once selected, airlines
infrequently replace entire wheel and brake systems because of the expense.
In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
equipment below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through
sale of replacement parts. Recovery of pricing concessions and design costs for
each airframe's wheels and brakes is contingent on a number of factors but
generally occurs prior to the end of the useful life of the particular aircraft.
Price concessions on original wheel and brake equipment are not customary in the
military market. Although manufacturers of military aircraft generally select
only one supplier of wheels and brakes for each model, the government has
approved at times the purchase of specific component replacement parts from
suppliers other than the original supplier of the wheel and brake system.
PRODUCTS
Aircraft Braking Systems. Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, steel and carbon brakes and anti-skid systems
for commercial transport, general aviation and military aircraft. Since 1989,
Aircraft Braking Systems has carefully directed its efforts toward expanding its
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on high-cycle, medium- and short-range
commercial aircraft and carbon equipped executive jets. As a result of this
strategic focus, during this period, Aircraft Braking Systems has added
approximately 1,500 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 year ended December 31,
1998, 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 FAA regulatory noise abatement requirements by outfitting their
older DC-9 fleets with engine hushkits and aircraft structural overhauls which
effectively add fifteen years of service life to the aircraft. As of December
31, 1998, there were 787 DC-9 aircraft in service and engine hushkits have been
installed and ordered for 496 aircraft. Airlines such as Northwest Airlines,
Scandinavian Air Systems, Air Tran and Air Canada have opted for DC-9 life
extension refurbishment programs for a portion of their fleet, to meet capacity
needs. The Company expects to produce replacement parts for these aircraft over
their remaining life.
Approximately 75% of Aircraft Braking Systems' revenues are derived from
the sale of replacement parts. As of December 31, 1998, the Company's products
had been installed on over 30,000 commercial transport, general aviation and
military aircraft. Commercial transport aircraft include the DC-9, DC-10, Fokker
FO-100/70, Fokker F-28, Canadair Regional Jet and Saab 340 on all of which
Aircraft Braking Systems is the sole-source supplier. In addition, the Company
supplies spare parts for the MD-80 program on a dual-source wheel and brake
program.
Aircraft Braking Systems has been successful in having its wheels and
brakes selected for use on a number of new high-cycle airframe designs. These
aircraft include the Airbus A-320, A-321, Saab 2000 and the MD-90. Most
recently, Aircraft Braking Systems has been successful in winning the CRJ-700
continuing its sole-source position on the Bombardier regional jets. Since its
introduction in late 1992, Bombardier has received firm orders and options for
over 1,000 Canadair Regional jets with approximately 290 aircraft currently in
service. The CRJ-700 is a 70 passenger plane which is a stretch version of the
50 passenger Canadair Regional Jet. In addition, the Company is certified as a
supplier of wheels and carbon brakes for the Airbus A-330 and A-340 wide-body
jets.
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Aircraft Braking Systems is one of two suppliers of wheels and carbon
brakes on the Airbus A-321, the European consortium's 186-seat "stretch" version
of its popular A-320 standard body twin-jet. Airbus has booked orders for over
250 A-321 aircraft. Of the 113 aircraft delivered to date, Aircraft Braking
Systems has provided wheels and brakes for 69 of these aircraft.
Aircraft Braking Systems' brake control systems, which are integrated into
a total braking system, are designed to minimize the distance required to stop
an aircraft by controlling applied brake pressure to maximize the braking force
while also preventing the wheels from locking and skidding. Of the three
principal competitors in the wheel and brake industry, Aircraft Braking Systems,
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company,
Aircraft Braking Systems is the only significant manufacturer of anti-skid
systems providing approximately 15% of the total market. Because of the
sensitivity of anti-skid systems to variations in brake performance, the
Company's management believes that its braking system integration capability
gives Aircraft Braking Systems a competitive advantage over its two largest
competitors. Other products manufactured by the Company include helicopter rotor
brakes and brake temperature monitoring equipment for various types of aircraft.
The following table shows the distribution of sales of aircraft wheels,
brakes and anti-skid systems to total sales of the Company:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------ DECEMBER 31,
1998 1997 1996
---- ---- -----------------
<S> <C> <C> <C>
Wheels and brakes..................................... 80% 80% 81%
Anti-skid systems..................................... 8% 8% 9%
-- -- --
Total....................................... 88% 88% 90%
== == ==
</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. Engineered Fabrics' programs include
new production or replacement parts programs for the U.S. Navy's F-18 C/D and
E/F aircraft and F-14, F-15, F-16 and C-130 aircraft. Military helicopter fuel
tank programs include the UH-60, SH-60, CH/MH-53 and RAH-66 platforms with
Sikorsky, CH-47 with Boeing, and the V-22 with Bell/ Boeing. Many of these
platforms also utilize Engineered Fabrics iceguards for deicing and anti-icing
of the rotor blades and inlets. Commercial helicopter applications include the
Boeing MD-500 and 600 and the Bell 214ST and A/B609. During the year ended
December 31, 1998, approximately 12% of the Company's total revenues were
derived from sales made by Engineered Fabrics.
Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the year ended December 31, 1998, sales of fuel tanks
accounted for approximately 77% of Engineered Fabrics' total revenues. For
military helicopter applications, Engineered Fabrics' fuel tanks feature
encapsulated layers of rubber which expand in contact with fuel thereby sealing
off holes or gashes caused by bullets or other projectiles penetrating the walls
of the fuel tank. The Company manufactures crash-resistant fuel tanks for
helicopters, military aircraft and race cars that significantly reduce the
potential for fires, leaks and spilled fuel following a crash. Engineered
Fabrics is the only known supplier of polyurethane fuel tanks for aircraft,
which are substantially lighter and more flexible than their metal or nitrile
counterparts and therefore cost-advantageous.
Iceguards manufactured by Engineered Fabrics are heating systems made from
layered composite materials that are applied on engine inlets, propellers, rotor
blades and tails. Encapsulated in the material are heating elements which are
connected to the electrical system of the aircraft and, when activated by the
pilot, the system provides the protection.
Engineered Fabrics also produces a variety of products utilizing coated
fabrics such as oil containment booms, towable storage bladders, heavy lift bags
and pillow tanks. Oil containment booms are air-inflated cylinders that are used
to confine oil spilled on the high seas and along coastal waterways. Towable
storage
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bladders are used for storage and transportation of the recovered oil after
removal from the water. Heavy lift bags, often used in emergency situations, are
inserted into tight spaces and inflated to lift heavy loads short distances.
Pillow tanks are collapsible rubberized containers used as an alternative to
steel drums and stationary storage tanks for the storage of liquids.
SALES AND CUSTOMERS
K & F sells its products to more than 175 airlines, airframe manufacturers,
governments and distributors within each of the commercial transport, general
aviation and military aircraft markets. Sales to the U.S. government represented
approximately 14%, 12%, and 12% of total sales for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, respectively. No
other customer accounted for more than 10% of total sales.
The following table shows the distribution of total Company revenues by
respective market, as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------ DECEMBER 31,
1998 1997 1996
---- ---- -----------------
<S> <C> <C> <C>
Commercial transport................................. 64% 64% 63%
Military (U.S. and foreign).......................... 18% 18% 18%
General aviation..................................... 18% 18% 19%
--- --- ---
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 parts
to the three largest commercial aircraft manufacturers; Boeing, Airbus and
Bombardier.
Military. The Company is the largest supplier of wheels, brakes and fuel
tanks to the U.S. military and also supplies the militaries of many foreign
governments. The Company's products are used on a variety of fighters, training
aircraft, transports, cargo planes, bombers and helicopters. Some of the
military aircraft using these products are the F-2 (formerly the FS-X), F-4,
F-14, F-15, F-16, F-18, F-117A, A-10, B-1B, B2, C-130, C-130J and the C-141.
Substantially all of the Company's military products are sold to the Department
of Defense, foreign governments or to airframe manufacturers including the
Lockheed Martin Corporation ("Lockheed Martin"), Boeing, Sikorsky, Bell, Saab
and AIDC. Brake control systems manufactured for the military are used on the
F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and IDF
aircraft.
General Aviation. The Company believes it is the industry's largest
supplier of wheels, brakes and fuel tanks for general aviation aircraft. This
market includes personal, business and executive aircraft. Customers include
airframe manufacturers, such as Gulfstream, Raytheon Aircraft, Learjet,
Canadair, Cessna, Dassault and Israeli Aircraft Industries ("IAI"), and
distributors, such as Aviall. Anti-skid systems are supplied by the Company to
Gulfstream, Dassault and other aircraft manufacturers. General aviation aircraft
using the Company's equipment exclusively include the Beech Starship and Beech
400 A/T series of aircraft, the Lear series 20, 30, 31A, 55 and 60, the
Gulfstream G-I, G-II, G-III and G-IV, the IAI 1123, 1124, 1125 Astra, Astra SPX
and Galaxy, the Raytheon Hawker Horizon and the Falcon 10, 100, 20, 200, 50 and
50EX.
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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>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------ DECEMBER 31,
1998 1997 1996
---- ---- -----------------
<S> <C> <C> <C>
Domestic sales..................................... 57% 57% 57%
Foreign sales...................................... 43% 43% 43%
--- --- ---
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, 1998, the Company employed approximately
167 engineers (of whom 30 held advanced degrees); approximately 27 of such
engineers (including 13 holding advanced degrees) devoted all or part of their
efforts toward a variety of projects including refining carbon processing
techniques to create more durable braking systems, upgrading existing braking
systems to provide enhanced performance, and developing new technologies to
improve the Company's products.
The costs incurred relating to independent research and development for the
years ended December 31, 1998 and 1997 and the nine months ended December 31,
1996, were $13.7 million, $10.9 million and $8.6 million, respectively.
PATENTS AND LICENSES
The Company has a large number of patents related to the products of its
subsidiaries. While in the aggregate its patents are of material importance to
its business, the Company believes no single patent or group of patents is of
material importance to its business as a whole.
COMPETITION
The Company faces substantial competition from a few suppliers in each of
its product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company.
Both significant competitors are larger and have greater financial resources
than the Company. The principal competitor for anti-skid systems is the
Hydro-Aire Division of Crane Co. The principal competitors for fuel tanks are
American Fuel Cell & Coated Fabrics Company and Aerazur of France, both owned by
Zodiac S.A., a French Company.
BACKLOG
Backlog at December 31, 1998 and 1997 amounted to approximately $174.6
million and $172.7 million, respectively. Backlog consists of firm orders for
the Company's products which have not been shipped. Approximately 90% of total
Company backlog at December 31, 1998 is expected to be shipped during the year
ending December 31, 1999, with the balance expected to be shipped over the
subsequent two-year period. No significant seasonality exists for sales of the
products manufactured by the Company.
Of the total Company backlog at December 31, 1998, approximately 21% was
directly or indirectly for end use by the U. S. Government (the "Government"),
substantially all of which was for use by the Department of Defense. For certain
risks associated with Government contracts, see "Government Contracts" discussed
below.
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GOVERNMENT CONTRACTS
For the years ended December 31, 1998 and 1997 and the nine months ended
December 31, 1996, approximately 14%, 12%, and 12%, respectively, of the
Company's total sales were made to agencies of the Government or to prime
contractors or subcontractors of the Government.
All of the Company's defense contracts are firm, fixed-price contracts
under which the Company agrees to perform for a predetermined price. Although
the Company's fixed-price contracts generally permit the Company to keep
unexpected profits if costs are less than projected, the Company does bear the
risk that increased or unexpected costs may reduce profit or cause the Company
to sustain losses on the contract. All domestic defense contracts and
subcontracts to which the Company is a party are subject to audit, various
profit and cost controls and standard provisions for termination at the
convenience of the Government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for allowable
costs and to an allowance for profit. Foreign defense contracts generally
contain comparable provisions relating to termination at the convenience of the
government.
Companies supplying defense-related equipment to the Government are subject
to certain additional business risks peculiar to that industry. Among these
risks are the ability of the Government to unilaterally suspend the Company from
new contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in advance
of design completion. A reduction in expenditures by the Government for aircraft
using products of the type manufactured by the Company, or lower margins
resulting from increasingly competitive procurement policies, or a reduction in
the volume of contracts or subcontracts awarded to the Company or substantial
cost overruns would have an adverse effect on the Company's cash flow and
results of operations.
SUPPLIES AND MATERIALS
The principal raw materials used in the Company's wheel and brake
manufacturing operations are steel, aluminum forgings and carbon compounds. In
April 1997, the Company completed the construction of a 21,000 square foot
expansion of its carbon manufacturing facility in Akron, Ohio, which facility
substantially increased the Company's carbon production capacity. Steel and
aluminum forgings are purchased from several sources. The principal raw
materials used by Engineered Fabrics to manufacture fuel tanks and related
coated fabric products are nylon cloth, forged metal fittings and various
adhesives and coatings, whose formulae are internally developed and proprietary.
The Company has not experienced any shortage of raw materials to date.
PERSONNEL
At December 31, 1998, the Company had 1,420 full-time employees, of which
951 were employed by Aircraft Braking Systems (458 hourly and 493 salaried
employees) and 469 were employed by Engineered Fabrics (350 hourly and 119
salaried employees). All of Aircraft Braking Systems' hourly employees are
represented by the United Auto Workers' Union and all of Engineered Fabrics'
hourly employees are represented by the United Food and Commercial Workers'
Union.
Aircraft Braking Systems' four-year contract with its union expires on May
31, 2002. Engineered Fabrics' three-year contract with its union expires on
February 5, 2001.
ITEM 2. 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
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office space. The Company believes that its properties and equipment are
generally well-maintained, in good operating condition and adequate for its
present needs.
Foreign Facilities. The Company occupies approximately 19,000 square feet
of leased office and warehouse space in Slough, England, under a lease expiring
in 2020. The Company also maintains sales and service offices in Rome, Italy and
Toulouse, France.
Akron Facility Arrangements. The manufacturing facilities owned by
Aircraft Braking Systems are part of a larger complex formerly owned and
operated by Loral Corporation and now owned by Lockheed Martin. Aircraft Braking
Systems and Lockheed Martin have various occupancy and service agreements to
provide for shared easements and services (including utility, sewer, and steam).
In addition to the 770,000 square feet owned by Aircraft Braking Systems, the
Company leases approximately 433,000 square feet of space within the Lockheed
Martin complex and is subject to annual occupancy payments to Lockheed Martin.
During the years ended December 31, 1998 and 1997 and the nine months ended
December 31, 1996, Aircraft Braking Systems made occupancy payments to Lockheed
Martin of $1.8 million, $1.7 million and $1.2 million, respectively. Certain
access easements and agreements regarding water, sanitary sewer, storm sewer,
gas, electricity and telecommunication are perpetual. In addition, Lockheed
Martin and Aircraft Braking Systems equally control Valley Association
Corporation, an Ohio corporation, which was formed to establish a single entity
to deal with the City of Akron and utility companies concerning governmental and
utility services which are furnished to Lockheed Martin's and Aircraft Braking
Systems' facilities.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no trading market for the Company's common stock. All of the
common stock of the Company is owned by Bernard L. Schwartz ("BLS"), Chairman of
the Company, and by four limited partnerships of Lehman Brothers Holdings Inc.
(the "Lehman Investors"). (See "Security Ownership of Certain Beneficial Owners
and Management.")
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements. The
selected financial data for the year ended December 31, 1996 and nine months
ended December 31, 1995 is unaudited. Effective December 31, 1996, the Company
changed its fiscal year-end from March 31 to December 31.
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<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------------------- --------------------- ---------------------
1998 1997 1996 1996 1995 1996 1995
--------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales................. $ 345,447 $ 304,331 $277,655 $212,703 $199,784 $264,736 $238,756
Cost of sales............. 196,190 188,001 180,971 136,813 136,277 180,435 164,697
--------- --------- -------- -------- -------- -------- --------
Gross Margin.............. 149,257 116,330 96,684 75,890 63,507 84,301 74,059
Independent research and
development............. 13,705 10,873 11,781 8,623 6,610 9,767 8,363
Selling, general and
administrative
expenses................ 35,332 40,182(a) 24,482 17,297 15,378 22,564 19,208
Amortization.............. 10,286 10,316 10,412 7,810 7,813 10,415 10,411
--------- --------- -------- -------- -------- -------- --------
Operating income.......... 89,934 54,959 50,009 42,160 33,706 41,555 36,077
Interest expense, net..... 44,830 34,091 36,957 27,197 31,288 41,048 46,250
--------- --------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary charge.... 45,104 20,868 13,052 14,963 2,418 507 (10,173)
Income tax (provision)
benefit................. (5,744) (5,184) 81 81 -- -- --
Extraordinary charge...... -- (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d) (1,913)(d) --
--------- --------- -------- -------- -------- -------- --------
Net (loss) income......... $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505 $ (1,406) $(10,173)
========= ========= ======== ======== ======== ======== ========
Balance Sheet Data (at end
of period):
Working capital........... $ 39,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938 $ 36,327 $ 48,025
Total assets.............. 420,099 425,236 419,115 419,115 412,028 416,037 429,074
Long-term debt............ 477,125 519,125(a) 287,000 287,000 293,000 294,000 310,000
Stockholders'
deficiency.............. (215,610) (256,459)(a) (33,306) (33,306) (34,327) (39,701) (34,748)
Other Data (for the period):
Capital expenditures...... 14,873 10,016 21,166 14,091 3,343 10,418 2,824
Depreciation and
amortization............ 19,961 19,680 19,305 14,644 14,260 18,921 18,843
</TABLE>
- ---------------
(a) On October 15, 1997, the Company completed a recapitalization that consisted
of the refinancing of existing indebtedness and the repurchase of a portion
of its outstanding stock. In connection therewith, the Company directly
increased its stockholders' deficiency by $218.6 million and recorded an
extraordinary charge of $27.8 million (net of tax) for the write-off of
unamortized financing costs and redemption premiums. In addition, the
Company recorded a charge of $12.4 million to selling, general and
administrative expenses, relating to the exercise of stock options and other
fees incurred in connection with the recapitalization. Financing for the
recapitalization was provided with $185 million of 9 1/4% Senior
Subordinated Notes due 2007 and $345 million in borrowings under a new
credit facility. (See Notes 1 and 7 to the consolidated financial
statements.)
