-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, DOzD2hXHsuBK0ynH5qo/Bjfhb+KY7mfgDSQVCNr+pLim5eHC6Wzn4pJYQuQmnuy0 dHjJ+6JJ3brapKeTL07Cxw== 0000950123-94-001946.txt : 19941201 0000950123-94-001946.hdr.sgml : 19941201 ACCESSION NUMBER: 0000950123-94-001946 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19941130 SROS: NONE 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: 0331 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-47028 FILM NUMBER: 94562745 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 POS AM 1 POST-EFFECTIVE AMENDMENT NO. 4 TO S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1994 Registration No. 33-47028 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- K & F INDUSTRIES, INC. (Exact name of registrant as specified in charter) DELAWARE 3728 34-1614845 (State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code) Identification No.) ------------------- 600 THIRD AVENUE NEW YORK, NEW YORK 10016 (Address of principal executive offices) 212-297-0900 (Registrant's telephone number including area code) ------------------- KENNETH M. SCHWARTZ CHIEF FINANCIAL OFFICER 600 THIRD AVENUE NEW YORK, NEW YORK 10016 (Name and address of agent for service) ------------------- Copies to: JOHN J. SUYDAM, ESQ. O'SULLIVAN GRAEV & KARABELL 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10112 ------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 K & F INDUSTRIES, INC. CROSS REFERENCE SHEET PURSUANT TO SECTION 501(b) OF REGULATION S-K
Prospectus Heading Registration Statement Item and Caption or Other Location --------------------------------------- ------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus . . . . . . . . . . . . . . . . . . Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus. . . Inside Front Cover Page; Additional Information; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges. . . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors; Summary Financial Data 4. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds 5. Determination of Offering Price . . . . . . . . . . . . . . Not Applicable 6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable 7. Selling Security Holders . . . . . . . . . . . . . . . . . . Not Applicable 8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . Plan of Distribution 9. Description of Securities to be Registered . . . . . . . . . Description of Senior Notes Debentures 10. Interests of Named Experts and Counsel . . . . . . . . . . . Not Applicable 11. Information with Respect to the Registrant . . . . . . . . . Prospectus Summary; The Company; Selected Financial Data; Management's Discussion and Analysis of Results of Operations and Financial Condition; Business; Management; Ownership of Capital Stock; Description of Certain Indebtedness; Certain Transactions; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . Undertakings
3 PROSPECTUS $100,000,000 K & F INDUSTRIES, INC. 11 7/8% SENIOR SECURED NOTES DUE 2003 -------------------- Interest Payable June 1 and December 1 -------------------- K & F Industries, Inc. ("K & F" or the "Company") offered $100,000,000 (the "Offering") aggregate principal amount of its 11 7/8% Senior Secured Notes Due 2003 (the "Senior Notes"). Interest on the Senior Notes is payable on June 1 and December 1, of each year. The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after June 1, 1997, at the redemption prices set forth herein plus accrued interest to the date of redemption. The Senior Notes are not subject to mandatory sinking fund payments. Upon the occurrence of a Change of Control (as defined herein), each holder of Senior Notes will be entitled to require the Company to repurchase such holder's Senior Notes at 101% of the principal amount thereof plus accrued interest to the date of such repurchase. The Senior Notes are secured by a pledge of all of the outstanding shares of capital stock of the Company's subsidiaries. All of the Company's assets are held through its two wholly-owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft Braking Systems") and Engineered Fabrics Corporation ("Engineered Fabrics"). Aircraft Braking Systems and Engineered Fabrics are currently parties to an Amended and Restated Revolving Credit Agreement (the "Restated Revolving Credit Agreement") providing for revolving loans (the "Revolving Loans") in an aggregate principal amount not to exceed $80 million. The Revolving Loans are secured by a first priority lien on all inventory and accounts receivable of Aircraft Braking Systems and Engineered Fabrics. The Senior Notes are effectively subordinated to the Revolving Loans and the claims of the other creditors of the Company's subsidiaries. As of September 30, 1994, the aggregate amount of indebtedness, including trade payables and other liabilities, of the Company's subsidiaries to which the Senior Notes were effectively subordinated, was approximately $78.3 million. See "Risk Factors - Holding Company Structure," "Description of Senior Notes" and "Description of Certain Indebtedness." -------------------- The Company is, and will continue to be, highly leveraged. See "Risk factors" For certain factors that should be considered by prospective investors. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The prospectus is to be used by the Underwriter in connection with offers and sales in market-making transactions of negotiated prices related to prevailing market prices at the time of the sale. The Underwriter may act as principal or agent in such transactions. -------------------- LEHMAN BROTHERS November 30, 1994 4 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass all amendments, exhibits and schedules thereto) under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Subordinated Debentures being offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Commission. The Registration Statement and the exhibits and schedules thereto, as well as such reports and other information filed by the Company with the Commission, can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the following regional offices of the Commission: 75 Park Place, New York, New York 10007, Kluczynski Federal Building, 230 South Dearborn Street, Chicago, Illinois 60604 and Jacob K. Javits Federal Building, 26 Federal Plaza, New York, New York 10278. Copies of such information can also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company is required under the Indenture governing the Subordinated Debentures to file periodic reports with the Commission and to distribute copies of such filings to the holders of the Subordinated Debentures. -2- 5 PROSPECTUS SUMMARY This following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." References to worldwide markets and market share information contained herein have been derived from information compiled by the Company due to the lack of independently compiled information. Such references exclude markets formerly controlled by the U.S.S.R. about which accurate information is not readily available. THE COMPANY 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 anti-skid systems for commercial transport, general aviation and military aircraft. Aircraft Braking Systems' products are marketed internationally and are used on over 30,000 commercial transport, general aviation and military aircraft. During the fiscal year ended March 31, 1994, approximately 86% of the Company's total revenues were derived from sales made by Aircraft Braking Systems. In addition, through its wholly-owned subsidiary Engineered Fabrics Corporation ("Engineered Fabrics"), K & F believes it is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and nearly one-half of the domestic military market. Engineered Fabrics also manufactures and sells iceguards, inflatable oil booms and various other products made from coated fabrics. During the fiscal year ended March 31, 1994, approximately 14% of the Company's total revenues were derived from sales made by Engineered Fabrics. Aircraft Braking Systems and its predecessors have been leaders in the design and development of aircraft wheels, brakes and anti-skid systems, investing significant resources refining existing braking systems, developing new technologies and designing braking systems for new airframes. As is customary in the industry, Aircraft Braking Systems supplies original wheels and brakes for commercial aircraft to the aircraft manufacturer at or substantially below the production cost of such equipment. Once a manufacturer's wheels and brakes have been certified and installed on an aircraft, Federal Aviation Administration ("FAA") regulations and similar requirements in foreign countries generally require that all replacement parts for such system be provided by such manufacturer. 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 sales of replacement parts over the life of the aircraft. During the fiscal year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total revenues were derived from the sale of replacement parts to service braking systems previously installed by Aircraft Braking Systems. BACKGROUND In connection with the Offering (i) Aircraft Braking Systems, Engineered Fabrics, the Company and Chemical Banking Corporation ("Chemical") as agent for a syndicate of banks terminated the Term Loan Credit Agreement and amended and restated the original Revolving Loan Credit Agreement to provide for up to $80 million of Revolving Loans to Aircraft Braking Systems and Engineered Fabrics, and ii) amended the Convertible Debenture Indenture to allow payment of interest on the 14.75% Convertible Debentures due 2004 (the "Convertible Debentures") with additional convertible debentures through April 15, 1997. See "Use of Proceeds," "Description of Senior Notes," "Description of Certain Indebtedness -- Subordinated Debentures" and "Description of Certain Indebtedness -- The Amended and Restated Revolving Credit Agreement". On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) -3- 6 PROCEEDS FROM THE OFFERING The net proceeds obtained by the Company from the sale of the Senior Notes were approximately $96.7 million. The Company used such proceeds to prepay in full its senior term loan (the "Term Loan") and to reduce the outstanding amount of Revolving Loans. The repayment of the Term Loan relieved the Company of $92.5 million in principal payments scheduled to be made on the Term Loan through the fiscal year ending March 31, 1998. The Restated Revolving Credit Agreement contains financial covenants which are less restrictive than those contained in the original Revolving and Term Loan Credit Agreements. While the interest rate on the Senior Notes is higher than the rate that was applicable to the Term Loan, the elimination of the principal payments on the Term Loan provided the Company with the option of dedicating more of its cash flow to investments in original equipment for selected airframes, paying down debt or applying such cash flow towards other general corporate purposes. THE OFFERING - SENIOR NOTES Securities Offered . . . . . . . . . . . . . $100,000,000 aggregate principal amount of 11 7/8% Senior Secured Notes Due 2003, issued pursuant to the Indenture dated as of June 1, 1992, (the "Senior Note Indenture") between the Company and the Bank of New York, as Trustee. Maturity Date . . . . . . . . . . . . . . . . December 1, 2003. Interest Payment Dates . . . . . . . . . . . June 1 and December 1. Optional Redemption . . . . . . . . . . . . . The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after June 1, 1997, at the redemption prices set forth herein plus accrued interest to the date of redemption. Mandatory Sinking Fund . . . . . . . . . . . None. Change of Control . . . . . . . . . . . . . . Upon the occurrence of a Change of Control, each holder of Senior Notes will be entitled to require the Company to repurchase such holder's Senior Notes at a price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase. Ranking . . . . . . . . . . . . . . . . . . . The Senior Notes rank senior in right of collateral to all unsecured indebtedness of the Company and senior in right of collateral and payment to the Subordinated Debentures. The Senior Notes are effectively subordinated to the Revolving Loans and to the claims of other creditors of Aircraft Braking Systems and Engineered Fabrics. See "Risk Factors-Holding Company Structure.
-4- 7 Certain Covenants . . . . . . . . . . . . . . The Senior Note Indenture contains certain covenants, including but not limited to covenants limiting the following: (i) the incurrence by the Company of additional indebtedness; (ii) the issuance of capital stock by Aircraft Braking Systems; (iii) the payment of dividends and interest on and redemption of capital stock and subordinated debt of the Company and its subsidiaries; (iv) transactions with shareholders and affiliates; (v) the application of the proceeds of certain asset sales; (vi) the incurrence of liens; (vii) the creation of restrictions on the ability of the Company's subsidiaries to make distributions; and (viii) the ability of the Company and its subsidiaries to engage in certain mergers or consolidations or to transfer all or substantially all of their assets to another person. However, such limitations and prohibitions are subject to a number of important exemptions. See "Description of Senior Notes." Collateral . . . . . . . . . . . . . . . . . The Senior Notes are secured by a pledge of all of the outstanding capital stock of Aircraft Braking Systems and Engineered Fabrics. See "Risk Factors-Holding Company Structure" and "Description of Senior Notes." Use of Proceeds . . . . . . . . . . . . . . . The Company used the net proceeds received from the issuance of the Senior Notes (approximately 96.7 million) to repay the indebtedness remaining under the Term Loan ($92.5 million) and to reduce the outstanding amount of Revolving Loans. See "Use of Proceeds."
-5- 8 SUMMARY FINANCIAL DATA The summary financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Prospectus. The summary consolidated financial data as of and for the six months ended September 30, 1994 and 1993 was derived from unaudited financial statements which in the opinion of management of the Company include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. The summary consolidated financial data as of and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990 was derived from audited financial statements.
For the Six Months For the Years Ended September 30, Ended March 31, -------------------- ----------------------------------------------------------- 1994 1993 1994 1993 1992 1991 1990(a) ---- ---- ---- ---- ---- ---- ------- (In Thousands) INCOME STATEMENT DATA: Net sales . . . . . . . . . . . . . $115,143 $ 115,773 $226,131 $277,107 $295,490 $314,635 $300,210 Cost of sales . . . . . . . . . . . 79,101 81,476 159,751 199,002 209,552 223,360 215,872 Independent research and development . . . . . . . . . . . 4,778 6,659 12,858 11,417 14,130 11,781 10,902 Selling, general and administrative expenses . . . . . 9,468 11,103 22,421 24,154 24,047 25,345 20,682 Amortization . . . . . . . . . . . 5,230 5,312 10,884 10,258 10,306 10,233 9,380 -------- --------- -------- -------- -------- -------- -------- Operating income . . . . . . . . . 16,566 11,223 20,217 32,276 37,455 43,916 43,374 Interest expense, net . . . . . . . 25,171 25,995 51,953 53,486 52,179 54,196 58,580 -------- --------- -------- -------- -------- -------- -------- Income (loss) before extraordinary charge and cumulative effect of accounting principles . . . . . . (8,605) (14,772) (31,736) (21,210) (14,724) (10,280) (15,206) Extraordinary charge(b) . . . . . . -- -- -- (2,477) (992) -- -- Cumulative effect of accounting changes . . . . . . . . . . . . . -- (2,305)(c) (2,305)(c) (73,540)(d) -- -- -- -------- --------- -------- -------- -------- -------- -------- Net loss . . . . . . . . . . . . . $ (8,605) $ (17,077) $(34,041) $(97,227) $(15,716) $(10,280) $(15,206) ======== ========= ======== ======== ======== ======== ======== Ratio of earnings to fixed charges(e) -- -- -- -- -- -- -- BALANCE SHEET DATA (at end of period): Working capital . . . . . . . . . . $ 48,543 $ 65,913 $ 53,091 $ 70,028 $ 77,606 $ 52,312 $ 79,755 Total assets . . . . . . . . . . . 434,021 473,659 446,880 489,968 518,938 536,781 529,975 Long-term obligations(f) . . . . . 413,344 482,365 484,407 480,580 405,111 404,871 415,033 Stockholders' equity (deficiency)(f) . . . . . . . . . (33,464) (66,639) (90,355) (51,868) 48,331 38,172 49,794 OTHER DATA (for the period): Capital expenditures, net . . . . . 611 1,890 3,127 4,670 3,986 8,718 8,878 Depreciation and amortization . . . 9,786 10,056 20,527 19,862 19,501 18,683 16,403 Non-cash interest - convertible debentures(f) . . . . . . . . . . 3,950 4,066 8,443 7,282 6,213 5,237 4,245 Non-cash interest - financing costs. 663 705 1,480 1,507 2,467 1,692 7,089
(a) Consists of the results of operations for the period April 28, 1989 to March 31, 1990 (338 days). (b) The extraordinary charge of $2,477 and $992 relates to the accelerated amortization of unamortized financing costs associated with the prepayment in full of the Term Loan in fiscal year 1993 and the partial prepayment of the Term Loan in fiscal year 1992. (See Note 7 to the March 31, 1994 consolidated financial statements.) (c) Represents cumulative effect of the change in method of accounting for the discounting of workers' compensation losses. (See Note 2 to the March 31, 1994 consolidated financial statements.) (d) Includes cumulative effect of accounting change for SFAS No. 106 and the change in method of accounting for certain overhead costs in inventory. (See Notes 11 and 4 to the March 31, 1994 consolidated financial statements.) (e) For purposes of this computation, earnings consist of income (loss) before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of debt issuance costs) plus that portion of lease rental expense representative of the interest factor (deemed to be one-third of lease rental expense). The Company's earnings were insufficient to cover fixed charges by $8,605, $14,772, $31,736, $21,210, $14,724, $10,280 and $15,206 for the six months ended September 30, 1994 and 1993 and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990, respectively. Non-cash charges included in the deficiency of earnings available to cover fixed charges for the six months ended September 30, 1994 and 1993 and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990 are $14,399, $14,827, $30,450, $28,651, $28,181, $25,612 and $27,737, respectively. Non-cash charges consist of depreciation, amortization and non-cash interest on the Convertible Debentures and deferred financing costs. (f) On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 22.5% of equity. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) -6- 9 THE COMPANY GENERAL K & F, through its wholly owned subsidiary Aircraft Braking Systems, is one of the world's leading manufacturers of aircraft wheels, brakes and anti-skid systems for commercial transport, general aviation and military aircraft. Aircraft Braking Systems' products are marketed directly to airframe manufacturers, airlines and governments worldwide, as well as through a distribution network comprising approximately 130 outlets, and are used on over 30,000 commercial transport, general aviation and military aircraft. During the fiscal year ended March 31, 1994, approximately 86% of the Company's total revenues were derived from sales made by Aircraft Braking Systems. In addition, through its wholly-owned subsidiary Engineered Fabrics, K & F believes it is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and nearly one-half of the domestic military market. Engineered Fabrics also manufactures and sells iceguards, inflatable oil booms and various other products made from coated fabrics for commercial and military uses. During the fiscal year ended March 31, 1994, approximately 14% of the Company's total revenues were derived from sales made by Engineered Fabrics. Aircraft Braking Systems and its predecessors have been leaders in the design and development of aircraft wheels, brakes and anti-skid systems, investing significant resources refining existing braking systems, developing new technologies and designing braking systems for new airframes. As is customary in the industry, Aircraft Braking Systems supplies original wheels and brakes for commercial aircraft to the aircraft manufacturers at or substantially below the production cost of such equipment. Once a manufacturer's wheels and brakes have been certified and installed on an aircraft, FAA regulations and similar requirements in foreign countries generally require that all replacement parts for such systems be provided by such manufacturer. 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 sales of replacement parts over the life of the aircraft. During the fiscal year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total revenues were derived from the sale of replacement parts to service braking systems previously installed by Aircraft Braking Systems. Aircraft Braking Systems also manufactures anti-skid systems for use on a variety of commercial, military and general aviation aircraft. These systems, which are integrated into a braking system, are designed to minimize the distance required to stop an aircraft by utilizing sensors, mounted on each brake and wheel, to maximize the braking force while preventing the wheels from locking and skidding. Of the three principal competitors in the wheel and brake industry, Aircraft Braking Systems is the only significant manufacturer of anti-skid systems. Because of the sensitivity of anti-skid systems to variations in brake performance, the Company's management believes that the ability to control the design and performance characteristics of both the anti-skid system and its integrated brakes gives Aircraft Braking Systems a competitive advantage over its two largest competitors. K & F currently sells its products to virtually all major airframe manufacturers and commercial airlines and to the United States and certain foreign governments. 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 Company has been successful in having its wheels and brakes selected for use on a number of new airframe designs which serve this market, including the McDonnell Douglas Corp.'s ("McDonnell Douglas") MD-90 program, the Airbus Industries ("Airbus") A-321, the Fokker Aircraft ("Fokker") Fo-100 and Fo-70, the Canadair Regional Jet, the Saab-Scania AB ("Saab") 340 and 2000 and The Fairchild Aircraft Corporation ("Fairchild") Metro 23. The Company has also been chosen to supply products for use on a number of long-range commercial transport, -7- 10 general aviation and military aircraft, including: brakes for the Airbus A-330 and A-340 programs; wheels, brakes, anti-skid systems and fuel tanks for the Beech 400 and its military counterpart the T-1A "Jayhawk"; and wheels and brakes for the Lear 60. The Company's management believes that these new airframes will broaden the portfolio of aircraft using the Company's products and that the revenue generated from such aircraft will eventually replace the revenue generated by those aircraft in the Company's current portfolio which are reaching maturity. The Company is a Delaware corporation formed on March 13, 1989, at the direction of BLS and LBH, to effect the Acquisition. The Company is the successor to the businesses of Aircraft Braking Systems/Engineered Fabrics which were acquired by Loral from Goodyear on March 13, 1987. The principal executive offices of the Company are located at 600 Third Avenue, New York, New York 10016, and its telephone number is (212) 297-0900. BACKGROUND In connection with the Offering (i) Aircraft Braking Systems, Engineered Fabrics, the Company and Chemical Banking Corporation ("Chemical") as agent for a syndicate of banks terminated the Term Loan Credit Agreement and amended and restated the original Revolving Loan Credit Agreement to provide for up to $80 million of Revolving Loans to Aircraft Braking Systems and Engineered Fabrics, and ii) amended the Convertible Debenture Indenture to allow payment of interest on the Convertible Debentures with additional convertible debentures through April 15, 1997. See "Use of Proceeds," "Description of Senior Notes," "Description of Certain Indebtedness -- Subordinated Debentures" and "Description of Certain Indebtedness -- The Amended and Restated Revolving Credit Agreement". On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) -8- 11 RISK FACTORS Purchasers of the Senior Notes offered hereby should consider the specific factors set forth below as well as the other information set forth in this Prospectus. HIGHLY LEVERAGED POSITION Debt to Equity Ratio. The Company is highly leveraged. As of September 30, 1994 and March 31, 1994, the Company had a stockholders' deficiency. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements. Dependence on Future Performance to Make Debt Payments. The Company will be required to make sinking fund payments on the Subordinated Debentures of $52.5 million on August 1, 1999, $52.5 million on August 1, 2000, to retire the remaining $105 million of Subordinated Debentures on August 1, 2001 and to pay all principal plus accrued interest on the Senior Notes in 2003. The Company's ability to make required principal and interest payments on its indebtedness is dependent on the future performance of the Company and its subsidiaries. The Company's performance is subject to a number of factors beyond its control, including the performance of the global economy and financial markets, worldwide demand for air travel, legislative pronouncements, performance of the commercial and military aircraft industries and other factors affecting the Company and its subsidiaries. Operating and Financial Restrictions. The Company's level of indebtedness and the restrictive covenants contained in its debt instruments could significantly limit the Company's ability to withstand competitive pressures or adverse economic consequences, including the ability of the Company to make investments in aircraft programs and capital expenditures. In addition, the Revolving Loans are floating rate obligations of the Company's subsidiaries, causing the Company and its subsidiaries to be sensitive to changes in prevailing interest rates. The Company currently believes that, based on current levels of operations and anticipated growth, its cash flow from operations, together with funds available from the Revolving Loans, will be adequate to allow for anticipated capital expenditures and investments in original equipment for aircraft programs, to fund working capital requirements and to make required payments of principal and interest on its debt. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. Restrictive Covenants. The Senior Note Indenture and the Subordinated Debenture Indenture impose certain operating and financial restrictions on the Company and its subsidiaries. Such restrictions affect, and in many respects limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, permit subsidiaries to issue preferred stock, repay certain indebtedness prior to its stated maturity, create liens, sell assets or engage in mergers or acquisitions and make certain capital expenditures. These restrictions, in combination with the leveraged nature of the Company, could limit the ability of the Company to effect future financings or otherwise restrict corporate activity. In addition, the Restated Revolving Credit Agreement will impose certain restrictions on the Company's subsidiaries, including limitations on additional indebtedness, dividend payments and other distributions from Aircraft Braking Systems and Engineered Fabrics to the Company and investments in original equipment for new airframe programs. DEFICIENCY OF EARNINGS TO FIXED CHARGES For the six months ended September 30, 1994 and for the fiscal years ended March 31, 1994, 1993 and 1992, the Company's deficiency of earnings available to cover fixed charges was approximately $8.6 million, $31.7 million, $21.2 million and $14.7 million, respectively. See "Selected Financial Data" and "Management's Discussion and Analysis of Results of Operations and Financial Condition." The Company's cash flow from operations has been sufficient to meet its debt service obligations for interest and required principal payments. Although the Company expects that it may continue to have a deficiency of earnings to cover fixed charges, the Company expects that, based upon current operations, it will be able to meet required principal and interest payments on the Senior Notes. However, no assurance can be given that the Company's operating results will provide sufficient cash flow to meet its financial obligations, including payment of principal and interest on the Senior Notes. -9- 12 HOLDING COMPANY STRUCTURE The Company is the sole obligor on the Senior Notes. The Company's operations are conducted through, and substantially all of the Company's assets are owned by, its directly owned operating subsidiaries, Aircraft Braking Systems and Engineered Fabrics. As a result, the Company will be dependent on the earnings and cash flow from Aircraft Braking Systems and Engineered Fabrics to meet its obligations under the Senior Notes and the Subordinated Debentures and to pay its general expenses. Aircraft Braking Systems and Engineered Fabrics provide funds to the Company through payments on intercompany indebtedness and dividends. Because the assets of the Company are held by and will continue to be held by these subsidiaries, the claims of holders of the Senior Notes will be subject to the prior claims of creditors of Aircraft Braking Systems and Engineered Fabrics, including the claims of the Banks under the Restated Revolving Credit Agreement and the claims of trade creditors. At September 30, 1994, the aggregate amount of indebtedness, including trade payables and other liabilities, of the Company's subsidiaries to which the Senior Notes would effectively be subordinated, was approximately $78.3 million. See "Description of Senior Notes-Certain Covenants." Pursuant to a Pledge Agreement between the Company and The Bank of New York, as collateral trustee (the "Collateral Trustee"), the Company has assigned and pledged to the Collateral Trustee, for the benefit of the holders of the Senior Notes, a security interest in all of the capital stock of Aircraft Braking Systems and Engineered Fabrics to secure performance by the Company of its obligations under the Senior Note Indenture and the Senior Notes. The value of the collateral securing the Senior Notes will depend upon the value of the equity of Aircraft Braking Systems and Engineered Fabrics at any given time. No assurance can be given that the value of the equity of Aircraft Braking Systems and Engineered Fabrics would be sufficient to satisfy the Company's obligations with respect to the Senior Notes. ADDITIONAL INDEBTEDNESS The Senior Note Indenture limits but does not prohibit the incurrence by the Company or its operating subsidiaries of additional indebtedness. See "Description of Senior Notes-Certain Covenants." INTEREST OF BLS, LEHMAN BROTHERS AND ITS AFFILIATES BLS owns 27.12% of the capital stock of the Company and has operating control of the Company by reason of certain stockholder arrangements. In addition, BLS serves as Chairman of the Board of Directors and Chief Executive Officer of the Company. In his capacity as Chairman and Chief Executive Officer, BLS participates in the material business decisions relating to the Company and its operations but does not participate in the ordinary day to day operations of the Company. BLS is also the Chairman and Chief Executive Officer of Loral which owns 22.5% of the capital stock of K & F. (See Note 7 to the September 30, 1994 consolidated financial statements.) BLS and certain other executive officers of Loral provide, pursuant to a Director Advisory Agreement (the "Advisory Agreement"), certain services to the Company, including acting as directors of and providing advisory services to the Company and its subsidiaries. The Company pays BLS and persons designated at his discretion an aggregate of $200,000 per month for such services. BLS and certain other advisors to the Company participate in certain other incentive compensation plans. See "Management," "Ownership of Capital Stock" and "Certain Transactions." The Lehman Investors own 48.17% of the capital stock of the Company. The Lehman Investors have the right pursuant to certain stockholders arrangements to designate three members of the Company's Board of Directors. In addition, in the event BLS dies or is disabled or owns less than a specified number of shares of capital stock of the Company, the Lehman Investors will be entitled to designate a majority of the directors of the Company. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial adviser to the Company. Lehman Brothers has performed investment banking services for the Company in connection with the Senior Note Offering and the Subordinated Debenture Offering. In connection with the Senior Note Offering and the Subordinated Debenture Offering, Lehman Brothers received discounts and commissions of $2.25 million and $7.35 million, respectively. The Offering was made in compliance with the requirements of Schedule E to the By-Laws ("Schedule E") of the National Association of Securities Dealers, Inc. ("NASD"). Ladenburg, Thalmann & Co. Inc. acted as a "qualified independent underwriter" within the requirements of Schedule E. See "Certain Transactions," "Ownership of Capital Stock" and "Plan of Distribution." -10- 13 REDUCTIONS IN AIR TRANSPORT ACTIVITY; DELIVERY OF NEW AIRCRAFT During fiscal year 1994, sales of replacement parts for braking systems previously installed on aircraft accounted for approximately 75% of Aircraft Braking Systems' total revenues. The demand for replacement parts for the Company's wheels and braking systems varies depending upon the number of aircraft equipped with the Company's products and the number of landings made by such aircraft. A reduction in airline travel will usually result in reduced utilization of commercial aircraft, fewer landings, and a corresponding decrease in the Company's sales of replacement parts and related income and cash flow. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business." Since original equipment in new commercial aircraft is supplied at or substantially below the Company's cost of production, delivery of new aircraft equipped with the Company's products negatively affects cash flow. The Company's business plan budgets cash needs based on current delivery schedules of new aircraft and also accommodates certain increases in aircraft deliveries. However, significant, unanticipated increases in commercial aircraft deliveries in a given year could have a material adverse impact on the Company's cash flow in such year. REDUCTIONS IN MILITARY APPROPRIATIONS Recent political developments throughout the world have led to reconsideration of the United States' military objectives and requirements and a decline in spending on defense related products. Reduced United States government (the "Government") demand for products supplied by the Company has and may continue to have adverse affects on the Company's sales, income and cash flow. Sales to the Government or to prime contractors or subcontractors of the Government were approximately 15%, 23% and 31% of the Company's total sales for the fiscal years ended March 31, 1994, 1993 and 1992, respectively. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business-Government Contracts." TRADING MARKET FOR THE DEBENTURES Lehman Brothers currently makes a market in the Senior Notes. However, it is not obligated to do so, and any such market making activity may be discontinued at any time without notice, at its sole discretion. Therefore, no assurance can be given as to the liquidity of, or the trading market for, the Senior Notes. In addition, in the recent past the market for "high yield" securities (of which the Senior Notes may be deemed a part) has been characterized by certain periods of relative instability and illiquidity. No assurance can be given as to the status of the market for "high yield" securities in the future or whether an active trading market will develop for the Senior Notes. -11- 14 USE OF PROCEEDS The net proceeds received by the Company from the sale of the Senior Notes, after the payment of fees and expenses in connection with the Offering and certain related transactions were approximately $96.7 million. The Company used the net proceeds from the Offering to repay in full the Term Loan ($92.5 million) and to reduce the outstanding amount of the Revolving Loans. The repayment of the Term Loan relieved the Company of approximately $92.5 million in principal payments scheduled to be made on the Term Loan through the fiscal year ending March 31, 1998. The Restated Revolving Credit Agreement contains financial covenants which are less restrictive than those contained in the Original Revolving Credit Agreement and the Term Loan. While the interest rate on the Senior Notes is higher than that applicable to the Term Loan, the elimination of the principal payments on the Term Loan will provide the Company with the option of dedicating more of its cash flow to investments in original equipment for selected airframes, paying down debt or applying such cash flow towards other general corporate purposes. The Term Loan matured on April 30, 1997 and bore interest at 2 3/4% above the London Interbank Offering Rate. -12- 15 SELECTED FINANCIAL DATA The selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Prospectus. The summary consolidated financial data as of and for the six months ended September 30, 1994 and 1993 was derived from unaudited financial statements which in the opinion of management of the Company include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. The summary consolidated financial data as of and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990 was derived from audited financial statements.
