-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QOsdzjzugxO9Sx3b8pYb/UhJ4yhA0+HOSqcCuuwViodY7TSQ/aoYVZ/pGZikbKtz B4zaSd7NFn6Dxy1e9X2GkA== 0000950123-99-002824.txt : 19990402 0000950123-99-002824.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950123-99-002824 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K&F INDUSTRIES INC CENTRAL INDEX KEY: 0000851797 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341614845 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-40977 FILM NUMBER: 99580999 BUSINESS ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2122970900 MAIL ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 10-K405 1 FINANCIAL DATA SCHEDULE 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 33-29035 K & F INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1614845 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 600 THIRD AVENUE, NEW YORK, NY 10016 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 297-0900 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] There is no trading market for the Company's common stock. As of March 1, 1999, there were 740,398 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM I. BUSINESS GENERAL K & F Industries, Inc. ("K & F" or the "Company") was incorporated in Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's leading manufacturers of aircraft wheels, brakes and anti-skid systems for commercial transport, general aviation and military aircraft. K & F sells its products to virtually all major airframe manufacturers and most commercial airlines and to the United States and certain foreign governments. During the year ended December 31, 1998, approximately 88% of the Company's total revenues were derived from sales made by Aircraft Braking Systems. In addition, K & F through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and over one-half of the domestic military market for such products. Engineered Fabrics also manufactures and sells iceguards and specialty coated fabrics used for storage, shipping, environmental and rescue applications for commercial and military uses. During the year ended December 31, 1998, approximately 12% of the Company's total revenues were derived from sales made by Engineered Fabrics. Aircraft Braking Systems and its predecessors have been leaders in the design and development of aircraft wheels, brakes and anti-skid systems, investing significant resources to refine existing braking systems, develop new technologies and design braking systems for new airframes. The Company has carefully directed its efforts toward expanding Aircraft Braking Systems' presence in the commercial and general aviation segments of the aircraft industry, focusing particularly on medium- and short-range commercial aircraft. These aircraft typically make more frequent landings than long-range commercial aircraft and correspondingly require more frequent replacement of brake parts. Effective December 31, 1996, the Company changed its fiscal year-end from March 31 to December 31. On October 15, 1997, the Company completed a recapitalization that consisted of a refinancing of its indebtedness and the purchase of a portion of its outstanding capital stock. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Recapitalization.") THE AIRCRAFT WHEEL AND BRAKE INDUSTRY Aircraft manufacturers are required to obtain regulatory airworthiness certification of their commercial aircraft by the FAA, by the United States Department of Defense in the case of military aircraft, or by similar agencies in most foreign countries. This process, which is both costly and time consuming, involves testing the entire airframe, including the wheels and braking system, to demonstrate that the airframe in operation complies with relevant governmental requirements for safety and performance. Generally, replacement parts for a wheel and brake system which has been certified for use on an airframe may only be provided by the original manufacturer of such wheel and brake system. Since most modern aircraft have a useful life of 25 years or more and require replacement of certain components of the braking system at regular intervals, sales of replacement parts are expected to provide a long and steady source of revenues for the manufacturer of the braking system. Due to the cost and time commitment associated with the aircraft certification process, competition among aircraft wheel and brake suppliers most often occurs at the time the airframe manufacturer makes its initial installation decision. Generally, competing suppliers submit proposals in response to requests for bids from manufacturers. Selections are made by the manufacturer on the basis of technological superiority, conformity to design criteria established by the manufacturer and pricing considerations. Typically, general aviation aircraft manufacturers will select one supplier of wheels and brakes for a particular aircraft. In the commercial transport market, however, there will often be "dual sourcing" of wheels and brakes. In such case, an airframe manufacturer may approve and receive FAA certification to configure a particular airframe with equipment provided by two or more wheel and brake manufacturers. Where two suppliers have been certified, 1 3 the aircraft customer, such as a major airline, will designate the original equipment to be installed on the customer's aircraft. Competition among two certified suppliers for that airline's initial installation decision generally focuses on such factors as the system's "cost-per-landing," given certain assumptions concerning the frequency of replacements required and the impact that the weight of the system has on the airline's ability to load the aircraft with passengers, freight or fuel, and the technical operating performance characteristics of the wheel and brake systems. Once selected, airlines infrequently replace entire wheel and brake systems because of the expense. In accordance with industry practice in the commercial aviation industry, aircraft wheel and brake suppliers customarily sell original wheel and brake equipment below cost in order to win selection of their products by airframe manufacturers and airlines. These investments are typically recouped through sale of replacement parts. Recovery of pricing concessions and design costs for each airframe's wheels and brakes is contingent on a number of factors but generally occurs prior to the end of the useful life of the particular aircraft. Price concessions on original wheel and brake equipment are not customary in the military market. Although manufacturers of military aircraft generally select only one supplier of wheels and brakes for each model, the government has approved at times the purchase of specific component replacement parts from suppliers other than the original supplier of the wheel and brake system. PRODUCTS Aircraft Braking Systems. Aircraft Braking Systems is one of the world's leading manufacturers of wheels, steel and carbon brakes and anti-skid systems for commercial transport, general aviation and military aircraft. Since 1989, Aircraft Braking Systems has carefully directed its efforts toward expanding its presence in the commercial and general aviation segments of the aircraft industry, focusing particularly on high-cycle, medium- and short-range commercial aircraft and carbon equipped executive jets. As a result of this strategic focus, during this period, Aircraft Braking Systems has added approximately 1,500 medium- and short-range commercial aircraft to the portfolio of aircraft using its products. These aircraft typically make frequent landings and correspondingly require more frequent replacement of brake parts. The braking systems produced by Aircraft Braking Systems are either carbon or steel-based. While steel-based systems typically are sold for less than carbon-based systems, such systems generally require more frequent replacement because their steel brake pads tend to wear more quickly. The Company's commercial transport fleet continued to grow during the year ended December 31, 1998, due to an increase in the number of new aircraft entering service, as well as a slower than expected retirement rate of older aircraft. Airlines have responded to FAA regulatory noise abatement requirements by outfitting their older DC-9 fleets with engine hushkits and aircraft structural overhauls which effectively add fifteen years of service life to the aircraft. As of December 31, 1998, there were 787 DC-9 aircraft in service and engine hushkits have been installed and ordered for 496 aircraft. Airlines such as Northwest Airlines, Scandinavian Air Systems, Air Tran and Air Canada have opted for DC-9 life extension refurbishment programs for a portion of their fleet, to meet capacity needs. The Company expects to produce replacement parts for these aircraft over their remaining life. Approximately 75% of Aircraft Braking Systems' revenues are derived from the sale of replacement parts. As of December 31, 1998, the Company's products had been installed on over 30,000 commercial transport, general aviation and military aircraft. Commercial transport aircraft include the DC-9, DC-10, Fokker FO-100/70, Fokker F-28, Canadair Regional Jet and Saab 340 on all of which Aircraft Braking Systems is the sole-source supplier. In addition, the Company supplies spare parts for the MD-80 program on a dual-source wheel and brake program. Aircraft Braking Systems has been successful in having its wheels and brakes selected for use on a number of new high-cycle airframe designs. These aircraft include the Airbus A-320, A-321, Saab 2000 and the MD-90. Most recently, Aircraft Braking Systems has been successful in winning the CRJ-700 continuing its sole-source position on the Bombardier regional jets. Since its introduction in late 1992, Bombardier has received firm orders and options for over 1,000 Canadair Regional jets with approximately 290 aircraft currently in service. The CRJ-700 is a 70 passenger plane which is a stretch version of the 50 passenger Canadair Regional Jet. In addition, the Company is certified as a supplier of wheels and carbon brakes for the Airbus A-330 and A-340 wide-body jets. 2 4 Aircraft Braking Systems is one of two suppliers of wheels and carbon brakes on the Airbus A-321, the European consortium's 186-seat "stretch" version of its popular A-320 standard body twin-jet. Airbus has booked orders for over 250 A-321 aircraft. Of the 113 aircraft delivered to date, Aircraft Braking Systems has provided wheels and brakes for 69 of these aircraft. Aircraft Braking Systems' brake control systems, which are integrated into a total braking system, are designed to minimize the distance required to stop an aircraft by controlling applied brake pressure to maximize the braking force while also preventing the wheels from locking and skidding. Of the three principal competitors in the wheel and brake industry, Aircraft Braking Systems, Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company, Aircraft Braking Systems is the only significant manufacturer of anti-skid systems providing approximately 15% of the total market. Because of the sensitivity of anti-skid systems to variations in brake performance, the Company's management believes that its braking system integration capability gives Aircraft Braking Systems a competitive advantage over its two largest competitors. Other products manufactured by the Company include helicopter rotor brakes and brake temperature monitoring equipment for various types of aircraft. The following table shows the distribution of sales of aircraft wheels, brakes and anti-skid systems to total sales of the Company:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ------------ DECEMBER 31, 1998 1997 1996 ---- ---- ----------------- Wheels and brakes..................................... 80% 80% 81% Anti-skid systems..................................... 8% 8% 9% -- -- -- Total....................................... 88% 88% 90% == == ==
Engineered Fabrics. The Company believes Engineered Fabrics is the largest aircraft fuel tank manufacturer in the world, serving approximately 90% of the worldwide general aviation and commercial transport market and over half of the domestic military market for such products. Engineered Fabrics' programs include new production or replacement parts programs for the U.S. Navy's F-18 C/D and E/F aircraft and F-14, F-15, F-16 and C-130 aircraft. Military helicopter fuel tank programs include the UH-60, SH-60, CH/MH-53 and RAH-66 platforms with Sikorsky, CH-47 with Boeing, and the V-22 with Bell/ Boeing. Many of these platforms also utilize Engineered Fabrics iceguards for deicing and anti-icing of the rotor blades and inlets. Commercial helicopter applications include the Boeing MD-500 and 600 and the Bell 214ST and A/B609. During the year ended December 31, 1998, approximately 12% of the Company's total revenues were derived from sales made by Engineered Fabrics. Fuel tanks, manufactured by combining multiple layers of coated fabrics and adhesives, are sold for use in commercial transport, military and general aviation aircraft. During the year ended December 31, 1998, sales of fuel tanks accounted for approximately 77% of Engineered Fabrics' total revenues. For military helicopter applications, Engineered Fabrics' fuel tanks feature encapsulated layers of rubber which expand in contact with fuel thereby sealing off holes or gashes caused by bullets or other projectiles penetrating the walls of the fuel tank. The Company manufactures crash-resistant fuel tanks for helicopters, military aircraft and race cars that significantly reduce the potential for fires, leaks and spilled fuel following a crash. Engineered Fabrics is the only known supplier of polyurethane fuel tanks for aircraft, which are substantially lighter and more flexible than their metal or nitrile counterparts and therefore cost-advantageous. Iceguards manufactured by Engineered Fabrics are heating systems made from layered composite materials that are applied on engine inlets, propellers, rotor blades and tails. Encapsulated in the material are heating elements which are connected to the electrical system of the aircraft and, when activated by the pilot, the system provides the protection. Engineered Fabrics also produces a variety of products utilizing coated fabrics such as oil containment booms, towable storage bladders, heavy lift bags and pillow tanks. Oil containment booms are air-inflated cylinders that are used to confine oil spilled on the high seas and along coastal waterways. Towable storage 3 5 bladders are used for storage and transportation of the recovered oil after removal from the water. Heavy lift bags, often used in emergency situations, are inserted into tight spaces and inflated to lift heavy loads short distances. Pillow tanks are collapsible rubberized containers used as an alternative to steel drums and stationary storage tanks for the storage of liquids. SALES AND CUSTOMERS K & F sells its products to more than 175 airlines, airframe manufacturers, governments and distributors within each of the commercial transport, general aviation and military aircraft markets. Sales to the U.S. government represented approximately 14%, 12%, and 12% of total sales for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. No other customer accounted for more than 10% of total sales. The following table shows the distribution of total Company revenues by respective market, as a percentage of total revenues:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ------------ DECEMBER 31, 1998 1997 1996 ---- ---- ----------------- Commercial transport................................. 64% 64% 63% Military (U.S. and foreign).......................... 18% 18% 18% General aviation..................................... 18% 18% 19% --- --- --- 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 airline's fleet. Some of the Company's airline customers include American Airlines, Delta Air Lines, Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines, United Airlines, US Airways and Continental Airlines. The Company provides parts to the three largest commercial aircraft manufacturers; Boeing, Airbus and Bombardier. Military. The Company is the largest supplier of wheels, brakes and fuel tanks to the U.S. military and also supplies the militaries of many foreign governments. The Company's products are used on a variety of fighters, training aircraft, transports, cargo planes, bombers and helicopters. Some of the military aircraft using these products are the F-2 (formerly the FS-X), F-4, F-14, F-15, F-16, F-18, F-117A, A-10, B-1B, B2, C-130, C-130J and the C-141. Substantially all of the Company's military products are sold to the Department of Defense, foreign governments or to airframe manufacturers including the Lockheed Martin Corporation ("Lockheed Martin"), Boeing, Sikorsky, Bell, Saab and AIDC. Brake control systems manufactured for the military are used on the F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and IDF aircraft. General Aviation. The Company believes it is the industry's largest supplier of wheels, brakes and fuel tanks for general aviation aircraft. This market includes personal, business and executive aircraft. Customers include airframe manufacturers, such as Gulfstream, Raytheon Aircraft, Learjet, Canadair, Cessna, Dassault and Israeli Aircraft Industries ("IAI"), and distributors, such as Aviall. Anti-skid systems are supplied by the Company to Gulfstream, Dassault and other aircraft manufacturers. General aviation aircraft using the Company's equipment exclusively include the Beech Starship and Beech 400 A/T series of aircraft, the Lear series 20, 30, 31A, 55 and 60, the Gulfstream G-I, G-II, G-III and G-IV, the IAI 1123, 1124, 1125 Astra, Astra SPX and Galaxy, the Raytheon Hawker Horizon and the Falcon 10, 100, 20, 200, 50 and 50EX. 4 6 FOREIGN CUSTOMERS The Company supplies products to a number of foreign aircraft manufacturers, airlines and foreign governments. Substantially all sales to foreign customers are in U.S. dollars and, therefore, the impact of currency translations is immaterial to the Company. The following table shows sales of the Company to both foreign and domestic customers:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ------------ DECEMBER 31, 1998 1997 1996 ---- ---- ----------------- Domestic sales..................................... 57% 57% 57% Foreign sales...................................... 43% 43% 43% --- --- --- Total.................................... 100% 100% 100% === === ===
INDEPENDENT RESEARCH AND DEVELOPMENT The Company employs scientific, engineering and other personnel to improve its existing product lines and to develop new products and technologies in the same or related fields. At December 31, 1998, the Company employed approximately 167 engineers (of whom 30 held advanced degrees); approximately 27 of such engineers (including 13 holding advanced degrees) devoted all or part of their efforts toward a variety of projects including refining carbon processing techniques to create more durable braking systems, upgrading existing braking systems to provide enhanced performance, and developing new technologies to improve the Company's products. The costs incurred relating to independent research and development for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, were $13.7 million, $10.9 million and $8.6 million, respectively. PATENTS AND LICENSES The Company has a large number of patents related to the products of its subsidiaries. While in the aggregate its patents are of material importance to its business, the Company believes no single patent or group of patents is of material importance to its business as a whole. COMPETITION The Company faces substantial competition from a few suppliers in each of its product areas. Its principal competitors that supply wheels and brakes are Allied Signal's Aircraft Landing Systems Division and the B.F. Goodrich Company. Both significant competitors are larger and have greater financial resources than the Company. The principal competitor for anti-skid systems is the Hydro-Aire Division of Crane Co. The principal competitors for fuel tanks are American Fuel Cell & Coated Fabrics Company and Aerazur of France, both owned by Zodiac S.A., a French Company. BACKLOG Backlog at December 31, 1998 and 1997 amounted to approximately $174.6 million and $172.7 million, respectively. Backlog consists of firm orders for the Company's products which have not been shipped. Approximately 90% of total Company backlog at December 31, 1998 is expected to be shipped during the year ending December 31, 1999, with the balance expected to be shipped over the subsequent two-year period. No significant seasonality exists for sales of the products manufactured by the Company. Of the total Company backlog at December 31, 1998, approximately 21% was directly or indirectly for end use by the U. S. Government (the "Government"), substantially all of which was for use by the Department of Defense. For certain risks associated with Government contracts, see "Government Contracts" discussed below. 