(b) On June 1, 1997, the Company redeemed $30 million aggregate principal amount
of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of the
principal thereof. In connection therewith, the Company recorded an
extraordinary charge of $1.7 million (net of tax) for the write-off of
unamortized financing costs and redemption premiums. (See Note 7 to the
consolidated financial statements.)
(c) During the nine months ended December 31, 1996, the Company redeemed $180
million principal amount of the 13 3/4% Senior Subordinated Debentures. In
connection therewith, the Company recorded an extraordinary charge of $9.1
million for the write-off of unamortized financing costs and redemption
premiums. (See Note 7 to the consolidated financial statements.)
(d) On December 28, 1995, the Company redeemed $30 million principal amount of
the 13 3/4% Senior Subordinated Debentures. In connection therewith, the
Company recorded an extraordinary charge of $1.9 million for the write-off
of unamortized financing costs and redemption premiums.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Aircraft Braking Systems generates approximately 75% of its revenues
through the sale of replacement parts for wheels and braking systems which are
installed on over 30,000 commercial, general aviation and military aircraft. As
is customary in the industry, Aircraft Braking Systems incurs substantial
expenditures to research, develop, design and supply original wheel and brake
equipment to aircraft manufacturers at or below the cost of production.
Research, development and design expenditures are charged to operations when
incurred. Original wheel and brake equipment supplied to aircraft manufacturers
at or below the cost of production ("Program Investments") are charged to
operations when delivered to the aircraft manufacturers. Since most modern
aircraft have a useful life of 25 years or longer and require periodic
replacement of certain components of the braking system, the Company typically
recoups its initial investment in original equipment and generates significant
profits from the sales of replacement parts over the life of the aircraft. The
Company has invested and will continue to invest significant resources to have
its products selected for use on new commercial airframes, focusing particularly
on medium- and short-range aircraft. During the years ended December 31, 1998
and 1997 and the nine months ended December 31, 1996, the Company spent an
aggregate of approximately $60.7 million, $51.0 million and $43.2 million,
respectively, for research, development, design, Program Investments, capital
expenditures and development participation costs. The Company has been selected
as a supplier of wheels and carbon brakes on the Airbus A-321, the sole supplier
of wheels, carbon brakes and anti-skid systems on the MD-90, the sole supplier
of wheels and brakes for each of the Saab 2000, the Canadair Regional Jet and
the Lear 60, and as a supplier of wheels and carbon brakes for the Airbus A-330
and A-340. Aircraft produced under these programs are in the early stages of
their life cycles and represent significant future revenue opportunities for the
Company.
THE RECAPITALIZATION
On October 15, 1997, the Company consummated a recapitalization (the
"Recapitalization") consisting of the repurchase of approximately 64% of its
outstanding capital stock for a total purchase price of $230.2 million and the
repayment of all outstanding indebtedness. Upon giving effect to the repurchase,
BLS and the Lehman Investors each became the owner of 50% of the capital stock
of the Company.
To finance the above transactions, the Company entered into a new credit
facility (the "Credit Facility") for $372 million and issued $185 million of
9 1/4% Senior Subordinated Notes due 2007 (The "9 1/4% Notes").
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
During 1998, sales, operating income, net income and bookings were the
highest in the Company's history, reflecting the continued build-out of customer
fleets using Company products, new program awards and significantly increased
airline industry traffic. These results were driven by growth in all market
sectors of the Company's business.
Sales. Sales for the year ended December 31, 1998 totaled $345.4 million,
reflecting an increase of $41.1 million or 13.5%, compared with $304.3 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 $25.2
million, primarily on the MD-90, DC-9, MD-80 and Canadair Regional Jet, and
higher general aviation sales of $6.8 million primarily on Canadair and Dassault
aircraft. Military sales increased by $9.1 million due to higher sales of wheels
and brakes primarily on the F-117 program, and higher sales of fuel tanks
primarily on the F-15 and F/A-18 programs.
Gross Margin. The gross margin for the year ended December 31, 1998 was
43.2% compared with 38.2% 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 operating efficiencies. The Company invested $14.9 million in capital
equipment in 1998, for a total of $46.1 million over the last three years. These
investments have helped to
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<PAGE> 11
reduce manufacturing costs and improve operating margins. Partially offsetting
this increase in margins was 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 $13.7 million for the year ended December 31, 1998 compared with
$10.9 million for the same period in the prior year. This increase was primarily
due to higher costs associated with the Raytheon Hawker Horizon and Canadair
CRJ-700 programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $35.3 million for the year ended December 31, 1998
compared with $40.2 million for the same period in the prior year. Excluding a
$12.4 million non-recurring charge in 1997, relating to the exercise of stock
options and other fees in connection with the Recapitalization, selling, general
and administrative expenses increased $7.5 million. This increase was primarily
due to higher costs associated with installation of a new computer system at
Aircraft Braking Systems and higher performance-related incentive compensation.
Interest Expense, Net. Interest expense, net was $44.8 million for the
year ended December 31, 1998 compared with $34.1 million for the same period in
the prior year. This increase was due to increased indebtedness resulting from
the Recapitalization on October 15, 1997. Partially offsetting this increase was
lower interest rates on the Company's indebtedness.
Effective Tax Rate. The Company's effective tax rate of 12.7% and 24.8%
for the years ended December 31, 1998 and 1997, respectively, differs from the
statutory rate of 35% due to a utilization of tax net operating losses in both
years partially offset by a net increase in the valuation allowance and a $0.9
million charge for foreign taxes in 1997. The decrease in the effective tax rate
in 1998 is primarily due to the net change in the valuation allowance and lower
foreign income taxes.
Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Sales. Sales for the year ended December 31, 1997 totaled $304.3 million,
reflecting an increase of $26.6 million, or 9.6%, compared with $277.7 million
for the same period in the prior year. This increase was due to higher
commercial sales of wheels and brakes for commercial transport aircraft of $20.8
million, primarily on the DC-10, MD-80, Canadair Regional Jet and Fokker FO-100
programs and higher general aviation sales of $6.2 million on the Lear and IAI
Astra and Galaxy aircraft.
Gross Margin. The gross margin for the year ended December 31, 1997 was
38.2% compared with 34.8% for the same period in the prior year. This increase
was primarily due to the overhead absorption effect relating to the higher sales
volume and cost savings relating to the in-house production of carbon in the
Company's new carbon facility.
Independent Research and Development. Independent research and development
costs were $10.9 million for the year ended December 31, 1997 compared with
$11.8 million for the same period in the prior year. This decrease was primarily
due to lower costs associated with the MD-90 Program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $40.2 million for the year ended December 31, 1997
compared with $24.5 million for the same period in the prior year. This increase
was primarily due to a non-recurring $12.4 million charge relating to the
exercise of stock options and other fees in connection with the Recapitalization
and higher performance-related incentive compensation.
Interest Expense, Net. Interest expense, net was $34.1 million for the
year ended December 31, 1997 compared with $37.0 million for the same period in
the prior year. This decrease was due to lower interest rates on outstanding
debt as a result of the refinancing in August 1996 of the 13 3/4% Senior
Subordinated Debentures due 2001 (the "13 3/4% Debentures") with 10 3/8% Senior
Subordinated Notes and borrowings under a prior credit facility. Partially
offsetting this decrease was the greater interest costs resulting from the
Recapitalization on October 15, 1997.
Effective Tax Rate. The Company's effective tax rate of 24.8% for the year
ended December 31, 1997 differs from the statutory rate of 35% due to
utilization of tax net operating losses offset by a net increase in the
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<PAGE> 12
valuation allowance and a $0.9 million charge for foreign taxes. For the same
period in the prior year the effective tax rate of (0.6)% differed from the
statutory rate of 35% primarily due to a net decrease in the valuation allowance
and utilization of tax net operating losses. The increase in the effective rate
in 1997 is primarily due to an increase in foreign taxes and a net change in the
valuation allowance.
LIQUIDITY AND FINANCIAL CONDITION
The Company expects that its principal use of funds for the next several
years will be to pay interest and principal on indebtedness, fund capital
expenditures and make Program Investments. The Company's primary source of funds
for conducting its business activities and servicing its indebtedness has been
cash generated from operations and borrowings under its revolving credit
facilities. The Company's total indebtedness decreased from $520.6 million at
December 31, 1997 to $485.1 million at December 31, 1998 due to $34 million of
principal prepayments and $1.5 million of scheduled principal payments on the
Credit Facility.
The Credit Facility consists of a term loan facility in an aggregate
principal amount of $300.1 million (the "Term Loans") and a revolving credit
facility in an aggregate principal amount of up to $50 million (the "Revolving
Loans"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the
principal amount of $49.4 million and a Tranche B term loan ("Term Loan B") in
the principal amount of $250.7 million. The Credit Facility bears interest at
floating rates selected at the option of the Company. At December 31,1998 and
1997, the average interest rate on the Credit Facility was 7.4% and 8.3%,
respectively. As a requirement of the Credit Facility, the Company entered into
an interest rate swap agreement to reduce the impact of potential increases in
interest rates on the Credit Facility. This interest rate agreement effectively
fixes the rate at 8.3% on $135 million of borrowings at December 31, 1998. Any
differences paid or received on the interest rate swap agreement are recognized
as adjustments to current interest expense. Obligations under the Credit
Facility are secured by a lien on substantially all of the assets of the
Subsidiaries and are guaranteed by K & F.
Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million per year in years one to five and
$47.4 million in year six. Term Loan B is an eight-year quarterly amortizing
facility maturing October 15, 2005, with scheduled installments of $1.0 million
per year in years one to seven and $245 million in year eight. The Company is
required to make mandatory reductions in the Credit Facility in the event of
certain asset sales, the incurrence of certain additional indebtedness, and
annually from a portion of excess cash flow (as defined). As a result of the
excess cash flow calculation, $26.5 million is required to be paid in 1999. The
Company voluntarily prepaid $20 million during 1998 and the balance of $6.5
million (classified as current at December 31, 1998) was paid in January 1999.
The Credit Facility provides for revolving loans not to exceed $50 million,
with up to $20 million available for letters of credit. At December 31, 1998,
the Company had outstanding letters of credit of $8.0 million. The Revolving
Loan commitment terminates on October 15, 2003. At December 31, 1998, the
Company had $42.0 million available to borrow under the Revolving Loan.
The Company's management believes that it will have adequate resources to
meet its current cash requirements through funds generated from operations and
borrowings under its Revolving Loan.
The Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Credit Facility also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 1998.
As a result of the Recapitalization, the Company increased its
stockholders' deficiency by $218.6 million for the repurchase of a portion of
the capital stock and recorded an extraordinary charge of $27.8 million (net of
tax of $2.0 million) for the write-off of unamortized financing costs,
redemption premiums and tender offer payments.
On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of
the principal amount thereof. In connection therewith, the
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Company recorded an extraordinary charge of $1.7 million (net of tax of $0.6
million) for the write-off of unamortized financing costs and redemption
premiums.
During the nine months ended December 31, 1996, the Company redeemed $180
million of its 13 3/4% Debentures at a redemption price of 102.5%. In connection
therewith, the Company recorded an extraordinary charge of $9.1 million for the
write-off of unamortized financing costs and redemption premiums.
CASH FLOW
During the year ended December 31, 1998, net cash provided by operating
activities amounted to $52.2 million and reflected $109.9 million of earnings
before interest, taxes, depreciation and amortization ("EBITDA"), decreases in
accounts receivable of $4.0 million, and increases in long-term liabilities of
$1.2 million, partially offset by increases in inventory of $4.3 million,
prepaid pension costs of $3.3 million, other working capital of $0.3 million,
decreases in accounts payable of $2.7 million, other current liabilities of $9.5
million (primarily reflecting a portion of a $5.0 million payment in settlement
of litigation and approximately $4.5 million paid to the bargaining workers at
Aircraft Braking Systems in conjunction with the ratification of a new contract)
and interest payments of $42.8 million. During the year ended December 31, 1997,
net cash provided by operating activities amounted to $42.5 million and
reflected $74.6 million of EBITDA, decreases in inventory of $2.4 million,
increases in long-term liabilities of $1.5 million, accounts payable of $6.7
million, other current liabilities of $5.3 million, partially offset by
increases in accounts receivables of $4.1 million, prepaid pension costs of $7.8
million, other working capital of $0.9 million and interest payments of $35.2
million. During the year ended December 31, 1996, net cash provided by operating
activities amounted to $28.9 million and reflected $69.3 million of EBITDA,
increases in other current liabilities of $10.0 million, accounts payable of
$1.3 million, decreases in other working capital of $1.6 million, partially
offset by increases in inventory of $8.6 million, decreases in long-term
liabilities of $3.7 million and interest payments of $41.0 million.
During the year ended December 31, 1998, net cash used in investing
activities amounted to $15.1 million primarily due to capital expenditures.
During the year ended December 31, 1997, net cash used in investing activities
amounted to $11.8 million primarily due to $10.0 million of capital expenditures
and $1.8 million of program participation payments. During the year ended
December 31, 1996, net cash used in investing activities amounted to $21.6
million primarily due to capital expenditures. The decrease in capital
expenditures for the year ended December 31, 1997 compared with the year ended
December 31, 1996 is primarily due to the expansion to the carbon manufacturing
building at the Company's Akron, Ohio facility during 1996. Capital spending for
the year ended December 31, 1999 is expected to be approximately $12.0 million.
During the year ended December 31, 1998, net cash used in financing
activities amounted to $34.9 million due to the repayment of indebtedness of
$35.5 million partially offset by $.6 million of proceeds received from a sale
and leaseback transaction. During the year ended December 31, 1997, net cash
used in financing activities amounted to $27.5 million due to the use of $218.6
million for the redemption of equity interests and $36.5 million for refinancing
expenditures, partially offset by increased borrowings of $227.6 million,
primarily related to the Recapitalization. During the year ended December 31,
1996, net cash used in financing activities amounted to $9.0 million due to
refinancing expenditures of $11.3 million partially offset by $2.3 million of
proceeds received from a sale and leaseback transaction.
ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. The Company is currently evaluating the impact, if any, on its financial
position upon the adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines which
costs incurred to develop or purchase internal-use software should be
capitalized
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and which costs should be expensed and is effective for fiscal years beginning
after December 15, 1998. The Company believes the adoption of SOP 98-1 will not
have a material impact on its financial position, results of operations or cash
flows.
INFLATION
A majority of the Company's sales are conducted through annually
established price lists and long-term contracts. The effect of inflation on the
Company's sales and earnings is minimal because the selling prices of such price
lists and contracts, established for deliveries in the future, generally reflect
estimated costs to be incurred in these future periods. In addition, some
contracts provide for price adjustments through escalation clauses.
YEAR 2000 MATTERS
The Company and its operating subsidiaries, assisted by outside
consultants, have conducted, and continue to conduct, a review of their computer
systems to identify areas that are affected by the "Year 2000" issue, i.e., the
issue of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000. Each Company subsidiary has
a project team and a plan for Year 2000 readiness. The Company has assessed and
inventoried internal systems including personal computers and network hardware
and software, engineering and technical systems, plant equipment and facilities.
Management believes that substantially all systems are already, or shortly will
be without material expense, Year 2000 compliant.
Procedures are on-going to test whether the Company's and each subsidiary's
systems are Year 2000 compliant, and whether the Company's plans and activities
are sufficient to address and correct system or other problems that might arise
because of the Year 2000. Modification or replacement of affected systems has
been and continues to be made as required. Except for certain anti-skid systems,
which are compliant, the Company's products do not have embedded systems and
thus are not susceptible to the Year 2000 issue in their operation.
The enterprise resource plan ("ERP") begun in 1997 at Aircraft Braking
Systems, is scheduled to be completed during the first half of 1999, and
involves replacement of virtually all financial management and most
manufacturing systems with systems that use programs from SAP America Inc.
("SAP") that are Year 2000 compliant. The plans to complete Year 2000 readiness
at Aircraft Braking Systems include a contingency plan, estimated to cost up to
$450,000 to implement, by which certain existing business systems would be
upgraded and retained in the event the conversion to the SAP programs is delayed
beyond June, 1999. The Company otherwise estimates the cost of the year 2000
compliance plans at Aircraft Braking Systems (exclusive of the ERP project
costs) and at Engineered Fabrics will not exceed $700,000, of which
approximately $490,000 has been expended as of December 31, 1998. The cost of
all Year 2000 related expenses are paid from funds generated by operations.
