-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S+EesgRyq67QWoMb3xE/Me/xxo82825KMMTkbze3jbeb8EL5K50IzVvuQT17qIOa AMdkOZuYVnK8fTxeLYGl2A== 0000950123-00-002912.txt : 20000411 0000950123-00-002912.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950123-00-002912 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K&F INDUSTRIES INC CENTRAL INDEX KEY: 0000851797 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341614845 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-40977 FILM NUMBER: 583205 BUSINESS ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2122970900 MAIL ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 10-K405 1 K & F INDUSTRIES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 33-29035 K & F INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1614845 STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER) 600 THIRD AVENUE, NEW YORK, NY 10016 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 297-0900 SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] There is no trading market for the Company's common stock. As of March 1, 2000, there were 740,398 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM I. BUSINESS GENERAL K & F Industries, Inc. ("K & F" or the "Company") was incorporated in Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's leading manufacturers of aircraft wheels, brakes and brake control systems for commercial transport, general aviation and military aircraft. K & F sells its products to virtually all major airframe manufacturers and most commercial airlines and to the United States and certain foreign governments. During the year ended December 31, 1999, approximately 88% of the Company's total revenues were derived from sales made by Aircraft Braking Systems. In addition, K & F, through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and over one-half of the domestic military market for such products. Engineered Fabrics also manufactures and sells iceguards and specialty coated fabrics used for storage, shipping, environmental and rescue applications for commercial and military uses. During the year ended December 31, 1999, 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 brake control 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. On October 15, 1997, the Company completed a recapitalization that consisted of a refinancing of its indebtedness and the purchase of a portion of its outstanding capital stock. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Recapitalization.") THE AIRCRAFT WHEEL AND BRAKE INDUSTRY Aircraft manufacturers are required to obtain regulatory airworthiness certification of their commercial aircraft by the FAA, by the United States Department of Defense in the case of military aircraft, or by similar agencies in most foreign countries. This process, which is both costly and time consuming, involves testing the entire airframe, including the wheels and braking system, to demonstrate that the airframe in operation complies with relevant governmental requirements for safety and performance. Generally, replacement parts for a wheel and brake system which has been certified for use on an airframe may only be provided by the original manufacturer of such wheel and brake system. Since most modern aircraft have a useful life of 25 years or more and require replacement of certain components of the braking system at regular intervals, sales of replacement parts are expected to provide a long and steady source of revenues for the manufacturer of the braking system. Due to the cost and time commitment associated with the aircraft certification process, competition among aircraft wheel and brake suppliers most often occurs at the time the airframe manufacturer makes its initial installation decision. Generally, competing suppliers submit proposals in response to requests for bids from manufacturers. Selections are made by the manufacturer on the basis of technological superiority, conformity to design criteria established by the manufacturer and pricing considerations. Typically, general aviation aircraft manufacturers will select one supplier of wheels and brakes for a particular aircraft. In the commercial transport market, however, there will often be "dual sourcing" of wheels and brakes. In such case, an airframe manufacturer may approve and receive FAA certification to configure a particular airframe with equipment provided by two or more wheel and brake manufacturers. Generally, 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 1 3 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 assemblies 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 brake control systems for commercial transport, general aviation and military aircraft. Since 1989, Aircraft Braking Systems has carefully directed its efforts toward expanding its presence in the commercial and general aviation segments of the aircraft industry, focusing particularly on high-cycle, medium- and short-range commercial aircraft and carbon equipped executive jets. As a result of this strategic focus, during this period, Aircraft Braking Systems has added approximately 1,700 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, 1999, due to an increase in the number of new aircraft entering service, as well as a slower than expected retirement rate of older aircraft. For example, airlines have responded to FAA regulatory noise abatement requirements by outfitting many of their older DC-9s with engine hushkits and by structural overhauls which effectively add fifteen years of service life to the aircraft. As of December 31, 1999, Aircraft Braking Systems estimates there were 718 DC-9 aircraft in service and engine hushkits were installed on 500 of them. 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, 1999, the Company's products had been installed on approximately 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 is a supplier of spare parts for the dual-sourced, MD-80 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 and CRJ-900 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 360 aircraft currently in service. The CRJ-700 is a 70 passenger plane and the CRJ-900 is a 90 passenger plane, both stretch versions of the 50 passenger Canadair Regional Jet. In addition, the Company has recently been selected as the supplier of wheels and carbon brakes for the Embraer ERJ170, ERJ190-100 and ERJ190-200, and as the total braking system supplier for the Fairchild Dornier 428 jet. 2 4 Aircraft Braking Systems is a supplier 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 312 A-321 aircraft. Of the 144 aircraft delivered to date, Aircraft Braking Systems has provided wheels and brakes for 97 of these aircraft. Aircraft Braking Systems' brake control systems, which are integrated into the 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, Honeywell's Aircraft Landing Systems Division and the B.F. Goodrich Company, Aircraft Braking Systems is the only significant manufacturer of brake control systems providing approximately 15% of the total market. Because of the sensitivity of brake control 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. 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, the 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 MD-500 and MD-600 and the Bell 214ST and Bell 609. During the year ended December 31, 1999, approximately 12% of the Company's total revenues were derived from sales made by Engineered Fabrics. Bladder 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, 1999, sales of fuel tanks accounted for approximately 80% of Engineered Fabrics' total revenues. For military helicopter applications, Engineered Fabrics' fuel tanks feature encapsulated layers of rubber which expand in contact with fuel thereby sealing off holes or gashes caused by bullets or other projectiles penetrating the walls of the fuel tank. The Company manufactures crash-resistant fuel tanks for helicopters and military aircraft 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 tail assemblies. 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. 3 5 The following table shows the distribution of sales of aircraft wheels and brakes, brake control systems and fuel tanks as a percentage of total sales of the Company:
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Wheels and brakes........................................... 81% 80% 80% Brake control systems....................................... 7% 8% 8% Fuel tanks.................................................. 10% 9% 9% -- -- -- Total............................................. 98% 97% 97% == == ==
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 15%, 14% and 12% of total sales for the years ended December 31, 1999, 1998 and 1997, 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 sales:
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Commercial transport........................................ 63% 64% 64% Military (U.S. and foreign)................................. 18% 18% 18% General aviation............................................ 19% 18% 18% --- --- --- Total............................................. 100% 100% 100% === === ===
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 (100 seats or more) and commuter aircraft. 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 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 in Taiwan. Some of the 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 (19 seats or less). 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. Brake control systems are supplied by the Company to Gulfstream, Dassault and other aircraft manufacturers. General aviation aircraft using the Company's wheels and brakes 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. 4 6 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:
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ----- ----- ----- Domestic sales.............................................. 58% 57% 57% Foreign sales............................................... 42% 43% 43% --- --- --- Total............................................. 100% 100% 100% === === ===
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, 1999, the Company employed approximately 151 engineers (of whom 29 held advanced degrees); approximately 28 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, 1999, 1998 and 1997 were $14.0 million, $13.7 million and $10.9 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 Honeywell'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 brake control 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, 1999 and 1998 amounted to approximately $150.6 million and $174.6 million, respectively. Backlog consists of firm orders for the Company's products which have not been shipped. Approximately 88% of total Company backlog at December 31, 1999 is expected to be shipped during the year ending December 31, 2000, 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, 1999, approximately 32% 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. 5 7 GOVERNMENT CONTRACTS For the years ended December 31, 1999, 1998 and 1997, approximately 15%, 14% and 12%, respectively, of the Company's total sales were made to agencies of the Government or to prime contractors or subcontractors of the Government. All of the Company's defense contracts are firm, fixed-price contracts under which the Company agrees to perform for a predetermined price. Although the Company's fixed-price contracts generally permit the Company to keep unexpected profits if costs are less than projected, the Company does bear the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls and standard provisions for termination at the convenience of the Government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and to an allowance for profit. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the government. Companies supplying defense-related equipment to the Government are subject to certain additional business risks peculiar to that industry. Among these risks are the ability of the Government to unilaterally suspend the Company from new contracts pending resolution of alleged violations of procurement laws or regulations. Other risks include a dependence on appropriations by the Government, changes in the Government's procurement policies (such as greater emphasis on competitive procurements) and the need to bid on programs in advance of design completion. A reduction in expenditures by the Government for aircraft using products of the type manufactured by the Company, or lower margins resulting from increasingly competitive procurement policies, or a reduction in the volume of contracts or subcontracts awarded to the Company or substantial cost overruns would have an adverse effect on the Company's cash flow and results of operations. SUPPLIES AND MATERIALS The principal raw materials used in the Company's wheel and brake manufacturing operations are steel, aluminum forgings and carbon compounds. The Company produces most of its carbon at its carbon manufacturing facility in Akron, Ohio. 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, 1999, the Company had 1,420 full-time employees, of which 915 were employed by Aircraft Braking Systems (461 hourly and 454 salaried employees) and 505 were employed by Engineered Fabrics (378 hourly and 127 salaried employees). All of Aircraft Braking Systems' hourly employees are represented by the United Auto Workers' Union and all of Engineered Fabrics' hourly employees are represented by the United Food and Commercial Workers' Union. Aircraft Braking Systems' four-year contract with its union expires on May 31, 2002. Engineered Fabrics' three-year contract with its union expires on February 5, 2001. ITEM 2. PROPERTIES United States Facilities. Aircraft Braking Systems and Engineered Fabrics operate two manufacturing facilities in the United States which are individually owned except as set forth below under "Akron Facility Arrangements." Aircraft Braking Systems' facility is located in Akron, Ohio, and consists of approximately 770,000 square feet of manufacturing, engineering and office space. Engineered Fabrics' facility is located in Rockmart, Georgia, and consists of approximately 564,000 square feet of manufacturing, engineering and office space. The Company believes that its properties and equipment are generally well-maintained, in good operating condition and adequate for its present needs. 6 8 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 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, 1999, 1998 and 1997, Aircraft Braking Systems made occupancy payments to Lockheed Martin of $1.9 million, $1.8 million and $1.7 million, respectively. Certain access easements and agreements regarding water, sanitary sewer, storm sewer, gas, electricity and telecommunication are perpetual. In addition, Lockheed Martin and Aircraft Braking Systems equally control Valley Association Corporation, an Ohio corporation, which was formed to establish a single entity to deal with the City of Akron and utility companies concerning governmental and utility services which are furnished to Lockheed Martin's and Aircraft Braking Systems' facilities. ITEM 3. LEGAL PROCEEDINGS There are various lawsuits and claims pending against the Company incidental to its business. Although the final results in such suits and proceedings cannot be predicted with certainty, in the opinion of the Company's management, the ultimate liability, if any, will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no trading market for the Company's common stock. All of the common stock of the Company is owned by Bernard L. Schwartz ("BLS"), Chairman of the Company, and by four limited partnerships of Lehman Brothers Holdings Inc. (the "Lehman Investors"). (See "Security Ownership of Certain Beneficial Owners and Management.") ITEM 6. SELECTED FINANCIAL DATA The selected financial data has been derived from, and should be read in conjunction with, the related audited consolidated financial statements. The selected financial data for the year ended December 31, 1996 and nine months ended December 31, 1995 is unaudited. Effective December 31, 1996, the Company changed its fiscal year-end from March 31 to December 31. 7 9
FISCAL YEAR NINE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ------------------------------------------------- -------------------- --------- 1999 1998 1997 1996 1996 1995 1996 --------- --------- --------- -------- -------- -------- --------- (IN THOUSANDS) Income Statement Data: Net sales...................... $ 355,951 $ 345,447 $ 304,331 $277,655 $212,703 $199,784 $264,736 Cost of sales.................. 197,757 196,190 188,001 180,971 136,813 136,277 180,435 --------- --------- --------- -------- -------- -------- -------- Gross Margin................... 158,194 149,257 116,330 96,684 75,890 63,507 84,301 Independent research and development.................. 13,996 13,705 10,873 11,781 8,623 6,610 9,767 Selling, general and administrative expenses...... 33,245 35,332 40,182(a) 24,482 17,297 15,378 22,564 Amortization................... 8,773 10,286 10,316 10,412 7,810 7,813 10,415 --------- --------- --------- -------- -------- -------- -------- Operating income............... 102,180 89,934 54,959 50,009 42,160 33,706 41,555 Interest expense, net.......... 40,396 44,830 34,091 36,957 27,197 31,288 41,048 --------- --------- --------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary charge....................... 61,784 45,104 20,868 13,052 14,963 2,418 507 Income tax benefit (provision).................. 12,136 (5,744) (5,184) 81 81 -- -- Extraordinary charge........... -- -- (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d) (1,913)(d) --------- --------- --------- -------- -------- -------- -------- Net income (loss).............. $ 73,920 $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505 $ (1,406) ========= ========= ========= ======== ======== ======== ======== Balance Sheet Data (at end of period): Working capital................ $ 76,622 $ 38,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938 $ 36,327 Total assets................... 441,868 420,099 425,236 419,115 419,115 412,028 416,037 Long-term debt................. 432,125 477,125 519,125(a) 287,000 287,000 293,000 294,000 Stockholders' deficiency....... (141,734) (215,610) (256,459)(a) (33,306) (33,306) (34,327) (39,701) Other Data (for the period): Capital expenditures........... 10,413 14,873 10,016 21,166 14,091 3,343 10,418 Depreciation and amortization................. 17,268 19,961 19,680 19,305 14,644 14,260 18,921
