-----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, WZyGMiW0Z6IRt+8MfhdNocZOYuVWP1TjuINQzhXtnSvZ/UotrW4PWmgbi4dGRyOa rUbipXgmmENUE9YJdDvYkg== 0000950123-01-002807.txt : 20010330 0000950123-01-002807.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950123-01-002807 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 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: 1583111 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 y47035e10-k405.txt 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, 2000 [ ] 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, 2001, 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, 2000, approximately 87% 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 80% 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 with storage, shipping, environmental and rescue applications for commercial and military uses. During the year ended December 31, 2000, approximately 13% 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. 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, although in recent years, Aircraft Braking Systems has sometimes teamed with landing gear manufacturers to respond to requests for proposals for a complete or "dressed" landing gear system. 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 generally focuses on such factors as the system's "cost-per-landing," given certain assumptions concerning the 2 3 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 the sales 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 1,800 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. Approximately 75% of Aircraft Braking Systems' revenues are derived from the sales of replacement parts. As of December 31, 2000, Aircraft Braking Systems' products had been installed on approximately 30,000 commercial transport, general aviation and military aircraft. Current fleets of commercial transport aircraft include the DC-9, DC-10, Fokker FO-100/70, Fokker F-28, Fokker F-50/60, Fairchild Dornier DO-228, Canadair Regional Jet, Saab 340 and Saab 2000 on all of which Aircraft Braking Systems is the sole-source supplier. In addition, Aircraft Braking Systems is a supplier of spare parts for the dual-sourced, MD-80 program. Aircraft Braking Systems' commercial transport fleet has benefitted not only from an increase in the number of new aircraft entering service, but also the 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, 2000, Aircraft Braking Systems estimates there were 638 DC-9 aircraft in service and engine hushkits were installed on 519 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. Aircraft Braking Systems expects to produce replacement parts for these aircraft over their remaining lives. Aircraft Braking Systems has been successful in having its wheels and brakes selected for use on a number of new high-cycle airframe designs including the Airbus A-320, A-321 and the MD-90. Most recently, Aircraft Braking Systems was selected for 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 for over 763 Canadair Regional Jets with approximately 460 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, Aircraft Braking Systems has been selected as the sole supplier of wheels and carbon brakes for the Embraer ERJ170, ERJ190-100 and ERJ190-200, a family of regional jets being 3 4 introduced in 2001. In 2000, the Company became the supplier for the Fairchild Dornier DO-328 Turboprop, the Dassault Falcon 900EX and the Gulfstream GIV-X. Aircraft Braking Systems is a supplier of wheels and carbon brakes on the Airbus A-321, the 186-seat "stretch" version of the popular A-320 standard body twin-jet. Airbus has booked orders for over 378 A-321 aircraft. Of the 172 aircraft delivered to date, Aircraft Braking Systems has provided wheels and brakes for 119 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. 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 Aircraft Braking Systems include helicopter rotor brakes and brake temperature monitoring equipment for various types of aircraft. ENGINEERED FABRICS. The Company believes Engineered Fabrics is the largest manufacturer of flexible bladder type fuel tanks for aircraft in the world, serving approximately 80% 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, 2000, approximately 13% 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, 2000, sales of fuel tanks accounted for approximately 78% 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. Engineered Fabrics 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. 4 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, ------------------------- 2000 1999 1998 ----- ----- ----- Wheels and brakes........................................... 81% 81% 80% Brake control systems....................................... 6% 7% 8% Fuel tanks.................................................. 10% 10% 9% -- -- -- Total............................................. 97% 98% 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 17%, 15% and 14% of total sales for the years ended December 31, 2000, 1999 and 1998, 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, ------------------------- 2000 1999 1998 ----- ----- ----- Commercial transport........................................ 61% 63% 64% Military (U.S. and foreign)................................. 20% 18% 18% General aviation............................................ 19% 19% 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 U.S. military aircraft using these products are the F-4, F-14, F-15, F-16, F-18, F-117A, A-10, B-1B, B2, C-130, C-130J and C-141. Some of the foreign military aircraft using these products include the F-2 (formerly the FS-X) in Japan, AIDC Indigenous Defensive Fighter ("IDF") in Taiwan, Saab JAS-39 in Sweden, Alenia C-27 in Italy and the Casa C-212 in Spain. 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 5 6 G-IV, the IAI 1123, 1124, 1125 Astra, Astra SPX and Galaxy, the Challenger CL600, CL601 and CL604, the Raytheon Hawker Horizon and the Falcon 10, 100, 20, 200, 50 and 50EX. FOREIGN CUSTOMERS The Company supplies products to a number of foreign aircraft manufacturers, airlines and foreign governments. Substantially all sales to foreign customers are in U.S. dollars and, therefore, the impact of currency translations is immaterial to the Company. The following table shows sales of the Company to both foreign and domestic customers:
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ----- ----- ----- Domestic sales.............................................. 60% 58% 57% Foreign sales............................................... 40% 42% 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, 2000, the Company employed approximately 152 engineers (of whom 24 held advanced degrees); approximately 24 of such engineers (including 10 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, 2000, 1999 and 1998 were $15.8 million, $14.0 million and $13.7 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 competitors for brake control systems are the Hydro-Aire Division of Crane Co. and Messier Bugatti in France. 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, 2000 and 1999 amounted to approximately $148.2 million and $150.6 million, respectively. Backlog consists of firm orders for the Company's products which have not been shipped. Approximately 91% of total Company backlog at December 31, 2000 is expected to be shipped during the year ending December 31, 2001, 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, 2000, approximately 30% 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. 6 7 GOVERNMENT CONTRACTS For the years ended December 31, 2000, 1999 and 1998, approximately 17%, 15% and 14%, respectively, of the Company's total sales were made to agencies of the Government or to prime contractors or subcontractors of the Government. The majority of the Company's defense related sales are from an annual catalog. The remainder of the Company's defense business is derived from contracts that 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, 2000, the Company had 1,483 full-time employees, of which 910 were employed by Aircraft Braking Systems (448 hourly and 462 salaried employees) and 573 were employed by Engineered Fabrics (435 hourly and 138 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 was recently extended and renewed, and now expires on February 5, 2004. 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 7 8 office space. The Company believes that its properties and equipment are generally well-maintained, in good operating condition and adequate for its present needs. FOREIGN FACILITIES. The Company occupies approximately 19,000 square feet of leased office and warehouse space in Slough, England, under a lease expiring in 2020. The Company also maintains a sales and service office in 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, 2000, 1999 and 1998, Aircraft Braking Systems made occupancy payments to Lockheed Martin of $2.1 million, $1.9 million and $1.8 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. 8 9
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------------------- --------------------- 2000 1999 1998 1997 1996 1996 1995 -------- --------- --------- --------- -------- -------- -------- (IN THOUSANDS) Income Statement Data: Net sales....................... $375,890 $ 355,951 $ 345,447 $ 304,331 $277,655 $212,703 $199,784 Cost of sales................... 199,459 197,757 196,190 188,001 180,971 136,813 136,277 -------- --------- --------- --------- -------- -------- -------- Gross Margin.................... 176,431 158,194 149,257 116,330 96,684 75,890 63,507 Independent research and development................... 15,763 13,996 13,705 10,873 11,781 8,623 6,610 Selling, general and administrative expenses....... 37,666 33,245 35,332 40,182(a) 24,482 17,297 15,378 Amortization.................... 8,118 8,773 10,286 10,316 10,412 7,810 7,813 -------- --------- --------- --------- -------- -------- -------- Operating income................ 114,884 102,180 89,934 54,959 50,009 42,160 33,706 Interest expense, net........... 35,993 40,396 44,830 34,091 36,957 27,197 31,288 -------- --------- --------- --------- -------- -------- -------- Income (loss) before income taxes and extraordinary charge........................ 78,891 61,784 45,104 20,868 13,052 14,963 2,418 Income tax (provision) benefit....................... (14,906) 12,136 (5,744) (5,184) 81 81 -- Extraordinary charge............ -- -- -- (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d) -------- --------- --------- --------- -------- -------- -------- Net income (loss)............... $ 63,985 $ 73,920 $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505 ======== ========= ========= ========= ======== ======== ======== Balance Sheet Data (at end of period): Working capital................. $ 45,695 $ 76,622 $ 38,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938 Total assets.................... 430,085 441,868 420,099 425,236 419,115 419,115 412,028 Long-term debt.................. 345,625 432,125 477,125 519,125(a) 287,000 287,000 293,000 Stockholders' deficiency........ (78,006) (141,734) (215,610) (256,459)(a) (33,306) (33,306) (34,327) Other Data (for the period): Capital expenditures............ 9,845 10,413 14,873 10,016 21,166 14,091 3,343 Depreciation and amortization... 16,128 17,268 19,961 19,680 19,305 14,644 14,260