Assessment of Year 2000 risk has included and will continue to include
surveying suppliers and other third parties about their readiness. The Company
is attempting to obtain Year 2000 assurances and to monitor the remediation
efforts of critical vendors and customers. No significant customer, vendor,
service provider or other third party has advised yet of a specific Year 2000
problem that it does not expect to have remedied on time.
An unexpected Year 2000 problem could result in an interruption of normal
business activities or operations. There can be no assurance that third parties
will address Year 2000 issues and meet their remediation goals. The Company has
no contingency plans in the event that major business partners, such as
suppliers, fail to remediate critical Year 2000 issues or essential services,
such as power, are interrupted. However, based on the expected completion of its
Year 2000 projects on time at both subsidiaries, and assuming the preparedness
of others, the Company believes that a significant interruption will not be
encountered.
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Statements made relating to Year 2000 issues, and to the Company's
particular Year 2000 circumstances, are forward looking and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such statements involve risks and uncertainties which may cause the
Company's plans regarding and assessments of Year 2000 issues to be adversely
impacted, such that the Company's state of readiness, anticipated costs to
address Year 2000 issues and contingency plans will differ materially from those
set forth above.
Risks and uncertainties include that key suppliers of raw materials and
energy, and others with whom the Company does business, will not meet their Year
2000 obligations, and that events or expenses, unforeseen or not quantifiable at
this time, may arise which cause the Company's compliance program or its
contingency plans to be delayed or to increase in cost in material respect. In
addition, Year 2000 issues are global, and may be affected by economic,
governmental, technological and other factors beyond the control of businesses
such as the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has approximately $485 million of total debt outstanding at
December 31, 1998. Of this amount, $185 million is borrowed at a fixed rate of
9 1/4% and the balance is borrowed under the Credit Facility. The interest rate
for borrowings under the Credit Facility varies with LIBOR or the prime rate at
the Company's option.
As a requirement of the Credit Facility, the Company entered into an
interest rate swap agreement to reduce the impact of potential increases in
interest rates on the Credit Facility. The interest rate swap agreement fixes
the Company's LIBOR borrowing rate at 5.95% on $135 million at December 31, 1998
and matures on December 17, 2001 with an option for the counterparty to extend
the agreement to December 17, 2003. Therefore the Company has fixed interest
rate borrowings of $320 million (includes the $185 million of 9 1/4% Notes and
the notional amount under the swap agreement) at December 31, 1998. Given that
approximately 66% of the Company's borrowings are effectively 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-21 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors are
duly elected and qualified, and all executive officers hold office at the
pleasure of the Board of Directors. The following executive officers or
directors of the Company are related by blood or marriage: Kenneth M. Schwartz
is the nephew of Bernard L. Schwartz, Ronald H. Kisner's wife is the niece of
Bernard L. Schwartz and John R. Paddock's wife is the daughter of Bernard L.
Schwartz. No other executive officer or director of the Company is related by
blood, marriage or adoption.
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<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION(S) SINCE
- ---- --- ----------- --------
<S> <C> <C> <C>
Bernard L. Schwartz*................. 73 Chairman of the Board and Chief 1989
Executive Officer
David J. Brand**..................... 38 Director 1997
Herbert R. Brinberg*................. 73 Director 1989
Robert B. Hodes*..................... 73 Director 1997
Ronald H. Kisner*.................... 50 Director and Secretary 1989
John R. Paddock*..................... 45 Director 1989
A. Robert Towbin***.................. 63 Director 1989
Alan H. Washkowitz**................. 58 Director 1989
Donald E. Fogelsanger................ 73 President
Kenneth M. Schwartz.................. 47 Executive Vice President
Dirkson R. Charles................... 35 Chief Financial Officer
</TABLE>
- ---------------
* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by the Lehman Investors pursuant to the Stockholders
Agreement.
*** Designated as independent director by BLS and the Lehman Investors pursuant
to the Stockholders Agreement.
Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of
the Company since 1989. Mr. Schwartz has been Chairman and Chief Executive
Officer of Loral Space & Communications Ltd. since April 1996. From 1972 to
April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of Loral
Corporation. Mr. Schwartz is Chairman and Chief Executive Officer of Globalstar
Telecommunications Ltd., Chairman and Chief Executive Officer of Space
Systems/Loral, Inc., Chief Executive Officer of Globalstar, L.P., a Director of
Reliance Group Holdings, Inc. and certain subsidiaries, a Director of First Data
Corporation and a Trustee of New York University Medical Center.
Mr. Brand is a Managing Director of Lehman Brothers and a principal in the
Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology Mergers
and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been
responsible for merger and corporate finance advisory services for many of
Lehman Brothers' technology and defense industry clients. Mr. Brand is a
director of L-3 Communications Corporation and L-3 Communications Holdings, Inc.
Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. He is also currently an Adjunct Professor of Management at Baruch College
City University of New York.
Mr. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which
he has been associated since 1949. He is a Director of W.R. Berkley Corporation,
Crystal Oil Company, Globalstar Telecommunications, Ltd., LCH Investments N.V.,
Loral Space & Communications Ltd., Mueller Industries, Inc., Restructured
Capital Holdings Ltd. and R.V.I. Guaranty Co., Ltd.
Mr. Kisner was a member of the law firm of Chekow & Kisner, P.C., from 1984
to 1999, and is now employed by the Company. From 1973 to 1982, he was Associate
General Counsel of APL Corporation, where he held such offices as Secretary,
Vice President and Director. From 1982 to 1984, Mr. Kisner was a sole
practitioner. Since January 1997, Mr. Kisner has been Secretary of the Company.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994), Director of Training for the Georgia School of Professional
Psychology, Adjunct Associate Professor of Psychology at Emory University,
Assistant Professor of Psychology at Kennesaw State College, and Southern Region
Coordinator for National Employee Assistance Services.
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<PAGE> 17
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.
Mr. Towbin joined C. E. Unterberg Towbin (formerly known as Unterberg
Harris) in September of 1995 as a Managing Director. From January 1994 to
September 1995, he was President and Chief Executive Officer of the
Russian-American Enterprise Fund and Vice Chairman of its successor fund, The
U.S. Russia Investment Fund. Mr. Towbin was a Managing Director at Lehman
Brothers from January 1987 until January of 1994. Mr. Towbin was Vice Chairman,
Member of the Executive Committee and Director of L.F. Rothschild, Unterberg,
Towbin Holdings, Inc. from 1986 to 1987 and from 1983 to 1986, Mr. Towbin was
Vice Chairman. From 1977 to 1983 he was General Partner of L.F. Rothschild,
Unterberg, Towbin and from 1959 to 1977, Mr. Towbin was General Partner of C.E.
Unterberg, Towbin Co. Mr. Towbin is also a Director of Bradley Real Estate Inc.,
Gerber Scientific, Inc., Globalstar Telecommunications Ltd. and Globecomm
Systems, Inc.
Mr. Washkowitz is a Managing Director of Lehman Brothers and head of the
Merchant Banking Group, and is responsible for the oversight of Lehman Brothers
Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman
Brothers in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr.
Washkowitz is currently a director of Illinois Central Corporation, L-3
Communications Corporation, McBride plc and Peabody Coal.
Mr. Fogelsanger has been President of the Company since January 1996. From
April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft
Braking Systems Corporation. From 1987 to 1989 he was President of Loral
Corporation's Aircraft Braking Systems Division. From January 1986 to March 1987
he was Vice President and General Manager of Goodyear Aerospace Corporation's
ABS division. From 1980 to 1986 he was General Manager of Goodyear's Aircraft
Tire Operations. In 1968, Mr. Fogelsanger directed Goodyear's development of a
crash-resistant fuel system for helicopters that was credited with saving
hundreds of lives during the Vietnam War. He joined Goodyear in 1951.
Mr. Kenneth M. Schwartz has been Executive Vice President of the Company
since January 1996. From June 1989 to January 1996, Mr. Schwartz held the
positions of Chief Financial Officer, Treasurer and Secretary. Previously he was
the Corporate Director of Internal Audit for Loral Corporation since late 1987.
From 1984 to 1987, Mr. Schwartz held the position of Director of Cost and
Schedule Administration for Loral Electronic Systems. Prior to 1984, Mr.
Schwartz held various other positions with Loral Electronic Systems and the
accounting firm of Deloitte & Touche LLP.
Mr. Charles has been Chief Financial Officer of the Company since May 1996.
From May 1993 to May 1996, Mr. Charles was the Controller of the Company.
Previously he was the Manager of Accounting and Financial Planning. Prior to
employment with the Company in 1989, Mr. Charles held various other positions
with the accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984.
EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED
FABRICS CORPORATION
Set forth below are the names, ages and positions of the executive officers
of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.
AIRCRAFT BRAKING SYSTEMS CORPORATION
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald E. Welsch 63 President
Frank P. Crampton 55 Vice President-Marketing
Richard W. Johnson 55 Vice President-Finance and Controller
Daniel J. Steele 54 Vice President-Customer Support
James J. Williams 43 Vice President-Manufacturing
</TABLE>
16
<PAGE> 18
ENGINEERED FABRICS CORPORATION
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger C. Martin 61 President
Terry L. Lindsey 54 Vice President-Marketing
Anthony G. McCann 39 Vice President-Operations
John A. Skubina 44 Vice President-Finance
</TABLE>
Mr. Welsch has been President of Aircraft Braking Systems Corporation since
January 1996. From November 1994 to January 1996, Mr. Welsch held the positions
of Executive Vice President and Chief Operating Officer. From September 1993 to
November 1994, he was Executive Vice President. Prior to joining Aircraft
Braking Systems, Mr. Welsch was General Manager of the GE 90 Commercial Engine
program at General Electric Aircraft Engines and held various positions in
management, including engineering, product support, marketing, product planning
and program management, over the course of 26 years. Mr. Welsch started his
aviation career at Douglas Aircraft in 1958 and joined Northrop Corporation in
1961. He entered the U.S. Marine Corp Aviation following graduation from Purdue
University.
Mr. Crampton was named Vice President of Marketing at Aircraft Braking
Systems in March 1987. He had been Director of Business Development for Goodyear
Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that
assignment, he was the divisional manager of Program Operations since 1983. Mr.
Crampton joined Goodyear in 1967. He became Section Manager in Commercial Sales
in 1977, a product marketing manager in 1978 and Divisional Sales Manager in
1979. In August of 1982, he joined manufacturing as the manager of the
manufacturing process organization. He also worked for NASA at the Johnson Space
Center, Houston, Texas from 1963 to 1966.
Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989, he was Vice President of
Finance and Controller of Loral Corporation's Aircraft Braking Systems Division.
Prior to this assignment, he had spent 22 years with Goodyear Aerospace
Corporation, including one year as the Controller of the wheel and brake
division. Mr. Johnson joined Goodyear Aerospace Corporation in 1966. He became
Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear
Aerospace Corporation after holding various positions in the Defense Systems
Division.
Mr. Steele was named Vice President of Customer Support in June 1998. From
December 1996 through May 1998, Mr. Steele was Director of Customer Support.
Prior to joining Aircraft Braking Systems, Mr. Steele held various management
positions with General Electric Aircraft Engines from January 1974 through March
1993 in field service, customer support, program management, marketing and spare
sales and support. From April 1993 through April 1995, Mr. Steele was Director
Corporate Marketing for the AGES Group, ALP, and from May 1995 through November
1996 was Vice President for World Air Lease Inc. Mr. Steele commenced his
aviation career with The Boeing Company in 1967 as an experimental flight test
mechanic, and from 1969 through 1973 was a maintenance supervisor with American
Airlines.
Mr. Williams was named Vice President of Manufacturing at Aircraft Braking
Systems in May 1992. He had been Director of Manufacturing since joining
Aircraft Braking Systems in September 1989. Previously from April 1985 to August
1989, he was Branch Manager of Refurbishment Operations at United Technologies
responsible for the refurbishment process of the Solid Rocket Boosters on the
Shuttle Program. Mr. Williams started his aviation career in 1975 in the Air
Force as a Hydraulic Systems Specialist. He was Superintendent, Manufacturing at
Fairchild Republic Company from 1979 to 1983, followed by Manager, B-1B
Manufacturing Operations at Rockwell International Corporation from 1983 to
1985.
Mr. Martin has been President of Engineered Fabrics Corporation since 1987.
From June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics
Division. Mr. Martin has been continuously employed by Goodyear, GAC, Loral
Corporation and K & F for the past 37 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.
17
<PAGE> 19
Mr. Lindsey has served as Vice President of Business Development since
1989. He has been with Goodyear Aerospace Corporation, Loral Corporation and K &
F since 1977. Prior to this he had 12 years of federal service with the US Army.
He joined GAC as Contract Administrator of the Industrial Brake Operation in
Berea, Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of
Contracts.
Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production Support
from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August
1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann
worked for Aircraft Braking Systems as Manager of Manufacturing Engineering,
Manager of Assembly and as a Manufacturing Engineer.
Mr. Skubina has been Vice President of Finance and Administration since
February 1991. Prior to that, he was made Vice President of Finance on April 1,
1990. He joined Engineered Fabrics Corporation in 1988 as Accounting Manager.
From 1985 until 1988, Mr. Skubina was the Assistant Controller and Controller of
MPD, a division of M/A-Com.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the years ended
December 31, 1998 and 1997 and the nine months ended December 31, 1996 (the
"Transition Period"), 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
FISCAL COMPENSATION
YEAR OR ANNUAL COMPENSATION ----------------- ALL OTHER
TRANSITION ----------------------- OPTIONS LTIP COMPEN-
PERIOD SALARY BONUS GRANTED PAYOUTS SATION(A)
NAME AND PRINCIPAL POSITION * ($) ($) (#) ($) ($)
- --------------------------- ---------- --------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bernard L. Schwartz............. 1998 2,070,782(b) 5,055,300 -- -- --
Chairman of the Board and 1997 1,440,000(b) 1,553,200 -- -- --
Chief Executive Officer 1996* 1,477,426(b) 1,247,000 -- -- --
Kenneth M. Schwartz............. 1998 265,154 160,000 1,500 45,000 5,532
Executive Vice President of 1997 494,038(b) 150,000 2,500 28,333 5,237
K & F Industries, Inc. 1996* 274,231(b) 106,000 -- 13,333 19,331
Donald E. Fogelsanger........... 1998 244,500 130,000 -- 48,333 35,636
President of K & F Industries, 1997 216,000 125,000 2,500 30,000 34,519
Inc. 1996* 170,769 115,000 -- 13,333 42,369
Ronald E. Welsch................ 1998 207,264 95,000 -- 35,333 28,230
President of Aircraft Braking 1997 192,500 185,000 2,500 22,000 27,473
Systems Corporation 1996* 145,308 60,000 -- 10,000 25,997
Roger C. Martin................. 1998 153,229 77,000 -- 27,333 29,238
President of Engineered 1997 148,059 49,000 1,500 17,333 28,266
Fabrics Corporation 1996* 109,757 30,000 -- 8,333 27,229
</TABLE>
- ---------------
(a) Includes the following: (i) Company contributions to individual 401(k) plan
accounts for the years ended December 31, 1998 and 1997, and the Transition
Period, respectively: Mr. K. Schwartz -- $4,517, $4,275, and $2,414; Mr.
Fogelsanger -- $4,517, $4,275, and $3,054; Mr. Welsch -- $4,592, $4,078 and
$3,084; Mr. Martin -- $4,610, $3,927 and $3,442; (ii) the value of
supplemental life insurance programs for the years ended December 31, 1998
and 1997 and the Transition Period, respectively: Mr. K. Schwartz -- $1,015,
$962 and $16,917; Mr. Fogelsanger -- $31,119, $30,244 and $39,315; Mr.
Welsch -- $23,638, $23,395 and $22,913; Mr. Martin -- $24,628, $24,339 and
$23,787.
(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. BLS designated that $250,000 and $100,000 of the
aggregate annual advisory fee be paid to Kenneth M. Schwartz, which is
included in his salary for the year ended December 31, 1997 and the
Transition Period, respectively.
18
<PAGE> 20
OPTION GRANTS IN LAST FISCAL YEAR
The following sets forth information relating to the grant of stock options
by the Company during the year ended December 31, 1998 to the named executive
officers. The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire a total of 100,000
authorized but unissued shares of common stock. None of the Company's stock is
publicly traded. The options granted are exercisable in four equal installments
on the second, third, fourth and fifth anniversaries of the date of grant, and
shall remain exercisable until expiration of the option, 10 years from the date
of the grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------------------------------------- --------------------
% OF TOTAL
OPTIONS
GRANTED TO EXERCISE
EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#) YEAR(%) ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth M. Schwartz........ 1,500 12.7 175.00 10/02/08 165,085 418,357
</TABLE>
19
<PAGE> 21
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTIONS VALUES
The following sets forth information as to the exercise of stock options
during the year ended December 31, 1998 and the value of unexercised stock
options at year-end.
