<PAGE> 1
Filed Pursuant to Rule 424 (b)(3) of the
Rules and Regulations Under the
Securities Act of 1933
Registration Statement No. 333-40977
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 7, 1999)
$185,000,000
K & F Industries, Inc.
9 1/4% Senior Subordinated Notes Due 2007
------------------------------------
This Prospectus Supplement, together with Prospectus, is to be used by
Lehman Brothers in connection with offers and sales of the above-referenced
securities in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Lehman Brothers may act as
principal or agent in such transactions.
November 12, 1999
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-29035
K & F Industries, Inc.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1614845
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Third Avenue, New York, New York 10016
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 297-0900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
------- -------
As of November 1, 1999, there were 740,398 shares of common stock outstanding.
<PAGE> 3
PART I. FINANCIAL INFORMATION
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------- -------------------------
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,951,000 $ 6,844,000
Accounts receivable, net 52,849,000 35,990,000
Inventory 75,696,000 70,296,000
Other current assets 594,000 673,000
Deferred tax asset 4,721,000 --
------------------------- -------------------------
Total current assets 147,811,000 113,803,000
------------------------- -------------------------
Property, plant and equipment 154,906,000 155,867,000
Less, accumulated depreciation and amortization 85,866,000 80,587,000
------------------------- -------------------------
69,040,000 75,280,000
------------------------- -------------------------
Prepaid pension cost 13,807,000 13,807,000
Deferred charges, net of amortization 23,826,000 25,631,000
Cost in excess of net assets acquired, net of
amortization 171,955,000 179,700,000
Intangible assets, net of amortization 10,744,000 11,878,000
------------------------- -------------------------
$437,183,000 $420,099,000
========================= =========================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
Accounts payable, trade $ 20,601,000 $ 15,328,000
Current portion of senior term loans 1,500,000 8,000,000
Interest payable 8,686,000 5,133,000
Other current liabilities 47,797,000 46,503,000
------------------------- -------------------------
Total current liabilities 78,584,000 74,964,000
------------------------- -------------------------
Postretirement benefit obligation other
than pensions 77,556,000 75,956,000
Other long-term liabilities 6,423,000 7,664,000
Senior term loan A 48,500,000 48,875,000
Senior term loan B 212,000,000 243,250,000
9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000
Stockholders' Deficiency:
Common stock, $.01 par value - authorized,
1,000,000 shares; issued and
outstanding, 740,398 shares 7,000 7,000
Additional paid-in capital (63,259,000) (63,259,000)
Deficit (107,937,000) (152,616,000)
Accumulated other comprehensive income 309,000 258,000
------------------------- -------------------------
Total stockholders' deficiency (170,880,000) (215,610,000)
------------------------- -------------------------
$437,183,000 $420,099,000
========================= =========================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------------------------
September 30, September 30,
1999 1998
--------------------------- ---------------------------
<S> <C> <C>
Sales $262,153,000 $261,032,000
Costs and expenses 181,007,000 182,369,000
Amortization 6,535,000 7,712,000
--------------------------- ---------------------------
Operating income 74,611,000 70,951,000
Interest and investment income 189,000 270,000
Interest expense (30,721,000) (34,388,000)
--------------------------- ---------------------------
Income before income taxes 44,079,000 36,833,000
Income tax benefit (provision) 600,000 (2,660,000)
--------------------------- ---------------------------
Net income $ 44,679,000 $ 34,173,000
=========================== ===========================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
September 30, September 30,
1999 1998
--------------------------- ---------------------------
<S> <C> <C>
Sales $89,122,000 $87,640,000
Costs and expenses 60,287,000 58,712,000
Amortization 2,197,000 2,571,000
--------------------------- ---------------------------
Operating income 26,638,000 26,357,000
Interest and investment income 78,000 105,000
Interest expense (10,087,000) (11,349,000)
--------------------------- ---------------------------
Income before income taxes 16,629,000 15,113,000
Income tax provision (7,257,000) (272,000)
--------------------------- ---------------------------
Net income $9,372,000 $14,841,000
