<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-40977
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
K & F INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3728 34-1614845
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH M. SCHWARTZ
EXECUTIVE VICE PRESIDENT
K & F INDUSTRIES, INC.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 297-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH A COPY TO:
GEORGE P. O'SULLIVAN, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this registration statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<PAGE> 2
EXPLANATORY NOTE
The registration statement to which this post-effective amendment
relates originally covered the registration of an aggregate principal amount of
$185,000,000 of 9 1/4% Series B Senior Subordinated Notes due 2007 of K & F
Industries, Inc. that were offered in exchange for equal principal amounts of
the company's then outstanding 9 1/4% Senior Subordinated Notes due 2007. That
registration statement also covered the registration of the exchange notes for
resale by Lehman Brothers Inc. in market-making transactions. The exchange offer
expired on March 6, 1998. Therefore, this post-effective amendment relates to
only the marketing-making transactions of Lehman Brothers Inc., and the
prospectus contained herein constitutes the market-making prospectus with
respect thereto.
<PAGE> 3
K & F INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
----------------------- ---------------------
<S> <C>
(1) Forepart of Registration Statement Facing Page of Registration
and Outside Front Cover Page Statement; Cross-Reference Sheet;
of Prospectus Outside Front Cover Page of Prospectus
(2) Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus; Where You Can Find More
Information
(3) Risk Factors, Ratio of Earnings Prospectus Summary; Risk Factors; Selected
to Fixed Charges and Other Historical Consolidated Financial
Information Information
(4) Terms of the Transaction Prospectus Summary;
Description of the Notes
(5) Pro Forma Financial Information *
(6) Material Contacts With the
Company Being Acquired *
(7) Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters *
(8) Interests of Named Experts and
Counsel *
(9) Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities *
(10) Information With Respect to
S-3 Registrants *
(11) Incorporation of Certain
Information by Reference *
(12) Information With Respect to S-2
or S-3 Registrants *
(13) Incorporation of Certain
Information by Reference *
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
----------------------- ---------------------
<S> <C>
(14) Information With Respect to Prospectus Summary; Risk Factors; Selected
Registrants Other Than S-3 or Historical Consolidated Financial
S-2 Registrants Information; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Description of
Certain Indebtedness
(15) Information With Respect to
S-3 Companies *
(16) Information With Respect to
S-2 or S-3 Companies *
(17) Information With Respect to
Companies Other Than S-3 or
S-2 Companies *
(18) Information if Proxies,
Consents or Authorizations
Are to be Solicited *
(19) Information if Proxies,
Consents or Authorizations
Are Not to be Solicited or in
an Exchange Offer Management; Security Ownership; Certain
Transactions
</TABLE>
<PAGE> 5
PROSPECTUS
$185,000,000
K & F INDUSTRIES, INC.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
The 9 1/4% Series B Senior Subordinated Notes due 2007 (the "Notes") of
K & F Industries, Inc. were issued in exchange for the then outstanding 9 1/4%
Senior Subordinated Notes due 2007 (the "Old Notes").
- - MATURITY
October 15, 2007.
- - INTEREST
Fixed annual rate of 9.25%.
Paid every six months on April 15 and October 15.
- - REDEMPTION
We may redeem the Notes at any time on or after October 15, 2002.
On or before October 15, 2000, we may redeem up to $65.0 million of the
Notes with the proceeds of a public offering of equity in our Company.
- - CHANGE OF CONTROL
In the event of a change of control, we must offer to repurchase the
Notes.
- - RANKING
The Notes are general unsecured obligations and are ranked behind:
- current indebtedness and other
liabilities of approximately $374.7
million at December 31, 1998; and
- future indebtedness.
This investment involves risks. see the "risk factors" section beginning on page
7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus has been prepared for and is to be used by Lehman Brothers Inc.
in connection with offers and sales in market-making transactions of the Notes.
We will not receive any of the proceeds of such sales. Lehman Brothers Inc. may
act as a principal or agent in such transactions. The Notes may be offered in
negotiated transactions or otherwise.
---------------------------
LEHMAN BROTHERS
---------------------------
APRIL ___, 1998
<PAGE> 6
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained in
this prospectus. You must not rely on any unauthorized information or
representations. This prospectus does not offer to sell or buy any of the
securities in any jurisdiction where it is unlawful. The information in this
prospectus is correct only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of these securities.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information 1
Prospectus Summary 2
Risk Factors 7
Use of Proceeds 10
The Recapitalization 11
Selected Historical Consolidated Financial Information 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Business 20
Management 25
Security Ownership 32
Certain Transactions 33
Description of Certain Indebtedness 34
Description of the Notes 36
Certain United States Federal Tax Considerations For Non-United
States Holders 56
Plan of Distribution 58
Legal Matters 58
Experts 58
Index to Consolidated Financial Statements F-1
</TABLE>
<PAGE> 7
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement and related exhibits with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1933, as amended. The registration statement contains additional information
about us and the debt securities. You may inspect the registration statement and
exhibits without charge at the public reference facility maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained
from the SEC at prescribed rates.
We file annual, quarterly and special reports and other information
with the SEC. You can inspect these reports and other information filed by us at
the public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the SEC located at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its public reference facilities in New York, New
York and Chicago, Illinois at prescribed rates. The SEC maintains a World Wide
Web site that contains reports and other information regarding registrants that
file electronically with the SEC. The address of the site is http://www.sec.gov.
So long as we are subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), we must
furnish the information required to be filed with the SEC to State Street Bank
and Trust Company (the "Trustee") and the holders of the Notes. We have agreed
that, even if we are not required under the Exchange Act to furnish such
information to the SEC, we will nonetheless continue to furnish information that
would be required to be furnished by us by Section 13 of the Exchange Act to the
Trustee and the holders of these Notes as if we were subject to such periodic
reporting requirements.
1
<PAGE> 8
PROSPECTUS SUMMARY
On the cover page, in this summary and in the "Risk Factors" section,
the words "Company," "we," "ours," and "us" refer only to K & F Industries, Inc.
and not to our subsidiaries. The following summary contains basic information
about the Notes. It likely does not contain all the information that is
important to you. For a more complete understanding of the Notes, we encourage
you to read this entire document and the documents we have referred you to.
References to worldwide markets and market share information was compiled by us.
We excluded markets formerly controlled by the U.S.S.R. about which accurate
information is not readily available.
THE COMPANY
Our 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, general aviation
and military aircraft. Aircraft Braking Systems' products are marketed
internationally through 10 sales offices located in four countries and are used
on over 30,000 commercial, general aviation and military aircraft. Our other
wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"),
is one of the leading worldwide manufacturers of aircraft fuel tanks, supplying
approximately 90% of the worldwide commercial transport and general aviation
market and over half of the domestic military market for such products.
We are a Delaware corporation formed on March 13, 1989. Our
subsidiaries are the successors to the businesses of Aircraft Braking Systems
and Engineered Fabrics formed by Goodyear Tire & Rubber Company, Inc. in 1929.
Our principal executive offices are located at 600 Third Avenue, New York, New
York 10016 and our telephone number is (212) 297-0900.
THE RECAPITALIZATION
On October 15, 1997, we 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. Bernard L. Schwartz ("BLS") and
certain merchant banking partnerships (collectively the "Lehman Investors")
affiliated with Lehman Brothers Holdings Inc. each became the owner of 50% of
our capital stock.
To finance the Recapitalization, we and our subsidiaries entered into a
credit facility for $372 million and issued the Old Notes. For more details, see
"The Recapitalization."
2
<PAGE> 9
SUMMARY DESCRIPTION OF THE NOTES
THE NOTES $185,000,000 aggregate principal amount of 9
1/4% Senior Subordinated Notes Due 2007.
MATURITY DATE October 15, 2007.
INTEREST Annual rate - 9.25%
Payment frequency - every six months on
April 15 and October 15
MANDATORY REDEMPTION None.
OPTIONAL REDEMPTION On or after October 15, 2002, we may redeem
some or all of the Notes at any time at the
redemption prices listed in the section
"Description of Notes" under the heading
"Optional Redemption."
On or before October 15, 2000, we may redeem
up to $65 million of the Notes with the
proceeds of one or more public offerings of
our equity, at a redemption price of
109.25%. See "Description of Notes" under
the heading "Optional Redemption."
CHANGE OF CONTROL In the event of a change of control, each
holder of the Notes has the right to require
us to purchase their Notes, in whole or in
part, at 101% of the principal amount, plus
accrued and unpaid interest. See
"Description of the Notes" under the heading
"Repurchase at the Option of Holders."
RANKING The Notes are general unsecured obligations
of ours.
They rank behind:
- all existing and future senior
indebtedness (including the obligations
under the credit facility); and
- indebtedness and other liabilities of
our subsidiaries.
At December 31, 1998, the Notes were
subordinated to approximately $300.1 million
of senior indebtedness and also ranked
behind $74.6 million of other liabilities of
our subsidiaries.
CERTAIN COVENANTS The indenture contains certain covenants
that, among other things, limit our ability
and the ability of our subsidiaries to:
- borrow money;
- pay dividends or make other restricted
payments;
- enter into transactions with affiliates;
- create certain liens;
- sell certain assets; and
- merge or consolidate with, or transfer
substantially all assets to, another
person.
The indenture also limits our subsidiaries'
ability to issue preferred stock and pay
dividends and other distributions. In
addition, we must offer to purchase the
Notes at 100% upon certain sales and
dispositions of assets.
These covenants are subject to a number of
important exceptions and qualifications.
For more details, see the section
"Description of Notes" under the heading
"Certain Covenants."
3
<PAGE> 10
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical consolidated financial
information for the years ended December 31, 1998, 1997 and 1996, the nine
months ended December 31, 1996 and 1995 and the years ended March 31, 1996 and
1995. Effective December 31, 1996, we changed our fiscal year end from March 31
to December 31. The historical financial information for the years ended
December 31,1998 and 1997, the nine months ended December 31, 1996 and for the
years ended March 31, 1996 and 1995 come from our audited financial statements.
The historical financial information for the year ended December 31, 1996 and
the nine months ended December 31, 1995 comes from our unaudited financial
statements which, in our opinion, contain all adjustments necessary for a fair
presentation. This information should be read in conjunction with our historical
consolidated financial statements and the related notes, "Selected Historical
Consolidated Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere in this
prospectus.
