424B3 1 y54981b3e424b3.txt K & F INDUSTRIES, INC. Filed Pursuant to Rule 424 (b)(3) of the Rules and Regulations Under the Securities Act of 1933 Registration Statement No. 333-40977 PROSPECTUS SUPPLEMENT (To Prospectus dated April 20, 2001) $185,000,000 K & F Industries, Inc. 9 1/4% Senior Subordinated Notes Due 2007 ----------------------------- This Prospectus Supplement, together with Prospectus, is to be used by Lehman Brothers in connection with offers and sales of the above-referenced securities in market-making transactions at negotiated prices related to prevailing market prices at the time of sale. Lehman Brothers may act as principal or agent in such transactions. November 14, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-29035 ------------ K & F Industries, Inc. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 34-1614845 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 600 Third Avenue, New York, New York 10016 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (212) 297-0900 ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ------ ------ As of November 1, 2001, there were 740,398 shares of common stock outstanding. PART I. FINANCIAL INFORMATION K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 2001 2000 -------------------- --------------------- ASSETS: Current Assets: Cash and cash equivalents $ 6,283,000 $ 6,477,000 Accounts receivable, net 40,798,000 46,765,000 Inventory 67,505,000 63,983,000 Other current assets 1,776,000 1,634,000 Deferred income taxes -- 4,260,000 -------------------- --------------------- Total current assets 116,362,000 123,119,000 -------------------- --------------------- Property, plant and equipment 168,799,000 165,375,000 Less, accumulated depreciation and amortization 98,139,000 92,339,000 -------------------- --------------------- 70,660,000 73,036,000 -------------------- --------------------- Prepaid pension cost 23,683,000 23,683,000 Deferred charges, net of amortization 39,588,000 32,120,000 Goodwill, net of amortization 158,098,000 162,679,000 Intangible assets, net of amortization 15,043,000 15,448,000 -------------------- --------------------- $423,434,000 $430,085,000 ==================== ===================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY: Current Liabilities: Accounts payable, trade $ 17,300,000 $ 18,373,000 Notes payable 1,300,000 3,900,000 Current portion of senior term loans 1,500,000 1,500,000 Interest payable 8,049,000 4,148,000 Other current liabilities 42,311,000 49,503,000 -------------------- --------------------- Total current liabilities 70,460,000 77,424,000 -------------------- --------------------- Deferred income taxes 14,260,000 -- Postretirement benefit obligation other than pensions 80,337,000 79,687,000 Other long-term liabilities 7,973,000 5,355,000 Senior revolving loan 16,000,000 20,000,000 Senior term loan A 47,500,000 47,875,000 Senior term loan B 52,000,000 92,750,000 9 1/4% senior subordinated notes due 2007 185,000,000 185,000,000 Stockholders' Deficiency: Common stock, $.01 par value - authorized, 1,000,000 shares; issued and outstanding, 740,398 shares 7,000 7,000 Additional paid-in capital (63,259,000) (63,259,000) Retained earnings (deficit) 13,733,000 (14,711,000) Accumulated other comprehensive loss (577,000) (43,000) -------------------- --------------------- Total stockholders' deficiency (50,096,000) (78,006,000) -------------------- --------------------- $423,434,000 $430,085,000 ==================== =====================
See notes to consolidated financial statements. 2 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended ----------------------------------------------------- September 30, September 30, 2001 2000 ---------------------- ---------------------- Sales $268,090,000 $277,772,000 Costs and expenses 185,819,000 183,410,000 Amortization 6,463,000 6,068,000 ---------------------- ---------------------- Operating income 75,808,000 88,294,000 Interest and investment income 174,000 225,000 Interest expense (26,505,000) (27,994,000) ---------------------- ---------------------- Income before income taxes 49,477,000 60,525,000 Income tax provision (21,033,000) (24,616,000) ---------------------- ---------------------- Net income $ 28,444,000 $ 35,909,000 ====================== ======================
See notes to consolidated financial statements. 3 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended ----------------------------------------------------- September 30, September 30, 2001 2000 ---------------------- ---------------------- Sales $85,284,000 $93,569,000 Costs and expenses 59,403,000 58,533,000 Amortization 2,207,000 1,984,000 ---------------------- ---------------------- Operating income 23,674,000 33,052,000 Interest and investment income 50,000 75,000 Interest expense (9,707,000) (8,842,000) ---------------------- ---------------------- Income before income taxes 14,017,000 24,285,000 Income tax provision (6,918,000) (9,900,000) ---------------------- ---------------------- Net income $ 7,099,000 $14,385,000 ====================== ======================