5 7 GOVERNMENT CONTRACTS For the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, approximately 14%, 12%, and 12%, respectively, of the Company's total sales were made to agencies of the Government or to prime contractors or subcontractors of the Government. All of the Company's defense contracts are firm, fixed-price contracts under which the Company agrees to perform for a predetermined price. Although the Company's fixed-price contracts generally permit the Company to keep unexpected profits if costs are less than projected, the Company does bear the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls and standard provisions for termination at the convenience of the Government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and to an allowance for profit. Foreign defense contracts generally contain comparable provisions relating to termination at the convenience of the government. Companies supplying defense-related equipment to the Government are subject to certain additional business risks peculiar to that industry. Among these risks are the ability of the Government to unilaterally suspend the Company from new contracts pending resolution of alleged violations of procurement laws or regulations. Other risks include a dependence on appropriations by the Government, changes in the Government's procurement policies (such as greater emphasis on competitive procurements) and the need to bid on programs in advance of design completion. A reduction in expenditures by the Government for aircraft using products of the type manufactured by the Company, or lower margins resulting from increasingly competitive procurement policies, or a reduction in the volume of contracts or subcontracts awarded to the Company or substantial cost overruns would have an adverse effect on the Company's cash flow and results of operations. SUPPLIES AND MATERIALS The principal raw materials used in the Company's wheel and brake manufacturing operations are steel, aluminum forgings and carbon compounds. In April 1997, the Company completed the construction of a 21,000 square foot expansion of its carbon manufacturing facility in Akron, Ohio, which facility substantially increased the Company's carbon production capacity. Steel and aluminum forgings are purchased from several sources. The principal raw materials used by Engineered Fabrics to manufacture fuel tanks and related coated fabric products are nylon cloth, forged metal fittings and various adhesives and coatings, whose formulae are internally developed and proprietary. The Company has not experienced any shortage of raw materials to date. PERSONNEL At December 31, 1998, the Company had 1,420 full-time employees, of which 951 were employed by Aircraft Braking Systems (458 hourly and 493 salaried employees) and 469 were employed by Engineered Fabrics (350 hourly and 119 salaried employees). All of Aircraft Braking Systems' hourly employees are represented by the United Auto Workers' Union and all of Engineered Fabrics' hourly employees are represented by the United Food and Commercial Workers' Union. Aircraft Braking Systems' four-year contract with its union expires on May 31, 2002. Engineered Fabrics' three-year contract with its union expires on February 5, 2001. ITEM 2. PROPERTIES United States Facilities. Aircraft Braking Systems and Engineered Fabrics operate two manufacturing facilities in the United States which are individually owned except as set forth below under "Akron Facility Arrangements." Aircraft Braking Systems' facility is located in Akron, Ohio, and consists of approximately 770,000 square feet of manufacturing, engineering and office space. Engineered Fabrics' facility is located in Rockmart, Georgia, and consists of approximately 564,000 square feet of manufacturing, engineering and 6 8 office space. The Company believes that its properties and equipment are generally well-maintained, in good operating condition and adequate for its present needs. Foreign Facilities. The Company occupies approximately 19,000 square feet of leased office and warehouse space in Slough, England, under a lease expiring in 2020. The Company also maintains sales and service offices in Rome, Italy and Toulouse, France. Akron Facility Arrangements. The manufacturing facilities owned by Aircraft Braking Systems are part of a larger complex formerly owned and operated by Loral Corporation and now owned by Lockheed Martin. Aircraft Braking Systems and Lockheed Martin have various occupancy and service agreements to provide for shared easements and services (including utility, sewer, and steam). In addition to the 770,000 square feet owned by Aircraft Braking Systems, the Company leases approximately 433,000 square feet of space within the Lockheed Martin complex and is subject to annual occupancy payments to Lockheed Martin. During the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, Aircraft Braking Systems made occupancy payments to Lockheed Martin of $1.8 million, $1.7 million and $1.2 million, respectively. Certain access easements and agreements regarding water, sanitary sewer, storm sewer, gas, electricity and telecommunication are perpetual. In addition, Lockheed Martin and Aircraft Braking Systems equally control Valley Association Corporation, an Ohio corporation, which was formed to establish a single entity to deal with the City of Akron and utility companies concerning governmental and utility services which are furnished to Lockheed Martin's and Aircraft Braking Systems' facilities. ITEM 3. LEGAL PROCEEDINGS There are various lawsuits and claims pending against the Company incidental to its business. Although the final results in such suits and proceedings cannot be predicted with certainty, in the opinion of the Company's management, the ultimate liability, if any, will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no trading market for the Company's common stock. All of the common stock of the Company is owned by Bernard L. Schwartz ("BLS"), Chairman of the Company, and by four limited partnerships of Lehman Brothers Holdings Inc. (the "Lehman Investors"). (See "Security Ownership of Certain Beneficial Owners and Management.") ITEM 6. SELECTED FINANCIAL DATA The selected financial data has been derived from, and should be read in conjunction with, the related audited consolidated financial statements. The selected financial data for the year ended December 31, 1996 and nine months ended December 31, 1995 is unaudited. Effective December 31, 1996, the Company changed its fiscal year-end from March 31 to December 31. 7 9
YEAR ENDED NINE MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ------------------------------------- --------------------- --------------------- 1998 1997 1996 1996 1995 1996 1995 --------- --------- -------- -------- -------- -------- -------- (IN THOUSANDS) Income Statement Data: Net sales................. $ 345,447 $ 304,331 $277,655 $212,703 $199,784 $264,736 $238,756 Cost of sales............. 196,190 188,001 180,971 136,813 136,277 180,435 164,697 --------- --------- -------- -------- -------- -------- -------- Gross Margin.............. 149,257 116,330 96,684 75,890 63,507 84,301 74,059 Independent research and development............. 13,705 10,873 11,781 8,623 6,610 9,767 8,363 Selling, general and administrative expenses................ 35,332 40,182(a) 24,482 17,297 15,378 22,564 19,208 Amortization.............. 10,286 10,316 10,412 7,810 7,813 10,415 10,411 --------- --------- -------- -------- -------- -------- -------- Operating income.......... 89,934 54,959 50,009 42,160 33,706 41,555 36,077 Interest expense, net..... 44,830 34,091 36,957 27,197 31,288 41,048 46,250 --------- --------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary charge.... 45,104 20,868 13,052 14,963 2,418 507 (10,173) Income tax (provision) benefit................. (5,744) (5,184) 81 81 -- -- -- Extraordinary charge...... -- (29,513)(a)(b) (9,142)(c) (9,142)(c) (1,913)(d) (1,913)(d) -- --------- --------- -------- -------- -------- -------- -------- Net (loss) income......... $ 39,360 $ (13,829) $ 3,991 $ 5,902 $ 505 $ (1,406) $(10,173) ========= ========= ======== ======== ======== ======== ======== Balance Sheet Data (at end of period): Working capital........... $ 39,839 $ 31,953 $ 34,189 $ 34,189 $ 38,938 $ 36,327 $ 48,025 Total assets.............. 420,099 425,236 419,115 419,115 412,028 416,037 429,074 Long-term debt............ 477,125 519,125(a) 287,000 287,000 293,000 294,000 310,000 Stockholders' deficiency.............. (215,610) (256,459)(a) (33,306) (33,306) (34,327) (39,701) (34,748) Other Data (for the period): Capital expenditures...... 14,873 10,016 21,166 14,091 3,343 10,418 2,824 Depreciation and amortization............ 19,961 19,680 19,305 14,644 14,260 18,921 18,843
- --------------- (a) On October 15, 1997, the Company completed a recapitalization that consisted of the refinancing of existing indebtedness and the repurchase of a portion of its outstanding stock. In connection therewith, the Company directly increased its stockholders' deficiency by $218.6 million and recorded an extraordinary charge of $27.8 million (net of tax) for the write-off of unamortized financing costs and redemption premiums. In addition, the Company recorded a charge of $12.4 million to selling, general and administrative expenses, relating to the exercise of stock options and other fees incurred in connection with the recapitalization. Financing for the recapitalization was provided with $185 million of 9 1/4% Senior Subordinated Notes due 2007 and $345 million in borrowings under a new credit facility. (See Notes 1 and 7 to the consolidated financial statements.) (b) On June 1, 1997, the Company redeemed $30 million aggregate principal amount of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of the principal thereof. In connection therewith, the Company recorded an extraordinary charge of $1.7 million (net of tax) for the write-off of unamortized financing costs and redemption premiums. (See Note 7 to the consolidated financial statements.) (c) During the nine months ended December 31, 1996, the Company redeemed $180 million principal amount of the 13 3/4% Senior Subordinated Debentures. In connection therewith, the Company recorded an extraordinary charge of $9.1 million for the write-off of unamortized financing costs and redemption premiums. (See Note 7 to the consolidated financial statements.) (d) On December 28, 1995, the Company redeemed $30 million principal amount of the 13 3/4% Senior Subordinated Debentures. In connection therewith, the Company recorded an extraordinary charge of $1.9 million for the write-off of unamortized financing costs and redemption premiums. 8 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Aircraft Braking Systems generates approximately 75% of its revenues through the sale of replacement parts for wheels and braking systems which are installed on over 30,000 commercial, general aviation and military aircraft. As is customary in the industry, Aircraft Braking Systems incurs substantial expenditures to research, develop, design and supply original wheel and brake equipment to aircraft manufacturers at or below the cost of production. Research, development and design expenditures are charged to operations when incurred. Original wheel and brake equipment supplied to aircraft manufacturers at or below the cost of production ("Program Investments") are charged to operations when delivered to the aircraft manufacturers. Since most modern aircraft have a useful life of 25 years or longer and require periodic replacement of certain components of the braking system, the Company typically recoups its initial investment in original equipment and generates significant profits from the sales of replacement parts over the life of the aircraft. The Company has invested and will continue to invest significant resources to have its products selected for use on new commercial airframes, focusing particularly on medium- and short-range aircraft. During the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, the Company spent an aggregate of approximately $60.7 million, $51.0 million and $43.2 million, respectively, for research, development, design, Program Investments, capital expenditures and development participation costs. The Company has been selected as a supplier of wheels and carbon brakes on the Airbus A-321, the sole supplier of wheels, carbon brakes and anti-skid systems on the MD-90, the sole supplier of wheels and brakes for each of the Saab 2000, the Canadair Regional Jet and the Lear 60, and as a supplier of wheels and carbon brakes for the Airbus A-330 and A-340. Aircraft produced under these programs are in the early stages of their life cycles and represent significant future revenue opportunities for the Company. THE RECAPITALIZATION On October 15, 1997, the Company consummated a recapitalization (the "Recapitalization") consisting of the repurchase of approximately 64% of its outstanding capital stock for a total purchase price of $230.2 million and the repayment of all outstanding indebtedness. Upon giving effect to the repurchase, BLS and the Lehman Investors each became the owner of 50% of the capital stock of the Company. To finance the above transactions, the Company entered into a new credit facility (the "Credit Facility") for $372 million and issued $185 million of 9 1/4% Senior Subordinated Notes due 2007 (The "9 1/4% Notes"). RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997 During 1998, sales, operating income, net income and bookings were the highest in the Company's history, reflecting the continued build-out of customer fleets using Company products, new program awards and significantly increased airline industry traffic. These results were driven by growth in all market sectors of the Company's business. Sales. Sales for the year ended December 31, 1998 totaled $345.4 million, reflecting an increase of $41.1 million or 13.5%, compared with $304.3 million for the same period in the prior year. This increase was due to higher commercial sales of wheels and brakes for commercial transport aircraft of $25.2 million, primarily on the MD-90, DC-9, MD-80 and Canadair Regional Jet, and higher general aviation sales of $6.8 million primarily on Canadair and Dassault aircraft. Military sales increased by $9.1 million due to higher sales of wheels and brakes primarily on the F-117 program, and higher sales of fuel tanks primarily on the F-15 and F/A-18 programs. Gross Margin. The gross margin for the year ended December 31, 1998 was 43.2% compared with 38.2% for the same period in the prior year. This increase was primarily due to the overhead absorption effect relating to the higher sales volume and operating efficiencies. The Company invested $14.9 million in capital equipment in 1998, for a total of $46.1 million over the last three years. These investments have helped to 9 11 reduce manufacturing costs and improve operating margins. Partially offsetting this increase in margins was higher shipments of original equipment to airframe manufacturers at or below the cost of production. Independent Research and Development. Independent research and development costs were $13.7 million for the year ended December 31, 1998 compared with $10.9 million for the same period in the prior year. This increase was primarily due to higher costs associated with the Raytheon Hawker Horizon and Canadair CRJ-700 programs. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $35.3 million for the year ended December 31, 1998 compared with $40.2 million for the same period in the prior year. Excluding a $12.4 million non-recurring charge in 1997, relating to the exercise of stock options and other fees in connection with the Recapitalization, selling, general and administrative expenses increased $7.5 million. This increase was primarily due to higher costs associated with installation of a new computer system at Aircraft Braking Systems and higher performance-related incentive compensation. Interest Expense, Net. Interest expense, net was $44.8 million for the year ended December 31, 1998 compared with $34.1 million for the same period in the prior year. This increase was due to increased indebtedness resulting from the Recapitalization on October 15, 1997. Partially offsetting this increase was lower interest rates on the Company's indebtedness. Effective Tax Rate. The Company's effective tax rate of 12.7% and 24.8% for the years ended December 31, 1998 and 1997, respectively, differs from the statutory rate of 35% due to a utilization of tax net operating losses in both years partially offset by a net increase in the valuation allowance and a $0.9 million charge for foreign taxes in 1997. The decrease in the effective tax rate in 1998 is primarily due to the net change in the valuation allowance and lower foreign income taxes. Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996 Sales. Sales for the year ended December 31, 1997 totaled $304.3 million, reflecting an increase of $26.6 million, or 9.6%, compared with $277.7 million for the same period in the prior year. This increase was due to higher commercial sales of wheels and brakes for commercial transport aircraft of $20.8 million, primarily on the DC-10, MD-80, Canadair Regional Jet and Fokker FO-100 programs and higher general aviation sales of $6.2 million on the Lear and IAI Astra and Galaxy aircraft. Gross Margin. The gross margin for the year ended December 31, 1997 was 38.2% compared with 34.8% for the same period in the prior year. This increase was primarily due to the overhead absorption effect relating to the higher sales volume and cost savings relating to the in-house production of carbon in the Company's new carbon facility. Independent Research and Development. Independent research and development costs were $10.9 million for the year ended December 31, 1997 compared with $11.8 million for the same period in the prior year. This decrease was primarily due to lower costs associated with the MD-90 Program. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $40.2 million for the year ended December 31, 1997 compared with $24.5 million for the same period in the prior year. This increase was primarily due to a non-recurring $12.4 million charge relating to the exercise of stock options and other fees in connection with the Recapitalization and higher performance-related incentive compensation. Interest Expense, Net. Interest expense, net was $34.1 million for the year ended December 31, 1997 compared with $37.0 million for the same period in the prior year. This decrease was due to lower interest rates on outstanding debt as a result of the refinancing in August 1996 of the 13 3/4% Senior Subordinated Debentures due 2001 (the "13 3/4% Debentures") with 10 3/8% Senior Subordinated Notes and borrowings under a prior credit facility. Partially offsetting this decrease was the greater interest costs resulting from the Recapitalization on October 15, 1997. Effective Tax Rate. The Company's effective tax rate of 24.8% for the year ended December 31, 1997 differs from the statutory rate of 35% due to utilization of tax net operating losses offset by a net increase in the 10 12 valuation allowance and a $0.9 million charge for foreign taxes. For the same period in the prior year the effective tax rate of (0.6)% differed from the statutory rate of 35% primarily due to a net decrease in the valuation allowance and utilization of tax net operating losses. The increase in the effective rate in 1997 is primarily due to an increase in foreign taxes and a net change in the valuation allowance. LIQUIDITY AND FINANCIAL CONDITION The Company expects that its principal use of funds for the next several years will be to pay interest and principal on indebtedness, fund capital expenditures and make Program Investments. The Company's primary source of funds for conducting its business activities and servicing its indebtedness has been cash generated from operations and borrowings under its revolving credit facilities. The Company's total indebtedness decreased from $520.6 million at December 31, 1997 to $485.1 million at December 31, 1998 due to $34 million of principal prepayments and $1.5 million of scheduled principal payments on the Credit Facility. The Credit Facility consists of a term loan facility in an aggregate principal amount of $300.1 million (the "Term Loans") and a revolving credit facility in an aggregate principal amount of up to $50 million (the "Revolving Loans"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the principal amount of $49.4 million and a Tranche B term loan ("Term Loan B") in the principal amount of $250.7 million. The Credit Facility bears interest at floating rates selected at the option of the Company. At December 31,1998 and 1997, the average interest rate on the Credit Facility was 7.4% and 8.3%, respectively. As a requirement of the Credit Facility, the Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates on the Credit Facility. This interest rate agreement effectively fixes the rate at 8.3% on $135 million of borrowings at December 31, 1998. Any differences paid or received on the interest rate swap agreement are recognized as adjustments to current interest expense. Obligations under the Credit Facility are secured by a lien on substantially all of the assets of the Subsidiaries and are guaranteed by K & F. Term Loan A is a six-year quarterly amortizing facility maturing October 15, 2003, with installments of $0.5 million per year in years one to five and $47.4 million in year six. Term Loan B is an eight-year quarterly amortizing facility maturing October 15, 2005, with scheduled installments of $1.0 million per year in years one to seven and $245 million in year eight. The Company is required to make mandatory reductions in the Credit Facility in the event of certain asset sales, the incurrence of certain additional indebtedness, and annually from a portion of excess cash flow (as defined). As a result of the excess cash flow calculation, $26.5 million is required to be paid in 1999. The Company voluntarily prepaid $20 million during 1998 and the balance of $6.5 million (classified as current at December 31, 1998) was paid in January 1999. The Credit Facility provides for revolving loans not to exceed $50 million, with up to $20 million available for letters of credit. At December 31, 1998, the Company had outstanding letters of credit of $8.0 million. The Revolving Loan commitment terminates on October 15, 2003. At December 31, 1998, the Company had $42.0 million available to borrow under the Revolving Loan. The Company's management believes that it will have adequate resources to meet its current cash requirements through funds generated from operations and borrowings under its Revolving Loan. The Credit Facility contains certain covenants and events of default, including limitations on additional indebtedness, liens, asset sales, making certain restricted payments, capital expenditures, creating guarantee obligations and material lease obligations. The Credit Facility also contains certain financial ratio requirements including a cash interest coverage ratio, a leverage ratio and maintenance of a minimum adjusted net worth. The Company was in compliance with all covenants at December 31, 1998. As a result of the Recapitalization, the Company increased its stockholders' deficiency by $218.6 million for the repurchase of a portion of the capital stock and recorded an extraordinary charge of $27.8 million (net of tax of $2.0 million) for the write-off of unamortized financing costs, redemption premiums and tender offer payments. On June 1, 1997, the Company redeemed $30 million aggregate principal amount of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of the principal amount thereof. In connection therewith, the 11 13 Company recorded an extraordinary charge of $1.7 million (net of tax of $0.6 million) for the write-off of unamortized financing costs and redemption premiums. During the nine months ended December 31, 1996, the Company redeemed $180 million of its 13 3/4% Debentures at a redemption price of 102.5%. In connection therewith, the Company recorded an extraordinary charge of $9.1 million for the write-off of unamortized financing costs and redemption premiums. CASH FLOW During the year ended December 31, 1998, net cash provided by operating activities amounted to $52.2 million and reflected $109.9 million of earnings before interest, taxes, depreciation and amortization ("EBITDA"), decreases in accounts receivable of $4.0 million, and increases in long-term liabilities of $1.2 million, partially offset by increases in inventory of $4.3 million, prepaid pension costs of $3.3 million, other working capital of $0.3 million, decreases in accounts payable of $2.7 million, other current liabilities of $9.5 million (primarily reflecting a portion of a $5.0 million payment in settlement of litigation and approximately $4.5 million paid to the bargaining workers at Aircraft Braking Systems in conjunction with the ratification of a new contract) and interest payments of $42.8 million. During the year ended December 31, 1997, net cash provided by operating activities amounted to $42.5 million and reflected $74.6 million of EBITDA, decreases in inventory of $2.4 million, increases in long-term liabilities of $1.5 million, accounts payable of $6.7 million, other current liabilities of $5.3 million, partially offset by increases in accounts receivables of $4.1 million, prepaid pension costs of $7.8 million, other working capital of $0.9 million and interest payments of $35.2 million. During the year ended December 31, 1996, net cash provided by operating activities amounted to $28.9 million and reflected $69.3 million of EBITDA, increases in other current liabilities of $10.0 million, accounts payable of $1.3 million, decreases in other working capital of $1.6 million, partially offset by increases in inventory of $8.6 million, decreases in long-term liabilities of $3.7 million and interest payments of $41.0 million. During the year ended December 31, 1998, net cash used in investing activities amounted to $15.1 million primarily due to capital expenditures. During the year ended December 31, 1997, net cash used in investing activities amounted to $11.8 million primarily due to $10.0 million of capital expenditures and $1.8 million of program participation payments. During the year ended December 31, 1996, net cash used in investing activities amounted to $21.6 million primarily due to capital expenditures. The decrease in capital expenditures for the year ended December 31, 1997 compared with the year ended December 31, 1996 is primarily due to the expansion to the carbon manufacturing building at the Company's Akron, Ohio facility during 1996. Capital spending for the year ended December 31, 1999 is expected to be approximately $12.0 million. During the year ended December 31, 1998, net cash used in financing activities amounted to $34.9 million due to the repayment of indebtedness of $35.5 million partially offset by $.6 million of proceeds received from a sale and leaseback transaction. During the year ended December 31, 1997, net cash used in financing activities amounted to $27.5 million due to the use of $218.6 million for the redemption of equity interests and $36.5 million for refinancing expenditures, partially offset by increased borrowings of $227.6 million, primarily related to the Recapitalization. During the year ended December 31, 1996, net cash used in financing activities amounted to $9.0 million due to refinancing expenditures of $11.3 million partially offset by $2.3 million of proceeds received from a sale and leaseback transaction. ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact, if any, on its financial position upon the adoption of SFAS No. 133. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines which costs incurred to develop or purchase internal-use software should be capitalized 12 14 and which costs should be expensed and is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-1 will not have a material impact on its financial position, results of operations or cash flows. INFLATION A majority of the Company's sales are conducted through annually established price lists and long-term contracts. The effect of inflation on the Company's sales and earnings is minimal because the selling prices of such price lists and contracts, established for deliveries in the future, generally reflect estimated costs to be incurred in these future periods. In addition, some contracts provide for price adjustments through escalation clauses. YEAR 2000 MATTERS The Company and its operating subsidiaries, assisted by outside consultants, have conducted, and continue to conduct, a review of their computer systems to identify areas that are affected by the "Year 2000" issue, i.e., the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. Each Company subsidiary has a project team and a plan for Year 2000 readiness. The Company has assessed and inventoried internal systems including personal computers and network hardware and software, engineering and technical systems, plant equipment and facilities. Management believes that substantially all systems are already, or shortly will be without material expense, Year 2000 compliant. Procedures are on-going to test whether the Company's and each subsidiary's systems are Year 2000 compliant, and whether the Company's plans and activities are sufficient to address and correct system or other problems that might arise because of the Year 2000. Modification or replacement of affected systems has been and continues to be made as required. Except for certain anti-skid systems, which are compliant, the Company's products do not have embedded systems and thus are not susceptible to the Year 2000 issue in their operation. The enterprise resource plan ("ERP") begun in 1997 at Aircraft Braking Systems, is scheduled to be completed during the first half of 1999, and involves replacement of virtually all financial management and most manufacturing systems with systems that use programs from SAP America Inc. ("SAP") that are Year 2000 compliant. The plans to complete Year 2000 readiness at Aircraft Braking Systems include a contingency plan, estimated to cost up to $450,000 to implement, by which certain existing business systems would be upgraded and retained in the event the conversion to the SAP programs is delayed beyond June, 1999. The Company otherwise estimates the cost of the year 2000 compliance plans at Aircraft Braking Systems (exclusive of the ERP project costs) and at Engineered Fabrics will not exceed $700,000, of which approximately $490,000 has been expended as of December 31, 1998. The cost of all Year 2000 related expenses are paid from funds generated by operations. Assessment of Year 2000 risk has included and will continue to include surveying suppliers and other third parties about their readiness. The Company is attempting to obtain Year 2000 assurances and to monitor the remediation efforts of critical vendors and customers. No significant customer, vendor, service provider or other third party has advised yet of a specific Year 2000 problem that it does not expect to have remedied on time. An unexpected Year 2000 problem could result in an interruption of normal business activities or operations. There can be no assurance that third parties will address Year 2000 issues and meet their remediation goals. The Company has no contingency plans in the event that major business partners, such as suppliers, fail to remediate critical Year 2000 issues or essential services, such as power, are interrupted. However, based on the expected completion of its Year 2000 projects on time at both subsidiaries, and assuming the preparedness of others, the Company believes that a significant interruption will not be encountered. 13 15 Statements made relating to Year 2000 issues, and to the Company's particular Year 2000 circumstances, are forward looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which may cause the Company's plans regarding and assessments of Year 2000 issues to be adversely impacted, such that the Company's state of readiness, anticipated costs to address Year 2000 issues and contingency plans will differ materially from those set forth above. Risks and uncertainties include that key suppliers of raw materials and energy, and others with whom the Company does business, will not meet their Year 2000 obligations, and that events or expenses, unforeseen or not quantifiable at this time, may arise which cause the Company's compliance program or its contingency plans to be delayed or to increase in cost in material respect. In addition, Year 2000 issues are global, and may be affected by economic, governmental, technological and other factors beyond the control of businesses such as the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has approximately $485 million of total debt outstanding at December 31, 1998. Of this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the balance is borrowed under the Credit Facility. The interest rate for borrowings under the Credit Facility varies with LIBOR or the prime rate at the Company's option. As a requirement of the Credit Facility, the Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates on the Credit Facility. The interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95% on $135 million at December 31, 1998 and matures on December 17, 2001 with an option for the counterparty to extend the agreement to December 17, 2003. Therefore the Company has fixed interest rate borrowings of $320 million (includes the $185 million of 9 1/4% Notes and the notional amount under the swap agreement) at December 31, 1998. Given that approximately 66% of the Company's borrowings are effectively at fixed interest rates, a change in rates of 10% would not have a significant impact on fair values, cash flows or earnings. The Company has no other derivative financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the financial statements, together with the auditors' reports thereon, appearing on pages F-1 to F-21 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the directors and executive officers of the Company. All directors hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualified, and all executive officers hold office at the pleasure of the Board of Directors. The following executive officers or directors of the Company are related by blood or marriage: Kenneth M. Schwartz is the nephew of Bernard L. Schwartz, Ronald H. Kisner's wife is the niece of Bernard L. Schwartz and John R. Paddock's wife is the daughter of Bernard L. Schwartz. No other executive officer or director of the Company is related by blood, marriage or adoption. 14 16
DIRECTOR NAME AGE POSITION(S) SINCE - ---- --- ----------- -------- Bernard L. Schwartz*................. 73 Chairman of the Board and Chief 1989 Executive Officer David J. Brand**..................... 38 Director 1997 Herbert R. Brinberg*................. 73 Director 1989 Robert B. Hodes*..................... 73 Director 1997 Ronald H. Kisner*.................... 50 Director and Secretary 1989 John R. Paddock*..................... 45 Director 1989 A. Robert Towbin***.................. 63 Director 1989 Alan H. Washkowitz**................. 58 Director 1989 Donald E. Fogelsanger................ 73 President Kenneth M. Schwartz.................. 47 Executive Vice President Dirkson R. Charles................... 35 Chief Financial Officer
- --------------- * Designated as director by BLS pursuant to the Stockholders Agreement. ** Designated as director by the Lehman Investors pursuant to the Stockholders Agreement. *** Designated as independent director by BLS and the Lehman Investors pursuant to the Stockholders Agreement. Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer of Loral Space & Communications Ltd. since April 1996. From 1972 to April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of Loral Corporation. Mr. Schwartz is Chairman and Chief Executive Officer of Globalstar Telecommunications Ltd., Chairman and Chief Executive Officer of Space Systems/Loral, Inc., Chief Executive Officer of Globalstar, L.P., a Director of Reliance Group Holdings, Inc. and certain subsidiaries, a Director of First Data Corporation and a Trustee of New York University Medical Center. Mr. Brand is a Managing Director of Lehman Brothers and a principal in the Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology Mergers and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been responsible for merger and corporate finance advisory services for many of Lehman Brothers' technology and defense industry clients. Mr. Brand is a director of L-3 Communications Corporation and L-3 Communications Holdings, Inc. Dr. Brinberg has been President and Chief Executive Officer of Parnassus Associates International, a firm of consultants in the field of Information Management, since September 1989. Previously, he was President and Chief Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since 1978. He is also currently an Adjunct Professor of Management at Baruch College City University of New York. Mr. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which he has been associated since 1949. He is a Director of W.R. Berkley Corporation, Crystal Oil Company, Globalstar Telecommunications, Ltd., LCH Investments N.V., Loral Space & Communications Ltd., Mueller Industries, Inc., Restructured Capital Holdings Ltd. and R.V.I. Guaranty Co., Ltd. Mr. Kisner was a member of the law firm of Chekow & Kisner, P.C., from 1984 to 1999, and is now employed by the Company. From 1973 to 1982, he was Associate General Counsel of APL Corporation, where he held such offices as Secretary, Vice President and Director. From 1982 to 1984, Mr. Kisner was a sole practitioner. Since January 1997, Mr. Kisner has been Secretary of the Company. Dr. Paddock is a licensed psychologist who has maintained an independent practice of psychotherapy, assessment and consultation in Atlanta, Georgia since 1982. He has also been President of the Georgia Psychological Association (1993-1994), Director of Training for the Georgia School of Professional Psychology, Adjunct Associate Professor of Psychology at Emory University, Assistant Professor of Psychology at Kennesaw State College, and Southern Region Coordinator for National Employee Assistance Services. 15 17 Currently, he is Visiting Associate Professor of Psychology at Emory, and holds positions as Adjunct Clinical Assistant Professor in the Department of Psychiatry at Emory. Mr. Towbin joined C. E. Unterberg Towbin (formerly known as Unterberg Harris) in September of 1995 as a Managing Director. From January 1994 to September 1995, he was President and Chief Executive Officer of the Russian-American Enterprise Fund and Vice Chairman of its successor fund, The U.S. Russia Investment Fund. Mr. Towbin was a Managing Director at Lehman Brothers from January 1987 until January of 1994. Mr. Towbin was Vice Chairman, Member of the Executive Committee and Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to 1987 and from 1983 to 1986, Mr. Towbin was Vice Chairman. From 1977 to 1983 he was General Partner of L.F. Rothschild, Unterberg, Towbin and from 1959 to 1977, Mr. Towbin was General Partner of C.E. Unterberg, Towbin Co. Mr. Towbin is also a Director of Bradley Real Estate Inc., Gerber Scientific, Inc., Globalstar Telecommunications Ltd. and Globecomm Systems, Inc. Mr. Washkowitz is a Managing Director of Lehman Brothers and head of the Merchant Banking Group, and is responsible for the oversight of Lehman Brothers Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman Brothers in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr. Washkowitz is currently a director of Illinois Central Corporation, L-3 Communications Corporation, McBride plc and Peabody Coal. Mr. Fogelsanger has been President of the Company since January 1996. From April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft Braking Systems Corporation. From 1987 to 1989 he was President of Loral Corporation's Aircraft Braking Systems Division. From January 1986 to March 1987 he was Vice President and General Manager of Goodyear Aerospace Corporation's ABS division. From 1980 to 1986 he was General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr. Fogelsanger directed Goodyear's development of a crash-resistant fuel system for helicopters that was credited with saving hundreds of lives during the Vietnam War. He joined Goodyear in 1951. Mr. Kenneth M. Schwartz has been Executive Vice President of the Company since January 1996. From June 1989 to January 1996, Mr. Schwartz held the positions of Chief Financial Officer, Treasurer and Secretary. Previously he was the Corporate Director of Internal Audit for Loral Corporation since late 1987. From 1984 to 1987, Mr. Schwartz held the position of Director of Cost and Schedule Administration for Loral Electronic Systems. Prior to 1984, Mr. Schwartz held various other positions with Loral Electronic Systems and the accounting firm of Deloitte & Touche LLP. Mr. Charles has been Chief Financial Officer of the Company since May 1996. From May 1993 to May 1996, Mr. Charles was the Controller of the Company. Previously he was the Manager of Accounting and Financial Planning. Prior to employment with the Company in 1989, Mr. Charles held various other positions with the accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984. EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED FABRICS CORPORATION Set forth below are the names, ages and positions of the executive officers of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold office at the pleasure of their respective Board of Directors. AIRCRAFT BRAKING SYSTEMS CORPORATION
NAME AGE POSITION ---- --- -------- Ronald E. Welsch 63 President Frank P. Crampton 55 Vice President-Marketing Richard W. Johnson 55 Vice President-Finance and Controller Daniel J. Steele 54 Vice President-Customer Support James J. Williams 43 Vice President-Manufacturing
16 18 ENGINEERED FABRICS CORPORATION
NAME AGE POSITION ---- --- -------- Roger C. Martin 61 President Terry L. Lindsey 54 Vice President-Marketing Anthony G. McCann 39 Vice President-Operations John A. Skubina 44 Vice President-Finance
Mr. Welsch has been President of Aircraft Braking Systems Corporation since January 1996. From November 1994 to January 1996, Mr. Welsch held the positions of Executive Vice President and Chief Operating Officer. From September 1993 to November 1994, he was Executive Vice President. Prior to joining Aircraft Braking Systems, Mr. Welsch was General Manager of the GE 90 Commercial Engine program at General Electric Aircraft Engines and held various positions in management, including engineering, product support, marketing, product planning and program management, over the course of 26 years. Mr. Welsch started his aviation career at Douglas Aircraft in 1958 and joined Northrop Corporation in 1961. He entered the U.S. Marine Corp Aviation following graduation from Purdue University. Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems in March 1987. He had been Director of Business Development for Goodyear Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that assignment, he was the divisional manager of Program Operations since 1983. Mr. Crampton joined Goodyear in 1967. He became Section Manager in Commercial Sales in 1977, a product marketing manager in 1978 and Divisional Sales Manager in 1979. In August of 1982, he joined manufacturing as the manager of the manufacturing process organization. He also worked for NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966. Mr. Johnson has been Vice President of Finance and Controller at Aircraft Braking Systems since April 1989. From 1987 to 1989, he was Vice President of Finance and Controller of Loral Corporation's Aircraft Braking Systems Division. Prior to this assignment, he had spent 22 years with Goodyear Aerospace Corporation, including one year as the Controller of the wheel and brake division. Mr. Johnson joined Goodyear Aerospace Corporation in 1966. He became Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear Aerospace Corporation after holding various positions in the Defense Systems Division. Mr. Steele was named Vice President of Customer Support in June 1998. From December 1996 through May 1998, Mr. Steele was Director of Customer Support. Prior to joining Aircraft Braking Systems, Mr. Steele held various management positions with General Electric Aircraft Engines from January 1974 through March 1993 in field service, customer support, program management, marketing and spare sales and support. From April 1993 through April 1995, Mr. Steele was Director Corporate Marketing for the AGES Group, ALP, and from May 1995 through November 1996 was Vice President for World Air Lease Inc. Mr. Steele commenced his aviation career with The Boeing Company in 1967 as an experimental flight test mechanic, and from 1969 through 1973 was a maintenance supervisor with American Airlines. Mr. Williams was named Vice President of Manufacturing at Aircraft Braking Systems in May 1992. He had been Director of Manufacturing since joining Aircraft Braking Systems in September 1989. Previously from April 1985 to August 1989, he was Branch Manager of Refurbishment Operations at United Technologies responsible for the refurbishment process of the Solid Rocket Boosters on the Shuttle Program. Mr. Williams started his aviation career in 1975 in the Air Force as a Hydraulic Systems Specialist. He was Superintendent, Manufacturing at Fairchild Republic Company from 1979 to 1983, followed by Manager, B-1B Manufacturing Operations at Rockwell International Corporation from 1983 to 1985. Mr. Martin has been President of Engineered Fabrics Corporation since 1987. From June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics Division. Mr. Martin has been continuously employed by Goodyear, GAC, Loral Corporation and K & F for the past 37 years. Other positions Mr. Martin held with Goodyear include General Manager, Program Manager and a number of research positions. He holds a patent for elastomeric protective coating for metal storage reels. 17 19 Mr. Lindsey has served as Vice President of Business Development since 1989. He has been with Goodyear Aerospace Corporation, Loral Corporation and K & F since 1977. Prior to this he had 12 years of federal service with the US Army. He joined GAC as Contract Administrator of the Industrial Brake Operation in Berea, Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of Contracts. Mr. McCann has been Vice President of Operations at Engineered Fabrics Corporation since June 1993. Prior to that, he was Manager of Production Support from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August 1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann worked for Aircraft Braking Systems as Manager of Manufacturing Engineering, Manager of Assembly and as a Manufacturing Engineer. Mr. Skubina has been Vice President of Finance and Administration since February 1991. Prior to that, he was made Vice President of Finance on April 1, 1990. He joined Engineered Fabrics Corporation in 1988 as Accounting Manager. From 1985 until 1988, Mr. Skubina was the Assistant Controller and Controller of MPD, a division of M/A-Com. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996 (the "Transition Period"), paid to the chief executive officer and each of the other four most highly compensated executive officers of the Company and the Company's subsidiaries.