4
<PAGE> 11
<TABLE>
<CAPTION> Year Ended Nine Months Ended
December 31, December 31,
--------------------------------------------- ---------------------------
1998 1997 1996 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ............................. $ 345,447 $ 304,331 $ 277,655 $ 212,703 $ 199,784
Cost of sales ......................... 196,190 188,001 180,971 136,813 136,277
--------- --------- --------- --------- ---------
Gross Margin .......................... 149,257 116,330 96,684 75,89 63,507
Independent research and
development ........................ 13,705 10,873 11,781 8,623 6,610
Selling, general and administrative
expenses .......................... 35,332 40,182(a) 24,482 17,297 15,378
Amortization .......................... 10,286 10,316 10,412 7,810 7,813
--------- --------- --------- --------- ---------
Operating income ...................... 89,934 54,959 50,009 42,160 33,706
Interest expense, net ................. 44,830 34,091 36,957 27,197 31,288
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary charge ................ 45,104 20,868 13,052 14,963 2,418
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)
--------- --------- --------- --------- ---------
Net (loss) income .................... $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital ....................... $ 39,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938
Total assets .......................... 420,099 425,236 419,115 419,115 412,028
Long-term debt ........................ 477,125 519,125(a) 287,000 287,000 293,000
Stockholders' deficiency .............. (215,610) (256,459)(a) (33,306) (33,306) (34,327)
Other Data (for the period):
EBITDA(e) ............................ $ 109,894 $ 74,639 $ 69,314 $ 56,804 $ 47,966
Capital expenditures .................. 14,873 10,016 21,166 14,091 3,343
Depreciation and amortization ........ 19,961 19,680 19,305 14,644 14,260
Ratio of earnings to fixed charges (f) 1.96x 1.57x 1.31x 1.49x 1.07x
Cash flow provided by
operating activities .............. $ 52,157 $ 42,513 $ 28,915 $ 23,394 $ 16,780
Cash flow used by
investing activities .............. (15,076) (11,797) (21,628) (14,341) (3,669)
Cash flow used by financing activities (34,944) (27,517) (8,957) (9,957) (18,426)
</TABLE>
<TABLE>
<CAPTION> Fiscal Year Ended
March 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Income Statement Data:
Net sales ............................. $ 264,736 $ 238,756
Cost of sales ......................... 180,435 164,697
--------- ---------
Gross Margin .......................... 84,301 74,059
Independent research and
development ........................ 9,767 8,363
Selling, general and administrative
expenses .......................... 22,564 19,208
Amortization .......................... 10,415 10,411
--------- ---------
Operating income ...................... 41,555 36,077
Interest expense, net ................. 41,048 46,250
--------- ---------
Income (loss) before income taxes and
extraordinary charge ................ 507 (10,173)
Income tax (provision) benefit......... -- --
Extraordinary charge .................. (1,913)(d) --
--------- ---------
Net (loss) income .................... $ (1,406) $ (10,173)
========= =========
Balance Sheet Data (at end of period):
Working capital ....................... $ 36,327 $ 48,025
Total assets .......................... 416,037 429,074
Long-term debt ........................ 294,000 310,000
Stockholders' deficiency .............. (39,701) (34,748)
Other Data (for the period):
EBITDA(e) ............................ $ 60,476 $ 54,920
Capital expenditures .................. 10,418 2,824
Depreciation and amortization ........ 18,921 18,843
Ratio of earnings to fixed charges (f) 1.01x
Cash flow provided by
operating activities .............. $ 22,301 $ 17,353
Cash flow used by
investing activities .............. (10,956) (3,187)
Cash flow used by financing activities (17,426) (10,000)
</TABLE>
(a) On October 15, 1997, we completed a recapitalization that consisted of
the refinancing of existing indebtedness and the repurchase of a portion
of our stock. We directly increased our 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, we recorded a charge of $12.4 million to selling,
general and administrative expenses, relating to the exercise of stock
options and other fees. Financing was provided with $185 million of 9
1/4% Senior Subordinated Notes due 2007 and $345 million in borrowings
under a new credit facility. (See Notes 1 and 7 to the consolidated
financial statements.)
(b) On June 1, 1997, we redeemed $30 million aggregate principal amount of 11
7/8% Senior Secured Notes. We 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, we redeemed $180 million
principal amount of 13 3/4% Senior Subordinated Debentures. We 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, we redeemed $30 million principal amount of the 13
3/4% Senior Subordinated Debentures. We recorded an extraordinary charge
of $1.9 million for the write-off of unamortized financing costs and
redemption premiums.
(e) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or as a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, EBITDA is included to provide additional
information about our ability to meet our future debt service, capital
expenditures and working capital requirements. EBITDA is not necessarily
a measure of our ability to fund our cash needs. We included EBITDA
because we believe that certain investors find it useful.
(f) For this computation, earnings consist of income (loss) before income
taxes plus fixed charges (excluding capitalized interest). Fixed charges
consist of interest on indebtedness (including capitalized interest and
amortization of deferred financing costs) plus that portion of lease
rental expense representative of the interest
5
<PAGE> 12
factor (deemed to be one-third of lease rental expense). Our earnings
were insufficient to cover fixed charges by $10,173,000 for the year
ended March 31, 1995. Non-cash charges included in the computation for
the years ended December 31, 1998, 1997 and 1996, the nine months ended
December 31, 1996 and 1995 and the fiscal years ended March 31, 1996 and
1995 were $21,893,000, $21,187,000, $20,816,000, $15,745,000,
$15,411,000, $20,482,000 and $24,275,000, respectively. Non-cash charges
consist of depreciation, amortization, non-cash interest on the
convertible debentures and amortization of deferred financing costs.
6
<PAGE> 13
RISK FACTORS
This prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act including,
in particular, the statements about the Company's plans, strategies, and
prospects under the headings "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business."
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this Prospectus are set forth below and
elsewhere in this Prospectus. All forward-looking statements attributable to the
Company or persons acting on our behalf are expressly qualified in their
entirety by the following cautionary statements.
SUBSTANTIAL LEVERAGE - OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THESE
NOTES. WE ALSO HAVE OPERATING AND FINANCIAL RESTRICTIONS, THAT COULD LIMIT OUR
ABILITY TO BORROW OR CONDUCT OTHER ACTIVITIES.
We now have and will continue to have, a significant amount of
indebtedness. This could have important consequences to you.
Debt and Stockholders' Deficiency. The following shows certain important
credit statistics:
<TABLE>
<CAPTION>
($ in millions) December 31,
1998
----------
<S> <C>
Total indebtedness $495.1
Other liabilities of subsidiaries 74.6
Stockholders' deficiency (215.6)
Ratio of earnings to fixed charges
for the year ended December 31, 1998 1.96x
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Selected Historical Consolidated Financial
Information." There can be no assurance that we will not have a deficiency of
earnings to cover fixed charges in the future.
Dependence on Future Performance to Make Debt Payments. Our ability to
satisfy our obligations is dependent on the ability of the Company and its
subsidiaries to generate cash in the future. This, to an extent, is subject to a
number of factors, including:
- the global economy and financial markets;
- worldwide demand for air travel;
- legislative pronouncements;
- performance of the commercial and military aircraft industries; and
- other factors beyond our control affecting us and our subsidiaries.
Operating and Financial Restrictions. Our substantial indebtedness, and
the restrictive covenants contained in our debt instruments, could limit our
ability to withstand competitive pressures, and to make investments in aircraft
programs and capital expenditures. In addition, borrowings under our credit
facility are floating rate obligations of our subsidiaries, causing our bank
debt to be sensitive to changes in prevailing interest rates. We have entered
into an interest rate swap agreement to reduce the impact of potential increases
in interest rates under the credit facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Based on current levels of operations and anticipated growth, we believe
our cash flow from operations, together with borrowings from time to time under
the credit facility, will allow us to make anticipated capital expenditures and
investments in original equipment for aircraft programs, to fund working capital
requirements and to make required payments of principal and interest on our
debt. However, if we are not able to generate sufficient cash flow from
operations, we may need to refinance all or a portion of our debt or to obtain
additional financing. There can be no assurance that we could refinance our debt
or obtain additional financing.
Restrictive Covenants. There are operating and financial covenants in the
indenture, and in our credit facility, that restrict or prohibit the ability of
the Company and its subsidiaries to:
7
<PAGE> 14
- incur additional indebtedness;
- pay dividends;
- permit subsidiaries to issue preferred stock;
- repay certain indebtedness prior to its stated maturity;
- create liens;
- sell assets or engage in mergers or acquisitions; and
- make certain capital expenditures.
These restrictions, in combination with our substantial indebtedness,
could limit our ability in the future to borrow or otherwise restrict our
activity. See "Description of Certain Indebtedness" and "Description of the
Notes."
HISTORY OF NET LOSSES - WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE
OUR INDEBTEDNESS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND
OUR CONTROL. BEFORE 1998, WE HAD A HISTORY OF NET LOSSES, ALTHOUGH WE HAVE
ALWAYS BEEN ABLE TO PAY OUR DEBTS.
We had net income of approximately $39.3 million for the year ended
December 31, 1998. However, we have had net losses in prior years. See "Selected
Historical Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Based upon current
operations, we expect to be able to make principal and interest payments on
these Notes. However, no assurance can be given that our operating results will
provide sufficient cash flow to meet all of our obligations, including payment
of principal and interest on these Notes.
SUBORDINATION - YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS JUNIOR TO OUR
AND OUR SUBSIDIARIES' OTHER INDEBTEDNESS EXISTING AT THE TIME OF THE ORIGINAL
SALE OF THE NOTES, AND LATER BORROWINGS.
With few exceptions, these Notes rank behind all of our and our
subsidiaries' indebtedness. As a result, in the event of a bankruptcy,
liquidation or reorganization relating to us, our subsidiaries, or our or their
property, the holders of senior indebtedness will be entitled to be paid in
full, before any payment may be made on these Notes. In addition, our credit
facility limits our liability to make payments on these Notes if the senior
indebtedness is not paid when due or other default on such senior indebtedness
occurs. As of December 31, 1998, these Notes ranked behind approximately $300.1
million of senior indebtedness. See "--Holding Company Structure" and
"Description of the Notes--Subordination."
HOLDING COMPANY STRUCTURE - ONLY THE COMPANY IS OBLIGATED TO PAY THE NOTES. YOU
HAVE NO ASSETS SECURING OUR PROMISE TO PAY THESE NOTES.
We alone are obligated to pay these Notes. Our business is conducted
through, and substantially all of our assets are owned by, our operating
subsidiaries, Aircraft Braking Systems and Engineered Fabrics. As a result, we
are dependent on the earnings and cash flow from Aircraft Braking Systems and
Engineered Fabrics to meet our obligations under these Notes and to pay our
other expenses. Because our assets are held by and will continue to be held by
our subsidiaries, the claims of holders of these Notes are subject to the claims
of creditors of Aircraft Braking Systems and Engineered Fabrics, including the
claims of the lenders (collectively, the "Lenders") under our credit facility.
As of December 31, 1998, our subsidiaries had liabilities (including $300.1
million of senior indebtedness) of approximately $374.7 million outstanding. See
"Description of Certain Indebtedness," "Description of the
Notes--Subordination."
Aircraft Braking Systems and Engineered Fabrics are the borrowers under
the credit facility, and they have secured their obligations by pledging
substantially all of their assets to the Lenders. In addition, we guaranteed the
obligation of the subsidiaries under the credit facility and secured our
guarantee by a pledge of all the stock of our subsidiaries and our subsidiaries'
intercompany Notes.
INTERESTS OF BLS AND THE LEHMAN INVESTORS - EACH OF BLS AND THE LEHMAN INVESTORS
OWN 50% OF THE COMPANY. HOWEVER, BLS HAS OPERATING CONTROL OF THE COMPANY.
BLS owns 50% of our capital stock, is entitled to designate a majority of
the Board of Directors and serves as Chairman of the Board of Directors and
Chief Executive Officer. We have an agreement with BLS for him to provide
certain services, pursuant to which we pay BLS and persons designated by him an
aggregate of $200,000 per month. BLS also participates in our incentive
compensation plans. See "Management," "Security Ownership" and "Certain
Transactions."
The other 50% of our capital stock is owned by the Lehman Investors. The
Lehman Investors are entitled to designate three members (in addition to one
independent director to be designated jointly with BLS) of our Board of
8
<PAGE> 15
Directors and have veto rights with respect to certain corporate actions. See
"Security Ownership--Stockholders' Agreement". In addition, in the event BLS
dies or is permanently disabled, the Lehman Investors are entitled to designate
50% of the members of the Board of Directors. An affiliate of the Lehman
Investors has from time to time provided us with investment banking, financial
advisory and other services and received fees. See "The Recapitalization,"
"Security Ownership," "Certain Transactions," "Description of Certain
Indebtedness--New Credit Facility" and "Plan of Distribution."
IMPACT OF AIR TRANSPORT ACTIVITY; DELIVERY OF NEW AIRCRAFT - OPERATIONS ARE
SIGNIFICANTLY DEPENDENT ON THE SALES OF REPLACEMENT PARTS FOR WHEEL AND BRAKE
SYSTEMS MADE BY OUR SUBSIDIARY, AIRCRAFT BRAKING SYSTEMS.