- --------------- (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. (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. (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. 9 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, 2000, 1999 and 1998, the Company spent an aggregate of approximately $53.3 million, $50.8 million and $60.7 million, respectively, for research, development, design, Program Investments, capital expenditures and development participation costs. In prior years, the Company was selected as the sole supplier of wheels and brakes for each of the Saab 2000, the Canadair Regional Jet and CRJ-700, the Lear 60 and Embraer's 70 and 90 passenger jets, a supplier of wheels and carbon brakes on the Airbus A-321 and the sole supplier of wheels, carbon brakes and brake control systems on the MD-90. In 2000, the Company became the supplier for the Canadair CRJ-900, the Fairchild Dornier DO-328 Turboprop, the Dassault Falcon 900EX and the Gulfstream GIV-X. 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. RESULTS OF OPERATIONS Year Ended December 31, 2000 Compared with the Year Ended December 31, 1999 During 2000, sales, operating income and income before income taxes 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, 2000 totaled $375.9 million, reflecting an increase of $19.9 million or 5.6%, compared with $356.0 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 $3.8 million, primarily on the MD-90, Canadair Regional Jet and Airbus A-321 programs, partially offset by lower sales on the Fokker FO-100, DC-9 and DC-10 programs. General aviation sales increased $4.1 million, primarily due to higher sales of wheels and brakes on Gulfstream aircraft. Military sales increased $12.0 million, primarily due to higher sales of wheels and brakes on the F-14 program and for fuel tanks on the F-18 program. GROSS MARGIN. The gross margin for the year ended December 31, 2000 was 46.9% compared with 44.4% for the same period in the prior year. This increase was primarily due to a favorable sales mix, the overhead absorption effect relating to the higher sales and operating efficiencies. Partially offsetting this increase was higher Program Investments. INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development costs were $15.8 million for the year ended December 31, 2000 compared with $14.0 million for the same period in the prior year. This increase was primarily due to higher costs associated with the Embraer ERJ-170, Dassault Falcon 900 and JAS-39 programs. 10 11 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $37.7 million for the year ended December 31, 2000 compared with $33.2 million for the same period in the prior year. This increase was primarily due to higher performance-related incentive compensation. INTEREST EXPENSE, NET. Interest expense, net was $36.0 million for the year ended December 31, 2000 compared with $40.4 million for the same period in the prior year. This decrease was due to a lower average debt balance, partially offset by higher interest rates on the Company's variable rate indebtedness. EFFECTIVE TAX RATE. The Company's effective tax rate of 18.9% for the year ended December 31, 2000 differs from the statutory rate of 35% due to utilization of tax net operating losses and foreign sales corporation tax benefits, partially offset by a change in the valuation allowance and state and local taxes. The effective tax rate of (19.6)% for 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 loss, partially offset by state and local income taxes. The increase in the effective rate in 2000 over 1999 is primarily due to a net decrease in the valuation allowance in the prior year. Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998 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 the overhead absorption effect relating to the higher sales. However, the reduction in Program Investments negatively affected 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. 11 12 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 $433.6 million at December 31, 1999 to $347.1 million at December 31, 2000 due to $85.0 million of voluntary principal prepayments and $1.5 million of scheduled principal payments on its credit facility. At December 31, 2000, the Credit Facility consists of a term loan facility in an aggregate principal amount of $142.1 million (the "Term Loans") and a revolving credit facility in an aggregate principal amount of up to $50 million (the "Revolving Loans"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the principal amount of $48.4 million and a Tranche B term loan ("Term Loan B") in the principal amount of $93.7 million. The Credit Facility bears interest at floating rates selected at the option of the Company. At December 31, 2000 and 1999, the average interest rate on the Credit Facility was 8.6% and 8.3%, respectively. As a requirement of the Credit Facility, the Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates on the Credit Facility. This interest rate agreement effectively fixes the rate at 8.1% on $115 million of borrowings at December 31, 2000. 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 2001 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 2001 through 2003, $67.0 million due in 2004 and $23.7 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, $45.8 million was determined to be due in 2001, however, this prepayment obligation has been satisfied by the aforementioned $85.0 million voluntary prepayment in 2000. 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, 2000, the Company had outstanding letters of credit of $6.4 million. The Revolving Loan commitment terminates on October 15, 2003. At December 31, 2000, the Company had $23.6 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, 2000. CASH FLOW During the year ended December 31, 2000, net cash provided by operating activities amounted to $110.7 million and reflected $131.0 million of earnings before interest, taxes, depreciation and amortization ("EBITDA"), decreases in accounts receivable of $4.9 million, inventory of $4.7 million, increases in accounts payable of 0.7 million, notes payable of $3.9 million, other current liabilities of $6.7 million, decreases in other working capital of $1.2 million, partially offset by prepaid pension costs of $5.9 million, interest payments of $34.9 million and tax payments of $1.6 million. During the year ended December 31, 1999, net cash provided by operating activities amounted to $60.5 million and reflected $119.4 million of EBITDA, decreases in inventory of $1.4 million, increases in accounts payable of $2.4 million, decreases in 12 13 other working capital of $1.0 million, 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, 2000, net cash used in investing activities amounted to $21.3 million due to $9.8 million of capital expenditures, $5.8 million of program participation payments and $5.7 million for the purchase of intellectual property for the Dornier 328 program. 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. Capital spending for the year ended December 31, 2001 is expected to be approximately $6.0 million. During the year ended December 31, 2000, net cash used in financing activities amounted to $86.5 million due to the repayment of indebtedness. 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. ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. The Company expects that at January 1, 2001, it will record an after-tax reduction in other comprehensive income of $0.5 million as a cumulative transition adjustment relating to derivatives designated in cash flow-type hedges prior to adopting SFAS No. 133. During the year ended December 31, 2000, the Company adopted Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." The adoption of SAB 101 had no impact on our financial position, results of operation and cash flows. INFLATION A majority of the Company's sales are conducted through annually established price lists and long-term contracts. The effect of inflation on the Company's sales and earnings is minimal because the selling prices of such price lists and contracts, established for deliveries in the future, generally reflect estimated costs to be incurred in these future periods. In addition, some contracts provide for price adjustments through escalation clauses. 13 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has approximately $347.1 million of total debt outstanding at December 31, 2000. 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 $115 million at December 31, 2000 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 $300 million of its indebtedness at December 31, 2000. Given that approximately 86% of the Company's borrowings at December 31, 2000 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-18 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the directors and executive officers of the Company. All directors hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualified, and all executive officers hold office at the pleasure of the Board of Directors. The following executive officers or directors of the Company are related by blood or marriage: Kenneth M. Schwartz is the nephew of Bernard L. Schwartz, Ronald H. Kisner's wife is the niece of Bernard L. Schwartz and John R. Paddock's wife is the daughter of Bernard L. Schwartz. No other executive officer or director of the Company is related by blood, marriage or adoption.