For the Six Months For the Years Ended September 30, Ended March 31, ------------------- ------------------------------------------------------- 1994 1993 1994 1993 1992 1991 1990(a) ---- ---- ---- ---- ---- ---- ------- (In Thousands) INCOME STATEMENT DATA: Net sales . . . . . . . . . . . . . . $115,143 $115,773 $226,131 $277,107 $295,490 $314,635 $ 300,210 Cost of sales . . . . . . . . . . . . 79,101 81,476 159,751 199,002 209,552 223,360 215,872 Independent research and development 4,778 6,659 12,858 11,417 14,130 11,781 10,902 Selling, general and administrative expenses . . . . . . . . . . . . . . 9,468 11,103 22,421 24,154 24,047 25,345 20,682 Amortization . . . . . . . . . . . . . 5,230 5,312 10,884 10,258 10,306 10,233 9,380 -------- -------- -------- -------- -------- -------- --------- Operating income . . . . . . . . . . . 16,566 11,223 20,217 32,276 37,455 43,916 43,374 Interest expense, net . . . . . . . . 25,171 25,995 51,953 53,486 52,179 54,196 58,580 -------- -------- -------- -------- -------- -------- --------- Income (loss) before extraordinary charge and cumulative effect of changes in accounting principles . . (8,605) (14,772) (31,736) (21,210) (14,724) (10,280) (15,206) Extraordinary charge(b) . . . . . . . -- -- -- (2,477) (992) -- -- Cumulative effect of accounting changes -- (2,305)(c) (2,305)(c) (73,540)(d) -- -- -- -------- -------- -------- -------- -------- -------- --------- Net loss . . . . . . . . . . . . . . . $ (8,605) $(17,077) $(34,041) $(97,227) $(15,716) $(10,280) $ (15,206) ======== ======== ======== ======== ======== ======== ========= Ratio of earnings to fixed charges (e) -- -- -- -- -- -- -- BALANCE SHEET DATA (at end of period): Working capital . . . . . . . . . . . $ 48,543 $ 65,913 $ 53,091 $ 70,028 $ 77,606 $ 52,312 $ 79,755 Total assets . . . . . . . . . . . . . 434,021 473,659 446,880 489,968 518,938 536,781 529,975 Long-term obligations(f) . . . . . . 413,344 482,365 484,407 480,580 405,111 404,871 415,033 Stockholders' equity (deficiency)(f) (33,464) (66,639) (90,355) (51,868) 48,331 38,172 49,794 OTHER DATA (for the period): Capital expenditures, net . . . . . . 611 1,890 3,127 4,670 3,986 8,718 8,878 Depreciation and amortization . . . . 9,786 10,056 20,527 19,862 19,501 18,683 16,403 Non-cash interest - convertible debentures(f) . . . . . . . . . . . 3,950 4,066 8,443 7,282 6,213 5,237 4,245 Non-cash interest - financing costs. . 663 705 1,480 1,507 2,467 1,692 7,089
(a) Consists of the results of operations for the period April 28, 1989 to March 31, 1990 (338 days). (b) The extraordinary charge of $2,477 and $992 relates to the accelerated amortization of unamortized financing costs associated with the prepayment in full of the Term Loan in fiscal year 1993 and the partial prepayment of the Term Loan in fiscal year 1992. (See Note 7 to the March 31, 1994 consolidated financial statements.) (c) Represents cumulative effect of the change in method of accounting for the discounting of workers' compensation losses. (See Note 2 to the March 31, 1994 consolidated financial statements.) (d) Includes cumulative effect of accounting change for SFAS No. 106 and the change in method of accounting for certain overhead costs in inventory. (See Notes 11 and 4 to the March 31, 1994 consolidated financial statements.) (e) For purposes of this computation, earnings consist of income (loss) before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of debt issuance costs) plus that portion of lease rental expense representative of the interest factor (deemed to be one-third of lease rental expense). The Company's earnings were insufficient to cover fixed charges by $8,605, $14,772, $31,736, $21,210, $14,724, $10,280 and $15,206 for the six months ended September 30, 1994 and 1993 and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990, respectively. Non-cash charges included in the deficiency of earnings available to cover fixed charges for the six months ended September 30, 1994 and 1993 and for the fiscal years ended March 31, 1994, 1993, 1992, 1991 and 1990 are $14,399, $14,827, $30,450, $28,651, $28,181, $25,612 and $27,737, respectively. Non-cash charges consist of depreciation, amortization and non-cash interest on the Convertible Debentures and deferred financing costs. (f) On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 22.5% of equity. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) -13- 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Aircraft Braking Systems generates approximately 75% of its revenues through the sale of replacement parts for wheels and braking systems previously manufactured by the Company and its predecessors and installed on over 30,000 commercial, general aviation and military aircraft. As is customary in the industry, Aircraft Braking Systems incurs substantial expenditures to research, develop, design and supply original wheel and brake equipment to aircraft manufacturers at or below the cost of production ("program investments"). Such expenditures are charged to operations when incurred, or in the case of program investments, when delivered to the aircraft manufacturer. Since most modern aircraft have a useful life of 25 years or longer and require periodic replacement of certain components of the braking system, the Company typically recoups its initial investment in original equipment and generates significant profits from the sales of replacement parts over the life of the aircraft. The Company has invested and will continue to invest significant resources to have its products selected for use on new commercial airframes, focusing particularly on medium- and short-range aircraft. During the three years ended March 31, 1994, the Company spent an aggregate of $104 million for research, development, design and program investments. As a result of these efforts, the Company has been selected as a basic supplier of wheels and carbon brakes on the Airbus A-321, the sole supplier of wheels, carbon brakes and anti-skid systems on the MD-90, Fo-100 and Fo-70, the sole supplier of wheels and brakes for the Saab 2000, the Canadair Regional Jet, the Lear 60, the Fairchild Metro 23 and as a supplier of wheels and carbon brakes for the Airbus A-330 and A-340. These programs are in the early stages of their life cycles and represent significant future growth opportunities for the Company. The Company believes that Department of Defense budget reductions have resulted in a general reduction in the use and deployment of military aircraft and, accordingly, sales to the United States military decreased from 23% of the Company's total sales during the fiscal year ended March 31, 1993, to 15% during the fiscal year ended March 31, 1994. The Company does not anticipate any further significant reduction in sales to the United States military from their fiscal year 1994 levels. RESULTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1994 COMPARED WITH SEPTEMBER 30, 1993 Sales. Sales for the first half of fiscal year 1995 totaled $115.1 compared with $115.8 in the first six months of fiscal 1994. The decrease was due to a decline in military sales of $3.2 million primarily on the F-16 program and lower shipments of commercial oil containment booms of $4.4 million. Offsetting this decrease were higher sales of wheels and brakes for both commercial transport and general aviation aircraft, which were approximately 10% higher than the prior year. Exceptionally strong demand for DC-9 replacement parts resulted in a 30% increase in sales on this program during the period. Operating Margins. Operating income increased to $16.6 million or 14.4% of sales for the first half of fiscal year 1995, compared with $11.2 million or 9.7% of sales for the same period in the prior year. Operating margins increased primarily due to a favorable sales mix (whereby higher-margin commercial sales comprised a higher percentage of total sales), lower shipments of original equipment to airframe manufacturers at or below the cost of production and cost reductions implemented during fiscal year 1994. Interest Expense. Interest expense decreased $.8 million for the first half of fiscal year 1995 compared with the same period in the prior year. This decrease was primarily due to the retirement of the Convertible Debentures on September 2, 1994 (see Note 7 to the September 30, 1994 consolidated financial statements) and a lower average principal balance on the Revolving Loan. Approximately 360 hourly employees of the Company's Aircraft Braking Systems subsidiary are represented by the United Auto Workers' Union. Aircraft Braking Systems' three-year contract with the United Auto Workers' Union expired on August 10, 1991. Aircraft Braking Systems has not had a ratified collective bargaining agreement since August 10, 1991, but has operated under Company implemented terms and conditions of employment. -14- 17 FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993 Sales. Sales for fiscal year 1994 totaled $226.1 million compared with $277.1 million in the prior year. Military sales decreased $27.2 million primarily on the F-16, F-14A, S-3A, F-117A and Saab J-35 and J-37 programs, reflecting the overall decline in government procurements. Commercial sales decreased $23.8 million, of which approximately $7.0 million was attributable to replacement parts of aircraft wheels and brakes, principally on the DC-10 program. Additionally, demand for original equipment on the MD-11 and various Gulfstream programs was down, reflecting what the Company believes is a temporary industry-wide trend of aircraft operators deferring receipt of new airplanes. Sales of oil spill containment booms were also below prior year levels. Gross Margin. The gross margin for fiscal year 1994 was 29.4% compared with 28.2% for fiscal year 1993. This increase was due primarily to lower postretirement health care and life insurance costs in fiscal year 1994 resulting from various plan amendments (see Note 11 to the March 31, 1994 consolidated financial statements) and a favorable sales mix (whereby higher margin-commercial sales comprised a higher percentage of total sales) partially offset by the overhead absorption effect relating to lower sales volume. Independent Research and Development. Independent research and development costs were $12.9 million in fiscal year 1994 compared with $11.4 million in fiscal year 1993 or 5.7% and 4.1% of sales for fiscal year 1994 and 1993, respectively. This increase was primarily due to the incurrence of higher costs associated with the design and development of wheels and brakes for the CL-604, Saab 2000 and Japan's FSX programs. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.7 million in fiscal year 1994 compared with fiscal year 1993. This decrease was primarily due to the Company's continuous cost containment efforts and lower postretirement health care and life insurance costs due to various plan amendments. (See Note 11 to the March 31, 1994 consolidated financial statements.) Interest Expense, Net. Net interest expense decreased $1.5 million in fiscal year 1994 compared with the prior year primarily due to a lower average principal balance on the Revolving Loan. Partially offsetting this decrease was a higher principal balance on the Convertible Debentures. The Company issued $8.4 million and $7.3 million in additional Convertible Debentures during fiscal years 1994 and 1993, respectively, in payment of non-cash interest. (See Note 7 to the September 30, 1994 consolidated financial statements). In the fourth quarter of fiscal year 1994, retroactive to April 1, 1993, in response to recent Securities and Exchange Commission guidance, the Company changed its method of accounting for the discounting of liabilities for workers' compensation losses, to use a risk-free rate rather than its incremental borrowing rate. The cumulative effect for periods prior to April 1, 1993, of this change amounted to $2,305,000, and is included as an increase to the net loss for the fiscal year ended March 31, 1994. (See Note 2 to the March 31, 1994 consolidated financial statements.) FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992 Sales. Sales for fiscal year 1993 totaled $277.1 million reflecting a decrease of $18.4 million compared with the prior year. This decrease was due to a decline in military sales of $26.3 million, primarily attributable to reduced sales of replacement parts for wheels and brakes on the Lockheed F-16 and S-3A programs and for fuel tanks on the McDonnell Douglas F-15 program. Partially offsetting this decline were higher commercial sales of oil containment booms. -15- 18 Gross Margin. The gross margin for fiscal year 1993 was 28.2% compared with 29.1% for fiscal year 1992. This decrease was primarily due to the fiscal year 1993 effect of adopting Statement of Financial Accounting Standards (SFAS) No. 106 (see Note 11 to the March 31, 1994 consolidated financial statements) and a change in accounting for inventory (see Note 4 to the March 31, 1994 consolidated financial statements), lower sales volume and higher shipments of original equipment to airframe manufacturers at or below the cost of production. Partially offsetting this decrease was a favorable sales mix (whereby higher margin-commercial sales comprised a higher percentage of total sales) and enhanced operating efficiencies. Independent Research and Development. Independent research and development costs were $11.4 million in fiscal 1993 compared with $14.1 million in fiscal year 1992 or 4.1% and 4.8% of sales for fiscal years 1993 and 1992, respectively. This decrease was primarily due to the incurrence of higher costs during the prior fiscal year 1992, associated with the design and development of wheels and brakes for the Airbus A-330 and A-340, the Canadair Regional Jet and the Saab 2000 programs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $.1 million in fiscal year 1993 compared with fiscal year 1992. This increase was primarily due to the fiscal year 1993 effect of adopting SFAS No. 106, offset by the Company's continuous cost containment efforts as well as the consolidation of the Moerfelden, Germany, distribution warehouse into the product support facility in Slough, England, during fiscal year 1992. Interest Expense, Net. Net interest expense increased $1.3 million in fiscal year 1993 compared with the prior year. This increase was attributable to the higher interest rate on the Senior Notes issued June 10, 1992 compared with the senior term loan that was prepaid (see Note 7 to the March 31, 1994 consolidated financial statements) and a higher interest rate and principal balance on the Convertible Debentures. Partially offsetting this increase was a lower interest rate and average principal balance on the Revolving Loan. The Company issued $7.3 million and $6.2 million in additional Convertible Debentures during fiscal years 1993 and 1992, respectively, in payment of non-cash interest. (See Note 7 to the September 30, 1994 consolidated financial statements.) In the fourth quarter of fiscal year 1993, the Company adopted, retroactive to April 1, 1992, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires accrual of these benefits during an employee's service period. The effect of adopting SFAS No. 106 was a cumulative charge of $77.9 million and an increase in fiscal year 1993 operating expenses of $6.2 million ($5.5 million included in cost of sales and $.7 million included in selling, general and administrative expenses). (See Note 11 to the March 31, 1994 consolidated financial statements.) Prior year results have not been restated to reflect this accounting change. LIQUIDITY AND FINANCIAL CONDITION The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been from cash generated from operations and borrowings under the Revolving Loan. The Company's long-term indebtedness increased from $379.5 million at March 31, 1993, to $381.4 million at March 31, 1994. This increase was primarily due to the accrual of non-cash interest on the Convertible Debentures of $8.4 million, partially offset by $6.5 million of repayments on the Revolving Loan. On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The retirement of the Convertible Debentures has reduced the Company's future cash requirement by approximately $195 million had the debentures been outstanding until maturity. (See Note 7 to the September 30, 1994 consolidated financial statements.) -16- 19 The Company expects that its principal use of funds for the next several years will be to pay interest on indebtedness, fund capital expenditures and make investments in original equipment for new airframes. Debt principal amortization commences August 1, 1999. The Company's management believes that it will have adequate resources to meet its cash requirements through funds generated from operations and borrowings under its $80 million Revolving Loan (maturing April 27, 1997 and subject to a borrowing base of eligible accounts receivable and inventory). At September 30, 1994 and March 31, 1994, the Company had $55.1 million and $38.2 million, respectively, available to borrow under its Revolving Loan. CAPITAL EXPENDITURES The Company had additions to fixed assets of $3.1 million and $4.7 million for the fiscal years ended March 31, 1994 and 1993, respectively. These additions were primarily for manufacturing equipment. Capital spending for fiscal year 1995 is expected to be approximately $5.0 million. INFLATION The effect of inflation on the Company's sales and earnings is minimal because a majority of the Company's sales are conducted through long-term contracts or established price lists. The selling prices of such contracts and price lists, 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. ACCOUNTING CHANGE Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." The adoption of SFAS No. 112 did not have a material effect on the Company's financial position or results of operations. (See Note 2 to the September 30, 1994 consolidated financial statements.) -17- 20 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 anti-skid systems for commercial transport, general aviation and military aircraft. Aircraft Braking Systems' products are marketed directly to airframe manufacturers, airlines and governments worldwide, as well as through a distributor network comprising approximately 130 outlets, and are used on over 30,000 commercial transport, general aviation and military aircraft. The Company also maintains nine product support offices located in four countries. During the fiscal year ended March 31, 1994, approximately 86% 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"), believes it is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and nearly one-half of the domestic military market. Engineered Fabrics also manufactures and sells iceguards, inflatable oil booms and various other products made from coated fabrics, for commercial and military uses. During the fiscal year ended March 31, 1994, approximately 14% of the Company's total revenues were derived from sales made by Engineered Fabrics. Aircraft Braking Systems and its predecessors have been leaders in the design and development of aircraft wheels, brakes and anti-skid systems, investing significant resources refining existing braking systems, developing new technologies and designing braking systems for new airframes. As is customary in the industry, Aircraft Braking Systems supplies original wheels and brakes for commercial aircraft to the aircraft manufacturers at or substantially below the production cost of such equipment. Once a manufacturer's wheels and brakes have been certified and installed on an aircraft, FAA regulations and similar requirements in foreign countries generally require that all replacement parts for such systems be provided by such manufacturer. 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 sales of replacement parts over the life of the aircraft. During the fiscal year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total revenues were derived from the sale of replacement parts to service braking systems previously installed by Aircraft Braking Systems. K & F currently sells its products to virtually all major airframe manufacturers and most commercial airlines and to the United States and certain foreign governments. 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 Company has been successful in having its wheels and brakes selected for use on a number of new airframe designs that serve this market, including the McDonnell Douglas MD-90 program, the Airbus A-321, the Fokker Fo-100 and Fo-70, the Canadair Regional Jet, the Saab 340 and 2000, the Fairchild Metro 23 and the Indonesian commuter IPTN-250. The Company has also been chosen to supply products for use on a number of long-range commercial transport, general aviation and military aircraft, including: wheels and brakes for the Airbus A-330 and A-340 programs; wheels, brakes and fuel tanks for the Beech 400 and its military counterpart, the T-1A "Jayhawk"; and wheels and brakes for the Lear 60. The Company's management believes that these new airframes will broaden the portfolio of aircraft using the Company's products and that the revenue generated from these aircraft will eventually replace the revenue generated by those aircraft in the Company's current portfolio which are reaching maturity. -18- 21 THE AIRCRAFT WHEEL AND BRAKE INDUSTRY During fiscal year 1993, the latest data available to the Company, K & F believes the aircraft wheel, brake and anti-skid business generated approximately $960 million in sales worldwide. Furthermore, the Company believes that the three largest competitors, Aircraft Braking Systems, Allied Signal's Aircraft Landing Systems Division and B.F. Goodrich Aerospace, Inc. ("B.F. Goodrich") accounted for approximately 70% of the worldwide sales of aircraft wheels, brakes, anti-skid systems and replacement parts in fiscal year 1993. Aircraft manufacturers are required to obtain regulatory airworthiness certification of their commercial aircraft by the FAA, by the United States Department of Defense in the case of military aircraft, or by similar agencies in most foreign countries. This process, which is both costly and time consuming, involves testing the entire airframe, including the wheels and braking system, to demonstrate that the airframe in operation complies with relevant governmental requirements for safety and performance. Generally, replacement parts for a wheel and brake system which has been certified for use on an airframe may only be provided by the original manufacturer of such wheel and brake system. Since most modern aircraft have a useful life of 25 years or more and require replacement of certain components of the braking system at regular intervals, sales of replacement parts are expected to provide a long and steady source of revenues for the manufacturer of the braking system. Due to the cost and time commitment associated with the aircraft certification process, competition among aircraft wheel and brake suppliers most often occurs at the time the airframe manufacturer makes its initial installation decision. Generally, competing suppliers submit proposals in response to requests for bids from manufacturers. Selections are made by the manufacturer on the basis of technological superiority, conformity to design criteria established by the manufacturer and pricing considerations. Typically, general aviation aircraft manufacturers will select one supplier of wheels and brakes for a particular aircraft. In the commercial transport market, however, there will often be "dual sourcing" of wheels and brakes. In such case, an airframe manufacturer may approve and receive FAA certification to configure a particular airframe with equipment provided by two or more wheel and brake manufacturers. Where two suppliers have been certified, the aircraft customer, such as a major airline, will designate the original equipment to be installed on the customer's aircraft. Competition among two certified suppliers for that airline's initial installation decision generally focuses on such factors as the system's "cost-per-landing," given certain assumptions concerning the frequency of replacements required and the impact that the weight of the system has on the airline's ability to load the aircraft with passengers, freight or fuel, and the technical operating and performance characteristics of the wheel and brake system. Once selected, airlines infrequently replace entire wheel and brake systems because of the expense. In accordance with industry practice in the commercial aviation industry, aircraft wheel and brake suppliers customarily sell original wheel and brake equipment below cost in order to win selection of their products by airframe manufacturers and airlines. These investments are typically recouped through the sale of replacement parts. Recovery of pricing concessions and design costs for each airframe's wheels and brakes is contingent on a number of factors but generally occurs prior to the end of the useful life of the particular aircraft. Price concessions on original wheel and brake equipment are not customary in the military market. Although manufacturers of military aircraft generally select only one supplier of wheels and brakes for each model, the Government has approved at times the purchase of specific component replacement parts from suppliers other than the original supplier of the wheel and brake system. OPERATIONS Aircraft Braking Systems. Aircraft Braking Systems is one of the world's leading manufacturers of wheels, steel and carbon brakes and anti-skid systems for commercial transport, general aviation and military aircraft. As of March 31, 1994, the Company's products had been installed on over 30,000 aircraft, including the following aircraft for which K&F is the sole-source supplier: DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340. In addition, the Company supplies spare parts for the MD- 80 program on a dual- -19- 22 source wheel and brake program. For the fiscal year ended March 31, 1994, approximately 86% of the Company's total revenues were derived from sales made by Aircraft Braking Systems. Sales of replacement brake parts account for approximately 75% of Aircraft Braking Systems' total revenues. The Company's anti-skid systems, which are integrated into a braking system, are designed to minimize the distance required to stop an aircraft by utilizing sensors, mounted on the wheel and brake, 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 is the only significant manufacturer of anti-skid systems. Because of the sensitivity of anti-skid systems to variations in brake performance, the Company's management believes that the ability to control the design and performance characteristics of both the anti-skid system and its integrated brakes gives Aircraft Braking Systems a competitive advantage over its two largest competitors. Other products manufactured by the Company include helicopter rotor brakes and brake temperature monitoring equipment for various types of aircraft. The following table shows the distribution of sales of aircraft wheels, brakes and anti-skid systems to total sales of the Company:
Fiscal Years Ended March 31, ---------------------------- 1994 1993 1992 ---- ---- ---- Wheels and brakes . . . . . . . . . . . . . . . . . . . . . . . 76% 75% 78% Anti-skid systems . . . . . . . . . . . . . . . . . . . . . . . 10% 10% 10% --- --- --- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 86% 85% 88% === === ===