During the year ended December 31, 1998, sales of replacement parts for
braking systems previously installed on aircraft accounted for approximately 75%
of the total revenues of Aircraft Braking Systems. The demand for Aircraft
Braking Systems' replacement parts varies depending upon the number of aircraft
equipped with Aircraft Braking Systems' products and the number of landings made
by such aircraft. A reduction in airline travel will usually result in reduced
utilization of commercial aircraft, fewer landings, and a corresponding decrease
in Aircraft Braking Systems' sales, related income and cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Since original equipment in new commercial aircraft is supplied at or
substantially below the cost of production, delivery of new aircraft equipped
with Aircraft Braking Systems' products negatively affects cash flow. Our
business plan budgets cash needs based on current delivery schedules of new
aircraft and also accommodates certain increases in aircraft deliveries.
However, significant, unanticipated increases in commercial aircraft deliveries
in a given year could have a material adverse impact on our cash flow in such
year.
SIGNIFICANT CUSTOMER - THE UNITED STATES GOVERNMENT IS A SIGNIFICANT CUSTOMER,
THE LOSS OF WHICH COULD ADVERSELY AFFECT US.
Sales to the United States government (the "Government") or to prime
contractors or subcontractors of the Government were approximately 14%, 12% and
12% of our total sales for the years ended December 31, 1998 and 1997 and the
nine months ended December 31, 1996, respectively. The loss of all or a
substantial portion of such sales could adversely effect us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Government Contracts."
POTENTIAL INABILITY TO FUND CHANGE OF CONTROL OFFER - WE MAY NOT HAVE THE
ABILITY TO RAISE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED
BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control
events, we will be required to offer to repurchase all outstanding Notes.
However, there can be no assurance that we will have sufficient funds at the
time of any change of control to make any required repurchases of these Notes.
Moreover, our credit facility restricts us from making such required
repurchases, and we could be in default of our credit facility if we make such
repurchases.
See "Description of Certain Indebtedness--Credit Facility."
FRAUDULENT CONVEYANCE STATUTES - FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID OBLIGATIONS AND REQUIRE NOTEHOLDERS TO RETURN
PAYMENTS RECEIVED FROM INSOLVENT DEBTORS. ALTERNATIVELY, YOUR CLAIMS COULD BE
SUBORDINATED TO OTHER DEBTS.
Various fraudulent conveyance laws could be utilized by a court of
competent jurisdiction to subordinate or void these Notes in favor of other
creditors. These Notes were issued in exchange for Notes originally sold on
October 15, 1997, the proceeds of which were used to effect the
Recapitalization. If a court, in a lawsuit on behalf of an unpaid creditor or a
representative of our creditors, were to conclude that, at the time we paid the
net proceeds of the sale of the original Notes to our stockholders, we:
- intended to hinder, delay or defraud any present or future creditor or
contemplated insolvency with a design to prefer one or more creditors
to the exclusion in whole or in part of others; or
- did not receive fair consideration or reasonably equivalent value for
issuing the Notes (for example, because our stockholders, and not the
Company received the benefits of the sale of the Notes);
and we:
- were insolvent;
- were rendered insolvent by reason of such distribution;
- were engaged or about to engage in a business or transaction for which
our remaining assets constituted unreasonably small capital to carry
on the business; or
9
<PAGE> 16
- intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they matured,
such court could void these Notes or subordinate these Notes to the claims of
our other creditors.
No such claims have been made, and we believe that the debt evidenced by
these Notes was incurred for proper purposes, in good faith and without
violating the measures of insolvency for purposes of those fraudulent transfer
laws. There can be no assurance, however, as to what standard a court would
apply in making such determinations or that a court would agree with our
conclusions in this regard.
TRADING MARKET FOR THE NOTES - YOU CANNOT BE SURE THERE WILL BE AN ACTIVE
TRADING MARKET FOR THESE NOTES.
Although it is not obligated to do so, Lehman Brothers Inc. is making a
market in these Notes. Any such market-making activity may be discontinued at
any time, for any reasons, without notice at the sole discretion of Lehman
Brothers Inc. No assurance can be given as to the liquidity of or the trading
market for these Notes.
Lehman Brothers Inc. may be required to deliver a prospectus in
connection with its market-making activities in these Notes. We agreed to file
and maintain a registration statement that would allow Lehman Brothers Inc. to
engage in market-making transactions in these Notes. Subject to certain
exceptions, the registration statement will remain effective for as long as
Lehman Brothers Inc. may be required to deliver a prospectus in connection with
market-making transactions in these Notes. We pay substantially all the costs
and expenses related to the registration statement.
THE YEAR 2000 PROBLEM COULD CAUSE COMPLICATIONS.
Some computer systems and software programs may not function properly in
the year 2000 and beyond because a once common programming standard used two
digits instead of four digits to signify a year. These computer systems and
software programs read the year 1999 as "99" and not "1999". Because of this,
the year 2000 may appear as the year 1900, which could result in system failures
or disruptions. This is commonly called the "Year 2000" problem. If we are or a
subsidiary is unable to fix a serious Year 2000 problem, or a critical supplier
or service provider is unable to fix a material Year 2000 problem, a resulting
failure or interruption of business could hurt us. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BLUE SKY RESTRICTIONS ON RESALE OF NOTES - STATE SECURITIES LAWS MAY PREVENT
YOUR RESALE OF THESE NOTES.
The securities laws of certain jurisdictions could limit your ability to
resell these Notes. We have not registered or qualified the resale of these
Notes in any states. However, exemptions under applicable state securities laws
may be available for sales to registered broker dealers and certain
institutional investors.
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the Notes by
Lehman Brothers Inc. in market-making transactions. The Company will not receive
any of the proceeds from such transactions.
10
<PAGE> 17
THE RECAPITALIZATION
On October 15, 1997, concurrently with the closing of the offering of the
Old Notes (the "Offering"), the Company consummated the Recapitalization,
consisting of the following transactions:
1. Pursuant to the Stock Purchase Agreement, the Company
repurchased approximately 64% of its outstanding capital stock for a
total purchase price, paid in cash, of $230.2 million. Upon giving effect
to the repurchase, BLS and the Lehman Investors each became the owner of
50% of the capital stock of the Company. The implied aggregate value of
the retained capital stock was $130 million.
2. The Company repaid all of its outstanding indebtedness ($54.5
million) under a prior credit agreement.
3. The Company made provision for redemption of its 11 7/8% Senior
Secured Notes due 2003 by irrevocably depositing $77.5 million
(representing a price of 105.28% of the principal amount of the 11 7/8%
Senior Secured Notes, plus accrued interest through the expected
redemption date) with the trustee. On November 13 1997, the 11 7/8%
Senior Notes were redeemed.
4. The Company purchased for cash, all of the $140 million 10 3/8%
Senior Subordinated Notes due 2004 pursuant to a tender offer and consent
solicitation. The aggregate price paid for the 10 3/8% Senior
Subordinated Notes (including accrued interest and tender offer premiums
and related fees and expenses) was $160.9 million.
5. The Company entered into a credit facility that provides for
$322 million of term loans and a $50 million revolving loan facility, of
which $23 million was drawn at the time of the Recapitalization. See
"Description of Certain Indebtedness--Credit Facility."
The Company issued the Old Notes for net proceeds of approximately $178.4
million (after deducting expenses payable by the Company in connection with the
Offering). The Company used such proceeds, together with borrowings under the
credit facility, to effect the Recapitalization.
11
<PAGE> 18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information for the Company for the years ended December 31, 1998, 1997 and
1996, the nine months ended December 31, 1996 and 1995 and the years ended March
31, 1996 and 1995. Effective December 31, 1996, the Company changed its fiscal
year end from March 31 to December 31. The historical financial information of
the Company for the years ended December 31,1998 and 1997, the nine months ended
December 31, 1996 and for the years ended March 31, 1996 and 1995 is derived
from the audited financial statements of the Company. The historical financial
information of the Company for the year ended December 31, 1996 and the nine
months ended December 31, 1995 is derived from the Company's unaudited financial
statements which, in the opinion of management of the Company, contain all
adjustments necessary for a fair presentation of this information. The financial
information set forth below should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," all included elsewhere in this Prospectus.
12
<PAGE> 19
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, December 31,
--------------------------------------------- ---------------------------
1998 1997 1996 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ............................. $ 345,447 $ 304,331 $ 277,655 $ 212,703 $ 199,784
Cost of sales ......................... 196,190 188,001 180,971 136,813 136,277
--------- --------- --------- --------- ---------
Gross Margin .......................... 149,257 116,330 96,684 75,89 63,507
Independent research and
development ........................ 13,705 10,873 11,781 8,623 6,610
Selling, general and administrative
expenses .......................... 35,332 40,182(a) 24,482 17,297 15,378
Amortization .......................... 10,286 10,316 10,412 7,810 7,813
--------- --------- --------- --------- ---------
Operating income ...................... 89,934 54,959 50,009 42,160 33,706
Interest expense, net ................. 44,830 34,091 36,957 27,197 31,288
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary charge ................ 45,104 20,868 13,052 14,963 2,418
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)
--------- --------- --------- --------- ---------
Net (loss) income .................... $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital ....................... $ 39,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938
Total assets .......................... 420,099 425,236 419,115 419,115 412,028
Long-term debt ........................ 477,125 519,125(a) 287,000 287,000 293,000
Stockholders' deficiency .............. (215,610) (256,459)(a) (33,306) (33,306) (34,327)
Other Data (for the period):
EBITDA(e) ............................ $ 109,894 $ 74,639 $ 69,314 $ 56,804 $ 47,966
Capital expenditures .................. 14,873 10,016 21,166 14,091 3,343
Depreciation and amortization ........ 19,961 19,680 19,305 14,644 14,260
Ratio of earnings to fixed charges (f) 1.96x 1.57x 1.31x 1.49x 1.07x
Cash flow provided by
operating activities .............. $ 52,157 $ 42,513 $ 28,915 $ 23,394 $ 16,780
Cash flow used by
investing activities .............. (15,076) (11,797) (21,628) (14,341) (3,669)
Cash flow used by financing activities (34,944) (27,517) (8,957) (9,957) (18,426)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Income Statement Data:
Net sales ............................. $ 264,736 $ 238,756
Cost of sales ......................... 180,435 164,697
--------- ---------
Gross Margin .......................... 84,301 74,059
Independent research and
development ........................ 9,767 8,363
Selling, general and administrative
expenses .......................... 22,564 19,208
Amortization .......................... 10,415 10,411
--------- ---------
Operating income ...................... 41,555 36,077
Interest expense, net ................. 41,048 46,250
--------- ---------
Income (loss) before income taxes and
extraordinary charge ................ 507 (10,173)
Income tax (provision) benefit......... -- --
Extraordinary charge .................. (1,913)(d) --
--------- ---------
Net (loss) income .................... $ (1,406) $ (10,173)
========= =========
Balance Sheet Data (at end of period):
Working capital ....................... $ 36,327 $ 48,025
Total assets .......................... 416,037 429,074
Long-term debt ........................ 294,000 310,000
Stockholders' deficiency .............. (39,701) (34,748)
Other Data (for the period):
EBITDA(e) ............................ $ 60,476 $ 54,920
Capital expenditures .................. 10,418 2,824
Depreciation and amortization ........ 18,921 18,843
Ratio of earnings to fixed charges (f) 1.01x
Cash flow provided by
operating activities .............. $ 22,301 $ 17,353
Cash flow used by
investing activities .............. (10,956) (3,187)
Cash flow used by financing activities (17,426) (10,000)
</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.
(e) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or as a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, EBITDA is included herein to provide additional
information with respect to the ability of the Company to meet its future
13
<PAGE> 20
debt service, capital expenditures and working capital requirements.