- --------------- (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. (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. 8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Aircraft Braking Systems generates approximately 75% of its revenues through the sale of replacement parts for wheels and braking systems which are installed on approximately 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 high-cycle, medium- and short-range aircraft. During the years ended December 31, 1999, 1998 and 1997, the Company spent an aggregate of approximately $50.8 million, $60.7 million and $51.0 million, respectively, for research, development, design, Program Investments, capital expenditures and development participation costs. In prior years, the Company was selected as a supplier of wheels and carbon brakes on the Airbus A-321, the sole supplier of wheels, carbon brakes and brake control systems on the MD-90 and the sole supplier of wheels and brakes for each of the Saab 2000, the Canadair Regional Jet and CRJ-700 and the Lear 60. During 1999, the Company was selected as the sole wheel and brake supplier for Embraer's 70 and 90 passenger jets and Bombardier's 90 passenger jet, and the total braking system supplier for the Fairchild Dornier 428. Aircraft produced under these programs are in development or 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, 1999 Compared with the Year Ended December 31, 1998 During 1999, sales, operating income and net income were the highest in the Company's history, reflecting the continued build-out of customer fleets using Company products, new program awards and 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, 1999 totaled $356.0 million, reflecting an increase of $10.5 million or 3.0%, compared with $345.4 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 $4.9 million, primarily on Fokker FO-100, A-321, MD-80, Fokker 27/28 and DC-10 programs, partially offset by lower sales on the MD-90 and DC-9 programs. General aviation sales increased $3.8 million, primarily due to higher sales of wheels and brakes on Gulfstream and Canadair aircraft. Military sales increased $1.8 million, primarily due to higher sales of aircraft fuel tanks on the F-18 and AH-64 programs. Gross Margin. The gross margin for the year ended December 31, 1999 was 44.4% compared with 43.2% for the same period in the prior year. This increase was primarily due to lower Program Investments and 9 11 the overhead absorption effect relating to the higher sales. However, the reduction in Program Investments negatively effected overhead absorption and partially offset the increase in operating margins. Independent Research and Development. Independent research and development costs were $14.0 million for the year ended December 31, 1999 compared with $13.7 million for the same period in the prior year. This increase was primarily due to higher costs associated with the JAS-39 and Canadair CRJ-700 programs, partially offset by lower costs on the Raytheon Hawker Horizon. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $33.2 million for the year ended December 31, 1999 compared with $35.3 million for the same period in the prior year. This decrease was primarily due to lower costs incurred in 1999 associated with the installation of a new computer system at Aircraft Braking Systems, partially offset by higher performance-related incentive compensation. Interest Expense, Net. Interest expense, net was $40.4 million for the year ended December 31, 1999 compared with $44.8 million for the same period in the prior year. This decrease was due to a lower average debt balance and lower interest rates on the Company's variable rate indebtedness. Effective Tax Rate. The Company's effective tax rate of (19.6)% for the year ended December 31, 1999 differs from the statutory rate of 35% due to a net decrease in the valuation allowance and utilization of tax net operating losses, partially offset by state and local taxes. The effective tax rate of 12.7% for year ended December 31, 1998 differs from the statutory rate of 35% due to utilization of tax net operating losses, partially offset by state, local and foreign income taxes. The decrease in the effective rate in 1999 over 1998 is primarily due to the recording of a deferred tax asset to reflect the more likely than not utilization of tax net operating loss carryforwards and the expected reversal of temporary differences through December 31, 2000. Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997 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 were higher shipments of original equipment to airframe manufacturers at or below the cost of production. Independent Research and Development. Independent research and development costs were $13.7 million for the year ended December 31, 1998 compared with $10.9 million for the same period in the prior year. This increase was primarily due to higher costs associated with the Raytheon Hawker Horizon and Canadair CRJ-700 programs. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $35.3 million for the year ended December 31, 1998 compared with $40.2 million for the same period in the prior year. Excluding a $12.4 million non-recurring charge in 1997, relating to the exercise of stock options and other fees in connection with the Recapitalization, selling, general and administrative expenses increased $7.5 million. This increase was primarily due to higher costs associated with installation of a new computer system at Aircraft Braking Systems and higher performance-related incentive compensation. Interest Expense, Net. Interest expense, net was $44.8 million for the year ended December 31, 1998 compared with $34.1 million for the same period in the prior year. This increase was due to increased 10 12 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% for the year ended December 31, 1998 differs from the statutory rate of 35% due to utilization of tax net operating losses, partially offset by state, local and foreign income taxes. The effective 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, partially offset by an increase in the valuation allowance and state, local and foreign income taxes. The decrease in the effective rate in 1998 is primarily due to the net change in the valuation allowance and lower foreign income taxes. 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 $485.1 million at December 31, 1998 to $433.6 million at December 31, 1999 due to $50 million of principal prepayments and $1.5 million of scheduled principal payments on its Credit Facility. At December 31, 1999, the Credit Facility consists of a term loan facility in an aggregate principal amount of $241.6 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 $48.9 million and a Tranche B term loan ("Term Loan B") in the principal amount of $192.7 million. The Credit Facility bears interest at floating rates selected at the option of the Company. At December 31, 1999 and 1998, the average interest rate on the Credit Facility was 8.3% and 7.4%, 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 $129 million of borrowings at December 31, 1999. 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 due in years 2000 through 2002 and $47.4 million due in year 2003. Term Loan B is an eight-year quarterly amortizing facility maturing October 15, 2005, with installments of $1.0 million per year due in years 2000 through 2003, $67.0 million due in 2004 and $121.8 million due in 2005. 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 50% of excess cash flow (as defined). As a result of the excess cash flow calculation, $18.5 million was determined to be payable in 2000; however, the Company voluntarily prepaid $50.5 million during 1999, of which $32.0 million will be applied to future excess cash flow. 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, 1999, the Company had outstanding letters of credit of $6.6 million. The Revolving Loan commitment terminates on October 15, 2003. At December 31, 1999, the Company had $36.4 million available to borrow under the Revolving Loan. The Company's management believes that it will have adequate resources to meet its current cash requirements through funds generated from operations and borrowings under its Revolving Loan. The Credit Facility contains certain covenants and events of default, including limitations on additional indebtedness, liens, asset sales, making certain restricted payments, capital expenditures, creating guarantee obligations and material lease obligations. The Credit Facility also contains certain financial ratio requirements including a cash interest coverage ratio, a leverage ratio and maintenance of a minimum adjusted net worth. The Company was in compliance with all covenants at December 31, 1999. 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 11 13 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. CASH FLOW During the year ended December 31, 1999, net cash provided by operating activities amounted to $60.5 million and reflected $119.4 million of earnings before interest, taxes, depreciation and amortization ("EBITDA"), decreases in inventory of $1.4 million, increases in accounts payable of $2.4 million, decreases in other working capital of $1.0 million, and increases in long-term liabilities of $1.3 million, partially offset by increases in accounts receivable of $16.1 million, prepaid pension costs of $4.0 million, decreases in other current liabilities of $3.7 million, interest payments of $39.5 million and income tax payments of $1.7 million. During the year ended December 31, 1998, net cash provided by operating activities amounted to $52.2 million and reflected $109.9 million of EBITDA, decreases in accounts receivable of $4.0 million, other working capital of $0.8 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, 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), interest payments of $42.8 million and income tax payments of $1.1 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, 1999, net cash used in investing activities amounted to $18.3 million due to $10.4 million of capital expenditures and $7.9 million of program participation payments. 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 due to $10.0 million of capital expenditures and $1.8 million of program participation payments. Capital spending for the year ended December 31, 2000 is expected to be approximately $11.0 million. During the year ended December 31, 1999, net cash used in financing activities amounted to $45.5 million due to the repayment of indebtedness of $51.5 million, partially offset by $6.0 million of proceeds received from a sale and leaseback transaction. 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 $0.6 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. ACCOUNTING PRONOUNCEMENT 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 January 1, 2001 for the Company. The Company is currently evaluating the impact, if any, on its financial position upon the adoption of SFAS No. 133. 12 14 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 The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations to date, the Company does not expect any significant impact to its ongoing business as a result of the Y2K issue. The Company is not aware of any significant Y2K issues or problems that may have arisen for its significant customers and suppliers. The Company expended approximately $0.6 million through December 31, 1999 on its Y2K readiness efforts. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has approximately $433.6 million of total debt outstanding at December 31, 1999. 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 $129 million at December 31, 1999 and matures on December 17, 2001 with an option for the counterparty to extend the agreement to December 17, 2003. Therefore, the Company has effectively fixed the interest on $314 million of its indebtedness at December 31, 1999. Given that approximately 72% of the Company's borrowings at December 31, 1999 are at fixed interest rates, a change in rates by 10% would not have a significant impact on fair values, cash flows or earnings. The Company has no other derivative financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the financial statements, together with the auditors' reports thereon, appearing on pages F-1 to F-19 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the directors and executive officers of the Company. All directors hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualified, and all executive officers hold office at the pleasure of the Board of Directors. The following executive officers or directors of the Company are related by blood or marriage: Kenneth M. Schwartz is the nephew of Bernard L. Schwartz, Ronald H. Kisner's wife is the niece of Bernard L. Schwartz and John R. Paddock's wife is the daughter of Bernard L. Schwartz. No other executive officer or director of the Company is related by blood, marriage or adoption.
NAME AGE POSITION(S) DIRECTOR SINCE - ---- --- ----------- -------------- Bernard L. Schwartz*................ 74 Chairman of the Board and Chief Executive Officer 1989 David J. Brand**.................... 39 Director 1997 Herbert R. Brinberg*................ 74 Director 1989 Robert B. Hodes*.................... 74 Director 1997 Ronald H. Kisner*................... 51 Director and Secretary 1989 John R. Paddock*.................... 46 Director 1989 A. Robert Towbin***................. 64 Director 1989 Alan H. Washkowitz**................ 59 Director 1989 Donald E. Fogelsanger............... 74 President Kenneth M. Schwartz................. 48 Executive Vice President Dirkson R. Charles.................. 36 Chief Financial Officer
- --------------- * 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 and a Director of Best Software Inc. 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, Globalstar Telecommunications, Ltd., LCH 14 16 Investments N.V., Loral Space & Communications Ltd., Mueller Industries, Inc., Restructured Capital Holdings Ltd. and R.V.I. Guaranty Co., Ltd. Mr. Kisner has been Secretary of the Company since 1997 and employed by the Company since January 1999. He was a member of the law firm of Chekow & Kisner, P.C., from 1984 until 1999. From 1982 to 1984, Mr. Kisner was a sole practitioner. From 1973 to 1982, he was Associate General Counsel of APL Corporation, where he held such offices as Secretary, Vice President and Director. 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). He holds appointments in the Department of Psychology at Kennesaw State University and Emory University. He is also on the clinical faculty in the Department of Psychiatry at Emory University School of Medicine. Mr. Towbin is Co-Chairman of C. E. Unterberg Towbin. From September of 1995 to January 2000 he was Senior Managing Director. From January 1994 to September 1995, he was President and Chief Executive Officer of the Russian-American Enterprise Fund and later Vice Chairman of its successor fund, The U.S. Russia Investment Fund. Mr. Towbin was a Managing Director at Lehman Brothers and Co-head, High Technology Investment Banking from January 1987 until January of 1994. Mr. Towbin was Vice Chairman and a Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. and its predecessor companies from 1986 to 1987. Mr. Towbin is also a Director of Bradley Real Estate Inc., Gerber Scientific, Inc., Globalstar Telecommunications Ltd., Globecomm Systems, Inc., and True Time, 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. Effective March 7, 2000, Mr. Fogelsanger was appointed Vice Chairman of the Company. Mr. Fogelsanger was 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. Effective March 7, 2000, Mr. Kenneth M. Schwartz was appointed President and Chief Operating Officer of the Company. Mr. Schwartz was 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. 15 17 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
NAME AGE POSITION - ---- --- -------- Frank P. Crampton....................... 56 Senior Vice President -- Marketing Richard W. Johnson...................... 56 Senior Vice President -- Finance and Administration James J. Williams....................... 44 Senior Vice President -- Operations Gary M. Rimlinger....................... 52 Vice President -- Engineering
ENGINEERED FABRICS CORPORATION
NAME AGE POSITION - ---- --- -------- Roger C. Martin......................... 62 President John A. Skubina......................... 45 Senior Vice President Richard P. Arsenault.................... 42 Vice President -- Finance Terry L. Lindsey........................ 55 Vice President -- Marketing Anthony G. McCann....................... 40 Vice President -- Operations Dan C. Sydow............................ 63 Vice President -- Engineering
Mr. Crampton has been Senior Vice President of Marketing at Aircraft Braking Systems since October 1999. He was previously Vice President of Marketing at Aircraft Braking Systems since 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 Senior Vice President of Finance and Administration at Aircraft Braking Systems since October 1999. He was previously 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. Williams has been Senior Vice President of Operations at Aircraft Braking Systems since October 1999. He was previously Vice President of Manufacturing at Aircraft Braking Systems since 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. Rimlinger was named Vice President of Engineering at Aircraft Braking Systems in June 1998. He had been Director of Research and Technology for Aircraft Braking Systems since February 1990. Prior to this assignment, he had spent 11 years in various Engineering and Engineering Management positions in the 16 18 Research and Technology Department of Aircraft Braking Systems, Loral Corporation's Aircraft Braking Systems Division and Goodyear Aerospace. 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 Engineered Fabrics Corporation for the past 38 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. Skubina has been Senior Vice President of Engineered Fabrics Corporation since September 1999. He had 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. Mr. Arsenault joined Engineered Fabrics Corporation in 1997 as Vice President of Finance. Prior to this he held various finance positions with the Remington Arms Company from 1994 to 1996 and he held Accounting and Auditing positions with the Fibers business, Composites business, and Corporate offices of E.I. Dupont from 1988 to 1994. He also worked for the U.S. army Audit Agency in various capacities from 1983 to 1988 and is a veteran of the U.S. Army, 82(nd) Airborne Division. Mr. Lindsey has been Vice President of Business Development at Engineered Fabrics Corporation since 1989. He has been with Goodyear Aerospace Corporation, Loral Corporation and Engineered Fabrics Corporation 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. Sydow has served as the Director and Vice President of Engineering since 1993. He joined Engineered Fabrics Corporation in September 1985 as a Senior Engineer. He served as the Manager of Product Engineering from 1989 to 1993. Before that, he served as the Supervisor of Centrifuge Assembly at Goodyear Atomic from 1981 to 1985. 17 19 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for the years ended December 31, 1999, 1998 and 1997, 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.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------- ----------------------- ALL OTHER FISCAL OPTIONS LTIP COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) GRANTED(#) PAYOUTS($) (a)($) --------------------------- ------ --------- --------- ---------- ---------- ------------ Bernard L. Schwartz............. 1999 2,084,224(b) 6,095,300 -- -- -- Chairman of the Board and 1998 2,070,782(b) 5,055,300 -- -- -- Chief Executive Officer 1997 1,440,000(b) 1,553,200 -- -- -- Kenneth M. Schwartz............. 1999 435,000(b) 175,000 -- 48,333 5,856 Executive Vice President of 1998 265,154 160,000 1,500 45,000 5,532 K & F Industries, Inc. 1997 494,038(b) 150,000 2,500 28,333 5,237 Donald E. Fogelsanger........... 1999 235,000 150,000 -- 53,332 32,976 President of K & F 1998 244,500 130,000 -- 48,333 35,636 Industries, Inc. 1997 216,000 125,000 2,500 30,000 34,519 Roger C. Martin................. 1999 164,000 82,000 -- 29,000 29,116 President of Engineered 1998 153,229 77,000 -- 27,333 29,238 Fabrics Corporation 1997 148,059 49,000 1,500 17,333 28,266 Dirkson R. Charles.............. 1999 170,000 90,000 -- 34,333 7,596 Chief Financial Officer of 1998 141,923 80,000 1,200 29,667 7,313 K & F Industries, Inc. 1997 135,000 170,000 2,250 18,333 7,071
- --------------- (a) Includes the following: (i) Company contributions to individual 401(k) plan accounts for the years ended December 31, 1999, 1998 and 1997, respectively: Mr. K. Schwartz -- $4,800, $4,517 and $4,275; Mr. Fogelsanger -- $4,800, $4,517 and $4,275; Mr. Martin -- $4,765, $4,610 and $3,927; Mr. Charles -- $4,800, $4,517 and $4,275; and (ii) the compensation element of supplemental life insurance programs for the years ended December 31, 1999, 1998 and 1997, respectively: Mr. K. Schwartz -- $1,056, $1,015 and $962; Mr. Fogelsanger -- $28,176, $31,119 and $30,244; Mr. Martin -- $24,351, $24,628 and $24,339; Mr. Charles -- $2,796, $2,796 and $2,796. (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 $150,000 and $250,000 of the aggregate annual advisory fee be paid to Kenneth M. Schwartz, which is included in his salary for the years ended December 31, 1999 and 1997, respectively. 18 20 OPTION GRANTS IN LAST FISCAL YEAR There were no grants of stock options by the Company during the year ended December 31, 1999 to the named executive officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTIONS VALUES The following sets forth information as to the exercise of stock options during the year ended December 31, 1999 and the value of unexercised stock options at year-end.