NAME AGE POSITION(S) DIRECTOR SINCE - ---- --- ----------- -------------- Bernard L. Schwartz*...................... 75 Chairman of the Board and Chief 1989 Executive Officer David J. Brand**.......................... 40 Director 1997 Herbert R. Brinberg*...................... 75 Director 1989 Robert B. Hodes*.......................... 75 Director 1997 Ronald H. Kisner*......................... 52 Director and Secretary 1989 John R. Paddock*.......................... 47 Director 1989 A. Robert Towbin***....................... 65 Director 1989 Alan H. Washkowitz**...................... 60 Director 1989 Donald E. Fogelsanger..................... 75 Vice Chairman Kenneth M. Schwartz....................... 49 President and Chief Operating Officer Dirkson R. Charles........................ 37 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. 14 15 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 a member of The General Partners' Committee and Chief Executive Officer of Globalstar, L.P., a Director of Globalstar Telecommunications Limited, a Director of Loral Cyberstar, Inc., a Director of Satelites Mexicanos, S.A. de C.V., a Director of Reliance Group Holdings, Inc. and certain subsidiaries, a Director of First Data Corporation, a Trustee of Mount Sinai-NYU Medical Center and Health System and a Trustee of Thirteen/WNET Educational Broadcasting Corporation. 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 Brill Academic Publishers, 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 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 1959 to 1987. Mr. Towbin is also a Director of Gerber Scientific, Inc., Globalstar Telecommunications Ltd., and Globecomm Systems, Inc. Mr. Washkowitz is a Managing Director of Lehman Brothers and Head of the Merchant Banking Group, and is responsible for the oversight of Merchant Banking Fund II and its affiliated investment vehicles, as well as their predecessor, Merchant Banking Fund I. He has served on the Investment Committee for 13 years, and he also is a member of Lehman Brothers' Commitment Committee and Fairness Opinion Committee. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968. He became a general partner of Lehman Brothers in 1977 when Kuhn Loeb was acquired and a Managing Director of Lehman Brothers in 1978. Prior to joining the Merchant Banking Group in 1988, Mr. Washkowitz headed the Financial Restructuring Group, which advised distressed companies and their creditors on a wide range of business and financial issues. Mr. Washkowitz is a Director of L-3 Communications Corporation, McBride plc, P&L Coal Holding Corporation and C.P. Kelco. 15 16 Mr. Fogelsanger has been Vice Chairman of the Company since March 2000. Mr. Fogelsanger was President of the Company from January 1996 to March 2000. From April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft Braking Systems Corporation. From 1987 to 1989 he was President of Loral Corporation's Aircraft Braking Systems Division. From January 1986 to March 1987 he was Vice President and General Manager of Goodyear Aerospace Corporation's ABS division. From 1980 to 1986 he was General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr. Fogelsanger directed Goodyear's development of a crash-resistant fuel system for helicopters that was credited with saving hundreds of lives during the Vietnam War. He joined Goodyear in 1951. Mr. Kenneth M. Schwartz has been President and Chief Operating Officer of the Company since March 2000. Mr. Schwartz was Executive Vice President of the Company from January 1996 to March 2000. From June 1989 to January 1996, Mr. Schwartz held the positions of Chief Financial Officer, Treasurer and Secretary. Previously he was the Corporate Director of Internal Audit for Loral Corporation since late 1987. From 1984 to 1987, Mr. Schwartz held the position of Director of Cost and Schedule Administration for Loral Electronic Systems. Prior to 1984, Mr. Schwartz held various other positions with Loral Electronic Systems and the accounting firm of Deloitte & Touche LLP. Mr. Charles has been Chief Financial Officer of the Company since May 1996. From May 1993 to May 1996, Mr. Charles was the Controller of the Company. Previously he was the Manager of Accounting and Financial Planning. Prior to employment with the Company in 1989, Mr. Charles held various other positions with the accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984. EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED FABRICS CORPORATION Set forth below are the names, ages and positions of the executive officers of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold office at the pleasure of their respective Board of Directors. AIRCRAFT BRAKING SYSTEMS CORPORATION
NAME AGE POSITION - ---- --- -------- Frank P. Crampton.................................... 57 Senior Vice President -- Marketing Richard W. Johnson................................... 57 Senior Vice President -- Finance and Administration James J. Williams.................................... 45 Senior Vice President -- Operations Gary M. Rimlinger.................................... 53 Vice President -- Engineering
ENGINEERED FABRICS CORPORATION
NAME AGE POSITION - ---- --- -------- John A. Skubina...................................... 46 President Richard P. Arsenault................................. 43 Vice President -- Finance Terry L. Lindsey..................................... 56 Vice President -- Marketing Anthony G. McCann.................................... 41 Vice President -- Operations Dan C. Sydow......................................... 64 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. 16 17 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 Research and Technology Department of Aircraft Braking Systems, Loral Corporation's Aircraft Braking Systems Division and Goodyear Aerospace. Mr. Skubina has been President of Engineered Fabrics Corporation since April 2000. Mr. Skubina was Senior Vice President of Engineered Fabrics Corporation from September 1999 to April 2000. 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, 82nd 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 18 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for the years ended December 31, 2000, 1999 and 1998, 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.
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------------ ALL OTHER ---------------------- OPTIONS LTIP COMPEN- SALARY BONUS GRANTED PAYOUTS SATION(A) NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($) - --------------------------- ---- --------- --------- ------- ------- --------- Bernard L. Schwartz.............. 2000 2,060,259(b) 7,300,200 -- -- -- Chairman of the Board and 1999 2,084,224(b) 6,095,300 -- -- -- Chief Executive Officer 1998 2,070,782(b) 5,055,300 -- -- -- Kenneth M. Schwartz.............. 2000 476,155(b) 850,000(c) 2,500 55,000 11,140 President and Chief Operating 1999 435,000(b) 175,000 -- 48,333 5,856 Officer of K & F Industries, Inc. 1998 265,154 160,000 1,500 45,000 5,532 Donald E. Fogelsanger............ 2000 235,000 410,000(c) -- 55,000 30,382 Vice Chairman of 1999 235,000 150,000 -- 53,332 32,976 K & F Industries, Inc. 1998 244,500 130,000 -- 48,333 35,636 Dirkson R. Charles............... 2000 185,000 525,000(c) 750 39,333 7,888 Chief Financial Officer of 1999 170,000 90,000 -- 34,333 7,596 K & F Industries, Inc. 1998 141,923 80,000 1,200 29,667 7,313 Ronald H. Kisner................. 2000 170,000 430,000(c) 1,250 35,000 11,552 Director and Secretary of 1999 160,000 75,000 -- 21,667 23,259 K & F Industries, Inc. 1998(d) -- -- -- -- --
- --------------- (a) Includes the following: (i) Company contributions to individual 401(k) plan accounts for the years ended December 31, 2000, 1999 and 1998, respectively: Mr. K. Schwartz -- $5,057, $4,800 and $4,517; Mr. Fogelsanger -- $5,086, $4,800 and $4,517; Mr. Charles -- $5,092, $4,800 and $4,517; Mr. Kisner -- $5,096, $4,798 and $0; and (ii) the compensation element of supplemental life insurance programs for the years ended December 31, 2000, 1999 and 1998, respectively: Mr. K. Schwartz -- $6,083, $1,056 and $1,015; Mr. Fogelsanger -- $25,296, $28,176 and $31,119; Mr. Charles -- $2,796, $2,796 and $2,796; Mr. Kisner -- $6,456, $6,456 and $0. Mr. Kisner also received a Board of Director fee of $12,000 in 1999. (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 of the aggregate annual advisory fee be paid to Kenneth M. Schwartz, which is included in his salary for the years ended December 31, 2000 and 1999. (c) In 2000, the Board of Directors awarded special bonuses to various directors, officers and employees, including $650,000 for Mr. K. Schwartz; $250,000 for Mr. Fogelsanger; $420,000 for Mr. Charles; and $340,000 for Mr. Kisner. (c) Mr. Kisner has been employed by the Company since January 1999. Prior to that he was a Director and retained to provide legal services to the Company. Mr. Kisner received $150,000 and options for 900 shares during the year ended December 31, 1998. (See "Certain Relationships and Related Transactions.") OPTION GRANTS IN LAST FISCAL YEAR The following sets forth information relating to the grant of stock options by the Company during the year ended December 31, 2000 to the named executive officers. The Company has two stock option plans, which 18 19 provide for the grant of non-qualified or incentive stock options to acquire a total of 100,000 authorized but unissued shares of common stock. None of the Company's stock is publicly traded. The options granted in 2000 become exercisable in three equal installments on the first, second and third anniversaries of the date of grant, and remain exercisable until 10 years from the date of the grant.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED --------------------------------------------------------- ANNUAL RATES OF % OF TOTAL STOCK PRICE OPTIONS APPRECIATION FOR GRANTED TO EXERCISE OR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(#) FISCAL YEAR(%) ($/SH) DATE 5%($) 10%($) - ---- ---------- -------------- ----------- ---------- -------- -------- Kenneth M. Schwartz... 2,500 21.1 250.00 04/24/10 393,059 996,089 Dirkson R. Charles.... 750 6.3 250.00 07/24/10 117,918 298,826 Ronald H. Kisner...... 750 6.3 250.00 07/24/10 117,918 298,826 Ronald H. Kisner...... 500 4.2 250.00 12/01/10 78,612 199,218
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, 2000 and the value of unexercised stock options at year-end. The Company's stock is not publicly traded.