EBITDA is not necessarily a measure of the Company's ability to fund its
cash needs. EBITDA is included herein because the Company believes that
certain investors find it to be a useful tool for measuring the ability
to service debt.
(f) For purposes of this computation, earnings consist of income (loss)
before income taxes plus fixed charges (excluding capitalized interest).
Fixed charges consist of interest on indebtedness (including capitalized
interest and amortization of deferred financing costs) plus that portion
of lease rental expense representative of the interest factor (deemed to
be one-third of lease rental expense). The Company's earnings were
insufficient to cover fixed charges by $10,173,000 for the year ended
March 31, 1995. Non-cash charges included in the ratio of earnings to
fixed charges and deficiency of earnings available to cover fixed charges
for the years ended December 31, 1998, 1997 and 1996, the nine months
ended December 31, 1996 and 1995 and the fiscal years ended March 31,
1996 and 1995 were $21,893,000, $21,187,000, $20,816,000, $15,745,000,
$15,411,000, $20,482,000 and $24,275,000, respectively. Non-cash charges
consist of depreciation, amortization, non-cash interest on the
convertible debentures and amortization of deferred financing costs.
14
<PAGE> 21
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 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.
15
<PAGE> 22
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 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.
16
<PAGE> 23
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 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 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.
Based upon the current level of operations and anticipated improvements,
management believes that the Company's cash flow from operations, together with
available borrowings under the Credit Facility, will be adequate to meet its
anticipated requirements for working capital, capital expenditures, research and
development expenditures, program and other discretionary investments, interest
payments and scheduled principal payments. There can be no assurance, however,
that the Company's business will continue to generate cash flow at or above
current levels or that currently anticipated improvements will be achieved. If
the Company is unable to generate sufficient cash flow from operations in the
future to service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing debt (including Notes)
or obtain additional financing. The Company's ability to make scheduled
principal payments of, to pay interest on or to refinance its indebtedness
(including the Notes) depends on its future performance and financial results,
which, to a certain extent, are subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control. There
can be no assurance that sufficient funds will be available to enable the
Company to service its indebtedness, including the Notes, or make necessary
capital expenditures and program and other discretional investments.
17
<PAGE> 24
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 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
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<PAGE> 25
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.
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.
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 66%
of the Company's borrowings are effectively at fixed interest rates, a change in
rates of 10% would not have a material impact on fair values, cash flows or
earnings.
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<PAGE> 26
BUSINESS
GENERAL
The Company, through its wholly owned subsidiary, 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. The Company 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, The Company through its wholly owned subsidiary,
Engineered Fabrics, is one of 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.
THE AIRCRAFT WHEEL AND BRAKE INDUSTRY
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long and
steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for bids
from manufacturers. Selections are made by the manufacturer on the basis of
technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be "dual
sourcing" of wheels and brakes. In such case, an airframe manufacturer may
approve and receive FAA certification to configure a particular airframe with
equipment provided by two or more wheel and brake manufacturers. Where two
suppliers have been certified, the aircraft customer, such as a major airline,
will designate the original equipment to be installed on the customer's
aircraft. Competition among two certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to load the aircraft with passengers, freight or fuel, and the
technical operating performance characteristics of the wheel and brake systems.
Once selected, airlines infrequently replace entire wheel and brake systems
because of the expense.
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
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<PAGE> 27
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.
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 Nine Months Ended
December 31, 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
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<PAGE> 28
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 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.
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:
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<PAGE> 29
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 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.
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
23
<PAGE> 30
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.
PROPERTIES
United States Facilities. Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio, and consists of
approximately 770,000 square feet of manufacturing, engineering and office
space. Engineered Fabrics' facility is located in Rockmart, Georgia, and
consists of approximately 564,000 square feet of manufacturing, engineering and
office space. The Company believes that its 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.
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.
24
<PAGE> 31
MANAGEMENT
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.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) DIRECTOR SINCE
---- --- ----------- --------------
<S> <C> <C> <C>
Bernard L. Schwartz* 73 Chairman of the Board
and Chief Executive 1989
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. Currently, he is Visiting
Associate Professor of
25
<PAGE> 32
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>
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
26
<PAGE> 33
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.
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.
27
<PAGE> 34
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>
Annual Long-Term
Compensation Compensation
------------------------------- -------------------------
Fiscal All other
Year or Options LTIP Compen-
Tran- Salary Bonus Granted Payouts sation(a)
Name and Principal Position sition ($) ($) (#) ($) ($)
Period *
- ----------------------------------------------------------------------------------------------------------------------------
<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 $100,000 of the
aggregate annual advisory fee be paid to Kenneth M. Schwartz, which is
included in his salary for the year ended December 31, 1997 and the
Transition Period, respectively.
28
<PAGE> 35
OPTION GRANTS IN LAST FISCAL YEAR
The following sets forth information relating to the grant of stock options by
the Company during the year ended December 31, 1998 to the named executive
officers. The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire a total of 100,000
authorized but unissued shares of common stock. None of the Company's stock is
publicly traded. The options granted are exercisable in four equal installments
on the second, third, fourth and fifth anniversaries of the date of grant, and
shall remain exercisable until expiration of the option, 10 years from the date
of the grant.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- ----------------------------------------------------------------------------------------------------------------------------
% of Total
Options
Granted to Exercise
Employees or Base
Options in Fiscal Price Expiration
Name Granted year (%) ($/Sh) Date 5% ($) 10% ($)
(#)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth M. Schwartz 1,500 12.7 175.00 10/02/08 165,085 418,357
</TABLE>
29
<PAGE> 36
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.
30
<PAGE> 37
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.
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.
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<PAGE> 38
SECURITY OWNERSHIP
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 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
32
<PAGE> 39
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.
CERTAIN TRANSACTIONS
GENERAL
BLS owns 50% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. 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.
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
33
<PAGE> 40
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.
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
In connection with the Recapitalization, the Company and the Lenders
entered into a credit facility, with Aircraft Braking Systems and Engineered
Fabrics as borrowers (each, a "Borrower" and together, the "Borrowers") on the
terms and subject to the conditions set forth below. The Credit Facility
consists of Term Loans in an aggregate principal amount of $300.1 million at
December 31, 1998 and a Revolving Loan in an aggregate principal amount of up to
$50.0 million. The Term Loans are comprised of Term Loan A in the principal
amount of $49.4 million and Term Loan B in the principal amount of $250.7
million. The obligations under the Credit Facility are secured by a lien on
substantially all of the assets of the Borrowers and are guaranteed by the
Company. Such guarantee is secured by a pledge of all the issued and outstanding
stock of the Borrowers and intercompany notes held by the Company.
Term Loan A is repayable over a six-year period in 21 quarterly
installments of $125,000 and, thereafter, four quarterly installments of
$11,843,750. Term Loan B is repayable over an eight-year period in 28 quarterly
installments of $250,000 and, thereafter, three quarterly installments of $66.25
million and, thereafter, one quarterly installment of $46.25 million. The
Company is required to make mandatory prepayments in the event of certain asset
sales, upon the incurrence of additional indebtedness and from a portion of
excess cash flow. Up to $20 million of the Revolving Loan is available for
standby and commercial letters of credit. The Revolving Loan commitment will
terminate on October 15, 2003.
Borrowings under the Credit Facility bear interest, at the option of the
Borrowers, at a rate equal to (a) the highest of (i) the publicly announced
prime rate of Citibank, N.A. ("Citibank"), (ii) the secondary market rate for
three-month certificates of deposit plus 1% and (iii) the federal funds rate
plus 1/2 of 1%, plus an applicable margin or (b) the rate at which eurodollar
deposits for one, two, three or six months (as selected by the Borrowers) are
offered in the interbank eurodollar market plus an applicable margin. Overdue
amounts under the Credit Facility bear interest at a rate equal to the rate then
in effect with respect to such borrowings, plus 2% per annum.
The Company paid LCPI, an affiliate of the Lehman Investors, a commitment
fee for the period from the date of the commitment letter to the closing of the
Credit Facility and certain upfront fees. In addition, the Company is obligated
to pay a quarterly commitment fee initially equal to 1/2 of 1% per annum of the
unused portion of the Revolving Loan commitment of $50.0 million, provided that
such commitment fee will decrease to 3/8 of 1% per annum if the consolidated
leverage ratio is less than 5.0 to 1 but greater than or equal to 4.5 to 1 and
will decrease to 1/4 of 1% per annum if the consolidated leverage ratio is less
than 4.5 to 1. The Company is also obligated to pay a commission on all
outstanding letters of credit in the amount of an applicable margin then in
effect with respect to eurodollar loans as well as fronting fees on the face
amount of each letter of credit.
The Credit Facility contains customary representations and warranties,
covenants and conditions to borrowing. There can be no assurance that the
conditions to borrowing under the Credit Facility will be satisfied.
The Credit Facility contains a number of negative covenants that limit the
Company's subsidiaries from, among other things, incurring other indebtedness,
entering into merger or consolidation transactions, disposing of all or
substantially all of their assets, making certain restricted payments, creating
any liens on the Borrowers' assets, creating guarantee obligations and material
lease obligations and entering into sale and leaseback transactions and
transactions with affiliates. In addition, the Credit Facility limits the
ability of the Company to redeem the Notes.
The Credit Facility also requires the maintenance of certain quarterly
financial and operating ratios, including: (i) a consolidated cash interest
coverage ratio, (ii) a subsidiary cash interest coverage ratio and (iii) a
consolidated leverage ratio. Capital expenditures are limited to $20.0 million
in fiscal 1997 and 1998 and $17.0 million in any fiscal year thereafter. In
addition, the Credit Facility requires the Company to maintain a specified
minimum consolidated adjusted net worth.
The Credit Facility also contains customary events of default, including
default upon the nonpayment of principal, interest, fees or other amounts or the
occurrence of a change of control.
34
<PAGE> 41
The Company used funds initially drawn under the Credit Facility to
refinance indebtedness under a prior credit agreement, which terminated upon the
completion of the offering and sale of the Old Notes, and, together with the net
proceeds from the issuance of the Old Notes, to fund the Recapitalization.
SETTLEMENT AGREEMENT
On October 15, 1997, the Company entered into the Settlement Agreement with
the Pension Benefit Guaranty Corporation (the "PBGC") regarding payment of the
Company's unfunded pension liabilities. Pursuant to the Settlement Agreement,
the Company contributed to its pension plans $4.5 million in 1997 and now makes
scheduled contributions to its pension plans equal to the minimum amount of cash
required under statutory funding obligations. In order to secure performance of
its obligations under the Settlement Agreement, the PBGC holds a $4.5 million
letter of credit for the benefit of the pension plans and the Company granted
the PBGC a second lien on the same assets securing the Credit Facility.
35
<PAGE> 42
DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued pursuant to an Indenture (the "Indenture") between
the Company and State Street Bank and Trust Company, as trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference Indenture, including the definitions therein of certain terms used
below. A copy of each of the Indenture and Registration Rights Agreement is
available as set forth under "Available Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions."