<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 0/0
Kenneth M. Schwartz................. 0 0 0/4,000 0/0
Donald E. Fogelsanger............... 0 0 0/2,500 0/0
Ronald E. Welsch.................... 0 0 0/2,500 0/0
Roger C. Martin..................... 0 0 0/1,500 0/0
</TABLE>
- ---------------
(1) None of the Company's stock is currently publicly traded. All options were
granted at an exercise price of $175.00 per share based upon the implied
value of the capital stock retained by BLS and the Lehman Investors
following the Recapitalization.
LONG-TERM INCENTIVE PLAN AWARDS
Under the Company's long-term incentive plan designed to provide an
incentive to encourage attainment of Company objectives and retain and attract
key executives of the Company, a limited number of persons participate in a
Deferred Bonus Plan. Under the terms of the plan, generally no awards are
allocated to any participant unless the Company has achieved at least a 10%
growth in earnings before interest, taxes and amortization over the prior fiscal
year. Awards vest and are paid (unless deferred by recipient direction) in three
equal annual installments starting on January 15th following each fiscal
year-end. All amounts not vested are forfeited upon termination of employment
for any reason other than death or disability prior to the vesting date. The
following awards were earned for the individuals named in the Summary
Compensation Table during the years ended December 31, 1998 and 1997 and the
nine months ended December 31, 1996, respectively: Mr. K. Schwartz $60,000,
$50,000 and $50,000; Mr. Fogelsanger $55,000, $55,000 and $55,000; Mr. Welsch
$50,000, $45,000 and $40,000; and Mr. Martin $32,000, $30,000 and $30,000.
THE RETIREMENT PLAN
The Company established, effective May 1, 1989, as amended, the K & F
Industries Retirement Plan for Salaried Employees (the "Company Retirement
Plan"), a defined benefit pension plan. The Company has received a favorable
determination letter from the Internal Revenue Service that the Company
Retirement Plan is a qualified plan under the Internal Revenue Code. The terms
of the Company Retirement Plan are as follows: a non-contributory benefit and a
contributory benefit. The cost of the former is borne by the Company; the cost
of the latter is borne partly by the Company and partly by the participants.
Salaried employees who have completed at least six months of service and
satisfied a minimum earnings level are eligible to participate in the
contributory portion of the Company Retirement Plan; salaried employees become
participants in the non-contributory portion on their date of hire. The Plan
provides a benefit of $20.00 per month for each year of credited service. For
participants who contribute to the Plan, in addition to the benefit of $20.00
per month for each year of credited service, the Plan provides an annual benefit
equal to the greater of: 60% of the participant's aggregate contributions; or,
average compensation earned (while contributing) during the last 10 years of
employment in excess of 90% of the Social Security Wage Base amount multiplied
by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times
additional years of such service up to 20, plus, (c) 1.2% times additional years
of such service up to 30, plus, (d) 0.6% times all additional such service above
30 years.
20
<PAGE> 22
Effective January 1, 1990, the Plan was amended for eligible employees of K
& F Industries and Aircraft Braking Systems to provide an annual benefit equal
to (a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (i) for 14 years of continuous
service or less, 1.05% of annual earnings between $19,800 and the Social
Security Wage Base plus 2.25% of annual earnings above the Social Security Wage
Base, and (ii) for more than 14 years of continuous service, 1.35% of annual
earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual
earnings above the Social Security Wage Base. In no event will the amount
calculated in (c) above be less than 60% of the participant's aggregate
contributions made on and after January 1, 1990. Benefits are payable upon
normal retirement age at age 65 in the form of single life or joint and survivor
annuity or, at the participant's option with appropriate spouse consent, in the
form of an annuity with a term certain. A participant who has (a) completed at
least 30 years of continuous service, (b) attained age 55 and completed at least
10 years of continuous service, or (c) attained age 55 and the combination of
such participant's age and service equals at least 70 years, is eligible for
early retirement benefits. If a participant elects early retirement before
reaching age 62, such benefits will be reduced except that the non-contributory
benefits of a participant with at least 30 years of credited service will not be
reduced. In addition, employees who retire after age 55 but before age 62 with
at least 30 years of service are entitled to a supplemental non-contributory
benefit until age 62. Annual benefits under the Company Retirement Plan are
subject to a statutory ceiling of $130,000 per participant. Participants are
fully vested in their accrued benefits under the Company Retirement Plan after
five years of credited service with the Company.
The individuals named in the Summary Compensation Table also participate in
a supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of K & F and Aircraft Braking Systems and the supplemental plan are $224,000 for
Mr. K. Schwartz; $135,000 for Mr. Fogelsanger; and $39,000 for Mr. Welsch. BLS
does not participate in either plan. The retirement benefits have been computed
on the assumption that (a) employment will be continued until normal retirement
at age 65 or current age if greater; (b) current levels of creditable
compensation and the Social Security Wage Base will continue without increases
or adjustments throughout the remainder of the computation period; and (c)
participation in the contributory portion of the plan will continue at current
levels. The Company has a similar plan at Engineered Fabrics in which Mr. Martin
participates. Estimated annual benefits for Mr. Martin are $96,000 using the
assumptions in (a), (b) and (c) above.
For purposes of eligibility, vesting and benefit accrual, participants
receive credit for years of service with Loral Corporation and Goodyear. At
retirement, retirement benefits calculated according to the benefit formula
described above are reduced by any retirement benefits payable from The Goodyear
Tire & Rubber Company Retirement Plan For Salaried Employees.
COMPENSATION OF DIRECTORS
The Board of Directors held three meetings during the year ended December
31, 1998. Members of the Board of Directors are entitled to receive a director's
fee of $12,000 per year. Messrs. Brand and Washkowitz did not receive
compensation for services as a director during the year ended December 31, 1998.
All directors are reimbursed for reasonable out-of-pocket expenses incurred in
that capacity. During the year ended December 31, 1998, Messrs. Brinberg, Hodes,
Paddock and Towbin each received stock options for 1,000 shares and Mr. Kisner
received stock options for 900 shares.
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. 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.
21
<PAGE> 23
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not in the past used a compensation committee to determine
executive officer compensation. The payments to BLS, the Company's Chairman and
Chief Executive Officer, are paid in accordance with the Advisory and
Stockholders Agreements. All other executive compensation decisions are made by
BLS in accordance with policies established in consultation with the Board of
Directors.
PART IV
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the capital stock of the
Company as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
OF OWNERSHIP OF
COMMON STOCK CAPITAL STOCK
---------------- -------------
<S> <C> <C>
Bernard L. Schwartz............................. 370,199 50.00%
*Lehman Brothers Merchant Banking Portfolio
Partnership L.P.(a)........................... 180,228 24.34
*Lehman Brothers Offshore Investment Partnership
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
------- ------
740,398 100.00%
======= ======
</TABLE>
- ---------------
* Collectively referred to as the "Lehman Investors."
(a) LBI Group Inc. is the general partner of the limited partnership and is an
indirect wholly owned subsidiary of Lehman Brothers Holdings Inc. ("LBH").
(b) Lehman Brothers Offshore Partners Ltd. is the general partner of the limited
partnership and is an indirect wholly owned subsidiary of LBH.
(c) LBH is the general partner of the limited partnership. The limited
partnership is a fund for current and former employees of LBH.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, BLS and the Lehman Investors
(collectively, the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement") dated as of October 15, 1997. The Stockholders
Agreement contains certain restrictions with respect to the transferability of
the Company's capital stock, subject to certain exceptions. The Stockholders
Agreement also includes provisions regarding designation of members of the Board
of Directors and other voting 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 the registration rights continue as to any common stock
held by the Stockholders as long as they own their shares, and the voting
provisions contained in the Stockholders Agreement terminate on October 15,
2007.
The Stockholders Agreement provides that the Company's Board of Directors
be comprised initially of nine directors. Under the Stockholders Agreement, BLS
is entitled to appoint five directors, the Lehman Investors are entitled to
appoint three directors and BLS and the Lehman Investors are entitled to
designate jointly one independent director. Upon the death, retirement or
resignation as Chairman or Chief Executive Officer or permanent disability of
BLS, the Lehman Investors and the BLS Group (as defined in the
22
<PAGE> 24
Stockholders Agreement) will each be entitled to designate 50% of the members of
the Board of Directors. The Company's by-laws provide for so long as there is a
director designated by the Lehman Investors, certain corporate actions will
require the vote of at least one director designated by the Lehman Investors,
including (with certain exceptions) (i) mergers, consolidations or
recapitalization, (ii) issuances of capital stock (iii) repurchases of and
dividends on capital stock, (iv) issuance of employee options to purchase more
than 50,000 shares of capital stock, (v) dissolution or liquidation of the
Company, (vi) acquisition, sale or exchange of assets in excess of $5 million,
(vii) the incurrence of debt or liens in excess of $10 million in the aggregate,
(viii) the making of loans, investments or capital expenditures in excess of $10
million in each case in any single year, (ix) transactions with affiliates, (x)
prepayments of or amendments to any amount of financing in excess of $10
million, (xi) amendment of the Charter and By-laws of the Company, (xii)
engaging in new businesses or ventures and (xiii) certain employee compensation
and other matters.
The Stockholders Agreement provides that any time after the earlier of (i)
the fifth anniversary of the Recapitalization, (ii) six months following the
death of BLS or (iii) upon the resignation or retirement of BLS as Chairman or
Chief Executive Officer; either the BLS Group or the Lehman Investors (the "Put
Party") may request an appraisal of the value of the capital stock of the
Company (the "Appraised Value") and may notify the other party of its desire to
sell all of its and its transferees' capital stock for a pro rata share of such
Appraised Value. The other party may elect to purchase such capital stock,
arrange for the purchase of such capital stock by a third party or notify the
Put Party that it does not intend to purchase, or arrange for the purchase by a
third party of, such capital stock. If the other party is unable or chooses not
to arrange for and consummate the purchase of such capital stock, the BLS Group
and the Lehman Investors shall cause the Company to be sold as an entirety if
such sale can be arranged for a price at least equal to the Appraised Value
(subject to reduction by no more than 10% under specified circumstances). Any
sale of the Company as an entirety shall include all Stockholders and the
proceeds thereof shall be allocated among the Stockholders in accordance with
their stock ownership.
Notwithstanding other restrictions on transfer set forth in the
Stockholders Agreement, from and after March 3, 2001, the Lehman Investors will
have the right to transfer capital stock to a third party, subject to specified
conditions. The put-sale rights of the Lehman Investors described above and the
rights of the Lehman Investors to designate 50% of the members of the Board of
Directors upon the death, retirement, resignation or disability of BLS will
terminate upon any such transfer.
The Stockholders Agreement provides certain first offer and tag-along
rights with respect to certain transfers and common stock or Common Equivalents.
The Stockholders Agreement grants the Stockholders demand and incidental
registration rights with respect to shares of capital stock held by them, which
rights will be exercisable at any time after an initial public offering of the
Company's common stock approved by the Board of Directors. The Stockholders
Agreement contains customary terms and provisions with respect to such
registration rights.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
BLS owns 50% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral Space & Communications Ltd.
("Loral Space"). Because BLS is Chairman of the Board of Directors and has the
right to designate a majority of the Directors to the Board of the Company, he
has operating control of the Company.
The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him in exchange for acting as directors and providing advisory
services to the Company and its subsidiaries. Such agreement will continue until
BLS dies or is disabled or ceases to own a specified number of shares of common
stock of the Company.
23
<PAGE> 25
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $5,055,300, $1,553,200 and $1,247,000 for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, respectively.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The Agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. During the year ended December 31, 1997 and
the nine months ended December 31, 1996, Lehman Brothers received underwriting
discounts and commissions of $4.6 million and $2.6 million in connection with
the offering of the 9 1/4% Notes and 10 3/8% Notes, respectively. In connection
with the tender offer component of the Recapitalization, Lehman Brothers
received a customary fee for acting as Dealer Manager and Solicitation Agent. In
addition, one or more affiliates of Lehman Brothers received underwriting
commissions of $4.7 million in connection with the Credit Facility. The Lehman
Investors own 50% of the outstanding capital stock of the Company and are
entitled to elect three directors (in addition to one independent director
jointly designated by BLS and the Lehman Investors) to the Company's Board of
Directors. The Lehman Investors have the benefit of certain additional rights
under the Stockholders Agreement and the Company's By-laws.
In May 1996, the Company purchased $343,000 principal amount of 13 3/4%
Debentures from A. Robert Towbin, who is a director of the Company and who is
managing director of C. E. Unterberg Towbin. 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 C. E. Unterberg Towbin a fee of $1.0 million for investment banking
services.
The Company has paid Ronald H. Kisner, who is Secretary and a member of the
Board of Directors of the Company, a monthly retainer of $6,000 for legal
services. In addition, Mr. Kisner received bonuses and other compensation of
$78,000, $176,000 and $41,000 during the years ended December 31, 1998 and 1997
and the nine months ended December 31, 1996, respectively. Mr. Kisner also
received stock options for 900 and 1,750 shares during the years ended December
31, 1998 and 1997, respectively. As of January 1999, Mr. Kisner is employed by
the Company.
Pursuant to agreements between the Company and Loral Space (of which BLS is
Chairman and Chief Executive Officer), the Company reimburses Loral Space for
benefits administration and legal services. The related charges agreed upon were
established to reimburse Loral Space for actual costs incurred without profit or
fee. The Company believes the arrangements are as favorable to the Company as
could have been obtained from unaffiliated parties. Payments to Loral Space were
$0.7 million, $0.5 million and $0.2 million for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, respectively.
Included in accounts payable at December 31, 1998 and 1997 is $0.1 million and
$0.3 million, respectively.
In connection with the Recapitalization, the Company paid Loral Space $80.6
million for the redemption of its 22.5% equity interest in the Company.
24
<PAGE> 26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
K & F Industries, Inc. -- Consolidated Financial Statements:
Independent Auditors' Report.............................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 and the Nine Months Ended
December 31, 1996...................................... F-3
Consolidated Statements of Stockholders' Deficiency for
the Years Ended December 31, 1998 and 1997 and the Nine
Months Ended December 31, 1996......................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 and the Nine Months Ended
December 31, 1996...................................... F-5
Notes to Consolidated Financial Statements................ F-6
</TABLE>
All other schedules and separate financial statements are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.04 through 10.09 and 10.11, 10.12 and
10.19 and 10.40 are management contracts or compensation plans.
(b) Reports on Form 8-K: No reports on Form 8-K were filed for the three
months ended December 31, 1998.
Exhibits: See exhibit index below.
(c) Exhibits
<TABLE>
<S> <C> <C>
1.01 -- Purchase Agreement dated as of October 9, 1997 between the
Company and Lehman Brothers Inc. and Unterberg Harris(10)
2.01 -- Agreement for Sale and Purchase of Assets dated March 26,
1989 between Loral Corporation and the Registrant(1)
2.02 -- Stock Purchase Agreement dated September 15, 1997 among the
Company and the Stockholders of the Company(10)
2.03 -- First Amendment to Stock Purchase Agreement dated as of
October 15, 1997 among the Company and the Stockholders
named therein(10)
3.01 -- Amended and Restated Certificate of Incorporation of the
Company(10)
3.02 -- Amended and Restated By-Laws of the Company(10)
4.01 -- Indenture dated October 15, 1997 for the 9 1/4% Notes
between the Company and State Street Bank and Trust Company,
as trustee(10)
4.02 -- Indenture dated as of August 15, 1996 for the 10 3/8% Notes
between the Company and Fleet National Bank, as trustee(9)
4.03 -- Indenture dated as of June 1, 1992 for the 11 7/8% Notes
between the Company and the Bank of New York, as trustee(5)
4.04 -- Pledge Agreement dated as of June 10, 1992 between the
Company and the Bank of New York, as collateral trustee(5)
10.01 -- Securities Purchase Agreement dated as of April 27, 1989,
among the Company, BLS and Lehman Brothers Holdings Inc.