=========================== ===========================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------------------------
September 30, September 30,
1999 1998
--------------------------- --------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 44,679,000 $ 34,173,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 12,766,000 14,954,000
Non-cash interest expense - amortization
of deferred financing charges 1,377,000 1,449,000
Deferred income taxes (1,557,000) 2,101,000
Changes in assets and liabilities:
Accounts receivable, net (16,839,000) (4,698,000)
Inventory (5,369,000) (4,908,000)
Other current assets 79,000 (76,000)
Accounts payable, interest payable, and
other current liabilities 10,120,000 (10,301,000)
Postretirement benefit obligation other
than pensions 1,600,000 450,000
Other long-term liabilities (1,241,000) (1,749,000)
--------------------------- --------------------------
Net cash provided by operating
activities 45,615,000 31,395,000
--------------------------- --------------------------
Cash flows from investing activities:
Capital expenditures (5,988,000) (6,445,000)
Deferred charges (392,000) (62,000)
--------------------------- --------------------------
Net cash used in investing activities (6,380,000) (6,507,000)
--------------------------- --------------------------
Cash flows from financing activities:
Payments of senior revolving loan (46,000,000) (39,000,000)
Payments of senior term loans (38,125,000) (21,125,000)
Borrowings under senior revolving loan 46,000,000 34,000,000
Proceeds from sale and leaseback transaction 5,997,000 556,000
--------------------------- --------------------------
Net cash used by financing activities (32,128,000) (25,569,000)
--------------------------- --------------------------
Net increase (decrease) in cash and cash
equivalents 7,107,000 (681,000)
Cash and cash equivalents, beginning of
period 6,844,000 4,707,000
--------------------------- --------------------------
Cash and cash equivalents, end of period $ 13,951,000 $ 4,026,000
=========================== ==========================
- ------------
Supplemental cash flow information:
Interest paid during period $ 25,791,000 $ 28,285,000
=========================== ==========================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements have been
prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of
financial position, results of operations and cash flows. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. The consolidated statements of
operations for the three and nine months ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full
year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the Company's December 31, 1998 Annual Report on Form 10-K.
2. Receivables are summarized as follows:
September 30, December 31,
1999 1998
------------- -------------
Accounts receivable, principally
from commercial customers $47,374,000 $32,434,000
Accounts receivable, on U. S.
Government and other long-term
contracts 5,728,000 3,803,000
Allowances (253,000) (247,000)
----------- ------------
$52,849,000 $35,990,000
============ =============
3. Inventory consists of the following:
September 30, December 31,
1999 1998
------------ -------------
Raw materials and work-in-process $43,438,000 $46,245,000
Finished goods 22,521,000 14,364,000
Inventoried costs related to U.S.
Government and other long-term
contracts 9,737,000 9,687,000
----------- -----------
$75,696,000 $70,296,000
=========== ============
The Company customarily sells original wheel and brake equipment below cost as
an investment in a new airframe which is expected to be recovered through the
subsequent sale of replacement parts. These commercial investments (losses) are
recognized when original equipment is shipped. Losses on U.S. Government
contracts are immediately recognized in full when determinable.
6
<PAGE> 8
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventory is stated at average cost, not in excess of net realizable
value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a
portion of which will not be realized within one year.
4. Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Accrued payroll costs $18,342,000 $17,448,000
Accrued taxes 4,358,000 6,864,000
Accrued costs on long-term contracts 2,120,000 2,342,000
Accrued warranty costs 10,586,000 8,165,000
Customer credits 2,202,000 2,777,000
Postretirement benefit obligation other
than pensions 3,000,000 3,000,000
Other 7,189,000 5,907,000
----------- -----------
$47,797,000 $46,503,000
=========== ===========
</TABLE>
5. Contingencies
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits
and proceedings cannot be predicted with certainty, in the opinion of
the Company's management, the ultimate liability, if any, will not
have a material adverse effect on the Company's financial position,
results of operations or cash flows.
6. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
September 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
Net income $9,372,000 $14,841,000
Other comprehensive income:
Cumulative translation adjustments 256,000 177,000
---------- -----------
Comprehensive income $9,628,000 $15,018,000
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
September 30, September 30,
1999 1998
------------ -------------
<S> <C> <C>
Net income $44,679,000 $34,173,000
Other comprehensive income:
Cumulative translation adjustments 51,000 106,000
----------- -----------
Comprehensive income $44,730,000 $34,279,000
=========== ===========
</TABLE>
7
<PAGE> 9
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Segments
The following represents financial information about the Company's
segments:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Sales:
Aircraft Braking Systems $78,579,000 $77,194,000
Engineered Fabrics 10,543,000 10,446,000
----------- -----------
$89,122,000 $87,640,000
=========== ===========
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $28,405,000 $29,566,000
Engineered Fabrics 2,292,000 1,798,000
----------- ----------
$30,697,000 $31,364,000
=========== ===========
Operating Profits:
Aircraft Braking Systems $24,826,000 $25,046,000
Engineered Fabrics 1,812,000 1,311,000
----------- -----------
Operating income 26,638,000 26,357,000
Interest expense, net (10,009,000) (11,244,000)
----------- -----------
Income before income taxes $16,629,000 $15,113,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1999 1999
------------ ------------
<S> <C> <C>
Sales:
Aircraft Braking Systems $229,929,000 $231,521,000
Engineered Fabrics 32,224,000 29,511,000
------------ -----------
$262,153,000 $261,032,000
============ ============
Earnings Before Interest, Taxes,
Depreciation and Amortization:
Aircraft Braking Systems $81,514,000 $81,362,000
Engineered Fabrics 5,863,000 4,543,000
$87,377,000 $85,905,000
Operating Profits:
Aircraft Braking Systems $70,233,000 $67,900,000
Engineered Fabrics 4,378,000 3,051,000
Operating income 74,611,000 70,951,000
Interest expense, net (30,532,000) (34,118,000)
Income before income taxes $44,079,000 $36,833,000
=========== ===========
September 30, December 31,
1999 1998
------------- ------------
Total Assets:
Aircraft Braking Systems $365,539,000 $352,057,000
Engineered Fabrics 58,275,000 57,773,000
------------ ------------
$423,814,000 $409,830,000
============ ============
</TABLE>
8
<PAGE> 10
8. Income Taxes
The income tax benefit for the nine months ended September 30, 1999
and the related deferred tax asset at September 30, 1999, represents a
reduction of the Company's valuation allowance due to the more likely
than not utilization of net operating loss carryforwards through
December 31, 1999.
9. Sale and Leaseback Transaction
During the three months ended September 30, 1999, the Company sold and
leased back $5,997,000 of various machinery and equipment. The term of
this lease is eight years.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and September 30, 1998
Sales for the nine months ended September 30, 1999 totaled $262,153,000,
reflecting an increase of $1,121,000, compared with $261,032,000 for the same
period in the prior year. Commercial transport and general aviation sales
increased $2,830,000, primarily for wheels and brakes on the MD-80, A-321,
Fokker 27/28 and DC-10 programs, partially offset by lower sales on the MD-90
and DC-9 programs. Military sales decreased $1,709,000 due to lower sales of
wheels and brakes on the F-16, partially offset by higher sales of aircraft fuel
tanks.
Operating income increased by $3,660,000 to $74,611,000 or 28.5% of sales for
the nine months ended September 30, 1999, compared with $70,951,000, or 27.2% of
sales for the same period in the prior year. Operating margins increased
primarily because we had less investment in original equipment for airframe
manufacturers ("Program Investments"). However, the reduction in Program
Investments negatively effected overhead absorption and partially offset the
increase in operating margins.
Interest expense, net decreased by $3,586,000 for the nine months ended
September 30, 1999 compared with the same period in the prior year. This
decrease was due to a lower average debt balance and lower interest rates on the
Company's variable rate indebtedness.
The Company's effective tax rate of (1.4)% for the nine months ended September
30, 1999 differs from the statutory rate of 35% due to a net decrease in the
valuation allowance, partially offset by a reduction in the deferred tax asset
and state and local income taxes. The effective tax rate of 7.2% for the nine
months ended September 30, 1998 differs from the statutory rate of 35% due to a
net decrease in the valuation allowance partially offset by state and local
income taxes. The decrease in the effective rate in 1999 over 1998 is primarily
due to the recording of a deferred tax asset to reflect the more likely than not
utilization of net operating loss carryforwards through December 31, 1999.
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and September 30, 1998
Sales for the three months ended September 30, 1999 totaled $89,122,000,
reflecting an increase of $1,482,000, compared with $87,640,000 for the same
period in the prior year. This increase was due to higher commercial transport
and general aviation sales of $2,192,000, primarily for wheels and brakes on the
A-321 and Fokker 27/28 programs, partially offset by lower sales on the DC- 9
and DC-10 programs. Military sales decreased $710,000.
Operating income increased by $281,000 to $26,638,000 or 29.9% of sales for the
three months ended September 30, 1999, compared with $26,357,000 or 30.1% of
sales for the same period in the prior year. While margins benefitted from lower
Program Investments, operating margins decreased primarily due to an unfavorable
sales mix and the negative overhead absorption effect of the lower Program
Investments.
Interest expense, net decreased by $1,235,000 for the three month ended
September 30, 1999 compared with the same period in the prior year. This
decrease is due to a lower average debt balance and lower interest rates on the
Company's variable rate indebtedness.
10
<PAGE> 12
The Company's effective tax rate of 43.6% for the three months ended September
30, 1999 differs from the statutory rate of 35% due to a reduction in the net
deferred tax asset and state and local income taxes, partially offset by a net
decrease in the valuation allowance. The effective tax rate of 1.8% for the
three months ended September 30, 1998 differs from the statutory rate of 35% due
to a net decrease in the valuation allowance partially offset by state and local
income taxes. The increase in the effective rate in 1999 over 1998 is primarily
due to a reduction of the deferred tax asset to reflect utilization of net
operating loss carryforwards during the quarter.