The Notes rank senior to or pari passu in right of payment with all
subordinated Indebtedness of the Company. The Notes are subordinated in right of
payment to all Senior Indebtedness of the Company, including all obligations of
the Company under the Credit Facility.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $185.0 million and
will mature on October 15, 2007. Interest on the Notes accrues at the rate of 9
1/4% per annum and is payable semi-annually in arrears, in cash on April 15 and
October 15, commencing on April 15, 1998, to Holders of record on the
immediately preceding April 1 and October 1. Interest on the Notes accrues from
the most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments with respect to Notes the Holders
of which have given wire transfer instructions to the Company are required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes are issued in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to October 15,
2002. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C> <C>
2002.......................................................................................104.625%
2003.......................................................................................103.083%
2004.......................................................................................101.542%
2005 and thereafter........................................................................100.000%
</TABLE>
Notwithstanding the foregoing, on or prior to October 15, 2000, the
Company may redeem up to an aggregate of $65.0 million in aggregate principal
amount of Notes at a redemption price of 109.25% of the principal amount
thereof, in each case plus accrued and unpaid interest thereon to the redemption
date, with the net proceeds of one or more underwritten public offerings of
common stock of the Company; provided that at least $120.0 million in aggregate
principal amount of Notes remain outstanding immediately after the occurrence of
such redemption; and
36
<PAGE> 43
provided, further, that such redemption shall occur within 45 days of the date
of the closing of such underwritten public offering of common stock of the
Company.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection
of Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment Date").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event within
90 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of the Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Facility limits the ability of the Company to purchase any
Notes and also provides that certain change of control events with respect to
the Company would constitute a default thereunder. Any future credit agreements
or other agreements relating to Senior Indebtedness to which the Company becomes
a party may contain similar restrictions and provisions. In the event a Change
of Control occurs at a time when the Company is prohibited from purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute
37
<PAGE> 44
a default under the Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes.
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or
the Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 70% of the consideration therefor received by the Company
or such Subsidiary is in the form of cash or Cash Equivalents; provided that the
amount of (x) any liabilities (as shown on the Company's or such Subsidiary's
most recent balance sheet) of the Company or any Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets and (y) any notes, securities or other obligations received by the
Company or any such Subsidiary from such transferee that are immediately
(subject to normal settlement periods) converted by the Company or such
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
The Company may apply such Net Proceeds, at its option, within 360 days
after the receipt of any Net Proceeds from an Asset Sale, (a) to permanently
reduce (x) Senior Indebtedness or (y) Indebtedness of the Company's Subsidiaries
or (b) to invest in the business or businesses of the Company or any of its
Subsidiaries or any business directly related to any business then conducted by
the Company or any of its Subsidiaries or any business related to the aircraft
industry or used for working capital purposes. Pending the final application of
any such Net Proceeds, the Company may temporarily reduce Senior Revolving
Indebtedness or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
is subordinated in right of payment as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness, whether outstanding on the date of
the Indenture or thereafter.
Upon any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness (including any interest accruing under the New Credit
Facility subsequent to an event of bankruptcy whether or not such interest is an
allowed claim in such proceeding) shall first be paid in full in cash or Cash
Equivalents, or payment provided for in cash or Cash Equivalents, before the
Holders or the Trustee on behalf of the Holders shall be entitled to receive any
payment by the Company of the principal of, premium, if any, or interest on the
Notes, or to acquire or redeem any of the Notes for cash or property (except
that Holders of Notes may receive securities that are subordinated at least to
the same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for such securities). Before any payment may be made by, or on behalf
of, the Company of the principal of, premium, if any, or interest on the Notes
upon any such dissolution, winding up, liquidation or reorganization, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the Holders of the Notes or
the Trustee on their behalf would be entitled, but for the subordination
provisions of the Indenture, shall be made by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, directly to the holders of the Senior Indebtedness (pro
rata to such holders on the basis of the respective amounts of Senior
Indebtedness held by such holders) or their representatives or to the trustee or
trustees under any indenture pursuant to which any of such Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
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necessary to pay all such Senior Indebtedness in full in cash or Cash
Equivalents after giving effect to any concurrent payment, distribution or
provision therefor, to or for the holders of such Senior Indebtedness.
If any default in the payment of any principal of or interest on any
Senior Indebtedness outstanding under any Specified Senior Indebtedness or any
Designated Senior Indebtedness when due and payable, whether at maturity, upon
any redemption, by declaration or otherwise, occurs and is continuing, no
payment shall be made by the Company with respect to the principal of, premium,
if any, or interest on, or other amounts owing with respect to, the Notes or to
redeem or acquire any of the Notes for cash or property or otherwise. If any
event of default occurs and is continuing under any Designated Senior
Indebtedness other than a default in payment of the principal of or interest on
any Designated Senior Indebtedness (or if such an event of default would occur
upon any payment of any kind or character with respect to the Notes), as such
event of default is defined in such Designated Senior Indebtedness, permitting
the holders thereof to accelerate the maturity thereof and if the holder or
holders or a representative of such holder or holders gives written notice of
the event of default to the Company and the Trustee (a "Default Notice"), then,
unless and until such event of default has been cured or waived or has ceased to
exist or the Trustee receives notice from the holder or holders of the relevant
Designated Senior Indebtedness (or a representative of such holder or holders)
terminating the Blockage Period (as defined below), during the 179 day period
after the delivery, of such Default Notice (the "Blockage Period"), the Company,
or any person acting on its behalf shall not, (x) make any payment or
distribution of or with respect to the principal of, premium, if any, or
interest on, or other amounts owing with respect to the Notes, or (y) acquire
any of the Notes for cash or property or otherwise. At the expiration of such
Blockage Period, the Company shall, as set forth in the Indenture, promptly pay
to the Trustee all sums which the Company would have been obligated to pay
during such Blockage Period but for this paragraph. Only one such Blockage
Period may be commenced with any 360 consecutive days. For all purposes of this
paragraph, no event of default which existed or was continuing with respect to
the Designated Senior Indebtedness to which the Blockage Period relates on the
date such Blockage Period commenced shall be or be made the basis for the
commencement of any subsequent Blockage Period by the holder or holders of such
Designated Senior Indebtedness (or a representative of such holder or holders)
unless such event of default is cured or waived for a period of not less than 90
consecutive days.
The Indenture further requires that the Company promptly notify holders
of Senior Indebtedness if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the
event of a liquidation or insolvency, Holders of Notes may recover less ratably
than creditors of the Company who are holders of Senior Indebtedness. As of
December 31, 1998, the principal amount of Senior Indebtedness outstanding was
approximately $300.1 million. The Indenture limits, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Indebtedness,
that the Company and its subsidiaries can incur. See "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company) or
to the direct or indirect holders of the Company's Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock), dividends or distributions payable to
the Company or any Subsidiary of the Company or dividends or distributions
payable by a Subsidiary of the Company to its shareholders on a pro rata basis);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any direct or indirect parent of the Company (other
than any such Equity Interests owned by the Company); (iii) make any principal
payment on, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes, except at stated
maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) with respect to Restricted Payments described in clauses
(i) and (ii) of the immediately preceding paragraph, the Company would,
at the time of such Restricted Payment and after giving pro forma
effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
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(c) such Restricted Payment, together with the aggregate of
all other Restricted Payments made by the Company and its Subsidiaries
after the date of the Indenture (including the Restricted Payments
permitted by the next paragraph, but excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v) and (vi) of the next
paragraph), is less than the sum of (i) an amount equal to the
difference (but not less than zero) between (A) Cumulative Operating
Cash Flow and (B) the product of 1.3 times Cumulative Total Interest
Expense, plus (ii) 100% of the aggregate net proceeds, including the
fair market value of property other than cash as determined in good
faith by the Board of Directors whose determination shall be conclusive
and evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee, received by the Company
from the issue or sale after the date of the Indenture of Equity
Interests of the Company or of debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests
(or convertible debt securities) sold to a Subsidiary of the Company
and other than Disqualified Stock or debt securities issued subsequent
to the date of the Indenture that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) $15 million.
The foregoing provisions do not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption
or repurchase of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or the substantially concurrent
issuance (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iv) investments, loans or advances to joint ventures of
the Company or any of its Subsidiaries in an aggregate amount at any time not to
exceed $20 million; and (v) the repurchase of shares of, or options to purchase
shares of, the Company's common stock held by employees of the Company (other
than any member of the BLS Group) or any of its Subsidiaries pursuant to the
forms of agreements under which such employees purchase, or are granted the
option to purchase, shares of such common stock in an aggregate amount not to
exceed $3 million in any fiscal year; provided that the amount available in any
given fiscal year shall be increased by the excess, if any, of (A) $3 million
over (B) the amount used pursuant to this clause (v) in the immediately
preceding fiscal year and (vi) distributions made by the Company on the date of
the Indenture provided that the proceeds of such distributions were used solely
to consummate the Recapitalization.
The amount of all Restricted Payments (other than cash) shall be the
fair market value (as determined in good faith by the Board of Directors, which
determination shall be conclusive and evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) on the
date of the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "Incur") any Indebtedness
(including Acquired Debt) or Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company or any of its Subsidiaries may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and the Subsidiaries may issue
shares of preferred stock if the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock or preferred stock is issued
would have been at least 2.0 to 1.0, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or preferred stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The foregoing provisions do not apply to:
(i) the incurrence by the Company or its Subsidiaries of
Indebtedness and letters of credit pursuant to the New Credit Facility
(with letters of credit being deemed to have a principal amount equal
to the
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maximum potential liability of the Company or its Subsidiaries
thereunder) in an aggregate principal amount not to exceed $372.0
million, less the aggregate amount of all proceeds of Assets Sales that
have been applied since the date of the Indenture to permanently reduce
the outstanding amount of such Indebtedness pursuant to the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(ii) Existing Indebtedness;
(iii) the incurrence by the Company, or any of its
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or
the net proceeds of which are used to extend, refinance, renew,
replace, defease or refund, Indebtedness that was permitted by the
Indenture to be incurred;
(iv) the incurrence by the Company or any of its Subsidiaries
of intercompany Indebtedness between or among the Company and any of
its Subsidiaries; provided, however, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinate to the payment in full of all Obligations with respect to
the Notes and (ii)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or a Subsidiary and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as
the case may be;
(v) Indebtedness under Guarantees in respect of obligations of
joint ventures of the Company or any of its Subsidiaries in aggregate
principal amount not to exceed $20 million at any one time;
(vi)(A) Indebtedness incurred to finance the purchase or
construction of property, plant or equipment which will be treated as
Consolidated Capital Expenditures of the Company so long as such
Indebtedness is secured by a Lien on the property, plant or equipment
so purchased or constructed and such Indebtedness does not exceed the
value of such property, plant or equipment so purchased or constructed
and such Lien shall not extend to or cover other assets of the Company
or any of its Subsidiaries other than the property, plant or equipment
so purchased or constructed and the real property, if any, on which the
property so constructed or so purchased, is situated and the
accessions, attachments, replacements and improvements thereto or (B)
Indebtedness incurred in connection with any lease financing
transaction in conjunction with the acquisition of new property;
provided that such lease financing transaction is consummated within 60
days of such acquisition (whether such lease will be treated as an
operating or capital lease in accordance with GAAP) and the aggregate
of the Indebtedness incurred pursuant to clauses (A) and (B) does not
exceed $15 million during any fiscal year (such amount is referred to
as the "Maximum Amount"); provided that the Maximum Amount for each
year shall be increased by the excess, if any, of (a) $30 million over
(b) Consolidated Capital Expenditures for the immediately preceding two
years;
(vii) Indebtedness incurred in connection with any sale and
leaseback transaction, provided that the aggregate of the Indebtedness
incurred pursuant to this clause (vii) shall not exceed $30.0 million;
(viii) obligations incurred in the ordinary course of business
under (A) trade letters of credit which are to be repaid in full not
more than one year after the date on which such Indebtedness is
originally incurred to finance the purchase of goods by the Company or
a Subsidiary of the Company; (B) standby letters of credit issued for
the purpose of supporting (1) workers' compensation liabilities of the
Company or any of its Subsidiaries as required by law, (2) obligations
with respect to leases of the Company or any of its Subsidiaries, (3)
performance, payment, deposit or surety obligations of the Company or
any of its Subsidiaries or (4) environmental liabilities of the Company
or any of its Subsidiaries as required by law, not exceeding an
aggregate amount of $15 million at any one time outstanding in addition
to any amounts required by law; (C) performance bonds and surety bonds,
and refinancings thereof, and (D) Guarantees of Indebtedness incurred
in the ordinary course of business of suppliers, licensees,
franchisees, or customers in an aggregate amount not to exceed $5
million;
(ix) Indebtedness to repurchase shares, or cancel options to
purchase shares, of the Company's common stock held by employees of the
Company (other than any member of the BLS Group) or any of its
Subsidiaries pursuant to the forms of agreements under which such
employees purchase shares of the Company's common stock;
(x) the incurrence by the Company or any of its Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding; and
(xi) the incurrence by the Company or any of its Subsidiaries
of Indebtedness (in addition to Indebtedness permitted by any other
clause of this paragraph) in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $25
million.