Aircraft Braking Systems has a long history of establishing and maintaining its relationships with major airframe manufacturers in the commercial transport sector, having sold its products to McDonnell Douglas since the early 1930s, Aerospatiale and Fokker since the early 1960s and Canadair since 1974. Similarly, in the general aviation market, Aircraft Braking Systems has supplied braking systems to Beechcraft since the early 1940s, Cessna since the 1940s, Lear since its inception in the 1960s and Gulfstream Aerospace since it was founded in 1970. The Company has carefully directed its efforts toward expanding Aircraft Braking Systems' presence in the commercial transport and general aviation segments of the aircraft industry, focusing particularly on medium- and short-range commercial aircraft. As a result of this increased focus, the Company has been successful in having its products selected on a number of new airframe designs, including the Airbus A-321, the McDonnell Douglas MD-90 and the Fokker Fo-70. In August 1991, Aircraft Braking Systems was selected as a basic supplier of wheels and carbon brakes on the Airbus A-321, the European consortium's new 186-seat "stretch" version of its popular A-320 standard body twin-jet. Equipped with Aircraft Braking Systems' wheels and carbon brakes, the first A-321 was delivered to Lufthansa German Airlines on January 27, 1994 in ceremonies in Hamburg, Germany. Based on airline supplier selections to date, Aircraft Braking Systems has captured more than 80% of the A-321 aircraft orders including Alitalia and Swissair in addition to Lufthansa. Airbus has booked orders for 141 aircraft to date and projects the program to be in production beyond the year 2000. In December 1990, Aircraft Braking Systems was awarded a sole-source contract to supply wheels, carbon brakes and anti-skid equipment on the McDonnell Douglas MD-90 twin-jet. The MD-90 adds new performance characteristics to a product line that began as the DC-9 model jet that first flew in 1965 and evolved later into the popular MD-80 series. Development of the MD-90 has remained on schedule since the program was formally launched in the late 1980s with orders from Delta Air Lines. The first MD-90 was officially rolled out February 13, 1993 and just nine days later, on February 23, completed its maiden flight. A technologically innovative design, the MD-90 is equipped with an advanced turbofan engine that complies with the FAA's restrictive Stage III noise restrictions and offers fuel savings over competing engines. The first MD-90 is scheduled for delivery to Delta Air Lines in the first quarter of calendar year 1995. -20- 23 Aircraft Braking Systems has also been selected as the basic supplier of wheels and brakes for the Saab 2000, the Canadair Regional Jet, the Lear 60, the Fairchild Metro 23, the Indonesian IPTN-250 and as a supplier of wheels and carbon brakes for the Airbus A-330 and A-340 wide-body jets. Engineered Fabrics. Engineered Fabrics is the largest aircraft fuel tank manufacturer in the world, serving approximately 90% of the worldwide general aviation and commercial transport market and nearly one-half of the domestic military market. For the fiscal year ended March 31, 1994, approximately 14% of the Company's total revenues were derived from sales made by Engineered Fabrics. Fuel tanks, manufactured by combining multiple layers of coated fabrics and adhesives, are sold for use in commercial transport, military and general aviation aircraft. During the fiscal year ended March 31, 1994, sales of fuel tanks accounted for approximately 60% of Engineered Fabrics' total revenues. For military helicopter applications, Engineered Fabrics' fuel tanks feature encapsulated layers of natural rubber which expand in contact with fuel thereby sealing off holes or gashes caused by bullets or other projectiles penetrating the walls of the fuel tank. The Company uses this "self-sealing" technology to manufacture crash-resistant fuel tanks for helicopters, military aircraft and race cars that significantly reduce the potential for fires, leaks and spilled fuel following a crash. Engineered Fabrics is the only known supplier of polyurethane fuel tanks for aircraft, which are lighter than their metal or nitrile counterparts and therefore cost-advantageous. In addition to fuel tanks, Engineered Fabrics produces iceguards, which are heating systems made out of layered composite materials that are applied on engine inlets, propellers, rotor blades and tails. Encapsulated in the material are heating elements which are connected to the electrical system of the aircraft and, when activated by the pilot, heat the composite to inhibit the formation of ice. The Company also produces a variety of products utilizing coated fabrics such as oil containment booms, 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. Engineered Fabrics has recently developed towable storage bladders for storage and transportation of the recovered oil after removal from the water. Heavy lift bags, often used in emergency situations, are inserted into tight spaces and inflated to lift heavy loads short distances. Pillow tanks are collapsible rubberized containers used as an alternative to steel drums and stationary storage tanks for the storage of liquids. SALES AND CUSTOMERS K & F sells its products to more than 150 airlines, airframe manufacturers, governments and distributors representing each of the commercial transport, general aviation and military aircraft markets. Sales to the U.S. government represented approximately 15%, 23% and 31% of total sales for the fiscal years ended March 31, 1994, 1993 and 1992, respectively. No other customer accounted for more than 10% of sales. In the commercial transport and general aviation markets, airframe manufacturers issue requests for formal proposals for various subsystems, including braking systems, to be included in new airframes. Producers of the various subsystems then prepare and submit competing proposals which are evaluated based on technological merit, conformity to design criteria established by the manufacturer and pricing considerations. After negotiations between an airframe manufacturer and the potential supplier, airframe manufacturers in the general aviation market generally choose one supplier of wheels and brakes for an aircraft. Where wheels and brakes are dual sourced in the commercial transport market, suppliers of approved products compete to have their brakes and wheels chosen by the ultimate customer, such as an airline, for use on such customer's aircraft. Competition for an aircraft customer focuses generally on the maintenance costs associated with the particular manufacturer's braking system, relationship with the customer and ongoing ability to provide technical support after the aircraft has been equipped with the manufacturer's product. -21- 24 In the military aircraft market, suppliers work in conjunction with airframe manufacturers to design complete airframes in response to requests for proposals issued by branches of the military through the Department of Defense. Generally, two or three teams of airframe manufacturers and suppliers will be selected to build prototypes of the aircraft. The aircraft are then evaluated for overall technological merit, conformity to design criteria and pricing considerations. Military aircraft are not generally dual sourced for parts by the airframe manufacturer. The following table shows the distribution of total Company revenues by respective market, as a percentage of total revenues:
Fiscal Years Ended March 31, --------------------------------- 1994 1993 1992 ---- ---- ---- Commercial transport . . . . . . . . . . . . . . . . . . . . . . . . . 60% 55% 48% Military (U.S. and foreign) . . . . . . . . . . . . . . . . . . . . . 22% 28% 35% General aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . 18% 17% 17% ---- ---- ---- 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 (60 seats or more) and commuter aircraft (20 to 60 seats). Where multiple braking systems are certified for a particular aircraft, it is generally the airline and not the airframe manufacturer that decides which of the approved wheel and brake suppliers will originally equip such airlines fleet. Some of the Company's airline customers include American Airlines, Delta Air Lines, Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines, United Airlines and USAir. The Company provides replacement parts for certain aircraft designed by The Boeing Company ("Boeing") including the Boeing 707, but does not produce products for any commercial aircraft currently manufactured by Boeing. Military. The Company believes it is the largest supplier of wheels, brakes and fuel tanks to the U.S. military and also supplies the militaries of certain foreign governments. The Company's products are used on a variety of fighters, training aircraft, transports, cargo planes, bombers and helicopters. Some of the military aircraft using these products are the F-4, F-14, F-16, F-117A, A-10, B-1B and the C-130. Substantially all of the Company's military products are sold to the Department of Defense or to airframe manufacturers including Lockheed, McDonnell Douglas, Boeing, Sikorsky, Bell and Rockwell. In 1990, the Department of Defense selected Beech Aircraft, in potentially the largest military contract for a general aviation aircraft in history, to supply the T-1A Tanker Transport Training System to be used to train Air Force pilots for in-flight refueling and transport duties. The Company will supply the wheels, brakes, fuel tanks and iceguards for this aircraft. Beechcraft expects to receive orders for a total of over two hundred aircraft before the program is completed. Anti-skid systems, manufactured for the military, are used on the F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and Jaguar aircraft. General Aviation. The Company believes it is the industry's largest supplier of wheels, brakes and fuel tanks for general aviation aircraft. This market includes personal, business and executive aircraft. Customers include airframe manufacturers, such as Gulfstream, Beech Aircraft, Lear, Canadair, Cessna, Dassault and distributors, such as Aviall. Anti-skid systems are supplied by the Company to Gulfstream, Canadair, Dassault and a variety of other aircraft manufacturers. General aviation aircraft using the Company's equipment exclusively include the Beech Starship and Beech 400 series of aircraft, the Lear series 20, 30, 50 and 60 and the Gulfstream G-IV, G-III, G-II and G-I. -22- 25 FOREIGN CUSTOMERS The Company supplies products to a number of foreign aircraft manufacturers, airlines and foreign governments. The following table shows sales of the Company to both foreign and domestic customers for the last three fiscal years:
Fiscal Years Ended March 31, ----------------------------- 1994 1993 1992 ---- ---- ---- Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63% 68% 72% Foreign sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37% 32% 28% ---- ---- ---- 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 March 31, 1994, the Company employed approximately 164 engineers (of whom 32 held advanced degrees); approximately 27 of such engineers (including 14 holding advanced degrees) devoted all or part of their effort 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 fiscal years ended March 31, 1994, 1993, and 1992 were $12.9 million, $11.4 million and $14.1 million, respectively. PATENTS AND LICENSES The Company has a large number of patents related to the products of its subsidiaries. In addition, the Company has pending a substantial number of patent applications and is licensed under several patents of others. While in the aggregate its patents are of material importance to its business, the Company believes no single patent or group of patents is of material importance to its business as a whole. COMPETITION The Company faces substantial competition from a few suppliers in each of its product areas. Its principal competitors that supply wheels and brakes are Allied Signal's Aircraft Landing Systems Division and B.F. Goodrich. Both significant competitors are larger and have greater financial resources than the Company. The principal competitor for anti-skid systems is the Hydro-Aire Division of Crane Co. The principal competitor for fuel tanks is American Fuel Cell & Coated Fabrics Company. BACKLOG Backlog at September 30, 1994 and March 31, 1994 amounted to approximately $141.3 million and $141.5 million, respectively. Backlog consists of firm orders for the Company's products which have not been shipped. Approximately 41% of total Company backlog at September 30, 1994 is expected to be shipped during the fiscal year ended March 31, 1995, 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 September 30, 1994, approximately 35% was directly or indirectly for end use by the United States 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. -23- 26 GOVERNMENT CONTRACTS Recent political developments in some regions of the globe have led to reconsideration of the United States' military objectives and requirements and a resultant decline in spending on defense related products. Reduced Government demand for products supplied by the Company has and may continue to have adverse effects on sales, income and cash flow. For the fiscal years ended March 31, 1994, 1993 and 1992, approximately 15%, 23% and 31%, respectively, of the Company's total sales were made to agencies of the Government or to prime contractors or subcontractors of the Government. All of the Company's defense contracts are firm, fixed-price contracts under which the Company agrees to perform for a predetermined price. Although the Company's fixed-price contracts generally permit the Company to keep unexpected profits if costs are less than projected, the Company does bear the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls and standard provisions for termination at the convenience of the Government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and to an allowance for profit. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the government. To date, no significant fixed-price contract of the Company has been terminated. 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. 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 purchases steel and aluminum forgings from several sources. Historically, substantially all of the Company's carbon was purchased from HITCO, a division of British Petroleum Company, p.l.c., pursuant to a multi-year supply contract. During the fiscal year ended March 31, 1991, Aircraft Braking Systems completed installation of a continuous carbon furnace to internally manufacture carbon material. The Company intends to fabricate its entire carbon requirements for the A-330, A-340, MD-90 and CL-604 programs, using in-house production facilities. The Company also recently developed a new European source of carbon to supply a portion of the carbon which will be used to produce braking systems for use on the A-321. 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 difficulty obtaining sources of supplies or adequate supplies of these raw materials, and believes that sufficient supplies and alternative sources of supply will be available in the foreseeable future. -24- 27 PERSONNEL At March 31, 1994, the Company had 1,141 full-time employees, of which 825 were employed by Aircraft Braking Systems (373 hourly and 452 salaried employees) and 316 were employed by Engineered Fabrics (195 hourly and 121 salaried employees). All 373 of Aircraft Braking Systems' hourly employees are represented by the United Auto Workers' Union and all 195 of Engineered Fabrics' hourly employees are represented by the United Textile Workers' Union. Engineered Fabrics has entered into a three-year contract with its union that expires on February 5, 1995. Aircraft Braking Systems' three-year contract with the United Auto Workers' Union expired on August 10, 1991. Aircraft Braking Systems has not had a ratified collective bargaining agreement since August 10, 1991, but has operated under Company implemented terms and conditions of employment. 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 733,000 square feet of manufacturing, engineering and office space. Engineered Fabrics' facility is located in Rockmart, Georgia, and consists of approximately 564,000 square feet of manufacturing, engineering and office space. The Company believes that its property and equipment are generally well-maintained, in good operating condition and adequate for its present needs. Foreign Facilities. The Company occupies approximately 13,000 square feet of leased office and warehouse space in Slough, England, under a lease expiring in 2017. During the fiscal year ended March 31, 1992, foreign distribution activities were consolidated from Moerfelden, Germany, into the Slough facility. The facility is used to distribute the Company's products to foreign purchasers. The Company also maintains sales and service offices in London, Rome, Tokyo and Toulouse, France. Akron Facility Arrangements. The Aircraft Braking Systems manufacturing plant acquired from Loral Corporation ("Loral") was a part of a larger complex owned and operated by Loral. Since complete physical separation of the Aircraft Braking Systems facility from the balance of the complex was impractical at the time of the Acquisition, Loral and Aircraft Braking Systems entered into various agreements covering occupancy arrangements and shared easements and services (including utility services). As an occupant of space within the Loral complex of approximately 433,000 square feet, Aircraft Braking Systems is subject to annual occupancy payments to Loral. During the fiscal year ended March 31, 1994 Aircraft Braking Systems made occupancy payments to Loral of $1.2 million. While most of the agreements are temporary (having terms ranging from two to 10 years from the closing date of the Acquisition), certain access easements and easements regarding water, sanitary sewer, storm sewer, gas, electricity and telecommunication are perpetual. In addition, as a condition to obtaining governmental approval to divide the real property following the Acquisition, Loral and Aircraft Braking Systems jointly formed and equally control Valley Association Corporation, an Ohio corporation, thereby establishing a single legal entity to deal with the City of Akron and utility companies concerning governmental and utility services furnished to Loral's and Aircraft Braking Systems' facilities and to receive and comply with remedial requests issued by such institutions. LEGAL PROCEEDINGS Aircraft Braking Systems is a defendant in a patent infringement suit filed on January 31, 1991, by the B.F. Goodrich Company in the United States District Court for the District of Delaware. The suit alleges infringement by Aircraft Braking Systems of two Goodrich patents related to the structure and method of overhaul of aircraft brake assemblies and seeks damages of approximately $75 million. Aircraft Braking Systems has vigorously defended the suit on the grounds that the patents are invalid, that Aircraft Braking Systems' brake assemblies do not infringe the patents and that the damage claim is speculative and inflated. -25- 28 On November 10. 1994, after an extensive hearing, submission of written briefs and oral argument, the court issued a decision and order finding for Aircraft Braking Systems and rejecting the plaintiff's claims. The court held that the patents at issue were invalid and that the Company's brake assemblies did not infringe the patents. While the time period for filing an appeal has not lapsed, management believes based on the court's decision and its own assessment of the facts and circumstances, as well as advice from counsel, that it is remote that the Company would suffer a material liability as a result of the above mentioned lawsuit. In addition to the foregoing, 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. ENVIRONMENTAL MATTERS The Company's manufacturing operations are subject to regulation by various federal, state and local agencies concerned with environmental control. The Company believes that its manufacturing facilities are in substantial compliance with all existing federal, state and local environmental regulations, but it cannot predict whether more burdensome air, water or solid waste disposal requirements will be imposed in the future by governmental authorities. The Company currently discharges wastewater from its manufacturing operations at the Akron facility into the Akron municipal waste water system. There is currently no wastewater pretreatment system employed on site. As specified in the existing governmental permit to discharge such waste water, sampling of the Akron facility sanitary wastewater streams is performed at one location after all sources throughout the facility have been combined. Samples taken at this location indicate substantial compliance with all existing federal, state and local environmental regulations. Aircraft Braking Systems has been notified by the City of Akron that separate waste stream sampling may be required in the future. When this occurs, anodizing facilities will require pretreatment. The Company estimates that the cost of installation of pretreatment equipment is not likely to exceed $200,000. The Company has received notice of potential liability for EPA Superfund clean-up costs for a hazardous waste disposal site previously utilized. Total expenses at this time are estimated to be $150,000. Beginning in fiscal year 1996, the Company believes it will incur compliance expenditures at its Rockmart, Georgia, facility as a result of recent amendments to the Clean Air Act. The Company does not believe that such expenditures will have a material adverse effect on its financial condition. -26- 29 MANAGEMENT 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) ---- --- ----------- Bernard L. Schwartz* 68 Chairman of the Board and Chief Executive Officer Herbert R. Brinberg* 68 Director Ronald H. Kisner* 45 Director John R. Paddock* 40 Director James A. Stern** 43 Director A. Robert Towbin** 58 Director Alan H. Washkowitz** 53 Director Kenneth M. Schwartz 43 Chief Financial Officer, Treasurer and Secretary - -----------------------
* Designated as director by BLS pursuant to the Stockholders Agreement. ** Designated as director by Lehman Brothers Holdings Inc. ("LBH") pursuant to the Stockholders Agreement. Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer of Loral Corporation since 1972. Mr. Schwartz is a Director of Reliance Group Holdings, Inc. and certain subsidiaries, Director of Sorema North American Reinsurance Company, Director of First Data Corporation and Trustee of New York University Medical Center. 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. Dr. Brinberg received an A.B. from Cornell University, an M.S. from Columbia University and a Ph.D. in Economics from New York University. He is also currently an Adjunct Professor of Management at Baruch College City University of New York. Mr. Kisner has been a member of the law firm of Chekow & Kisner, P.C., since 1984. From 1973 to 1982, he was Associate General Counsel of APL Corporation, where he held such offices as Secretary, Vice President and Director. From 1982 to 1984, Mr. Kisner was a sole practitioner. Mr. Kisner received a B.A. from Syracuse University in 1970 and a J.D. from Washington College of Law, American University, in 1973. 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 Director of Training for the Georgia School of Professional Psychology, Adjunct Associate Professor of Psychology at Emory University, Assistant Professor of Psychology at Kennesaw State College, and Southern Region Coordinator for National Employee Assistance Services. Dr. Paddock received his B.A. from Williams College and his M.A. and Ph.D. in Clinical Psychology from Emory University. Currently, he has clinical faculty appointments at both Emory's Department of Psychology and in the medical school. -27- 30 Mr. Stern is Chairman of The Cypress Group, a private merchant bank. He was a Managing Director of Lehman Brothers from 1984 to 1994. Lehman Brothers is a division of a direct subsidiary of LBH, a company whose common stock is principally owned by American Express Company. Since 1989, Mr. Stern has also been head of the Merchant Banking Group of Lehman Brothers. He was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1982 to 1984. Mr. Stern is also a director of Infinity Broadcasting Corporation, Loral Aerospace Holdings, Inc., R.P. Scherer Corp., Noel Group Inc. and Lear Seating Corporation. Mr. Towbin was elected President and Chief Executive Officer of the Russian-American Enterprise Fund in January of 1994 and has taken a leave of absence from Lehman Brothers where he had been a Managing Director of the High Technology Investment Banking Group since 1987. Prior to joining Lehman Brothers, Mr. Towbin was Vice Chairman, Member of the Executive Committee and Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to 1987. From 1983 to 1986, Mr. Towbin was Vice Chairman, and from 1977 to 1983 he was General Partner of L.F. Rothschild, Unterberg, Towbin. From 1959 to 1977, Mr. Towbin was General Partner of C.E. Unterberg, Towbin Co. Mr. Towbin received a B.A. from Dartmouth College in 1957. Mr. Towbin is also a Director of Columbus New Millennium Fund, Gerber Scientific, Inc. and the Russian-American Enterprise Fund. Mr. Washkowitz has been a Managing Director of Lehman Brothers since 1984. He was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1984. Mr. Washkowitz began in the Corporate Finance Department of Kuhn Loeb & Co. in 1968 and became a general partner of the firm in 1975. Mr. Washkowitz received an A.B. from Brooklyn College, an M.B.A. from Harvard Business School and a J.D. from Columbia Law School. Mr. Washkowitz is also a director of Illinois Central Corporation and Lear Seating Corporation. Mr. Kenneth M. Schwartz has been Chief Financial Officer, Treasurer and Secretary of the Company since June 1989. Previously he was the Corporate Director of Internal Audit for Loral 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. Mr. Schwartz received a B.B.A. in accounting from the University of Miami in 1973. 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 ---- --- -------- Donald E. Fogelsanger 68 President Ronald E. Welsch 59 Executive Vice President Robert Crawford 50 Senior Vice President-Operations Frank P. Crampton 50 Vice President-Marketing Richard W. Johnson 50 Vice President-Finance and Controller
ENGINEERED FABRICS CORPORATION
Name Age Position ---- --- -------- Roger C. Martin 57 President Terry L. Lindsey 49 Vice President-Marketing Anthony G. McCann 34 Vice President-Operations John A. Skubina 39 Vice President-Finance
-28- 31 Mr. Fogelsanger has been President of Aircraft Braking Systems Corporation since 1989. From 1987 to 1989 he was President of Loral's Aircraft Braking Systems Division. 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 after graduating from Pennsylvania State University with a bachelor's degree in industrial engineering. Mr. Welsch joined Aircraft Braking Systems Corporation in September 1993 as Executive Vice President. Prior to joining Aircraft Braking Systems, Mr. Welsch was General Manager of the GE 90 Commercial Engine program at General Electric Aircraft Engines and held various positions in management, including engineering, product support, marketing, product planning and program management, over the course of 26 years. Mr. Welsch started his aviation career at Douglas Aircraft in 1958 and joined Northrop Corporation in 1961. He entered the U.S. Marine Corp Aviation following graduation from Purdue University with a bachelor's degree in mechanical engineering. Mr. Welsch also attended Massachusetts Institute of Technology-Sloan School in 1983. Mr. Crawford was named Senior Vice President of Operations at Aircraft Braking Systems in April 1988. He joined Loral's ABS division as Vice President of Operations in June 1987 after 26 years working for prime aircraft manufacturers. Mr. Crawford has been involved in the building and delivery of both military and commercial aircraft. Prior to joining ABS, he was Vice President of Operations at the Fairchild plant on Long Island, General Manager of the Fairchild facility in Hagerstown and of the Precision Fabrication Center in Columbus, Georgia. Mr. Crawford had extensive experience in Industrial Engineering, Manufacturing Engineering, and Manufacturing at Canadair prior to leaving there in 1981 as Director of Manufacturing to join Fairchild Industries. He studied mechanical engineering at Sir George Williams University and also studied Business Administration at Alexandria Hamilton Institute. Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems in March 1987. He had been Director of Business Development for Goodyear Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that assignment, he was the divisional manager of Program Operations since 1983. Mr. Crampton joined Goodyear in 1967 following his graduation from the University of Akron with a bachelor's degree in electrical engineering. 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. Mr. Crampton completed the executive management program at Northwestern University in 1982 and received an M.B.A. from Kent State University in 1983. He also worked for NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966. Mr. Johnson has been Vice President of Finance and Controller at Aircraft Braking Systems since April 1989. From 1987 to 1989 he was Vice President of Finance and Controller of Loral'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 following his graduation from Kent State University with a bachelor's degree in accounting. 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. Martin has been President of Engineered Fabrics Corporation since 1987. From June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics Division. Mr. Martin has been continuously employed by Goodyear, GAC and Loral for the past 32 years. Other positions Mr. Martin held with Goodyear include General Manager, Program Manager and a number of research positions. He holds a patent for elastomeric protective coating for metal storage reels. Mr. Martin received a B.S. and a B.Ch.E. in 1958 and 1962, respectively, from Auburn University. -29- 32 Mr. Lindsey has served as Vice President of Business Development since 1989. He has been with Goodyear Aerospace Corporation, Loral and K & F Industries 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. He received a B.S. in Industrial Technology from Berea College in 1967. 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. He received a BSME in 1984 from the University of Akron. Mr. Skubina has been Vice President of Finance and Administration since February 1991. Prior to that, he was made Vice President of Finance on April 1, 1990. He joined Engineered Fabrics Corporation in 1988 as Accounting Manager. From 1985 until 1988, Mr. Skubina was the Assistant Controller and Controller of MPD, a division of M/A-Com. He received a B.S. in Accounting in 1979 from New York Institute of Technology. -30- 33 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for the past three years 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 whose aggregate current remuneration exceeded $100,000.