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END(#) FY-END($) SHARES ------------- ------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ------------- ------------- Bernard L. Schwartz...................... 0 0 0/0 0/0 Kenneth M. Schwartz...................... 0 0 1,625/4,875 0/0 Donald E. Fogelsanger.................... 0 0 1,250/1,250 0/0 Dirkson R. Charles....................... 0 0 1,425/2,775 0/0 Ronald H. Kisner......................... 0 0 1,100/2,800 0/0
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, 2000, 1999 and 1998, respectively: Mr. K. Schwartz $92,000, $70,000 and $60,000; Mr. Fogelsanger $79,000, $65,000 and $55,000; Mr. Charles $67,000, $55,000 and $45,000 and Mr. Kisner $61,000, $50,000 and $40,000. 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 19 20 Plan is a qualified plan under the Internal Revenue Code. The terms of the Company Retirement Plan are as follows: a non-contributory benefit and a contributory benefit. The cost of the former is borne by the Company; the cost of the latter is borne partly by the Company and partly by the participants. Salaried employees who have completed at least six months of service and satisfied a minimum earnings level are eligible to participate in the contributory portion of the Company Retirement Plan; salaried employees become participants in the non-contributory portion on their date of hire. The Plan provides a benefit of $20.00 per month for each year of credited service. For participants who contribute to the Plan, in addition to the benefit of $20.00 per month for each year of credited service, the Plan provides an annual benefit equal to the greater of: 60% of the participant's aggregate contributions; or, average compensation earned (while contributing) during the last 10 years of employment in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2% times additional years of such service up to 30, plus, (d) 0.6% times all additional such service above 30 years. 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 contributory service on and after January 1, 1990, a contributory benefit of (i) for 14 years of contributory 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 contributory 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 $324,000 for Mr. K. Schwartz; $159,000 for Mr. Fogelsanger; $207,000 for Mr. Charles; and $87,000 for Mr. Kisner. 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. 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. 20 21 COMPENSATION OF DIRECTORS The Board of Directors held four meetings during the year ended December 31, 2000. Members of the Board of Directors are entitled to receive a director's fee of $12,000 per year. Messrs. Brand, Kisner and Washkowitz did not receive director's fees during the year ended December 31, 2000. All directors are reimbursed for reasonable out-of-pocket expenses incurred in that capacity. During the year ended December 31, 2000, Messrs. Brinberg, Hodes, Paddock and Towbin received a special bonus award of $100,000 each. 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, 2000.
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 5,400 shares, and executive officers and directors as a group hold options covering 9,150 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. 21 22 The Stockholders Agreement contains certain restrictions with respect to the transferability of the Company's capital stock, subject to certain exceptions. The Stockholders Agreement also includes provisions regarding designation of members of the Board of Directors and other voting arrangements. The Stockholders Agreement will terminate at such time as more than 75% of the shares of common stock and shares of common stock issuable upon the exercise of options or rights to acquire common stock or upon conversion of convertible securities (collectively, "Common Equivalents") then outstanding have been sold pursuant to one or more public offerings, except that the registration rights continue as to any common stock held by the Stockholders as long as they own their shares, and the voting provisions contained in the Stockholders Agreement terminate on October 15, 2007. The Stockholders Agreement provides that the Company's Board of Directors be comprised initially of nine directors. Under the Stockholders Agreement, BLS is entitled to appoint five directors, the Lehman Investors are entitled to appoint three directors and BLS and the Lehman Investors are entitled to designate jointly one independent director. Upon the death, retirement or resignation as Chairman or Chief Executive Officer or permanent disability of BLS, the Lehman Investors and the BLS Group (as defined in the Stockholders Agreement) will each be entitled to designate 50% of the members of the Board of Directors. The Company's by-laws provide for so long as there is a director designated by the Lehman Investors, certain corporate actions will require the vote of at least one director designated by the Lehman Investors, including (with certain exceptions) (i) mergers, consolidations or recapitalization, (ii) issuances of capital stock (iii) repurchases of and dividends on capital stock, (iv) issuance of employee options to purchase more than 50,000 shares of capital stock, (v) dissolution or liquidation of the Company, (vi) acquisition, sale or exchange of assets in excess of $5 million, (vii) the incurrence of debt or liens in excess of $10 million in the aggregate, (viii) the making of loans, investments or capital expenditures in excess of $10 million in each case in any single year, (ix) transactions with affiliates, (x) prepayments of or amendments to any amount of financing in excess of $10 million, (xi) amendment of the Charter and By-laws of the Company, (xii) engaging in new businesses or ventures and (xiii) certain employee compensation and other matters. The Stockholders Agreement provides that any time after the earlier of (i) the fifth anniversary of the Recapitalization, (ii) six months following the death of BLS or (iii) upon the resignation or retirement of BLS as Chairman or Chief Executive Officer; either the BLS Group or the Lehman Investors (the "Put Party") may request an appraisal of the value of the capital stock of the Company (the "Appraised Value") and may notify the other party of its desire to sell all of its and its transferees' capital stock for a pro rata share of such Appraised Value. The other party may elect to purchase such capital stock, arrange for the purchase of such capital stock by a third party or notify the Put Party that it does not intend to purchase, or arrange for the purchase by a third party of, such capital stock. If the other party is unable or chooses not to arrange for and consummate the purchase of such capital stock, the BLS Group and the 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. 22 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS GENERAL BLS owns 50% of the capital stock of the Company and pursuant to the Stockholders Agreement has the right to designate a majority of the Board of Directors of the Company. In addition, BLS serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and devotes such time to the business and affairs of the Company as he deems appropriate. BLS is also Chairman and Chief Executive Officer of Loral Space & Communications Ltd. ("Loral Space"). Because BLS is Chairman of the Board of Directors and has the right to designate a majority of the Directors to the Board of the Company, he has operating control of the Company. The Company has an Advisory Agreement with BLS which provides for the payment of an aggregate of $200,000 per month of compensation to BLS and persons designated by him in exchange for acting as directors and providing advisory services to the Company and its subsidiaries. Such agreement will continue until BLS dies or is disabled or ceases to own a specified number of shares of common stock of the Company. 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 $7,300,200, $6,095,300 and $5,055,300 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company reimburses Loral Space (of which BLS is Chairman and Chief Executive Officer), for rent and certain other services. The related charges agreed upon were established to reimburse Loral Space for actual costs incurred without profit or fee. The Company believes the arrangements are as favorable to the Company as could have been obtained from unaffiliated parties. Payments to Loral Space were $0.6 million, $0.6 million and $0.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers has agreed to act as exclusive financial adviser to the Company and the Company has agreed to pay Lehman Brothers customary fees for services when rendered. During the three years ended December 31, 2000 no amounts were paid under this agreement. The Agreement may be terminated by the Company or Lehman Brothers upon certain conditions. 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 during the year ended December 31, 1998. Mr. Kisner also received stock options for 900 shares during the year ended December 31, 1998. Since January 1999, Mr. Kisner has been employed by the Company. 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, 2000 and 1999................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998....................... F-3 Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 2000, 1999 and 1998....... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998....................... F-5 Notes to Consolidated Financial Statements................ F-6
23 24 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, 2000. 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) 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)
24 25 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) 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)