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END(#) FY-END($)(1) SHARES ------------- ------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ---- ----------- ------------ ------------- ------------- Bernard L. Schwartz...................... 0 0 0/0 0/0 Kenneth M. Schwartz...................... 0 0 625/3,375 0/0 Donald E. Fogelsanger.................... 0 0 625/1,875 0/0 Roger C. Martin.......................... 0 0 375/1,125 0/0 Dirkson R. Charles....................... 0 0 563/2,887 0/0
- --------------- (1) None of the Company's stock is currently publicly traded. All options in the table 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, 1999, 1998 and 1997, respectively: Mr. K. Schwartz $70,000, $60,000 and $50,000; Mr. Fogelsanger $65,000, $55,000 and $55,000; Mr. Martin $35,000, $32,000 and $30,000; and Mr. Charles $55,000, $45,000 and $39,000. 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 19 21 contributing) during the last 10 years of employment in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2% times additional years of such service up to 30, plus, (d) 0.6% times all additional such service above 30 years. Effective January 1, 1990, the Plan was amended for eligible employees of 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 $135,000 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 $300,000 for Mr. K. Schwartz; $148,000 for Mr. Fogelsanger; and $186,000 for Mr. Charles. 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 $95,000 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 four meetings during the year ended December 31, 1999. 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, 1999. All directors are reimbursed for reasonable out-of-pocket expenses incurred in that capacity. 20 22 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. PART IV ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the ownership of the capital stock of the Company as of December 31, 1999.
NUMBER OF PERCENTAGE SHARES OF OWNERSHIP OF COMMON STOCK** CAPITAL STOCK -------------- ------------- 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% ======= ======
- --------------- * Collectively referred to as the "Lehman Investors." ** The executive officers named in Item 11 hold options covering 2,188 shares, and executive officers and directors as a group hold options covering 4,750 shares, which may be acquired within 60 days pursuant to the exercise of the options. (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 21 23 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 Lehman Investors shall cause the Company to be sold as an entirety if such sale can be arranged for a price at least equal to the Appraised Value (subject to reduction by no more than 10% under specified circumstances). Any sale of the Company as an entirety shall include all Stockholders and the proceeds thereof shall be allocated among the Stockholders in accordance with their stock ownership. Notwithstanding other restrictions on transfer set forth in the Stockholders Agreement, from and after March 3, 2001, the Lehman Investors will have the right to transfer capital stock to a third party, subject to specified conditions. The put-sale rights of the Lehman Investors described above and the rights of the Lehman Investors to designate 50% of the members of the Board of Directors upon the death, retirement, resignation or disability of BLS will terminate upon any such transfer. The Stockholders Agreement provides certain first offer and tag-along rights with respect to certain transfers and common stock or Common Equivalents. The Stockholders Agreement grants the Stockholders demand and incidental registration rights with respect to shares of capital stock held by them, which rights will be exercisable at any time after an initial public offering of the Company's common stock approved by the Board of Directors. The Stockholders Agreement contains customary terms and provisions with respect to such registration rights. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS GENERAL BLS owns 50% of the capital stock of the Company and pursuant to the Stockholders Agreement has the right to designate a majority of the Board of Directors of the Company. In addition, BLS serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and devotes such time to the business and affairs of the Company as he deems appropriate. BLS is also Chairman and Chief Executive Officer of 22 24 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 $6,095,300, $5,055,300 and $1,553,200 for the years ended December 31, 1999, 1998 and 1997, 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, Lehman Brothers received underwriting discounts and commissions of $4.6 million in connection with the offering of the 9 1/4% Notes. 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. Before 1999, the Company 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 and $176,000 during the years ended December 31, 1998 and 1997, respectively. Mr. Kisner also received stock options for 900 and 1,750 shares during the years ended December 31, 1998 and 1997, respectively. Since January 1999, Mr. Kisner has been 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 certain legal services and rent. 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 $0.6 million, $0.7 million and $0.5 million for the years ended December 31, 1999, 1998 and 1997, 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. 23 25 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Financial Statements:
PAGE ---- K & F Industries, Inc. -- Consolidated Financial Statements: Independent Auditors' Report.............................. F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997....................... F-3 Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 1999, 1998 and 1997....... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................... F-5 Notes to Consolidated Financial Statements................ F-6
All other schedules and separate financial statements are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Exhibits 10.04 through 10.09 and 10.11, 10.12, 10.19, 10.40 and 10.41 are management contracts or compensation plans. (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended December 31, 1999. Exhibits: See exhibit index below. (c) Exhibits 1.01 -- Purchase Agreement dated as of October 9, 1997 between the Company and Lehman Brothers Inc. and Unterberg Harris(10) 2.01 -- Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral Corporation and the Registrant(1) 2.02 -- Stock Purchase Agreement dated September 15, 1997 among the Company and the Stockholders of the Company(10) 2.03 -- First Amendment to Stock Purchase Agreement dated as of October 15, 1997 among the Company and the Stockholders named therein(10) 3.01 -- Amended and Restated Certificate of Incorporation of the Company(10) 3.02 -- Amended and Restated By-Laws of the Company(10) 4.01 -- Indenture dated October 15, 1997 for the 9 1/4% Notes between the Company and State Street Bank and Trust Company, as trustee(10) 4.02 -- Indenture dated as of August 15, 1996 for the 10 3/8% Notes between the Company and Fleet National Bank, as trustee(9) 4.03 -- Indenture dated as of June 1, 1992 for the 11 7/8% Notes between the Company and the Bank of New York, as trustee(5) 4.04 -- Pledge Agreement dated as of June 10, 1992 between the Company and the Bank of New York, as collateral trustee(5) 10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among the Company, BLS and Lehman Brothers Holdings Inc. ("LBH")(1) 10.02 -- Assumption Agreement dated as of April 27, 1989(1) 10.03 -- Shared Services Agreement dated as of April 27, 1996 between Lockheed Martin Tactical Defense Systems -- Akron and Aircraft Braking Systems(10) 10.04 -- Amended and Restated Director Advisory Agreement dated as of October 15, 1997, between the Company and BLS(10)
24 26 10.05 -- Non-Competition Agreement dated as of April 27, 1989, between the Company and BLS(1) 10.06 -- K & F Industries, Inc. Retirement Plan for Salaried Employees(5) 10.07 -- K & F Industries, Inc. Savings Plan for Salaried Employees(5) 10.08 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees -- Plan A(1) 10.09 -- The Loral Systems Group Release and Separation Allowance Plan(1) 10.10 -- Letter Agreement dated April 27, 1989, between the Company and LBH(1) 10.11 -- K & F Industries, Inc. 1989 Stock Option Plan(2) 10.12 -- K & F Industries, Inc. Executive Deferred Bonus Plan(2) 10.13 -- Securities Purchase Agreement dated as of July 22, 1991 among the Company, BLS and the Lehman Investors(4) 10.14 -- Securities Purchase Agreement among the Company, BLS and the Lehman Investors dated September 2, 1994(6) 10.15 -- Amended and Restated Stockholders Agreement dated as of September 2, 1994, by and among the Company, BLS, the Lehman Investors, Chase Capital Partners and Loral Space(6) 10.16 -- Agreement dated as of September 2, 1994, between the Company and Loral Space(6) 10.17 -- Amendment of Stockholders Agreement dated November 8, 1994(6) 10.18 -- Securities Conversion Agreement among the Company and the Converting Stockholders, dated November 8, 1994(6) 10.19 -- K & F Industries, Inc. Supplemental Executive Retirement Plan(8) 10.20 -- Amended and Restated Credit Agreement dated as of August 14, 1996, among Aircraft Braking Systems ("ABS"), Engineered Fabrics Corporation ("EFC"), the Lenders (as defined therein), Lehman Commercial Paper, Inc., as Documentation Agent and Chase Securities Inc., individually and as agent for the Lenders ("Chase")(9) 10.21 -- Amended and Restated Security Agreement dated as of August 14, 1996, between ABS and Chase(9) 10.22 -- Amended and Restated Security Agreement dated as of August 14, 1996, between EFC and Chase(9) 10.23 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank(9) 10.24 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank(9) 10.25 -- Amended and Restated K & F Agreement dated as of August 14, 1996, between the Company and Chase(9) 10.26 -- Amended and Restated Subordination Agreement dated as of August 14, 1996, between ABS and Chase(9) 10.27 -- Amended and Restated Subordination Agreement dated as of August 14, 1996, between EFC and Chase(9) 10.28 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc. and Chase Securities Inc.(9) 10.29 -- Registration Rights Agreement dated as of August 15, 1996 among the Company, Lehman Brothers Inc. and Chase Securities Inc.(9) 10.30 -- Credit Agreement dated as of October 15, 1997 among ABS, EFC, the Lenders (as defined therein), Lehman Commercial Paper, Inc. as Documentation Agent and The First National Bank of Chicago ("FNBC"), as Administrative Agent(10)
25 27 10.31 -- Guarantee and Collateral Agreement dated as of October 15, 1997 among the Company, ABS, EFC, certain subsidiaries named therein and FNBC, as Collateral Agent(10) 10.32 -- Subordination Agreement dated as of October 15, 1997 between ABS and FNBC(10) 10.33 -- Subordination Agreement dated as of October 15, 1997 between EFC and FNBC(10) 10.34 -- Intercreditor Agreement dated as of October 15, 1997 among the Pension Benefit Guaranty Corporation ("PBGC"), FNBC, ABS, EFC and the Company(10) 10.35 -- K & F Agreement dated as of October 15, 1997 executed by the Company in favor of FNBC(10) 10.36 -- Settlement Agreement dated as of October 15, 1997 between the Company and PBGC(10) 10.37 -- Registration Rights Agreement dated as of October 15, 1997 between the Company and Lehman Brothers Inc. and Unterberg Harris(10) 10.38 -- Dealer Manager Agreement dated as of September 15, 1997 between Lehman Brothers Inc. and the Company(10) 10.39 -- Stockholders' Agreement dated as of October 15, 1997 between the Company and the Stockholders identified therein(10) 10.40 -- K & F Industries, Inc. 1998 Stock Option Plan(11) 10.41 -- K & F Industries, Inc. Supplemental Executive Retirement Plan, as amended 12.01 -- Statement of computations of ratio of earnings to fixed charges(10) 21.01 -- Subsidiaries of the Registrant(1) 24.01 -- Powers of Attorney (included on signature page) 27.01 -- Financial Data Schedule
- --------------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, No. 33-29035 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990 and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1991 and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, No. 33-47028 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Registration Statement on Form S-4, No. 333-11047 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Registration Statement on Form S-4, No. 333-40977 and incorporated herein by reference. (11) 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. Supplemental Information to Be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act: No annual report or proxy material has been sent to security holders. 26 28 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. K & F INDUSTRIES, INC. By: /s/ KENNETH M. SCHWARTZ ------------------------------------ Kenneth M. Schwartz Executive Vice President Date: March 29, 2000 Pursuant to the requirements of The Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------------- ------------------------------- ----------------- * Chairman of the Board, Chief March 29, 2000 - --------------------------------------------------- Executive Officer and Bernard L. Schwartz Director (principal executive officer) /s/ KENNETH M. SCHWARTZ Executive Vice President March 29, 2000 - --------------------------------------------------- Kenneth M. Schwartz /s/ DIRKSON R. CHARLES Chief Financial Officer March 29, 2000 - --------------------------------------------------- (principal financial and Dirkson R. Charles accounting officer) * Director March 29, 2000 - --------------------------------------------------- David J. Brand * Director March 29, 2000 - --------------------------------------------------- Herbert R. Brinberg * Director March 29, 2000 - --------------------------------------------------- Robert B. Hodes * Director March 29, 2000 - --------------------------------------------------- Ronald H. Kisner * Director March 29, 2000 - --------------------------------------------------- John R. Paddock * Director March 29, 2000 - --------------------------------------------------- A. Robert Towbin * Director March 29, 2000 - --------------------------------------------------- Alan H. Washkowitz *By: /s/ KENNETH M. SCHWARTZ Attorney-in-Fact March 29, 2000 - -------------------------------------------------- Kenneth M. Schwartz
27 29 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York February 7, 2000 F-1 30 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents................................. $ 3,584,000 $ 6,844,000 Accounts receivable -- net................................ 51,870,000 35,990,000 Inventory................................................. 68,848,000 70,296,000 Other current assets...................................... 801,000 673,000 Deferred tax asset........................................ 18,063,000 -- ------------- ------------- Total current assets.............................. 143,166,000 113,803,000 ------------- ------------- Property, Plant and Equipment -- Net........................ 71,201,000 75,280,000 Prepaid Pension Cost........................................ 17,814,000 13,807,000 Deferred Charges -- Net of amortization of $10,445,000 and $7,456,000................................................ 30,534,000 25,631,000 Cost in Excess of Net Assets Acquired -- Net of amortization of $65,149,000 and $59,041,000............................ 168,787,000 179,700,000 Intangible Assets -- Net of amortization of $34,472,000 and $32,960,000............................................... 10,366,000 11,878,000 ------------- ------------- Total Assets................................................ $ 441,868,000 $ 420,099,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable.......................................... $ 17,687,000 $ 15,328,000 Current portion of long-term debt......................... 1,500,000 8,000,000 Interest payable.......................................... 4,506,000 5,133,000 Other current liabilities................................. 42,851,000 46,503,000 ------------- ------------- Total current liabilities......................... 66,544,000 74,964,000 ------------- ------------- Postretirement Benefit Obligation Other Than Pensions....... 78,667,000 75,956,000 Other Long-Term Liabilities................................. 6,266,000 7,664,000 Long-Term Debt.............................................. 432,125,000 477,125,000 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................................................... (78,696,000) (152,616,000) Accumulated other comprehensive income.................... 214,000 258,000 ------------- ------------- Total stockholders' deficiency.................... (141,734,000) (215,610,000) ------------- ------------- Total Liabilities and Stockholders' Deficiency.............. $ 441,868,000 $ 420,099,000 ============= =============