Annual Compensation Long-Term Compensation All ---------------------------- ---------------------- Other Options LTIP Compen- Fiscal Salary Bonus Granted Payouts sation( b) Name and Principal Position Year ($) ($) (#) ($) ($) --------------------------- ------ ------------- --------- -------- -------- ----------- Bernard L. Schwartz 1994 1,859,800(a) -- -- -- -- Chairman of the Board and Chief 1993 1,840,650(a) -- -- -- -- Executive Officer 1992 1,739,000(a) -- -- -- (c) Kenneth M. Schwartz 1994 176,418 37,500 -- -- 3,404 Chief Financial Officer - K & F 1993 167,809 75,000 7,500 10,000 3,322 Industries, Inc. 1992 135,000 50,000 -- 10,000 (c) Donald E. Fogelsanger 1994 185,000 -- -- -- 18,949 President of Aircraft 1993 178,340 85,000 5,000 13,333 19,032 Braking Systems 1992 172,337 70,000 -- 13,333 (c) Robert Crawford 1994 145,000 -- -- -- 2,848 Senior Vice President - Operations - 1993 137,293 47,500 -- 8,333 2,985 Aircraft Braking Systems 1992 132,372 38,000 -- 8,333 (c) Roger C. Martin 1994 127,000 -- -- -- 10,545 President of Engineered Fabrics 1993 120,231 38,000 5,000 6,667 10,237 Corporation 1992 110,938 25,364 -- 6,667 (c)
(a) Comprised of amounts paid to BLS under the Advisory Agreement. (b) Includes the following Company contributions to individual 401(k) plan accounts for fiscal year 1994 and 1993, respectively: Mr. K. Schwartz - $3,225 and $3,152; Mr. Fogelsanger - $2,719 and $2,977; Mr. Crawford - $2,848 and $2,985; Mr. Martin $3,161 and $2,985. Also includes the value of supplemental life insurance programs for fiscal year 1994 and 1993, respectively: Mr. K. Schwartz - $179 and $170; Mr. Fogelsanger - $16,230 and $16,055; Mr. Martin - $7,384 and $7,252. (c) In accordance with the transitional provisions applicable to the revised rules on executive compensation adopted by the Securities and Exchange Commission, amounts of all other compensation are not disclosed for fiscal years ending prior to December 15, 1992. -31- 34 OPTION GRANTS IN LAST FISCAL YEAR There were no grants of stock options by the Company, during fiscal year 1994, to the named executive officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS VALUES
Value of Number of Unexercised Unexercised In-the-Money Options at Options at FY-End (#) FY-End ($)(1) ------------- ------------- Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable ---- ------------ ------------- ------------- ------------- Bernard L. Schwartz 0 0 0/0 0/0 Kenneth M. Schwartz 0 0 5,625/9,375 0/0 Donald E. Fogelsanger 0 0 15,000/10,000 0/0 Robert Crawford 0 0 3,750/1,250 0/0 Roger C. Martin 0 0 7,500/7,500 0/0
(1) None of the Company's stock is currently publicly traded. All options were granted at book value computed as of the date of Acquisition. -32- 35 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, 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 nonvested amounts to an executive are forfeited upon termination of employment for any reason other than death or disability prior to the vesting date. Awards earned in fiscal year 1990 were paid in fiscal years 1991, 1992 and 1993. No awards have been earned since fiscal year 1990. 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 intends to apply for a determination letter from the Internal Revenue Service that the Company Retirement Plan is a qualified plan under the Internal Revenue Code. The terms of the Company Retirement Plan are as follows: a non-contributory benefit and a contributory benefit. The cost of the former is borne by the Company; the cost of the latter is borne partly by the Company and partly by the participants. Salaried employees who have completed at least six months of service and satisfied a minimum earnings level are eligible to participate in the contributory portion of the Company Retirement Plan; salaried employees become participants in the non-contributory portion on their date of hire. The Plan provides a benefit of $20.00 per month for each year of credited service. For participants who contribute to the Plan, in addition to the benefit of $20.00 per month for each year of credited service, the Plan provides an annual benefit equal to the greater of: 60% of the participant's aggregate contributions; or, average compensation earned (while contributing) during the last 10 years of employment in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2% times additional years of such service up to 30, plus, (d) 0.6% times all additional such service above 30 years. Effective January 1, 1990, the Plan was amended for eligible employees of the K & F Industries and Aircraft Braking Systems to provide an annual benefit equal to (a) the accrued benefit described above as of December 31, 1989, plus (b) a non-contributory benefit for each year of credited service after January 1, 1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288, whichever is greater, plus (c) for each year of continuous service on and after January 1, 1990, a contributory benefit of (i) for 14 years of continuous service or less, 1.05% of annual earnings between $19,800 and the Social Security Wage Base plus 2.25% of annual earnings above the Social Security Wage Base, (ii) for more than 14 years of continuous service, 1.35% of annual earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual earnings above the Social Security Wage Base. In no event will the amount calculated in (c) above be less than 60% of the participant's aggregate contributions made on and after January 1, 1990. Benefits are payable upon normal retirement age at age 65 in the form of single life or joint and survivor annuity or, at the participant's option with appropriate spousal 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 $118,800 per participant. Participants are fully vested in their accrued benefits under the Company Retirement Plan after five years of credited service with the Company. -33- 36 Estimated annual benefits upon retirement for the individuals named in the Summary Compensation Table, who are participants in the amended plan of K & F and Aircraft Braking Systems, are $11,441 for Mr. K. Schwartz (does not currently participate in contributory portion of plan); $88,246 for Mr. Fogelsanger; and $69,755 for Mr. Crawford. BLS does not participate in this plan. The retirement benefits have been computed on the assumption that (a) employment will be continued until normal retirement at age 65; and (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. For purposes of eligibility, vesting and benefit accrual, participants receive credit for years of service with Loral 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. The following table sets forth the estimated annual retirement benefits assuming a contributory formula applicable to eligible employees of Engineered Fabrics payable in the form of a single life annuity under the Company Retirement Plan to a salaried employee at various levels of credited compensation upon retirement at age 65 with the indicated years of service.
FINAL AVERAGE YEARS OF SERVICE SALARY 15 20 25 30 35 ------ ------ ------ ------ ------ ------ $125,000 $30,095 $38,521 $44,538 $ 50,556 $54,164 150,000 38,345 49,021 56,538 64,056 68,414 175,000 46,595 59,521 68,538 77,556 82,664 200,000 54,845 70,021 80,538 91,056 96,914
These figures have not been limited by the Section 415 dollar limitation of the Internal Revenue Code, which was $115,641 in 1993 and is $118,800 in 1994. Currently the Internal Revenue Code permits only $150,000 of annual compensation to be taken into account for purposes of determining retirement benefits. At March 31, 1994, the credited service (as calculated under the Company Retirement Plan for Engineered Fabrics to the nearest whole year) for Mr. Martin was 32 years. COMPENSATION OF DIRECTORS The Board of Directors held four meetings during the fiscal year ended March 31, 1994. Nonequity members of the Board of Directors receive annual fees of $12,000 per year. Messrs. Towbin, Washkowitz and Stern (three directors designated by LBH pursuant to the Stockholders Agreement) waived any compensation for services as a director for the fiscal year ended March 31, 1994. All directors are reimbursed for reasonable out-of-pocket expenses incurred in that capacity. -34- 37 EMPLOYMENT 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 (including certain other executive officers of Loral who are active in the management of the Company) 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 at least 1,350,000 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 annual salary and bonus paid to BLS, the Company's Chairman and Chief Executive Officer, are determined in accordance with his employment agreement with the Company as described above. All other executive compensation decisions are made by BLS in accordance with policies established in consultation with the Board of Directors. -35- 38 OWNERSHIP OF CAPITAL STOCK The following table sets forth the ownership of the capital stock of the Company at September 30, 1994:
Number of Number of Shares of Number of Percentage Shares of Class B Shares of Ownership Class A Common Preferred of Capital Common Stock Stock (a) Stock(b) Stock(c) ----------- --------- -------- -------- Bernard L. Schwartz . . . . . . . . . . . 5,533,427(d) -- -- 27.12% *Lehman Brothers Merchant Banking Portfolio Partnership L.P. . . -- -- 478,387(e) 23.45 *Lehman Brothers Offshore Investment Partnership L.P. . . . . . . -- -- 129,745(f) 6.36 *Lehman Brothers Offshore Investment Partnership - Japan L.P. . . . . . . . . . . . . . . . . . -- -- 49,348(f) 2.42 *Lehman Brothers Capital Partners II, L.P. . . . . . . . . . . . -- -- 325,156(g) 15.94 CBC Capital Partners, Inc . . . . . . . . 10 -- 44,999 2.21 Loral Corporation . . . . . . . . . . . . -- 4,589,938 -- 22.50 --------- --------- --------- ------ 5,533,437 4,589,938 1,027,635 100.00% ========= ========= ========= ======
*Collectively referred to as the "Lehman Investors." (a) On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) (b) The preferred stock is convertible into common stock on a one-for-ten basis. (c) Assumes that the preferred stock has been converted into common stock. (d) BLS has granted options to officers and directors of the Company and its subsidiaries, at a per share exercise price of $4, for an aggregate of 535,000 shares of the voting common stock owned by BLS. The agreements pursuant to which such options are issued (i) provide that the option is exercisable in whole or in part at any time prior to the tenth anniversary of the date of such agreement and (ii) restrict the transfer of the option and any shares purchased upon exercise of the option. The option agreements further provide that BLS will retain all voting rights with respect to shares sold to an option holder upon exercise of an option. (e) Lehman Brothers Merchant Banking Partners Inc. is the general partner of the limited partnership and is an indirect wholly owned subsidiary of LBH. (f) Lehman Brothers Offshore Partners Ltd. is the general partner of the limited partnership and is an indirect wholly owned subsidiary of LBH. (g) Lehman Brothers II Investment Inc. is the general partner of the limited partnership and is an indirect wholly owned subsidiary of LBH. The limited partnership is a fund for employees of LBH and its affiliates. -36- 39 STOCKHOLDERS AGREEMENT The Company, BLS, the Lehman Investors, CBC Capital Partners, Inc. and Loral (each, a "Stockholder") entered into an Amended and Restated Stockholders Agreement (the "Stockholders Agreement") dated as of September 2, 1994, which contains certain restrictions with respect to the transferability of the Company's capital stock, certain rights granted by the Company with respect to such shares and certain voting and other arrangements. The Stockholders Agreement will terminate as of 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 ("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 parties thereto as long as they own their shares, and the voting provisions contained in the Stockholders Agreement terminate on September 2, 2004. The Stockholders Agreement provides that the Company's Board of Directors be comprised initially of 7 directors. BLS is entitled to (i) appoint a majority of the directors as long as he and his affiliates own at least 1,350,000 shares of common stock, (ii) three directors as long as he and his affiliates own at least 1,000,000 shares of common stock, and (iii) one director as long as he and his affiliates own any shares of common stock. The Lehman Investors are entitled to (i) appoint three directors as long as they collectively own at least 1,000,000 Common Equivalents, (ii) a majority of the directors if (i) they own at least 1,350,000 shares of common stock and (ii) BLS dies or becomes disabled or owns less than 1,350,000 shares of Common Equivalents and (iii) one director as long as they own any Common Equivalents. If and for so long as Loral and its affiliates own any shares of voting common stock, at the request of Loral, the number of members of the Board of Directors shall be increased to 9, Loral shall be entitled to designate one member of Board of Directors, and the remaining member shall be designated by the stockholder which at such time has the right to designate a majority of the Board of Directors. The Company's by-laws provide that the following corporate actions will require the vote of at least one Lehman Investor designated director including (with certain limited exceptions) (i) mergers, consolidations or recapitalizations, (ii) issuances of capital stock or preferred stock, (iii) repurchases of and dividends on capital stock, (iv) issuance of employee options representing more than 500,000 shares of common stock, (v) dissolution or liquidation of the Company, (vi) acquisition, sale or exchange of assets in excess of $5,000,000, (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, (ix) transactions with affiliates and (x) prepayments of or amendments to any amount of financing in excess of $10 million. The Stockholders Agreement provides that the Charter and By-laws of the Company in effect on the closing date of the Acquisition may not be amended without the consent of the Lehman Investors designated director for so long as the Lehman Investors or its affiliates own at least 1,000,000 shares of the outstanding capital stock. The Stockholders Agreement provides each Stockholder with a right of first refusal with respect to certain transfers of Common Stock or Common Equivalents. In addition, subject to certain limitations, if any Stockholder or group of Stockholders proposes to transfer securities representing more than 15% of the Common Equivalents, then each other Stockholder is permitted to transfer to the proposed transferee their pro rata share of Common Equivalents at the price and on the other terms of the proposed transfer. The Stockholders Agreement provides that either BLS 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 transferee's 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 such capital stock. If such election is made such party must use its best efforts to purchase or arrange for the purchase of such capital stock. If such capital stock is not purchased within a specified period, BLS and the Lehman Investors shall cause the Company to be sold if such sale can be arranged for a price at least equal to the Appraised Value. 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. Stockholders of specified percentages of capital stock may demand registration rights. The Stockholders Agreement also grants the Stockholders incidental registration rights with respect to shares of capital stock held by them; provided that the Stockholders not exercising such rights have the right to purchase the shares which are the subject of such registration rights pursuant to the right of first offer provided in the Stockholders Agreement. The Stockholders Agreement contains customary terms and provisions with respect to such registration rights. Pursuant to the Stockholders Agreement, Stockholders have certain preemptive rights, subject to certain exceptions, with respect to future issuances of shares or share equivalents of capital stock so that such Stockholders may maintain their proportional equity ownership interest in the Company. -37- 40 DESCRIPTION OF SENIOR NOTES The 11 7/8% Senior Secured Notes Due 2003 (the "Senior Notes") were issued pursuant to an Indenture dated as of June 1, 1992 (the "Senior Note Indenture") between the Company and The Bank of New York, as trustee (the "Senior Note Trustee"). The terms of the Senior Notes include those stated in the Senior Note Indenture and those made part of the Senior Note Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date of the Senior Note Indenture. The Senior Notes are subject to all such terms, and holders of the Senior Notes are referred to the Senior Note Indenture and the Trust Indenture Act for a statement thereof. Principal of, premium, if any, and interest on the Senior Notes are payable, and the Senior Notes will be exchangeable and transferable, at the office or agency of the Company in The City of New York (which will be the corporate trust office of the Senior Note Trustee at 101 Barclay Street, New York, New York 10286); provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the register for the Senior Notes. No service charge will be made for any registration of transfer or exchange of Senior Notes, except for any tax or other governmental charge that may be imposed in connection therewith. The Senior Note Indenture and the Senior Notes are governed by and construed in accordance with the laws of the State of New York. The following is a summary of the material terms and provisions of the Senior Notes. The summary does not purport to be a complete description of the Senior Notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Senior Note Indenture (including the definitions contained therein). A copy of the proposed form of Senior Note Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL The Senior Notes are direct obligations of the Company, secured in the manner described below, limited to $100,000,000 in aggregate principal amount. The Senior Notes were issued in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. The Senior Notes will mature on December 1, 2003, unless redeemed before such date. The Senior Notes bear interest at the rate shown on the cover page of this Prospectus from the date of their issuance or from the most recent Interest Payment Date to which interest has been paid or duly provided for. Interest is payable semi-annually (to holders of record at the close of business on the May 15 and November 15 immediately preceding the Interest Payment Date) on June 1 and December 1, commencing December 1, 1992. REDEMPTION Optional Redemption. The Senior Notes may not be redeemed prior to June 1, 1997. On or after June 1, 1997 the Company at its option may, at any time, redeem all, or from time to time any part of, the Senior Notes at the following prices (expressed as percentages of the outstanding principal amount), together with accrued interest to the date fixed for redemption. If redeemed during the 12 month period commencing:
June Redemption Prices ---- ----------------- 1997 105.28% 1998 103.96% 1999 102.64% 2000 101.32% 2001 and thereafter 100.00%
-38- 41 Selection and Notice of Redemption. Selection of Senior Notes for any redemption in part will be made by the Senior Note Trustee in such manner as in its sole discretion it shall deem fair and appropriate. Notice of redemption to the holders of Senior Notes to be redeemed as a whole or in part shall be given by mailing notice of such redemption by first-class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such holders of Senior Notes at their last addresses as they shall appear upon the registry books. On and after the redemption date, interest ceases to accrue on Senior Notes or portions thereof called for redemption. Sinking Fund. The Senior Notes are not subject to a sinking fund. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Senior Note Indenture. Reference is made to the Senior Note Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Acquisition" means the purchase by the Company from Loral Corporation of substantially all of the assets and the assumption of certain liabilities of the Principal Subsidiary and EFC. "Affiliate" means, when used with reference to a specified Person, any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Person specified. For the purposes of this definition, "control," when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agent" means the agent under the Credit Agreement. "Asset Acquisition" means (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged with the Company or any of its Subsidiaries or (ii) the acquisition by the Company or any of its Subsidiaries of the assets of any Person which constitutes substantially all of an operating unit or business of such Person. "Asset Sale" means the sale or other disposition (by merger or otherwise) by the Company or any of its Subsidiaries (other than to Wholly owned Subsidiaries) of (i) any of the Capital Stock of any of the Company's Subsidiaries (other than the Principal Subsidiary) or (ii) substantially all of the assets which constitute substantially all of an operating unit or business of the Company or any of its Subsidiaries (other than the Principal Subsidiary). "Average Life" means, as of the date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bank" or "Banks" means any financial institution(s) extending credit to the Company pursuant to the Credit Agreement. "BLS" means Mr. Bernard L. Schwartz. "BLS Group" means (i) BLS; (ii) BLS's spouse and descendants (collectively, "relatives"); (iii) a trust of which there are no beneficiaries other than BLS and the relatives of BLS; (iv) a partnership of which there are no other partners other than BLS or the relatives of BLS; (v) a corporation of which there are no stockholders other than BLS or relatives of BLS; and (vi) any other Affiliate of BLS. "Business Day" means each day other than Saturdays, Sundays and days when commercial banks are authorized to be closed for business in New York, New York. -39- 42 "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued after the date of the Senior Note Indenture, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) the discounted present value of the rental obligations of such Person as lessee under which, in conformity with generally accepted accounting principles, is required to be capitalized on the balance sheet of that Person. "Change of Control" means an event or series of events by which (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a Permitted Investor is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire without condition, other than the passage of time, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total power of all classes of stock entitled to vote for directors of the Company ("Voting Stock") or (ii) the Company consolidates with or merges into another corporation or conveys, transfers or leases all or substantially all of its assets to any person, or any corporation consolidates with or merges into the Company, in any event pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction between the Company and a Wholly owned Subsidiary of the Company or between the Company and any of the Permitted Investors or any transaction in which the Permitted Investors own, in the aggregate, directly or indirectly, at least 50% of the Voting Stock of the resulting, surviving or transferee corporation and have the right to designate a majority of the board of directors thereof or (iv) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company. "Collateral" means all of the shares of capital stock of the Principal Subsidiary and EFC, which shares have been pledged to the Collateral Trustee pursuant to the Pledge Agreement and not released pursuant to the terms hereof and thereof. "Collateral Trustee" has the meaning set forth in the Pledge Agreement. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of the Senior Notes, and includes, without limitation, all series and classes of such common stock. "Consolidated Capital Expenditures" means, for any period, the aggregate of all expenditures Incurred (whether paid in cash or accrued as liabilities), by the Company and its Consolidated Subsidiaries during such period that, in conformity with generally accepted accounting principles, are included in the property, plant or equipment or similar fixed asset account reflected in the consolidated balance sheet of the Company and its Consolidated Subsidiaries. "Consolidated Interest Coverage Ratio" means the ratio, on a pro forma basis, of (i) the aggregate amount of Operating Cash Flow of any Person for the Reference Period immediately prior to the date of the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction Date") to (ii) the aggregate Consolidated Interest Expense of such Person during such Reference Period; provided that for the purposes of such computation, in calculating Operating Cash Flow and Consolidated Interest Expense, (1) the Incurrence of the Debt giving rise to the need to calculate the Consolidated Interest Coverage Ratio and the application of the proceeds therefrom shall be assumed to have occurred on the first day of the Reference Period, (2) Asset Sales and Asset Acquisitions which occur during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date (but including any Asset Acquisition occurring in connection with the Incurrence of Debt pursuant to (1) above) shall be assumed to have occurred on the first day of the Reference Period, (3) the Incurrence of any Debt during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date and the application of the proceeds therefrom shall be assumed to have occurred on the first day of such Reference Period, -40- 43 (4) Consolidated Interest Expense attributable to any Debt (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period unless such Person or any of its Subsidiaries is a party to an Interest Rate Agreement which has the effect of reducing the interest rate below the rate on the date of computation, in which case such lower rate shall be used and (5) there shall be excluded from Consolidated Interest Expense any Consolidated Interest Expense related to any Debt which was outstanding during and subsequent to the Reference Period but is not outstanding on the Transaction Date ("Repaid Debt"), unless the Company may again Incur such Repaid Debt in an amount equal to the weighted average amount of Repaid Debt outstanding during such Reference Period (the "Weighted Average Amount") pursuant to clauses (i), (iv), (xi)(D), (xii) and (xiii) set forth under the exceptions to the "Limitation on Debt" covenant, in which case such Consolidated Interest Expense shall not be excluded (it being understood that if the Company can again so Incur an amount of Repaid Debt which is less than the Weighted Average Amount, then a portion of such Consolidated Interest Expense shall be excluded equivalent to a fraction of which the numerator shall be the difference between the Weighted Average Amount and the amount of such Repaid Debt which the Company can again so Incur and of which the denominator shall be the Weighted Average Amount). For the purposes of making the computation referred to above, Asset Sales and Asset Acquisitions which have been made by any Person which has become a Subsidiary of the Company or been merged with or into the Company or any Subsidiary of the Company during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date shall be calculated on a pro forma basis (including all of the calculations referred to in numbers (1) through (5) above) assuming such Asset Sales or Asset Acquisitions occurred on the first day of the Reference Period. "Consolidated Interest Expense" of any Person for any period means interest expense (including amortization of original issue discount and non-cash interest payments or accruals and the interest portion of Capitalized Leases) of such Person and its Consolidated Subsidiaries, all as determined in accordance with generally accepted accounting principles. "Consolidated Subsidiary" of any Person means a Subsidiary which for financial reporting purposes is or, in accordance with generally accepted accounting principles, should be, accounted for by such Person as a consolidated subsidiary. "Credit Agreement" means the Amended and Restated Revolving Credit Agreement to be dated as of June 10, 1992, among the Banks, the Principal Subsidiary and EFC providing for the $80 million revolving credit facility together with any security and other related documents, as such Agreement and other documents may be amended, restated or supplemented from time to time and includes any agreement extending the maturity of, or restructuring all or any portion of, the Debt under such Agreement or any successor agreements and includes any agreement with one or more banks refinancing or refunding all or any portion of the Debt under such Agreement or any successor agreements, covering an aggregate amount not to exceed $110 million. "Cumulative Operating Cash Flow" means, for the period beginning March 31, 1992 through and including the end of the last fiscal quarter (taken as one accounting period) preceding the date of any proposed Restricted Payment, Operating Cash Flow for the Company and its Consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Cumulative Total Interest Expense" means, for the period beginning March 31, 1992 through and including the end of the last fiscal quarter (taken as one accounting period) preceding the date of any proposed Restricted Payment, Consolidated Interest Expense for the Company and its Consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company against fluctuations in currency values. -41- 44 "Debt" of any Person means, at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred purchase price of property or services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (vii) all Debt of others Guaranteed by such Person and (viii) to the extent not otherwise included, obligations under Currency Agreements and Interest Rate Agreements. "EFC" means Engineered Fabrics Corporation, a Delaware corporation or any successors. "Excluded Entity" means (i) any Joint Venture or (ii) any Subsidiary that is subject to consensual restrictions, direct or indirect (other than pursuant to the Credit Agreement), on the declaration or payment of dividends or similar distributions by that Subsidiary to the Company or any other Consolidated Subsidiary of the Company. "generally accepted accounting principles" or "GAAP" means generally accepted accounting principles in the United States as in effect as of the date of the Senior Note Indenture, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession; provided that all ratios and computations based on generally accepted accounting principles contained in the Senior Note Indenture shall be computed in accordance with generally accepted accounting principles except that calculations made for the purpose of determining compliance with the terms of the covenants set forth therein and other provisions of the Senior Note Indenture shall be made, except as otherwise provided therein, without giving effect to adjustments in component amounts required or permitted by Accounting Principles Board Opinions Nos. 16 and 17 as a result of the Acquisition and for the amortization of any expenses Incurred in connection with the Acquisition or the financing with respect thereto. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Incurrence" means the Incurrence, creation, assumption or in any other manner becoming liable with respect to, or the extension of the maturity of or becoming responsible for the payment of, any Debt. "Incur" shall have a comparable meaning. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future, interest rate option, interest rate swap, interest rate cap or other interest rate hedge arrangement, to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the date hereof or becomes a party or a beneficiary hereafter. "Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that no Subsidiary of any Person shall be deemed a Joint Venture of such Person. -42- 45 "Lehman Investor" means (i) LBH, (ii) any Affiliate of LBH and (iii) any merchant banking limited partnerships affiliated with LBH or any Affiliate of LBH. "Lien" means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For the purposes of this Agreement, the Company shall be deemed to own subject to a Lien any Property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such Property. "Material Subsidiary" of any Person means, as of any date, any Subsidiary of such Person (a) the value of whose assets, as such assets would appear on a consolidated balance sheet of such Subsidiary and its Consolidated Subsidiaries prepared as of the end of the fiscal quarter next preceding such determination in accordance with generally accepted accounting principles, is at least 10% of the value of the assets of such Person and its Consolidated Subsidiaries, determined as aforesaid, or (b) whose Operating Cash Flow for the most recently completed fiscal quarter next preceding such date was at least 10% of the Operating Cash Flow of such Person for such fiscal quarter. "Net Cash Proceeds" from a sale, transfer or other disposition of properties or assets means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received (including any cash received upon sale or disposition of such note or receivable), excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to such properties or assets or received in any other non-cash form) therefrom, in each case, net of all legal, title and recording tax expenses, commissions and other fees and expenses Incurred, and all federal, state, provincial, foreign and local taxes required to be accrued as a liability under generally accepted accounting principles, as a consequence of such sale, transfer or other disposition (including any taxes attributable to the assets sold arising pursuant to any election or action taken for income tax purposes in connection with or relating to the Acquisition), and in each case net of appropriate amounts to be provided by the Company as a reserve, in accordance with generally accepted accounting principles, against any liabilities associated with such assets and retained by the Company or any Subsidiary after such sale or other disposition thereof, including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters and the after-tax-cost of any indemnification payments (fixed and contingent) attributable to seller's indemnities to the purchaser undertaken by the Company or any of its Subsidiaries in connection with such sale or disposition and net of all payments made on any Debt which is secured by such assets, in accordance with the terms of any Lien upon or with respect to such assets or which must by its terms, or in order to obtain a necessary consent to such asset disposition, or by applicable law be repaid out of the proceeds from such sale, transfer or other disposition, and net of all distributions and other payments made to minority interest holders in Subsidiaries or Joint Ventures as a result of such sale, transfer or other disposition. "Net Income" of any Person for any period means the net income (loss) of such Person and its Consolidated Subsidiaries for such period, determined in accordance with generally accepted accounting principles, except that extraordinary, unusual and non- recurring gains and losses as determined in accordance with generally accepted accounting principles shall be excluded. "Net Worth" of any Person means as of any date the aggregate of capital, surplus and retained earnings of such Person and its Consolidated Subsidiaries as would be shown on a consolidated balance sheet of such Person and its Consolidated Subsidiaries prepared as of such date in accordance with generally accepted accounting principles plus, without duplication, all Capital Stock (other than Redeemable Stock) not otherwise included in Net Worth in accordance with generally accepted accounting principles. -43- 46 "Operating Cash Flow" of any Person means, for any period, the sum of (a) Net Income of such Person and its Consolidated Subsidiaries for such period, plus (b) provision for taxes based on income or profits included in computing Net Income of such Person for such period, plus (c) Consolidated Interest Expense of such Person for such period, plus (d) other non-cash charges deducted from consolidated revenues in determining Net Income of such Person for such period, in each case, determined on a consolidated basis in accordance with GAAP. "Permitted Investor" means any Person that is a member of the BLS Group or a Lehman Investor. "Permitted Payments" means with respect to the Company or any of its Subsidiaries (i) any dividend on shares of Capital Stock payable solely in shares of Capital Stock (other than Redeemable Stock) or in options, warrants or other rights to purchase Capital Stock (other than Redeemable Stock); (ii) any dividend or other distribution with respect to Capital Stock payable to the Company by any of its Subsidiaries or by a Subsidiary to another Subsidiary; (iii) the repurchase or other acquisition or retirement for value of any shares of the Company's Capital Stock with additional shares of, or out of the proceeds of a substantially contemporaneous issuance of, Capital Stock (other than Redeemable Stock); (iv) any defeasance, redemption, repurchase or other acquisition for value of any Debt which is subordinate in right of payment to the Senior Notes with the proceeds from the issuance of (x) Debt which is subordinate in right of payment to the Senior Notes at least to the extent and in the manner as the Subordinated Debentures are subordinate to the Senior Obligations on the date hereof; provided that such new subordinated Debt has a remaining Average Life equal to or greater than the remaining Average Life of the Senior Notes and that the agreements or investments creating such new subordinated Debt do not provide for the redemption or retirement by way of a sinking fund, mandatory redemption or otherwise (including defeasance or at the option of the holder) of more than 25% of the principal amount of such new subordinated Debt prior to the maturity of the Senior Notes and that the proceeds of such new subordinated Debt are utilized for such purpose within 90 days of issuance or (y) Capital Stock (other than Redeemable Stock); (v) investments, loans or advances to Excluded Entities in an aggregate amount at any time not to exceed $20 million; and (vi) the repurchase of shares of, or options to purchase shares of, the Company's Common Stock held by employees of the Company (other than any member of the BLS Group) or any of its subsidiaries pursuant to the forms of agreements under which such employees purchase, or are granted the option to purchase, shares of the Company's Common Stock in an aggregate amount not to exceed $2 million in any fiscal year; provided that the amount available in any given fiscal year shall be increased by the excess, if any, of (A) $2 million over (B) the amount used pursuant to this clause (vi) in the immediately preceding fiscal year; and (vii) any payment of interest on the Convertible Debentures with additional Convertible Debentures, in accordance with the Indenture governing the Convertible Debentures. Notwithstanding the foregoing, where any transaction described in clause (iv)(x) above involves a defeasance, redemption, repurchase or the acquisition for value of the Convertible Debentures, the agreements or instruments creating Debt so Incurred may not permit payment of cash interest prior to April 15, 1997, unless at the date of Incurrence of such Debt, the Consolidated Interest Coverage Ratio, after giving effect to such transaction on a pro forma basis, would be greater than 1.50 to 1. "Pledge Agreement" means the pledge agreement dated as of June 10, 1992 between the Company and The Bank of New York, as Collateral Trustee, as such Pledge Agreement shall be amended or supplemented or supplemented from time to time. "Principal Subsidiary" means Aircraft Braking Systems Corporation, a Delaware corporation or any successors. "Redeemable Stock" means, with respect to any Person, any class or series of Capital Stock which is redeemable at the option of the holder or is subject to mandatory redemption prior to December 1, 2003. "Reference Period" means the four fiscal quarters for which financial information is available preceding the date of a transaction giving rise to the need to make a financial calculation. -44- 47 "Restricted Payment" means with respect to any Person (i) any dividend or other distribution on any shares of such Person's Capital Stock, (ii) any payment on account of the purchase, redemption, retirement or other acquisition of (a) any shares of such Person's Capital Stock or (b) any option, warrant or other right to acquire shares of such Person's Capital Stock, or (iii) any defeasance, redemption, repurchase or other acquisition or retirement for value prior to scheduled maturity of (A) any Debt (other than (x) Debt Incurred under the Credit Agreement or the Senior Notes or (y) any required payment by way of a sinking fund or mandatory repurchase in respect of the Subordinated Debentures) ranked pari passu or subordinate in right of payment to the Senior Notes but not including the Convertible Debentures or (B) any of the Convertible Debentures or (iv) any investment, loan or advance to any Excluded Entity or (v) prior to April 15, 1997, any payment of interest in cash on the Convertible Debentures. Notwithstanding the foregoing, "Restricted Payment" shall not include any Permitted Payment. "Senior Obligations" means the Senior Notes and debt Incurred under the Credit Agreement, collectively. "Subordinated Debentures" means the 13 3/4% Senior Subordinated Debentures Due 2001 of the Company. "Subordinated Debenture Indenture" means the Indenture dated as of August 1, 1989 between the Company and The Connecticut National Bank, as Trustee. "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of the Capital Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Subsidiary Stock Sale" means a sale, transfer or other disposition of any Capital Stock of a Subsidiary (including any new issuance of such Capital Stock by such Subsidiary) other than the Principal Subsidiary. "Wholly owned Subsidiary" means, at any time, a Subsidiary all of the Capital Stock of which (except directors' qualifying shares) are at the time owned directly or indirectly by the Company. RANKING The Senior Notes rank senior in right of collateral to all unsecured indebtedness of the Company and senior in right of collateral and payment to the Subordinated Debentures. The Senior Notes are effectively subordinated to the Revolving Loans and to the claims of other creditors of the Principal Subsidiary and EFC. As discussed herein, the Company is principally a holding company for the Principal Subsidiary and EFC with limited operations of its own and limited assets. Accordingly, the Company is dependent upon the distribution of amounts from the Principal Subsidiary and EFC, whether in the forms of dividends, advances or payments on account of intercompany obligations, to service its debt obligations. See "Risk Factors-Holding Company Structure." COLLATERAL AND SECURITY Pursuant to the Pledge Agreement, the Company has assigned and pledged to the Collateral Trustee for the benefit of the holders of the Senior Notes a security interest in all of the capital stock of the Principal Subsidiary and EFC to secure performance of the Company's obligations under the Senior Note Indenture and the Senior Notes. If the Senior Notes become due and payable prior to maturity or are not paid in full at the maturity, the Senior Note Trustee shall promptly notify the Collateral Trustee. The Collateral Trustee will thereupon foreclose upon the Collateral in accordance with instructions received from holders of a majority in principal amount of the Senior Notes, or in the absence of such instructions, in such manner as the Collateral Trustee deems appropriate, in each case as -45- 48 provided in the Pledge Agreement. The proceeds received from the sale of any Collateral that is the subject of a foreclosure shall be applied first to pay the expenses of such foreclosure and amounts then payable to the Senior Note Trustee and the Collateral Trustee and thereafter to pay the principal of and interest on the Senior Notes. Notwithstanding the above, the Company shall at all times have the right to vote and receive dividends and distributions on such Collateral unless and until the Senior Note Trustee shall foreclose upon such Collateral. The Collateral was pledged pursuant to the Pledge Agreement between the Company and the Collateral Trustee. Collateral may be sold or disposed of by the Company, the Principal Subsidiary or EFC, free and clear of the liens referred to above in the following circumstances: (i) the sale or other disposition of the Collateral in accordance with the covenant described above under "Certain Covenants-Restrictions on Disposition of Assets of the Company"; and (ii) the release of additional Collateral in accordance with the terms of the Pledge Agreement. See "Risk Factors-Holding Company Structure." CERTAIN BANKRUPTCY LIMITATIONS The right of the Collateral Agent to repossess and dispose of the Collateral upon the occurrence of an Event of Default is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against the Company or the Principal Subsidiary or EFC prior to the Collateral Agent having repossessed and disposed of the Collateral. Under Bankruptcy Law, secured creditors are prohibited from repossessing their security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor without bankruptcy court approval. Moreover, Bankruptcy Law permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments; provided that the secured creditor is given "adequate protection." The meaning of the term "adequate protection" may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the Collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Senior Notes could be delayed following commencement of a bankruptcy case, whether or when the Collateral Agent could repossess or dispose of the Collateral or whether or to what extent holders of the Senior Notes would be compensated for any delay in payment or loss of value of the Collateral through the requirement of "adequate protection." CERTAIN COVENANTS The Senior Note Indenture contains, among others, the following covenants. Limitation on Debt. The Company shall not, and shall not permit any of its Subsidiaries to, Incur any Debt if, after giving effect thereto, (i) an Event of Default or an event that through the passage of time or the giving of notice or both, would become an Event of Default, shall have occurred and be continuing or (ii) the Consolidated Interest Coverage Ratio of the Company would be less than 1.70 to 1. Notwithstanding the foregoing, the Company and its Subsidiaries may Incur each and all of the following: (i) Debt under or in respect of the Credit Agreement in an aggregate principal amount not to exceed $110 million; (ii) Debt evidenced by the Senior Notes; (iii) (A) Debt of the Company to any of its Wholly owned Subsidiaries; provided that such Indebtedness is subordinated to the Senior Obligations in a manner no less favorable to the holders of Senior Obligations than the manner in which the Subordinated Debentures are subordinated to the Senior Obligations, or (B) Debt of a Wholly owned Subsidiary to the Company or to a Wholly owned Subsidiary, except that any subsequent -46- 49 issuance or transfer of any Capital Stock which results in any such Wholly owned Subsidiary ceasing to be a Wholly owned Subsidiary or any transfer of such Debt by any Wholly owned Subsidiary will, in each case, be deemed an Incurrence of Debt by the Company or any such Wholly owned Subsidiary; (iv) Debt under Currency Agreements and Interest Rate Agreements; provided that in the case of Currency Agreements which relate to Debt (other than Debt Incurred under the Credit Agreement), such Currency Agreements do not increase the Debt of the Company or any of its Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (v) Debt the proceeds of which are applied to redeem the Subordinated Debentures, the Convertible Debentures or Debt Incurred pursuant to this clause (v); provided that (A) such Indebtedness is subordinated to Senior Obligations at least to the extent and in the manner that the Subordinated Debentures are subordinate to the Senior Obligations on the date hereof, (B) has a remaining Average Life equal to or greater than the remaining Average Life of the Senior Notes and (C) the agreements or instruments creating such new subordinated Debt do not provide for the redemption or retirement by way of a sinking fund, mandatory redemption or otherwise (including defeasance or at the option of the holder) of more than 25% of the principal amount of such new subordinated Debt prior to the maturity of the Senior Notes and that the proceeds of such new subordinated Debt are utilized for such purpose within 90 days of issuance, and further provided that the agreements or instruments creating any such Debt referred to in this clause (v) that is applied to redeem the Convertible Debentures shall not permit the payment of cash interest prior to April 15, 1997, unless at the date of Incurrence of such Debt the Consolidated Interest Coverage Ratio, after giving effect to such transaction on a pro forma basis, would be greater than 1.50 to 1; (vi) Debt, the proceeds of which are applied to redeem the Senior Notes; provided that (A) such indebtedness has a remaining Average Life equal to or greater than the remaining Average Life of the Senior Notes and (B) the agreements or instruments creating such new Debt do not provide for the redemption or retirement by way of a sinking fund, mandatory redemption or otherwise (including defeasance or at the option of the holder) of more than 25% of the principal amount of such new Subordinated Debt prior to the maturity of the Senior Notes and that the proceeds of such new Debt are utilized for such purpose within 90 days of issuance; (vii) Debt the proceeds of which are applied to repay Debt Incurred under the Credit Agreement; (viii) Debt Incurred as payment of interest on the Convertible Debentures with additional Convertible Debentures in accordance with the Convertible Debenture Indenture; (ix) Debt under Guarantees in respect of obligations of Excluded Entities in an aggregate principal amount not to exceed $20 million at any one time; (x) (A) Debt Incurred to finance the purchase or construction of property, plant or equipment which will be treated as Consolidated Capital Expenditures of the Company so long as such Debt is secured by a Lien on the property, plant or equipment so purchased or constructed and such Debt does not exceed the value of such property, plant or equipment so purchased or constructed and such Lien shall not extend to or cover other assets of the Company or any of its Subsidiaries other than the property, plant or equipment so purchased or constructed and the real property, if any, on which the property so constructed or so purchased, is situated and the accessions, attachments, replacements and improvements thereto or (B) Debt Incurred in connection with any lease financing transaction in conjunction with the acquisition of new property; provided that such lease financing transaction is consummated within 60 days of such acquisition (whether such lease will be treated as an operating or capital lease in accordance with generally accepted accounting principles) and the aggregate of the Debt Incurred pursuant to clauses (A) and (B) does not exceed $15 million during any fiscal year (such amount is referred to as the "Maximum Amount"); provided that the Maximum Amount for each year shall be increased by the excess, if any, of (a) $30 million over (b) Consolidated Capital Expenditures for the immediately preceding two years; (xi) obligations Incurred in the ordinary course of business under (A) trade letters of credit which are to be repaid in full not more than one year after the date on which such Debt is originally Incurred to finance the purchase of goods by the Company or a Subsidiary of the Company; (B) standby letters of credit issued for the purpose of supporting (1) workers' compensation liabilities of the Company or any of its Subsidiaries as required by law, (2) obligations with respect to leases of the Company or any of its Subsidiaries, (3) performance, payment, deposit or surety obligations of the Company or any of its Subsidiaries or (4) environmental liabilities of the Company or any of its Subsidiaries as required by law, not exceeding an aggregate amount of $15 million at any one time outstanding in addition to any amounts required by law; (C) performance bonds and surety bonds, and refinancings thereof; and (D) Guarantees of Debt Incurred in the ordinary course of business of suppliers, licensees, franchisees, or customers in an aggregate amount not to exceed $5 million; (xii) Debt to repurchase shares, or cancel options to purchase shares, of the Company's Common Stock held by employees of the Company (other than any member of the BLS Group) or any -47- 50 of its Subsidiaries pursuant to the forms of agreements under which such employees purchase shares of the Company's Common Stock; and (xiii) Debt (other than Debt permitted under clauses (i) through (xii) above); provided that the aggregate principal amount of such Debt shall not exceed $25 million at any time outstanding, including any extension, renewal or replacement thereof. For the purpose of determining compliance, (A) in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company, in its sole discretion, shall classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses, and (B) the amount of Debt issued at a price which is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles. Limitation on Restricted Payments. On and after the date of the Senior Note Indenture, the Company will not, and will not permit any Subsidiary to, make any Restricted Payment, if, after giving effect thereto: (a) an Event of Default, or an event that through the passage of time or the giving of notice, or both, would become an Event of Default, shall have occurred and be continuing; or (b) the aggregate amount of all Restricted Payments (together with any amounts paid pursuant to clause (vi) of the definition of Permitted Payments) made by the Company and its Subsidiaries (the amount expended or distributed for such purposes, if other than in cash, to be valued at its fair market value as determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a resolution of the Board of Directors), from and after March 31, 1992 shall exceed the sum (without duplication) of: (i) an amount equal to the difference (but not less than zero) between (A) Cumulative Operating Cash Flow and (B) the product of 1.3 times Cumulative Total Interest Expense; and (ii) the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a resolution of the Board of Directors), received by the Company from the issuance or sale (other than to a Subsidiary) of its Capital Stock after March 31, 1992 (excluding Redeemable Stock but including Capital Stock other than Redeemable Stock issued upon conversion of, or exchange for, Redeemable Stock or securities other than its Capital Stock) and warrants and rights to purchase its Capital Stock (other than Redeemable Stock), but excluding the net proceeds from the issuance, sale, exchange, conversion or other disposition of (x) its Capital Stock convertible (whether at the option of the Company or the Holder thereof or upon the happening of any event) into any security other than its Capital Stock; (y) its Capital Stock which may be mandatorily redeemed (whether at the option of the Company or the Holder thereof or upon the happening of any event) earlier than payment in full of the Senior Notes; and (z) its Redeemable Stock; and (iii) $15 million; provided that any Restricted Payment described in clauses (i), (ii) and (iii)(B) of the definition of Restricted Payment provided under "Certain Definitions" made with respect to any Capital Stock or subordinated Debt outstanding on the date of the Senior Note Indenture which is otherwise permissible under clause (b) of the Restricted Payment covenant above, shall be allowed under such covenant only if in addition to satisfying clause (b) of such covenant, the Company could Incur $1.00 of Debt pursuant to the first paragraph of the "Limitation on Debt" covenant after giving effect to such Restricted Payment on a pro forma basis. The foregoing clause (b) shall not prevent the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration without violation of the provisions stated herein. Notwithstanding clause (b)(ii), (x) the aggregate net proceeds received by the Company from the issuance of its Capital Stock upon the conversion of, or exchange for, securities evidencing Debt of the Company shall be calculated on the assumption that the gross proceeds from such issuance are equal to the aggregate principal amount of the Debt evidenced by such securities converted or exchanged, (y) the aggregate net proceeds received by the Company upon the conversion or exchange of other securities of the Company shall be equal to the aggregate net proceeds of the original sale of the securities so converted or exchanged if such proceeds of such -48- 51 original sale were not previously included in any calculation for this purpose plus any additional sums payable upon conversion or exchange and (z) in connection with the sale of any Capital Stock for property other than cash, the Company shall obtain a written opinion of an Independent Financial Advisor stating that the terms of such transaction are fair to the Company from a financial point of view. Restrictions on Disposition of Assets of the Company. Subject to the provisions as set forth in the Senior Note Indenture, the Company will not, and will not permit any of its Subsidiaries to, sell, transfer or otherwise dispose of, in any consecutive 12- month period, any assets (including by way of sale-and-leaseback or Subsidiary Stock Sale), other than in the ordinary course of business and other than to the Company or a Wholly owned Subsidiary of the Company, in any such case, with an aggregate fair market value of greater than $5,000,000, unless (i) the Company (or the Subsidiary, as the case may be) receives consideration at the time of such sale or other disposition at least equal to the fair market value (as determined in good faith by the Board of Directors) of the shares or assets sold or otherwise disposed of, (ii) not less than 70% of the consideration received by the Company (or the Subsidiary, as the case may be) is in the form of cash or Cash Equivalents and (iii) the Net Cash Proceeds of the sale, transfer or other disposition of such assets or Capital Stock in excess of $5,000,000 are either (x) invested in the business or businesses of the Company or any of its Subsidiaries or any business related to any business then conducted by the Company or any of its Subsidiaries or any business related to the aircraft industry or are used for working capital purposes; provided however, that in the case of a Subsidiary Stock Sale, for purposes of this clause (x), such Net Cash Proceeds may only be invested in the Principal Subsidiary or in any Wholly owned Subsidiary of the Company (a "Venture Subsidiary") and in such case, proceeds must be used for any business directly related to the business of the Principal Subsidiary; provided further that any investment in a business related to any business then conducted by the Company or any of its Subsidiaries or any business related to the aircraft industry shall be made only if (A) the investment is to be made in any Person and such Person will become a Wholly owned Subsidiary subsequent to such investment or (B) the Company or one of its Subsidiaries will acquire the assets of any Person which constitutes substantially all of an operating unit or business of such Person and (C) in each case, such investment is committed to be made within 6 months from the later of the date of such sale or the receipt of the Net Cash Proceeds or (y) to the extent that such Net Cash Proceeds are not actually applied in accordance with clause (x), or, if after being so applied there remain Net Cash Proceeds, to the payment of the principal of and interest on any Senior Obligation of the Company or, in the case of any such sale, transfer or other disposition by a Subsidiary, any payment of Debt of such Subsidiary or any other Wholly owned Subsidiary (other than Debt owed to the Company or another Wholly owned Subsidiary) and in connection with any such payment, any related loan commitment shall be reduced in an amount equal to the principal amount so repaid. In the case of (y) above, the Net Cash Proceeds are to be applied within three months of the expiration of the six month period referred to in clause (x) above. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary to, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock; (b) make payments in respect of any Debt owed to the Company or any of the Company's Subsidiaries; (c) make loans or advances to the Company or any of the Company's Subsidiaries; or (d) transfer any of its assets to the Company or any of the Company's Subsidiaries, other than (i) those required by the Credit Agreement as in effect on the date of the Senior Notes (or the Senior Note Indenture) or the Subordinated Debentures (or the Subordinated Debenture Indenture), (ii) terms relating to the nonassignability of any operating lease, (iii) consensual encumbrances or restrictions which are no less favorable to the Company than those required by the Credit Agreement as in effect on the date of the Senior Note Indenture in connection with any refinancing of Debt Incurred under the Credit Agreement, (iv) consensual encumbrances or restrictions binding upon any Person at the time such Person becomes a Subsidiary of the Company or (v) any restrictions with respect to a Subsidiary of the Company imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. -49- 52 Limitation on Capital Stock of the Principal Subsidiary or any Venture Subsidiary. The Company will not permit the Principal Subsidiary or any Venture Subsidiary (as defined above under "Restrictions on Dispositions of Assets of the Company") to cease to be a Wholly owned Subsidiary. Limitation on Liens. The Company will not, and will not permit any of its Subsidiaries to, create, Incur, assure or suffer to exist any Lien upon any of its property, assets, income or profits, whether now owned or hereafter acquired, except for Permitted Liens. "Permitted Liens" means (1) Liens existing as of the date of issuance of the Senior Notes and any renewals or extensions thereof, including, without limitation, Liens securing the Senior Notes; (2) Liens with respect to assets of a Subsidiary granted by such Subsidiary to the Company to secure debt owing to the Company; (3) statutory Liens or landlords and carriers', warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business; (4) Liens for taxes, assessments, government charges or claims which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (5) Liens Incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (6) Liens created or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a like nature Incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (7) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any Material Subsidiary Incurred in the ordinary course of business; (8) any attachment or judgment Lien, unless the judgment it secures shall not, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay; (9) any other Liens imposed by operation of law which do not materially affect the Company's ability to perform its obligations under the Senior Notes and the Senior Note Indenture; (10) rights of banks to set off deposits against debts owed to said bank; (11) Liens on the assets of any entity existing at the time such assets are acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise; provided that such Liens (x) are not created, Incurred or assumed in connection with, or in contemplation of, such assets being acquired by the Company or any of its subsidiaries and (y) do not extend to any other Property of the Company or any of its Subsidiaries; (12) Liens granted pursuant to the Credit Agreement or the Pledge Agreement; (13) Liens upon specific items of inventory or other goods and proceeds of the Company or its Subsidiaries securing the Company's or any Subsidiary's obligations in respect of bankers' acceptances issued or created for the account of any such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (14) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (15) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and (16) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or one of its Subsidiaries relating to such property or assets. Transactions with Affiliates. So long as any of the Senior Notes remain outstanding, neither the Company nor any of its Subsidiaries will directly or indirectly enter into any transaction involving aggregate consideration in excess of $500,000 with any Affiliate or holder of 5% or more of any class of Capital Stock of the Company (including any Affiliates of such holders) except for transactions (including any loans or advances by or to any Affiliate) in good faith the terms of which are fair and reasonable to the Company or such Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary, as the case may be, in a comparable transaction made on an arm's length basis with Persons who are not such a Holder, an Affiliate of such Holder or Affiliate of the Company; provided that any such transaction shall be conclusively deemed to be on terms which are fair and reasonable to the Company or any of its Subsidiaries and on terms which are at least as favorable as the terms which could be obtained on an arm's length basis with Persons who are not such a Holder, an Affiliate -50- 53 of such Holder or Affiliate of the Company if such transaction is approved by a majority of the Company's directors (including a majority of the Company's independent directors, if any); and provided further that with respect to the purchase or disposition of assets of the Company or any of its Subsidiaries having a net book value in excess of $5 million, if the Company does not have any independent directors, in addition to approval of its board of directors, the Company shall obtain a written opinion of an Independent Financial Advisor stating that the terms of such transaction are fair and reasonable to the Company or its Subsidiary, as the case may be, and are at least as favorable to the Company or such Subsidiary, as the case may be, as could have been obtained on an arm's length basis with Persons who are not such a holder, an Affiliate of such holder or Affiliate of the Company. This covenant shall not apply to (a) any transaction between the Company and LBH, or any Affiliate thereof relating to the Senior Note Indenture (including the issuance of the Senior Notes) or the payment of fees to any of the foregoing for financial and consulting services, (b) transactions between the Company or any of its Subsidiaries and any employee or director of, or consultant to, the Company or any of its Subsidiaries that are approved by the Board of Directors, (c) the payment of reasonable and customary regular fees to directors of the Company, (d) any transaction between the Company and any of its Wholly owned Subsidiaries or between any of its Wholly owned Subsidiaries, (e) any transaction between the Company or any of its Subsidiaries and Loral as required by the Acquisition Agreement or with respect to the Convertible Debentures, (f) transactions with or relating to the joint venture between the Principal Subsidiary and Loral Information Defense Systems Division, which joint venture may be in partnership, corporate or other business entity form, and any successor joint venture or (g) any Restricted Payment not otherwise prohibited by the "Limitation on Restricted Payments" covenant. Change of Control. (a) Upon a Change of Control, each Holder of the Senior Notes shall have the right to require that the Company (or its successor or transferee) repurchase such Holder's Senior Notes