LONG-TERM FISCAL COMPENSATION YEAR OR ANNUAL COMPENSATION ----------------- ALL OTHER TRANSITION ----------------------- OPTIONS LTIP COMPEN- PERIOD SALARY BONUS GRANTED PAYOUTS SATION(A) NAME AND PRINCIPAL POSITION * ($) ($) (#) ($) ($) - --------------------------- ---------- --------- --------- ------- ------- ---------- Bernard L. Schwartz............. 1998 2,070,782(b) 5,055,300 -- -- -- Chairman of the Board and 1997 1,440,000(b) 1,553,200 -- -- -- Chief Executive Officer 1996* 1,477,426(b) 1,247,000 -- -- -- Kenneth M. Schwartz............. 1998 265,154 160,000 1,500 45,000 5,532 Executive Vice President of 1997 494,038(b) 150,000 2,500 28,333 5,237 K & F Industries, Inc. 1996* 274,231(b) 106,000 -- 13,333 19,331 Donald E. Fogelsanger........... 1998 244,500 130,000 -- 48,333 35,636 President of K & F Industries, 1997 216,000 125,000 2,500 30,000 34,519 Inc. 1996* 170,769 115,000 -- 13,333 42,369 Ronald E. Welsch................ 1998 207,264 95,000 -- 35,333 28,230 President of Aircraft Braking 1997 192,500 185,000 2,500 22,000 27,473 Systems Corporation 1996* 145,308 60,000 -- 10,000 25,997 Roger C. Martin................. 1998 153,229 77,000 -- 27,333 29,238 President of Engineered 1997 148,059 49,000 1,500 17,333 28,266 Fabrics Corporation 1996* 109,757 30,000 -- 8,333 27,229
- --------------- (a) Includes the following: (i) Company contributions to individual 401(k) plan accounts for the years ended December 31, 1998 and 1997, and the Transition Period, respectively: Mr. K. Schwartz -- $4,517, $4,275, and $2,414; Mr. Fogelsanger -- $4,517, $4,275, and $3,054; Mr. Welsch -- $4,592, $4,078 and $3,084; Mr. Martin -- $4,610, $3,927 and $3,442; (ii) the value of supplemental life insurance programs for the years ended December 31, 1998 and 1997 and the Transition Period, respectively: Mr. K. Schwartz -- $1,015, $962 and $16,917; Mr. Fogelsanger -- $31,119, $30,244 and $39,315; Mr. Welsch -- $23,638, $23,395 and $22,913; Mr. Martin -- $24,628, $24,339 and $23,787. (b) The Company has an Advisory Agreement with BLS which provides for the payment of an aggregate of $200,000 per month of compensation to BLS and persons designated by him. BLS designated that $250,000 and $100,000 of the aggregate annual advisory fee be paid to Kenneth M. Schwartz, which is included in his salary for the year ended December 31, 1997 and the Transition Period, respectively. 18 20 OPTION GRANTS IN LAST FISCAL YEAR The following sets forth information relating to the grant of stock options by the Company during the year ended December 31, 1998 to the named executive officers. The Company has two stock option plans which provide for the grant of non-qualified or incentive stock options to acquire a total of 100,000 authorized but unissued shares of common stock. None of the Company's stock is publicly traded. The options granted are exercisable in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant, and shall remain exercisable until expiration of the option, 10 years from the date of the grant.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM -------------------------------------------------- -------------------- % OF TOTAL OPTIONS GRANTED TO EXERCISE EMPLOYEES OR BASE OPTIONS IN FISCAL PRICE EXPIRATION NAME GRANTED(#) YEAR(%) ($/SH) DATE 5%($) 10%($) - ---- ---------- ---------- -------- ---------- -------- -------- Kenneth M. Schwartz........ 1,500 12.7 175.00 10/02/08 165,085 418,357
19 21 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTIONS VALUES The following sets forth information as to the exercise of stock options during the year ended December 31, 1998 and the value of unexercised stock options at year-end.
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 0/4,000 0/0 Donald E. Fogelsanger............... 0 0 0/2,500 0/0 Ronald E. Welsch.................... 0 0 0/2,500 0/0 Roger C. Martin..................... 0 0 0/1,500 0/0
- --------------- (1) None of the Company's stock is currently publicly traded. All options were granted at an exercise price of $175.00 per share based upon the implied value of the capital stock retained by BLS and the Lehman Investors following the Recapitalization. LONG-TERM INCENTIVE PLAN AWARDS Under the Company's long-term incentive plan designed to provide an incentive to encourage attainment of Company objectives and retain and attract key executives of the Company, a limited number of persons participate in a Deferred Bonus Plan. Under the terms of the plan, generally no awards are allocated to any participant unless the Company has achieved at least a 10% growth in earnings before interest, taxes and amortization over the prior fiscal year. Awards vest and are paid (unless deferred by recipient direction) in three equal annual installments starting on January 15th following each fiscal year-end. All amounts not vested are forfeited upon termination of employment for any reason other than death or disability prior to the vesting date. The following awards were earned for the individuals named in the Summary Compensation Table during the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively: Mr. K. Schwartz $60,000, $50,000 and $50,000; Mr. Fogelsanger $55,000, $55,000 and $55,000; Mr. Welsch $50,000, $45,000 and $40,000; and Mr. Martin $32,000, $30,000 and $30,000. THE RETIREMENT PLAN The Company established, effective May 1, 1989, as amended, the K & F Industries Retirement Plan for Salaried Employees (the "Company Retirement Plan"), a defined benefit pension plan. The Company has received a favorable determination letter from the Internal Revenue Service that the Company Retirement Plan is a qualified plan under the Internal Revenue Code. The terms of the Company Retirement Plan are as follows: a non-contributory benefit and a contributory benefit. The cost of the former is borne by the Company; the cost of the latter is borne partly by the Company and partly by the participants. Salaried employees who have completed at least six months of service and satisfied a minimum earnings level are eligible to participate in the contributory portion of the Company Retirement Plan; salaried employees become participants in the non-contributory portion on their date of hire. The Plan provides a benefit of $20.00 per month for each year of credited service. For participants who contribute to the Plan, in addition to the benefit of $20.00 per month for each year of credited service, the Plan provides an annual benefit equal to the greater of: 60% of the participant's aggregate contributions; or, average compensation earned (while contributing) during the last 10 years of employment in excess of 90% of the Social Security Wage Base amount multiplied by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2% times additional years of such service up to 30, plus, (d) 0.6% times all additional such service above 30 years. 20 22 Effective January 1, 1990, the Plan was amended for eligible employees of K & F Industries and Aircraft Braking Systems to provide an annual benefit equal to (a) the accrued benefit described above as of December 31, 1989, plus (b) a non-contributory benefit for each year of credited service after January 1, 1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288, whichever is greater, plus (c) for each year of continuous service on and after January 1, 1990, a contributory benefit of (i) for 14 years of continuous service or less, 1.05% of annual earnings between $19,800 and the Social Security Wage Base plus 2.25% of annual earnings above the Social Security Wage Base, and (ii) for more than 14 years of continuous service, 1.35% of annual earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual earnings above the Social Security Wage Base. In no event will the amount calculated in (c) above be less than 60% of the participant's aggregate contributions made on and after January 1, 1990. Benefits are payable upon normal retirement age at age 65 in the form of single life or joint and survivor annuity or, at the participant's option with appropriate spouse consent, in the form of an annuity with a term certain. A participant who has (a) completed at least 30 years of continuous service, (b) attained age 55 and completed at least 10 years of continuous service, or (c) attained age 55 and the combination of such participant's age and service equals at least 70 years, is eligible for early retirement benefits. If a participant elects early retirement before reaching age 62, such benefits will be reduced except that the non-contributory benefits of a participant with at least 30 years of credited service will not be reduced. In addition, employees who retire after age 55 but before age 62 with at least 30 years of service are entitled to a supplemental non-contributory benefit until age 62. Annual benefits under the Company Retirement Plan are subject to a statutory ceiling of $130,000 per participant. Participants are fully vested in their accrued benefits under the Company Retirement Plan after five years of credited service with the Company. The individuals named in the Summary Compensation Table also participate in a supplemental plan which generally makes up for certain reductions in such benefits caused by Internal Revenue Code limitations. Estimated annual benefits upon retirement for these individuals who are participants in the amended plan of K & F and Aircraft Braking Systems and the supplemental plan are $224,000 for Mr. K. Schwartz; $135,000 for Mr. Fogelsanger; and $39,000 for Mr. Welsch. BLS does not participate in either plan. The retirement benefits have been computed on the assumption that (a) employment will be continued until normal retirement at age 65 or current age if greater; (b) current levels of creditable compensation and the Social Security Wage Base will continue without increases or adjustments throughout the remainder of the computation period; and (c) participation in the contributory portion of the plan will continue at current levels. The Company has a similar plan at Engineered Fabrics in which Mr. Martin participates. Estimated annual benefits for Mr. Martin are $96,000 using the assumptions in (a), (b) and (c) above. For purposes of eligibility, vesting and benefit accrual, participants receive credit for years of service with Loral Corporation and Goodyear. At retirement, retirement benefits calculated according to the benefit formula described above are reduced by any retirement benefits payable from The Goodyear Tire & Rubber Company Retirement Plan For Salaried Employees. COMPENSATION OF DIRECTORS The Board of Directors held three meetings during the year ended December 31, 1998. Members of the Board of Directors are entitled to receive a director's fee of $12,000 per year. Messrs. Brand and Washkowitz did not receive compensation for services as a director during the year ended December 31, 1998. All directors are reimbursed for reasonable out-of-pocket expenses incurred in that capacity. During the year ended December 31, 1998, Messrs. Brinberg, Hodes, Paddock and Towbin each received stock options for 1,000 shares and Mr. Kisner received stock options for 900 shares. ADVISORY AGREEMENT The Company has an Advisory Agreement with BLS which provides for the payment of an aggregate of $200,000 per month of compensation to BLS and persons designated by him. Such agreement will continue until BLS dies or is disabled or ceases to own a specified number of shares of common stock of the Company. 21 23 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has not in the past used a compensation committee to determine executive officer compensation. The payments to BLS, the Company's Chairman and Chief Executive Officer, are paid in accordance with the Advisory and Stockholders Agreements. All other executive compensation decisions are made by BLS in accordance with policies established in consultation with the Board of Directors. PART IV ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the ownership of the capital stock of the Company as of December 31, 1998.
NUMBER OF SHARES PERCENTAGE OF OWNERSHIP OF COMMON STOCK CAPITAL STOCK ---------------- ------------- Bernard L. Schwartz............................. 370,199 50.00% *Lehman Brothers Merchant Banking Portfolio Partnership L.P.(a)........................... 180,228 24.34 *Lehman Brothers Offshore Investment Partnership L.P.(b)....................................... 48,880 6.60 *Lehman Brothers Offshore Investment Partnership -- Japan L.P. (b)................. 18,591 2.51 *Lehman Brothers Capital Partners II, L.P.(c)... 122,500 16.55 ------- ------ 740,398 100.00% ======= ======
- --------------- * Collectively referred to as the "Lehman Investors." (a) LBI Group Inc. is the general partner of the limited partnership and is an indirect wholly owned subsidiary of Lehman Brothers Holdings Inc. ("LBH"). (b) Lehman Brothers Offshore Partners Ltd. is the general partner of the limited partnership and is an indirect wholly owned subsidiary of LBH. (c) LBH is the general partner of the limited partnership. The limited partnership is a fund for current and former employees of LBH. STOCKHOLDERS AGREEMENT In connection with the Recapitalization, BLS and the Lehman Investors (collectively, the "Stockholders") entered into a Stockholders Agreement (the "Stockholders Agreement") dated as of October 15, 1997. The Stockholders Agreement contains certain restrictions with respect to the transferability of the Company's capital stock, subject to certain exceptions. The Stockholders Agreement also includes provisions regarding designation of members of the Board of Directors and other voting arrangements. The Stockholders Agreement will terminate at such time as more than 75% of the shares of common stock and shares of common stock issuable upon the exercise of options or rights to acquire common stock or upon conversion of convertible securities (collectively, "Common Equivalents") then outstanding have been sold pursuant to one or more public offerings, except that the registration rights continue as to any common stock held by the Stockholders as long as they own their shares, and the voting provisions contained in the Stockholders Agreement terminate on October 15, 2007. The Stockholders Agreement provides that the Company's Board of Directors be comprised initially of nine directors. Under the Stockholders Agreement, BLS is entitled to appoint five directors, the Lehman Investors are entitled to appoint three directors and BLS and the Lehman Investors are entitled to designate jointly one independent director. Upon the death, retirement or resignation as Chairman or Chief Executive Officer or permanent disability of BLS, the Lehman Investors and the BLS Group (as defined in the 22 24 Stockholders Agreement) will each be entitled to designate 50% of the members of the Board of Directors. The Company's by-laws provide for so long as there is a director designated by the Lehman Investors, certain corporate actions will require the vote of at least one director designated by the Lehman Investors, including (with certain exceptions) (i) mergers, consolidations or recapitalization, (ii) issuances of capital stock (iii) repurchases of and dividends on capital stock, (iv) issuance of employee options to purchase more than 50,000 shares of capital stock, (v) dissolution or liquidation of the Company, (vi) acquisition, sale or exchange of assets in excess of $5 million, (vii) the incurrence of debt or liens in excess of $10 million in the aggregate, (viii) the making of loans, investments or capital expenditures in excess of $10 million in each case in any single year, (ix) transactions with affiliates, (x) prepayments of or amendments to any amount of financing in excess of $10 million, (xi) amendment of the Charter and By-laws of the Company, (xii) engaging in new businesses or ventures and (xiii) certain employee compensation and other matters. The Stockholders Agreement provides that any time after the earlier of (i) the fifth anniversary of the Recapitalization, (ii) six months following the death of BLS or (iii) upon the resignation or retirement of BLS as Chairman or Chief Executive Officer; either the BLS Group or the Lehman Investors (the "Put Party") may request an appraisal of the value of the capital stock of the Company (the "Appraised Value") and may notify the other party of its desire to sell all of its and its transferees' capital stock for a pro rata share of such Appraised Value. The other party may elect to purchase such capital stock, arrange for the purchase of such capital stock by a third party or notify the Put Party that it does not intend to purchase, or arrange for the purchase by a third party of, such capital stock. If the other party is unable or chooses not to arrange for and consummate the purchase of such capital stock, the BLS Group and the Lehman Investors shall cause the Company to be sold as an entirety if such sale can be arranged for a price at least equal to the Appraised Value (subject to reduction by no more than 10% under specified circumstances). Any sale of the Company as an entirety shall include all Stockholders and the proceeds thereof shall be allocated among the Stockholders in accordance with their stock ownership. Notwithstanding other restrictions on transfer set forth in the Stockholders Agreement, from and after March 3, 2001, the Lehman Investors will have the right to transfer capital stock to a third party, subject to specified conditions. The put-sale rights of the Lehman Investors described above and the rights of the Lehman Investors to designate 50% of the members of the Board of Directors upon the death, retirement, resignation or disability of BLS will terminate upon any such transfer. The Stockholders Agreement provides certain first offer and tag-along rights with respect to certain transfers and common stock or Common Equivalents. The Stockholders Agreement grants the Stockholders demand and incidental registration rights with respect to shares of capital stock held by them, which rights will be exercisable at any time after an initial public offering of the Company's common stock approved by the Board of Directors. The Stockholders Agreement contains customary terms and provisions with respect to such registration rights. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS GENERAL BLS owns 50% of the capital stock of the Company and pursuant to the Stockholders Agreement has the right to designate a majority of the Board of Directors of the Company. In addition, BLS serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and devotes such time to the business and affairs of the Company as he deems appropriate. BLS is also Chairman and Chief Executive Officer of Loral Space & Communications Ltd. ("Loral Space"). Because BLS is Chairman of the Board of Directors and has the right to designate a majority of the Directors to the Board of the Company, he has operating control of the Company. The Company has an Advisory Agreement with BLS which provides for the payment of an aggregate of $200,000 per month of compensation to BLS and persons designated by him in exchange for acting as directors and providing advisory services to the Company and its subsidiaries. Such agreement will continue until BLS dies or is disabled or ceases to own a specified number of shares of common stock of the Company. 23 25 The Company has a bonus plan pursuant to which the Company's Board of Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of $50 million before interest, taxes and amortization. Bonuses earned under this plan were $5,055,300, $1,553,200 and $1,247,000 for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial adviser to the Company. The Company pays Lehman Brothers customary fees for services rendered on an as-provided basis. The Agreement may be terminated by the Company or Lehman Brothers upon certain conditions. During the year ended December 31, 1997 and the nine months ended December 31, 1996, Lehman Brothers received underwriting discounts and commissions of $4.6 million and $2.6 million in connection with the offering of the 9 1/4% Notes and 10 3/8% Notes, respectively. In connection with the tender offer component of the Recapitalization, Lehman Brothers received a customary fee for acting as Dealer Manager and Solicitation Agent. In addition, one or more affiliates of Lehman Brothers received underwriting commissions of $4.7 million in connection with the Credit Facility. The Lehman Investors own 50% of the outstanding capital stock of the Company and are entitled to elect three directors (in addition to one independent director jointly designated by BLS and the Lehman Investors) to the Company's Board of Directors. The Lehman Investors have the benefit of certain additional rights under the Stockholders Agreement and the Company's By-laws. In May 1996, the Company purchased $343,000 principal amount of 13 3/4% Debentures from A. Robert Towbin, who is a director of the Company and who is managing director of C. E. Unterberg Towbin. The Company purchased such 13 3/4% Debentures at a price of 103.65% of the principal thereof plus accrued interest. In May 1996, the 13 3/4% Debentures were callable at a price of 103.75% of the principal amount thereof. In connection with the Recapitalization, the Company paid C. E. Unterberg Towbin a fee of $1.0 million for investment banking services. The Company has paid Ronald H. Kisner, who is Secretary and a member of the Board of Directors of the Company, a monthly retainer of $6,000 for legal services. In addition, Mr. Kisner received bonuses and other compensation of $78,000, $176,000 and $41,000 during the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Mr. Kisner also received stock options for 900 and 1,750 shares during the years ended December 31, 1998 and 1997, respectively. As of January 1999, Mr. Kisner is employed by the Company. Pursuant to agreements between the Company and Loral Space (of which BLS is Chairman and Chief Executive Officer), the Company reimburses Loral Space for benefits administration and legal services. The related charges agreed upon were established to reimburse Loral Space for actual costs incurred without profit or fee. The Company believes the arrangements are as favorable to the Company as could have been obtained from unaffiliated parties. Payments to Loral Space were $0.7 million, $0.5 million and $0.2 million for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Included in accounts payable at December 31, 1998 and 1997 is $0.1 million and $0.3 million, respectively. In connection with the Recapitalization, the Company paid Loral Space $80.6 million for the redemption of its 22.5% equity interest in the Company. 24 26 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Financial Statements:
PAGE ---- K & F Industries, Inc. -- Consolidated Financial Statements: Independent Auditors' Report.............................. F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996...................................... F-3 Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996......................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996...................................... F-5 Notes to Consolidated Financial Statements................ F-6
All other schedules and separate financial statements are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Exhibits 10.04 through 10.09 and 10.11, 10.12 and 10.19 and 10.40 are management contracts or compensation plans. (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended December 31, 1998. Exhibits: See exhibit index below. (c) Exhibits 1.01 -- Purchase Agreement dated as of October 9, 1997 between the Company and Lehman Brothers Inc. and Unterberg Harris(10) 2.01 -- Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral Corporation and the Registrant(1) 2.02 -- Stock Purchase Agreement dated September 15, 1997 among the Company and the Stockholders of the Company(10) 2.03 -- First Amendment to Stock Purchase Agreement dated as of October 15, 1997 among the Company and the Stockholders named therein(10) 3.01 -- Amended and Restated Certificate of Incorporation of the Company(10) 3.02 -- Amended and Restated By-Laws of the Company(10) 4.01 -- Indenture dated October 15, 1997 for the 9 1/4% Notes between the Company and State Street Bank and Trust Company, as trustee(10) 4.02 -- Indenture dated as of August 15, 1996 for the 10 3/8% Notes between the Company and Fleet National Bank, as trustee(9) 4.03 -- Indenture dated as of June 1, 1992 for the 11 7/8% Notes between the Company and the Bank of New York, as trustee(5) 4.04 -- Pledge Agreement dated as of June 10, 1992 between the Company and the Bank of New York, as collateral trustee(5) 10.01 -- Securities Purchase Agreement dated as of April 27, 1989, among the Company, BLS and Lehman Brothers Holdings Inc. ("LBH")(1) 10.02 -- Assumption Agreement dated as of April 27, 1989(1) 10.03 -- Shares Services Agreement dated as of April 27, 1996 between Lockheed Martin Tactical Defense Systems -- Akron and Aircraft Braking Systems(10) 10.04 -- Amended and Restated Director Advisory Agreement dated as of October 15, 1997, between the Company and BLS(10)
25 27 10.05 -- Non-Competition Agreement dated as of April 27, 1989, between the Company and BLS(1) 10.06 -- K & F Industries, Inc. Retirement Plan for Salaried Employees(5) 10.07 -- K & F Industries, Inc. Savings Plan for Salaried Employees(5) 10.08 -- Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees -- Plan A(1) 10.09 -- The Loral Systems Group Release and Separation Allowance Plan(1) 10.10 -- Letter Agreement dated April 27, 1989, between the Company and LBH(1) 10.11 -- K & F Industries, Inc. 1989 Stock Option Plan(2) 10.12 -- K & F Industries, Inc. Executive Deferred Bonus Plan(2) 10.13 -- Securities Purchase Agreement dated as of July 22, 1991 among the Company, BLS and the Lehman Investors(4) 10.14 -- Securities Purchase Agreement among the Company, BLS and the Lehman Investors dated September 2, 1994(6) 10.15 -- Amended and Restated Stockholders Agreement dated as of September 2, 1994, by and among the Company, BLS, the Lehman Investors, Chase Capital Partners and Loral Space(6) 10.16 -- Agreement dated as of September 2, 1994, between the Company and Loral Space(6) 10.17 -- Amendment of Stockholders Agreement dated November 8, 1994(6) 10.18 -- Securities Conversion Agreement among the Company and the Converting Stockholders, dated November 8, 1994(6) 10.19 -- K & F Industries, Inc. Supplemental Executive Retirement Plan(8) 10.20 -- Amended and Restated Credit Agreement dated as of August 14, 1996, among Aircraft Braking Systems ("ABS"), Engineered Fabrics Corporation ("EFC"), the Lenders (as defined therein), Lehman Commercial Paper, Inc., as Documentation Agent and Chase Securities Inc., individually and as agent for the Lenders ("Chase")(9) 10.21 -- Amended and Restated Security Agreement dated as of August 14, 1996, between ABS and Chase(9) 10.22 -- Amended and Restated Security Agreement dated as of August 14, 1996, between EFC and Chase(9) 10.23 -- Revolving Credit Note dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank(9) 10.24 -- Facility A Notes dated as of August 14, 1996 executed by each of ABS and EFC in favor of NBD Bank(9) 10.25 -- Amended and Restated K & F Agreement dated as of August 14, 1996, between the Company and Chase(9) 10.26 -- Amended and Restated Subordination Agreement dated as of August 14, 1996, between ABS and Chase(9) 10.27 -- Amended and Restated Subordination Agreement dated as of August 14, 1996, between EFC and Chase(9) 10.28 -- Purchase Agreement dated August 12, 1996 among the Company, Lehman Brothers Inc. and Chase Securities Inc.(9) 10.29 -- Registration Rights Agreement dated as of August 15, 1996 among the Company, Lehman Brothers Inc. and Chase Securities Inc.(9) 10.30 -- Credit Agreement dated as of October 15, 1997 among ABS, EFC, the Lenders (as defined therein), Lehman Commercial Paper, Inc. as Documentation Agent and The First National Bank of Chicago ("FNBC"), as Administrative Agent(10)
26 28 10.31 -- Guarantee and Collateral Agreement dated as of October 15, 1997 among the Company, ABS, EFC, certain subsidiaries named therein and FNBC, as Collateral Agent(10) 10.32 -- Subordination Agreement dated as of October 15, 1997 between ABS and FNBC(10) 10.33 -- Subordination Agreement dated as of October 15, 1997 between EFC and FNBC(10) 10.34 -- Intercreditor Agreement dated as of October 15, 1997 among the Pension Benefit Guaranty Corporation ("PBGC"), FNBC, ABS, EFC and the Company(10) 10.35 -- K & F Agreement dated as of October 15, 1997 executed by the Company in favor of FNBC(10) 10.36 -- Settlement Agreement dated as of October 15, 1997 between the Company and PBGC(10) 10.37 -- Registration Rights Agreement dated as of October 15, 1997 between the Company and Lehman Brothers Inc. and Unterberg Harris(10) 10.38 -- Dealer Manager Agreement dated as of September 15, 1997 between Lehman Brothers Inc. and the Company(10) 10.39 -- Stockholders' Agreement dated as of October 15, 1997 between the Company and the Stockholders identified therein(10) 10.40 -- K & F Industries, Inc. 1998 Stock Option Plan 12.01 -- Statement of computations of ratio of earnings to fixed charges(10) 21.01 -- Subsidiaries of the Registrant(1) 24.01 -- Powers of Attorney (included on signature page) 27.01 -- Financial Data Schedule
- --------------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, No. 33-29035 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990 and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1991 and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Registration Statement on Form S-1, No. 33-47028 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Registration Statement on Form S-4, No. 333-11047 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Registration Statement on Form S-4, No. 333-40977 and incorporated herein by reference. 27 29 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. K & F INDUSTRIES, INC. By: /s/ KENNETH M. SCHWARTZ ------------------------------------ Kenneth M. Schwartz Executive Vice President Date: March 31, 1999 Pursuant to the requirements of The Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board, Chief March 31, 1999 - --------------------------------------------------- Executive Officer and Director Bernard L. Schwartz (principal executive officer) /s/ KENNETH M. SCHWARTZ Executive Vice President March 31, 1999 - --------------------------------------------------- Kenneth M. Schwartz /s/ DIRKSON R. CHARLES Chief Financial Officer March 31, 1999 - --------------------------------------------------- (principal financial and Dirkson R. Charles accounting officer) * Director March 31, 1999 - --------------------------------------------------- David J. Brand * Director March 31, 1999 - --------------------------------------------------- Herbert R. Brinberg * Director March 31, 1999 - --------------------------------------------------- Robert B. Hodes * Director March 31, 1999 - --------------------------------------------------- Ronald H. Kisner * Director March 31, 1999 - --------------------------------------------------- John R. Paddock * Director March 31, 1999 - --------------------------------------------------- A. Robert Towbin * Director March 31, 1999 - --------------------------------------------------- Alan H. Washkowitz *By: /s/ KENNETH M. SCHWARTZ Attorney-in-Fact March 31, 1999 --------------------------------------------- Kenneth M. Schwartz
28 30 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of K & F Industries, Inc.: We have audited the accompanying consolidated balance sheets of K & F Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of K & F Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York January 27, 1999 F-1 31 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1998 1997 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents................................. $ 6,844,000 $ 4,707,000 Accounts receivable -- net................................ 35,990,000 40,014,000 Inventory................................................. 70,296,000 65,871,000 Other current assets...................................... 673,000 559,000 ------------- ------------- Total current assets.............................. 113,803,000 111,151,000 ------------- ------------- Property, Plant and Equipment -- Net........................ 75,280,000 70,638,000 Prepaid Pension Cost........................................ 13,807,000 7,848,000 Deferred Charges -- Net of amortization of $7,456,000 and $4,502,000................................................ 25,631,000 28,382,000 Cost in Excess of Net Assets Acquired -- Net of amortization of $59,041,000 and $52,933,000............................ 179,700,000 190,720,000 Intangible Assets -- Net of amortization of $32,960,000 and $29,804,000............................................... 11,878,000 16,497,000 ------------- ------------- Total Assets...................................... $ 420,099,000 $ 425,236,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable.......................................... $ 15,328,000 $ 17,979,000 Current portion of long-term debt......................... 8,000,000 1,500,000 Interest payable.......................................... 5,133,000 4,725,000 Other current liabilities................................. 46,503,000 54,994,000 ------------- ------------- Total current liabilities......................... 74,964,000 79,198,000 ------------- ------------- Postretirement Benefit Obligation Other Than Pensions....... 75,956,000 75,542,000 Other Long-Term Liabilities................................. 7,664,000 7,830,000 Long-Term Debt.............................................. 477,125,000 519,125,000 Commitments and Contingencies (Notes 12 and 13) Stockholders' Deficiency: Common stock, $.01 par value -- authorized, 1,000,000 shares; issued and outstanding, 740,398 shares......... 7,000 7,000 Additional paid-in capital................................ (63,259,000) (63,259,000) Deficit................................................... (152,616,000) (191,976,000) Accumulated other comprehensive income (loss)............. 258,000 (1,231,000) ------------- ------------- Total stockholders' deficiency.................... (215,610,000) (256,459,000) ------------- ------------- Total Liabilities and Stockholders' Deficiency.... $ 420,099,000 $ 425,236,000 ============= =============
See notes to consolidated financial statements. F-2 32 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Net sales...................................... $345,447,000 $304,331,000 $212,703,000 Cost of sales.................................. 196,190,000 188,001,000 136,813,000 ------------ ------------ ------------ Gross margin................................... 149,257,000 116,330,000 75,890,000 Independent research and development........... 13,705,000 10,873,000 8,623,000 Selling, general and administrative expenses... 35,332,000 40,182,000 17,297,000 Amortization................................... 10,286,000 10,316,000 7,810,000 ------------ ------------ ------------ Operating income............................... 89,934,000 54,959,000 42,160,000 Interest expense, net of interest income of $356,000, $621,000 and $787,000.............. 44,830,000 34,091,000 27,197,000 ------------ ------------ ------------ Income before income taxes and extraordinary charge....................................... 45,104,000 20,868,000 14,963,000 Income tax (provision) benefit................. (5,744,000) (5,184,000) 81,000 ------------ ------------ ------------ Income before extraordinary charge............. 39,360,000 15,684,000 15,044,000 Extraordinary charge from early extinguishment of debt, net of tax.......................... -- (29,513,000) (9,142,000) ------------ ------------ ------------ Net income (loss).............................. $ 39,360,000 $(13,829,000) $ 5,902,000 ============ ============ ============
See notes to consolidated financial statements. F-3 33 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 1998 AND 1997 AND NINE MONTHS ENDED DECEMBER 31, 1996
CLASS B CLASS A PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK ------------------- ------------------- ------------------ ---------------- SHARES SHARES SHARES SHARES ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT --------- ------- --------- ------- -------- ------- ------- ------ Balance, April 1, 1996............. 1,027,635 $10,000 458,994 $ 5,000 553,344 $ 6,000 -- $ -- Net income....................... Pension adjustment............... Cumulative translation adjustments.................... --------- ------- --------- ------- -------- ------- ------- ------ Balance, December 31, 1996......... 1,027,635 10,000 458,994 5,000 553,344 6,000 -- -- Issuance pursuant to stock option plan........................... 11,250 Redemption of capital stock...... (657,436) (7,000) (458,994) (5,000) (194,395) (2,000) Conversion to common stock....... (370,199) (3,000) (370,199) (4,000) 740,398 7,000 Net loss......................... Pension adjustment............... Cumulative translation adjustments.................... --------- ------- --------- ------- -------- ------- ------- ------ Balance, December 31, 1997......... -- -- -- -- -- -- 740,398 7,000 Net Income....................... Pension adjustment............... Cumulative translation adjustments.................... --------- ------- --------- ------- -------- ------- ------- ------ Balance, December 31, 1998......... -- $ -- -- $ -- -- $ -- 740,398 $7,000 ========= ======= ========= ======= ======== ======= ======= ====== ACCUMULATED ADDITIONAL OTHER PAID-IN COMPREHENSIVE COMPREHENSIVE CAPITAL DEFICIT INCOME INCOME ------------ ------------- ------------- ------------- Balance, April 1, 1996............. $155,350,000 $(184,049,000) $(11,023,000) Net income....................... 5,902,000 $ 5,902,000 Pension adjustment............... (77,000) (77,000) Cumulative translation adjustments.................... 570,000 570,000 ------------ ------------- ------------ ------------ Balance, December 31, 1996......... 155,350,000 (178,147,000) (10,530,000) $ 6,395,000 ============ Issuance pursuant to stock option plan........................... 952,000 Redemption of capital stock...... (219,561,000) Conversion to common stock....... Net loss......................... (13,829,000) $(13,829,000) Pension adjustment............... 9,436,000 9,436,000 Cumulative translation adjustments.................... (137,000) (137,000) ------------ ------------- ------------ ------------ Balance, December 31, 1997......... (63,259,000) (191,976,000) (1,231,000) $ (4,530,000) ============ Net Income....................... 39,360,000 $ 39,360,000 Pension adjustment............... 1,213,000 1,213,000 Cumulative translation adjustments.................... 276,000 276,000 ------------ ------------- ------------ ------------ Balance, December 31, 1998......... $(63,259,000) $(152,616,000) $ 258,000 $ 40,849,000 ============ ============= ============ ============
See notes to consolidated financial statements. F-4 34 K & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ----------------------------- DECEMBER 31, 1998 1997 1996 ------------ ------------- ------------- Cash Flows From Operating Activities: Net income (loss)............................ $ 39,360,000 $ (13,829,000) $ 5,902,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation.............................. 9,675,000 9,364,000 6,834,000 Amortization.............................. 10,286,000 10,316,000 7,810,000 Non-cash interest expense-amortization of deferred financing charges.............. 1,932,000 1,507,000 1,101,000 Provision for losses on accounts receivable.............................. 140,000 27,000 2,000 Extraordinary charge from early extinguishment of debt.................. -- 29,513,000 9,142,000 Deferred income taxes..................... 4,912,000 3,621,000 (320,000) Changes in assets and liabilities: Accounts receivable..................... 3,989,000 (4,060,000) (552,000) Inventory............................... (4,254,000) 2,377,000 (4,686,000) Other current assets.................... (114,000) 27,000 246,000 Prepaid pension costs................... (3,283,000) (7,848,000) -- Accounts payable........................ (2,651,000) 6,726,000 (1,232,000) Interest payable........................ 408,000 (1,964,000) (1,528,000) Other current liabilities............... (9,491,000) 5,254,000 4,965,000 Postretirement benefit obligation other than pensions........................ 1,414,000 103,000 49,000 Other long-term liabilities............. (166,000) 1,379,000 (4,339,000) ------------ ------------- ------------- Net cash provided by operating activities......................... 52,157,000 42,513,000 23,394,000 ------------ ------------- ------------- Cash Flows From Investing Activities: Capital expenditures......................... (14,873,000) (10,016,000) (14,091,000) Deferred charges............................. (203,000) (1,781,000) (250,000) ------------ ------------- ------------- Net cash used in investing activities......................... (15,076,000) (11,797,000) (14,341,000) ------------ ------------- ------------- Cash Flows From Financing Activities: Payments of senior revolving loan............ (55,000,000) (61,000,000) (49,000,000) Borrowings under senior revolving loan....... 41,000,000 62,000,000 48,000,000 Payments on long-term debt................... (21,500,000) (280,375,000) (180,000,000) Proceeds from issuance of long-term debt..... -- 507,000,000 180,000,000 Premiums paid on early extinguishment of debt...................................... -- (24,418,000) (4,500,000) Deferred charges -- financing costs.......... -- (12,101,000) (6,772,000) Redemption of equity interests............... -- (218,623,000) -- Proceeds from sale and leaseback transaction............................... 556,000 -- 2,315,000 ------------ ------------- ------------- Net cash used in financing activities......................... (34,944,000) (27,517,000) (9,957,000) ------------ ------------- ------------- Net increase (decrease) in cash and cash equivalents.................................. 2,137,000 3,199,000 (904,000) Cash and cash equivalents, beginning of period....................................... 4,707,000 1,508,000 2,412,000 ------------ ------------- ------------- Cash and cash equivalents, end of period....... $ 6,844,000 $ 4,707,000 $ 1,508,000 ============ ============= ============= Supplemental Information: Interest paid during the period.............. $ 42,846,000 $ 35,169,000 $ 28,411,000 ============ ============= ============= Income taxes paid during the period.......... $ 1,055,000 $ 136,000 $ 344,000 ============ ============= =============