25 26 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) 10.42 -- Agreement dated as of January 1, 2000 between the Company and Loral Space 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. (12) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 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 27 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 President and Chief Operating Officer Date: March 29, 2001 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, 2001 - --------------------------------------------------- Executive Officer and Director Bernard L. Schwartz (principal executive officer) /s/ KENNETH M. SCHWARTZ President and Chief Operating March 29, 2001 - --------------------------------------------------- Officer Kenneth M. Schwartz /s/ DIRKSON R. CHARLES Chief Financial Officer March 29, 2001 - --------------------------------------------------- (principal financial and Dirkson R. Charles accounting officer) * Director March 29, 2001 - --------------------------------------------------- David J. Brand * Director March 29, 2001 - --------------------------------------------------- Herbert R. Brinberg * Director March 29, 2001 - --------------------------------------------------- Robert B. Hodes * Director March 29, 2001 - --------------------------------------------------- Ronald H. Kisner * Director March 29, 2001 - --------------------------------------------------- John R. Paddock * Director March 29, 2001 - --------------------------------------------------- A. Robert Towbin * Director March 29, 2001 - --------------------------------------------------- Alan H. Washkowitz *By: /s/ KENNETH M. SCHWARTZ Attorney-in-Fact March 29, 2001 --------------------------------------------- Kenneth M. Schwartz
27 28 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP New York, New York February 1, 2001 F-1 29 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents................................. $ 6,477,000 $ 3,584,000 Accounts receivable -- net................................ 46,765,000 51,870,000 Inventory................................................. 63,983,000 68,848,000 Other current assets...................................... 1,634,000 801,000 Deferred tax asset........................................ 4,260,000 18,063,000 ------------ ------------- Total current assets.............................. 123,119,000 143,166,000 ------------ ------------- Property, Plant and Equipment -- Net........................ 73,036,000 71,201,000 Prepaid Pension Cost........................................ 23,683,000 17,814,000 Deferred Charges -- Net of amortization of $13,622,000 and $10,445,000........................................... 32,120,000 30,534,000 Cost in Excess of Net Assets Acquired -- Net of amortization of $71,257,000 and $65,149,000............................ 162,679,000 168,787,000 Intangible Assets -- Net of amortization of $35,060,000 and $34,472,000........................................... 15,448,000 10,366,000 ------------ ------------- Total Assets................................................ $430,085,000 $ 441,868,000 ============ ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable.......................................... $ 18,373,000 $ 17,687,000 Notes payable............................................. 3,900,000 -- Current portion of long-term debt......................... 1,500,000 1,500,000 Interest payable.......................................... 4,148,000 4,506,000 Other current liabilities................................. 49,503,000 42,851,000 ------------ ------------- Total current liabilities......................... 77,424,000 66,544,000 ------------ ------------- Postretirement Benefit Obligation Other Than Pensions....... 79,687,000 78,667,000 Other Long-Term Liabilities................................. 5,355,000 6,266,000 Long-Term Debt.............................................. 345,625,000 432,125,000 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................................................... (14,711,000) (78,696,000) Accumulated other comprehensive (loss) income............. (43,000) 214,000 ------------ ------------- Total stockholders' deficiency.................... (78,006,000) (141,734,000) ------------ ------------- Total Liabilities and Stockholders' Deficiency.............. $430,085,000 $ 441,868,000 ============ =============
See notes to consolidated financial statements. F-2 30 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Net sales........................................ $375,890,000 $355,951,000 $345,447,000 Cost of sales.................................... 199,459,000 197,757,000 196,190,000 ------------ ------------ ------------ Gross margin..................................... 176,431,000 158,194,000 149,257,000 Independent research and development............. 15,763,000 13,996,000 13,705,000 Selling, general and administrative expenses..... 37,666,000 33,245,000 35,332,000 Amortization..................................... 8,118,000 8,773,000 10,286,000 ------------ ------------ ------------ Operating income................................. 114,884,000 102,180,000 89,934,000 Interest expense, net of interest income of $318,000, $281,000 and $356,000................ 35,993,000 40,396,000 44,830,000 ------------ ------------ ------------ Income before income taxes....................... 78,891,000 61,784,000 45,104,000 Income tax (provision) benefit................... (14,906,000) 12,136,000 (5,744,000) ------------ ------------ ------------ Net income....................................... $ 63,985,000 $ 73,920,000 $ 39,360,000 ============ ============ ============
See notes to consolidated financial statements. F-3 31 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
COMMON STOCK ACCUMULATED ---------------- ADDITIONAL OTHER SHARES PAID-IN COMPREHENSIVE COMPREHENSIVE ISSUED AMOUNT CAPITAL DEFICIT INCOME (LOSS) INCOME (LOSS) ------- ------ ------------ ------------- ------------- ------------- Balance, January 1, 1998..... 740,398 $7,000 $(63,259,000) $(191,976,000) $(1,231,000) 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... 740,398 7,000 (63,259,000) (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... 740,398 7,000 (63,259,000) (78,696,000) 214,000 $73,876,000 =========== Net Income................. 63,985,000 $63,985,000 Cumulative translation adjustments............. (257,000) (257,000) ------- ------ ------------ ------------- ----------- ----------- Balance, December 31, 2000... 740,398 $7,000 $(63,259,000) $ (14,711,000) $ (43,000) $63,728,000 ======= ====== ============ ============= =========== ===========
See notes to consolidated financial statements. F-4 32 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Cash Flows From Operating Activities: Net income....................................... $ 63,985,000 $ 73,920,000 $ 39,360,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................. 8,010,000 8,495,000 9,675,000 Amortization.................................. 8,118,000 8,773,000 10,286,000 Non-cash interest expense-amortization of deferred financing charges.................. 1,755,000 1,836,000 1,932,000 Provision for losses on accounts receivable... 109,000 161,000 140,000 Deferred income taxes......................... 13,803,000 (13,258,000) 4,912,000 Changes in assets and liabilities: Accounts receivable......................... 4,897,000 (16,058,000) 3,989,000 Inventory................................... 4,707,000 1,421,000 (4,254,000) Other current assets........................ 167,000 (128,000) (114,000) Prepaid pension costs....................... (5,869,000) (4,007,000) (3,283,000) Accounts payable............................ 686,000 2,359,000 (2,651,000) Notes payable............................... 3,900,000 - - Interest payable............................ (358,000) (627,000) 408,000 Other current liabilities................... 6,652,000 (3,652,000) (9,491,000) Postretirement benefit obligation other than pensions................................. 1,020,000 2,711,000 1,414,000 Other long-term liabilities................. (911,000) (1,398,000) (166,000) ------------ ------------ ------------ Net cash provided by operating activities............................. 110,671,000 60,548,000 52,157,000 ------------ ------------ ------------ Cash Flows From Investing Activities: Capital expenditures............................. (9,845,000) (10,413,000) (14,873,000) Deferred charges................................. (5,763,000) (7,892,000) (203,000) Purchase of intellectual property................ (5,670,000) - - ------------ ------------ ------------ Net cash used in investing activities.... (21,278,000) (18,305,000) (15,076,000) ------------ ------------ ------------ Cash Flows From Financing Activities: Payments of senior revolving loan................ (95,000,000) (59,000,000) (55,000,000) Borrowings under senior revolving loan........... 108,000,000 66,000,000 41,000,000 Payments on long-term debt....................... (99,500,000) (58,500,000) (21,500,000) Proceeds from sale and leaseback transaction..... - 5,997,000 556,000 ------------ ------------ ------------ Net cash used in financing activities.... (86,500,000) (45,503,000) (34,944,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents...................................... 2,893,000 (3,260,000) 2,137,000 Cash and cash equivalents, beginning of period..... 3,584,000 6,844,000 4,707,000 ------------ ------------ ------------ Cash and cash equivalents, end of period........... $ 6,477,000 $ 3,584,000 $ 6,844,000 ============ ============ ============ Supplemental Information: Interest paid during the period.................. $ 34,914,000 $ 39,468,000 $ 42,846,000 ============ ============ ============ Income taxes paid during the period.............. $ 1,550,000 $ 1,658,000 $ 1,055,000 ============ ============ ============
See notes to consolidated financial statements. F-5 33 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 87% of the Company's total revenues during the year ended December 31, 2000 and Engineered Fabrics Corporation ("Engineered Fabrics") (collectively, the "Subsidiaries"), which generated approximately 13% of the Company's total revenues during the year ended December 31, 2000. 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 ($6.1 million and $7.9 million, which is net of amortization (non-cash interest expense) of $6.0 million and $4.2 million at December 31, 2000 and 1999, respectively), and program participation costs ($26.0 million and $22.6 million, which is net of amortization of $7.7 million and $6.3 million at December 31, 2000 and December 31, 1999, respectively) paid in connection with the 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 F-6 34 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 11 to 30 years. During the year ended December 31, 2000, the Company purchased intellectual property (primarily consisting of patents, licenses, trade names and drawings) in connection with the Dornier 328 program in the amount of $5.7 million. 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, 2000, 1999 and 1998 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 17%, 15% and 14% of total sales for the years ended December 31, 2000, 1999 and 1998, 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, 2000 and December 31, 1999. 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. Accounting Pronouncements -- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. The Company expects that at January 1, 2001, it will record an after-tax reduction in other comprehensive income of $0.5 million as a cumulative transition adjustment relating to derivatives designated in cash flow-type hedges prior to adopting SFAS No. 133. During the year ended December 31, 2000, the Company adopted Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." The adoption of SAB 101 had no impact on the Company's financial position, results of operation and cash flows. F-7 35 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reclassifications -- Certain amounts in the prior years' financial statements have been reclassified to conform to the current period presentation. 3. ACCOUNTS RECEIVABLE
DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Accounts receivable, principally from commercial customers....................................... $40,816,000 $46,510,000 Accounts receivable on U.S. government and other long-term contracts............................. 6,093,000 5,634,000 Allowances........................................ (144,000) (274,000) ----------- ----------- Total................................... $46,765,000 $51,870,000 =========== ===========
4. INVENTORY
DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Raw materials and work-in-process................. $36,058,000 $37,216,000 Finished goods.................................... 18,642,000 22,069,000 Inventoried costs related to U.S. government and other long-term contracts....................... 9,283,000 9,563,000 ----------- ----------- Total................................... $63,983,000 $68,848,000 =========== ===========
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ---------------------------- 2000 1999 ------------ ------------ Land............................................ $ 661,000 $ 661,000 Buildings and improvements...................... 36,894,000 36,770,000 Machinery, equipment, furniture and fixtures.... 127,820,000 121,900,000 ------------ ------------ Total................................. 165,375,000 159,331,000 Less accumulated depreciation and amortization.................................. 92,339,000 88,130,000 ------------ ------------ Total................................. $ 73,036,000 $ 71,201,000 ============ ============
F-8 36 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. OTHER CURRENT LIABILITIES
DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Accrued payroll costs............................. $25,256,000 $18,733,000 Accrued taxes..................................... 2,984,000 3,429,000 Accrued costs on long-term contracts.............. 3,172,000 2,875,000 Accrued warranty costs............................ 10,789,000 9,626,000 Customer credits.................................. 2,693,000 3,312,000 Postretirement benefit obligation other than pensions........................................ 3,000,000 3,000,000 Other............................................. 1,609,000 1,876,000 ----------- ----------- Total................................... $49,503,000 $42,851,000 =========== ===========
7. LONG-TERM DEBT
DECEMBER 31, ---------------------------- 2000 1999 ------------ ------------ Senior Revolving Loan........................... $ 20,000,000 $ 7,000,000 Senior Term Loan A.............................. 48,375,000 48,875,000 Senior Term Loan B.............................. 93,750,000 192,750,000 9 1/4% Senior Subordinated Notes due 2007....... 185,000,000 185,000,000 ------------ ------------ Total........................................... 347,125,000 433,625,000 Less current maturities......................... 1,500,000 1,500,000 ------------ ------------ Total................................. $345,625,000 $432,125,000 ============ ============
At December 31, 2000, the Credit Facility consists of a term loan facility in an aggregate principal amount of $142.1 million (the "Term Loans") and a revolving credit facility in an aggregate principal amount of up to $50 million (the "Revolving Loan"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the principal amount of $48.4 million and a Tranche B term loan ("Term Loan B") in the principal amount of $93.7 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, 2000 and 1999, the average interest rate on outstanding borrowings on the Credit Facility was 8.6% and 8.3%, respectively. As a requirement of the Credit Facility, the Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates on the Credit Facility. The interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95% and matures December 17, 2001 with an option for the counterparty to extend the agreement to December 17, 2003. At December 31, 2000, the notional value on the interest rate swap agreement was $115 million and the fair value was approximately $0.9 million in favor of the counterparty (taking into account interest rates in effect at December 31, 2000), representing the amount the Company would pay if the agreement was terminated. Any differences paid or received on the interest rate swap agreement are recognized as adjustments to current interest expense. This interest rate agreement effectively fixes the Company's borrowing rate at 8.1% on $115 million of borrowings at December 31, 2000. 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 2001 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 2001 through 2003, $67.0 million due in 2004 and $23.7 million due in 2005. The Company is required F-9 37 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, $45.8 million was determined to be due in 2001, however, this prepayment obligation has been satisfied by $85.0 million of voluntary prepayments in 2000. Scheduled debt maturities of the Term Loans for the five years subsequent to December 31, 2000 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ----------- 2001.................................................... $ 1,500,000 2002.................................................... 1,500,000 2003.................................................... 48,375,000 2004.................................................... 67,000,000 2005.................................................... 23,750,000
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, 2000 and 1999, the Company had $23.6 million and $36.4 million available to borrow, respectively. At December 31, 2000 and 1999, the Company had outstanding letters of credit of $6.4 million and $6.6 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, 2000. 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. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of all financial instruments reported on the balance sheet at December 31, 2000 and 1999 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 $340 million and $424 million at December 31, 2000 and 1999, respectively. 9. CAPITAL STOCK a. 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 prior to 2000 are exercisable in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant. The options issued in 2000 are exercisable in three equal installments on the first, second and third anniversaries of the date of grant. All options remain exercisable until the expiration of the option, which is 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 2000 and 1999 were issued with an exercise price of $250 per share. F-10 38 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 1998 ------ ------ ------ Outstanding at beginning of year......................... 43,075 47,350 35,550 Granted.................................................. 11,850 900 11,800 Exercised................................................ -- -- -- Canceled................................................. (525) (5,175) -- ------ ------ ------ Outstanding at end of year............................... 54,400 43,075 47,350 ====== ====== ====== Exercisable options outstanding.......................... 18,000 7,719 - ====== ====== ====== Available for future grant............................... 28,650 40,500 41,400 ====== ====== ======
At December 31, 2000, there were outstanding options for 41,650 and 12,750 shares that were exercisable at $175 per share and $250 per share and with weighted-average remaining contractual lives of 7.1 years and 9.5 years, respectively. All options exercisable at December 31, 2000 were exercisable at $175 per share. b. 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 (LOSS) Components of other comprehensive income (loss) consist of the following:
ACCUMULATED CUMULATIVE OTHER MINIMUM PENSION TRANSLATION COMPREHENSIVE LIABILITY ADJUSTMENTS INCOME (LOSS) --------------- ----------- ------------- January 1, 1998........................... $(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 2000 Change............................... -- (257,000) (257,000) ----------- --------- ----------- December 31, 2000......................... $ -- $ (43,000) $ (43,000) =========== ========= ===========
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. F-11 39 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year............................ $ 86,110,000 $ 90,396,000 $ 76,127,000 $ 78,942,000 Service cost...................... 2,405,000 2,900,000 1,720,000 2,044,000 Interest cost..................... 6,766,000 6,216,000 5,661,000 5,671,000 Plan participants' contributions................... 353,000 372,000 551,000 427,000 Amendments........................ -- -- (2,875,000) -- Actuarial loss (gain)............. 3,306,000 (10,112,000) 658,000 (7,888,000) Benefits paid..................... (4,880,000) (4,236,000) (3,198,000) (3,069,000) Special termination benefits...... -- 574,000 -- -- ------------ ------------ ------------ ------------ Benefit obligation at end of year............................ 94,060,000 86,110,000 78,644,000 76,127,000 ------------ ------------ ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............... 101,299,000 89,199,000 -- -- Actual return on plan assets...... 978,000 9,292,000 -- -- Employer contributions............ 5,013,000 6,672,000 2,647,000 2,642,000 Plan participants' contributions................... 353,000 372,000 551,000 427,000 Benefits paid..................... (4,880,000) (4,236,000) (3,198,000) (3,069,000) ------------ ------------ ------------ ------------ Fair value of plan assets at end of year......................... 102,763,000 101,299,000 -- -- ------------ ------------ ------------ ------------ Funded status..................... 8,703,000 15,189,000 (78,644,000) (76,127,000) Unrecognized actuarial loss....... 14,336,000 1,513,000 9,601,000 9,195,000 Unrecognized prior service cost... 644,000 1,112,000 (13,644,000) (14,735,000) ------------ ------------ ------------ ------------ Prepaid (accrued) benefit cost.... $ 23,683,000 $ 17,814,000 $(82,687,000) $(81,667,000) ============ ============ ============ ============ WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate..................... 7.75% 8.00% 7.75% 8.00% Expected return on plan assets.... 9.50 9.50 -- -- Rate of compensation increase..... 4.50 4.50 4.50 4.50