See notes to consolidated financial statements. 4 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended -------------------------------------------------- September 30, September 30, 2001 2000 ---------------------- --------------------- Cash flows from operating activities: Net income $ 28,444,000 $ 35,909,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,404,000 11,922,000 Non-cash interest expense - amortization of deferred financing charges 1,260,000 1,314,000 Non-cash interest expense - change in fair market value of interest rate swap 4,299,000 -- Deferred income taxes 18,520,000 22,834,000 Changes in assets and liabilities: Accounts receivable, net 5,920,000 7,619,000 Inventory (3,597,000) (1,732,000) Other current assets (1,142,000) 299,000 Accounts payable, notes payable, interest payable, and other current liabilities (9,001,000) (1,000) Postretirement benefit obligation other than pensions 650,000 750,000 Other long-term liabilities (56,000) (2,400,000) ---------------------- --------------------- Net cash provided by operating activities 57,701,000 76,514,000 ---------------------- --------------------- Cash flows from investing activities: Capital expenditures (3,565,000) (6,696,000) Deferred charges (9,205,000) (1,263,000) ---------------------- --------------------- Net cash used in investing activities (12,770,000) (7,959,000) ---------------------- --------------------- Cash flows from financing activities: Payments of senior revolving loan (50,000,000) (75,000,000) Payments of senior term loans (41,125,000) (73,750,000) Borrowings under senior revolving loan 46,000,000 83,000,000 ---------------------- --------------------- Net cash used by financing activities (45,125,000) (65,750,000) ---------------------- --------------------- Net (decrease) increase in cash and cash equivalents (194,000) 2,805,000 Cash and cash equivalents, beginning of period 6,477,000 3,584,000 ---------------------- --------------------- Cash and cash equivalents, end of period $ 6,283,000 $ 6,389,000 ====================== ===================== ------------ Supplemental cash flow information: Interest paid during period $ 17,045,000 $ 22,750,000 ====================== ===================== Income taxes paid during the period $ 2,069,000 $ 1,270,000 ====================== =====================
See notes to consolidated financial statements. 5 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited consolidated financial statements have been prepared by K & F Industries, Inc. and Subsidiaries (the "Company") pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules. The Company believes that the disclosures made are adequate to make the information presented not misleading. The consolidated statements of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company's December 31, 2000 Annual Report on Form 10-K. 2. Accounting Change Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. As a requirement of its 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 adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative pre-tax reduction in other comprehensive income of $923,000 ($550,000 after tax)related to derivatives designated in cash flow-type hedges prior to adopting SFAS No. 133. This amount will be amortized into interest expense over three years which is the remaining life of the interest rate swap agreement. During the three and nine months ended September 30, 2001, the change in fair market value of our derivative instrument resulted in a non-cash charge of $2,605,000 and $4,299,000, respectively, which is recorded in interest expense as this derivative was not designated as a hedging instrument. 6 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 will also require any recognized intangible asset determined to have an indefinite useful life to not be amortized, but instead be tested for impairment in accordance with this Standard until its life is determined to no longer be indefinite. The Company is required to adopt SFAS No. 142 on January 1, 2002, at which time goodwill amortization will cease. The Company is currently assessing the impact of SFAS No. 142 on its financial position and results of operations. Goodwill amortization expense was $4,581,000 during the nine months ended September 30, 2001 and 2000. 4. Receivables are summarized as follows:
September 30, December 31, 2001 2000 ------------ ----------- Accounts receivable, principally from commercial customers $35,117,000 $40,816,000 Accounts receivable, on U. S. Government and other long-term contracts 6,032,000 6,093,000 Allowances (351,000) (144,000) ------------ ------------ $40,798,000 $46,765,000 ============ ============
5. Inventory consists of the following:
September 30, December 31, 2001 2000 ------------ ------------ Raw materials and work-in-process $37,048,000 $36,058,000 Finished goods 20,523,000 18,642,000 Inventoried costs related to U.S. Government and other long-term contracts 9,934,000 9,283,000 ------------ ------------ $67,505,000 $63,983,000 ============ ============
7 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 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. 6. Other current liabilities consist of the following:
September 30, December 31, 2001 2000 ------------ ------------ Accrued payroll costs $16,302,000 $25,256,000 Accrued taxes 2,835,000 2,984,000 Accrued costs on long-term contracts 3,199,000 3,172,000 Accrued warranty costs 11,295,000 10,789,000 Customer credits 1,792,000 2,693,000 Postretirement benefit obligation other than pensions 3,000,000 3,000,000 Other 3,888,000 1,609,000 ----------- ----------- $42,311,000 $49,503,000 =========== ===========
7. Contingencies There are various lawsuits and claims pending against the Company incidental to its business. Although the final results in such suits and proceedings cannot be predicted with certainty, in the opinion of the Company's management, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 8. Comprehensive Income
Three Months Ended ----------------------------- September 30, September 30, 2001 2000 ------------ ------------ Net income $ 7,099,000 $14,385,000 Other comprehensive income: Cumulative translation adjustments 32,000 (43,000) Amortization of transition adjustment included in interest expense 46,000 -- ------------ ------------ Comprehensive income $ 7,177,000 $14,342,000 ============ ============
8 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended ------------------------------------- September 30, September 30, 2001 2000 ------------- ------------- Net income $28,444,000 $35,909,000 Other comprehensive income: Cumulative translation adjustments (122,000) (299,000) Cumulative effect of change in accounting principle (SFAS No. 133) (550,000) -- Amortization of transition adjustment included in interest expense 138,000 -- ------------ ------------ Comprehensive income $27,910,000 $35,610,000 ============ ============
9. Segments The following represents financial information about the Company's segments:
Three Months Ended ------------------------------------- September 30, September 30, 2001 2000 ------------ ------------ Sales: Aircraft Braking Systems $72,102,000 $82,309,000 Engineered Fabrics 13,182,000 11,260,000 ------------ ------------ $85,284,000 $93,569,000 ============ ============ Earnings Before Interest, Taxes, Depreciation and Amortization: Aircraft Braking Systems $26,315,000 $34,403,000 Engineered Fabrics 1,557,000 2,671,000 ------------ ------------ $27,872,000 $37,074,000 ============ ============ Operating Profits: Aircraft Braking Systems $22,598,000 $30,872,000 Engineered Fabrics 1,076,000 2,180,000 ------------ ------------ Operating income 23,674,000 33,052,000 Interest expense, net (9,657,000) (8,767,000) ------------ ------------ Income before income taxes $14,017,000 $24,285,000 ============ ============
9 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended ------------------------------------- September 30, September 30, 2001 2000 ------------- ------------- Sales: Aircraft Braking Systems $229,357,000 $243,770,000 Engineered Fabrics 38,733,000 34,002,000 ------------- ------------- $268,090,000 $277,772,000 ============= ============= Earnings Before Interest, Taxes, Depreciation and Amortization: Aircraft Braking Systems $ 83,269,000 $ 93,454,000 Engineered Fabrics 4,943,000 6,762,000 ------------- ------------- $ 88,212,000 $100,216,000 ============= ============= Operating Profits: Aircraft Braking Systems $ 72,350,000 $ 83,006,000 Engineered Fabrics 3,458,000 5,288,000 ------------- ------------- Operating income 75,808,000 88,294,000 Interest expense, net (26,331,000) (27,769,000) ------------- ------------- Income before income taxes $ 49,477,000 $ 60,525,000 ============= =============
September 30, December 31, 2001 2000 ------------- ----------- Total Assets: Aircraft Braking Systems $358,134,000 $360,070,000 Engineered Fabrics 59,966,000 59,235,000 Deferred tax asset not allocated to segments -- 4,260,000 Deferred financing costs not allocated to segments 4,883,000 6,143,000 Corporate assets 451,000 377,000 ------------ ------------ $423,434,000 $430,085,000 ============ ============