See notes to consolidated financial statements. F-5 35 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the "Company") is primarily engaged in the design, development, manufacture and distribution of wheels, brakes and anti-skid systems for commercial, military and general aviation aircraft, and the manufacture of materials for fuel tanks, iceguards, inflatable oil booms and various other products made from coated fabrics for military and commercial uses. The Company serves the aerospace industry and sells its products to airframe manufacturers and commercial airlines throughout the world and to the United States and certain foreign governments. The Company's activities are conducted through its two wholly owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft Braking Systems"), which generated approximately 88% of the Company's total revenues during the year ended December 31, 1998 and Engineered Fabrics Corporation (collectively, the "Subsidiaries"), which generated approximately 12% of the Company's total revenues during the year ended December 31, 1998. On October 15, 1997, the Company consummated a recapitalization (the "Recapitalization") consisting of the repurchase of approximately 64% of its outstanding capital stock for a total purchase price of $230.2 million and the repayment of all outstanding indebtedness. Upon giving effect to the repurchase, Bernard L. Schwartz ("BLS") and certain merchant banking partnerships affiliated with Lehman Brothers Holdings Inc. (the "Lehman Investors") each became the owner of 50% of the capital stock of the Company. To finance the above transactions, the Company entered into a new credit facility (the "Credit Facility") for $372 million and issued $185 million of 9 1/4% Senior Subordinated Notes due 2007 (the "9 1/4% Notes"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Year-End Change -- Effective December 31, 1996, the Company changed its fiscal year-end from March 31 to December 31. Accordingly, the accompanying financial statements include audited financial statements for the nine months ended December 31, 1996. Principles of Consolidation -- The consolidated financial statements include the accounts of K & F Industries, Inc. and its Subsidiaries. All material intercompany accounts and transactions between these entities have been eliminated. Cash and Cash Equivalents -- Cash and cash equivalents consist of cash, commercial paper and other investments that are readily convertible into cash and have original maturities of three months or less. Revenue and Expense Recognition -- Sales are recorded as units are shipped. The Company customarily sells original wheel and brake equipment below cost as an investment in a new airframe which is expected to be recovered through the subsequent sale of replacement parts. These commercial investments (losses) are recognized when original equipment is shipped. For the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, investments were $31.9 million, $28.3 million and $20.2 million, respectively. Losses on U.S. government contracts are immediately recognized in full when determinable. Inventory -- Inventory is stated at average cost, not in excess of net realizable value. In accordance with industry practice, inventoried costs may contain amounts relating to contracts with long production cycles, a portion of which will not be realized within one year. Property, Plant and Equipment -- Property, plant and equipment are stated at cost. Maintenance and repairs are expensed when incurred; renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is included in the results of operations. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets as follows: buildings and improvements -- 8 to 40 years; machinery, equipment, furniture and fixtures -- 3 to 25 years; leasehold improvements -- over the life of the applicable lease or 10 years, whichever is shorter. F-6 36 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Charges -- Deferred charges consist primarily of financing costs ($9.7 million and $11.7 million, which is net of amortization (non-cash interest expense) of $2.4 million and $0.4 million at December 31, 1998 and 1997, respectively), and program participation costs ($12.3 million and $13.1 million, which is net of amortization of $4.0 million and $3.2 million, at December 31, 1998 and December 31, 1997, respectively) paid in connection with the sole-source award of wheels, brakes and anti-skid equipment on the McDonnell Douglas Corporation's MD-90 twin-jet program. Program participation costs are being amortized on a straight-line method over a period of 20 years. Deferred financing charges are primarily being amortized on an effective interest method over 6 to 10 years which reflect the terms of the Company's debt. Cost in Excess of Net Assets Acquired -- Cost in excess of net assets acquired is being amortized on the straight-line method over a period of 40 years. The Company reviews the cost in excess of net assets acquired for recoverability on an on-going basis using undiscounted cash flows. Impairments would be recognized in operating results. Intangible Assets -- Intangible assets consist of patents, licenses and computer software which are stated at cost and are being amortized on a straight-line method over periods of 5 to 30 years. Evaluation of Long-Lived Assets -- Long-lived assets are assessed for recoverability on an on-going basis in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. In evaluating the value and future benefits of long-lived assets, their carrying value would be compared to management's estimate of the anticipated undiscounted future net cash flows of the related long-lived asset. There were no adjustments to the carrying amount of long-lived assets during the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, resulting from the Company's evaluations. Warranty -- Estimated costs of product warranty are accrued when individual claims arise with respect to a product. When the Company becomes aware of such defects, the estimated costs of all potential warranty claims arising from such defects are fully accrued. Business and Credit Concentrations -- The Company's customers are concentrated in the airline industry but are not concentrated in any specific region. The U. S. government accounted for approximately 14%, 12% and 12% of total sales for the years ended December 31, 1998 and 1997 and the nine months ended December 31,1996, respectively. No other single customer accounted for 10% or more of consolidated revenues for the year and fiscal years then ended, and there were no significant accounts receivable from a single customer, except the U.S. government, at December 31, 1998 and December 31, 1997. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation Plans -- As allowed by SFAS 123, "Accounting for Stock-Based Compensation," the Company records compensation expense for its stock-based compensation plans in accordance with the intrinsic-value method prescribed by Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees." Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. Reporting Changes -- During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Also during 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments. The Company also adopted F-7 37 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 132 during 1998, "Employee Disclosures about Pensions and Other Postretirement Benefits," which revises the disclosure requirements for pensions and other postretirement benefit plans. Adoption of the above disclosure requirements did not affect the Company's financial results. New Accounting Pronouncements -- In June 1998, The Financial Accounting Standards Board issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact, if any, on its financial position upon the adoption of SFAS No. 133. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines which costs incurred to develop or purchase internal-use software should be capitalized and which costs should be expensed and is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-1 will not have a material impact on its financial position, results of operations or cash flows. Reclassifications -- Certain amounts in the prior years' financial statements have been reclassified to conform to the current period presentation. 3. ACCOUNTS RECEIVABLE
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- Accounts receivable, principally from commercial customers............................................... $32,434,000 $36,506,000 Accounts receivable on U.S. government and other long-term contracts............................................... 3,803,000 3,904,000 Allowances................................................ (247,000) (396,000) ----------- ----------- Total........................................... $35,990,000 $40,014,000 =========== ===========
4. INVENTORY
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- Raw materials and work-in-process......................... $46,245,000 $43,236,000 Finished goods............................................ 14,364,000 11,726,000 Inventoried costs related to U.S. government and other long-term contracts..................................... 9,687,000 10,909,000 ----------- ----------- Total........................................... $70,296,000 $65,871,000 =========== ===========
F-8 38 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Land.................................................... $ 661,000 $ 661,000 Buildings and improvements.............................. 35,257,000 34,895,000 Machinery, equipment, furniture and fixtures............ 119,949,000 111,360,000 ------------ ------------ Total......................................... 155,867,000 146,916,000 Less accumulated depreciation and amortization.......... 80,587,000 76,278,000 ------------ ------------ Total......................................... $ 75,280,000 $ 70,638,000 ============ ============
6. OTHER CURRENT LIABILITIES
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- Accrued payroll costs..................................... $17,448,000 $17,399,000 Accrued taxes............................................. 6,864,000 7,895,000 Accrued costs on long-term contracts...................... 2,342,000 7,590,000 Accrued warranty costs.................................... 8,165,000 7,496,000 Customer credits.......................................... 2,777,000 4,172,000 Postretirement benefit obligation other than pensions..... 3,000,000 2,000,000 Other..................................................... 5,907,000 8,442,000 ----------- ----------- Total........................................... $46,503,000 $54,994,000 =========== ===========
7. LONG-TERM DEBT
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Senior Revolving Loan................................... $ -- $ 14,000,000 Senior Term Loan A...................................... 49,375,000 49,875,000 Senior Term Loan B...................................... 250,750,000 271,750,000 9 1/4% Senior Subordinated Notes due 2007............... 185,000,000 185,000,000 ------------ ------------ Total................................................... 485,125,000 520,625,000 Less current maturities................................. 8,000,000 1,500,000 ------------ ------------ Total......................................... $477,125,000 $519,125,000 ============ ============
The Credit Facility consists of a term loan facility in an aggregate principal amount of $300.1 million (the "Term Loans") and a revolving credit facility in an aggregate principal amount of up to $50 million (the "Revolving Loan"). The Term Loans consist of a Tranche A term loan ("Term Loan A") in the principal amount of $49.4 million and a Tranche B term loan ("Term Loan B") in the principal amount of $250.7 million. The interest rates under the Credit Facility are, at the Company's option, either the LIBOR or prime rate, in each case plus a margin. At December 31, 1998 and 1997, the average interest rate on outstanding borrowings on the Credit Facility was 7.4% and 8.3%, respectively. As a requirement of the Credit Facility, the Company entered into an interest rate swap agreement to reduce the impact of potential increases in interest rates on the Credit Facility. The interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95% and matures December 17, 2001 with an option for the counterparty to extend the agreement to December 17, 2003. At December 31, 1998, the notional value on the interest rate swap agreement was $135 F-9 39 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) million and the fair value was approximately $4.6 million in favor of the counterparty (taking into account interest rates in effect at December 31, 1998), representing the amount the Company would pay if the agreement was terminated. Any differences paid or received on the interest rate swap agreement are recognized as adjustments to current interest expense. This interest rate agreement effectively fixes the Company's all in borrowing rate at 8.3% on $135 million of borrowings at December 31, 1998. Obligations under the Credit Facility are secured by a lien on substantially all of the assets of the Subsidiaries and are guaranteed by K & F. Term Loan A is a six-year quarterly amortizing facility maturing October 15, 2003, with installments of $0.5 million per year in years one to five and $47.4 million in year six. Term Loan B is an eight-year quarterly amortizing facility maturing October 15, 2005, with scheduled installments of $1.0 million per year in years one to seven and $245 million in year eight. The Company is required to make mandatory reductions in the Credit Facility in the event of certain asset sales, the incurrence of certain additional indebtedness, and annually from a portion of excess cash flow (as defined). As a result of the excess cash flow calculation, $26.5 million is required to be paid in 1999. The Company voluntarily prepaid $20 million during 1998 and the balance of $6.5 million (classified as current at December 31, 1998) was paid in January 1999. Scheduled debt maturities of the Term Loans for the five years subsequent to December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------ ----------- 1999................................................. $ 8,000,000 2000................................................. 1,500,000 2001................................................. 1,500,000 2002................................................. 1,500,000 2003................................................. 48,375,000
The Credit Facility provides for Revolving Loans not to exceed $50 million, with up to $20 million available for letters of credit. The Revolving Loan commitment terminates on October 15, 2003. At December 31, 1998 and 1997, the Company had $42.0 million and $27.2 million available to borrow, respectively. At December 31, 1998 and 1997, the Company had outstanding letters of credit of $8.0 million and $8.8 million, respectively. The Credit Facility contains certain covenants and events of default, including limitations on additional indebtedness, liens, asset sales, making certain restricted payments, capital expenditures, creating guarantee obligations and material lease obligations. The Credit Facility also contains certain financial ratio requirements including a cash interest coverage ratio, a leverage ratio and maintenance of a minimum adjusted net worth. The Company was in compliance with all covenants at December 31, 1998. On October 15, 1997, the Company issued $185 million of 9 1/4% Notes which mature on October 15, 2007. The 9 1/4% Notes are not subject to a sinking fund. The 9 1/4% Notes may not be redeemed prior to October 15, 2002. On or after October 15, 2002, the Company may redeem the 9 1/4% Notes at descending premiums ranging from 104.625% in October 2002 to no premium after October 2005. Proceeds from the Credit Facility and the 9 1/4% Notes were used to finance the Recapitalization. As a result of the Recapitalization, the Company recorded an extraordinary charge of $27.8 million (net of tax of $2.0 million) for the write-off of unamortized financing costs, redemption premiums and tender offer payments. On June 1, 1997, the Company redeemed $30 million aggregate principal amount of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of the principal amount thereof. In connection therewith, the F-10 40 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company recorded an extraordinary charge of $1.7 million (net of tax of $0.6 million) for the write-off of unamortized financing costs and redemption premiums. During the nine months ended December 31, 1996, the Company redeemed $180 million of its 13 3/4% Senior Subordinated Debentures at a redemption price of 102.5%. In connection therewith, the Company recorded an extraordinary charge of $9.1 million for the write-off of unamortized financing costs and redemption premiums. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of all financial instruments reported on the balance sheet at December 31, 1998 and 1997 approximate their fair value, except as discussed below. See Note 7 for disclosure of the fair value of the Company's interest rate swap agreement. The fair value of the Company's total debt based on quoted market prices or on current rates for similar debt with the same maturities was approximately $487 million and $525 million at December 31, 1998 and 1997, respectively. 9. CAPITAL STOCK a. In connection with the Recapitalization, the Company purchased all but 740,398 shares of its capital stock at a per share price of $175.58. All purchased shares were retired and canceled. The 740,398 retained shares were reclassified as common stock. In connection with the purchase of the capital stock, the Company directly increased its stockholders' deficiency by $218.6 million. b. The Company has two stock option plans which provide for the grant of non-qualified or incentive stock options to acquire an aggregate of 100,000 authorized but unissued shares of common stock. The options granted are exercisable in four equal installments on the second, third, fourth and fifth anniversaries of the date of grant, and remain exercisable until the expiration of the option, 10 years from the date of the grant. All options granted in 1998 and 1997 were issued with an exercise price of $175.00 per share. Stock option activity is summarized as follows:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ----------------- DECEMBER 31, 1998 1997 1996 ------ ------- ----------------- Outstanding at beginning of year........ 35,550 11,250 11,500 Granted................................. 11,800 35,550 -- Exercised............................... -- (11,250) -- Canceled................................ -- -- (250) ------ ------- ------ Outstanding at end of year.............. 47,350 35,550 11,250 ====== ======= ====== Exercisable options outstanding......... -- -- 10,375 ====== ======= ====== Available for future grant.............. 41,400 3,200 38,750 ====== ======= ======
The weighted-average remaining contractual life of options outstanding at December 31, 1998 was 9.1 years. All Company options issued prior to 1997 were granted at a per share exercise price of $84.60. All such options were exercised prior to the consummation of the Recapitalization and the common stock issued upon exercise of such options was purchased as part of the Recapitalization at a per share price of $175.58. In connection therewith, the Company recorded a charge to operations of $1.0 million. F-11 41 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to the stock option plans as described above, certain individuals held options to purchase 70,500 shares of the Company's capital stock owned by BLS at a per share exercise price of $40. All such options were exercised prior to the consummation of the Recapitalization and the common stock issued upon exercise of such options was purchased as part of the Recapitalization at a per share price of $175.58. In connection therewith, the Company recorded a charge to operations of $9.6 million. c. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," effective April 1, 1996. As permitted by SFAS No. 123, the Company accounts for its stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 requires the disclosure of pro forma net income (loss) had the Company adopted the fair value method. However, disclosure has been omitted because the pro forma effect on net income (loss) required to be disclosed under SFAS No. 123 is not material to the Company's results of operations. d. In April 1996, Loral Space & Communications Ltd. ("Loral Space") (which then owned 22.5% of the outstanding capital stock of K & F) granted options to certain officers and employees of K & F to purchase 265,000 shares of Loral Space common stock at $10.50 per share. Such exercise price was equal to the market price at grant date. These options expire ten years from the date of grant and become exercisable ratably over a five-year period. K & F is obligated to pay semi-annual interest at the six month LIBOR rate plus two percent to Loral Space on the balance of options issued but not exercised, times $10.50. During the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, the amount charged against income was $0.2 million, $0.2 million and $0.1 million, respectively. As described above, the Company accounts for its stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25. SFAS No. 123 requires that equity instruments granted to an employee by a principal stockholder be included as part of the disclosure. However, disclosure has been omitted because the pro forma incremental effect of these options on net income (loss) required to be disclosed under SFAS No. 123 is not material to the Company's results of operations. 10. ACCUMULATED OTHER COMPREHENSIVE INCOME Components of other comprehensive income (loss) consist of the following:
ACCUMULATED MINIMUM CUMULATIVE OTHER PENSION TRANSLATION COMPREHENSIVE LIABILITY ADJUSTMENTS INCOME (LOSS) --------- ----------- ------------- April 1, 1996..................... $ (10,572,000) $ (451,000) $ (11,023,000) 1996 Change....................... (77,000) 570,000 493,000 ---------------------- ----------------- ---------------------- December 31, 1996................. (10,649,000) 119,000 (10,530,000) 1997 Change....................... 9,436,000 (137,000) 9,299,000 ---------------------- ----------------- ---------------------- December 31, 1997................. (1,213,000) (18,000) (1,231,000) 1998 Change....................... 1,213,000 276,000 1,489,000 ---------------------- ----------------- ---------------------- December 31, 1998................. $ -- $ 258,000 $ 258,000 ====================== ================= ======================
The tax benefit or expense related to the components of other comprehensive income was not material. F-12 42 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. EMPLOYEE BENEFIT PLANS The Company provides pension benefits to substantially all employees through hourly and salaried pension plans. The plans provide benefits based primarily on the participant's years of service. The salaried plan also includes voluntary employee contributions. The Company's funding policy is to contribute the lesser of the amount required by the Employee Retirement Income Security Act of 1974 ("ERISA") without considering the $10 million credit balance accumulated by the Company per ERISA calculations on December 31, 1997 plus interest, or the maximum deductible for tax purposes. The Company provides postretirement health care and life insurance benefits for all eligible employees and their dependents active at April 27, 1989 and thereafter, and postretirement life insurance benefits for retirees prior to April 27, 1989. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements of the Company's pension plans. The health care plans are generally contributory and the life insurance plans are generally non-contributory. F-13 43 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit and other postretirement benefit plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS DECEMBER 31, DECEMBER 31, -------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.............................. $81,552,000 $73,120,000 $ 65,444,000 $ 58,846,000 Service cost........................ 2,535,000 1,970,000 1,824,000 1,242,000 Interest cost....................... 5,830,000 5,662,000 5,195,000 4,422,000 Plan participants' contributions.... 337,000 267,000 493,000 531,000 Amendments.......................... 584,000 -- 11,801,000 -- Actuarial loss (gain)............... 2,907,000 4,144,000 (2,407,000) 3,130,000 Benefits paid....................... (3,913,000) (3,611,000) (3,408,000) (2,727,000) ----------- ----------- ------------ ------------ Benefit obligation at end of year... 89,832,000 81,552,000 78,942,000 65,444,000 ----------- ----------- ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year................. 78,676,000 63,268,000 -- -- Actual return on plan assets........ 9,212,000 11,214,000 -- -- Employer contributions.............. 4,887,000 7,538,000 2,915,000 2,196,000 Plan participants' contributions.... 337,000 267,000 493,000 531,000 Benefits paid....................... (3,913,000) (3,611,000) (3,408,000) (2,727,000) ----------- ----------- ------------ ------------ Fair value of plan assets at end of year.............................. 89,199,000 78,676,000 -- -- ----------- ----------- ------------ ------------ Funded status....................... (633,000) (2,876,000) (78,942,000) (65,444,000) Unrecognized actuarial loss......... 12,860,000 11,937,000 18,450,000 21,898,000 Unrecognized prior service cost..... 1,580,000 1,463,000 (18,464,000) (33,996,000) ----------- ----------- ------------ ------------ Net amount recognized............... $13,807,000 $10,524,000 $(78,956,000) $(77,542,000) =========== =========== ============ ============ AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Prepaid (accrued) benefit cost...... $13,807,000 $ 7,848,000 $(78,956,000) $(77,542,000) Intangible asset.................... -- 1,463,000 -- -- Accumulated other comprehensive income............................ -- 1,213,000 -- -- ----------- ----------- ------------ ------------ Net amount recognized............... $13,807,000 $10,524,000 $(78,956,000) $(77,542,000) =========== =========== ============ ============ WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate....................... 7.00% 7.25% 7.00% 7.25% Expected return on plan assets...... 9.50 9.50 -- -- Rate of compensation increase....... 4.50 4.50 4.50 4.50
F-14 44 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents the net periodic benefit cost for the defined benefit and postretirement benefit plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------------------------- --------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED ------------------------- DECEMBER 31, ------------------------- DECEMBER 31, 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------------- ----------- ----------- ----------------- Service cost......... $ 2,535,000 $ 1,970,000 $ 1,521,000 $ 1,824,000 $ 1,242,000 $ 873,000 Interest cost........ 5,830,000 5,662,000 3,980,000 5,195,000 4,422,000 3,176,000 Expected return on plan assets........ (7,518,000) (6,096,000) (3,801,000) -- -- -- Amortization of prior service cost....... 467,000 413,000 310,000 (3,730,000) (4,677,000) (3,508,000) Recognized actuarial loss............... 290,000 362,000 564,000 1,040,000 1,259,000 1,120,000 ----------- ----------- ----------- ----------- ----------- ----------- Net periodic benefit cost............... $ 1,604,000 $ 2,311,000 $ 2,574,000 $ 4,329,000 $ 2,246,000 $ 1,661,000 =========== =========== =========== =========== =========== ===========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the plan with accumulated benefit obligations in excess of plan assets was $36.0 million, $32.6 million and $31.9 million, respectively, as of December 31, 1997. For measurement purposes, a 7.14% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.25% for 2001 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the retiree medical plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
ONE-PERCENTAGE- ONE-PERCENTAGE- POINT INCREASE POINT DECREASE --------------- --------------- Effect on total of service cost and interest cost components.............................. $ 1,103,000 $ (888,000) Effect on postretirement benefit obligation.... 11,347,000 (9,241,000)
Investments held by the Company's pension plans consist primarily of S&P 500 equity securities and investment grade fixed income securities. Eligible employees having one year of service also participate in one of the Company's Savings Plans (hourly or salaried). Under one of these plans, the Company matches 50% of a participating employee's contributions, up to 6% of compensation. The employer contributions generally vest to participating employees after five years of service. The matching contributions were $1,205,000, $782,000 and $572,000 for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. F-15 45 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. COMMITMENTS The Company is party to various non-cancelable operating leases which are longer than a one-year term for certain data processing, and other equipment and facilities with minimum rental commitments payable as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------ ---------- 1999..................................................... $5,557,000 2000..................................................... 5,006,000 2001..................................................... 2,329,000 2002..................................................... 1,603,000 2003..................................................... 1,202,000 Thereafter............................................... 5,509,000
Rental expense was $5,410,000, $5,060,000 and $3,491,000 for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. 13. CONTINGENCIES There are various lawsuits and claims pending against the Company incidental to its business. Although the final results in such suits and proceedings cannot be predicted with certainty, in the opinion of management, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 14. INCOME TAXES The components of the net deferred tax asset and corresponding valuation allowance are as follows:
DECEMBER 31, ------------------------------ 1998 1997 ------------- ------------- Tax net operating loss carryforwards.......... $ 62,335,000 $ 72,270,000 Temporary differences: Postretirement and other employee benefits................................. 33,899,000 32,772,000 Intangibles................................. 37,261,000 39,929,000 Program participation costs................. (6,349,000) (6,409,000) Other....................................... 10,460,000 13,083,000 ------------- ------------- Deferred tax benefit.......................... 137,606,000 151,645,000 Valuation allowance........................... (137,606,000) (151,645,000) ------------- ------------- Net deferred tax asset........................ $ -- $ -- ============= =============
SFAS No. 109 requires that a valuation allowance be recorded against tax assets which are not likely to be realized. The Company has established a valuation allowance against these benefits given the uncertain nature of their ultimate realization. In the event of future recognition of a 100 percent reduction of the valuation allowance, income tax expense and goodwill would be reduced by $62 million and $76 million, respectively. The realization of these benefits would reduce future income tax payments by $138 million. F-16 46 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's provision (benefit) for income taxes before extraordinary charges consists of:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED --------------------------- DECEMBER 31, 1998 1997 1996 ------------ ----------- ----------------- Current domestic provision............. $ 17,135,000 $ 8,001,000 $ 1,330,000 Foreign provision...................... 230,000 908,000 170,000 Domestic utilization of net operating loss carryforwards................... (11,621,000) (5,136,000) (1,581,000) Change in net deferred tax asset....... -- 1,411,000 -- ------------ ----------- ----------- Income tax provision (benefit)......... $ 5,744,000 $ 5,184,000 $ (81,000) ============ =========== ===========
The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED -------------- DECEMBER 31, 1998 1997 1996 ----- ----- ----------------- Statutory federal income tax rate.................. 35.0% 35.0% 35.0% Change in the valuation allowance.................. -- 8.0 (29.4) Utilization of tax net operating losses............ (27.3) (25.9) (10.6) State tax.......................................... 4.9 3.3 3.4 Foreign subsidiaries tax provision................. 0.1 4.4 1.1 ----- ----- ----- Effective income tax rate.......................... 12.7% 24.8% (0.5)% ===== ===== =====
The Company has tax net operating loss carryforwards of approximately $156 million at December 31, 1998. The tax net operating losses expire from 2006 through 2012, with $30 million of carryforwards expiring in 2006. 15. RELATED PARTY TRANSACTIONS BLS owns 50% of the capital stock of the Company and pursuant to the Stockholders Agreement has the right to designate a majority of the Board of Directors of the Company. In addition, BLS serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and devotes such time to the business and affairs of the Company as he deems appropriate. BLS is also Chairman and Chief Executive Officer of Loral Space. Because BLS is Chairman of the Board of Directors and has the right to designate a majority of the Directors to the Board of the Company, he has operating control of the Company. The Company has an Advisory Agreement with BLS which provides for the payment of an aggregate of $200,000 per month of compensation to BLS and persons designated by him. Such agreement will continue until BLS dies or is disabled or ceases to own a specified number of shares of common stock of the Company. The Company has a bonus plan pursuant to which the Company's Board of Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of $50 million before interest, taxes and amortization. Bonuses earned under this plan were $5,055,300, $1,553,200 and $1,247,000 for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Pursuant to a financial advisory agreement between Lehman Brothers and the Company, Lehman Brothers acts as exclusive financial adviser to the Company. The Company pays Lehman Brothers customary fees for services rendered on an as-provided basis. The Agreement may be terminated by the Company or Lehman Brothers upon certain conditions. During the year ended December 31, 1997 and the nine month ended December 31, 1996, Lehman Brothers received underwriting discounts and commissions of $4.6 million F-17 47 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and $2.6 million in connection with the offering of the 9 1/4% Notes and 10 3/8% Notes, respectively. In connection with the tender offer component of the Recapitalization, Lehman Brothers received a customary fee for acting as Dealer Manager and Solicitation Agent. In addition, one or more affiliates of Lehman Brothers received underwriting commissions of $4.7 million in connection with the Credit Facility. The Lehman Investors own 50% of the outstanding capital stock of the Company and are entitled to elect three directors (in addition to one independent director jointly designated by BLS and the Lehman Investors) to the Company's Board of Directors. The Lehman Investors have the benefit of certain additional rights under the Stockholders' Agreement and the Company's By-laws. In May 1996, the Company purchased $343,000 principal amount of 13 3/4% Debentures from A. Robert Towbin, as trustee, who is a director of the Company and who is managing director of C. E. Unterberg Towbin. The Company purchased such 13 3/4% Debentures at a price of 103.65% of the principal thereof plus accrued interest. In May 1996, the 13 3/4% Debentures were callable at a price of 103.75% of the principal amount thereof. In connection with the Recapitalization, the Company paid Unterberg Harris a fee of $1.0 million for investment banking services. The Company has paid Ronald H. Kisner, who is Secretary and a member of the Board of Directors of the Company, a monthly retainer of $6,000 for legal services. In addition, Mr. Kisner received bonuses and other compensation of $78,000, $176,000 and $41,000 during the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Mr. Kisner also received stock options for 900 and 1,750 shares during the years ended December 31, 1998 and 1997, respectively. As of January 1, 1999, Mr. Kisner is employed by the Company. Pursuant to agreements between the Company and Loral Space (of which BLS is Chairman and Chief Executive Officer), the Company reimburses Loral Space for benefits administration and legal services. The related charges agreed upon were established to reimburse Loral Space for actual costs incurred without profit or fee. The Company believes the arrangements are as favorable to the Company as could have been obtained from unaffiliated parties. Payments to Loral Space were $0.7 million, $0.5 million and $0.2 million for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Included in accounts payable at December 31, 1998 and 1997 is $0.1 million and $0.3 million, respectively. In connection with the Recapitalization, the Company paid Loral Space $80.6 million for the redemption of its 22.5% equity interest in the Company. 16. SEGMENTS The Company's activities are conducted through its two wholly owned subsidiaries, Aircraft Braking Systems and Engineered Fabrics, each considered an operating segment. Aircraft Braking Systems manufactures aircraft wheels, brakes and anti-skid systems. Engineered Fabrics manufactures aircraft fuel tanks and iceguards and various other products from coated fabrics. The accounting policies of the subsidiaries are the same as those described in the summary of significant accounting policies. Both subsidiaries are managed separately due to different products, technology and marketing strategies. The Company evaluates performance of the subsidiaries based on profits from operations before interest, income taxes and extraordinary charges. F-18 48 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents financial information about the Company's segments:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Sales: Aircraft Braking Systems............... $305,911,000 $269,078,000 $192,014,000 Engineered Fabrics..................... 39,536,000 35,253,000 20,689,000 ------------ ------------ ------------ $345,447,000 $304,331,000 $212,703,000 ============ ============ ============ Earnings Before Interest Taxes Depreciation and Amortization: Aircraft Braking Systems............... $102,894,000 $ 70,365,000 $ 53,909,000 Engineered Fabrics..................... 7,001,000 4,274,000 2,895,000 ------------ ------------ ------------ $109,895,000 $ 74,639,000 $ 56,804,000 ============ ============ ============ Operating Income: Aircraft Braking Systems............... $ 84,927,000 $ 52,793,000 $ 40,907,000 Engineered Fabrics..................... 5,007,000 2,166,000 1,253,000 ------------ ------------ ------------ $ 89,934,000 $ 54,959,000 $ 42,160,000 ============ ============ ============ Depreciation and Amortization: Aircraft Braking Systems............... $ 17,967,000 $ 17,572,000 $ 13,002,000 Engineered Fabrics..................... 1,994,000 2,108,000 1,642,000 ------------ ------------ ------------ $ 19,961,000 $ 19,680,000 $ 14,644,000 ============ ============ ============ Capital Expenditures: Aircraft Braking Systems............... $ 13,726,000 $ 9,462,000 $ 13,161,000 Engineered Fabrics..................... 886,000 547,000 903,000 ------------ ------------ ------------ Total Segments................. 14,612,000 10,009,000 14,064,000 Corporate.............................. 261,000 7,000 27,000 ------------ ------------ ------------ $ 14,873,000 $ 10,016,000 $ 14,091,000 ============ ============ ============
DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Total Assets: Aircraft Braking Systems............... $352,057,000 $354,099,000 $352,182,000 Engineered Fabrics..................... 57,773,000 59,089,000 56,247,000 ------------ ------------ ------------ $409,830,000 $413,188,000 $408,429,000 ============ ============ ============
F-19 49 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following reconciles the total assets for the reportable segments to the Company's consolidated assets:
DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Total Assets: Total assets for reportable segments... $409,830,000 $413,188,000 $408,429,000 Deferred financing costs not allocated to segments......................... 9,734,000 11,666,000 8,745,000 Corporate assets....................... 535,000 382,000 530,000 Deferred tax asset not allocated to segments............................ -- -- 1,411,000 ------------ ------------ ------------ Consolidated Total............. $420,099,000 $425,236,000 $419,115,000 ============ ============ ============
The following represents the Company's total sales by products:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Braking systems.......................... $305,911,000 $269,078,000 $192,014,000 Fuel tanks............................... 30,256,000 26,564,000 14,030,000 Other.................................... 9,280,000 8,689,000 6,659,000 ------------ ------------ ------------ $345,447,000 $304,331,000 $212,703,000 ============ ============ ============
The following represents export sales by geographic location:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Sales: United States.......................... $197,268,000 $172,277,000 122,207,000 Europe................................. 74,228,000 70,578,000 49,894,000 Asia................................... 35,845,000 29,763,000 22,098,000 North America.......................... 20,165,000 16,671,000 7,277,000 South America.......................... 13,042,000 10,211,000 9,732,000 Australia.............................. 4,899,000 4,831,000 2,495,000 ------------ ------------ ------------ $345,447,000 $304,331,000 $212,703,000 ============ ============ ============
Sales are attributed to geographic location based on the location of the customer. Long-lived assets held outside of the United States were $318,000, $333,000 and $293,000 as of December 31, 1998, 1997 and 1996, respectively. The U.S. government accounted for approximately 14%, 12% and 12% of the Company's total sales for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. F-20 50 K & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. COMPARATIVE RESULTS (UNAUDITED) The following financial information for the years ended December 31, 1998, 1997 and 1996 is presented for comparative purposes. The financial information for the year ended December 31, 1996 is unaudited.