F-12 40 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, ---------------------------------------- --------------------------------------- 2000 1999 1998 2000 1999 1998 ------------ ----------- ----------- ----------- ----------- ----------- Service cost............ $ 2,405,000 $ 2,900,000 $ 2,535,000 $ 1,720,000 $ 2,044,000 $ 1,824,000 Interest cost........... 6,766,000 6,216,000 5,830,000 5,661,000 5,671,000 5,195,000 Expected return on plan assets................ (10,498,000) (8,459,000) (7,518,000) -- -- -- Amortization of prior service cost.......... 467,000 467,000 467,000 (3,966,000) (3,730,000) (3,730,000) Recognized actuarial loss.................. 3,000 402,000 290,000 251,000 1,368,000 1,040,000 Special termination charge................ -- 574,000 -- -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Net periodic benefit (income) cost......... $ (857,000) $ 2,100,000 $ 1,604,000 $ 3,666,000 $ 5,353,000 $ 4,329,000 ============ =========== =========== =========== =========== ===========
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..................................... $1,028,000 $ (838,000) Effect on postretirement benefit obligation...... 9,943,000 (8,205,000)
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 60% 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 $1,609,000, $1,530,000 and $1,205,000 for the years ended December 31, 2000, 1999 and 1998, respectively. F-13 41 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 - ------------------------ ---------- 2001................................................... $3,573,000 2002................................................... 3,537,000 2003................................................... 3,187,000 2004................................................... 3,119,000 2005................................................... 2,754,000 Thereafter............................................. 6,465,000
Rental expense was $5,612,000, $5,991,000 and $5,410,000 for the years ended December 31, 2000, 1999 and 1998, 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, ---------------------------- 2000 1999 ------------ ------------ Tax net operating loss carryforwards.................... $ 24,708,000 $ 46,604,000 Temporary differences: Postretirement and other employee benefits............ 32,669,000 34,525,000 Intangibles........................................... 29,084,000 33,666,000 Program participation costs........................... (11,419,000) (9,267,000) Other................................................. 9,660,000 9,543,000 ------------ ------------ Deferred tax benefit.................................... 84,702,000 115,071,000 Valuation allowance..................................... (80,442,000 (97,008,000) ------------ ------------ Net deferred tax asset.................................. $ 4,260,000 $ 18,063,000 ============ ============
At December 31, 2000, the Company recorded a deferred tax asset of $4.3 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-14 42 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's benefit (provision) for income taxes consists of:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Current domestic provision............... $(32,235,000) $(26,768,000) $(17,135,000) Foreign provision........................ 309,000 (7,000) (230,000) Domestic utilization of net operating loss carryforwards..................... 30,823,000 20,848,000 11,621,000 Change in net deferred tax asset......... (13,803,000) 18,063,000 -- ------------ ------------ ------------ Income tax (provision) benefit........... $(14,906,000) $ 12,136,000 $ (5,744,000) ============ ============ ============
The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 ----- ----- ----- Statutory federal income tax rate........................... 35.0% 35.0% 35.0% Change in the valuation allowance........................... 19.7 (28.6) -- Utilization of tax net operating losses..................... (38.5) (31.9) (27.3) State tax................................................... 5.3 5.9 4.9 Foreign sales corporation benefit........................... (2.2) -- -- Foreign subsidiaries tax provision.......................... (0.4) -- 0.1 ----- ----- ----- Effective income tax rate................................... 18.9% (19.6)% 12.7% ===== ===== =====
The Company has tax net operating loss carryforwards of approximately $60 million at December 31, 2000. The tax net operating losses expire from 2009 through 2019, with $28 million of carryforwards expiring in 2009. 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 $7,300,200, $6,095,300 and $5,055,300 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company reimburses Loral Space (of which BLS is Chairman and Chief Executive Officer), for rent and certain other services. The related charges agreed upon were established to reimburse Loral Space for actual costs incurred without profit or fee. The Company believes the arrangements are as favorable to the Company as could have been obtained from unaffiliated parties. Payments to Loral Space were $0.6 million, $0.6 million and $0.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. F-15 43 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers has agreed to act as exclusive financial adviser to the Company and the Company has agreed to pay Lehman Brothers customary fees for services when rendered. During the three years ended December 31, 2000 no amounts were paid under this agreement. The Agreement may be terminated by the Company or Lehman Brothers upon certain conditions. 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 during the year ended December 31, 1998. Mr. Kisner also received stock options for 900 shares during the year ended December 31, 1998. Since January 1999, Mr. Kisner has been employed by 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, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Sales: Aircraft Braking Systems....................... $328,472,000 $313,475,000 $305,911,000 Engineered Fabrics............................. 47,418,000 42,476,000 39,536,000 ------------ ------------ ------------ $375,890,000 $355,951,000 $345,447,000 ============ ============ ============ Earnings Before Interest, Taxes, Depreciation and Amortization: Aircraft Braking Systems....................... $121,761,000 $111,457,000 $102,894,000 Engineered Fabrics............................. 9,251,000 7,991,000 7,001,000 ------------ ------------ ------------ $131,012,000 $119,448,000 $109,895,000 ============ ============ ============ Operating Profits: Aircraft Braking Systems....................... $107,596,000 $ 96,172,000 $ 84,927,000 Engineered Fabrics............................. 7,288,000 6,008,000 5,007,000 ------------ ------------ ------------ Operating Income............................ 114,884,000 102,180,000 89,934,000 Interest expense, net....................... 35,993,000 40,396,000 44,830,000 ------------ ------------ ------------ Income before income taxes................ $ 78,891,000 $ 61,784,000 $ 45,104,000 ============ ============ ============
F-16 44 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Depreciation and Amortization: Aircraft Braking Systems....................... $ 14,165,000 $ 15,285,000 $ 17,967,000 Engineered Fabrics............................. 1,963,000 1,983,000 1,994,000 ------------ ------------ ------------ $ 16,128,000 $ 17,268,000 $ 19,961,000 ============ ============ ============ Capital Expenditures: Aircraft Braking Systems....................... $ 9,092,000 $ 8,757,000 $ 13,726,000 Engineered Fabrics............................. 714,000 1,600,000 886,000 ------------ ------------ ------------ Total segments.............................. 9,806,000 10,357,000 14,612,000 Corporate...................................... 39,000 56,000 261,000 ------------ ------------ ------------ $ 9,845,000 $ 10,413,000 $ 14,873,000 ============ ============ ============
DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Total Assets: Aircraft Braking Systems....................... $360,070,000 $360,490,000 $352,057,000 Engineered Fabrics............................. 59,235,000 55,055,000 57,773,000 ------------ ------------ ------------ $419,305,000 $415,545,000 $409,830,000 ============ ============ ============
The following reconciles the total assets for the reportable segments to the Company's consolidated assets:
DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Total Assets: Total assets for reportable segments........... $419,305,000 $415,545,000 $409,830,000 Deferred financing costs not allocated to segments.................................... 6,143,000 7,898,000 9,734,000 Corporate assets............................... 377,000 362,000 535,000 Deferred tax asset not allocated to segments... 4,260,000 18,063,000 -- ------------ ------------ ------------ Consolidated Total.......................... $430,085,000 $441,868,000 $420,099,000 ============ ============ ============
The following represents the Company's total sales by products:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Braking systems.................................. $328,472,000 $313,475,000 $305,911,000 Fuel tanks....................................... 36,889,000 33,935,000 30,256,000 Other............................................ 10,529,000 8,541,000 9,280,000 ------------ ------------ ------------ $375,890,000 $355,951,000 $345,447,000 ============ ============ ============
F-17 45 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents sales by geographic location:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Sales: United States.................................. $226,082,000 $207,810,000 $197,268,000 Europe......................................... 76,470,000 75,766,000 74,228,000 Asia........................................... 35,255,000 34,052,000 35,845,000 North America.................................. 23,567,000 19,429,000 20,165,000 South America.................................. 10,000,000 14,105,000 13,042,000 Australia...................................... 4,516,000 4,789,000 4,899,000 ------------ ------------ ------------ $375,890,000 $355,951,000 $345,447,000 ============ ============ ============