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Notwithstanding the foregoing, the accretion or amortization of
original issue discount under any Indebtedness, the payment of interest in
additional Indebtedness or the accretion of the liquidation preference of
Disqualified Stock or preferred stock, shall not be deemed an incurrence of
Indebtedness, Disqualified Stock or preferred stock; provided, however, that
such accretion or amortization or payment of interest is included in Fixed
Charges.
Liens
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) the New Credit Facility as in effect as of the date of
the Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the New Credit Facility as in effect on the date of the Indenture,
(b) the Indenture and the Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (e) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property, acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to directly or indirectly enter into any transaction
involving aggregate consideration in excess of $1,000,000 with any Affiliate or
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holder of 5% or more of any class of Capital Stock of the Company (including any
Affiliates of such holders) except for transactions (including any loans or
advances by or to any Affiliate) in good faith the terms of which are fair and
reasonable to the Company or such Subsidiary, as the case may be, and are at
least as favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a comparable transaction made on an arm's
length basis with Persons who are not such a Holder, an Affiliate of such Holder
or Affiliate of the Company; provided that any such transaction shall be
conclusively deemed to be on terms which are fair and reasonable to the Company
or any of its Subsidiaries and on terms which are at least as favorable as the
terms which could be obtained on an arm's length basis with Persons who are not
such a Holder, an Affiliate of such Holder or Affiliate of the Company if such
transaction is approved by a majority of the Company's directors (including a
majority of the Company's disinterested and independent directors, if any); and
provided further that with respect to the purchase or disposition of assets of
the Company or any of its Subsidiaries having a net book value in excess of $5
million, if the Company does not have any disinterested and independent
directors, in addition to approval of its board of directors, the Company shall
obtain a written opinion of an Independent Financial Advisor stating that the
terms of such transaction are fair and reasonable to the Company or its
Subsidiary, as the case may be, and are at least as favorable to the Company or
such Subsidiary, as the case may be, as could have been obtained on an arm's
length basis with Persons who are not such a holder, an Affiliate of such holder
or Affiliate of the Company. This covenant shall not apply to (a) any
transaction between the Company or any Affiliate thereof and any Lehman
Investors, including, without limitation, the payment of fees to any Lehman
Investor for financial and consulting services, (b) transactions between the
Company or any of its Subsidiaries and any employee or director of, or
consultant to, the Company or any of its Subsidiaries that are approved by the
Board of Directors, (c) the payment of reasonable and customary regular fees to
directors of the Company, (d) any transaction between the Company and any of its
Subsidiaries or between any of its Subsidiaries, (e) any Restricted Payment not
otherwise prohibited by the "Restricted Payments" covenant or (f) transactions
with Loral Space pursuant to agreements in effect on the date of the Indenture
(as such agreements are in effect on such date).
No Senior Subordinated Indebtedness
The Indenture provides that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Indebtedness and senior in any
respect in right of payment to the Notes.
Payments for Consent
The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, they will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company for
45 days after notice to comply with any of its other agreements in the Indenture
or the Notes; (iv) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is
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created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10 million or more; (v) failure by
the Company or any of its Subsidiaries to pay final judgments aggregating in
excess of $10 million, which judgments are not paid, discharged or stayed for a
period of 60 days; and (vi) certain events of bankruptcy or insolvency with
respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, that so long
as the New Credit Facility is in effect, such declaration shall not become
effective until the earlier of (i) five days after receipt of notice of such
acceleration by the Agent and the Company or (ii) an acceleration of obligations
under the New Credit Facility. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company, any Significant Subsidiary or any group of Subsidiaries
that, taken together, would constitute a Significant Subsidiary, all outstanding
Notes will become due and payable without further action or notice. Holders of
the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
October 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to October 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
as to all Notes issued thereunder, when (a) either (i) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Notes
which have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust and thereafter repaid to the Company) have
been delivered to the Trustee for cancellation; or (ii) all such Notes not
theretofore delivered to such Trustee for cancellation have become due and
payable by reason of the making of a notice of redemption or otherwise or will
become due and payable within one year and the Company has irrevocably deposited
or caused to be deposited with such Trustee as trust funds in trust solely for
the benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient
without consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on such Notes not theretofore delivered to the Trustee for
cancellation for principal, premium, if any, and accrued interest to the date of
maturity or redemption; (b) no Default or Event of Default with respect to the
Indenture or the Notes shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such deposit will not
result in a breach or violation of, or constitute a default under, any other
instrument to which the Company is a party or by which the Company is bound; (c)
the Company has paid or caused to be paid all sums payable by it under such
Indenture; and (d) the Company has delivered irrevocable instructions to the
Trustee under such Indenture to apply the deposited money toward the payment of
such Notes at maturity or the redemption date, as the case may be. In addition,
the Company must deliver an Officers' Certificate and an opinion of counsel to
the Trustee stating that all conditions precedent to satisfaction and discharge
have been satisfied.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
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Except as provided in the next two succeeding paragraphs, the Indenture
or the Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Notes or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
The Notes were issued in the form of one Global Note (the "Global
Note"). The Global Note was deposited on behalf of DTC (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "Global Note Holder").
Transfer of beneficial interests in the Global Note will be subject to
the applicable rules and procedures of the Depositary and its direct or indirect
participants, including, if applicable, those of Euroclear (as defined) and
CEDEL (as defined), which may change from time to time. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar.
The Depositary has advised the Company that the Depositary is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of Participants. The Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations.
Access to the Depositary's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial
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relationship with a Participant, either directly or indirectly (collectively,
"Indirect Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the Participants
or Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of the
Depositary are recorded on the records of the Participants and Indirect
Participants.
The Depositary has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depositary will
credit the accounts of Participants with portions of the principal amount of the
Global Note and (ii) ownership of such interests in the Global Note will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Note).
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer a beneficial interest in the Global Note to such persons may
be limited to that extent. Because the Depositary can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having a beneficial interest in the Global Note
to pledge such interest to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such interests, may
be affected by the lack of physical certificate evidencing such interest.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS, OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, premium, if any, and interest
on the Global Note registered in the name of the Depositary or its nominee will
be payable by the Trustee to the Depositary or its nominee in its capacity as
the registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of the Depositary's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Note, or for maintaining, supervising or reviewing any
of the Depositary's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Note or
(ii) any other matter relating to the actions and practices of the Depositary or
any of its Participants or Indirect Participants.
The Depositary has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of the Depositary.
Payments by Participants and the Indirect Participants to the beneficial owners
of Notes will be governed by standing instructions and customary practices and
will not be the responsibility of the Depositary, the Trustee or the Company.
Neither the Company nor the Trustee will be liable for any delay by the
Depositary or its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Depositary or its nominee as the
registered owner of the Notes for all purposes.
Except for trades involving only the Euroclear System ("Euroclear") and
Cedel Bank, S.A. ("CEDEL") Participants, interests in the Global Note will trade
in the Depositary's Same-Day Funds Settlement System and secondary market
trading activity in such interests will, therefore, settle in immediately
available funds, subject in all cases to the rules and procedures of the
Depositary and its Participants.
Transfers between Participants in the Depositary will be effective in
accordance with the Depositary's procedures, and will be settled in same-day
funds. Transfers between Participants in Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Cross-market transfers between Participants in the Depositary, on the
one hand, and Euroclear or CEDEL Participants, on the other hand, will be
effected through the Depositary in accordance with the depository's rules on
behalf of Euroclear or CEDEL, as the case may be, by its respective depository;
however, such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the Global Note in the Depositary, and
making or receiving payment in accordance with normal procedures for same-day
fund settlement applicable to the Depositary. Euroclear Participants and CEDEL
Participants may not deliver instructions directly to the depositories for
Euroclear or CEDEL.
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<PAGE> 54
Due to time zone differences, the securities accounts of a Euroclear or
CEDEL Participant purchasing an interest in the Global Note from a Participant
in the Depositary will be credited, and any such crediting will be reported to
the relevant Euroclear or CEDEL Participant, during the securities settlement
processing day (which must be a business day for Euroclear or CEDEL) immediately
following the settlement date of the Depositary. Cash received in Euroclear or
CEDEL as a result of sales of interests in the Global Note by or through a
Euroclear or CEDEL Participant to a Participant in the Depositary will be
received with value on the settlement date of the Depositary but will be
available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the Depositary's settlement date.
The Depositary has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or more
Participants to whose account the Depositary interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Notes, the
Depositary reserves the right to exchange Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
The information in this section concerning the Depositary, Euroclear
and CEDEL and their book-entry systems has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility for the
accuracy thereof. Although the Depositary, Euroclear and CEDEL have agreed to
the foregoing procedures to facilitate transfers of interests in the Global Note
among Participants in the Depositary, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by the Depositary, Euroclear or
CEDEL or their respective Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
Exchange of Book-Entry Notes for Certificated Notes
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depositary notifies the Company that it is (A)
unwilling or unable to continue as depository for the Global Note and the
Company thereupon fails to appoint a successor depository or (B) has ceased to
be a clearing agency registered under the Exchange Act or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause issuance of
the Notes in certificated form. In addition, beneficial interests in the Global
Note may be exchanged for certificated Notes upon request but only upon at least
20 days prior written notice given to the Trustee by or on behalf of the
Depositary in accordance with customary procedures. In all cases, certificated
Notes delivered in exchange for the Global Note or beneficial interest therein
will be registered in names, and issued in any approved denominations, requested
by or on behalf of the Depositary (in accordance with its customary procedures).
Certificated Notes
Subject to certain conditions, any person having a beneficial interest
in the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of certificated Notes. Upon any such issuance,
the Trustee is required to register such certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of any
thereof). In addition, if (i) the Company notifies the Trustee in writing that
the Depositary is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of certificated Notes under the Indenture,
then, upon surrender by the Global Note Holder of its Global Note, Notes in such
form will be issued to each person that the Global Note Holder and the
Depository identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes
represented by the Global Note (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to certificated
Notes, the Company will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. The Company expects that
secondary trading in the certificated Notes will also be settled in immediately
available funds.
CERTAIN DEFINITIONS
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Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
of any assets (including, without limitation, by way of a sale and leaseback,
other than sale and leaseback transactions so long as the present value of the
rental obligations of the Company and its Subsidiaries thereunder do not exceed
$30.0 million in the aggregate since the Issue Date) other than sales of
inventory in the ordinary course of business consistent with past practices
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption "--Change of Control" and/or the provisions described above under
the caption "--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $5.0 million or (b) for net proceeds in excess of $5.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Subsidiary or by a Subsidiary to the Company or to another Subsidiary, (ii)
an issuance of Equity Interests by a Subsidiary to the Company or to another
Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments" will not be deemed to
be Asset Sales.
"Bank" means any financial institution extending credit under the New
Credit Facility.
"BLS" means Bernard L. Schwartz.