See notes to consolidated financial statements. F-2 31 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net sales........................................ $355,951,000 $345,447,000 $304,331,000 Cost of sales.................................... 197,757,000 196,190,000 188,001,000 ------------ ------------ ------------ Gross margin..................................... 158,194,000 149,257,000 116,330,000 Independent research and development............. 13,996,000 13,705,000 10,873,000 Selling, general and administrative expenses..... 33,245,000 35,332,000 40,182,000 Amortization..................................... 8,773,000 10,286,000 10,316,000 ------------ ------------ ------------ Operating income................................. 102,180,000 89,934,000 54,959,000 Interest expense, net of interest income of $281,000, $356,000 and $621,000................ 40,396,000 44,830,000 34,091,000 ------------ ------------ ------------ Income before income taxes and extraordinary charge......................................... 61,784,000 45,104,000 20,868,000 Income tax benefit (provision)................... 12,136,000 (5,744,000) (5,184,000) ------------ ------------ ------------ Income before extraordinary charge............... 73,920,000 39,360,000 15,684,000 Extraordinary charge from early extinguishment of debt, net of tax............................... -- -- (29,513,000) ------------ ------------ ------------ Net income (loss)................................ $ 73,920,000 $ 39,360,000 $(13,829,000) ============ ============ ============
See notes to consolidated financial statements. F-3 32 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CLASS B CLASS A PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK ------------------- ------------------ ------------------ ---------------- ADDITIONAL SHARES SHARES SHARES SHARES PAID-IN ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL --------- ------- -------- ------- -------- ------- ------- ------ ------------- Balance, January 1, 1997................... 1,027,635 $10,000 458,994 $ 5,000 553,344 $ 6,000 -- $ -- $ 155,350,000 Issuance pursuant to stock option plan.... 11,250 952,000 Redemption of capital stock................ (657,436) (7,000) (458,994) (5,000) (194,395) (2,000) (219,561,000) 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 (63,259,000) Net Income............. Pension adjustment..... Cumulative translation adjustments.......... --------- ------- -------- ------- -------- ------- ------- ------ ------------- Balance, December 31, 1998................... -- -- -- -- -- -- 740,398 7,000 (63,259,000) Net Income............. Cumulative translation adjustments.......... --------- ------- -------- ------- -------- ------- ------- ------ ------------- Balance, December 31, 1999................... -- $ -- -- $ -- -- $ -- 740,398 $7,000 $ (63,259,000) ========= ======= ======== ======= ======== ======= ======= ====== ============= ACCUMULATED OTHER COMPREHENSIVE COMPREHENSIVE DEFICIT INCOME (LOSS) INCOME (LOSS) ------------- ------------- ------------- Balance, January 1, 1997................... $(178,147,000) $(10,530,000) Issuance pursuant to stock option plan.... Redemption of capital stock................ 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................... (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................... (152,616,000) 258,000 $ 40,849,000 ============ Net Income............. 73,920,000 $ 73,920,000 Cumulative translation adjustments.......... (44,000) (44,000) ------------- ------------ ------------ Balance, December 31, 1999................... $ (78,696,000) $ 214,000 $ 73,876,000 ============= ============ ============
See notes to consolidated financial statements. F-4 33 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- Cash Flows From Operating Activities: Net income (loss)............................. $ 73,920,000 $ 39,360,000 $ (13,829,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................... 8,495,000 9,675,000 9,364,000 Amortization............................... 8,773,000 10,286,000 10,316,000 Non-cash interest expense-amortization of deferred financing charges............... 1,836,000 1,932,000 1,507,000 Provision for losses on accounts receivable............................... 161,000 140,000 27,000 Extraordinary charge from early extinguishment of debt................... -- -- 29,513,000 Deferred income taxes...................... (13,258,000) 4,912,000 3,621,000 Changes in assets and liabilities: Accounts receivable...................... (16,058,000) 3,989,000 (4,060,000) Inventory................................ 1,421,000 (4,254,000) 2,377,000 Other current assets..................... (128,000) (114,000) 27,000 Prepaid pension costs.................... (4,007,000) (3,283,000) (7,848,000) Accounts payable......................... 2,359,000 (2,651,000) 6,726,000 Interest payable......................... (627,000) 408,000 (1,964,000) Other current liabilities................ (3,652,000) (9,491,000) 5,254,000 Postretirement benefit obligation other than pensions......................... 2,711,000 1,414,000 103,000 Other long-term liabilities.............. (1,398,000) (166,000) 1,379,000 ------------ ------------ ------------- Net cash provided by operating activities............................ 60,548,000 52,157,000 42,513,000 ------------ ------------ ------------- Cash Flows From Investing Activities: Capital expenditures.......................... (10,413,000) (14,873,000) (10,016,000) Deferred charges.............................. (7,892,000) (203,000) (1,781,000) ------------ ------------ ------------- Net cash used in investing activities.......................... (18,305,000) (15,076,000) (11,797,000) ------------ ------------ ------------- Cash Flows From Financing Activities: Payments of senior revolving loan............. (59,000,000) (55,000,000) (61,000,000) Borrowings under senior revolving loan........ 66,000,000 41,000,000 62,000,000 Payments on long-term debt.................... (58,500,000) (21,500,000) (280,375,000) Proceeds from issuance of long-term debt...... -- -- 507,000,000 Premiums paid on early extinguishment of debt....................................... -- -- (24,418,000) Deferred charges -- financing costs........... -- -- (12,101,000) Redemption of equity interests................ -- -- (218,623,000) Proceeds from sale and leaseback transaction................................ 5,997,000 556,000 -- ------------ ------------ ------------- Net cash used in financing activities.......................... (45,503,000) (34,944,000) (27,517,000) ------------ ------------ ------------- Net (decrease) increase in cash and cash equivalents................................... (3,260,000) 2,137,000 3,199,000 Cash and cash equivalents, beginning of period........................................ 6,844,000 4,707,000 1,508,000 ------------ ------------ ------------- Cash and cash equivalents, end of period........ $ 3,584,000 $ 6,844,000 $ 4,707,000 ============ ============ ============= Supplemental Information: Interest paid during the period............... $ 39,468,000 $ 42,846,000 $ 35,169,000 ============ ============ ============= Income taxes paid during the period........... $ 1,658,000 $ 1,055,000 $ 136,000 ============ ============ =============
See notes to consolidated financial statements. F-5 34 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 brake control 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, 1999 and Engineered Fabrics Corporation (collectively, the "Subsidiaries"), which generated approximately 12% of the Company's total revenues during the year ended December 31, 1999. 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 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. Losses on U.S. government contracts are immediately recognized in full when determinable. Inventory -- Inventory is stated at average cost, not in excess of net realizable value. In accordance with industry practice, inventoried costs may contain amounts relating to contracts with long production cycles, a portion of which will not be realized within one year. Property, Plant and Equipment -- Property, plant and equipment are stated at cost. Maintenance and repairs are expensed when incurred; renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is included in the results of operations. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets as follows: buildings and improvements -- 8 to 40 years; machinery, equipment, furniture and fixtures -- 3 to 25 years; leasehold improvements -- over the life of the applicable lease or 10 years, whichever is shorter. Deferred Charges -- Deferred charges consist primarily of financing costs ($7.9 million and $9.7 million, which is net of amortization (non-cash interest expense) of $4.2 million and $2.4 million at December 31, 1999 and 1998, respectively), and program participation costs ($22.6 million and $15.9 million, which is net of amortization of $6.3 million and $5.1 million at December 31, 1999 and December 31, 1998, respectively) F-6 35 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid in connection with the sole-source award of wheels, brakes and brake control equipment on various commercial programs. 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 ongoing 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 ongoing 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, 1999, 1998 and 1997 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 15%, 14% and 12% of total sales for the years ended December 31, 1999, 1998 and 1997, respectively. No other single customer accounted for 10% or more of consolidated revenues for the years then ended, and there were no significant accounts receivable from a single customer, except the U.S. government, at December 31, 1999 and December 31, 1998. 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. New Accounting Pronouncement -- 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 January 1, 2001 for the Company. The Company is currently evaluating the impact, if any, on its financial position upon the adoption of SFAS No. 133. Reclassifications -- Certain amounts in the prior years' financial statements have been reclassified to conform to the current period presentation. F-7 36 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE
DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Accounts receivable, principally from commercial customers....................................... $46,510,000 $32,434,000 Accounts receivable on U.S. government and other long-term contracts............................. 5,634,000 3,803,000 Allowances........................................ (274,000) (247,000) ----------- ----------- Total................................... $51,870,000 $35,990,000 =========== ===========
4. INVENTORY
DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Raw materials and work-in-process................. $37,216,000 $46,245,000 Finished goods.................................... 22,069,000 14,364,000 Inventoried costs related to U.S. government and other long-term contracts....................... 9,563,000 9,687,000 ----------- ----------- Total................................... $68,848,000 $70,296,000 =========== ===========
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ Land............................................ $ 661,000 $ 661,000 Buildings and improvements...................... 36,770,000 35,257,000 Machinery, equipment, furniture and fixtures.... 121,900,000 119,949,000 ------------ ------------ Total................................. 159,331,000 155,867,000 Less accumulated depreciation and amortization.................................. 88,130,000 80,587,000 ------------ ------------ Total................................. $ 71,201,000 $ 75,280,000 ============ ============
6. OTHER CURRENT LIABILITIES
DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Accrued payroll costs............................. $18,733,000 $17,448,000 Accrued taxes..................................... 3,429,000 6,864,000 Accrued costs on long-term contracts.............. 2,875,000 2,342,000 Accrued warranty costs............................ 9,626,000 8,165,000 Customer credits.................................. 3,312,000 2,777,000 Postretirement benefit obligation other than pensions........................................ 3,000,000 3,000,000 Other............................................. 1,876,000 5,907,000 ----------- ----------- Total................................... $42,851,000 $46,503,000 =========== ===========
F-8 37 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT
DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ Senior Revolving Loan........................... $ 7,000,000 $ -- Senior Term Loan A.............................. 48,875,000 49,375,000 Senior Term Loan B.............................. 192,750,000 250,750,000 9 1/4% Senior Subordinated Notes due 2007....... 185,000,000 185,000,000 ------------ ------------ Total........................................... 433,625,000 485,125,000 Less current maturities......................... 1,500,000 8,000,000 ------------ ------------ Total................................. $432,125,000 $477,125,000 ============ ============
At December 31,1999, the Credit Facility consists of a term loan facility in an aggregate principal amount of $241.6 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 $48.9 million and a Tranche B term loan ("Term Loan B") in the principal amount of $192.7 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, 1999 and 1998, the average interest rate on outstanding borrowings on the Credit Facility was 8.3% and 7.4%, 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, 1999, the notional value on the interest rate swap agreement was $129 million and the fair value was approximately $1.1 million in favor of the Company (taking into account interest rates in effect at December 31, 1999), representing the amount the Company would receive 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 borrowing rate at 8.3% on $129 million of borrowings at December 31, 1999. 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 due in years 2000 through 2002 and $47.4 million due in 2003. Term Loan B is an eight-year quarterly amortizing facility maturing October 15, 2005, with installments of $1.0 million per year due in years 2000 through 2003, $67.0 million due in 2004 and $121.8 million due in 2005. 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, $18.5 million was determined to be payable in 2000; however, the Company voluntarily prepaid $50.5 million during 1999, of which $32.0 million will be applied to future excess cash flow. Scheduled debt maturities of the Term Loans for the five years subsequent to December 31, 1999 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ----------- 2000.................................................. $ 1,500,000 2001.................................................. 1,500,000 2002.................................................. 1,500,000 2003.................................................. 48,375,000 2004.................................................. 67,000,000
F-9 38 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1999 and 1998, the Company had $36.4 million and $42.0 million available to borrow, respectively. At December 31, 1999 and 1998, the Company had outstanding letters of credit of $6.6 million and $8.0 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, 1999. 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. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of all financial instruments reported on the balance sheet at December 31, 1999 and 1998 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 $424 million and $487 million at December 31, 1999 and 1998, 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 per share. All options granted in 1999 were issued with an exercise price of $250 per share. F-10 39 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------ ------ ------- Outstanding at beginning of year........................ 47,350 35,550 11,250 Granted................................................. 900 11,800 35,550 Exercised............................................... -- -- (11,250) Canceled................................................ (5,175) -- -- ------ ------ ------- Outstanding at end of year.............................. 43,075 47,350 35,550 ====== ====== ======= Exercisable options outstanding......................... 7,719 -- - ====== ====== ======= Available for future grant.............................. 40,500 41,400 3,200 ====== ====== =======
At December 31, 1999, there were outstanding options for 42,175 and 900 shares that were exercisable at $175 per share and $250 per share and with weighted-average remaining contractual lives of 8.1 years and 9.7 years, respectively. All options exercisable at December 31, 1999 were exercisable at $175 per share. All Company options issued prior to 1997 were granted at a per share exercise price of $84.60. All such options were exercised prior to the consummation of the Recapitalization and the common stock issued upon exercise of such options was purchased as part of the Recapitalization at a per share price of $175.58. In connection therewith, the Company recorded a charge to operations of $1.0 million. In addition to stock options 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. 10. ACCUMULATED OTHER COMPREHENSIVE INCOME Components of other comprehensive income (loss) consist of the following:
ACCUMULATED CUMULATIVE OTHER MINIMUM PENSION TRANSLATION COMPREHENSIVE LIABILITY ADJUSTMENTS INCOME (LOSS) --------------- ----------- ------------- January 1, 1997.......................... $(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 1999 Change.............................. -- (44,000) (44,000) ------------ --------- ------------ December 31, 1999........................ $ -- $ 214,000 $ 214,000 ============ ========= ============
F-11 40 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 (i) 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 (ii) the maximum deductible for tax purposes, or (iii) the excess of the liability calculated under Section 4001(a) of ERISA over the fair market value of the assets at year-end. 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-12 41 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:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- ---------------------------- DECEMBER 31, DECEMBER 31, --------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year............................. $ 90,396,000 $82,116,000 $ 78,942,000 $ 65,444,000 Service cost....................... 2,900,000 2,535,000 2,044,000 1,824,000 Interest cost...................... 6,216,000 5,830,000 5,671,000 5,195,000 Plan participants' contributions... 372,000 337,000 427,000 493,000 Amendments......................... -- 584,000 -- 11,801,000 Actuarial (gain) loss.............. (10,112,000) 2,907,000 (7,888,000) (2,407,000) Benefits paid...................... (4,236,000) (3,913,000) (3,069,000) (3,408,000) Special termination benefits....... 574,000 -- -- -- ------------ ----------- ------------ ------------ Benefit obligation at end of year............................. 86,110,000 90,396,000 76,127,000 78,942,000 ------------ ----------- ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year................ 89,199,000 78,676,000 -- -- Actual return on plan assets....... 9,292,000 9,212,000 -- -- Employer contributions............. 6,672,000 4,887,000 2,642,000 2,915,000 Plan participants' contributions... 372,000 337,000 427,000 493,000 Benefits paid...................... (4,236,000) (3,913,000) (3,069,000) (3,408,000) ------------ ----------- ------------ ------------ Fair value of plan assets at end of year............................. 101,299,000 89,199,000 -- -- ------------ ----------- ------------ ------------ Funded status...................... 15,189,000 (1,197,000) (76,127,000) (78,942,000) Unrecognized actuarial loss........ 1,513,000 13,424,000 9,195,000 18,450,000 Unrecognized prior service cost.... 1,112,000 1,580,000 (14,735,000) (18,464,000) ------------ ----------- ------------ ------------ Prepaid (accrued) benefit cost..... $ 17,814,000 $13,807,000 $(81,667,000) $(78,956,000) ============ =========== ============ ============ WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate...................... 8.00% 7.00% 8.00% 7.00% Expected return on plan assets..... 9.50 9.50 -- -- Rate of compensation increase...... 4.50 4.50 4.50 4.50
F-13 42 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:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------------------- --------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- ----------- Service cost......... $ 2,900,000 $ 2,535,000 $ 1,970,000 $ 2,044,000 $ 1,824,000 $ 1,242,000 Interest cost........ 6,216,000 5,830,000 5,662,000 5,671,000 5,195,000 4,422,000 Expected return on plan assets........ (8,459,000) (7,518,000) (6,096,000) -- -- -- Amortization of prior service cost....... 467,000 467,000 413,000 (3,730,000) (3,730,000) (4,677,000) Recognized actuarial loss............... 402,000 290,000 362,000 1,368,000 1,040,000 1,259,000 Special termination charge............. 574,000 -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net periodic benefit cost............... $ 2,100,000 $ 1,604,000 $ 2,311,000 $ 5,353,000 $ 4,329,000 $ 2,246,000 =========== =========== =========== =========== =========== ===========
On October 28, 1999, the Company offered a voluntary early retirement incentive program to certain employees. The special benefit was the addition of three years of age and service to be immediately credited to their non-contributory pension benefit as well as three years of age credited to their contributory portion of such benefit. On December 1, 1999, 22 employees accepted the offer. As a result of the early retirement incentive program, a $574,000 charge was recorded as part of the 1999 net periodic benefit cost which also increased the 1999 benefit obligation by the same amount. For measurement purposes, a 6.20% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease 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:
ONE- ONE- PERCENTAGE- PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- Effect on total of service cost and interest cost components..................................... $1,220,000 $ (982,000) Effect on postretirement benefit obligation...... 9,859,000 (8,151,000)
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). 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 $1,530,000, $1,205,000 and $782,000 for the years ended December 31, 1999, 1998 and 1997, respectively. F-14 43 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:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ---------- 2000................................................. $4,980,000 2001................................................. 3,293,000 2002................................................. 2,515,000 2003................................................. 2,163,000 2004................................................. 2,074,000 Thereafter............................................. 7,556,000
Rental expense was $5,991,000, $5,410,000 and $5,060,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 13. CONTINGENCIES There are various lawsuits and claims pending against the Company incidental to its business. Although the final results in such suits and proceedings cannot be predicted with certainty, in the opinion of management, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 14. INCOME TAXES The components of the net deferred tax asset and corresponding valuation allowance are as follows:
DECEMBER 31, ---------------------------- 1999 1998 ----------- ------------- Tax net operating loss carryforwards............ $46,604,000 $ 62,335,000 Temporary differences: Postretirement and other employee benefits.... 34,525,000 33,899,000 Intangibles................................... 33,666,000 37,261,000 Program participation costs................... (9,267,000) (6,349,000) Other......................................... 9,543,000 10,460,000 ----------- ------------- Deferred tax benefit............................ 115,071,000 137,606,000 Valuation allowance............................. (97,008,000) (137,606,000) ----------- ------------- Net deferred tax asset................... $18,063,000 $ -- =========== =============
At December 31, 1999, the Company recorded a deferred tax asset of $18.1 million which the Company believes is more likely than not to be realized in the future based on its estimate of future earnings and expected reversal of temporary differences. The Company continued to record a valuation allowance against its deferred tax asset to the extent the realization of such tax asset is uncertain as required by SFAS No. 109. F-15 44 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's benefit (provision) for income taxes before extraordinary charges consists of:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ------------ ------------ ----------- Current domestic provision................ $(26,768,000) $(17,135,000) $(8,001,000) Foreign provision......................... (7,000) (230,000) (908,000) Domestic utilization of net operating loss carryforwards........................... 20,848,000 11,621,000 5,136,000 Change in net deferred tax asset.......... 18,063,000 -- (1,411,000) ------------ ------------ ----------- Income tax benefit (provision)............ $ 12,136,000 $ (5,744,000) $(5,184,000) ============ ============ ===========
The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- Statutory federal income tax rate........................... 35.0% 35.0% 35.0% Change in the valuation allowance........................... (28.6) -- 8.0 Utilization of tax net operating losses..................... (31.9) (27.3) (25.9) State tax................................................... 5.9 4.9 3.3 Foreign subsidiaries tax provision.......................... -- 0.1 4.4 ----- ----- ----- Effective income tax rate................................... (19.6)% 12.7% 24.8% ===== ===== =====
The Company has tax net operating loss carryforwards of approximately $114 million at December 31, 1999. The tax net operating losses expire from 2006 through 2018, with $18 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 & 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. 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 $6,095,300, $5,055,300 and $1,553,200 for the years ended December 31, 1999, 1998 and 1997, 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, Lehman Brothers received underwriting discounts and commissions of $4.6 million in connection with the offering of the 9 1/4% Notes. In connection with the tender offer component of the Recapitalization, Lehman Brothers received a F-16 45 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Before 1999, the Company 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 and $176,000 during the years ended December 31, 1998 and 1997, respectively. Mr. Kisner also received stock options for 900 and 1,750 shares during the years ended December 31, 1998 and 1997, respectively. Since January 1999, Mr. Kisner has been 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 certain legal services and rent. 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 $0.6 million, $0.7 million and $0.5 million for the years ended December 31, 1999, 1998 and 1997 , respectively. In connection with the Recapitalization, the Company paid Loral Space $80.6 million for the redemption of its 22.5% equity interest in the Company. 16. SEGMENTS The Company's activities are conducted through its two wholly owned subsidiaries, Aircraft Braking Systems and Engineered Fabrics, each considered an operating segment. Aircraft Braking Systems manufactures aircraft wheels, brakes and brake control 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:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Sales: Aircraft Braking Systems............... $313,475,000 $305,911,000 $269,078,000 Engineered Fabrics..................... 42,476,000 39,536,000 35,253,000 ------------ ------------ ------------ $355,951,000 $345,447,000 $304,331,000 ============ ============ ============ Earnings Before Interest, Taxes, Depreciation and Amortization: Aircraft Braking Systems............... $111,457,000 $102,894,000 $ 70,365,000 Engineered Fabrics..................... 7,991,000 7,001,000 4,274,000 ------------ ------------ ------------ $119,448,000 $109,895,000 $ 74,639,000 ============ ============ ============
F-17 46 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Operating Profits: Aircraft Braking Systems............... $ 96,172,000 $ 84,927,000 $ 52,793,000 Engineered Fabrics..................... 6,008,000 5,007,000 2,166,000 ------------ ------------ ------------ Operating Income.................... 102,180,000 89,934,000 54,959,000 Interest expense, net............... 40,396,000 44,830,000 34,091,000 ------------ ------------ ------------ Income before income taxes and extraordinary charge........... $ 61,784,000 $ 45,104,000 $ 20,868,000 ============ ============ ============ Depreciation and Amortization: Aircraft Braking Systems............... $ 15,285,000 $ 17,967,000 $ 17,572,000 Engineered Fabrics..................... 1,983,000 1,994,000 2,108,000 ------------ ------------ ------------ $ 17,268,000 $ 19,961,000 $ 19,680,000 ============ ============ ============ Capital Expenditures: Aircraft Braking Systems............... $ 8,757,000 $ 13,726,000 $ 9,462,000 Engineered Fabrics..................... 1,600,000 886,000 547,000 ------------ ------------ ------------ Total segments................. 10,357,000 14,612,000 10,009,000 Corporate.............................. 56,000 261,000 7,000 ------------ ------------ ------------ $ 10,413,000 $ 14,873,000 $ 10,016,000 ============ ============ ============
DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Total Assets: Aircraft Braking Systems............... $360,490,000 $352,057,000 $354,099,000 Engineered Fabrics..................... 55,055,000 57,773,000 59,089,000 ------------ ------------ ------------ $415,545,000 $409,830,000 $413,188,000 ============ ============ ============
The following reconciles the total assets for the reportable segments to the Company's consolidated assets:
DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Total Assets: Total assets for reportable segments... $415,545,000 $409,830,000 $413,188,000 Deferred financing costs not allocated to segments......................... 7,898,000 9,734,000 11,666,000 Corporate assets....................... 362,000 535,000 382,000 Deferred tax asset not allocated to segments............................ 18,063,000 -- -- ------------ ------------ ------------ Consolidated Total............. $441,868,000 $420,099,000 $425,236,000 ============ ============ ============
F-18 47 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents the Company's total sales by products:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Braking systems.......................... $313,475,000 $305,911,000 $269,078,000 Fuel tanks............................... 33,935,000 30,256,000 26,564,000 Other.................................... 8,541,000 9,280,000 8,689,000 ------------ ------------ ------------ $355,951,000 $345,447,000 $304,331,000 ============ ============ ============
The following represents sales by geographic location:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Sales: United States.......................... $207,810,000 $197,268,000 $172,277,000 Europe................................. 75,766,000 74,228,000 70,578,000 Asia................................... 34,052,000 35,845,000 29,763,000 North America.......................... 19,429,000 20,165,000 16,671,000 South America.......................... 14,105,000 13,042,000 10,211,000 Australia.............................. 4,789,000 4,899,000 4,831,000 ------------ ------------ ------------ $355,951,000 $345,447,000 $304,331,000 ============ ============ ============
Sales are attributed to geographic location based on the location of the customer. Long-lived assets held outside of the United States were $322,000, $318,000 and $333,000 as of December 31, 1999, 1998 and 1997, respectively. The U.S. government accounted for approximately 15%, 14% and 12% of the Company's total sales, for the years ended December 31, 1999, 1998 and 1997, respectively. F-19 EX-10.41 2 K & F INDUSTRIES, INC. SUPPLE. EXEC. RETIRE. PLAN 1 SERP-KF-5 EXHIBIT 10.41 K&F INDUSTRIES SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Informally Known As The K&F SERP Revised as of October 1, 1999 i 2 TABLE OF CONTENTS
Page Introduction......................................................................... v Article I - Definitions ............................................................. 1 1.1 Annuity Starting Date ................................................... 1 1.2 Basic Plan .............................................................. 2 1.3 Basic Plan Benefit ...................................................... 2 1.4 Beneficiary ............................................................. 2 1.5 Board ................................................................... 2 1.6 Code .................................................................... 2 1.7 Committee ............................................................... 3 1.8 Effective Date .......................................................... 3 1.9 Employer ................................................................ 3 1.10 ERISA ................................................................... 3 1.11 Investment Committee .................................................... 3 1.12 K&F ..................................................................... 4 1.13 Participant ............................................................. 4 1.14 Plan .................................................................... 4 1.15 Proper Application ...................................................... 4 1.16 QDRO or Qualified Domestic Relations Order .............................. 4 1.17 SERP .................................................................... 6 1.18 Trust Agreement or Trust ................................................ 6 1.19 Trustee ................................................................. 6 Article II - Benefits ............................................................... 7 2.1 Amount and Duration of SERP Benefits .................................... 7 2.1.1 Initial Formula of the SERP Benefit ..................................... 7 2.1.1.1 Service Credited for Position as Non-Employee Director .................. 7 2.1.2 SERP Benefit Shall Not Duplicate Any Other Plan Benefit Actually Paid ... 8 2.2 Death Benefits .......................................................... 9 2.2.1 Death After Annuity Starting Date ....................................... 9 2.2.2 Death Before Annuity Starting Date ...................................... 9 2.3 Special Rules ........................................................... 10 2.3.1 Small Benefit Cashout ................................................... 10 2.3.2 Lump Sum Benefit Limitation ............................................. 10 2.3.3 No Insured Death Benefit ................................................ 11 2.4 Benefits under Multiple Qualified Plans ................................. 11 2.4.1 Different Annuity Starting Dates ........................................ 11