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Effect of September 11, 2001 Events The Company is a supplier to manufacturers and operators of commercial, general aviation and military aircraft. Results for the three and nine months ended September 30, 2001 were adversely affected by the sluggish economy and the tragic events of September 11, 2001. These events combined to reduce orders from and shipments to certain commercial and general aviation customers. In addition, the Company also re- evaluated its customer credit limits which added to the reduced sales levels. Offsetting this weakness are increased revenues and orders in the Company's military sector. The Company believes the impact from all of the above was to lower sales by approximately $7,000,000 during the three and nine months ended September 30, 2001. Comparison of Results of Operations for the Nine Months Ended September 30, 2001 and September 30, 2000 Sales for the nine months ended September 30, 2001 totaled $268,090,000, reflecting a decrease of $9,682,000 compared with $277,772,000 for the same period in the prior year. This decrease was due to lower commercial transport and general aviation sales of $22,323,000, primarily due to lower sales on the MD-90, DC-9 and Gulfstream programs, partially offset by higher sales on the CRJ-700 program. Partially offsetting this decrease was higher military sales of $12,641,000, due to higher sales of wheels, brakes and fuel tanks on various military aircraft. Operating income decreased $12,486,000 to $75,808,000, or 28.3% of sales for the nine months ended September 30, 2001, compared with $88,294,000, or 31.8% of sales for the same period in the prior year. Operating margins decreased primarily due to the overhead absorption effect relating to the lower sales and an unfavorable product sales mix. Net interest expense decreased by $1,438,000 for the nine months ended September 30, 2001 compared with the same period in the prior year. This decrease was due to a lower average debt balance and lower interest rates on the Company's variable rate indebtedness, partially offset by a non-cash charge of $4,299,000 relating to the change in fair market value of the Company's interest rate swap in accordance with SFAS No. 133. The Company's effective tax rate of 42.5% for the nine months ended September 30, 2001 differs from the statutory rate of 35% primarily due to foreign, state and local income taxes and a net increase in the valuation allowance. The effective tax rate of 40.7% for the nine months ended September 30, 2000 differs from the statutory rate of 35% due to a net increase in the valuation allowance and state and local income taxes. The increase in the effective rate in 2001 over 2000 is primarily due to a net increase in the valuation allowance over the prior year. Comparison of Results of Operations for the Three Months Ended September 30, 2001 and September 30, 2000 Sales for the three months ended September 30, 2001 totaled $85,284,000, reflecting a decrease of $8,285,000 compared with $93,569,000 for the same period in the prior year. This decrease was due to lower commercial transport and general aviation sales of $12,646,000, primarily on the DC-9 and Fokker FO-100 programs, partially offset by higher sales on the CRJ-700 program. Partially offsetting this decrease was higher military sales of $4,361,000, due to higher sales of wheels, brakes and fuel tanks on various military aircraft. 11 Operating income decreased $9,378,000 to $23,674,000, or 27.8% of sales for the three months ended September 30, 2001, compared with $33,052,000, or 35.3% of sales for the same period in the prior year. Operating margins decreased primarily due to the overhead absorption effect relating to the lower sales and an unfavorable product sales mix. Net interest expense increased by $890,000 for the three months ended September 30, 2001 compared with the same period in the prior year. This increase was due to a non-cash charge of $2,605,000 relating to the change in the fair market value of the Company's interest rate swap in accordance with SFAS No. 133, partially offset by a lower average debt balance and lower interest rates on the Company's variable rate indebtedness. The Company's effective tax rate of 49.4% for the three months ended September 30, 2001 differs from the statutory rate of 35% primarily due to a net increase in the valuation allowance and state, local and foreign income taxes. The effective tax rate of 40.8% for the three months ended September 30, 2000 differs from the statutory rate of 35% due to a net increase in the valuation allowance and state and local income taxes. The increase in the effective rate in 2001 over 2000 is primarily due to a net increase in the valuation allowance over the prior year. Liquidity and Financial Condition The Company expects that its principal use of funds for the next several years will be