("LBH")(1)
10.02 -- Assumption Agreement dated as of April 27, 1989(1)
10.03 -- Shares Services Agreement dated as of April 27, 1996 between
Lockheed Martin Tactical Defense Systems -- Akron and
Aircraft Braking Systems(10)
10.04 -- Amended and Restated Director Advisory Agreement dated as of
October 15, 1997, between the Company and BLS(10)
</TABLE>
25
<PAGE> 27
<TABLE>
<S> <C> <C>
10.05 -- Non-Competition Agreement dated as of April 27, 1989,
between the Company and BLS(1)
10.06 -- K & F Industries, Inc. Retirement Plan for Salaried
Employees(5)
10.07 -- K & F Industries, Inc. Savings Plan for Salaried
Employees(5)
10.08 -- Goodyear Aerospace Corporation Supplemental Unemployment
Benefits Plan for Salaried Employees -- Plan A(1)
10.09 -- The Loral Systems Group Release and Separation Allowance
Plan(1)
10.10 -- Letter Agreement dated April 27, 1989, between the Company
and LBH(1)
10.11 -- K & F Industries, Inc. 1989 Stock Option Plan(2)
10.12 -- K & F Industries, Inc. Executive Deferred Bonus Plan(2)
10.13 -- Securities Purchase Agreement dated as of July 22, 1991
among the Company, BLS and the Lehman Investors(4)
10.14 -- Securities Purchase Agreement among the Company, BLS and the
Lehman Investors dated September 2, 1994(6)
10.15 -- Amended and Restated Stockholders Agreement dated as of
September 2, 1994, by and among the Company, BLS, the Lehman
Investors, Chase Capital Partners and Loral Space(6)
10.16 -- Agreement dated as of September 2, 1994, between the Company
and Loral Space(6)
10.17 -- Amendment of Stockholders Agreement dated November 8,
1994(6)
10.18 -- Securities Conversion Agreement among the Company and the
Converting Stockholders, dated November 8, 1994(6)
10.19 -- K & F Industries, Inc. Supplemental Executive Retirement
Plan(8)
10.20 -- Amended and Restated Credit Agreement dated as of August 14,
1996, among Aircraft Braking Systems ("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")(9)
10.21 -- Amended and Restated Security Agreement dated as of August
14, 1996, between ABS and Chase(9)
10.22 -- Amended and Restated Security Agreement dated as of August
14, 1996, between EFC and Chase(9)
10.23 -- Revolving Credit Note dated as of August 14, 1996 executed
by each of ABS and EFC in favor of NBD Bank(9)
10.24 -- Facility A Notes dated as of August 14, 1996 executed by
each of ABS and EFC in favor of NBD Bank(9)
10.25 -- Amended and Restated K & F Agreement dated as of August 14,
1996, between the Company and Chase(9)
10.26 -- Amended and Restated Subordination Agreement dated as of
August 14, 1996, between ABS and Chase(9)
10.27 -- Amended and Restated Subordination Agreement dated as of
August 14, 1996, between EFC and Chase(9)
10.28 -- Purchase Agreement dated August 12, 1996 among the Company,
Lehman Brothers Inc. and Chase Securities Inc.(9)
10.29 -- Registration Rights Agreement dated as of August 15, 1996
among the Company, Lehman Brothers Inc. and Chase Securities
Inc.(9)
10.30 -- 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)
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C> <C>
10.31 -- Guarantee and Collateral Agreement dated as of October 15,
1997 among the Company, ABS, EFC, certain subsidiaries named
therein and FNBC, as Collateral Agent(10)
10.32 -- Subordination Agreement dated as of October 15, 1997 between
ABS and FNBC(10)
10.33 -- Subordination Agreement dated as of October 15, 1997 between
EFC and FNBC(10)
10.34 -- Intercreditor Agreement dated as of October 15, 1997 among
the Pension Benefit Guaranty Corporation ("PBGC"), FNBC,
ABS, EFC and the Company(10)
10.35 -- K & F Agreement dated as of October 15, 1997 executed by the
Company in favor of FNBC(10)
10.36 -- Settlement Agreement dated as of October 15, 1997 between
the Company and PBGC(10)
10.37 -- Registration Rights Agreement dated as of October 15, 1997
between the Company and Lehman Brothers Inc. and Unterberg
Harris(10)
10.38 -- Dealer Manager Agreement dated as of September 15, 1997
between Lehman Brothers Inc. and the Company(10)
10.39 -- Stockholders' Agreement dated as of October 15, 1997 between
the Company and the Stockholders identified therein(10)
10.40 -- K & F Industries, Inc. 1998 Stock Option Plan
12.01 -- Statement of computations of ratio of earnings to fixed
charges(10)
21.01 -- Subsidiaries of the Registrant(1)
24.01 -- Powers of Attorney (included on signature page)
27.01 -- Financial Data Schedule
</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 Annual Report on Form 10-K
for the fiscal year ended March 31, 1991 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991 and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-47028 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995 and incorporated herein by
reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996 and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-11047 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4, No. 333-40977 and incorporated herein by reference.
27
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
K & F INDUSTRIES, INC.
By: /s/ KENNETH M. SCHWARTZ
------------------------------------
Kenneth M. Schwartz
Executive Vice President
Date: March 31, 1999
Pursuant to the requirements of The Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, Chief March 31, 1999
- --------------------------------------------------- Executive Officer and Director
Bernard L. Schwartz (principal executive officer)
/s/ KENNETH M. SCHWARTZ Executive Vice President March 31, 1999
- ---------------------------------------------------
Kenneth M. Schwartz
/s/ DIRKSON R. CHARLES Chief Financial Officer March 31, 1999
- --------------------------------------------------- (principal financial and
Dirkson R. Charles accounting officer)
* Director March 31, 1999
- ---------------------------------------------------
David J. Brand
* Director March 31, 1999
- ---------------------------------------------------
Herbert R. Brinberg
* Director March 31, 1999
- ---------------------------------------------------
Robert B. Hodes
* Director March 31, 1999
- ---------------------------------------------------
Ronald H. Kisner
* Director March 31, 1999
- ---------------------------------------------------
John R. Paddock
* Director March 31, 1999
- ---------------------------------------------------
A. Robert Towbin
* Director March 31, 1999
- ---------------------------------------------------
Alan H. Washkowitz
*By: /s/ KENNETH M. SCHWARTZ Attorney-in-Fact March 31, 1999
---------------------------------------------
Kenneth M. Schwartz
</TABLE>
28
<PAGE> 30
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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for the years ended December 31, 1998 and 1997 and
the nine months ended December 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
and the nine months ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
January 27, 1999
F-1
<PAGE> 31
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 6,844,000 $ 4,707,000
Accounts receivable -- net................................ 35,990,000 40,014,000
Inventory................................................. 70,296,000 65,871,000
Other current assets...................................... 673,000 559,000
------------- -------------
Total current assets.............................. 113,803,000 111,151,000
------------- -------------
Property, Plant and Equipment -- Net........................ 75,280,000 70,638,000
Prepaid Pension Cost........................................ 13,807,000 7,848,000
Deferred Charges -- Net of amortization of $7,456,000 and
$4,502,000................................................ 25,631,000 28,382,000
Cost in Excess of Net Assets Acquired -- Net of amortization
of $59,041,000 and $52,933,000............................ 179,700,000 190,720,000
Intangible Assets -- Net of amortization of $32,960,000 and
$29,804,000............................................... 11,878,000 16,497,000
------------- -------------
Total Assets...................................... $ 420,099,000 $ 425,236,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable.......................................... $ 15,328,000 $ 17,979,000
Current portion of long-term debt......................... 8,000,000 1,500,000
Interest payable.......................................... 5,133,000 4,725,000
Other current liabilities................................. 46,503,000 54,994,000
------------- -------------
Total current liabilities......................... 74,964,000 79,198,000
------------- -------------
Postretirement Benefit Obligation Other Than Pensions....... 75,956,000 75,542,000
Other Long-Term Liabilities................................. 7,664,000 7,830,000
Long-Term Debt.............................................. 477,125,000 519,125,000
Commitments and Contingencies (Notes 12 and 13)
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................................................... (152,616,000) (191,976,000)
Accumulated other comprehensive income (loss)............. 258,000 (1,231,000)
------------- -------------
Total stockholders' deficiency.................... (215,610,000) (256,459,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency.... $ 420,099,000 $ 425,236,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 32
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales...................................... $345,447,000 $304,331,000 $212,703,000
Cost of sales.................................. 196,190,000 188,001,000 136,813,000
------------ ------------ ------------
Gross margin................................... 149,257,000 116,330,000 75,890,000
Independent research and development........... 13,705,000 10,873,000 8,623,000
Selling, general and administrative expenses... 35,332,000 40,182,000 17,297,000
Amortization................................... 10,286,000 10,316,000 7,810,000
------------ ------------ ------------
Operating income............................... 89,934,000 54,959,000 42,160,000
Interest expense, net of interest income of
$356,000, $621,000 and $787,000.............. 44,830,000 34,091,000 27,197,000
------------ ------------ ------------
Income before income taxes and extraordinary
charge....................................... 45,104,000 20,868,000 14,963,000
Income tax (provision) benefit................. (5,744,000) (5,184,000) 81,000
------------ ------------ ------------
Income before extraordinary charge............. 39,360,000 15,684,000 15,044,000
Extraordinary charge from early extinguishment
of debt, net of tax.......................... -- (29,513,000) (9,142,000)
------------ ------------ ------------
Net income (loss).............................. $ 39,360,000 $(13,829,000) $ 5,902,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 33
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CLASS B CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------------- ------------------- ------------------ ----------------
SHARES SHARES SHARES SHARES
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT
--------- ------- --------- ------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996............. 1,027,635 $10,000 458,994 $ 5,000 553,344 $ 6,000 -- $ --
Net income.......................
Pension adjustment...............
Cumulative translation
adjustments....................
--------- ------- --------- ------- -------- ------- ------- ------
Balance, December 31, 1996......... 1,027,635 10,000 458,994 5,000 553,344 6,000 -- --
Issuance pursuant to stock option
plan........................... 11,250
Redemption of capital stock...... (657,436) (7,000) (458,994) (5,000) (194,395) (2,000)
Conversion to common stock....... (370,199) (3,000) (370,199) (4,000) 740,398 7,000
Net loss.........................
Pension adjustment...............
Cumulative translation
adjustments....................
--------- ------- --------- ------- -------- ------- ------- ------
Balance, December 31, 1997......... -- -- -- -- -- -- 740,398 7,000
Net Income.......................
Pension adjustment...............
Cumulative translation
adjustments....................
--------- ------- --------- ------- -------- ------- ------- ------
Balance, December 31, 1998......... -- $ -- -- $ -- -- $ -- 740,398 $7,000
========= ======= ========= ======= ======== ======= ======= ======
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE COMPREHENSIVE
CAPITAL DEFICIT INCOME INCOME
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, April 1, 1996............. $155,350,000 $(184,049,000) $(11,023,000)
Net income....................... 5,902,000 $ 5,902,000
Pension adjustment............... (77,000) (77,000)
Cumulative translation
adjustments.................... 570,000 570,000
------------ ------------- ------------ ------------
Balance, December 31, 1996......... 155,350,000 (178,147,000) (10,530,000) $ 6,395,000
============
Issuance pursuant to stock option
plan........................... 952,000
Redemption of capital stock...... (219,561,000)
Conversion to common stock.......
Net loss......................... (13,829,000) $(13,829,000)
Pension adjustment............... 9,436,000 9,436,000
Cumulative translation
adjustments.................... (137,000) (137,000)
------------ ------------- ------------ ------------
Balance, December 31, 1997......... (63,259,000) (191,976,000) (1,231,000) $ (4,530,000)
============
Net Income....................... 39,360,000 $ 39,360,000
Pension adjustment............... 1,213,000 1,213,000
Cumulative translation
adjustments.................... 276,000 276,000
------------ ------------- ------------ ------------
Balance, December 31, 1998......... $(63,259,000) $(152,616,000) $ 258,000 $ 40,849,000
============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 34
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------------------- DECEMBER 31,
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)............................ $ 39,360,000 $ (13,829,000) $ 5,902,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.............................. 9,675,000 9,364,000 6,834,000
Amortization.............................. 10,286,000 10,316,000 7,810,000
Non-cash interest expense-amortization of
deferred financing charges.............. 1,932,000 1,507,000 1,101,000
Provision for losses on accounts
receivable.............................. 140,000 27,000 2,000
Extraordinary charge from early
extinguishment of debt.................. -- 29,513,000 9,142,000
Deferred income taxes..................... 4,912,000 3,621,000 (320,000)
Changes in assets and liabilities:
Accounts receivable..................... 3,989,000 (4,060,000) (552,000)
Inventory............................... (4,254,000) 2,377,000 (4,686,000)
Other current assets.................... (114,000) 27,000 246,000
Prepaid pension costs................... (3,283,000) (7,848,000) --
Accounts payable........................ (2,651,000) 6,726,000 (1,232,000)
Interest payable........................ 408,000 (1,964,000) (1,528,000)
Other current liabilities............... (9,491,000) 5,254,000 4,965,000
Postretirement benefit obligation other
than pensions........................ 1,414,000 103,000 49,000
Other long-term liabilities............. (166,000) 1,379,000 (4,339,000)
------------ ------------- -------------
Net cash provided by operating
activities......................... 52,157,000 42,513,000 23,394,000
------------ ------------- -------------
Cash Flows From Investing Activities:
Capital expenditures......................... (14,873,000) (10,016,000) (14,091,000)
Deferred charges............................. (203,000) (1,781,000) (250,000)
------------ ------------- -------------
Net cash used in investing
activities......................... (15,076,000) (11,797,000) (14,341,000)
------------ ------------- -------------
Cash Flows From Financing Activities:
Payments of senior revolving loan............ (55,000,000) (61,000,000) (49,000,000)
Borrowings under senior revolving loan....... 41,000,000 62,000,000 48,000,000
Payments on long-term debt................... (21,500,000) (280,375,000) (180,000,000)
Proceeds from issuance of long-term debt..... -- 507,000,000 180,000,000
Premiums paid on early extinguishment of
debt...................................... -- (24,418,000) (4,500,000)
Deferred charges -- financing costs.......... -- (12,101,000) (6,772,000)
Redemption of equity interests............... -- (218,623,000) --
Proceeds from sale and leaseback
transaction............................... 556,000 -- 2,315,000
------------ ------------- -------------
Net cash used in financing
activities......................... (34,944,000) (27,517,000) (9,957,000)
------------ ------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................. 2,137,000 3,199,000 (904,000)
Cash and cash equivalents, beginning of
period....................................... 4,707,000 1,508,000 2,412,000
------------ ------------- -------------
Cash and cash equivalents, end of period....... $ 6,844,000 $ 4,707,000 $ 1,508,000
============ ============= =============
Supplemental Information:
Interest paid during the period.............. $ 42,846,000 $ 35,169,000 $ 28,411,000
============ ============= =============
Income taxes paid during the period.......... $ 1,055,000 $ 136,000 $ 344,000
============ ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 35
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and anti-skid systems for commercial, military
and general aviation aircraft, and the manufacture of materials for fuel tanks,
iceguards, inflatable oil booms and various other products made from coated
fabrics for military and commercial uses. The Company serves the aerospace
industry and sells its products to airframe manufacturers and commercial
airlines throughout the world and to the United States and certain foreign
governments. The Company's activities are conducted through its two wholly owned
subsidiaries, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"),
which generated approximately 88% of the Company's total revenues during the
year ended December 31, 1998 and Engineered Fabrics Corporation (collectively,
the "Subsidiaries"), which generated approximately 12% of the Company's total
revenues during the year ended December 31, 1998.
On October 15, 1997, the Company consummated a recapitalization (the
"Recapitalization") consisting of the repurchase of approximately 64% of its
outstanding capital stock for a total purchase price of $230.2 million and the
repayment of all outstanding indebtedness. Upon giving effect to the repurchase,
Bernard L. Schwartz ("BLS") and certain merchant banking partnerships affiliated
with Lehman Brothers Holdings Inc. (the "Lehman Investors") each became the
owner of 50% of the capital stock of the Company.
To finance the above transactions, the Company entered into a new credit
facility (the "Credit Facility") for $372 million and issued $185 million of
9 1/4% Senior Subordinated Notes due 2007 (the "9 1/4% Notes").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Year-End Change -- Effective December 31, 1996, the Company changed its
fiscal year-end from March 31 to December 31. Accordingly, the accompanying
financial statements include audited financial statements for the nine months
ended December 31, 1996.
Principles of Consolidation -- The consolidated financial statements
include the accounts of K & F Industries, Inc. and its Subsidiaries. All
material intercompany accounts and transactions between these entities have been
eliminated.
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 years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, investments were
$31.9 million, $28.3 million and $20.2 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.
F-6
<PAGE> 36
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Charges -- Deferred charges consist primarily of financing costs
($9.7 million and $11.7 million, which is net of amortization (non-cash interest
expense) of $2.4 million and $0.4 million at December 31, 1998 and 1997,
respectively), and program participation costs ($12.3 million and $13.1 million,
which is net of amortization of $4.0 million and $3.2 million, at December 31,
1998 and December 31, 1997, 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 6 to 10 years which reflect the terms of the Company's debt.
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 compared to
management's estimate of the anticipated undiscounted future net cash flows of
the related long-lived asset. There were no adjustments to the carrying amount
of long-lived assets during the years ended December 31, 1998 and 1997 and the
nine months ended December 31, 1996, 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 14%, 12% and 12% of
total sales for the years ended December 31, 1998 and 1997 and the nine months
ended December 31,1996, respectively. No other single customer accounted for 10%
or more of consolidated revenues for the year and fiscal years then ended, and
there were no significant accounts receivable from a single customer, except the
U.S. government, at December 31, 1998 and December 31, 1997.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation Plans -- As allowed by SFAS 123, "Accounting for
Stock-Based Compensation," the Company records compensation expense for its
stock-based compensation plans in accordance with the intrinsic-value method
prescribed by Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees." Intrinsic value is the amount by which the market price of
the underlying stock exceeds the exercise price of the stock option or award on
the measurement date, generally the date of grant.
Reporting Changes -- During 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Also during 1998, the Company adopted 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. The Company also adopted
F-7
<PAGE> 37
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 132 during 1998, "Employee Disclosures about Pensions and Other
Postretirement Benefits," which revises the disclosure requirements for pensions
and other postretirement benefit plans. Adoption of the above disclosure
requirements did not affect the Company's financial results.