"BLS Group" means (i) BLS, (ii) BLS's spouse and descendants
(collectively, "relatives"), (iii) a trust of which there are no beneficiaries
other than BLS, or relatives of BLS, or a charitable institution or
organization, (iv) a partnership, corporation or limited liability company of
which there are no other partners, stockholders or members, as applicable, other
than BLS or the relatives of BLS, (v) a legal representative or guardian of BLS
or a relative of BLS if BLS or such relative becomes mentally incompetent, (vi)
any person succeeding BLS or a relative of BLS by will or by the laws of
descent, (vii) any individual who is employed by, a consultant to or a director
of the Company or any of its subsidiaries, and (viii) any individual who is a
consultant or advisor to BLS with respect to the investment by BLS in the
Company.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than twelve months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500.0 million, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii) above
and (v) commercial paper having a rating of at least A-3 from Moody's Investors
Service, Inc. or P-3 from Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition.
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"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Permitted Investors, (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Permitted Investors, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
more than 50% of the voting stock of the Company or (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors. For purposes of this definition, any transfer of an Equity
Interest of an entity that was formed for the purpose of acquiring voting stock
of the Company will be deemed to be a transfer of such portion of such voting
stock as corresponds to the portion of the equity of such entity that has been
so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any net loss realized in connection with an Asset Sale (to the
extent such losses were deducted in computing such Consolidated Net Income),
plus (ii) provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Subsidiaries for such period, whether
paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations but excluding amortization
of deferred financing fees incurred in connection with the Recapitalization), to
the extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash charges
were deducted in computing such Consolidated Net Income, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Interest Expense" of any Person for any period means
interest expense (including amortization of original issue discount and non-cash
interest payments or accruals and the interest portion of Capitalized Leases but
excluding amortization of deferred financing fees incurred in connection with
the Recapitalization) of such Person and its Consolidated Subsidiaries, all as
determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of
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such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any
member of the Board of the Company who (i) was a member of such Board on the
date of the Indenture or (ii) was nominated for election or elected to such
Board with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Facility" means that certain Credit Facility, dated as of
October 15, 1997, by and among Aircraft Braking Systems, Engineered Fabrics,
Lehman Brothers, as arranger, Lehman Commercial Paper Inc., as syndication
agent, The First National Bank of Chicago, as administrative agent, and the
lenders named therein, providing for up to $372.0 million of borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time with the
same or different lenders.
"Cumulative Operating Cash Flow" means, for the period beginning
September 30, 1997 through and including the end of the last fiscal quarter
(taken as one accounting period) preceding the date of any proposed Restricted
Payment, Operating Cash Flow for the Company and its Consolidated Subsidiaries
for such period determined on a consolidated basis in accordance with GAAP.
"Cumulative Total Interest Expense" means, for the period beginning
September 30, 1997 through and including the end of the last fiscal quarter
(taken as one accounting period) preceding the date of any proposed Restricted
Payment, Consolidated Interest Expense for the Company and its Consolidated
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) Indebtedness under the New
Credit Facility and (ii) if there is no Indebtedness outstanding or active
commitments to issue Indebtedness under the New Credit Facility, any other
Indebtedness constituting Senior Indebtedness which, at the time of
determination has an aggregate principal amount outstanding of at least $25
million and is specifically designated in the instrument evidencing such Senior
Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock so long as it is a debt
security).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, including the Notes, until such amounts
are repaid.
"Fixed Charges" means, with respect to any Person for any period, the
sum of (i) the consolidated interest expense of such Person and its Subsidiaries
for such period, whether paid or accrued (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations but excluding amortization of deferred financing fees incurred in
connection with the Recapitalization) and (ii) the consolidated interest of such
Person and its Subsidiaries that was capitalized during such period and (iii)
any interest expense on Indebtedness of another Person that is Guaranteed by
such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all cash dividend payments (and
non-cash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the
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event that the Company or any of its Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, and (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, and (iii) the
Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Indebtedness" means, without duplication, with respect to any Person,
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Lehman Investors" means those certain merchant banking partnerships
affiliated with Lehman Brothers Holdings Inc.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
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"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain or loss, together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees, expenses,
indemnifications, reimbursements, obligations, damages and other liabilities or
other amounts payable under the documentation governing any Indebtedness.
"Operating Cash Flow" of any Person means, for any period, the sum of
(a) Net Income of such Person and its consolidated Subsidiaries for such period,
plus (b) provision for taxes based on income or profits included in computing
Net Income of such Person for such period, plus (c) Consolidated Interest
Expense of such Person for such period, plus (d) other non-cash charges deducted
from consolidated revenues in determining Net Income of such Person for such
period, in each case, determined on a consolidated basis in accordance with
GAAP.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Subsidiary of the Company in a Person,
if as a result of such Investment (i) such Person becomes a Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary of the Company; and (d) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
"Permitted Investor" means (i) any Person that is a member of the BLS
Group or (ii) any Lehman Investor.
"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries that secure Senior Indebtedness permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens existing on the date of the Indenture and any extensions
or renewals thereof, provided that such Liens do not extend to or cover any
other property or assets of the Company or any Subsidiary; (vi) statutory Liens
or landlords and carriers', warehouseman's, mechanics', suppliers',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business; (vii) Liens for taxes, assessments, government charges or claims which
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted and if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (ix) Liens created or deposits made to secure the performance
of tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (x) easements,
rights-of-way, restrictions and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any
Significant Subsidiary incurred in the ordinary course of business; (xi) any
attachment or judgment Lien, unless the judgment it secures shall not, within 60
days after the entry thereof, have been discharged or execution thereof stayed
pending appeal, or shall not have been discharged within 60 days after the
expiration of any such stay; (xii) any other Liens imposed by operation of law
which do not materially affect the Company's ability to perform its obligations
under the Notes and the Indenture; (xiii) rights of banks to set off deposits
against debts owed to said bank; (xiv) Liens upon specific items of inventory or
other goods and proceeds of the Company or its Subsidiaries securing the
Company's or any Subsidiary's obligations in respect of bankers' acceptances
issued or created for the account of any such Person to facilitate the purchase,
shipment or storage of such inventory or other goods; (xv) Liens securing
reimbursement obligations with respect to letters of credit which encumber
documents and other property relating to such letters of
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credit and the products and proceeds thereof; (xvi) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvii) Liens encumbering
property or assets under construction arising from progress or partial payments
by a customer of the Company or one of its Subsidiaries relating to such
property or assets; (xviii) Liens on the property or assets of the Company or
its Subsidiaries in favor of the PBGC in respect of unfunded pension obligations
or similar obligations pursuant to any agreement existing on the date of the
Indenture as in effect on the date of the Indenture; and (xix) Liens incurred in
the ordinary course of business of the Company or any Subsidiary of the Company
with respect to obligations that do not exceed $5 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of accrued and unpaid interest
thereon, reasonable expenses incurred in connection therewith and any associated
redemption premium); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Indebtedness" means (i) all Indebtedness and other monetary
obligations (whether now existing or hereafter incurred) of the Company and its
Subsidiaries on, under or in respect of, the New Credit Facility and including
all fees, expenses (including reasonable fees and expenses of counsel), claims,
charges, indemnity obligations and interest accruing on or subsequent to the
filing of a petition initiating any proceeding in bankruptcy, insolvency or like
proceeding whether or not such interest is an allowed claim in such proceeding;
(ii) all other Indebtedness of the Company (other than the Notes and the
Existing Notes), whether presently outstanding or hereafter created, incurred or
assumed, unless such Indebtedness, by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to or pari passu
with the Notes and (iii) any Hedging Obligations; provided that the term Senior
Indebtedness shall not include (a) any Indebtedness of the Company which when
incurred and without respect to any election under Section 11(b) of the
Bankruptcy Code, was without recourse to the Company, (b) any Indebtedness of
the Company to any of its Subsidiaries or Affiliates, (c) any Indebtedness of
the Company not otherwise permitted by the covenants described under the
captions "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" and "--Subordination--No Senior Subordinated Debt," (d)
Indebtedness to any employee of the Company, (e) any liability for taxes and (f)
trade payables.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Specified Senior Indebtedness" means any Indebtedness constituting
Senior Indebtedness which, at the time of determination has an aggregate
principal amount outstanding of at least $25 million and is specifically
designated in the instrument evidencing such Senior Indebtedness as "Specified
Senior Indebtedness."
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment. sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
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"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person and one
or more Wholly Owned Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Notes by an initial beneficial owner of Notes that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). This discussion is based upon the United States federal tax law now in
effect, which is subject to change, possibly retroactively. For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof, an estate whose income is includible in gross income for
United States federal income tax purposes regardless of its source or a trust,
if a U.S. court is able to exercise primary supervision over the administration
of the trust and one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust. This rule on trusts is effective for tax
years beginning after December 31, 1996, or in some cases earlier by election.
The tax treatment of the holders of the Notes may vary depending upon their
particular situations. U.S. persons acquiring the Notes are subject to different
rules than those discussed below. In addition, certain other holders (including
insurance companies, tax exempt organizations, financial institutions and
broker-dealers) may be subject to special rules not discussed below. Prospective
investors are urged to consult their tax advisors regarding the United States
federal tax consequences of acquiring, holding and disposing of Notes, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.
New final regulations dealing with withholding tax on income paid to
foreign persons and related matters (the "New Withholding Regulations") were
issued by the Treasury Department in 1997 and 1998. In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements, but unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Accordingly, payments made on or
before December 31, 1999 will continue to be subject to the regulations that
existed before the New Withholding Regulations were issued. THE NEW WITHHOLDING
REGULATIONS ARE QUITE COMPLEX. NON-U.S. HOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States Holder
(i) does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the United States Internal Revenue Code of 1986 (the
"Code") and (iii) certifies, under penalties of perjury, that such holder is not
a United States person and provides such holder's name and address. For payments
made after December 31, 1999, the New Withholding Regulations specify that the
statement must be made on Form W-8 and provided prior to payment.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United
States federal income tax on gain recognized on a sale, redemption or other
disposition of a Note unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United States
Holder or (ii) in the case of a Non-United States Holder who is a nonresident
alien individual and holds the Note as a capital asset, such holder is present
in the United States for 183 or more days in the taxable year and certain other
requirements are met.
FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For payments made on or before December 31, 1999, the Company will,
where required, report to the holders of Notes and the Internal Revenue Service
the amount of any interest paid on the Notes in each calendar year and the
amounts of tax withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States holders,
temporary Treasury regulations provide that the 31% backup withholding tax and
certain information reporting will not apply to such payments with respect to
which either the requisite certification, as described above, has been received
or an exemption has otherwise been
56
<PAGE> 63
established; provided that neither the Company nor its payment agent has actual
knowledge that the holder is a United States person or that the conditions of
any other exemption are not in fact satisfied. Under temporary Treasury
regulations, these information reporting and backup withholding requirements
will apply, however, to the gross proceeds paid to a Non-United States Holder on
the disposition of the Notes by or through a United States office of a United
States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a foreign person or
the holder otherwise establishes an exemption. Information reporting
requirements, but not backup withholding, will also apply to a payment of the
proceeds of a disposition of the Notes by or through a foreign office of a
United States broker or foreign brokers with certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the holder of the Notes is not a United States person, and such broker has no
actual knowledge to the contrary, or the holder establishes an exemption.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
For payments made after December 31, 1999, the New Withholding
Regulations provide that to the extent a Non-United States Holder certifies on
Form W-8 (or a permitted substitute form) as to such holder's status as a
foreign person, the backup withholding provisions and the information reporting
provisions will generally not apply. If a Non-United States Holder fails to
provide such certification, such holder may be subject to certain information
reporting and the 31% backup withholding tax.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
57
<PAGE> 64
PLAN OF DISTRIBUTION
This prospectus is to be used by Lehman Brothers Inc. in connection
with offers and sales of the Notes in market-making transactions effected from
time to time. Lehman Brothers Inc. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or negotiated prices.