ii 3 2.4.2 Same Annuity Starting Dates ............................................. 12 2.4.3 Death Benefits .......................................................... 12 Article III - Administration; Accrued Benefits; Right to Amend....................... 13 3.1 Committee's Discretionary Power to Interpret and Administer the Plan..... 13 3.1.1 Appointment.............................................................. 13 3.1.2 Committee Establishes Plan Procedures.................................... 13 3.1.3 Role of Human Resource and Benefits Personnel............................ 13 3.1.4 Discretionary Power to Interpret Plan.................................... 13 3.2 Rules of the Committee................................................... 14 3.3 Claims Procedure......................................................... 16 3.4 QDRO Claim............................................................... 18 3.5 Indemnification of Committee and Investment Committee Members............ 18 3.6 Power to Execute Plan and Other Documents................................ 18 3.7 Conclusiveness of Records................................................ 19 3.8 No Personal Liability.................................................... 19 3.9 How Plan Benefits are Accrued............................................ 19 3.10 Right to Amend........................................................... 19 3.10.1 General Power to Amend................................................... 19 3.10.2 No Cut-Back of Accrued Benefits.......................................... 20 3.11 Investment Committee..................................................... 20 3.11.1 Appointment of Investment Committee...................................... 20 3.11.2 Powers of the Investment Committee....................................... 20 Article IV - Vesting and Forfeiture.................................................. 23 4.1 Vesting.................................................................. 23 4.2 Dismissed for Cause...................................................... 23 4.3 Forfeiture after Plan Benefits have Commenced............................ 24 4.4 Determinations by Committee.............................................. 24 Article V - General Provisions....................................................... 25 5.1 No Assignment or Alienation of Benefits.................................. 25 5.2 Withholding Taxes........................................................ 25 5.3 No Right to Continue Employment.......................................... 25 5.4 Unfunded Plan .......................................................... 26 5.5 Governing Law .......................................................... 26 5.6 Payment of Benefits...................................................... 26 5.7 Section Headings......................................................... 26 5.8 Payment to a Minor or Incompetent........................................ 27 5.9 Doubt as to Right to Payment............................................. 27 5.10 Missing Payees .......................................................... 28 5.11 Mistaken Payments........................................................ 28 5.12 Receipt and Release for Payments......................................... 29 5.13 Illegality of Particular Provisions...................................... 29
iii 4 5.14 Discharge of Liability................................................... 29 ADDENDUM - SUMMARY PLAN DESCRIPTION INFORMATION...................................... 31 Who should answer your questions about the Plan.................................. 31 Giving Away Your Plan Benefits................................................... 32 Divorce and Your Plan Benefits................................................... 32 Future Of The Plan............................................................... 32 Tax Laws ............................................................... 33 Plan Limitations ............................................................... 33 Plan Benefits are Not Insured.................................................... 33 Other Important Facts............................................................ 33
iv 5 Introduction This document contains the full provisions of the K&F SERP, as well as an addendum , in its final pages, which describes how to apply for benefits and plan procedures. This document thus contains the plan document and its summary plan description, found in the addendum. In response to certain limitations under the Internal Revenue Code, as amended, on the maximum amount of compensation that can be taken into account and the maximum amount of benefits that can be paid from a qualified defined benefit plan, K&F Industries, Inc. ("K&F") has adopted this Plan to permit employees and their beneficiaries to be able to enjoy the benefits that would have been provided to them but for these limitations. The Plan shall be known as the K&F Industries Supplemental Executive Retirement Plan, or the K&F SERP. Benefits under this Plan are payable to or on behalf of eligible participants in the qualified defined benefit plan of any Employer, if that participant has had an Annuity Starting Date, as defined by the qualified plan, on or after April 1, 1995. v 6 Article I - Definitions The following terms shall have the designated meaning, unless a different meaning is clearly required by the context: 1.1 Annuity Starting Date. Subject to Section 2.4, "Annuity Starting Date" shall mean: (a) generally, the "Annuity Starting Date" defined in the Basic Plan, provided that the Participant is fully vested under Article IV, and Proper Application has been made. (b) With respect to any lump sum, the first day of the month coincident with or next following the date as of which the Participant is both (1) eligible to receive a Basic Plan payment and (2) has completed his Proper Application. (c) With respect to any one of a series of payments over the life or life expectancy of one or more distributees, the first day of the month for which the Basic Plan benefit is paid, even if this date is not the date of actual payment. (d) The term "Annuity Starting Date" shall be determined with respect to Basic Plan payments that are payable to the Participant, rather than with respect to any survivor benefit payments. (e) The term "Annuity Starting Date" shall, in all events, be defined by Code Regulation Section 1.401(a)-20. 7 1.2 Basic Plan. The qualified defined benefit pension plan sponsored by K&F or any Employer, in which an employee participates. If an employee has an interest in more than one such plan, then the term "Basic Plan" shall refer to such plans collectively except as the context shall otherwise require. 1.3 Basic Plan Benefit. The amount accrued by a Participant from a Basic Plan. 1.4 Beneficiary. Beneficiary means the person, estate, or other entity entitled to receive benefits (if any) after the Participant's death under the SERP. Any such Beneficiary shall be the same as such Participant's beneficiary under the Basic Plan. However, if a QDRO has determined the beneficiary under the Basic Plan, then the Beneficiary under this SERP will be determined without regard to that court order (unless the Committee determines, within its discretion, to follow the terms of the court order.) 1.5 Board. The Board of Directors of K&F Industries, Inc. 1.6 Code. The Internal Revenue Code of 1986, as amended from time to time, and all appropriate regulations and administrative guidance. 2 8 1.7 Committee. The administrative Committee appointed to administer the SERP pursuant to Article III. 1.8 Effective Date. The Effective Date of this Plan is April 1, 1995. More precisely, this Plan is effective only with respect to eligible participants in the Basic Plan of an Employer, who have incurred an Annuity Starting Date under the Basic Plan, that falls on or after April 1, 1995. 1.9 Employer. Any subsidiary or affiliate of K&F which has adopted this SERP (and, if applicable, its related trust), so as to become a participating employer in the SERP, with the consent of K&F. Each Employer shall act by resolution of its Board of Directors. If the context of the Plan provision requires, the term "Employer" shall also include K&F. 1.10 ERISA. The Employee Retirement Income Security Act of 1974, as amended, and all appropriate regulations and administrative guidance. 1.11 Investment Committee. The group of one or more persons created, at the discretion of the Board, having 3 9 investment authority over Plan assets (or, if applicable Trust assets), as described in Section 3.11 1.12 K&F. K&F Industries, Inc., and depending on the context, its subsidiaries or affiliates. K&F shall act by resolution of the Board. 1.13 Participant. A Participant in this SERP is any participant in a Basic Plan who has incurred an Annuity Starting Date on or after the Effective Date, and whose Basic Plan Benefit is limited by Section 415 of the Code, or whose compensation for purposes of calculating a Basic Plan Benefit is limited by Section 401(a)(17) of the Code. As context demands, the term "Participant" shall also include a former Participant. 1.14 Plan. This K&F Industries Supplemental Executive Retirement Plan, as amended, and as from time to time in effect. 1.15 Proper Application. For all Plan purposes, making any election, granting any consent, giving any notice or information, and making any communication whatsoever to the Committee or its delegates, in compliance with all Plan procedures, on forms provided by the Committee, and providing all information required by the Committee. A Proper Application will be deemed to have been made only if it is properly completed, as determined by the Committee. 1.16 QDRO or Qualified Domestic Relations Order. 4 10 (a) Committee determines whether or not to comply with court orders. A "QDRO" or "qualified domestic relations order" is a court order as defined in Code Section 414(p) and ERISA Section 206(d)(3). Under those statutes, the administrator of a non-qualified plan such as this SERP is not obliged to comply with the terms of a QDRO. The Plan Committee may decide, within its discretion, to review an order submitted as a QDRO or draft QDRO, or any other court order concerning SERP payments, under the general administrative guidelines established for QDROs under the Basic Plan. However, a determination by the Basic Plan Committee that any order is a QDRO does not mean that the Plan Committee or the Plan is subject to the terms of that order. Instead, the Plan Committee has discretionary authority to disregard any court order, even if it explicitly provides that SERP payments shall be made to certain individuals or entities. Alternatively, the Plan Committee may decide to request amendments to the order, or to comply with its terms. (b) Acceptance of QDRO does not imply assignable plan benefit. If the Committee does determine to follow the terms of a court order, as described in the preceding paragraph, this shall not be construed to mean that the Participant whose SERP benefits are at issue has any vested or nonforfeitable interests in this Plan. Instead, the determination to comply with a court order shall be, in all circumstances, conditioned on the Participant's SERP interests ultimately becoming vested and nonforfeitable, under the provisions set out in Article IV. The Alternate Payee set out in the court order shall therefore be considered to be a conditional Beneficiary or conditional quasi-Participant, so that the provisions of 5 11 Section 5.1 are not violated. 1.17 SERP. This K&F Industries Supplemental Executive Retirement Plan, as amended, and as from time to time in effect. 1.18 Trust Agreement or Trust. The assets of this Plan may, or may not, be held in a trust, at the discretion of the Board. If the Board declines to enter into a trust agreement, then all provisions in this document referring to a "Trust," "Trust Agreement," or "Trustee" may be disregarded. However, if the Board determines to create a trust for this Plan, then the "Trust Agreement" or "Trust" shall be the document executed by K&F and the Trustee, fixing the rights and liabilities of each with respect to holding assets to be used to pay Plan benefits, should any such assets be held in the Trust. The Trust is established pursuant to K&F's intention that the Plan shall be an unfunded plan, as detailed in Section 5.4. 1.19 Trustee. The trustee or trustees that may, from time to time, be in office, pursuant to the Trust Agreement. 6 12 Article II - Benefits 2.1 Amount and Duration of SERP Benefits. The benefit payable from this SERP to a Participant shall be in the form of a monthly annuity equal to the amount determined under Section 2.1.1 (calculated to include the amounts described in Section 2.1.1.1), minus the amounts determined under Section 2.1.2. In the event of the Participant's death, any SERP survivor benefit shall be calculated under Section 2.2. The SERP benefit shall be payable as of the Participant's Annuity Starting Date and shall continue to be payable for the precise period set out in the Basic Plan, with respect to which payments are payable to the Participant or his Beneficiary. 2.1.1 Initial Formula of the SERP Benefit. The monthly benefit paid by this SERP shall initially be calculated as the amount that would be payable to a Participant under the Basic Plan, in the form elected by the Participant pursuant to the provisions of the Basic Plan, irrespective of any limitations imposed by Section 415 or Section 401(a)(17) of the Code. 2.1.1.1 Service Credited for Position as Non-Employee Director. This Section 2.1.1.1 concerns any individual who is a Participant eligible to receive a benefit under the Basic Plan, and who has: - served as a member of the Board of Directors of any corporation that is a participating employer under the Basic Plan, but - his service as a Director took place during a period when he was not an Employee (as defined by the Basic Plan). Such service as a Director shall nevertheless be credited as service 7 13 under this SERP, so as to provide a benefit in addition to that described in Section 2.1.1. That is, such service as a non-Employee director shall, for the purposes of Section 2.1.1, be deemed to be credited by the Basic Plan (even though the Basic Plan does not actually credit such service). The rules and intent of the Basic Plan regarding its crediting of service shall generally be used to credit such service under this SERP. Accordingly, should the individual have served on more than one Board during any period of time, then such service shall not be double-credited. 2.1.2 SERP Benefit Shall Not Duplicate Any Other Plan Benefit Actually Paid. The benefit paid by this SERP shall, after being initially calculated under Section 2.1.1, then be reduced by an amount equal to the Basic Plan Benefit actually paid to or on behalf of the Participant. It shall be further reduced by any additional benefits paid to, or on behalf of, the Participant under any non-qualified defined benefit plan (besides this SERP) sponsored by K&F or any of its subsidiaries or affiliates. 2.1.2.1 Any benefit which is deemed paid by the Basic Plan solely under Section 2.1.1.1, but which is not actually paid by the Basic Plan, shall not be considered to be a Basic Plan Benefit that is actually paid, for the purposes of Section 2.1.2. 8 14 2.1.2.2 If benefits under the Basic Plan are increased as a result of a change in the law that "raises the ceiling" in the limitations under Code Sections 415 or 401(a)(17) (or corresponding provisions of applicable law), benefits under this SERP shall be reduced by the amount of any such increase. 2.2 Death Benefits. 2.2.1 Death After Annuity Starting Date. Upon the death of the Participant after his Annuity Starting Date, benefits will continue to be paid to the Participant's Beneficiary in an amount equal to the monthly benefit determined under Section 2.1, multiplied by a fraction, the numerator of which is the monthly benefit payable from the Basic Plan, on behalf of the Participant, after the Participant's death, and the denominator of which is the monthly benefit payable from the Basic Plan to the Participant immediately before the Participant's death. 