Sales are attributed to geographic location based on the location of the customer. Long-lived assets held outside of the United States were $266,000, $322,000 and $318,000 as of December 31, 2000, 1999 and 1998, respectively. The U.S. government accounted for approximately 17%, 15% and 14% of the Company's total sales, for the years ended December 31, 2000, 1999 and 1998, respectively. F-18 EX-10.42 2 y47035ex10-42.txt MANAGEMENT SERVICES AGREEMENT 1 EXHIBIT 10.42 MANAGEMENT SERVICES AGREEMENT This Management Services Agreement (this "Agreement") is executed and made effective as of January 1, 2000, between K & F Industries Inc., a Delaware corporation ("K & F") and Loral SpaceCom Corporation, a Delaware corporation ("Loral" or the "Manager"). WHEREAS, K & F is engaged in manufacturing aircraft wheels, brakes and anti-skid systems as well as fuel tanks, iceguards, and specialty coated fabrics for use in aircraft (the "Business"). WHEREAS, Loral has expert administrative staff and personnel available to render general and specific services of a financial, commercial and administrative nature with respect to the Business, and desires to provide such services pursuant to the terms hereof. WHEREAS, K & F desires that Loral provide K & F with the aforesaid services. NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein and for other good, valid and binding consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Description of Services. Subject to the terms and provisions of this Agreement, the Manager shall, or shall cause its affiliates to, provide K & F with general managerial services of a financial, commercial and administrative nature with respect to the Business, in such scope and nature as K & F may request from time to time. The current scope and nature of these services is more particularly set forth in Annex I of this Agreement, which may be updated or modified by the parties as necessary. This Agreement does not impose upon K & F the obligation to request any services from Manager. The Manager shall for all purposes of this Agreement be an independent contractor and not an agent of K & F. Manager shall have no authority to bind K & F to any contract or obligation. 2. Consideration. K & F shall pay, and the Manager shall accept, as full consideration for the services to be rendered hereunder, a fee equal to the direct or "out of pocket" cost of such services plus 10%. K & F shall also reimburse the Manager for all reasonable out of pocket expenses. 3. Method and Character of Payment. The fees hereunder shall be remitted to the Manager by K & F in United States dollars by check or by wire transfer to a bank to be designated by the Manager, unless otherwise provided for and agreed upon in writing by the parties. 4. Liability. Neither the Manager nor its respective directors, officers, employees or agents shall be liable to K & F for any action or conduct taken or not taken by any of such parties, except as may arise from the willful misconduct of such party. 5. Indemnification. (a) The Manager and its respective agents, officers, employees and directors (the "Loral Indemnified Parties") will have no liability for, and will be indemnified and held harmless against, any and all claims, demands, liabilities, costs, expenses, damages, losses, suits, proceedings and actions, whether judicial, administrative, investigative or otherwise, of any nature whatsoever, known or unknown, liquidated or unliquidated, contingent or otherwise, in which any of the Loral Indemnified Parties may become involved, as a party or otherwise, arising out of the conduct of the business or affairs of K & F by the respective Loral Indemnified Parties or otherwise as a result of services provided under or relating to this Agreement, except as may arise from the willful misconduct of such party. The right of any Loral Indemnified Party to the indemnification provided herein shall be cumulative of, and in addition to, any and all rights to which such Loral Indemnified Party may otherwise be entitled to by contract or as a matter of law or equity and shall extend to such Loral Indemnified Party's successors, assigns and legal representatives. (b) K & F and its respective agents, officers, employees and directors (the "K & F Indemnified Parties") will have no liability for, and will be indemnified and held harmless against, any and all claims, demands, liabilities, costs, expenses, damages, losses, suits, proceedings and actions, whether judicial, administrative, investigative or otherwise, of any nature whatsoever, known or unknown, liquidated or 2 unliquidated, contingent or otherwise, in which any of the K & F Indemnified Parties may become involved, as a party or otherwise, arising out of the conduct of the business or affairs of the Manager, including, without limitation, the employment by the Manager of its employees, or otherwise resulting from the Manager's breach of this Agreement or default of its obligations to third parties, except as may arise from the willful misconduct of such party. The right of any K & F Indemnified Party to the indemnification provided herein shall be cumulative of, and in addition to, any and all rights to which such K & F Indemnified Party may otherwise be entitled to by contract or as a matter of law or equity and shall extend to such K & F Indemnified Party's successors, assigns and legal representatives. 6. Termination by K & F. Should the Manager commit a breach or default of any of its obligations hereunder and fail to cure such breach after 30 days written notice of such default from K & F, K & F may terminate this Agreement with respect to the Manager after ten (10) days' written notice to the Manager. Upon any such termination, the Manager shall be compensated for all services performed to the date of termination in accordance with the provisions of this Agreement. 7. Termination by the Manager. Should K & F commit a breach or default of any of its obligations hereunder and fail to cure such breach after 30 days written notice of such default from the Manager, the Manager may terminate this Agreement, after ten (10) days' written notice to K & F. 8. Effect of Termination. In the event of termination by a party for cause under paragraph 6 or 7 of this Agreement, the party terminating the Agreement shall, in addition to the rights set forth in paragraph 6 or 7, as the case may be, have such other rights and remedies as may be available at law or in equity, including, in the case of paragraph 6, the right of set-off. 9. Amendment. This Agreement may be modified or amended only by the agreement of the parties hereto in writing, duly executed by the authorized representatives of each party. 10. Force Majeure. Any delays in or failure of performance by any party hereto, other than the payment of money, shall not constitute a default hereunder if and to the extent such delays or failures of performance are caused by occurrences beyond the control of such party, including but not limited to: acts of God or the public enemy; expropriation or confiscation of facilities; compliance with any order or request of any governmental authority; acts of war; riots or strikes or other concerted acts of personnel; or any causes, whether or not of the same class or kind as those specifically named above, which are not within the control of such party, and which by the exercise of reasonable diligence, such party is unable to prevent. 11. Assignment. This Agreement shall not be assignable by any party without the prior written consent of the other party hereto, except that the Manager may assign its rights and delegate its obligations to any affiliate which it controls, which controls it or with which it is under common control. When duly assigned in accordance with the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the assignee. 12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 13. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, and delivered by means of facsimile transmission or otherwise, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same agreement. 14. No Third Party Beneficiaries. Nothing contained in this Agreement, express or implied, is intended to or shall confer upon anyone other than the parties hereto (and their permitted successors and assigns) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 15. Notices. All notices and other communications hereunder shall be in writing, signed by the party giving the same and shall be delivered by hand, facsimile or mailed by express courier or by registered or certified mail, postage prepaid, at the addresses set forth below or such other address as any party may specify 2 3 by notice to the other parties. Any notice so addressed shall be deemed to be given; if delivered by hand or facsimile, on the date of such delivery and if mailed by courier, on the second business day following the date of such mailing. (a) if to Loral: Loral SpaceCom Corporation 600 Third Avenue New York, New York 10016 Attention: Avi Katz Fax No.: (212) 338-5320 (b) if to K & F: K & F Industries Inc. 600 Third Avenue New York, New York 10016 Attention: Kenneth M. Schwartz Fax No.: (212) 867-1182 16. Waiver. Any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by any of the parties entitled to the benefit thereof only by a written instrument signed by each such party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of or estoppel with respect to, any subsequent or other failure. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized respective officers, as of the date first above written. LORAL SPACECOM CORPORATION By: /s/ AVI KATZ ------------------------------------ Name: Avi Katz Title: Vice President and Secretary K & F INDUSTRIES INC. By: /s/ KENNETH M. SCHWARTZ ------------------------------------ Name: Kenneth M. Schwartz Title: President and COO 3 4 ANNEX I SCOPE OF SERVICES The Manager shall provide services to K & F in the following areas as requested by K & F from time to time. - Rental of premises - Legal Services - Interest on Loral Space options - Insurance Services - Communications Services - Information Technology Services EX-27.01 3 y47035ex27-01.txt FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 6,477,000 0 46,909,000 144,000 63,983,000 123,119,000 165,375,000 92,339,000 430,085,000 77,424,000 347,125,000 0 0 7,000 (78,013,000) 430,085,000 375,890,000 375,890,000 199,459,000 199,459,000 20,694,000 109,000 36,311,000 78,891,000 14,906,000 63,985,000 0 0 0 63,985,000 0 0
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