Affiliates of Lehman Brothers Inc. currently own 50% of the Company's
Common Stock. See "Ownership of Capital Stock." Lehman Brothers Inc. has
informed the Company that it does not intend to confirm sales of the Notes to
any accounts over which it exercises discretionary authority without the prior
specific written approval of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to make
a market in the Notes. However, Lehman Brothers Inc. is not obligated to do so
and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors -- Trading Market for the Notes."
Lehman Brothers Inc. has provided investment banking services to the
Company in the past and may provide such services and financial advisory
services to the Company in the future. Lehman Brothers Inc. acted as one of two
purchasers in connection with the initial sale of the Old Notes and received an
underwriting discount of approximately $4.6 million in connection therewith. See
"Certain Transactions."
Lehman Brothers Inc. and the Company have entered into a registration
rights agreement with respect to the use by Lehman Brothers Inc. of this
Prospectus. Pursuant to such agreement, the Company agreed to bear all
registration expenses incurred under such agreement, and the Company agreed to
indemnify Lehman Brothers Inc. against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes was passed upon for the Company by O'Sullivan
Graev & Karabell, LLP, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997
and for the years ended December 31, 1998 and 1997 and the nine months ended
December 31, 1996 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
58
<PAGE> 65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
K & F INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended December
31, 1998 and 1997 and the nine months ended December 31, 1996 F-4
Consolidated Statements of Stockholders' Deficiency for the years ended December
31, 1998 and 1997 and the nine months ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998 and 1997 and the nine months ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 66
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-2
<PAGE> 67
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 ......................................... 40,014,000 35,990,000
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-3
<PAGE> 68
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, Nine Months 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-4
<PAGE> 69
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
========== ======== ========= ======= ========= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-in Comprehensive Comprehensive
Capital Deficit Income Income
------- ------- ------ ------
<S> <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) $(152,661,000) $ 258,000 $ 40,849,000
============= ============== ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 70
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-6
<PAGE> 71
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. [/R]
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-7
<PAGE> 72
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
F-8
<PAGE> 73
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 3,803,000 3,904,000
contracts
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>
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>
F-9
<PAGE> 74
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-10
<PAGE> 75
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-11
<PAGE> 76
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
Nine Months Ended
Year Ended December 31, 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
F-12
<PAGE> 77
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-13
<PAGE> 78
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
<TABLE>
<CAPTION>
Accumulated
Cumulative Other
Minimum 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.
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-14
<PAGE> 79
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>
<PAGE> 80
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 Nine Months Ended Year Ended
December 31, December 31, December 31, Nine Months Ended
--------------------------- ----------- --------------------------- 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-16
<PAGE> 81
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.
F-17
<PAGE> 82
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-18
<PAGE> 83
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-19
<PAGE> 84
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-20
<PAGE> 85
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-21
<PAGE> 86
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
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>
Nine Months
Year Ended 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>
F-22
<PAGE> 87
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 total
sales for the Company, for the years ended December 31, 1998 and 1997 and the
nine months ended December 31, 1996, respectively.
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-23
<PAGE> 88
$185,000,000
K & F INDUSTRIES, INC.
9 1/4%
SENIOR SUBORDINATED
NOTES DUE 2007
PROSPECTUS
____________, 1998
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation of
the Registrant provides that the directors of the Registrant, individually or
collectively, shall not be held personally liable to the Registrant or its
stockholders for monetary damages for breaches of fiduciary duty as directors,
except that any director shall remain liable (1) for any breach of the
director's fiduciary duty of loyalty to the Registrant or its stockholders, (2)
for acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (3) for liability under Section 174 of the General
Corporation Law of the State of Delaware or (4) for any transaction from which
the director derived an improper personal benefit. The by-laws of the Registrant
provide for indemnification of its officers and directors to the full extent
authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<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 Company (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
Securityholders 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 as of October 15, 1997 for the 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% Senior Subordinated Notes between the Company and Fleet
National Bank, as trustee (8)
5.01 -- Opinion of O'Sullivan Graev & Karabell, LLP (10)
10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among the Company, BLS and LBH (1)
10.02 -- Assumption Agreement dated as of April 27, 1989 (1)
10.03 -- Non-Competition Agreement dated as of April 27, 1989, between the Company and BLS (1)
10.04 -- K & F Industries, Inc. Retirement Plan for Salaried Employees (4)
10.05 -- K & F Industries, Inc. Savings Plan for Salaried Employees (4)
10.06 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees Plan A (1)
10.07 -- The Loral Systems Group Release and Separation Allowance Plan (1)
</TABLE>
II-1
<PAGE> 90
<TABLE>
<S> <C> <C>
10.08 -- Letter Agreement dated April 27, 1989, between the Company and Shearson Lehman Brothers Inc. (1)
10.09 -- K & F Industries, Inc. 1989 Stock Option Plan (2)
10.10 -- K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.11 -- Securities Purchase Agreement dated as of July 22, 1991, among the Company, BLS and the Lehman Investors (3)
10.12 -- Securities Purchase Agreement among the Company, BLS and the Lehman Investors dated September 2, 1994 (5)
10.13 -- Agreement dated as of September 2, 1994 between the Company and Loral (5)
10.14 -- Securities Conversion Agreement among the Company and the Converting Stockholders, dated November 8, 1994 (5)
10.15 -- Shared Services Agreement dated as of April 27, 1996 between Lockheed Martin Tactical Defense Systems--Akron
and ABS (10)
10.16 -- K & F Industries, Inc. Supplemental Executive Retirement Plan (7)
10.17 -- Amended and Restated Credit Agreement dated as of August 14, 1996 among Aircraft Braking Systems Corporation
("ABS"), Engineered Fabrics Corporation ("EFC"), the Lenders (as defined therein), Lehman Commercial Paper,
Inc., as Documentation Agent and Chase Securities Inc., individually and as agent for the Lenders ("Chase") (8)
10.18 -- Amended and Restated Security Agreement dated as of August 14, 1996 between ABS and Chase (8)
10.19 -- Amended and Restated Security Agreement dated as of August 14, 1996 between EFC and Chase (8)
10.20 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank (8)
10.21 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank (8)
10.22 -- Amended and Restated K & F Agreement dated as of August 14, 1996 between the Company and Chase (8)
10.23 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between ABS and Chase (8)
10.24 -- Amended and Restated Subordination Agreement dated as of August 14, 1996 between EFC and Chase (8)
10.25 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc. and Chase Securities Inc. (8)
10.26 -- Registration Rights Agreement dated as of August 15, 1996 among the Company, Lehman Brothers Inc. and Chase
Securities Inc. (8)
10.27 -- Credit Agreement dated as of October 15, 1997 among ABS, EFC, the Lenders (as defined therein), Lehman
Commercial Paper, Inc., as Documentation Agent and The First National Bank of Chicago ("FNBC"), as
Administrative Agent (10)
10.28 -- Guarantee and Collateral Agreement dated as of October 15, 1997 among the Company, ABS, EFC, certain
subsidiaries named therein and FNBC, as Collateral Agent (10)
10.29 -- Form of Term Note dated as of October 15, 1997 to be executed by each of ABS and EFC in favor of FNBC (10)
</TABLE>
II-2
<PAGE> 91
<TABLE>
<S> <C> <C>
10.30 -- Form of Revolving Credit Note dated as of October 15, 1997 to be executed by each of ABS and EFC in favor of
FNBC (10)
10.31 -- Subordination Agreement dated as of October 15, 1997 between ABS and FNBC (10)
10.32 -- Subordination Agreement dated as of October 15, 1997 between EFC and FNBC (10)
10.33 -- Intercreditor Agreement dated as of October 15, 1997 among the Pension Benefit Guaranty Corporation ("PBGC"),
FNBC, ABS, EFC and the Company (10)
10.34 -- K & F Agreement dated as of October 15, 1997 executed by the Company in favor of FNBC (10)
10.35 -- Settlement Agreement dated as of October 15, 1997 between the Company and PBGC (10)
10.36 -- Registration Rights Agreement dated as of October 15, 1997 between the Company and Lehman Brothers Inc. and
Unterberg Harris (10)
10.37 -- Dealer Manager Agreement dated as of September 15, 1997 between Lehman Brothers Inc. and the Company (10)
10.38 -- Amended and Restated Director Advisory Agreement dated as of October 15, 1997 between the Company and BLS (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)
12.01 -- Statement of computation of ratio of earnings (deficiency) to fixed charges
12.02 -- Statement of computation of pro forma earnings to fixed charges (10)
21.01 -- Subsidiaries of the Registrant (1)
23.01 -- Consent of O'Sullivan Graev and Karabell, LLP (included in Exhibit 5) (10)
23.02 -- Consent of Deloitte & Touche LLP
24.01 -- Powers of Attorney (included on signature page)
25.01 -- Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939 of State Street Bank and
Trust Company, as Trustee (10)
27.01 -- Financial Data Schedule (12)
99.1 -- Form of Letter of Transmittal (10)
99.2 -- Form of Notice of Guaranteed Delivery (10)
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (10)
99.4 -- Form of Letter to Clients (10)
</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 incorported herein by
reference.
II-3
<PAGE> 92
(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 filed 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.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference.
(b) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
required information is shown in financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-4
<PAGE> 93
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-5
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 3 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, state of New
York, on the 30th day of April, 1999.
K & F INDUSTRIES, INC.
By:/s/ KENNETH M. SCHWARTZ
------------------------------------
Kenneth M. Schwartz
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 to this Registration Statement on Form S-4 has
been signed on April 30, 1999 by or on behalf of the following persons in the
capacity indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, Chief Executive
------------------- Officer and Director (principal executive officer)
Bernard L. Schwartz
/S/ KENNETH M. SCHWARTZ Executive Vice President
-----------------------
Kenneth M. Schwartz
* Chief Financial Officer (principal financial and accounting officer)
------------------
Dirkson R. Charles
* Director
--------------
David J. Brand
* Director
-------------------
Herbert R. Brinberg
* Director
---------------
Robert B. Hodes
* Director and Secretary
----------------
Ronald H. Kisner
* Director
---------------
John R. Paddock
* Director
----------------
A. Robert Towbin
* Director
------------------
Alan H. Washkowitz
*BY /S/ KENNETH M. SCHWARTZ
-----------------------
Kenneth M. Schwartz
Attorney-in-fact
</TABLE>
II-6
<PAGE> 1
Exhibit 12.01
K & F INDUSTRIES, INC.
STATEMENT OF COMPUTATION OF EARNINGS (DEFICIENCY) TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, December 31, Year Ended March 31,
----------------------------------- ---------------------- ----------------------
1998 1997 1996 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 45,104 $ 20,868 $ 13,052 $ 14,963 $ 2,418 $ 507 ($10,173)
Fixed Charges (b) (1) 46,989 36,574 39,934 29,148 33,130 43,340 48,171
Less: capitalized interest 0 (175) (568) (568) 0 (105) 0
-------- -------- -------- -------- -------- -------- --------
Earnings (a) (2) $ 92,093 $ 57,267 $ 52,418 $ 43,543 $ 35,548 $ 43,742 $ 37,998
======== ======== ======== ======== ======== ======== ========
Ratio of earnings available to
cover fixed charges
(2) / (1) 1.96 1.57 1.31 1.49 1.07 1.01
Deficiency of earnings available to
cover fixed charges
(2) - (1) ($10,173)
</TABLE>
Note (a) Earnings consist of income (loss) before income taxes plus fixed
charges (excluding capitalized interest).
Note (b) Fixed charges consist of interest on indebtedness (including
capitalized interest and amortization of debt issuance costs) plus that
portion of lease rental expense representative of the interest factor
(deemed to be one-third of lease rental expense).
<PAGE> 1
Exhibit 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 3 to
Registration Statement No. 333-40977 of K & F Industries, Inc. of our report
dated January 27, 1999, appearing in the Prospectus, which is a part of such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 28, 1999