at a repurchase price in cash equal to 101% of the principal amount of the Senior Notes plus, accrued and unpaid interest, if any, to the date of repurchase, in accordance with the terms contemplated in paragraph (b) below. (b) Within 30 days following any Change of Control, the Company (or its successor or transferee) shall mail a notice to each Holder with a copy to the Senior Note Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company (or its successor or transferee) to repurchase such Holder's Senior Notes at a repurchase price in cash equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest, if any, to the date of repurchase; (2) the circumstance and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change in Control); (3) the repurchase date (which shall be not earlier than 30 days or later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company (or its successor or transferee), consistent with this Section, that a Holder must follow in order to have its Senior Notes repurchased. (c) Holders electing to have Senior Notes repurchased will be required to surrender the Senior Notes, with an appropriate form duly completed, to the Company (or its successor or transferee) at the address specified in the notice at least 10 Business Days prior to the repurchase date. Holders will be entitled to withdraw their election if the Senior Note Trustee or the Company (or its successor or transferee) receives not later than three Business Days prior to the repurchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the face amount of the Senior Notes which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Senior Notes repurchased. (d) On the repurchase date, all Senior Notes repurchased by the Company (or its successor or transferee) under this Section shall be delivered by the Senior Note Trustee for cancellation, and the Company (or its successor or transferee) shall pay the purchase price plus accrued and unpaid interest, if any, to the Holders entitled thereto. -51- 54 MERGER, CONSOLIDATION OR SALE OF ASSETS The Company shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person (other than a merger with or into a Wholly owned Subsidiary; provided that such Wholly owned Subsidiary is not organized in a foreign jurisdiction) unless: (a) the Corporation formed by or surviving any such consolidation or merger (if other than the Company), or to which sale, lease, conveyance or other disposition shall have been made (the "Surviving Entity"), is a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia; (b) the Surviving Entity assumes by supplemental indenture all the obligations of the Company on the Senior Notes and the Senior Note Indenture; (c) immediately after the transaction no Event of Default or event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing; (d) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth of the Surviving Entity would be at least equal to the Consolidated Net Worth of the Company immediately prior to such transaction; and (e) immediately after giving effect to such transaction on a pro forma basis, the Surviving Entity could Incur at least $1.00 of Debt pursuant to the first paragraph of the "Limitation on Debt" covenant. EVENTS OF DEFAULT AND REMEDIES An Event of Default is (a) default in the payment of any interest upon any of the Senior Notes as and when the same shall become due and payable, and continuance of such default for a period of 30 days; (b) default in the payment of all or any part of the principal of (or premium, if any, on) any of the Senior Notes as and when the same shall become due and payable, either at maturity, upon any redemption, by declaration or otherwise; provided that, in the case of any obligation to repurchase the Senior Notes pursuant to the covenant relating to a Change of Control more than 33 1/3 % of the then outstanding Senior Notes have been surrendered to the Company (or its successor or transferee) for repurchase and the Company (or its successor or transferee) has failed to repurchase all of the Senior Notes so surrendered, whether or not such purchase is prohibited by the Credit Agreement or any other agreement binding upon the Company; (c) failure on the part of the Company duly to observe or perform any other covenant or agreement set forth in the Senior Notes or in the Senior Note Indenture for a period of 45 days after the date on which written notice specifying such failure, stating that such notice is a "Notice of Default" hereunder and demanding that the Company remedy the same, shall have been given by registered or certified mail, return receipt requested, to the Company by the Senior Note Trustee or to the Company and the Senior Note Trustee by the Holders of a majority in aggregate principal amount of the Senior Notes at the time outstanding; (d)(i) the Company and/or any Subsidiary shall have failed to make any principal payment due at final maturity of $10,000,000 in principal amount or more individually or in the aggregate and such failure to pay is continuing for more than 30 days after the payment default has occurred, or (ii) there shall have occurred with respect to any issue or issues of Debt of the Company or any Subsidiary having an outstanding principal amount when due of $10,000,000 individually or in the aggregate for all such issues of all such persons, an event of default which permits, or with the giving of notice or lapse of time or both, would permit the holders of such Debt to declare such Debt to be due and payable prior to the maturity thereof; (e) the Company or any Subsidiary shall fail to discharge any final judgment not covered by insurance (from which no further appeal may be taken) in excess of $5,000,000 and such judgment shall remain in force, undischarged, unsatisfied, unstayed and unbonded for more than 30 days; (f) certain events of bankruptcy or insolvency of the Company or any Material Subsidiary; or (g) the Pledge Agreement shall cease to be in full force and effect in any material respect, or shall cease to give the Collateral Trustee the Liens, rights, powers and privileges purported to be created thereby (including, without limitation, a perfected security interest in, and Lien on, the Collateral) in favor of the Collateral Trustee for the benefit of the Holders superior to and prior to the rights of all third Persons and subject to no other Liens (in each case, except as otherwise permitted and other than as a result of any action on the part of the Collateral Trustee), or the Company shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Pledge Agreement. -52- 55 If an Event of Default (other than an Event of Default specified in clause (f) above if the event in question relates to the Company) occurs and is continuing under the Senior Note Indenture, either the Senior Note Trustee or the holders of 25% in aggregate principal amount of the Senior Notes then outstanding thereunder, by notice in writing to the Company (and to the Senior Note Trustee if given by Holders) (the "Acceleration Notice"), may declare all unpaid principal of, and accrued interest on, the Senior Notes to be due and payable immediately, and the same shall, upon such declaration, become immediately due and payable. If an Event of Default specified in clause (f) above occurs with respect to the Company, all unpaid principal of, and accrued interest on, the Senior Notes shall become and be immediately due and payable without any declaration or other act on the part of the Senior Note Trustee or any Holder. The Holders of at least a majority in principal amount of the Senior Notes, by notice to the Senior Note Trustee, may rescind an acceleration and its consequences if all existing Events of Default, other than the nonpayment of the principal of, and accrued interest on, the Senior Notes which became due solely by such declaration of acceleration, have been cured or waived. SATISFACTION AND DISCHARGE OF THE SENIOR NOTE INDENTURE; COVENANT DEFEASANCE If at any time (a) the Company shall have paid or caused to be paid the principal of and interest on all the Senior Notes outstanding hereunder, as and when the same shall have become due and payable, or (b) the Company shall have delivered to the Senior Note Trustee for cancellation all Senior Notes theretofore authenticated (other than any Senior Notes which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in the Senior Note Indenture) or (c)(i) the Senior Notes not theretofore delivered to the Senior Note Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year, or are to be called for redemption under arrangements satisfactory to the Senior Note Trustee for the giving of notice of redemption, and (ii) the Company shall have irrevocably deposited or caused to be deposited with the Senior Note Trustee as trust funds the entire amount in cash (other than moneys repaid by the Senior Note Trustee or any paying agent to the Company in accordance with the provisions of the Senior Note Indenture), sufficient to pay at maturity or upon redemption all such Senior Notes not theretofore delivered to the Senior Note Trustee for cancellation, including principal and interest (and premium, if any) due or to become due to such date of maturity or redemption, as the case may be, and if, in any such case, the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Senior Note Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange, and the Company's right of optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Senior Notes, (iii) rights of holders to receive payments of principal thereof and interest thereon (and premium, if any,), (iv) the rights, obligations and immunities of the Senior Note Trustee hereunder and (v) the rights of the holders as beneficiaries thereof with respect to the property so deposited with the Senior Note Trustee payable to all or any of them), and the Senior Note Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging such satisfaction of and discharging this Senior Note Indenture. The Company has agreed to reimburse the Senior Note Trustee for any costs or expenses (including the reasonable fees of its counsel) thereafter reasonably and properly Incurred and to compensate the Senior Note Trustee for any services thereafter reasonably and properly rendered by the Senior Note Trustee in connection with the Senior Note Indenture or the Senior Notes. The Company shall be deemed to have paid and discharged the entire indebtedness on all the Outstanding Senior Notes on the 123rd day after the date of the deposit referred to below, and the provisions of the Senior Note Indenture, as it relates to such Outstanding Senior Notes, shall no longer be in effect (and the Senior Note Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except as to (a) rights of registration of transfer and exchange, and the Company's right of optional redemption, (b) substitution of apparently mutilated, defaced, destroyed, lost or stolen Senior Notes, (c) rights of holders to receive payments of principal thereof and interest thereon (and premium, if any,), (d) the rights, obligations and immunities of the Senior Note Trustee thereunder and (e) the rights of the holders as beneficiaries thereof with respect to the property so deposited with the -53- 56 Senior Note Trustee payable to all or any of them; provided that the following conditions shall have been satisfied: (A) with reference to this provision the Company has irrevocably deposited or caused to be irrevocably deposited with the Senior Note Trustee (or another trustee satisfying the requirements of the terms of the Senior Note Indenture) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Senior Notes, (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in this subparagraph (A) money in an amount, or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Senior Note Trustee, to pay and discharge without consideration of the reinvestment of such interest and after payment of all Federal, state and local taxes or other charges and assessments in respect thereof payable by the Senior Note Trustee the principal of and interest on the Outstanding Senior Notes at the maturity date of such principal or interest; (B) such deposit shall not cause the Senior Note Trustee to have a conflicting interest as defined in the Trust Indenture Act; (C) such deposit will not result in a breach or violation of, or constitute a default under, the Senior Note Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (D) no Event of Default or event which with notice or lapse of time would become an Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date; (E) the Company has delivered to the Senior Note Trustee (i) either (a) a ruling directed to the Senior Note Trustee received from the Internal Revenue Service to the effect that the Holders of the Senior Notes will not recognize income, gain or loss for Federal income tax purposes as a result of the Company's exercise of its option herein and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (b) an Opinion of Counsel to the same effect as the ruling described in clause (a) and (ii) an Opinion of Counsel to the effect that, after the passage of 123 days following the deposit, the trust funds will not, with respect to the Company, be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; and (F) the Company has delivered to the Senior Note Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with. The Company may omit to comply with any term, provision or condition set forth in the covenants described under "Certain Covenants" above with respect to the Senior Notes, if (a) the Company has irrevocably deposited or caused to be irrevocably deposited with the Senior Note Trustee (or another trustee satisfying the requirements of the Senior Note Indenture) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Senior Notes, (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to below money in an amount, or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Senior Note Trustee, to pay and discharge without consideration of the reinvestment of such interest and after payment of all Federal, state and local taxes or other charges and assessments in respect thereof payable by the Senior Note Trustee the principal of and each installment of principal and interest on the Outstanding Senior Notes on the maturity date of such principal or installment or principal or interest; (b) such deposit shall not cause the Senior Note Trustee to have a conflicting interest as defined in the Trust Indenture Act; (c) such deposit will not result in a breach or violation of, or constitute a default under, the Senior Note Indenture or any other agreement or instrument (including the Credit Agreement) to which the Company is a party or by which it is bound; (d) no Event of Default or event which with notice or lapse of time would become an Event of Default shall have occurred and be continuing on the date of such deposit; (e) the Company has delivered to the Senior Note Trustee an Opinion of Counsel to the effect that (i) the creation of the defeasance trust does not violate the Investment Company Act of 1940 and (ii) the Holders of the Senior Notes have a valid perfected first-priority security interest in the trust funds; and (f) the Company has delivered to the Senior Note Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated herein have been complied with. -54- 57 TRANSFER AND EXCHANGE A holder may transfer or exchange such holder's Senior Notes in accordance with the Senior Note Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Senior Note Indenture. The Registrar is not required to transfer or exchange any Senior Notes selected for redemption. The registered holder of a Senior Note may be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER The Senior Note Indenture contains provisions permitting the Company and the Senior Note Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of Senior Notes at the time outstanding, to amend or supplement such Senior Note Indenture or any supplemental indenture or modify the rights of the relevant holders; provided that no such modifications may, (a) extend the final maturity of any Senior Notes, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof, or impair or affect the right of any Senior Note holder to institute suit for the payment thereof without the consent of the holder of each Senior Note so affected, or (b) reduce the aforesaid percentage of Senior Notes, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Senior Notes then outstanding; or (c) consent to the assignment or transfer by the Company of any of its rights and obligations under the Senior Note Indenture or to the release of any Collateral from the lien created by the Pledge Agreement except in accordance with the Pledge Agreement and the Senior Note Indenture. CONCERNING THE SENIOR NOTE TRUSTEE The Senior Note Indenture provides that except during the continuance of an Event of Default, the Senior Note Trustee thereunder will perform only such duties as are specifically set forth in such Senior Note Indenture. During the existence of an Event of Default, such Senior Note Trustee will exercise such rights and powers vested in it under the Senior Note Indenture and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Company may remove the Senior Note Trustee at any time for any reason. The Senior Note Indenture and provisions of the Trust Indenture Act contain limitations on the rights of the Senior Note Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Senior Note Trustee is permitted to engage in other transactions; provided, that if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign. -55- 58 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of certain indebtedness of the Company and its subsidiaries and is qualified in its entirety by reference to the definitive agreements and instruments governing such indebtedness, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. THE AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT General. The Original Revolving Credit Agreement was amended and restated pursuant to an Amended and Restated Revolving Credit Agreement (the "Restated Revolving Credit Agreement") simultaneously with the issuance of the Senior Notes. In connection with such amendment and restatement, the Banks released their lien on the capital stock of Aircraft Braking Systems and Engineered Fabrics. The Restated Revolving Credit Agreement provides for revolving loans (the "Revolving Loans") to Aircraft Braking Systems and Engineered Fabrics (each a "Borrower" and together the "Borrowers") in an aggregate principal amount of up to $80 million (but not exceeding a borrowing base equal to 85% of eligible accounts receivable and 45% of eligible inventory), secured by a lien on the inventories and accounts receivable of Aircraft Braking Systems and Engineered Fabrics. As part of the total commitment under the Revolving Loans, the Restated Revolving Credit Agreement provides for the issuance of letters of credit for the account of the Borrowers in an aggregate amount not to exceed $11 million for specified purposes. Maturity. All borrowings under the Revolving Loans will mature on April 27, 1997. Borrowings under the Revolving Loans may be prepaid in whole or in part at any time without premium or penalty, and the Banks' commitment under Revolving Loans may be reduced in whole or in part at any time. Interest. Borrowings under the Revolving Loans bear interest at floating rates. Security. The obligations of the Borrowers under the Revolving Credit Agreement are secured by liens on the Borrowers' inventory and accounts receivable. Covenants; Event of Default. The Restated Revolving Credit Agreement contains covenants and events of default, including limitations on additional indebtedness, liens, asset sales, investments in original equipment by the Company in new airframe programs, and contains financial ratio requirements including cash interest coverage and consolidated net worth. K & F Agreement. In connection with the execution and delivery of the Restated Revolving Credit Agreement, the Company entered into the K & F Agreement with the Banks which contains limitations on the incurrence by the Company of additional indebtedness and limitations on annual operating expenses. THE SUBORDINATED DEBENTURES General. The Subordinated Debentures are unsecured subordinated obligations of the Company. At September 30, 1994, the Company had outstanding $210 million of Subordinated Debentures. The Subordinated Debentures bear interest at the rate of 13.75% per annum payable semi-annually on August 1 and February 1. The Subordinated Debentures will mature on August 1, 2001, unless redeemed prior to such date. -56- 59 Optional Redemption. The Subordinated Notes may be redeemed at any time on or after August 1, 1994, upon payment of the following redemption price, together with accrued interest to the date fixed for redemption, if redeemed during the 12 month period commencing:
August Redemption Prices ------ ----------------- 1994 105.00% 1995 103.75% 1996 102.50% 1997 101.25% 1998 and thereafter 100.00%
Sinking Fund. The Company is required to provide for the retirement, by redemption, of 25% of the principal amount of the Subordinated Debentures originally issued on each of August 1, 1999 and August 1, 2000, at a redemption price of 100% of the principal amount thereof, plus accrued interest to the redemption date. The Company may, at its option, receive credit against sinking fund payments for the principal amount of Subordinated Debentures acquired by the Company and surrendered for cancellation prior to such dates or redeemed other than through the operation of the sinking fund. Subordination. The payment of the principal of and interest on the Subordinated Debentures is subordinated in right of payment, as set forth in the Subordinated Debenture Indenture, to the prior payment in full of all Senior Debt (including, the Senior Notes and the Revolving Loans). "Senior Debt" is defined in the Subordinated Debenture Indenture as (i) all indebtedness and other monetary obligations (whether now existing or hereafter incurred) of the Company on, under or in respect of, the Term Credit Agreement or the Original Revolving Credit Agreement (including the Additional Bank Credit Amount as defined in the Subordinated Debenture Indenture), and including all fees, expenses (including reasonable fees and expenses of counsel), claims, charges, indemnity obligations and interest accruing subsequent to the filing of a petition initiating any proceeding in bankruptcy, insolvency or like proceeding whether or not such interest is an allowed claim enforceable against the debtor in a bankruptcy case under Title 11 of the United States Code; (ii) all other indebtedness of the Company (other than the Debentures), whether presently outstanding or hereafter created, incurred or assumed, unless such indebtedness, by its terms or the terms of the instrument creating or evidencing it is subordinate in right of payment to or pari passu with the Subordinated Debentures and (iii) obligations of the Company under any interest rate agreement or currency agreement; provided that the term Senior Debt shall not include (a) any indebtedness of the Company which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Code, was without recourse to the Company, (b) any indebtedness of the Company to any of its subsidiaries, (c) any indebtedness of the Company not otherwise permitted by the "Limitation on Debt" and "Limitation on Issuance of other Subordinated Debt Senior to the Debentures" covenants contained in the Subordinated Debenture Indenture, (d) indebtedness to any employee of the Company, (e) any liability for taxes and (f) trade payables. The Convertible Debentures are subordinated to the Subordinated Debentures. If any default in the payment of any principal of or interest on any Senior Debt when due and payable, whether at maturity, upon any redemption, by declaration or otherwise, occurs and is continuing, no payment may be made by the Company with respect to the principal of or interest on, or other amounts owing with respect to, the Subordinated Debentures, or to redeem or acquire any of the Subordinated Debentures for cash or property or otherwise. If any event of default occurs and is continuing, as such event of default is defined in such Senior Debt, permitting the holders thereof to accelerate the maturity thereof and if the holder or holders or a representative of such holder or holders gives written notice of the event of default to the Company and the Trustee under the Subordinated Debenture Indenture (a "Default Notice"), then, unless and until such event of default has been cured or waived or has ceased to exist or the Trustee receives notice from the holder or holders of the relevant Senior Debt (or a representative of such holder or holders) terminating the Blockage Period (as defined below), during the 179 day period after the delivery of such Default Notice (the "Blockage Period"), the Company, or any person acting on its behalf, shall not (x) make any payment of or with respect to the principal of or interest on, the Subordinated Debentures or (y) acquire -57- 60 any of the Subordinated Debentures for cash or property or otherwise. At the expiration of such Blockage Period, the Company shall, as set forth in the Subordinated Debenture Indenture, promptly pay to the Trustee all sums which the Company would have been obligated to pay during such Blockage Period but for this restriction. Only one such Blockage Period may be commenced within any 360 consecutive days. Certain Covenants. The Company and its subsidiaries are generally prohibited from incurring any indebtedness unless the Company's Consolidated Fixed Charge Ratio (as defined in the Subordinated Debenture Indenture) is at least 1.50 to 1 through March 31, 1996 and 1.75 to 1 thereafter. Notwithstanding the foregoing, the limitations on indebtedness do not apply to (i) indebtedness such as the Senior Notes used to retire indebtedness of the Company, (ii) indebtedness among the Company and its subsidiaries, (iii) indebtedness under currency or similar interest rate swap agreements, (iv) indebtedness incurred to refinance existing indebtedness of the Company, and (v) indebtedness not described in clauses (i) through (iv) provided that the aggregate principal amount of such indebtedness does not exceed $25,000,000 at any time outstanding. Restricted Payments. The Company is not permitted to make restricted payments, which include dividends and distributions on the capital stock of the Company and the making of certain investments by the Company and its subsidiaries, if (i) an event of default has occurred and is continuing under the Subordinated Debenture Indenture, (ii) if the aggregate amount of such proposed restricted payment, (A) is greater than 50% of the Company's Consolidated Net Income and (B) the aggregate net proceeds received by the Company after the date of the Subordinated Debenture Indenture from sales of the Company's capital stock. Additional Covenants. The Subordinated Debenture Indenture contains additional covenants which restrict, among other things, the merger or consolidation of the Company and/or its subsidiaries, sales of the Company's or any subsidiaries' assets, the issuance by any subsidiary of a class of preferred stock, limitations on liens, and restrictions on transactions with affiliates. Default Provisions. The Subordinated Debenture Indenture contains default provisions which are typical in subordinated debt financings. Upon the occurrence of an event of default, the holders of at least 33% of the principal amount of the Subordinated Debentures may declare the Subordinated Debentures due and payable. CONVERTIBLE DEBENTURES On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) -58- 61 CERTAIN TRANSACTIONS GENERAL BLS owns 27.12% 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. 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. On September 2, 1994 K & F retired the $65.4 million principal amount of Convertible Debentures, held by Loral, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) 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 (including certain other executive officers of Loral who are active in the management of the Company) 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 at least 1,350,000 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 and other advisers ranging from 5% to 10% of earnings in excess of $50 million before interest, taxes and amortization. No bonuses were earned under this plan during fiscal years ended March 31, 1994, 1993 and 1992. Certain persons who are designated by LBH to serve as members of the Company's Board of Directors may, under certain limited circumstances, comprise a majority of the Board of Directors, although initially BLS has the right to designate all of the directors of the Company other than the three directors which may be LBH designees so long as BLS and his affiliates own at least 1,350,000 shares of the outstanding Common stock. See "Ownership of Capital Stock -- Stockholders Agreement" for a description of the restrictions on transfer of Common Stock, registration rights and voting arrangements. In addition, Loral, BLS and the Lehman Investors have engaged in a variety of commercial transactions to which the Company and its subsidiaries were not party. See "Business -- Properties -- Akron Facility Arrangements" for a description of certain property arrangements between Loral and the Company. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial adviser to the Company. The Company pays Lehman Brothers customary fees for services rendered on an as-provided basis. The agreement may be terminated by the Company or Lehman Brothers upon certain conditions. In connection with the Senior Note Offering on June 10, 1992, Lehman Brothers received underwriting discounts and a commission of $2.25 million. Pursuant to the Services Agreement, Loral provides the Company with certain services which it previously provided to the subsidiaries. These services include, among others, security, fire protection, yard service and road maintenance, power plant and equipment calibration as well as other services on an as needed basis (the "Loral Services"). Certain of the Loral Services are used by the Company on a limited basis. The charge for these services is based on actual costs incurred. Billings from Loral were $3.0 million, $3.7 million and $4.5 million in fiscal years 1994, 1993 and 1992, respectively. Billings to Loral were $1.1 million, $1.1 million and $1.1 million in fiscal years 1994, 1993 and 1992. Purchases from Loral were $4.2 million, $3.7 million and $8.8 million in fiscal years 1994, 1993 and 1992. Included in accounts receivable and accounts payable at March 31, 1994 is $.6 million and $2.0 million. Included in accounts receivable and accounts payable at March 31, 1993 is $1.6 million and $3.7 million. -59- 62 PLAN OF DISTRIBUTION This Prospectus is to be used by Lehman Brothers in connection with offers and sales of the Senior Notes 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 and has no obligation to make a market in the Senior Notes, and may discontinue its market-making activities at any time without notice, at its sole discretion. Lehman Brothers is affiliated with entities that own capital stock of the Company representing 48.17% of the aggregate voting power of the capital stock of the Company and have the ability to elect 3 members of the Company's Board of Directors. See "Certain Risk Factors-Interest of BLS, Lehman Brothers and its Affiliates" and "Ownership of Capital Stock." Lehman Brothers acted as underwriter in connection with the original offering of the Subordinated Debentures and received underwriting discounts and commissions of $7.35 million in connection therewith. Lehman Brothers acted as underwriter in connection with the original offering of the Senior Notes and received underwriting discounts and commissions of $2.25 million in connection therewith. LBH received fees and additional interest aggregating $5.4 million in connection with the sale of the Subordinated Bridge Notes, plus certain out-of-pocket expenses. Lehman Brothers has from time to time provided investment banking, financial advisory and other services to the Company, for which services Lehman Brothers has received fees. As the beneficial owners of 48.17% of the outstanding capital stock, the Lehman Investors are able to elect three directors to the Company's board of directors. See "Management -- Directors and Executive Officers of the Company" and "Certain Transactions." LEGAL MATTERS The validity of the Senior Notes was passed upon for the Company by O'Sullivan Graev & Karabell, New York, New York. Certain legal matters in connection with the sale of the Senior Notes were passed upon for the Underwriter by Davis Polk & Wardwell. Davis Polk & Wardwell represented the Company in connection with the Acquisition and the Financing. Michael B. Targoff represented the Company in connection with the preparation of this Prospectus. EXPERTS The consolidated financial statements as of March 31, 1994 and 1993 and for the years ended March 31, 1994, 1993 and 1992, included in this Prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports dated May 4, 1994 (which expresses an unqualified opinion and includes an explanatory paragraph related to changes in the Company's method of accounting for discounting of certain liabilities, effective April 1, 1993, and certain overhead costs included in inventory and postretirement benefits other than pensions, effective April 1, 1992) appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. -60- 63 INDEX TO FINANCIAL STATEMENTS K & F INDUSTRIES, INC. AND SUBSIDIARIES PAGE Consolidated Balance Sheets as of September 30, 1994 (unaudited) and March 31, 1994 . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations for the six months ended September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the three months ended September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows for the three months ended September 30, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Consolidated Balance Sheets as of March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 Consolidated Statements of Operations for the years ended March 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended March 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11 Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