New Accounting Pronouncements -- In June 1998, The Financial Accounting
Standards Board issued SFAS No. 133, "Accounting For Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company is currently evaluating the impact, if any, on its financial position
upon the adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines which
costs incurred to develop or purchase internal-use software should be
capitalized and which costs should be expensed and is effective for fiscal years
beginning after December 15, 1998. The Company believes the adoption of SOP 98-1
will not have a material impact on its financial position, results of operations
or cash flows.
Reclassifications -- Certain amounts in the prior years' financial
statements have been reclassified to conform to the current period presentation.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable, principally from commercial
customers............................................... $32,434,000 $36,506,000
Accounts receivable on U.S. government and other long-term
contracts............................................... 3,803,000 3,904,000
Allowances................................................ (247,000) (396,000)
----------- -----------
Total........................................... $35,990,000 $40,014,000
=========== ===========
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Raw materials and work-in-process......................... $46,245,000 $43,236,000
Finished goods............................................ 14,364,000 11,726,000
Inventoried costs related to U.S. government and other
long-term contracts..................................... 9,687,000 10,909,000
----------- -----------
Total........................................... $70,296,000 $65,871,000
=========== ===========
</TABLE>
F-8
<PAGE> 38
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land.................................................... $ 661,000 $ 661,000
Buildings and improvements.............................. 35,257,000 34,895,000
Machinery, equipment, furniture and fixtures............ 119,949,000 111,360,000
------------ ------------
Total......................................... 155,867,000 146,916,000
Less accumulated depreciation and amortization.......... 80,587,000 76,278,000
------------ ------------
Total......................................... $ 75,280,000 $ 70,638,000
============ ============
</TABLE>
6. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accrued payroll costs..................................... $17,448,000 $17,399,000
Accrued taxes............................................. 6,864,000 7,895,000
Accrued costs on long-term contracts...................... 2,342,000 7,590,000
Accrued warranty costs.................................... 8,165,000 7,496,000
Customer credits.......................................... 2,777,000 4,172,000
Postretirement benefit obligation other than pensions..... 3,000,000 2,000,000
Other..................................................... 5,907,000 8,442,000
----------- -----------
Total........................................... $46,503,000 $54,994,000
=========== ===========
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Senior Revolving Loan................................... $ -- $ 14,000,000
Senior Term Loan A...................................... 49,375,000 49,875,000
Senior Term Loan B...................................... 250,750,000 271,750,000
9 1/4% Senior Subordinated Notes due 2007............... 185,000,000 185,000,000
------------ ------------
Total................................................... 485,125,000 520,625,000
Less current maturities................................. 8,000,000 1,500,000
------------ ------------
Total......................................... $477,125,000 $519,125,000
============ ============
</TABLE>
The Credit Facility consists of a term loan facility in an aggregate
principal amount of $300.1 million (the "Term Loans") and a revolving credit
facility in an aggregate principal amount of up to $50 million (the "Revolving
Loan"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the
principal amount of $49.4 million and a Tranche B term loan ("Term Loan B") in
the principal amount of $250.7 million. The interest rates under the Credit
Facility are, at the Company's option, either the LIBOR or prime rate, in each
case plus a margin. At December 31, 1998 and 1997, the average interest rate on
outstanding borrowings on the Credit Facility was 7.4% and 8.3%, respectively.
As a requirement of the Credit Facility, the Company entered into an interest
rate swap agreement to reduce the impact of potential increases in interest
rates on the Credit Facility. The interest rate swap agreement fixes the
Company's LIBOR borrowing rate at 5.95% and matures December 17, 2001 with an
option for the counterparty to extend the agreement to December 17, 2003. At
December 31, 1998, the notional value on the interest rate swap agreement was
$135
F-9
<PAGE> 39
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million and the fair value was approximately $4.6 million in favor of the
counterparty (taking into account interest rates in effect at December 31,
1998), representing the amount the Company would pay if the agreement was
terminated. Any differences paid or received on the interest rate swap agreement
are recognized as adjustments to current interest expense. This interest rate
agreement effectively fixes the Company's all in borrowing rate at 8.3% on $135
million of borrowings at December 31, 1998. Obligations under the Credit
Facility are secured by a lien on substantially all of the assets of the
Subsidiaries and are guaranteed by K & F.
Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million per year in years one to five and
$47.4 million in year six. Term Loan B is an eight-year quarterly amortizing
facility maturing October 15, 2005, with scheduled installments of $1.0 million
per year in years one to seven and $245 million in year eight. The Company is
required to make mandatory reductions in the Credit Facility in the event of
certain asset sales, the incurrence of certain additional indebtedness, and
annually from a portion of excess cash flow (as defined). As a result of the
excess cash flow calculation, $26.5 million is required to be paid in 1999. The
Company voluntarily prepaid $20 million during 1998 and the balance of $6.5
million (classified as current at December 31, 1998) was paid in January 1999.
Scheduled debt maturities of the Term Loans for the five years subsequent
to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1999................................................. $ 8,000,000
2000................................................. 1,500,000
2001................................................. 1,500,000
2002................................................. 1,500,000
2003................................................. 48,375,000
</TABLE>
The Credit Facility provides for Revolving Loans not to exceed $50 million,
with up to $20 million available for letters of credit. The Revolving Loan
commitment terminates on October 15, 2003. At December 31, 1998 and 1997, the
Company had $42.0 million and $27.2 million available to borrow, respectively.
At December 31, 1998 and 1997, the Company had outstanding letters of credit of
$8.0 million and $8.8 million, respectively.
The Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Credit Facility also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 1998.
On October 15, 1997, the Company issued $185 million of 9 1/4% Notes which
mature on October 15, 2007. The 9 1/4% Notes are not subject to a sinking fund.
The 9 1/4% Notes may not be redeemed prior to October 15, 2002. On or after
October 15, 2002, the Company may redeem the 9 1/4% Notes at descending premiums
ranging from 104.625% in October 2002 to no premium after October 2005.
Proceeds from the Credit Facility and the 9 1/4% Notes were used to finance
the Recapitalization.
As a result of the Recapitalization, the Company recorded an extraordinary
charge of $27.8 million (net of tax of $2.0 million) for the write-off of
unamortized financing costs, redemption premiums and tender offer payments.
On June 1, 1997, the Company redeemed $30 million aggregate principal
amount of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of
the principal amount thereof. In connection therewith, the
F-10
<PAGE> 40
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded an extraordinary charge of $1.7 million (net of tax of $0.6
million) for the write-off of unamortized financing costs and redemption
premiums.
During the nine months ended December 31, 1996, the Company redeemed $180
million of its 13 3/4% Senior Subordinated Debentures at a redemption price of
102.5%. In connection therewith, the Company recorded an extraordinary charge of
$9.1 million for the write-off of unamortized financing costs and redemption
premiums.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the balance
sheet at December 31, 1998 and 1997 approximate their fair value, except as
discussed below. See Note 7 for disclosure of the fair value of the Company's
interest rate swap agreement.
The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was approximately
$487 million and $525 million at December 31, 1998 and 1997, respectively.
9. CAPITAL STOCK
a. In connection with the Recapitalization, the Company purchased all but
740,398 shares of its capital stock at a per share price of $175.58.
All purchased shares were retired and canceled. The 740,398 retained
shares were reclassified as common stock. In connection with the
purchase of the capital stock, the Company directly increased its
stockholders' deficiency by $218.6 million.
b. The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire an aggregate of
100,000 authorized but unissued shares of common stock. The options
granted are exercisable in four equal installments on the second,
third, fourth and fifth anniversaries of the date of grant, and remain
exercisable until the expiration of the option, 10 years from the date
of the grant. All options granted in 1998 and 1997 were issued with an
exercise price of $175.00 per share.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
----------------- DECEMBER 31,
1998 1997 1996
------ ------- -----------------
<S> <C> <C> <C>
Outstanding at beginning of year........ 35,550 11,250 11,500
Granted................................. 11,800 35,550 --
Exercised............................... -- (11,250) --
Canceled................................ -- -- (250)
------ ------- ------
Outstanding at end of year.............. 47,350 35,550 11,250
====== ======= ======
Exercisable options outstanding......... -- -- 10,375
====== ======= ======
Available for future grant.............. 41,400 3,200 38,750
====== ======= ======
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1998 was 9.1 years.
All Company options issued prior to 1997 were granted at a per share
exercise price of $84.60. All such options were exercised prior to the
consummation of the Recapitalization and the common stock issued upon exercise
of such options was purchased as part of the Recapitalization at a per share
price of $175.58. In connection therewith, the Company recorded a charge to
operations of $1.0 million.
F-11
<PAGE> 41
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the stock option plans as described above, certain
individuals held options to purchase 70,500 shares of the Company's capital
stock owned by BLS at a per share exercise price of $40. All such options were
exercised prior to the consummation of the Recapitalization and the common stock
issued upon exercise of such options was purchased as part of the
Recapitalization at a per share price of $175.58. In connection therewith, the
Company recorded a charge to operations of $9.6 million.
c. The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective April 1, 1996. As permitted by SFAS No. 123,
the Company accounts for its stock-based compensation using the
intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123 requires the
disclosure of pro forma net income (loss) had the Company adopted the
fair value method. However, disclosure has been omitted because the pro
forma effect on net income (loss) required to be disclosed under SFAS
No. 123 is not material to the Company's results of operations.
d. In April 1996, Loral Space & Communications Ltd. ("Loral Space") (which
then owned 22.5% of the outstanding capital stock of K & F) granted
options to certain officers and employees of K & F to purchase 265,000
shares of Loral Space common stock at $10.50 per share. Such exercise
price was equal to the market price at grant date. These options expire
ten years from the date of grant and become exercisable ratably over a
five-year period.
K & F is obligated to pay semi-annual interest at the six month LIBOR
rate plus two percent to Loral Space on the balance of options issued
but not exercised, times $10.50. During the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, the amount
charged against income was $0.2 million, $0.2 million and $0.1 million,
respectively.
As described above, the Company accounts for its stock-based
compensation using the intrinsic value method in accordance with APB
Opinion No. 25. SFAS No. 123 requires that equity instruments granted
to an employee by a principal stockholder be included as part of the
disclosure. However, disclosure has been omitted because the pro forma
incremental effect of these options on net income (loss) required to be
disclosed under SFAS No. 123 is not material to the Company's results
of operations.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
<TABLE>
<CAPTION>
ACCUMULATED
MINIMUM CUMULATIVE OTHER
PENSION TRANSLATION COMPREHENSIVE
LIABILITY ADJUSTMENTS INCOME (LOSS)
--------- ----------- -------------
<S> <C> <C> <C>
April 1, 1996..................... $ (10,572,000) $ (451,000) $ (11,023,000)
1996 Change....................... (77,000) 570,000 493,000
---------------------- ----------------- ----------------------
December 31, 1996................. (10,649,000) 119,000 (10,530,000)
1997 Change....................... 9,436,000 (137,000) 9,299,000
---------------------- ----------------- ----------------------
December 31, 1997................. (1,213,000) (18,000) (1,231,000)
1998 Change....................... 1,213,000 276,000 1,489,000
---------------------- ----------------- ----------------------
December 31, 1998................. $ -- $ 258,000 $ 258,000
====================== ================= ======================
</TABLE>
The tax benefit or expense related to the components of other comprehensive
income was not material.
F-12
<PAGE> 42
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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
the lesser of the amount required by the Employee Retirement Income Security Act
of 1974 ("ERISA") without considering the $10 million credit balance accumulated
by the Company per ERISA calculations on December 31, 1997 plus interest, or the
maximum deductible for tax purposes.
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.
F-13
<PAGE> 43
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a reconciliation of the benefit obligation, fair
value of plan assets and funded status of the Company's defined benefit and
other postretirement benefit plans:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year.............................. $81,552,000 $73,120,000 $ 65,444,000 $ 58,846,000
Service cost........................ 2,535,000 1,970,000 1,824,000 1,242,000
Interest cost....................... 5,830,000 5,662,000 5,195,000 4,422,000
Plan participants' contributions.... 337,000 267,000 493,000 531,000
Amendments.......................... 584,000 -- 11,801,000 --
Actuarial loss (gain)............... 2,907,000 4,144,000 (2,407,000) 3,130,000
Benefits paid....................... (3,913,000) (3,611,000) (3,408,000) (2,727,000)
----------- ----------- ------------ ------------
Benefit obligation at end of year... 89,832,000 81,552,000 78,942,000 65,444,000
----------- ----------- ------------ ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year................. 78,676,000 63,268,000 -- --
Actual return on plan assets........ 9,212,000 11,214,000 -- --
Employer contributions.............. 4,887,000 7,538,000 2,915,000 2,196,000
Plan participants' contributions.... 337,000 267,000 493,000 531,000
Benefits paid....................... (3,913,000) (3,611,000) (3,408,000) (2,727,000)
----------- ----------- ------------ ------------
Fair value of plan assets at end of
year.............................. 89,199,000 78,676,000 -- --
----------- ----------- ------------ ------------
Funded status....................... (633,000) (2,876,000) (78,942,000) (65,444,000)
Unrecognized actuarial loss......... 12,860,000 11,937,000 18,450,000 21,898,000
Unrecognized prior service cost..... 1,580,000 1,463,000 (18,464,000) (33,996,000)
----------- ----------- ------------ ------------
Net amount recognized............... $13,807,000 $10,524,000 $(78,956,000) $(77,542,000)
=========== =========== ============ ============
AMOUNTS RECOGNIZED IN THE STATEMENT
OF FINANCIAL POSITION CONSIST OF:
Prepaid (accrued) benefit cost...... $13,807,000 $ 7,848,000 $(78,956,000) $(77,542,000)
Intangible asset.................... -- 1,463,000 -- --
Accumulated other comprehensive
income............................ -- 1,213,000 -- --
----------- ----------- ------------ ------------
Net amount recognized............... $13,807,000 $10,524,000 $(78,956,000) $(77,542,000)
=========== =========== ============ ============
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate....................... 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets...... 9.50 9.50 -- --
Rate of compensation increase....... 4.50 4.50 4.50 4.50
</TABLE>
F-14
<PAGE> 44
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the net periodic benefit cost for the defined
benefit and postretirement benefit plans:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------------- ---------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------- DECEMBER 31, ------------------------- DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Service cost......... $ 2,535,000 $ 1,970,000 $ 1,521,000 $ 1,824,000 $ 1,242,000 $ 873,000
Interest cost........ 5,830,000 5,662,000 3,980,000 5,195,000 4,422,000 3,176,000
Expected return on
plan assets........ (7,518,000) (6,096,000) (3,801,000) -- -- --
Amortization of prior
service cost....... 467,000 413,000 310,000 (3,730,000) (4,677,000) (3,508,000)
Recognized actuarial
loss............... 290,000 362,000 564,000 1,040,000 1,259,000 1,120,000
----------- ----------- ----------- ----------- ----------- -----------
Net periodic benefit
cost............... $ 1,604,000 $ 2,311,000 $ 2,574,000 $ 4,329,000 $ 2,246,000 $ 1,661,000
=========== =========== =========== =========== =========== ===========
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the plan with accumulated benefit obligations in excess
of plan assets was $36.0 million, $32.6 million and $31.9 million, respectively,
as of December 31, 1997.
For measurement purposes, a 7.14% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 5.25% for 2001 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree medical plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE-PERCENTAGE- ONE-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- ---------------
<S> <C> <C>
Effect on total of service cost and interest
cost components.............................. $ 1,103,000 $ (888,000)
Effect on postretirement benefit obligation.... 11,347,000 (9,241,000)
</TABLE>
Investments held by the Company's pension plans consist primarily of S&P
500 equity securities and investment grade fixed income securities.
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 50% 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
$1,205,000, $782,000 and $572,000 for the years ended December 31, 1998 and 1997
and the nine months ended December 31, 1996, respectively.
F-15
<PAGE> 45
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS
The Company is party to various non-cancelable operating leases which are
longer than a one-year term for certain data processing, and other equipment and
facilities with minimum rental commitments payable as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1999..................................................... $5,557,000
2000..................................................... 5,006,000
2001..................................................... 2,329,000
2002..................................................... 1,603,000
2003..................................................... 1,202,000
Thereafter............................................... 5,509,000
</TABLE>
Rental expense was $5,410,000, $5,060,000 and $3,491,000 for the years
ended December 31, 1998 and 1997 and the nine months ended December 31, 1996,
respectively.
13. 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 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.
14. INCOME TAXES
The components of the net deferred tax asset and corresponding valuation
allowance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Tax net operating loss carryforwards.......... $ 62,335,000 $ 72,270,000
Temporary differences:
Postretirement and other employee
benefits................................. 33,899,000 32,772,000
Intangibles................................. 37,261,000 39,929,000
Program participation costs................. (6,349,000) (6,409,000)
Other....................................... 10,460,000 13,083,000
------------- -------------
Deferred tax benefit.......................... 137,606,000 151,645,000
Valuation allowance........................... (137,606,000) (151,645,000)
------------- -------------
Net deferred tax asset........................ $ -- $ --
============= =============
</TABLE>
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets which are not likely to be realized. The Company has established a
valuation allowance against these benefits given the uncertain nature of their
ultimate realization.
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced by $62
million and $76 million, respectively. The realization of these benefits would
reduce future income tax payments by $138 million.