2.2.2 Death Before Annuity Starting Date. Upon the death of the Participant prior to his Annuity Starting Date, his Beneficiary shall receive a benefit equal to the difference between the benefit payable to the Beneficiary under the Basic Plan and the benefit that would have been paid to the Beneficiary under the Basic Plan if the limits imposed by Code Sections 415 or 401(a)(17) had not applied. The SERP benefit described in the preceding sentence shall be augmented as provided in Section 2.1.1.1 of this Plan. 2.2.3 No SERP Benefit if no Basic Plan Death Benefit. No amount will be paid 9 15 under this SERP on account of the Participant's death to any Beneficiary, unless accrued pension death benefits are paid to the Beneficiary under the Basic Plan. For the purposes of the preceding sentence, the term "accrued pension death benefits" means benefits that are not ancillary, but which instead derive from accruals made under the Basic Plan's principal, defined benefit formula. 2.3 Special Rules. The following rules shall apply notwithstanding any other provision of this SERP. 2.3.1 Small Benefit Cashout. If the actuarial present value (utilizing the assumptions set forth in the small benefit cashout provisions of the Basic Plan) of a Participant's benefit under Section 2.1 or a Beneficiary's benefit under Section 2.2 is $3,500 or less (or any other applicable limit set by the Internal Revenue Service or the Internal Revenue Code), payment will be made from this SERP in a single lump sum as soon as practicable after the Annuity Starting Date (with respect to a benefit paid pursuant to Section 2.1) or the death of the Participant (with respect to a benefit paid pursuant to Section 2.2). 2.3.2 Lump Sum Benefit Limitation. Except for benefits paid pursuant to Section 2.3.1, no benefits under this SERP shall be paid in a lump sum. Accordingly, if any benefits are paid under the Basic Plan to a Participant in a lump sum, the amount payable under this SERP shall nevertheless be paid in the form of a straight life annuity for the Participant, beginning on 10 16 the Annuity Starting Date and ending with the payment for the month in which the Participant dies, unless a special exception is made by the Committee. However, such an exception would be made only with respect to benefits payable as a lump sum under the Basic Plan. 2.3.3 No Insured Death Benefit. No benefit pursuant to Section 2.2 shall be paid with respect to any death benefit under the Basic Plan which is provided by insurance, to the extent that such benefit exceeds the minimum benefit required to be provided under the Basic Plan under Code Section 401(a)(11). 2.4 Benefits under Multiple Qualified Plans. The following rules shall apply if a Participant has a benefit under more than one Basic Plan: 2.4.1 Different Annuity Starting Dates. Benefits under this SERP shall be payable as of the Participant's earliest Annuity Starting Date under all such Basic Plans. In the event that the Participant has benefits payable under different Basic Plans, with different Annuity Starting Dates, then the amount of his benefit under this SERP shall initially be determined based only on the Basic Plans for which the Participant's Annuity Starting Date has occurred, as though such Basic Plans were the only Basic Plan in which the Participant had accrued a benefit. When benefits later begin under the other Basic Plans, SERP benefits shall be increased to reflect the 11 17 intent of this Plan to: - fully make up to the Participant the benefits he had not received under all Basic Plans, as a result of the Code Sections 415 and 401(a)(17) limitations, and - augment his SERP benefit as prescribed by Section 2.1.1.1 of this Plan. 2.4.2 Same Annuity Starting Dates. If a Participant's Annuity Starting Date is the same under all Basic Plans, then benefits under this SERP shall generally be payable as of such date, provided the Participant is fully vested under Article IV, and that Proper Application has been made. 2.4.3 Death Benefits. If benefits are paid under the Basic Plans in different forms, the death benefits pursuant to Section 2.2 shall be determined with respect to each individual plan. 12 18 Article III - Administration; Accrued Benefits; Right to Amend 3.1 Committee's Discretionary Power to Interpret and Administer the Plan 3.1.1 Appointment. The Committee shall be appointed from time to time by the Board to serve at its pleasure. Any member of the Committee may resign by delivering his written resignation to the Board. 3.1.2 Committee Establishes Plan Procedures. The Committee and its delegates shall from time to time establish rules and procedures for the administration and interpretation of the Plan and the transaction of its business. The Committee is the Plan Administrator. 3.1.3 Role of Human Resource and Benefits Personnel. Employees of an Employer who are human resources personnel or benefits representatives are the Committee's delegates and shall, under the authority of the Committee, perform the routine administration of the Plan, such as distributing and collecting forms and providing information about Plan procedures. They shall also establish Plan rules and procedures. 3.1.4 Discretionary Power to Interpret Plan. 3.1.4.1 The Committee has complete discretionary and final authority to (1) determine all questions, including factual questions, concerning eligibility, elections, contributions, and benefits under the Plan, (2) construe all terms under the Plan and the Trust (if applicable), including any uncertain terms, and (3) determine all questions, including factual questions, concerning 13 19 Plan administration. All administrative decisions made by the Committee, and all its interpretations of the Plan documents, shall be given full deference by any court of law. 3.1.4.2 Information that concerns an interpretation of the Plan or a discretionary determination, can be properly provided only by the Committee, and not by any delegate (other than legal counsel). 3.1.4.3 Should any individual receive oral or written information concerning the Plan, which is contradicted by a subsequent determination by the Committee, then the Committee's final determination shall control. 3.2 Rules of the Committee. 3.2.1 Any act which the Plan authorizes or requires the Committee to do may be done by a majority of its members. Any such action shall constitute the action of the Committee and shall have the same effect for all purposes as if made by all members of the Committee at the time in office. The Committee may act without any writing that records its decisions, and need not document its meetings or teleconferences. The Committee may also act through any authorized representative. 3.2.2 The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. 14 20 3.2.3 The Committee may employ counsel and other agents and may procure such clerical, accounting, actuarial and other services as they may require in carrying out the provisions of the Plan. Legal counsel are authorized as the Committee's delegates. 3.2.4 No member of the Committee shall receive any compensation for his services as such. All expenses of administering the Plan, including, but not limited to, fees of accountants, counsel and actuaries shall be paid by the Employer, to the extent that they are not paid from Plan assets (or, if applicable, Trust assets). 3.2.5 Each member of the Committee may delegate Committee responsibilities among Employer directors, officers, or employees, and may consult with or hire outside experts. The expenses of such experts shall be paid by the Employer, to the extent that they are not paid from Plan assets (or, if applicable, Trust assets). 3.3 Claims Procedure. 3.3.1 The Committee shall determine Participants' and Beneficiaries' rights to benefits under the Plan. In the event that a Participant or Beneficiary disputes an initial determination made by the Committee, then he may dispute the determination only by filing a written claim for benefits. 15 21 3.3.2 If a claim is wholly or partially denied, the Committee shall provide the claimant with a notice of denial, generally within 90 days of receipt, written in a manner calculated to be understood by the claimant and setting forth: 3.3.2.1 The specific reason(s) for such denial; 3.3.2.2 Specific references to the pertinent Plan provisions on which the denial is based; 3.3.2.3 A description of any additional material or information necessary for the claimant to perfect the claim with an explanation of why such material or information is necessary (if applicable); and 3.3.2.4 Appropriate information as to the steps to be taken if the claimant wishes the Committee to revise its initial denial. The notice of denial shall be given within a reasonable time period but no later than 90 days after the claim is received, unless circumstances require an extension of time for processing the claim. If such extension is required, written notice shall be furnished to the claimant within 90 days of the date the claim was received, stating that an extension of time and the date by which a decision on the claim can be expected, which shall be no more than 180 days from the date the claim was filed. 3.3.2.5 If no written notice of denial is provided by the Committee within the 90-day deadline described in Section 3.3.2, then the claim shall be deemed to be denied, and the claimant may appeal the claim as though the claim had been denied. 16 22 3.3.3 The claimant and/or his representative may appeal the denied claim through the following procedure: 3.3.3.1 Request a review by making a written request to the Committee provided that such a request is made within 65 days of the date of the notification of the denied claim; 3.3.3.2 Review pertinent documents. 3.3.4 Upon receipt of a request for review, the Committee shall within a reasonable time period but not later than 60 days after receiving the request, provide written notification of its decision to the claimant stating the specific reasons and referencing specific plan provisions on which its decision is based, unless special circumstances require an extension for processing the review. If such an extension is required, the Committee shall so notify the claimant, within this 60-day period. 3.3.5 In the event of any dispute over benefits under this Plan, all remedies available to the disputing individual under this Article must be exhausted, within the specified deadlines, before legal recourse of any type is sought. 3.4 QDRO Claim. Claims relating to any domestic relations order, or any QDRO or draft QDRO may be determined as set out in Section 1.16 In this event, the claims procedure described in the preceding Section 3.3 shall therefore not apply. 3.5 Indemnification of Committee and Investment Committee Members. To the fullest extent permitted by law, K&F agrees to indemnify, to defend, and 17 23 hold harmless the members of the Investment Committee (if created) and the Committee and its delegates, individually and collectively, against any liability whatsoever for any action taken or omitted by them in good faith in connection with this Plan or their duties hereunder and for any expenses or losses for which they may become liable as a result of any such actions or non-actions unless resultant from their own willful misconduct; and K&F will purchase insurance for the Investment Committee and the Committee and its delegates to cover any of their potential liabilities with regard to the Plan. 3.6 Power to Execute Plan and Other Documents. The Chief Financial Officer or Executive Vice President of K&F Industries, Inc. and the Committee shall have the authority to execute governmental filings or other documents relating to the Plan (including the Plan document), or this authority may be delegated to another officer or employee of K&F or of a K&F subsidiary or affiliate by either the Chief Financial Officer or the Executive Vice President of K&F Industries, Inc. or the Board, or the Committee. 3.7 Conclusiveness of Records. In administering the Plan, the Committee may conclusively rely upon the Basic Plan employer's payroll and personnel records maintained in the ordinary course of business. 3.8 No Personal Liability No Committee member or delegate shall be personally liable by reason of any contract or other instrument executed by him or on his behalf in his capacity as a member or delegate of a Committee nor for any mistake of judgment made in good faith, and K&F shall indemnify and hold harmless each member of the Committee and each other officer, employee, or director of K&F to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expenses (including counsel fees) or 18 24 liability (including any sum in settlement of a claim with the approval of the Board) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 3.9 How Plan Benefits are Accrued. Benefits that would be accrued under the Basic Plan, but for the limiting provisions of Code Sections 415 and/or 401(a)(17), shall be deemed to be accrued under the Plan. 3.10 Right to Amend. 3.10.1 General Power to Amend. The Board may at any time amend the Plan in any respect or suspend or terminate the Plan in whole or in part without the consent of any Participant or Beneficiary or any Employer whose employees are covered by this Plan, subject to Section 3.10.2. Any such amendment, suspension or termination may be made with or without retroactive effect, save as provided in Section 3.10.2. 3.10.2 No Cut-Back of Accrued Benefits. Notwithstanding the previous Section 3.10.1, this Plan may not be amended or terminated in any respect that has the effect of reducing or eliminating any Plan benefit that had accrued as of the effective date of the amendment or termination, unless the affected Participants or Beneficiaries each gives his consent. That is, there shall be no retroactive cut-backs of accrued Plan benefits, without individual consent. 3.11 Investment Committee. 19 25 3.11.1 Appointment of Investment Committee. The Board may, within its discretion, appoint an Investment Committee, of at least one person. The appointment of an Investment Committee shall relieve the Committee, Board, K&F, and all other participating Employers from any fiduciary responsibility (if applicable) for Plan assets under the control of the Investment Committee, or its delegates, as provided by law. The Investment Committee, if it is created by the Board, shall be a fiduciary of the Plan, but shall not be the "named fiduciary," as that term is used by ERISA. The Board may also, within its discretion, decline to create an Investment Committee, or disband it at any time. 3.11.2 Powers of the Investment Committee. The Investment Committee, if appointed, has final authority regarding the investment and management of Plan assets. The Investment Committee may delegate its responsibilities, appoint investment managers, oversee its delegates, and each Investment Committee member may execute documents on behalf of the Investment Committee, with respect to Plan assets (including Trust assets, if applicable) . Should the Investment Committee appoint an investment manager, as that term is defined in ERISA, then the Investment Committee shall be relieved of any fiduciary duty (if applicable) with respect to Plan assets under the control of such an investment manager. The Investment Committee shall exercise its powers subject to the terms of the Trust, if applicable. 3.11.2.1 Any act which the Plan or Trust authorizes or requires the Investment 20 26 Committee to do may be done by a majority of its members. The action of such majority, shall constitute the action of the Investment Committee and shall have the same effect for all purposes as if made by all members of the Investment Committee at that time in office. The Investment Committee may act without any writing that records its decisions, and need not document its meetings or teleconferences. The Investment Committee may also act through any authorized representative. 3.11.2.2 The members of the Investment Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Investment Committee to do. 3.11.2.3 The Investment Committee may employ counsel, outside experts, and other agents and may procure such clerical, accounting, actuarial and other services as they may require in carrying out the provisions of the Plan. 3.11.2.4 No member of the Investment Committee shall receive any compensation for his services as such. All expenses relating to the Investment Committee's activities, including, but not limited to, fees of accountants, counsel and actuaries shall be paid by the Employer, to the extent that they are not paid under the from Plan assets (including Trust assets, if applicable). 21 27 Article IV - Vesting and Forfeiture 4.1 Vesting. 4.1.1. A Participant shall be entitled to a benefit under this Plan only upon satisfying the vesting requirements set out in this Section 4.1. 4.1.2. Vesting, as defined by this Section 4.1, shall occur only when the Participant has (I) satisfied the vesting requirements of the Basic Plan and made any contributions that are required to receive benefits under the Basic Plan, (ii) terminated employment with K&F and all affiliated companies, (iii) satisfied all eligibility requirements for benefits under this Plan, and (iv) applied and received Committee approval to receive Plan benefits, with respect to the forfeiture issues addressed by Section 4.1.3. 