to fund capital expenditures, to make investments in new airframes and to pay interest and principal on indebtedness. The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under its revolving credit facility. At September 30, 2001, the Company had $32.2 million available to borrow under its $50 million revolving credit facility. Cash Flows During the nine months ended September 30, 2001, cash provided by operating activities amounted to $57,701,000 and reflected $88,212,000 of earnings before interest, taxes, depreciation and amortization ("EBITDA"), decreases in accounts receivable of $5,920,000, increases in long-term liabilities of $594,000, partially offset by increases in inventory of $3,597,000, other current assets of $1,142,000, decreases in accounts payable of $1,073,000, notes payable of $2,600,000, other current liabilities of $9,229,000, increases in other working capital of $270,000, interest payments of $17,045,000 and tax payments of $2,069,000. During the nine months ended September 30, 2000, cash provided by operating activities amounted to $76,514,000 and reflected $100,216,000 of EBITDA, decreases in accounts receivables of $7,619,000, decreases in other working capital of $12,000, partially offset by increases in inventory of $1,732,000, decreases in accounts payable of $2,759,000, other current liabilities of $1,172,000, long-term liabilities of $1,650,000, interest payments of $22,750,000 and tax payments of $1,270,000. During the nine months ended September 30, 2001, net cash used in investing activities amounted to $12,770,000 due to $3,565,000 of capital expenditures and $9,205,000 of program participation payments. During the nine months ended September 30, 2000, net cash used in investing activities amounted to $7,959,000 due to $6,696,000 of capital expenditures and $1,263,000 of program participation payments. During the nine months ended September 30, 2001 and 2000, net cash used by financing activities amounted to $45,125,000 and $65,750,000, respectively, each representing the repayment of indebtedness. 12 Accounting Change Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative pre-tax reduction in other comprehensive income of $923,000 ($550,000 after tax)related to derivatives designated in cash flow-type hedges prior to adopting SFAS No. 133. This amount will be amortized into interest expense over three years which is the remaining life of the interest rate swap agreement. During the three and nine months ended September 30, 2001, the change in fair market value of our derivative instrument resulted in a non- cash charge of $2,605,000 and $4,299,000, respectively, which is recorded in interest expense as this derivative was not designated as a hedging instrument. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 will also require any recognized intangible asset determined to have an indefinite useful life to not be amortized, but instead be tested for impairment in accordance with this Standard until its life is determined to no longer be indefinite. The Company is required to adopt SFAS No. 142 on January 1, 2002, at which time goodwill amortization will cease. The Company is currently assessing the impact of SFAS No. 142 on its financial position and results of operations. Goodwill amortization expense was $4,581,000 during the nine months ended September 30, 2001 and 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has $302 million of total debt outstanding at September 30, 2001. Of this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the balance is borrowed under our credit facility. The interest rate for borrowings under the credit facility varies with LIBOR or the prime rate at the Company's option. The Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates. The interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95% on $101.5 million at September 30, 2001 and matures on December 17, 2001 with an option for the counterparty to extend the agreement to December 17, 2003. Therefore, the Company has effectively fixed the interest rate on $286.5 million of its indebtedness at September 30, 2001. Given that approximately 95% of the Company's borrowings are at fixed interest rates, a 10% change in rates would not have a significant impact on fair values, cash flows or earnings. The Company has no other derivative financial instruments. 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None (b) Reports on Form 8-K. There were no reports on Form 8-K for the three months ended September 30, 2001. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. K & F INDUSTRIES, INC. ----------------------------------- Registrant /s/ DIRKSON R. CHARLES ---------------------- Dirkson R. Charles Chief Financial Officer and Registrant's Authorized Officer Dated: November 14, 2001 15