F-16
<PAGE> 46
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's provision (benefit) for income taxes before extraordinary
charges consists of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
--------------------------- DECEMBER 31,
1998 1997 1996
------------ ----------- -----------------
<S> <C> <C> <C>
Current domestic provision............. $ 17,135,000 $ 8,001,000 $ 1,330,000
Foreign provision...................... 230,000 908,000 170,000
Domestic utilization of net operating
loss carryforwards................... (11,621,000) (5,136,000) (1,581,000)
Change in net deferred tax asset....... -- 1,411,000 --
------------ ----------- -----------
Income tax provision (benefit)......... $ 5,744,000 $ 5,184,000 $ (81,000)
============ =========== ===========
</TABLE>
The effective income tax rate differs from the statutory federal income tax
rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
-------------- DECEMBER 31,
1998 1997 1996
----- ----- -----------------
<S> <C> <C> <C>
Statutory federal income tax rate.................. 35.0% 35.0% 35.0%
Change in the valuation allowance.................. -- 8.0 (29.4)
Utilization of tax net operating losses............ (27.3) (25.9) (10.6)
State tax.......................................... 4.9 3.3 3.4
Foreign subsidiaries tax provision................. 0.1 4.4 1.1
----- ----- -----
Effective income tax rate.......................... 12.7% 24.8% (0.5)%
===== ===== =====
</TABLE>
The Company has tax net operating loss carryforwards of approximately $156
million at December 31, 1998. The tax net operating losses expire from 2006
through 2012, with $30 million of carryforwards expiring in 2006.
15. RELATED PARTY TRANSACTIONS
BLS owns 50% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral Space. Because BLS is Chairman of
the Board of Directors and has the right to designate a majority of the
Directors to the Board of the Company, he has operating control of the Company.
The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him. Such agreement will continue until BLS dies or is disabled or
ceases to own a specified number of shares of common stock of the Company.
The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $5,055,300, $1,553,200 and $1,247,000 for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, respectively.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company. The
Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The Agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. During the year ended December 31, 1997 and
the nine month ended December 31, 1996, Lehman Brothers received underwriting
discounts and commissions of $4.6 million
F-17
<PAGE> 47
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $2.6 million in connection with the offering of the 9 1/4% Notes and 10 3/8%
Notes, respectively. In connection with the tender offer component of the
Recapitalization, Lehman Brothers received a customary fee for acting as Dealer
Manager and Solicitation Agent. In addition, one or more affiliates of Lehman
Brothers received underwriting commissions of $4.7 million in connection with
the Credit Facility. The Lehman Investors own 50% of the outstanding capital
stock of the Company and are entitled to elect three directors (in addition to
one independent director jointly designated by BLS and the Lehman Investors) to
the Company's Board of Directors. The Lehman Investors have the benefit of
certain additional rights under the Stockholders' Agreement and the Company's
By-laws.
In May 1996, the Company purchased $343,000 principal amount of 13 3/4%
Debentures from A. Robert Towbin, as trustee, who is a director of the Company
and who is managing director of C. E. Unterberg Towbin. 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 has paid Ronald H. Kisner, who is Secretary and a member of the
Board of Directors of the Company, a monthly retainer of $6,000 for legal
services. In addition, Mr. Kisner received bonuses and other compensation of
$78,000, $176,000 and $41,000 during the years ended December 31, 1998 and 1997
and the nine months ended December 31, 1996, respectively. Mr. Kisner also
received stock options for 900 and 1,750 shares during the years ended December
31, 1998 and 1997, respectively. As of January 1, 1999, Mr. Kisner is employed
by the Company.
Pursuant to agreements between the Company and Loral Space (of which BLS is
Chairman and Chief Executive Officer), the Company reimburses Loral Space for
benefits administration and legal services. The related charges agreed upon were
established to reimburse Loral Space for actual costs incurred without profit or
fee. The Company believes the arrangements are as favorable to the Company as
could have been obtained from unaffiliated parties. Payments to Loral Space were
$0.7 million, $0.5 million and $0.2 million for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996, respectively.
Included in accounts payable at December 31, 1998 and 1997 is $0.1 million and
$0.3 million, respectively.
In connection with the Recapitalization, the Company paid Loral Space $80.6
million for the redemption of its 22.5% equity interest in the Company.
16. SEGMENTS
The Company's activities are conducted through its two wholly owned
subsidiaries, Aircraft Braking Systems and Engineered Fabrics, each considered
an operating segment. Aircraft Braking Systems manufactures aircraft wheels,
brakes and anti-skid systems. Engineered Fabrics manufactures aircraft fuel
tanks and iceguards and various other products from coated fabrics. The
accounting policies of the subsidiaries are the same as those described in the
summary of significant accounting policies. Both subsidiaries are managed
separately due to different products, technology and marketing strategies. The
Company evaluates performance of the subsidiaries based on profits from
operations before interest, income taxes and extraordinary charges.
F-18
<PAGE> 48
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents financial information about the Company's
segments:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
Aircraft Braking Systems............... $305,911,000 $269,078,000 $192,014,000
Engineered Fabrics..................... 39,536,000 35,253,000 20,689,000
------------ ------------ ------------
$345,447,000 $304,331,000 $212,703,000
============ ============ ============
Earnings Before Interest Taxes
Depreciation and Amortization:
Aircraft Braking Systems............... $102,894,000 $ 70,365,000 $ 53,909,000
Engineered Fabrics..................... 7,001,000 4,274,000 2,895,000
------------ ------------ ------------
$109,895,000 $ 74,639,000 $ 56,804,000
============ ============ ============
Operating Income:
Aircraft Braking Systems............... $ 84,927,000 $ 52,793,000 $ 40,907,000
Engineered Fabrics..................... 5,007,000 2,166,000 1,253,000
------------ ------------ ------------
$ 89,934,000 $ 54,959,000 $ 42,160,000
============ ============ ============
Depreciation and Amortization:
Aircraft Braking Systems............... $ 17,967,000 $ 17,572,000 $ 13,002,000
Engineered Fabrics..................... 1,994,000 2,108,000 1,642,000
------------ ------------ ------------
$ 19,961,000 $ 19,680,000 $ 14,644,000
============ ============ ============
Capital Expenditures:
Aircraft Braking Systems............... $ 13,726,000 $ 9,462,000 $ 13,161,000
Engineered Fabrics..................... 886,000 547,000 903,000
------------ ------------ ------------
Total Segments................. 14,612,000 10,009,000 14,064,000
Corporate.............................. 261,000 7,000 27,000
------------ ------------ ------------
$ 14,873,000 $ 10,016,000 $ 14,091,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total Assets:
Aircraft Braking Systems............... $352,057,000 $354,099,000 $352,182,000
Engineered Fabrics..................... 57,773,000 59,089,000 56,247,000
------------ ------------ ------------
$409,830,000 $413,188,000 $408,429,000
============ ============ ============
</TABLE>
F-19
<PAGE> 49
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reconciles the total assets for the reportable segments to
the Company's consolidated assets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total Assets:
Total assets for reportable segments... $409,830,000 $413,188,000 $408,429,000
Deferred financing costs not allocated
to segments......................... 9,734,000 11,666,000 8,745,000
Corporate assets....................... 535,000 382,000 530,000
Deferred tax asset not allocated to
segments............................ -- -- 1,411,000
------------ ------------ ------------
Consolidated Total............. $420,099,000 $425,236,000 $419,115,000
============ ============ ============
</TABLE>
The following represents the Company's total sales by products:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Braking systems.......................... $305,911,000 $269,078,000 $192,014,000
Fuel tanks............................... 30,256,000 26,564,000 14,030,000
Other.................................... 9,280,000 8,689,000 6,659,000
------------ ------------ ------------
$345,447,000 $304,331,000 $212,703,000
============ ============ ============
</TABLE>
The following represents export sales by geographic location:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
United States.......................... $197,268,000 $172,277,000 122,207,000
Europe................................. 74,228,000 70,578,000 49,894,000
Asia................................... 35,845,000 29,763,000 22,098,000
North America.......................... 20,165,000 16,671,000 7,277,000
South America.......................... 13,042,000 10,211,000 9,732,000
Australia.............................. 4,899,000 4,831,000 2,495,000
------------ ------------ ------------
$345,447,000 $304,331,000 $212,703,000
============ ============ ============
</TABLE>
Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $318,000,
$333,000 and $293,000 as of December 31, 1998, 1997 and 1996, respectively.
The U.S. government accounted for approximately 14%, 12% and 12% of the
Company's total sales for the years ended December 31, 1998 and 1997 and the
nine months ended December 31, 1996, respectively.
F-20
<PAGE> 50
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. COMPARATIVE RESULTS (UNAUDITED)
The following financial information for the years ended December 31, 1998,
1997 and 1996 is presented for comparative purposes. The financial information
for the year ended December 31, 1996 is unaudited.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................ $345,447,000 $304,331,000 $277,655,000
Gross margin............................. 49,257,000 116,330,000 96,684,000
Operating income......................... 89,934,000 54,959,000 50,009,000
Income before income taxes and
extraordinary charge................... 45,104,000 20,868,000 13,052,000
Income before extraordinary charge....... 39,360,000 15,684,000 13,133,000
Net income (loss)........................ 39,360,000 (13,829,000) 3,991,000
</TABLE>
F-21
<PAGE> 1
Exhibit 10.40
K&F INDUSTRIES, INC.
1998 STOCK OPTION PLAN
1. PURPOSES
The purposes of this Plan are: (a) to further the growth and success of
K&F Industries, Inc. (the "Company") and its subsidiary corporations by enabling
selected employees and directors of, or consultants to, the Company or its
subsidiary corporations to acquire shares of its Common Stock, $.O1 par value
(the "Common Stock"), under the terms and conditions and in the manner
contemplated by this Plan, thereby increasing their personal involvement and
interest in the Company and its subsidiary corporations, encouraging their
continued service with the Company and its subsidiary corporations and promoting
the interest of the Company and all of its stockholders; (b) to enable the
Company or its subsidiary corporations to obtain and retain the service of
employees, directors or consultants necessary to the continued growth and
success of the Company and its subsidiary corporations; and (c) to provide a
means of rewarding outstanding performance to the Company and its subsidiary
corporations. Options granted under this Plan will be either options which are
intended to qualify as "incentive stock options" ("ISOs") under Section 422A of
the Internal Revenue Code of 1986, as amended (the "Code"), or as non-qualified
stock options ("NSOs") which are not intended to qualify as "incentive stock
options" under Section 422A of the Code. For the purposes of the Plan, the terms
"subsidiary" and "subsidiary corporation" shall mean "subsidiary corporation",
as such term is defined in Section 425(e) and (f) of the Code. Unless the
context otherwise requires, any ISO or NSO shall hereinafter be referred to as
an "Option".
2. ADMINISTRATION OF PLAN
(a) Option Committee. The Plan shall be administered by the Board of
Directors of the Company (the "Board") or an Option Committee (the "Committee")
consisting of two or more persons appointed to such Committee from time to time
by the Board; provided, however, that (i) to the extent necessary in order to
permit officers and directors of the Company to be exempt from the provisions of
Section 16(b) of the 1934 Act with respect to transactions pursuant to the Plan,
each of such persons shall be a "Non-Employee Director" within the meaning of
Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (the "1934 Act") and (ii)
if such qualification is deemed necessary in order for the grant or exercise of
awards made under the Plan to qualify for any tax or other material benefit to
participants of
<PAGE> 2
the Company under applicable regulations under Section 162(m) of the Code, each
of such persons shall be an "outside director" (as defined in applicable
regulations thereunder).
2.2 Committee Procedures. If a Committee has been appointed, it shall
select from its members a Chairman and shall adopt such rules and regulations as
it shall deem appropriate concerning the holding of meetings and the
administration of the Plan. A majority of the entire Committee shall constitute
a quorum and the actions of a majority of the members of the Committee present
at a meeting at which a quorum is present, or actions approved in writing by all
of the members of the Committee, shall be actions of the Committee.
2.3 Authority and Interpretation. Subject to the provisions of the Plan,
the Board shall have authority: (a) to determine the fair market value of the
shares of Common Stock covered by each Option, (b) to select the employees or
directors of, or consultants to, the Company or its subsidiary corporations to
receive Options under the Plan, (c) to fix the number of shares which each
Optionee may purchase, (d) to set the terms and conditions of each Option,
including whether an Option should be an ISO or NSO and the extent to which
Options shall vest in installments and, with the consent of the holder thereof,
to modify or amend any provisions of an Option (other than provisions
incorporated directly or by reference from this Plan), (e) to interpret this
Plan, (f) to prescribe, amend and rescind rules and regulations relating to this
Plan, (g) to accelerate an exercise date of any Option, (h) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an Option already granted and (i) to determine all other matters
relating to the Plan. The Board shall have complete authority to construe,
interpret and administer this Plan. All decisions of the Board shall be
conclusive and binding on all participants in the Plan.
3. ELIGIBLE EMPLOYEES, DIRECTORS AND INDEPENDENT CONTRACTORS; LIMITATION ON
GRANTS
3.1. Generally. From time to time, the Board may grant Options under this
Plan to any person (the "Optionee") who at the time of such grant is (a) any
employee of the Company or its subsidiary corporations, (b) any director of the
Company or one of its subsidiary corporations, including any employee of the
Company or its subsidiary corporations who is also a director of the Company or
(c) any consultant to the Company or one of its subsidiary corporations,
provided that the right to grant Options to consultants or other non-employees
does not disqualify the Plan from any qualification or right which would be
available if the Plan were limited to employees and directors. Options granted
2
<PAGE> 3
under the Plan shall be in such amounts, at such prices and upon such other
terms and conditions not inconsistent with this Plan as the Board, in its
discretion, may determine. Options granted to employees of the Company or its
subsidiary corporations will be either NSOs or ISOs, and Options granted to
directors of the Company or its subsidiary corporations, or consultants to the
Company or its subsidiary corporations will be NSOs. Any employee or director
of, or consultant to, the Company or its subsidiary corporations who has been
granted an Option may, if otherwise eligible, be granted additional Options.
3.2. Certain Limitations. Anything contained in this Section 3 to the
contrary notwithstanding, no employee who owns, directly or indirectly (within
the meaning of Sections 422A(b)(6) and 425(d) of the Code), stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of a subsidiary corporation shall be eligible to receive
an ISO under the Plan, unless (i) the exercise price (as determined in
accordance with Section 6.3.1 and 6.3.2 hereof) of the shares of Common Stock
subject to such ISO is fixed at not less than 110% of the FMV on the date of
grant of such shares and (ii) such ISO by its terms is not exercisable after the
expiration of five years from the date it is granted.
4. SHARES SUBJECT TO THE PLAN
4.1. Number of Shares. The aggregate number of shares of Common Stock
which may be issued upon the exercise of all Options granted under this Plan,
excluding any such shares repurchased by the Company, shall be 50,000 shares of
Common Stock, subject to adjustment as provided in Sections 6.1.7, 6.1.8 and
6.1.9 hereof. Shares of Common Stock subject to unexercised portions of any
terminated or expired Option (including Options surrendered in accordance with
Section 7 hereof) and shares of Common Stock issued pursuant to the exercise of
Options and repurchased by the Company shall again be available for the granting
of Options under the Plan.
4.2.2 Character of Shares. The shares of Common Stock issuable upon
exercise of an Option granted under the Plan shall be (a) authorized by unissued
shares of Common Stock, (b) shares of Common Stock held in the Company's
treasury or (c) a combination of the foregoing.
5. GRANTING OF OPTIONS
No Options shall be granted under this Plan after ten (10) years from the
date this Plan becomes effective (as provided in Section 15 hereof).
3
<PAGE> 4
Options granted pursuant to the Plan shall be evidenced by written stock
option agreements specifying the number of shares covered thereby, in such form
as the Board shall from time to time establish, which agreements may incorporate
all or any of the terms of the Plan by reference and shall comply with and be
subject to the terms and conditions set forth in Section 6 hereof. Each
agreement shall specify whether the Option it evidences is an ISO or NSO.
The Board may approve the grant of Options under this Plan, subject to
Section 3 hereof, to persons who are expected to become employees or directors
of, or consultants to, the Company or its subsidiary corporations but are not
employees, directors, or consultants at the date of the approval. In such cases,
the Option shall be deemed granted on the date the grantee becomes an employee
or director or consultant and must satisfy all requirements of this Plan for
Options granted on that date.
6. TERMS, CONDITIONS AND FORM OF OPTIONS
Each Option granted under this Plan shall be designated as an ISO or a NSO
and shall be subject to the terms and conditions set forth in Section 6.1. NSOs
and ISOs shall also be subject to the terms and conditions set forth in Section
6.2 and Section 6.3 hereof, respectively.
6.1. Terms and Conditions to Which All Options are Subject. All Options
granted under this Plan shall be subject to the following terms and conditions.