Liquidity and Financial Condition
The Company expects that its principal use of funds for the next several years
will be to fund capital expenditures, to make investments in new airframes and
to pay interest and principal on indebtedness. The Company's primary source of
funds for conducting its business activities and servicing its indebtedness has
been cash generated from operations and borrowings under its revolving credit
facility. At September 30, 1999, the Company had $43.1 million available to
borrow under its $50 million revolving credit facility.
Cash Flows
During the nine months ended September 30, 1999 cash provided by operating
activities amounted to $45,615,000 and reflected $87,377,000 of earnings before
interest, taxes, depreciation and amortization ("EBITDA"), increases in accounts
payable of $5,273,000, long-term liabilities of $359,000, decreases in other
working capital of $605,000, partially offset by increases in accounts
receivable of $16,839,000, inventory of $5,369,000 and interest payments of
$25,791,000. Management anticipates that reductions in the carrying amounts of
accounts receivable and inventory will be realized upon the full implementation
of its new SAP enterprise resource planning system which was initially installed
at Aircraft Braking Systems during the second quarter of 1999. During the nine
months ended September 30, 1998, cash provided by operating activities amounted
to $31,395,000 and reflected $85,905,000 of EBITDA, partially offset by
increases in accounts receivable of $4,698,000, inventory of $4,908,000, other
working capital of $365,000, decreases in accounts payable of $5,252,000, other
current liabilities of $9,703,000, long-term liabilities of $1,299,000 and
interest payments of $28,285,000.
During the nine months ended September 30, 1999 and 1998, net cash used in
investing activities amounted to $6,380,000 and $6,507,000, respectively. These
expenditures were primarily for capital expenditures.
During the nine months ended September 30, 1999, net cash used by financing
activities amounted to $32,128,000 due to the repayment of indebtedness of
$38,125,000, partially offset by $5,997,000 of proceeds received from a sale and
leaseback transaction. During the nine months ended September 30, 1998, net cash
used by financing activities amounted to $25,569,000 due to the repayment of
indebtedness of $26,125,000, partially offset by $556,000 of proceeds received
from a sale and leaseback transaction.
Year 2000 Issue
We believe the critical technology and other systems that we use in our
businesses are now ready for the date related issues commonly referred to as the
Year 2000 problem. We continue to test our systems and to make modifications or
replacements as required. Most of our effort is now on contingency planning and
verifying that our important suppliers are Year 2000 ready.
11
<PAGE> 13
We spent approximately $550,000 on our Year 2000 compliance program. We do not
anticipate any large, additional expense.
The most reasonably likely worst-case Year 2000 scenario for us would be if the
public utilities' or telecommunications carriers' systems failed, or if a major
supplier of raw material could not supply us. We have no contingency plans if
the delivery of power or other essential services or materials is interrupted
for an extended period of time. We are making plans to cover a brief
interruption in power or communications at our subsidiaries. No significant
customer, vendor, service provider or other third party has advised us of a
specific Year 2000 problem that it does not expect to have remedied on time.
The statements we make about the Year 2000 problem, and our particular
circumstances, are forward looking and are made pursuant to the safe harbor
provisions of the Private Litigation Reform Act of 1995. There are risks and
uncertainties that could change our actual state of readiness, the costs that we
anticipated and our ability to implement contingency plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has $447 million of total debt outstanding at September 30, 1999. Of
this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the balance
is borrowed under our credit facility. The interest rate for borrowings under
the credit facility varies with LIBOR or the prime rate at the Company's option.
The Company entered into an interest rate swap agreement to reduce the impact of
potential increases in interest rates. The interest rate swap agreement fixes
the Company's LIBOR borrowing rate at 5.95% on $130.5 million at September 30,
1999 and matures on December 17, 2001 with an option for the counterparty to
extend the agreement to December 17, 2003. Therefore, the Company has
effectively fixed the interest rate on $315.5 million of its indebtedness at
September 30, 1999. Given that approximately 71% of the Company's borrowings are
at fixed interest rates, a change in rates of 10% would not have a significant
impact on fair values, cash flows or earnings. The Company has no other
derivative financial instruments.
12
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended September
30, 1999.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K & F INDUSTRIES, INC.
----------------------
Registrant
DIRKSON R. CHARLES
----------------------
Dirkson R. Charles
Chief Financial Officer
and
Registrant's Authorized
Officer
Dated: November 12, 1999
14