4.1.3. A Participant shall not be fully vested under this Section 4.1 until, following his termination and application for Plan benefits, the Committee has determined that he is not subject to forfeiture of his Plan benefits under this Section 4.1. Forfeiture of all Plan benefits (including death benefits and Plan benefits previously paid) under this Section 4.1 shall take place, notwithstanding any contrary Plan provision, if a Participant: (i) is Dismissed for Cause, as defined in Section 4.2, (ii) becomes employed by a company in substantial competition with an Employer, or (iii) engages in conduct detrimental or contrary to the best interests of an Employer. Clause (ii) of the preceding sentence may be excluded as an event of forfeiture in individual cases, if a written determination is made by the Committee. 4.2 Dismissed for Cause. 22 28 "Dismissed for Cause" means termination of employment for (a) theft, embezzlement, or malicious destruction of an Employer's property; (b) fraud or other wrongdoing against an Employer; or (c) improper disclosure of an Employer's trade secrets. 4.3 Forfeiture after Plan Benefits have Commenced. Even though the Committee has made an initial favorable vesting determination under Section 4.1., it may nevertheless determine that a Participant's Plan benefits, after payment has commenced, are forfeited, if the Committee reconsiders the issues addressed in Section 4.1.3 and determines that forfeiture is in fact warranted. Such a forfeiture shall be effective as of the date that the Committee determines an event of forfeiture has occurred, as set out in Section 4.1.3. The Committee may therefore make a retroactive forfeiture determination. Any Plan benefits that have been paid after the effective date of the retroactive forfeiture determination shall be considered a mistaken payment under Section 5.11. 4.4 Determinations by Committee. The Committee shall have full, final, and discretionary authority to make determinations under this Article IV. Any forfeiture determination made by the Committee shall be final, binding, and conclusive upon the Participant and his Beneficiaries. 23 29 Article V - General Provisions 5.1 No Assignment or Alienation of Benefits. Subject to Section 2.2, payment of benefits pursuant to this Plan shall be made only to Participants. Such benefits shall not be subject in any manner to the debts or other obligations of the Participant or any Beneficiary, and shall not be subject to transfer, anticipation, alienation, sale, assignment, bankruptcy, pledge, attachment, charge, garnishment or encumbrance in any manner, either voluntarily or involuntarily, by the Participant, a Beneficiary, or any creditor of any person or entity, subject only to Section 1.16, concerning QDROs. 5.2 Withholding Taxes. Whenever under the Plan payment is made to a Participant or Beneficiary, an Employer shall be entitled to require as a condition of payment that the recipient remit an amount, sufficient in the Employer's opinion, to satisfy all FICA, federal and other withholding tax requirements related thereto. The Employer shall be entitled to deduct such amount from any payment. 5.3 No Right to Continue Employment. This Plan is voluntary on the part of each Employer and shall not be deemed to constitute an employment contract between the Employer and a Participant and/or consideration for or an inducement for or condition of employment of any Participant. Nothing in this Plan shall be deemed to give any employee the right to be retained in the service of an Employer or to interfere with the right of the Employer to discharge, terminate or lay off any Participant at any 24 30 time for any reason. 5.4 Unfunded Plan. The Plan is intended to constitute an unfunded, excess benefit, nonqualified pension plan for a select group of management or highly compensated employees, for the purposes of Title I of ERISA, and is also intended to be an unfunded plan for all tax purposes. Accordingly, all Plan Participants have the status of general unsecured creditors of their Employer, and the Plan constitutes a mere unsecured and conditional promise made by each Employer, to pay benefits in the future. 5.5 Governing Law. It is intended that the Plan conform to and meet the applicable requirements of ERISA and the Code. Except to the extent preempted by ERISA, the validity of the Plan or of any of its provisions shall be determined under, and it shall be construed and administered according to, the laws of the State of New York (including its statute of limitations and all substantive and procedural law, and without regard to its conflict of laws provisions). 5.6 Payment of Benefits. If a Trust is created, then all benefits payable under the Plan shall be paid under the Trust Agreement. In all events, the rights or entitlement of any Participant or Beneficiary shall be no greater than those of an unsecured general creditor of the Employer. 5.7 Section Headings. The section headings contained in the Plan are for purposes of convenience only and are not intended to define or limit the contents of the sections. 25 31 5.8 Payment to a Minor or Incompetent. If any amount is payable under this Plan to a minor or other legally incompetent person, such amount may be paid in any one or more of the following ways, as the Committee in its sole discretion shall determine: 5.8.1 To the legal representatives of such minor or other incompetent person; 5.8.2 Directly to such minor or other incompetent person; 5.8.3 To a parent or guardian of such minor or other incompetent person, to the person with whom such minor or other incompetent person shall reside, or to a custodian for such minor under the Uniform Gifts to Minors Act (or similar statute) of any jurisdiction. Payment to any person in accordance with the foregoing provisions shall pro tanto discharge from liability the Employer, the members of the Committee, and any person or corporation making such payment pursuant to the direction of the Committee, and none of the foregoing shall be required to see to the proper application of any such payment. Without in any manner limiting or qualifying the provisions of this Section 5.8, if any amount is payable under this Plan to a minor or any other legally incompetent person, the Committee may in its discretion utilize the procedures described in Section 5.8. 5.9 Doubt as to Right to Payment. If at any time any doubt exists as to the right of any person to any payment under this Plan or the amount or time of such payment (including, without limitation, any case of doubt as to identity, or any case in which any notice has been received from any other person claiming any interest in amounts payable hereunder, or any case in which a claim from other persons may exist by reason of community property or similar laws), the Committee shall be entitled, in its discretion, to direct that such sum be held as a segregated amount in trust until such right or 26 32 amount or time is determined or until order of a court of competent jurisdiction, or to pay such sum into court in accordance with appropriate rules of law in such case then provided, or to make payment only upon receipt of a bond or similar indemnification (in such amount and in such form as is satisfactory to the Committee). 5.10 Missing Payees. If all or portion of a Participant's vested Plan benefit becomes payable and the Committee after a reasonable search cannot locate the Participant (or his Beneficiary if such Beneficiary is entitled to payment), then, 5 years after the Participant's benefit first became payable under the Plan, a notice shall be mailed to the last known address of the Participant. If the Participant does not respond within three months, the Committee may elect, upon advice of counsel, to remove all records of the Participant's accrued benefit from the Plan's current records and that benefit shall be used to offset future employer contributions. If the Participant or his Beneficiary subsequently presents a valid claim for benefits to the Committee, the Committee shall restore and pay the appropriate Plan benefit. 5.11 Mistaken Payments. No Participant or Beneficiary shall have any right to any payment made (1) in error, (2) in contravention to the terms of the Plan, the Code, or ERISA, or (3) because the Committee or its delegates were not informed of any death. The Committee shall have full rights under the law and ERISA to recover any such mistaken payment, and the right to recover attorney's fees and other costs incurred with respect to such recovery. Recovery shall be made from future Plan payments, or by any other available means. 27 33 5.12 Receipt and Release for Payments. Any payment to any Participant, Beneficiary, or to any such person's legal representative, parent, guardian, or any person or entity described by Section 5.8 or under any other Plan provision, shall be in full satisfaction of all claims for benefits that can be made under the Plan. The Trustee (if any), Committee, or The Employer may require such Participant, Beneficiary, legal representative, or any other person or entity described in this Section 5.12, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee (if any), Committee, or The Employer. 5.13 Illegality of Particular Provisions. The illegality of any particular provision of this Plan shall not affect the other provisions thereof, but the Plan shall be construed in all respects as if such invalid provision were omitted. 5.14 Discharge of Liability. If distribution in respect of a Participant is made under this Plan in a form, or to a person, reasonably believed by the Committee or its delegate to be proper, the Plan shall have no further liability with respect to the Participant (or his spouse or Beneficiary) to the extent of such distribution. 28 34 IN WITNESS WHEREOF, K&F INDUSTRIES, INC., on its own behalf and as agent for each of its subsidiaries, has caused this Plan to be executed by its duly authorized officer, this 1st day of October, 1999. K&F INDUSTRIES, INC. By: /s/ KENNETH M. SCHWARTZ ------------------------------ Signature Kenneth M. Schwartz ------------------------------ Printed Name Executive Vice President ------------------------------ Title 29 35 ADDENDUM - SUMMARY PLAN DESCRIPTION INFORMATION This Addendum contains certain information generally included in summary plan descriptions. Although this Plan is not subject to Title I of ERISA, and therefore a summary description is not required to be issued, this Addendum is provided for the convenience of Plan Participants. It is addressed directly to the Participants. In some instances, this Addendum may repeat information previously stated in the text of the document, but is restated here, in a simpler, summarized form. The preceding full text of Plan document, however, will always control the administration of the Plan. HOW TO APPLY FOR BENEFITS Before you can receive benefits from the SERP, you must submit a properly-completed Election of Benefit form to your Human Resources Representative. This form must be submitted within 30 to 90 days before the date you plan to begin collecting your pension under your qualified pension plan. You will be asked to submit two election forms at the same time: one for this SERP and the other for the qualified pension plan.. WHO SHOULD ANSWER YOUR QUESTIONS ABOUT THE PLAN. Your Company Benefit Representatives are responsible for the daily, routine administration of the Plan. You may turn to them for answers to any questions you may have. However, if your question involves an interpretation of the Plan, it will be forwarded to the Committee. Although your Company Benefit Representatives will always make their best efforts to give accurate information, mistakes may occur from time to time. Should this happen, the Committee will make its own determination, based on the terms of this Plan document. The Committee's determination will control because it reflects this document, even if it conflicts with earlier decisions made by the Benefits Representative. IF A BENEFIT REQUEST IS DENIED. Any claim for benefits under this Plan must be made in writing, addressed to the Committee. If you submit a claim for benefits under this Plan, the Committee will give a written answer to your claim within 90 days after it receives it, as to whether the Committee will pay or deny the benefit. If it is decided that you are not entitled to any or all of the benefits requested, you will be told why. The notice will also: - - request additional information, if necessary - - refer you to applicable provisions of the Plan. You (or your legal representative) are entitled to review all documents and papers which affect your benefit. The notice will also tell you how you can appeal this decision. If further information is necessary, you will be notified of the problem. The Committee may then take an additional 90 days after it receives the information. If you disagree with the denial, you have 65 days after the date of the written denial in which to ask, in writing, for a review of the decision. You should furnish all supporting information and documents on behalf of your application at this time. The Committee will review your 30 36 application, and, within 60 days after it has received your appeal, give you its decision in writing in clear, understandable language, explaining how the decision was made and referring to specific sections of the Plan document on which the denial is based. If more time is needed because of unusual circumstances, you will be notified. This last decision of the Committee is final and binding. Please remember that you must complete each step of the benefit review and appeal process just described, within the deadlines, before you can take any legal action. GIVING AWAY YOUR PLAN BENEFITS The benefits described here are exclusively for Plan members and their beneficiaries. Your benefits cannot be assigned, transferred, sold, or used as collateral for any reason whatsoever. DIVORCE AND YOUR PLAN BENEFITS In the event of a divorce, marital, or child support order, benefits under your qualified defined benefit retirement plan may be payable to someone other than you and your designated beneficiary, if a "QDRO" or qualified domestic relations order has been issued by the court. The plan administrator of your retirement plan (and not the issuing court) will decide whether or not such an order is "qualified." However, the Committee of this Plan will independently decide, within its complete discretion, whether a QDRO or any other order concerning this Plan is binding upon the Committee and this Plan. The Committee reserves the right to disregard the terms of any court order or QDRO, with respect to payments from this Plan. HOW BENEFITS CAN BE FORFEITED OR DELAYED There are certain situations under which Plan benefits can be forfeited or delayed. Most of these circumstances are spelled out in the previous pages, particularly in Article IV, but you can also forfeit or delay payment of your Pension Plan benefit if: - - you or your beneficiary do not file an application for benefits; - - you do not furnish information requested to complete or verify your application for benefits; or - - your current address is not on file with your local Benefits Representative - - your benefits were described or paid to you in error, and were not authorized by the Plan - - there is a delay in payment under the Company's qualified pension plan. FUTURE OF THE PLAN The Company intends to continue the Plan indefinitely, but reserves the right to terminate, 31 37 suspend, withdraw, amend or modify the Plan at any time. Any change or termination of benefits will be based solely on the decisions of K&F and may apply to active employees, future retirees and current retirees as either separate groups, or as one group. If this should happen, the Company will notify employees and/or retirees as soon as possible. TAX LAWS The Plan is governed by the rulings of the Internal Revenue Service and current tax laws. If there are any changes in tax laws or IRS rulings, the Plan will be amended to comply. You will be informed of any changes. PLAN LIMITATIONS Being a member of the Plan does not give you any right of continued employment with the Company. PLAN BENEFITS ARE NOT INSURED Because the Plan is not a qualified retirement plan under the Internal Revenue Code, benefits are not insured or protected by the Pension Benefit Guaranty Corporation (PBGC). OTHER IMPORTANT FACTS Official Name of Plan: K&F Industries Supplemental Executive Retirement Plan (Informally known as the K&F SERP) Sponsoring Employer: K&F Industries, Inc. 600 Third Avenue New York, New York 10016 (212) 297-0900 A complete list of other participating employers may be obtained from the Plan Administrator. Employer Identification Number: 34-1614845 Plan Number: 513 Plan Administrator: Committee The K&F SERP c/o Chief Financial Officer K&F Industries, Inc. 600 Third Avenue New York, NY 10016 (212) 297-0900 32 38 Agent for Service of The Plan Administrator Process: Plan Year: January 1 - December 31 Type of Plan: Nonqualified, Unfunded, Excess Benefit, Deferred Compensation Plan 33 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,584,000 0 52,144,000 274,000 68,848,000 143,166,000 159,331,000 88,130,000 441,868,000 66,544,000 433,625,000 0 0 7,000 (141,741,000) 441,868,000 355,951,000 355,951,000 197,757,000 197,757,000 18,068,000 161,000 40,677,000 61,784,000 12,136,000 73,920,000 0 0 0 73,920,000 0 0
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