6.1.1. Exercise Period. Each stock option agreement shall state the period
or periods of time within which the Option may be exercised by the Optionee, in
whole or in part, which shall be such period or periods of time as may be
determined by the Board; provided, however, that if the Company files a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the initial public offering of its securities, no Option
granted under the Plan shall be exercisable during the 180-day period
immediately following the effective date of such registration statement; and
provided further, that no Option granted under this Plan shall be exercisable
more than ten (10) years after the date of its grant and no ISO granted to a
person described in Section 3.2 hereof shall be exercisable more than five (5)
years after the date of its grant. If an Option is not at the time of grant
immediately exercisable, the Board may (a) in the stock option agreement
evidencing such Option, provide for acceleration of the exercise date or dates
of the subject Option under the occurrence of specified events and/or (b) at any
time prior to the complete termination of an Option, accelerate the exercise
date or dates of such Option.
4
<PAGE> 5
6.1.2. Exercise of Options. An Option granted under this Plan shall be
exercised by delivery to the Secretary of the Company of:
(a) a notice in writing from the Optionee of his intention to purchase
shares, (i) specifying the number of shares as to which the Optionee
desires to exercise his Option, (ii) specifying whether the shares are
issued pursuant to an ISO or NSO, (iii) specifying the date (the "Purchase
Date") upon which the Optionee desires to complete his purchase (which
must be within the exercise periods specified in the stock option
agreement) and (iv) containing any representations of the Optionee
required under Section 11 hereof and the stock option agreement of such
Optionee;
(b) a copy of any election filed by the Optionee pursuant to Section 83(b)
of the Code;
(c) in the event that such Option shall be exercised by any person other
than the Optionee pursuant to Section 6.1.4 hereof, appropriate proof of
the right of such person to exercise such Option;
(d) such payments as are required by Section 6.1.5 hereof (including cash
or Common Stock and, as applicable, any promissory notes to be delivered
to the Company in payment of all or a portion of the exercise price); and
(e) such further undertakings or agreements consistent with the Plan as
the Board may require.
Promptly after the later of the receipt of written notice of exercise of
an Option or the Purchase Date, the Company shall deliver, without stock issue
taxes or transfer taxes to the Optionee or other person entitled to exercise the
Option, to the Optionee or other person a certificate or certificates for the
requisite number of shares of Common Stock.
6.1.3. Option Grant Date. The date of grant of an Option under this Plan
shall be the date as of which the Board approves the grant, except as otherwise
provided in Section 5 hereof.
5
<PAGE> 6
6.1.4. Nonassignability of Option Rights. No Option granted under this
Plan shall be assignable or otherwise transferable by the Optionee except by
will or by the laws of descent and distribution (for purposes of this Plan, all
references to the Optionee shall be deemed to include any successor to the
Optionee by will or the laws of descent and distribution unless the context
otherwise requires). During the life of the Optionee an Option shall be
exercisable only by the Optionee.
6.1.5. Payment. At the time a NSO or an ISO is granted, the Board, in the
exercise of its absolute discretion, may specify one or more of the following
forms of payment which may be used by an Optionee upon exercise of his Option
(absent such specification any combination of the following methods shall be
permitted):
(a) cash or personal or certified check payable to the Company in an
amount equal to the aggregate Option Price of the shares with respect to
which the Option is being exercised; and/or
(b) stock certificates (in negotiable form) representing shares of Common
Stock having a FMV on the date of exercise (as determined in accordance
with Section 6.3.2 as if the date of exercise were the date of grant)
equal to the aggregate Option Price of the shares with respect to which
the Option is being exercised; provided, however, that the par value of
the shares with respect to which the Option is being exercised shall in
any event be paid in cash or by personal or certified check.
6.1.6 Termination of Unexercised Options Following Termination of
Association; Repurchase of Shares. No Option shall be affected by any change of
duties or position of the Optionee (including transfer to or from a subsidiary),
so long as he continues to be an employee or director of, or consultant to, the
Company or one of its subsidiaries. If an Optionee ceases to be an employee or
director of, or consultant to, the Company and its subsidiary corporations other
than because of his death or disability (within the meaning of Section 22(e)(3)
of the Code), any portion of the Optionee's Option which is otherwise
exercisable by its terms and has not been previously exercised shall expire
three (3) months following the date of such termination and shall thereafter be
of no further force and effect; provided, however, that if the Optionee shall
die during such three-month period, his Option shall expire one year following
the date of such termination. If an Optionee ceases to be an employee or
director of, or consultant to, the Company and
6
<PAGE> 7
its subsidiary corporations because of his death or disability (within the
meaning of Section 22(e)(3) of the Code), his Option shall expire one year
following the date of such termination and shall thereafter be of no further
force and effect.
6.1.7. Changes in Capital Structure. Subject to Sections 6.1.8 and 6.1.9,
if the Common Stock of the Company is changed by reason of a stock split,
reverse stock split, stock dividend, or recapitalization, or converted into or
exchanged for other securities as a result of a merger, consolidation or
reorganization, the Board shall make appropriate adjustments, all as calculated
in its sole discretion, in (a) the number and class of shares of stock subject
to this Plan and each Option outstanding under this Plan and (b) the exercise
price of each outstanding Option. Notwithstanding the foregoing, such
adjustments shall be "appropriate" with respect to ISOs only where such
adjustments merely reflect a change in capitalization, do not constitute a
modification, extension or renewal of the Option with the meaning of Sections
422A and 425 of the Code and the Treasury Regulations thereunder, and do not
constitute the adoption of a new plan requiring stockholder approval under
Section 422A of the Code. Any adjustments determined by the Board shall be
final, conclusive and binding. The Company shall provide written notice to each
Optionee of the nature and effect of such adjustment as promptly as is
practicable.
6.1.8. Corporate Transactions. The following rules shall apply in
connection with the dissolution or liquidation of the Company, a reorganization,
merger or consolidation in which the Company is not the surviving corporation,
or a sale of all or substantially all of the assets of the Company to another
person or entity (a "Corporate Transaction"):
(a) Upon the occurrence of a Corporate Transaction, all Options granted
under the Plan shall automatically terminate; provided, however, that each
holder of an Option outstanding at such time shall be given (i) written
notice of such Corporate Transaction at least twenty (20) days prior to
its proposed effective date (as specified in such notice) and (ii) an
opportunity, during the period commencing with delivery of such notice and
ending ten (10) days prior to such proposed effective date, to exercise
the Option to the full extent to which such Option would have been
exercisable by the Optionee at the expiration of such ten-day period; and
(b) Anything contained herein to the contrary notwithstanding, Section
6.1.8(a) shall not be applicable if provision shall me made in connection
with such Corporate
7
<PAGE> 8
Transaction for the assumption of outstanding Options by, or the
substitution for such Options of new Options covering the stock of, the
surviving, successor or purchasing corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number, kind and Option
Prices of shares subject to such Options; provided, however, that no such
assumption or substitution shall be permitted with respect to ISOs if the
effect thereof would be a modification, extension or renewal of the ISOs
within the meaning of Section 425(h) of the Code and the Treasury
Regulations promulgated thereunder.
6.1.9. Special Adjustment Rules. The following rules shall apply in
connection with Sections 6.1.7 and 6.1.8 hereof:
(a) No fractional shares shall be issued as a result of any such
adjustment, and any fractional shares resulting from the computations
pursuant to Sections 6.1.7 and 6.1.8 hereof shall be eliminated, without
consideration, from the respective Options:
(b) No adjustment shall be made for cash dividends or the issuance to
stockholders of rights to subscribe for additional shares of Common Stock
or other securities; and
(c) Any adjustments referred to in Section 6.1.7 and 6.1.8 hereof shall be
made by the Board in its sole discretion and shall be conclusive and
binding on all persons holding Options granted under the Plan.
6.1.10. Other Provisions. Each Option granted under this Plan may contain
such other terms, provisions, and conditions, and may obligate the Optionee to
become a party to such other agreements, in each case not inconsistent with this
Plan as may be determined by the Board, including provisions or agreements
concerning transfer restrictions, rights of first refusal and repurchase rights.
Each ISO granted under this Plan shall include such other provisions and
conditions as are necessary to qualify the Option as an "incentive stock option"
within the meaning of Section 422A of the Code and shall not include any tens or
conditions which are inconsistent therewith.
6.2. Terms and Conditions to Which Only NSOs Are Subject. Options granted
under this Plan which are designated as NSOs shall be subject to the following
terms and conditions:
8
<PAGE> 9
6.2.1. Exercise Price. The exercise price of a NSO shall be such price as
shall be determined by the Board but in any event shall be at least equal to the
lesser of (i) $20 below the FMV of the Common Stock on the effective date of the
grant or (ii) 25% of the FMV of the Common Stock on the effective date of the
grant.
6.2.2. Withholding and Employment Taxes. At the time of exercise of an
NSO, the Optionee shall remit to the Company in cash all applicable Federal and
State withholding and employment taxes.
6.3. Terms and Conditions to Which Only ISOs Are Subject. Options granted
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
6.3.1. Exercise Price. The exercise price of an ISO shall be the FMV of
the Common Stock subject to the Option on the date of grant.
6.3.2. Determination of Fair Market Value. Subject to the requirements of
Section 422A of the Code, for purposes of the Plan, the "fair market value" or
"FMV" of shares of Common Stock shall be equal to:
(a) if the Common Stock is publicly traded, (i) in the over-the-counter
market, the closing price (or the mean between the last bid and asked
prices if no sales took place) on the business day immediately preceding
the date of grant, or, if lower, the average of the daily closing prices
(or the means between the last bid and asked prices for days on which no
sales took place) of the 30 business days immediately preceding the date
of grant, in all cases as reported by NASDAQ or (ii) on a national
securities exchange, the average of the high and low prices on the
business day immediately preceding the date of grant, or, if lower, the
average of the daily closing prices (or the means between the last bid and
asked prices for days on which no sales took place) of the 30 business
days immediately preceding the date of grant, in all cases on the
principal national securities exchange on which it is so traded; or
(b) if there is no public trading market for such shares, the fair market
value of such shares as determined by the Board after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arms' length.
9
<PAGE> 10
Anything contained herein to the contrary notwithstanding, all
determinations pursuant to this Section 6.3.2 shall be made without regard to
any restriction other than a restriction which, by its terms, will never lapse.
6.3.3. Limitations on Exercise. Anything to the contrary contained herein
notwithstanding, an ISO granted under this Plan to an Optionee shall be
considered a NSO to the extent that the aggregate FMV on the date of the grant
of such ISO (as determined pursuant to Section 6.3.2) of the stock with respect
to which ISOs are exercisable for the first time by such Optionee during any
calendar year (under all plans of the Company and any parent or subsidiary
corporations) exceeds $100,000.
6.3.4. Disqualifying Dispositions. If stock acquired by exercise of an ISO
granted pursuant to this Plan is disposed of within two (2) years from the date
of grant of the ISO or within one (1) year after the transfer of stock to the
Optionee, the holder of the stock immediately prior to the disposition shall
promptly notify the Company in writing of the date and terms of the disposition
and shall provide such other information regarding the disposition as the
Company may reasonably require.
6.3.5. Withholding Taxes. Whenever under this Plan shares of Common Stock
are to be delivered by an Optionee upon exercise of an NSO, the Company shall be
entitled to require as a condition of delivery that the Optionee remit or, in
appropriate cases, agree to remit when due, an amount sufficient to satisfy all
current or estimated future Federal, state and local withholding tax and
employment tax requirements relating thereto. At the time of a disqualifying
disposition, the Optionee shall remit to the Company in cash any applicable
Federal and state withholding and employment taxes.
7. SURRENDER OF OPTIONS
The Board may, under such terms and conditions as it deems appropriate,
accept the surrender and termination by an Optionee of a right to exercise an
Option to purchases shares of Common Stock granted under an Option and authorize
a payment in consideration therefor of an amount equal to the difference
obtained by subtracting the exercise price of such Option from the fair market
value of the shares of Common Stock for which such Option is exercisable on the
date of such surrender as determined in the discretion of the Board, such
payment to be in cash, provided that the Board determines that such settlement
is consistent with the purposes set forth in Section 1 hereof. The Company shall
be entitled to withhold from any payment to the
10
<PAGE> 11
Optionee pursuant to this Section 7, within sixty (60) days following the date
of such settlement, any applicable Federal and state income and employment taxes
due in respect of such settlement.
8. DURATION OF PLAN
Except with respect to Options then outstanding, the Plan shall expire on
the first to occur of (a) the tenth anniversary of the date on which the Plan is
adopted by the Board, (b) the tenth anniversary of the date on which the Plan is
approved by the stockholders of the Company or (c) the date as of which the
Board, in its sole discretion, determines that the Plan shall terminate (the
"Expiration Date"). Any Options outstanding as of the Expiration Date shall
remain in effect until they have been exercised or terminated or have expired by
their respective terms.
9. STOCKHOLDER RIGHTS
An Optionee shall not have any privileges of a stockholder with respect to
any shares of stock subject to his Option until the date of the issuance to the
Optionee of a stock certificate evidencing such shares pursuant to his exercise
of the Option.
10. AMENDMENT OR DISCONTINUANCE
The Board at any time may terminate or amend this Plan; provided, however,
that the approval of the holders of a majority of the votes that may be cast by
all of the holders of shares of Common Stock and preferred stock of the Company,
if any, entitled to vote (voting as a single class) shall be obtained prior to
any such amendment becoming effective if such approval is required by law or is
necessary to comply with regulations promulgated by the SEC under Section 16(b)
of the 1934 Act or with Section 422A of the Code or the Treasury Regulations
thereunder.
11. COMPLIANCE WITH SECURITIES LAWS
No Options shall be granted under this Plan, and no shares shall be
purchased upon the exercise of any Option and no Option may be surrendered in
accordance with Section 7, unless and until any then applicable securities law
or requirements of any regulatory agencies having jurisdiction and of any
exchanges upon which stock subject to said Options of the Company may be listed
shall have been fully complied with.
11
<PAGE> 12
At the time of the exercise or surrender of any Option hereunder, the
Board, in its discretion, may require assurances or representations satisfactory
to it from the person exercising or surrendering the Option appropriate to
satisfy the requirements of applicable Federal and state securities laws.
12. EMPLOYMENT OR DIRECTORSHIP RIGHTS
Nothing contained in this Plan shall be deemed to give any Optionee a
right to the continuation of his employment by, or retention as a consultant to,
or directorship with, the Company or any of its subsidiaries to which he is not
otherwise entitled, or to any increase or decrease in the compensation of the
Optionee from the rate in existence at the time of the grant of the Option, nor
shall the Company or its subsidiaries be under any obligation by virtue of this
Plan to retain any Optionee as an employee, consultant or director for any
period.
13. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, and
vice versa, as the context requires.
14. INDEMNIFICATION
In addition to any other rights to indemnification which they may have as
members of the Board, the members of the Board administering the Plan shall be
indemnified by the Company against reasonable expenses, including reasonable
attorney's fees incurred, in connection with any action, suit or proceeding, or
in connection with any appeal thereof, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any Option granted hereunder, and against all amounts paid by
them in settlement thereof (provided such settlement is approved by independent
legal counsel selected by the Company) or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
Board member is liable for gross negligence or willful misconduct in the
performance of his duties; provided, that within sixty (60) days after
institution of any such action, suit or proceeding a Board member shall by
written notice offer the Company the opportunity, at its own expense, to handle
and defend such action, suit or proceeding.
12
<PAGE> 13
15. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon adoption by the Board, provided,
however, that no Option shall be exercisable unless and until the written
consent of a majority (or such greater number as may be required by law or
applicable government regulations or orders) of the holders of the securities of
the Company entitled to vote, or approval by stockholders of the Company voting
at a validly called stockholders meeting and holding a majority (or such greater
number as may be required by law or applicable governmental regulations or
orders) of the shares voting at such meeting, is obtained within twelve (12)
months before or after adoption by the Board.
16. SEVERABILITY
If any provision of the Plan or any Option Agreement shall be determined
to be illegal and unenforceable by any court or law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
17. GOVERNING LAW
The validity and construction of this Plan and the instruments evidencing
the Options shall be governed by the laws of the State of Delaware.
18. ARBITRATION
All disputes arising out of, or in connection with, the validity,
interpretation, construction, meaning, or execution of the Plan shall be finally
settled by arbitration to be held in New York City and conducted in accordance
with the Rules of the American Arbitration Association. Judgment upon any award
rendered may be entered in any court having jurisdiction or application may be
made to such court for judicial acceptance of the award and an order of
enforcement, as the case may be.
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,844,000
<SECURITIES> 0
<RECEIVABLES> 36,237,000
<ALLOWANCES> 247,000
<INVENTORY> 70,296,000
<CURRENT-ASSETS> 113,803,000
<PP&E> 155,867,000
<DEPRECIATION> 80,587,000
<TOTAL-ASSETS> 420,099,000
<CURRENT-LIABILITIES> 74,964,000
<BONDS> 485,125,000
0
0
<COMMON> 7,000
<OTHER-SE> (215,617,000)
<TOTAL-LIABILITY-AND-EQUITY> 420,099,000
<SALES> 345,447,000
<TOTAL-REVENUES> 345,447,000
<CGS> 196,190,000
<TOTAL-COSTS> 196,190,000
<OTHER-EXPENSES> 20,050,000
<LOSS-PROVISION> 140,000
<INTEREST-EXPENSE> 45,186,000
<INCOME-PRETAX> 45,104,000
<INCOME-TAX> 5,744,000
<INCOME-CONTINUING> 39,360,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,360,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