F-1 64 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, March 31, 1994 1994 ----------- ---------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 2,552,000 $ 4,327,000 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . 34,201,000 32,783,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,537,000 67,613,000 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,394,000 1,196,000 ------------ ------------ Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 102,684,000 105,919,000 ------------ ------------ Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . 112,493,000 111,882,000 Less, accumulated depreciation and amortization . . . . . . . . . . . 47,698,000 43,142,000 ------------ ------------ 64,795,000 68,740,000 ------------ ------------ Deferred Charges - Net of amortization . . . . . . . . . . . . . . . . 27,129,000 28,050,000 Cost in Excess of Net Assets Acquired - Net of amortization . . . . . . 211,282,000 214,340,000 Intangible Assets - Net of amortization . . . . . . . . . . . . . . . . 28,131,000 29,831,000 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $434,021,000 $446,880,000 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . $ 10,119,000 $ 9,028,000 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . 8,771,000 8,818,000 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 35,251,000 34,982,000 ------------ ------------ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 54,141,000 52,828,000 ------------ ------------ Postretirement Benefit obligation other than pensions . . . . . . . . . 79,199,000 80,150,000 Other Long-term Liabilities . . . . . . . . . . . . . . . . . . . . . . 24,145,000 22,836,000 Senior revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000,000 11 7/8% senior secured notes due 2003 . . . . . . . . . . . . . . . . . 100,000,000 100,000,000 13 3/4% subordinated debentures due 2001 . . . . . . . . . . . . . . . 210,000,000 210,000,000 14.75% convertible debentures due 2004 . . . . . . . . . . . . . . . . - 61,421,000 Stockholders' Deficiency: Preferred stock, $.01 par value - authorized 1,500,000 and 900,000 shares; issued and outstanding 1,027,635 and 899,999 shares (liquidation preference of $60,110,000 and $76,154,000) . . . . . . 10,000 9,000 Common stock, Class B, $.01 par value - authorized 4,600,000 shares; issued and outstanding 4,589,938 shares (liquidation preference of $26,848,000) . . . . . . . . . . . . . . . . . . . . 46,000 - Common stock, Class A, $.01 par value - authorized 21,000,000 and 5,350,000 shares; issued and outstanding 5,533,437 and 4,846,164 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 48,000 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 155,260,000 89,943,000 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (181,075,000) (172,470,000) Adjustment to equity for minimum pension liability . . . . . . . . . (7,467,000) (7,467,000) Cumulative translation adjustment . . . . . . . . . . . . . . . . . . (293,000) (418,000) ------------ ------------ Total stockholders' deficiency . . . . . . . . . . . . . . . . . . . . (33,464,000) (90,355,000) ------------ ------------ Total Liabilities and Stockholders' Deficiency . . . . . . . . . . . . $434,021,000 $446,880,000 ============ ============
See notes to consolidated financial statements. F-2 65 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended, ----------------------------------- September 30, September 30, 1994 1993 -------------- --------------- Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,143,000 $115,773,000 Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 93,347,000 99,238,000 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,230,000 5,312,000 ------------ ------------ Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 16,566,000 11,223,000 Interest and investment income . . . . . . . . . . . . . . . . . . . 78,000 35,000 Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . (25,249,000) (26,030,000) ------------ ------------ Loss before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . (8,605,000) (14,772,000) Cumulative effect of change in method of accounting for the discounting of certain liabilities . . . . . . . . . . . . . . . . -- (2,305,000) ------------ ------------ Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,605,000) $(17,077,000) ============ ============
Note (1): Includes non-cash interest expense on the convertible debentures and financing costs of $4,613,000 and $4,771,000 for the six months ended September 30, 1994 and 1993, respectively. See notes to consolidated financial statements. F-3 66 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended, ------------------------------------ September 30, September 30, 1994 1993 --------------- --------------- Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,432,000 $ 64,042,000 Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 45,664,000 53,152,000 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,580,000 2,743,000 ------------ ------------ Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 9,188,000 8,147,000 Interest and investment income . . . . . . . . . . . . . . . . . . . 45,000 17,000 Interest expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . (12,252,000) (12,922,000) ------------ ------------ Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,019,000) $ (4,758,000) ============ ============
Note (1): Includes non-cash interest expense on the convertible debentures and financing costs of $1,943,000 and $2,394,000 for the three months ended September 30, 1994 and 1993, respectively. See notes to consolidated financial statements. F-4 67 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended, ----------------------------------- September 30, September 30, 1994 1993 ---------- --------- Cash Flows From Operating Activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,605,000) $(17,077,000) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of change in accounting for the discounting of certain liabilities . . . . . . . . . . . . . . . . . . . . . . -- 2,305,000 Depreciation and amortization . . . . . . . . . . . . . . . . . . . 9,786,000 10,056,000 Non-cash interest expense . . . . . . . . . . . . . . . . . . . . . 4,613,000 4,771,000 Changes in assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . (1,359,000) 8,982,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,142,000 384,000 Other current assets . . . . . . . . . . . . . . . . . . . . . (198,000) (333,000) Accounts payable, interest payable, and other current liabilities . . . . . . . . . . . . . . . . . . . . . 1,313,000 (3,323,000) Postretirement benefits other than pensions . . . . . . . . . . . (951,000) (781,000) Other long-term liabilities . . . . . . . . . . . . . . . . . . . 1,309,000 (2,500,000) ------------ ------------ Net cash provided by operating activities . . . . . . . . . . . . . 9,050,000 2,484,000 ------------ ------------ Cash flows from investing activities: Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . (611,000) (1,890,000) Deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . (214,000) -- ------------ ------------ Net cash used in investing activities . . . . . . . . . . . . . . . (825,000) (1,890,000) ------------ ------------ Cash Flows From Financing Activities: Payments of senior revolving loan . . . . . . . . . . . . . . . . . (20,000,000) (23,000,000) Borrowings of senior revolving loan . . . . . . . . . . . . . . . . 10,000,000 24,000,000 Payment of convertible debentures . . . . . . . . . . . . . . . . . (12,764,000) -- Proceeds from issuance of capital stock . . . . . . . . . . . . . . 12,764,000 -- ------------ ------------ Net cash used by financing activities . . . . . . . . . . . . . . . (10,000,000) 1,000,000 ------------- ------------ Net (decrease) increase in cash and cash equivalents . . . . . . . . . . (1,775,000) 1,594,000 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 4,327,000 2,921,000 ------------ ------------ Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . $ 2,552,000 $ 4,515,000 ============ ============ - ------------------------------- Supplemental information: Cash interest paid during the period . . . . . . . . . . . . . . . . $ 20,683,000 $ 21,704,000 ============ ============
Supplemental disclosure of non-cash financing activities: See Note 7 for a discussion of non-cash financing activities See notes to consolidated financial statements. F-5 68 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 six months ended September 30, 1994 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 March 31, 1994 Annual Report on Form 10-K. 2. Accounting Change Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires that the costs of benefits provided to employees after employment but before retirement be recognized in the financial statements on an accrual basis. The adoption of SFAS No. 112 did not have a material effect on the Company's financial position or results of operations. 3. Receivables are summarized as follows:
September 30, March 31, 1994 1994 -------------- ------------ Accounts receivable, principally from commercial customers $31,911,000 $29,099,000 Accounts receivable, on U. S. Government and other long-term contracts 2,992,000 4,379,000 Allowances (702,000) (695,000) ----------- ----------- $34,201,000 $32,783,000 =========== =========== 4. Inventory consists of the following: September 30, March 31, 1994 1994 ------------- ----------- Raw materials and work-in-process $40,281,000 $42,375,000 Finished goods 13,626,000 15,821,000 Inventoried costs related to U.S. Government and other long-term contracts 11,233,000 9,823,000 ----------- ----------- 65,140,000 68,019,000 Less, unliquidated progress payments received, principally related to long-term government contracts 603,000 406,000 ----------- ----------- $64,537,000 $67,613,000 =========== ===========
F-6 69 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 5. Other current liabilities consist of the following:
September 30, March 31, 1994 1994 ------------- ----------- Accrued payroll costs $13,690,000 $11,687,000 Accrued taxes 6,663,000 7,094,000 Accrued costs on long-term contracts 3,962,000 3,415,000 Accrued warranty costs 5,103,000 4,502,000 Postretirement benefit obligation other than pensions 2,000,000 2,000,000 Other 3,833,000 6,284,000 ----------- ----------- $35,251,000 $34,982,000 =========== ===========
6. 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. 7. Retirement of Debt On September 2, 1994 K & F retired the $65,371,000 principal amount of 14 3/4% Subordinated Convertible Debentures due 2004 held by Loral, in exchange for $12,764,000 in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with a $12,764,000 capital infusion by K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65,371,000 million and long-term debt was reduced by an equal amount, resulting in no gain or loss on the transaction. F-7 70 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 March 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended March 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on the audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of K & F Industries, Inc. and subsidiaries as of March 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, effective April 1, 1993, the Company changed its method of accounting for discounting of certain liabilities. As discussed in Notes 4 and 11, respectively, to the consolidated financial statements, effective April 1, 1992, the Company changed its method of accounting for certain overhead costs included in inventory and postretirement benefits other than pensions. DELOITTE & TOUCHE LLP New York, New York May 4, 1994 F-8 71 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, --------------------------------- 1994 1993 ---- ---- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,327,000 $ 2,921,000 Accounts receivable, net . . . . . . . . . . . . . . . . . . . 32,783,000 50,045,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,613,000 77,259,000 Other current assets . . . . . . . . . . . . . . . . . . . . . 1,196,000 1,059,000 ------------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . 105,919,000 131,284,000 ------------- ------------- Property, Plant and Equipment - Net . . . . . . . . . . . . . . . 68,740,000 76,262,000 Deferred Charges - Net of amortization of $8,328,000 and $5,581,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 28,050,000 30,871,000 Cost in Excess of Net Assets Acquired - Net of amortization of $30,036,000 and $23,927,000 . . . . . . . . . . . . . . . . . 214,340,000 220,449,000 Intangible Assets - Net of amortization of $17,244,000 and $13,736,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 29,831,000 31,102,000 ------------- ------------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446,880,000 $ 489,968,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 9,028,000 $ 14,326,000 Interest payable . . . . . . . . . . . . . . . . . . . . . . . 8,818,000 9,256,000 Other current liabilities . . . . . . . . . . . . . . . . . . . 34,982,000 37,674,000 ------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . . 52,828,000 61,256,000 ------------- ------------- Postretirement Benefit Obligation Other Than Pensions . . . . . . 80,150,000 84,240,000 Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 22,836,000 16,862,000 Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 381,421,000 379,478,000 Commitments and Contingencies (Notes 12 and 13) Stockholders' Deficiency: Preferred stock, $.01 par value - authorized, 900,000 shares; issued and outstanding, 899,999 shares (liquidation preference of $76,154,000) . . . . . . . . . . . . . . . . . 9,000 9,000 Common stock, $.01 par value - authorized, 5,350,000 shares; issued and outstanding, 4,846,164 shares . . . . . . . . . . 48,000 48,000 Additional paid-in capital . . . . . . . . . . . . . . . . . . 89,943,000 89,943,000 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,470,000) (138,429,000) Adjustment to equity for minimum pension liability . . . . . . (7,467,000) (3,052,000) Cumulative translation adjustment . . . . . . . . . . . . . . . (418,000) (387,000) ------------- ------------- Total stockholders' deficiency . . . . . . . . . . . . . . . (90,355,000) (51,868,000) ------------- ------------- Total Liabilities and Stockholders' Deficiency . . . . . . . . . $ 446,880,000 $ 489,968,000 ============= =============
See notes to consolidated financial statements. F-9 72 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, -------------------------------------------------------- 1994 1993 1992 ---- ---- ---- Net sales . . . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000 Cost of sales . . . . . . . . . . . . . . . . . . . . . 159,751,000 199,002,000 209,552,000 Selling, general and administrative expenses . . . . . 22,421,000 24,154,000 24,047,000 Independent research and development . . . . . . . . . 12,858,000 11,417,000 14,130,000 Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000 ------------ ------------ ------------ Operating income . . . . . . . . . . . . . . . . . . . 20,217,000 32,276,000 37,455,000 Interest expense, net of interest income of $96,000, $108,000 and $152,000 . . . . . . . . . . . . . . . . 51,953,000 53,486,000 52,179,000 ------------ ------------ ------------ Loss before extraordinary charge and cumulative effect of changes in accounting principles . . . . . . . . . (31,736,000) (21,210,000) (14,724,000) Extraordinary charge from early extinguishment of debt -- (2,477,000) (992,000) Cumulative effect of change in method of accounting for the discounting of certain liabilities . . . . . (2,305,000) -- -- Cumulative effect of change in method of accounting for postretirement benefits other than pensions . . . -- (77,902,000) -- Cumulative effect of change in method of accounting for certain overhead costs in inventory . . . . . . . -- 4,362,000 -- ------------ ------------ ------------ Net loss . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000) ============ ============ ============
See notes to consolidated financial statements. F-10 73 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED MARCH 31, 1994, 1993 AND 1992
Common Stock Preferred Stock Adjustment ------------ --------------- to Equity for Additional Minimum Cumulative Shares Shares Paid-in Pension Translation Issued Amount Issued Amount Capital Deficit Liability Adjustment ------ ------ ------ ------ ------- ------- ------------- ---------- Balance, March 31, 1991 . . 3,500,010 $35,000 649,999 $6,000 $64,959,000 $ (25,486,000) $(1,342,000) $ -- Issuance of common stock . . . . . . . . . 1,346,154 13,000 3,833,000 Issuance of preferred stock . . . . . . . . . 250,000 3,000 21,151,000 Net loss . . . . . . . . (15,716,000) Pension adjustment . . . 875,000 --------- ------- ------- ------ ----------- ------------- ----------- --------- Balance, March 31, 1992 . . 4,846,164 48,000 899,999 9,000 89,943,000 (41,202,000) (467,000) -- Net loss . . . . . . . . (97,227,000) Pension adjustment . . . (2,585,000) Cumulative translation adjustment . . . . . . (387,000) --------- ------- ------- ------ ----------- ------------- ----------- --------- Balance, March 31, 1993 . . 4,846,164 48,000 899,999 9,000 89,943,000 (138,429,000) (3,052,000) (387,000) Net loss . . . . . . . . (34,041,000) Pension adjustment . . . (4,415,000) Cumulative translation adjustment . . . . . . (31,000) --------- ------- ------- ------ ----------- ------------- ----------- --------- Balance, March 31, 1994 4,846,164 $48,000 899,999 $9,000 $89,943,000 $(172,470,000) $(7,467,000) $(418,000) ========= ======= ======= ====== =========== ============= =========== =========
See notes to consolidated financial statements. F-11 74 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, ----------------------------------------------------- 1994 1993 1992 ---- ---- ---- Cash Flows From Operating Activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000) Adjustments to reconcile net loss to net cash provided by operating activities: . . . . . . . . . . . . . . . . . . Cumulative effect of change in accounting for: Discounting certain liabilities . . . . . . . . . . . 2,305,000 -- -- Postretirement benefits other than pensions . . . . . -- 77,902,000 -- Certain overhead costs in inventory . . . . . . . . -- (4,362,000) -- Depreciation . . . . . . . . . . . . . . . . . . . . . 9,643,000 9,604,000 9,195,000 Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000 Non-cash interest expense-convertible debentures . . . 8,443,000 7,282,000 6,213,000 Non-cash interest expense-amortization of deferred financing charges . . . . . . . . . . . . . . . . . . 1,480,000 1,507,000 2,467,000 Provision for losses on accounts receivable . . . . . . 450,000 190,000 (331,000) Extraordinary charge from early extinguishment of debt -- 2,477,000 992,000 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . 16,797,000 5,110,000 666,000 Inventory . . . . . . . . . . . . . . . . . . . . . . 9,638,000 12,038,000 (469,000) Other current assets . . . . . . . . . . . . . . . . (137,000) (262,000) (33,000) Accounts payable . . . . . . . . . . . . . . . . . . (5,298,000) 1,141,000 (6,502,000) Interest payable . . . . . . . . . . . . . . . . . . (438,000) 3,552,000 (245,000) Other current liabilities . . . . . . . . . . . . . . (2,692,000) 4,567,000 (370,000) Postretirement benefit obligation other than pensions (4,090,000) 6,338,000 -- Other long-term liabilities . . . . . . . . . . . . . (3,981,000) (1,289,000) 4,427,000 Deferred charges - financing costs . . . . . . . . . -- (3,256,000) (1,695,000) ------------ ------------ ------------ Net cash provided by operating activities . . . . . . 8,963,000 35,570,000 8,905,000 ------------ ------------ ------------ Cash Flows From Investing Activities: Capital expenditures, net . . . . . . . . . . . . . . . (3,127,000) (4,670,000) (3,986,000) Deferred charges . . . . . . . . . . . . . . . . . . 74,000 258,000 (1,409,000) ------------ ------------ ------------ Net cash used in investing activities . . . . . . . . (3,053,000) (4,412,000) (5,395,000) ------------ ------------ ------------ Cash Flows From Financing Activities: Payments of senior revolving loan . . . . . . . . . . . . (43,500,000) (81,000,000) (56,000,000) Borrowings under senior revolving loan . . . . . . . . . 37,000,000 47,000,000 59,000,000 Proceeds from sale and leaseback transaction . . . . . . 1,996,000 -- -- Payments of senior term loan . . . . . . . . . . . . . . -- (95,875,000) (34,625,000) Proceeds from issuance of senior secured notes . . . . . -- 100,000,000 -- Proceeds from issuance of common and preferred stocks . . -- -- 25,000,000 ------------ ------------ ------------ Net cash used by financing activities . . . . . . . (4,504,000) (29,875,000) (6,625,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents . . . . 1,406,000 1,283,000 (3,115,000) Cash and cash equivalents, beginning of year . . . . . . . . 2,921,000 1,638,000 4,753,000 ------------ ------------ ------------ Cash and cash equivalents, end of year . . . . . . . . . . . $ 4,327,000 $ 2,921,000 $ 1,638,000 ============ ============ ============ - -------------------------------- Supplemental Information: Interest paid during the year . . . . . . . . . . . . . $ 42,564,000 $ 41,253,000 $ 43,896,000 ============ ============ ============
See notes to consolidated financial statements. F-12 75 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the "Company") is primarily engaged in the design, development, manufacture and distribution of wheels, brakes and anti-skid systems for commercial, military and general aviation aircraft, and the manufacture of materials for fuel tanks, iceguards, inflatable oil booms and various other products made from coated fabrics for military and commercial uses. The Company's activities are conducted through its two wholly owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft Braking Systems") and Engineered Fabrics Corporation (collectively the "Subsidiaries"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of the Company. 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. During fiscal year 1993, the Company changed its method of accounting for certain overhead costs. (See Note 4.) 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 ($11.2 million and $12.7 million, which is net of amortization (non-cash interest expense) of $3.9 million and $2.9 million in fiscal years 1994 and 1993, respectively), organization and program participation costs ($15.8 million, net of vendor participations) paid in connection with the sole-source award of wheels, brakes and anti-skid equipment on the McDonnell Douglas Corporation's MD-90 twin-jet program. Program participation costs are being amortized on a straight-line method over a period of 20 years. Deferred financing charges are primarily being amortized on an effective interest method over periods of eight to 12 years. 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. F-13 76 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 five to 30 years. Evaluation of Long-Lived Assets - Long-lived assets are assessed for recoverability on an on-going basis. In evaluating the value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over 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 in fiscal year 1994 resulting from the Company's evaluations. Extraordinary charges of $2,477,000 and $992,000 were recorded relating to the accelerated amortization of unamortized financing costs associated with the full prepayment of the senior term loan in fiscal year 1993 and partial prepayment in fiscal year 1992, respectively. (See Note 7.) 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 not concentrated in any specific region, but are concentrated in the airline industry. The United States Government accounted for approximately 15%, 23% and 31% of sales for the fiscal years ended March 31, 1994, 1993 and 1992, respectively. No other single customer accounted for significant sales for the fiscal years then ended, and there were no significant accounts receivable from a single customer, except the United States Government, at March 31, 1994. Changes in Accounting Methods - In the fourth quarter of fiscal year 1994, retroactive to April 1, 1993, in response to recent Securities and Exchange Commission guidance, the Company changed its method of accounting for the discounting of liabilities for workers' compensation losses, to use a risk-free rate rather than its incremental borrowing rate. The cumulative effect for periods prior to April 1, 1993, of this change amounted to $2,305,000, and is included as an increase to the net loss for the fiscal year ended March 31, 1994. The effect of the change on the results of operations for the fiscal years ended March 31, 1994 and pro forma 1993 and 1992 were not material. The effect of this change on previously reported quarterly financial data for the three months ended June 30, 1993, was to increase the net loss reported as $10,014,000 to $12,319,000. Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." In connection with such adoption, there was no impact to the financial statements as the Company has provided a 100% valuation allowance against its net deferred tax benefit. (See Note 14.) In the fourth quarter of fiscal year 1993, the Company adopted, retroactive to April 1, 1992, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." (See Note 11.) Accounting Pronouncement - In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," which requires that employers who provide benefits to employees after employment but before retirement recognize the obligation in the financial statements. The Company will adopt Statement of Financial Accounting Standards No. 112 in the first quarter of fiscal year 1995. The impact of this new statement has not been fully determined, but the Company believes its adoption will not have a material effect on its financial position or results of operations. F-14 77 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACCOUNTS RECEIVABLE
March 31, ------------------------------- 1994 1993 ---- ---- Accounts receivable, principally from commercial customers . . . . . . . . . . . . . . . . . . . . . . $29,099,000 $42,836,000 Accounts receivable on U.S. Government and other long-term contracts . . . . . . . . . . . . . . . . . 4,379,000 8,391,000 Allowances . . . . . . . . . . . . . . . . . . . . . . . (695,000) (1,182,000) ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . $32,783,000 $50,045,000 =========== ===========
4. INVENTORY
March 31, ------------------------------- 1994 1993 ---- ---- Raw materials and work-in-process . . . . . . . . . . . $42,375,000 $46,027,000 Finished goods . . . . . . . . . . . . . . . . . . . . . 15,821,000 17,307,000 Inventoried costs related to U.S. Government and other long-term contracts . . . . . . . 9,823,000 14,914,000 ----------- ----------- 68,019,000 78,248,000 Less: unliquidated progress payments received, principally related to long-term government contracts . . . . . . . . . . . . . . . . . . . . . . 406,000 989,000 ----------- ----------- Total . . . . . . . . . . . . . . . . . . . . . $67,613,000 $77,259,000 =========== ===========
During the fiscal year ended March 31, 1993, the Company's Aircraft Braking Systems subsidiary changed its method of accounting, effective April 1, 1992, to capitalize in inventory certain material related overhead costs (such as procurement and receiving) at the raw material, work-in-process and finished goods stages. Historically, these costs were inventoried only in finished goods. This change is preferable in that it provides a better matching of product costs with related revenues. The cumulative effect of this change in method of accounting for periods prior to April 1, 1992, amounted to $4,362,000, and is included as a reduction in the net loss for the fiscal year ended March 31, 1993. The effect of the change on the results of operations for the fiscal year ended March 31, 1993 was to increase the loss before extraordinary charge and cumulative effect of changes in accounting principles by $1,469,000 and to reduce the net loss by $2,893,000. Pro forma net loss for the fiscal year ended March 31, 1992 would not be materially different had the change been applied retroactively. F-15 78 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT
March 31, -------------------------------- 1994 1993 ---- ---- Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 662,000 $ 662,000 Buildings and improvements . . . . . . . . . . . . . . . 27,113,000 26,791,000 Machinery, equipment, furniture and fixtures . . . . . . 84,107,000 83,081,000 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . 111,882,000 110,534,000 Less: accumulated depreciation and amortization . . . . 43,142,000 34,272,000 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $ 68,740,000 $ 76,262,000 ============ ============
During the fiscal year ended March 31, 1994, the Company sold and leased back assets with a net book value of $1,006,000. 6. OTHER CURRENT LIABILITIES
March 31, -------------------------------- 1994 1993 ---- ---- Accrued payroll costs . . . . . . . . . . . . . . . . . $ 11,687,000 $ 12,900,000 Accrued taxes . . . . . . . . . . . . . . . . . . . . . 7,094,000 7,199,000 Accrued costs on long-term contracts . . . . . . . . . . 3,415,000 4,933,000 Accrued warranty costs . . . . . . . . . . . . . . . . . 4,502,000 6,158,000 Postretirement benefit obligation other than pensions . . 2,000,000 1,500,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,284,000 4,984,000 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $ 34,982,000 $ 37,674,000 ============ ============
7. LONG-TERM DEBT
March 31, -------------------------------- 1994 1993 ---- ---- Senior revolving loan (a) . . . . . . . . . . . . . . . $ 10,000,000 $ 16,500,000 11 7/8% Senior Secured Notes due 2003 (b) . . . . . . . 100,000,000 100,000,000 13 3/4% Senior Subordinated Debentures due 2001 (c) . . 210,000,000 210,000,000 14.75% Convertible Debentures due 2004 (d) . . . . . . . 61,421,000 52,978,000 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $381,421,000 $379,478,000 ============ ============
(a) Credit Agreements - On April 27, 1989, the Company entered into senior term loan and senior revolving loan credit agreements (collectively referred to as the "Credit Agreement") with a syndicate of banks. On June 10, 1992, the Company issued $100 million aggregate principal amount of 11 7/8% Senior Secured Notes due 2003 (the "Senior Notes"). The net proceeds from the Senior Notes were used to prepay the senior term loan in full and reduce the outstanding amount of the senior revolving loan. The Company recorded extraordinary charges of $2,477,000 and $992,000 relating to the accelerated amortization of unamortized financing costs associated with the full prepayment of the senior term loan in fiscal year 1993 and the partial prepayment of the senior term loan in fiscal year 1992, respectively. F-16 79 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with the Senior Note offering, the original senior revolving loan credit agreement was amended and restated pursuant to an Amended and Restated Revolving Credit Agreement (the "Restated Revolving Credit Agreement"). The Restated Revolving Credit Agreement provides for revolving loans (the "Revolving Loan") in an aggregate principal amount not to exceed $80 million (subject to a borrowing base of a portion of eligible accounts receivable and inventory). The Company's obligation under the Revolving Loan is secured by a first priority lien on all accounts receivable and inventory of the Subsidiaries. All borrowings under the Revolving Loan will mature on April 27, 1997. Borrowings under the Revolving Loan bear interest at floating rates. At March 31, 1994 the interest rate on the Revolving Loan was 5.81%. As part of the total commitment, the Restated Revolving Credit Agreement provides for the issuance of letters of credit not to exceed $11 million. As of March 31, 1994, the Company had outstanding letters of credit of $7.5 million. At March 31, 1994, the Company had $38.2 million available under the Revolving Loan. The Restated Revolving Credit Agreement contains certain covenants and events of default, including limitations on additional indebtedness, liens, asset sales, dividend payments and other distributions from the subsidiaries to K & F and contains financial ratio requirements including cash interest coverage and consolidated net worth. The Company was in compliance with all covenants at March 31, 1994. (b) 11 7/8% Senior Secured Notes - On June 10, 1992, the Company issued $100 million of 11 7/8% Senior Secured Notes which mature on December 1, 2003. The Senior Notes are not subject to a sinking fund. The Senior Notes may not be redeemed prior to June 1, 1997. On and after June 1, 1997, the Company may redeem the Senior Notes at descending premiums from 5.28% in June 1997 to no premium after June 2001. (c) 13 3/4% Senior Subordinated Debentures - On August 10, 1989, the Company issued $210 million of 13 3/4% Senior Subordinated Debentures which mature on August 1, 2001 (the "Subordinated Debentures"). The Company is required to make sinking fund payments of $52.5 million plus accrued interest on each of August 1, 1999 and August 1, 2000. The Company may, at its option, receive credit against sinking fund payments for the principal amount of Subordinated Debentures acquired by the Company. However, the Senior Subordinated Debentures may not be redeemed prior to August 1, 1994. On and after August 1, 1994, the Company may redeem the Subordinated Debentures at descending premiums ranging from 5% in August 1994 to no premium after August 1998. (d) 14.75% Convertible Debentures - On April 27, 1989, the Company issued $30 million aggregate principal amount of 14.75% Convertible Debentures to Loral Corporation ("Loral") which mature on April 15, 2004 (the "Convertible Debentures") and pay interest semiannually on October 15 and April 15. At any time prior to April 15, 1997, the Company may, at its option, pay interest through the issuance of additional Convertible Debentures. In accordance with an amendment to the Credit Agreement, interest will continue to be paid in additional debentures until all outstanding obligations under the Credit Agreement have been paid in full or a substantial portion is refinanced; the interest rate was increased to 15.35% with a future change to 16.25% unless cash interest is paid with the April 15, 1997 interest payment. For any given six month period that the Company pays interest in cash, the applicable interest rate is 14.75%. The Convertible Debentures are convertible into 15% of the Company's outstanding voting common stock on a fully diluted basis, provided Loral delivers $5 million principal amount of the Convertible Debentures to the Company for cancellation on or prior to January 31, 1995. The Convertible Debentures are convertible at the option of the holders at any time on or after April 15, 1996, and prior to maturity or upon the occurrence of a triggering event (as defined). F-17 80 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Convertible Debentures are subordinate to the Subordinated Debentures and to all other senior debt of the Company. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of all financial instruments reported on the balance sheet at March 31, 1994 and 1993 approximate their fair value, except as discussed below. The fair value of the Company's total debt, excluding the Convertible Debentures, based on quoted market prices or on current rates for similar debt with the same maturities, was approximately $297,000,000 and $332,000,000 at March 31, 1994 and 1993, respectively. Because the Convertible Debentures are not publicly traded their fair value is not readily determinable. However, the Company believes that the Convertible Debentures have a fair value less than the Subordinated Debentures, which have rights superior to the Convertible Debentures and pay interest currently, and are trading at approximately 92% of face value. 9. CAPITAL STOCK a. The Preferred Stock is convertible into voting Common Stock on a one-for-ten basis. The Preferred Stock is entitled to vote on all matters on which the voting Common Stock will vote and is entitled to ten votes per share. b. In November 1989, the Company adopted the 1989 Stock Option Plan, which provides for the grant of nonqualified or incentive stock options to acquire 500,000 authorized but unissued shares of common stock. The options are exercisable in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant, and shall remain exercisable until the expiration of the option, 10 years from the date of the grant, at an exercise price of $8.46. Stock option activity is summarized as follows:
Years Ended March 31, --------------------------------------------------- 1994 1993 1992 ---- ---- ---- Outstanding at April 1 . . . . . . . . . 137,500 116,000 116,000 Granted . . . . . . . . . . . . . . . . . 5,000 27,500 -- Cancelled . . . . . . . . . . . . . . . . (22,500) (6,000) -- ------- ------- ------- Outstanding at March 31, . . . . . . . . 120,000 137,500 116,000 ======= ======= ======= Exercisable options outstanding . . . . . 65,625 55,000 29,000 ======= ======== ======== Available for future grants . . . . . . . 380,000 362,500 384,000 ======= ======= =======
F-18 81 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS The Company provides pension benefits to substantially all employees through two pension plans (hourly and salaried). The plans provide benefits based primarily on the participant's years of service. The salaried plan also includes voluntary employee contributions. Net pension cost included the following:
Years Ended March 31, ------------------------------------------------- 1994 1993 1992 ---- ---- ---- Service cost-benefits earned during the period . . . . . . . . . . . . . . . . . . . $ 1,361,000 $ 1,407,000 $ 988,000 Interest cost on projected benefit obligation 4,033,000 3,632,000 3,386,000 Actual return on plan assets . . . . . . . . . (3,683,000) (2,960,000) (4,323,000) Net amortization and deferred gain . . . . . . 809,000 315,000 2,642,000 ----------- ----------- ----------- Net pension cost . . . . . . . . . . . . . . $ 2,520,000 $ 2,394,000 $ 2,693,000 =========== =========== ===========
The table below sets forth the funded status of the plans as follows:
March 31, --------------------------- 1994 1993 ---- ---- Actuarial present value of benefit obligation: Vested benefit obligation . . . . . . . . . . . . . . $53,088,000 $39,867,000 =========== =========== Accumulated benefit obligation . . . . . . . . . . . . 53,535,000 42,353,000 Effect of projected future salary increases . . . . . 1,053,000 766,000 ----------- ----------- Projected benefit obligation . . . . . . . . . . . . . 54,588,000 43,119,000 Plan assets at fair market value . . . . . . . . . . . . 40,347,000 33,928,000 ----------- ----------- Unfunded projected benefit obligation . . . . . . . . . 14,241,000 9,191,000 Unrecognized prior service cost . . . . . . . . . . . . (2,786,000) (3,183,000) Unrecognized net gain (loss) . . . . . . . . . . . . . . (7,971,000) 219,000 Adjustment for minimum liability . . . . . . . . . . . . 9,704,000 3,052,000 ----------- ----------- Accrued pension cost recognized in the consolidated balance sheet . . . . . . . . . . . . . . $13,188,000 $ 9,279,000 =========== ===========
F-19 82 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Statement of Financial Accounting Standards No. 87 requires recognition in the balance sheet of an additional minimum pension liability for underfunded plans with accumulated benefit obligations in excess of plan assets. A corresponding amount is recognized as an intangible asset or a reduction of equity. At March 31, 1994, the Company's additional minimum liability was $9,704,000 with a corresponding equity reduction of $7,467,000 and intangible asset of $2,237,000. At March 31, 1993, the Company's additional minimum liability and corresponding equity reduction was $3,052,000. Investments held by the Company's pension plans consist primarily of Fortune 500 equity securities and investment grade fixed income securities. The assumptions used in accounting for the plans are as follows:
Years Ended March 31, -------------------------------------- 1994 1993 1992 ---- ---- ---- Discount rate . . . . . . . . . . . . . . . . . . . 7.75% 9.00% 9.00% Rate of increase in compensation levels . . . . . . 4.50 5.50 5.50 Expected long-term rate of return on assets . . . . 9.50 9.50 9.50
The Company offered a voluntary early retirement opportunity in fiscal year 1992, enabling eligible employees to elect early retirement. The early retirement program resulted in charges, from a curtailment, in fiscal year 1992 of $900,000. Eligible employees having one year of service also participate in one of the Company's Savings Plans (hourly or salaried). Under one of these plans, the Company matches 35% 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 $568,000, $582,000 and $631,000 for the fiscal years ended March 31, 1994, 1993 and 1992, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 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 noncontributory. Prior to the fiscal year ended March 31, 1993, the costs of these benefits were recognized as claims were paid. The total cost of postretirement benefits was $1,237,000 for the fiscal year ended March 31, 1992. In the fourth quarter of fiscal year 1993, the Company adopted, retroactive to April 1, 1992, the provisions of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires accrual of these benefits during an employee's service period. The Company elected to record the transition obligation of $77,902,000 as a one-time charge against earnings. During the first quarter of fiscal year 1994, the Company adopted various plan amendments which had the effect of reducing the accumulated postretirement benefit obligation. This reduction is being amortized as prior service cost over the average remaining years of service to full eligibility of active plan participants. F-20 83 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net periodic postretirement benefit cost included the following components:
Years Ended March 31, ----------------------------- 1994 1993 ---- ---- Service cost-benefits attributed to service during the period . . . $ 458,000 $2,287,000 Interest cost on accumulated postretirement benefit obligation . . 2,749,000 7,100,000 Net amortization and deferral . . . . . . . . . . . . . . . . . . . (4,677,000) -- ----------- ---------- Net periodic postretirement benefit cost . . . . . . . . . . . . . $(1,470,000) $9,387,000 =========== ==========
Included in the results of operations for the fiscal year ended March 31, 1994 is a $1,619,000 charge relating to net postretirement benefit cost that was capitalized in inventory at March 31, 1993. The net periodic postretirement benefit cost charged to operations was $443,000 and $7,768,000 for the fiscal years ended March 31, 1994 and 1993, respectively. Presented below are the total obligations and amounts recognized in the Company's consolidated balance sheets, inclusive of the current portion:
March 31 ------------------------------- 1994 1993 ---- ---- Accumulated postretirement benefit obligation: Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $23,989,000 $31,716,000 Fully eligible active plan participants . . . . . . . . . . . 2,159,000 18,200,000 Other active plan participants. . . . . . . . . . . . . . . . 11,882,000 35,812,000 ----------- ----------- Total accumulated postretirement benefit obligation. . . . . . . . 38,030,000 85,728,000 Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . (7,416,000) -- Unrecognized prior service cost related to plan amendments . . . . 51,536,000 -- ----------- ----------- Accrued postretirement benefit costs . . . . . . . . . . . . . . . $82,150,000 $85,728,000 =========== ===========
The assumed annual rate of increase in the per capita cost of covered health care benefits was 14.1% and 15.0% in fiscal year 1994 and 1993, respectively. The rate was assumed to decrease gradually to 6.5% by fiscal year 2002 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. A change in the assumed health care trend rates by 1% in each year would change the accumulated postretirement benefit obligation at March 31, 1994 by $3,400,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for the fiscal years ended March 31, 1994 by $600,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation as of March 31, 1994 and 1993 was 7.75% and 9%, respectively. F-21 84 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS The Company is party to various noncancelable 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 March 31, Amount --------------------- ------ 1995 $4,422,000 1996 4,195,000 1997 4,103,000 1998 4,155,000 1999 4,185,000 Thereafter 9,971,000 Rental expense was $4,190,000, $3,941,000 and $4,190,000 for the fiscal years ended March 31, 1994, 1993 and 1992, 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. 14. INCOME TAXES Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." In connection with such adoption, there was no impact to the financial statements as the Company has provided a 100 percent valuation allowance against its net deferred tax benefit. The components of the net deferred tax benefit are as follows:
March 31, April 1, 1994 1993 ----------- -------- Tax net operating loss carryforwards . . . . . . . . . . . . . . . $ 43,135,000 $28,215,000 Temporary differences: Postretirement and other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 37,337,000 37,526,000 Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 28,223,000 29,924,000 Program participation costs . . . . . . . . . . . . . . . . . . (6,651,000) (6,759,000) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,179,000 7,938,000 ------------ ----------- Net deferred tax benefit . . . . . . . . . . . . . . . . . . . . . $109,223,000 $96,844,000 ============ ===========
In the event of future recognition of a 100 percent reduction of the valuation allowance, income tax expense and goodwill would be reduced by approximately $63 million and $46 million, respectively. F-22 85 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's effective tax rate of zero percent results from non-recognition of tax net operating losses and temporary differences as compared to the federal statutory rate (benefit of 35%). The Company has tax net operating loss carryforwards of approximately $110 million at March 31, 1994. The tax net operating losses expire from 2005 through 2009, with $16 million of carryforwards expiring in 2005. 15. GEOGRAPHIC SEGMENT INFORMATION The Company operates primarily in one industry segment, the manufacture of aircraft products. Sales and assets by geographic location are as follows:
Years Ended March 31, ---------------------------------------------- 1994 1993 1992 ---- ---- ---- Sales: United States . . . . . . . . . . . . . . . . . . $224,053,000 $275,068,000 $284,002,000 Europe . . . . . . . . . . . . . . . . . . . . . 4,973,000 3,961,000 55,316,000 Eliminations of interdivisional sales . . . . . (2,895,000) (1,922,000) (43,828,000) ------------ ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000 ============ ============ ============ Operating income: United States (*) . . . . . . . . . . . . . . . $ 20,409,000 $ 32,552,000 $ 29,606,000 Europe . . . . . . . . . . . . . . . . . . . . . (91,000) (311,000) 1,070,000 Eliminations of operating (loss) profit from interdivisional sales . . . . . . . . . (101,000) 35,000 6,779,000 ------------ ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $ 20,217,000 $ 32,276,000 $ 37,455,000 ============ ============ ============ Identifiable assets: United States . . . . . . . . . . . . . . . . . $444,827,000 $487,596,000 $514,813,000 Europe . . . . . . . . . . . . . . . . . . . . . 2,259,000 2,476,000 4,265,000 Adjustments and eliminations . . . . . . . . . . (206,000) (104,000) (140,000) ------------ ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $446,880,000 $489,968,000 $518,938,000 ============ ============ ============
Identifiable assets are all assets identified with operations in each geographic area. *Includes operating income in connection with Aircraft Braking Systems Corporation's sales from the United States to foreign divisions at transfer prices, which prices represent substantially all of the profit recorded by Aircraft Braking Systems Corporation in connection with such export sales. Sales to U.S. Government agencies for the fiscal years ended March 31, 1994, 1993 and 1992 were $34,473,000, $62,784,000 and $92,405,000, respectively. During the fiscal year ended March 31, 1992, Aircraft Braking Systems consolidated its Moerfelden, Germany, distribution warehouse operations into the product support facility in Slough, England. The billings for commercial product support sales previously billed from the Moerfelden and Slough facilities, representing the majority of the Company's foreign sales, are now generated from Aircraft Braking Systems' Akron facility. F-23 86 K & F INDUSTRIES, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RELATED PARTY TRANSACTIONS Bernard L. Schwartz ("BLS") owns 35% of the capital stock of the Company and serves as Chairman of the Board of Directors and Chief Executive Officer. BLS is also Chairman and Chief Executive Officer of Loral. The Company has entered into 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 at least 1,350,000 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 and other advisers ranging from 5% to 10% of earnings in excess of $50 million before interest, taxes and amortization. No bonuses were earned under this plan during fiscal years ended March 31, 1994, 1993 and 1992. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial adviser to the Company. The Company pays Lehman Brothers customary fees for services rendered on an as-provided basis. The agreement may be terminated by the Company or Lehman Brothers upon certain conditions. In connection with the Senior Note Offering on June 10, 1992, Lehman Brothers received underwriting discounts and a commission of $2.25 million. Pursuant to the Services Agreement, Loral provides the Company with certain services which it previously provided to the subsidiaries. These services include, among others, security, fire protection, yard service and road maintenance, power plant and equipment calibration as well as other services on an as needed basis (the "Loral Services"). Certain of the Loral Services are used by the Company on a limited basis. The charge for these services is based on actual costs incurred. Billings from Loral were $3.0 million, $3.7 million and $4.5 million in fiscal years 1994, 1993 and 1992, respectively. Billings to Loral were $1.1 million, $1.1 million and $1.1 million in fiscal years 1994, 1993 and 1992. Purchases from Loral were $4.2 million, $3.7 million and $8.8 million in fiscal years 1994, 1993 and 1992. Included in accounts receivable and accounts payable at March 31, 1994 is $.6 million and $2.0 million. Included in accounts receivable and accounts payable at March 31, 1993, is $1.6 million and $3.7 million. F-24 87 ======================================================= ======================================================= No dealer, salesman or any other person has been $100,000,000 authorized to give any information or to make any representations not contained in this Prospectus, and, K & F INDUSTRIES, INC. if given or made, such information or representation must not be relied upon as having been authorized by 11-7/8% SENIOR SUBORDINATED the Company or any of the Underwriters. This DEBENTURES DUE 2003 Prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. ----------------- ------------------------------------------------------- TABLE OF CONTENTS PROSPECTUS NOVEMBER 30, 1994 PAGE ---- ------------------------------------------------------- Additional Information 2 Prospectus Summary 3 The Company 7 Risk Factors 9 Use of Proceeds 12 Selected Financial Data 13 Management's Discussion and Analysis of Results of Operations and Financial Condition 14 Business 18 Management 27 Ownership of Capital Stock 36 Description of Senior Notes 38 Description of Certain Indebtedness 56 Certain Transactions 59 Plan of Distribution 60 Legal Matters 60 Experts 60 Index to Financial Statements F-1 LEHMAN BROTHERS ======================================================= =======================================================
88 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all fees and expenses paid by the Company in connection with the issuance and distribution of the securities being registered hereby (other than underwriting discounts and commissions). SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,250 NASD fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . . . . 44,142 Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 47,575 Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,042 Trustee's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,624 Qualified Independent Underwriter's fees and expenses . . . . . . . . . . . . 61,913 Rating services registration fees . . . . . . . . . . . . . . . . . . . . . . 60,000 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,595 ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,005,641 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware provides for the indemnification of officers and directors under certain circumstances against expenses incurred in successfully defending against a claim and authorizes Delaware corporations to indemnify their officers and directors under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their being or having been an officer or director. Pursuant to Section 102(b)(7) of the General Corporation Law of the State of Delaware, the Certificate of Incorporation of the Registrant provides that the directors of the Registrant, individually or collectively, shall not be held personally liable to the Registrant or its stockholders for monetary damages for breaches of fiduciary duty as directors, except that any director shall remain liable (1) for any breach of the director's fiduciary duty of loyalty to the Registrant or its stockholders, (2) for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (3) for liability under Section 174 of the General Corporation Law of the State of Delaware or (4) for any transaction from which the director derived an improper personal benefit. The by-laws of the Registrant provide for indemnifications of its officers and directors to the full extent authorized by law. Reference is made to the Underwriting Agreement and the Independent Underwriting Agreement, the proposed forms of which were filed herewith as Exhibits 1.01 and 1.02, respectively, for additional indemnification provisions. II-1 89 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Common Stock On April 27, 1989 in connection with the Acquisition, the Registrant sold shares of Common Stock as follows: Purchaser Shares Purchase Price --------- ------ -------------- Lehman Brothers Holdings Inc. 175,000 Voting Common Stock $14,807,693 475,000 Non-Voting Common Stock 40,192,307 ----------- $55,000,000 Bernard L. Schwartz 350,000 Voting Common Stock $10,000,000
On July 28, 1989, Lehman Brothers Holdings Inc. sold 32,499 shares of Non-Voting Common Stock to CBC Capital Partners, Inc. who subsequently exchanged the shares of Non-Voting Common Stock for an equal number of shares of Convertible Preferred Stock and one share of Voting Common Stock. On July 28, 1989, Lehman Brothers Holdings, Inc. sold its remaining shares of Common Stock (at the price and upon the same terms at which Lehman Brothers Holdings Inc. purchased such Common Stock) to certain affiliates of Shearson Lehman Brothers Holdings, Inc. which were subsequently exchanged for an equal number of shares of Convertible Preferred Stock as follows: Shares of Convertible Name Preferred Stock ---- --------------- Lehman Brothers Merchant Banking Portfolio Partnership L.P. . . . . . . . . . . . . . 301,143 Lehman Brothers Offshore Investment Partnership L.P. . . . . . . . . . . . . . . . . 81,017 Lehman Brothers Offshore Investment Partnership - Japan L.P. . . . . . . . . . . . . 30,800 Lehman Brothers Capital Partners II, L.P. . . . . . . . . . . . . . . . . . . . . . . 204,540
On November 15, 1989, the Board of Directors approved a ten-for-one Common Stock split for all holders of Common Stock on such date. Total Common Stock and Preferred Stock outstanding subsequent to the events described above are 3,500,010 and 649,999, respectively. II-2 90 On July 22, 1991, the Registrant sold shares of Common Stock and Convertible Preferred Stock as follows:
Shares of Shares of Voting Convertible Common Preferred Purchase Stock Stock Price --------- ----------- -------- Bernard L. Schwartz 1,346,154 $ 3,846,154 Lehman Brothers Merchant Banking Portfolio Partnership, L.P. 115,353 9,760,607 Lehman Brothers Offshore Investment Partnership L.P. 31,713 2,683,399 Lehman Brothers Offshore Investment Partnership - Japan, L.P. 12,050 1,019,576 Lehman Brothers Capital Partners II, L.P. 78,384 6,632,572 CBC Capital Partners, Inc. 12,500 1,057,692 --------- ------- ----------- 1,346,154 250,000 $25,000,000 ========= ======= ===========
On September 2, 1994 the Registrant sold shares of Common Stock and Convertible Preferred Stock as follows:
Shares of Shares of Voting Convertible Common Preferred Purchase Stock Stock Price --------- ----------- -------- Bernard L. Schwartz 687,273 $ 1,963,636 Lehman Brothers Merchant Banking Portfolio Partnership, L.P. 61,891 5,236,910 Lehman Brothers Offshore Investment Partnership, L.P. 17,015 1,439,751 Lehman Brothers Offshore Investment Partnership - Japan, L.P. 6,498 549,839 Lehman Brothers Capital Partners II, L.P. 42,232 3,573,500 ------- ------- ----------- 687,273 127,636 $12,763,636 ======= ======= ===========
On September 2, 1994, K & F retired the $65.4 million principal amount of 14 3/4% Subordinated Convertible Debentures due 2004 held by Loral Corporation, in exchange for $12.76 million in cash and 4,589,938 shares of Class B common stock representing 22.5% of equity. The cash portion of this transaction was funded with the proceeds from the sale of capital stock to K & F's principal stockholders for which stockholders received a total of 687,273 shares of Class A common stock and 127,636 shares of preferred stock. As a result, K & F stockholders' equity was increased by $65.4 million and long-term debt was reduced by an equal amount. (See Note 7 to the September 30, 1994 consolidated financial statements.) Debt Securities On April 27, 1989, the Registrant sold $180 million aggregate principal amount of its Subordinated Bridge Notes due October 27, 1989 to Lehman Brothers Holdings, Inc. The Subordinated Bridge Notes were repaid in full on August 10, 1989. The shares of Common Stock and the Preferred Stock issued as provided above were not registered under the Securities Act of 1933 (the "Act"). All of such shares of Common and Preferred Stock were issued in reliance on the exemption from registration provided by Section 4(2) of the Act. II-3 91 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS. 1.01 - Form of Underwriting Agreement(5) 1.02 - Form of Qualified Independent Underwriting Agreement(2) 2.01 - Agreement or Sale and Purchase of Assets dated March 26, 1989 between Loral Corporation and the Registrant 3.01 - Restated Certificate of Incorporation of K & F Industries, Inc. (6) 3.02 - Amended and Restated By-Laws of K & F Industries, Inc.(6) 4.01 - Indenture for the 13.75% Senior Subordinated Debentures Due 2001(1) 4.02 - Indenture for the 14.75% Subordinated convertible debentures Due 2004(1) 4.03 - First Supplemental Indenture dated as of July 22, 1991, to Convertible Debenture Indenture(4) 4.04 - Form of Second Supplemental Indenture dated as of June 10, 1992, to Convertible Debenture Indenture(5) 4.05 - Form of Indenture dated as of June 1, 1992 for the 11 7/8% Senior Secured Notes Due 2003(5) 4.06 - Form of 11 7/8% Senior Secured Notes Due 2003(5) 4.07 - Form of Pledge Agreement(5) 5.01 - Opinion of Davis Polk & Wardwell(1) 8.01 - Tax Opinion of Davis Polk & Wardwell(1) 9.01 - Stockholders Agreement dated April 27, 1989 among the Registrant, Lehman Brothers Holdings Inc. ("LBH") and Bernard L. Schwartz ("BLS")(1) 10.01 - Credit Agreement Dated as of April 27, 1989 among the Registrant, Manufacturers Hanover Trust Company, as Agent and the Banks named therein(1) 10.02 - Revolving Credit Agreement dated as of April 27, 1989, among Aircraft Braking Systems Corporation, Engineered Fabrics Corporation, the Agent and the Banks named therein(1) 10.03 - Securities Purchase Agreement dated as of April 27, 1989, among the Registrant, BLS and LBH(1) 10.04 - Assumption Agreement dated as of April 27, 1989(1) 10.06 - Senior Subordinated Loan Agreement dated as of April 27, 1989 among the Registrant and LBH(1) 10.07 - Director Advisory Agreement dated as of april 27, 1989, among the Registrant and BLS(1) II-4 92 (A) EXHIBITS (CONTINUED): 10.08 - Shared Services Agreement dated April 27, 1989, among Loral, the Registrant, Aircraft Braking Systems Corporation and Engineered Fabrics Corporation(1) 10.09 - Non-Competition Agreement dated as of April 27, 1989, between the Registrant and BLS(1) 10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees(5) 10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees(5) 10.12 - Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees - Plan A(1) 10.13 - The Loral Systems Group Release and Separation Allowance Plan(1) 10.14 - Letter Agreement dated April 27, 1989, between the Registrant and Shearson Lehman Brothers Inc.(1) 10.15 - Amendment and Waiver dated as of July 14, 1989(1) 10.16 - Amendment to Credit Agreement dated as of July 31, 1989, between K & F Industries, the Subsidiaries and the Banks named therein(2) 10.17 - K & F Industries, Inc. 1989 Stock Option Plan(2) 10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan(2) 10.19 - Amendment to the Credit Agreement dated as of June 26, 1991(3) 10.21 - Securities Purchase Agreement dated as of July 22, 1991, among the Registrant, BLS and the Lehman Investors(4) 10.22 - Interest Rate Protection Agreement between K & F Industries, Inc. and Lehman Brothers Special Financing, Inc(4) 10.23 - Interest Rate Protection Agreement between K & F Industries, Inc. and Manufacturers Hanover Trust Company(4) 10.24 - Securities Purchase Agreement among K & F Industries, Inc., BLS and the Lehman Brothers Partnerships dated September 2, 1994(6) 10.25 - Amended and Restated Stockholders Agreement dated as of September 2, 1994 by and among K & F Industries, Inc., BLS, the Lehman Brothers Partnerships, CBC Capital Partners, Inc. and Loral Corporation(6) 10.26 - Agreement dated as of September 2, 1994 between K & F Industries, Inc. and Loral Corporation(6) 10.27 - Form of Amended and Restated Revolving Credit Agreement dated as of June 10, 1992, among Chemical Bank, the banks named therein, Aircraft Braking Systems Corporation and Engineered Fabrics Corporation(5) II-5 93 (A) EXHIBITS (CONTINUED): 10.28 - Waiver and Consent dated as of August 26, 1994(6) 10.29 - Amendment of Stockholders Agreement dated November 8, 1994(6) 10.30 - Securities Conversion Agreement among K & F Industries, Inc. and the Converting Stockholders, dated November 8, 1994(6) 12.01 - Statement of computations of ratio of earnings (deficiency) to fixed charges(5) 12.02 - Statement of computation of pro forma deficiency ratio of earnings to fixed charges(5) 21.01 - Subsidiaries of the Registrant(1) 23.01 - Consent and Report on Schedule of Deloitte & Touche LLP. 24.01 - Powers of Attorney (included on signature page). 26.01 - Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of the Connecticut National Bank, with respect to the indenture for the 13 3/4% Senior Subordinated Debentures due 2001(1) 26.02 - Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of the Bank of New York, with respect to the Indenture for the 11 7/8% Senior Secured Notes(5) 27.01 - Financial Data Schedule(6) ------------------------- (1) Previously filed, as an exhibit to the Company's Registration Statement on Form S-1, No. 33-29035. (2) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990. (3) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1991. (4) Previously filed, as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. (5) Previously filed, as an exhibit to the Company's Registration Statement on Form S-1, No. 33-47028. (6) Previously filed, as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (b) Financial Statement Schedules. X Supplementary Income Statement Information All other schedules are omitted because they are not applicable or the required information is shown in they financial statements or notes thereto. II-6 94 Item 17. Undertakings The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement (i) to include any prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment hereto) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that the undertakings set forth in subparagraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 that are incorporated by reference in this registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and (4) That, for the purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 hereof, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 95 SIGNATURES Exhibit 24.01 Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, New York on the 30th day of November, 1994. K & F Industries By: KENNETH M. SCHWARTZ ------------------- Kenneth M. Schwartz Chief Financial Officer POWER OF ATTORNEY We the undersigned directors of K & F Industries, Inc. do hereby constitute and appoint Kenneth M. Schwartz our true and lawful attorney and agent, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933 and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Post-Effective Amendment No. 4, including specifically, but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 4 to the Registration Statement on Form S-1 has been signed by the following persons in the capacity and on the dates indicated. Signature Title Date --------- ----- ---- /s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief November 30, 1994 - ---------------------------- Executive Officer and Director Bernard L. Schwartz (principal executive officer) KENNETH M. SCHWARTZ Chief Financial Officer (principal November 30, 1994 - -------------------- financial and accounting officer) Kenneth M. Schwartz /s/ HERBERT R. BRINBERG Director November 30, 1994 - ----------------------------- Herbert R. Brinberg /s/ RONALD H. KISNER Director November 30, 1994 - -------------------------------- Ronald H. Kisner /s/ JOHN R. PADDOCK Director November 30, 1994 - --------------------------------- John R. Paddock /s/ JAMES A. STERN Director November 30, 1994 - ----------------------------------- James A. Stern /s/ A. ROBERT TOWBIN Director November 30, 1994 - -------------------------------- A. Robert Towbin /s/ ALAN H. WASHKOWITZ Director November 30, 1994 - ----------------------------- Alan H. Washkowitz
96 K & F INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Column A Column B - --------------------------------------------------------------------------------------------------------------------- Charges to costs Item and expenses - --------------------------------------------------------------------------------------------------------------------- Years Ended March 31, --------------------------------------------------------------- 1994 1993 1992 ---- ---- ---- 1. Maintenance and repairs $7,165,000 $8,374,000 $8,644,000 2. Taxes, other than payroll and income 3,508,000 3,034,000 3,317,000 taxes
97 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ------------ 23.01 Consent and Report on Schedule of Deloitte & Touche LLP. EX-23.01 2 CONSENT AND REPORT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.01 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of K & F Industries, Inc. We consent to the use in this Post-Effective Amendment No. 4 To Registration Statement No. 33-47028 of K & F Industries, Inc. of our report dated May 4, 1994, appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule of K & F Industries, Inc. listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP New York, New York November 28, 1994 -----END PRIVACY-ENHANCED MESSAGE-----