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net sales................................ $345,447,000 $304,331,000 $277,655,000 Gross margin............................. 49,257,000 116,330,000 96,684,000 Operating income......................... 89,934,000 54,959,000 50,009,000 Income before income taxes and extraordinary charge................... 45,104,000 20,868,000 13,052,000 Income before extraordinary charge....... 39,360,000 15,684,000 13,133,000 Net income (loss)........................ 39,360,000 (13,829,000) 3,991,000
F-21 EX-10.40 2 STOCK OPTION AGREEMENT 1 Exhibit 10.40 K&F INDUSTRIES, INC. 1998 STOCK OPTION PLAN 1. PURPOSES The purposes of this Plan are: (a) to further the growth and success of K&F Industries, Inc. (the "Company") and its subsidiary corporations by enabling selected employees and directors of, or consultants to, the Company or its subsidiary corporations to acquire shares of its Common Stock, $.O1 par value (the "Common Stock"), under the terms and conditions and in the manner contemplated by this Plan, thereby increasing their personal involvement and interest in the Company and its subsidiary corporations, encouraging their continued service with the Company and its subsidiary corporations and promoting the interest of the Company and all of its stockholders; (b) to enable the Company or its subsidiary corporations to obtain and retain the service of employees, directors or consultants necessary to the continued growth and success of the Company and its subsidiary corporations; and (c) to provide a means of rewarding outstanding performance to the Company and its subsidiary corporations. Options granted under this Plan will be either options which are intended to qualify as "incentive stock options" ("ISOs") under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or as non-qualified stock options ("NSOs") which are not intended to qualify as "incentive stock options" under Section 422A of the Code. For the purposes of the Plan, the terms "subsidiary" and "subsidiary corporation" shall mean "subsidiary corporation", as such term is defined in Section 425(e) and (f) of the Code. Unless the context otherwise requires, any ISO or NSO shall hereinafter be referred to as an "Option". 2. ADMINISTRATION OF PLAN (a) Option Committee. The Plan shall be administered by the Board of Directors of the Company (the "Board") or an Option Committee (the "Committee") consisting of two or more persons appointed to such Committee from time to time by the Board; provided, however, that (i) to the extent necessary in order to permit officers and directors of the Company to be exempt from the provisions of Section 16(b) of the 1934 Act with respect to transactions pursuant to the Plan, each of such persons shall be a "Non-Employee Director" within the meaning of Rule 16b-3 ("Rule 16b-3") promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "1934 Act") and (ii) if such qualification is deemed necessary in order for the grant or exercise of awards made under the Plan to qualify for any tax or other material benefit to participants of 2 the Company under applicable regulations under Section 162(m) of the Code, each of such persons shall be an "outside director" (as defined in applicable regulations thereunder). 2.2 Committee Procedures. If a Committee has been appointed, it shall select from its members a Chairman and shall adopt such rules and regulations as it shall deem appropriate concerning the holding of meetings and the administration of the Plan. A majority of the entire Committee shall constitute a quorum and the actions of a majority of the members of the Committee present at a meeting at which a quorum is present, or actions approved in writing by all of the members of the Committee, shall be actions of the Committee. 2.3 Authority and Interpretation. Subject to the provisions of the Plan, the Board shall have authority: (a) to determine the fair market value of the shares of Common Stock covered by each Option, (b) to select the employees or directors of, or consultants to, the Company or its subsidiary corporations to receive Options under the Plan, (c) to fix the number of shares which each Optionee may purchase, (d) to set the terms and conditions of each Option, including whether an Option should be an ISO or NSO and the extent to which Options shall vest in installments and, with the consent of the holder thereof, to modify or amend any provisions of an Option (other than provisions incorporated directly or by reference from this Plan), (e) to interpret this Plan, (f) to prescribe, amend and rescind rules and regulations relating to this Plan, (g) to accelerate an exercise date of any Option, (h) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option already granted and (i) to determine all other matters relating to the Plan. The Board shall have complete authority to construe, interpret and administer this Plan. All decisions of the Board shall be conclusive and binding on all participants in the Plan. 3. ELIGIBLE EMPLOYEES, DIRECTORS AND INDEPENDENT CONTRACTORS; LIMITATION ON GRANTS 3.1. Generally. From time to time, the Board may grant Options under this Plan to any person (the "Optionee") who at the time of such grant is (a) any employee of the Company or its subsidiary corporations, (b) any director of the Company or one of its subsidiary corporations, including any employee of the Company or its subsidiary corporations who is also a director of the Company or (c) any consultant to the Company or one of its subsidiary corporations, provided that the right to grant Options to consultants or other non-employees does not disqualify the Plan from any qualification or right which would be available if the Plan were limited to employees and directors. Options granted 2 3 under the Plan shall be in such amounts, at such prices and upon such other terms and conditions not inconsistent with this Plan as the Board, in its discretion, may determine. Options granted to employees of the Company or its subsidiary corporations will be either NSOs or ISOs, and Options granted to directors of the Company or its subsidiary corporations, or consultants to the Company or its subsidiary corporations will be NSOs. Any employee or director of, or consultant to, the Company or its subsidiary corporations who has been granted an Option may, if otherwise eligible, be granted additional Options. 3.2. Certain Limitations. Anything contained in this Section 3 to the contrary notwithstanding, no employee who owns, directly or indirectly (within the meaning of Sections 422A(b)(6) and 425(d) of the Code), stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of a subsidiary corporation shall be eligible to receive an ISO under the Plan, unless (i) the exercise price (as determined in accordance with Section 6.3.1 and 6.3.2 hereof) of the shares of Common Stock subject to such ISO is fixed at not less than 110% of the FMV on the date of grant of such shares and (ii) such ISO by its terms is not exercisable after the expiration of five years from the date it is granted. 4. SHARES SUBJECT TO THE PLAN 4.1. Number of Shares. The aggregate number of shares of Common Stock which may be issued upon the exercise of all Options granted under this Plan, excluding any such shares repurchased by the Company, shall be 50,000 shares of Common Stock, subject to adjustment as provided in Sections 6.1.7, 6.1.8 and 6.1.9 hereof. Shares of Common Stock subject to unexercised portions of any terminated or expired Option (including Options surrendered in accordance with Section 7 hereof) and shares of Common Stock issued pursuant to the exercise of Options and repurchased by the Company shall again be available for the granting of Options under the Plan. 4.2.2 Character of Shares. The shares of Common Stock issuable upon exercise of an Option granted under the Plan shall be (a) authorized by unissued shares of Common Stock, (b) shares of Common Stock held in the Company's treasury or (c) a combination of the foregoing. 5. GRANTING OF OPTIONS No Options shall be granted under this Plan after ten (10) years from the date this Plan becomes effective (as provided in Section 15 hereof). 3 4 Options granted pursuant to the Plan shall be evidenced by written stock option agreements specifying the number of shares covered thereby, in such form as the Board shall from time to time establish, which agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the terms and conditions set forth in Section 6 hereof. Each agreement shall specify whether the Option it evidences is an ISO or NSO. The Board may approve the grant of Options under this Plan, subject to Section 3 hereof, to persons who are expected to become employees or directors of, or consultants to, the Company or its subsidiary corporations but are not employees, directors, or consultants at the date of the approval. In such cases, the Option shall be deemed granted on the date the grantee becomes an employee or director or consultant and must satisfy all requirements of this Plan for Options granted on that date. 6. TERMS, CONDITIONS AND FORM OF OPTIONS Each Option granted under this Plan shall be designated as an ISO or a NSO and shall be subject to the terms and conditions set forth in Section 6.1. NSOs and ISOs shall also be subject to the terms and conditions set forth in Section 6.2 and Section 6.3 hereof, respectively. 6.1. Terms and Conditions to Which All Options are Subject. All Options granted under this Plan shall be subject to the following terms and conditions. 6.1.1. Exercise Period. Each stock option agreement shall state the period or periods of time within which the Option may be exercised by the Optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Board; provided, however, that if the Company files a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), for the initial public offering of its securities, no Option granted under the Plan shall be exercisable during the 180-day period immediately following the effective date of such registration statement; and provided further, that no Option granted under this Plan shall be exercisable more than ten (10) years after the date of its grant and no ISO granted to a person described in Section 3.2 hereof shall be exercisable more than five (5) years after the date of its grant. If an Option is not at the time of grant immediately exercisable, the Board may (a) in the stock option agreement evidencing such Option, provide for acceleration of the exercise date or dates of the subject Option under the occurrence of specified events and/or (b) at any time prior to the complete termination of an Option, accelerate the exercise date or dates of such Option. 4 5 6.1.2. Exercise of Options. An Option granted under this Plan shall be exercised by delivery to the Secretary of the Company of: (a) a notice in writing from the Optionee of his intention to purchase shares, (i) specifying the number of shares as to which the Optionee desires to exercise his Option, (ii) specifying whether the shares are issued pursuant to an ISO or NSO, (iii) specifying the date (the "Purchase Date") upon which the Optionee desires to complete his purchase (which must be within the exercise periods specified in the stock option agreement) and (iv) containing any representations of the Optionee required under Section 11 hereof and the stock option agreement of such Optionee; (b) a copy of any election filed by the Optionee pursuant to Section 83(b) of the Code; (c) in the event that such Option shall be exercised by any person other than the Optionee pursuant to Section 6.1.4 hereof, appropriate proof of the right of such person to exercise such Option; (d) such payments as are required by Section 6.1.5 hereof (including cash or Common Stock and, as applicable, any promissory notes to be delivered to the Company in payment of all or a portion of the exercise price); and (e) such further undertakings or agreements consistent with the Plan as the Board may require. Promptly after the later of the receipt of written notice of exercise of an Option or the Purchase Date, the Company shall deliver, without stock issue taxes or transfer taxes to the Optionee or other person entitled to exercise the Option, to the Optionee or other person a certificate or certificates for the requisite number of shares of Common Stock. 6.1.3. Option Grant Date. The date of grant of an Option under this Plan shall be the date as of which the Board approves the grant, except as otherwise provided in Section 5 hereof. 5 6 6.1.4. Nonassignability of Option Rights. No Option granted under this Plan shall be assignable or otherwise transferable by the Optionee except by will or by the laws of descent and distribution (for purposes of this Plan, all references to the Optionee shall be deemed to include any successor to the Optionee by will or the laws of descent and distribution unless the context otherwise requires). During the life of the Optionee an Option shall be exercisable only by the Optionee. 6.1.5. Payment. At the time a NSO or an ISO is granted, the Board, in the exercise of its absolute discretion, may specify one or more of the following forms of payment which may be used by an Optionee upon exercise of his Option (absent such specification any combination of the following methods shall be permitted): (a) cash or personal or certified check payable to the Company in an amount equal to the aggregate Option Price of the shares with respect to which the Option is being exercised; and/or (b) stock certificates (in negotiable form) representing shares of Common Stock having a FMV on the date of exercise (as determined in accordance with Section 6.3.2 as if the date of exercise were the date of grant) equal to the aggregate Option Price of the shares with respect to which the Option is being exercised; provided, however, that the par value of the shares with respect to which the Option is being exercised shall in any event be paid in cash or by personal or certified check. 6.1.6 Termination of Unexercised Options Following Termination of Association; Repurchase of Shares. No Option shall be affected by any change of duties or position of the Optionee (including transfer to or from a subsidiary), so long as he continues to be an employee or director of, or consultant to, the Company or one of its subsidiaries. If an Optionee ceases to be an employee or director of, or consultant to, the Company and its subsidiary corporations other than because of his death or disability (within the meaning of Section 22(e)(3) of the Code), any portion of the Optionee's Option which is otherwise exercisable by its terms and has not been previously exercised shall expire three (3) months following the date of such termination and shall thereafter be of no further force and effect; provided, however, that if the Optionee shall die during such three-month period, his Option shall expire one year following the date of such termination. If an Optionee ceases to be an employee or director of, or consultant to, the Company and 6 7 its subsidiary corporations because of his death or disability (within the meaning of Section 22(e)(3) of the Code), his Option shall expire one year following the date of such termination and shall thereafter be of no further force and effect. 6.1.7. Changes in Capital Structure. Subject to Sections 6.1.8 and 6.1.9, if the Common Stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, or converted into or exchanged for other securities as a result of a merger, consolidation or reorganization, the Board shall make appropriate adjustments, all as calculated in its sole discretion, in (a) the number and class of shares of stock subject to this Plan and each Option outstanding under this Plan and (b) the exercise price of each outstanding Option. Notwithstanding the foregoing, such adjustments shall be "appropriate" with respect to ISOs only where such adjustments merely reflect a change in capitalization, do not constitute a modification, extension or renewal of the Option with the meaning of Sections 422A and 425 of the Code and the Treasury Regulations thereunder, and do not constitute the adoption of a new plan requiring stockholder approval under Section 422A of the Code. Any adjustments determined by the Board shall be final, conclusive and binding. The Company shall provide written notice to each Optionee of the nature and effect of such adjustment as promptly as is practicable. 6.1.8. Corporate Transactions. The following rules shall apply in connection with the dissolution or liquidation of the Company, a reorganization, merger or consolidation in which the Company is not the surviving corporation, or a sale of all or substantially all of the assets of the Company to another person or entity (a "Corporate Transaction"): (a) Upon the occurrence of a Corporate Transaction, all Options granted under the Plan shall automatically terminate; provided, however, that each holder of an Option outstanding at such time shall be given (i) written notice of such Corporate Transaction at least twenty (20) days prior to its proposed effective date (as specified in such notice) and (ii) an opportunity, during the period commencing with delivery of such notice and ending ten (10) days prior to such proposed effective date, to exercise the Option to the full extent to which such Option would have been exercisable by the Optionee at the expiration of such ten-day period; and (b) Anything contained herein to the contrary notwithstanding, Section 6.1.8(a) shall not be applicable if provision shall me made in connection with such Corporate 7 8 Transaction for the assumption of outstanding Options by, or the substitution for such Options of new Options covering the stock of, the surviving, successor or purchasing corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number, kind and Option Prices of shares subject to such Options; provided, however, that no such assumption or substitution shall be permitted with respect to ISOs if the effect thereof would be a modification, extension or renewal of the ISOs within the meaning of Section 425(h) of the Code and the Treasury Regulations promulgated thereunder. 6.1.9. Special Adjustment Rules. The following rules shall apply in connection with Sections 6.1.7 and 6.1.8 hereof: (a) No fractional shares shall be issued as a result of any such adjustment, and any fractional shares resulting from the computations pursuant to Sections 6.1.7 and 6.1.8 hereof shall be eliminated, without consideration, from the respective Options: (b) No adjustment shall be made for cash dividends or the issuance to stockholders of rights to subscribe for additional shares of Common Stock or other securities; and (c) Any adjustments referred to in Section 6.1.7 and 6.1.8 hereof shall be made by the Board in its sole discretion and shall be conclusive and binding on all persons holding Options granted under the Plan. 6.1.10. Other Provisions. Each Option granted under this Plan may contain such other terms, provisions, and conditions, and may obligate the Optionee to become a party to such other agreements, in each case not inconsistent with this Plan as may be determined by the Board, including provisions or agreements concerning transfer restrictions, rights of first refusal and repurchase rights. Each ISO granted under this Plan shall include such other provisions and conditions as are necessary to qualify the Option as an "incentive stock option" within the meaning of Section 422A of the Code and shall not include any tens or conditions which are inconsistent therewith. 6.2. Terms and Conditions to Which Only NSOs Are Subject. Options granted under this Plan which are designated as NSOs shall be subject to the following terms and conditions: 8 9 6.2.1. Exercise Price. The exercise price of a NSO shall be such price as shall be determined by the Board but in any event shall be at least equal to the lesser of (i) $20 below the FMV of the Common Stock on the effective date of the grant or (ii) 25% of the FMV of the Common Stock on the effective date of the grant. 6.2.2. Withholding and Employment Taxes. At the time of exercise of an NSO, the Optionee shall remit to the Company in cash all applicable Federal and State withholding and employment taxes. 6.3. Terms and Conditions to Which Only ISOs Are Subject. Options granted under this Plan which are designated as ISOs shall be subject to the following terms and conditions: 6.3.1. Exercise Price. The exercise price of an ISO shall be the FMV of the Common Stock subject to the Option on the date of grant. 6.3.2. Determination of Fair Market Value. Subject to the requirements of Section 422A of the Code, for purposes of the Plan, the "fair market value" or "FMV" of shares of Common Stock shall be equal to: (a) if the Common Stock is publicly traded, (i) in the over-the-counter market, the closing price (or the mean between the last bid and asked prices if no sales took place) on the business day immediately preceding the date of grant, or, if lower, the average of the daily closing prices (or the means between the last bid and asked prices for days on which no sales took place) of the 30 business days immediately preceding the date of grant, in all cases as reported by NASDAQ or (ii) on a national securities exchange, the average of the high and low prices on the business day immediately preceding the date of grant, or, if lower, the average of the daily closing prices (or the means between the last bid and asked prices for days on which no sales took place) of the 30 business days immediately preceding the date of grant, in all cases on the principal national securities exchange on which it is so traded; or (b) if there is no public trading market for such shares, the fair market value of such shares as determined by the Board after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arms' length. 9 10 Anything contained herein to the contrary notwithstanding, all determinations pursuant to this Section 6.3.2 shall be made without regard to any restriction other than a restriction which, by its terms, will never lapse. 6.3.3. Limitations on Exercise. Anything to the contrary contained herein notwithstanding, an ISO granted under this Plan to an Optionee shall be considered a NSO to the extent that the aggregate FMV on the date of the grant of such ISO (as determined pursuant to Section 6.3.2) of the stock with respect to which ISOs are exercisable for the first time by such Optionee during any calendar year (under all plans of the Company and any parent or subsidiary corporations) exceeds $100,000. 6.3.4. Disqualifying Dispositions. If stock acquired by exercise of an ISO granted pursuant to this Plan is disposed of within two (2) years from the date of grant of the ISO or within one (1) year after the transfer of stock to the Optionee, the holder of the stock immediately prior to the disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. 6.3.5. Withholding Taxes. Whenever under this Plan shares of Common Stock are to be delivered by an Optionee upon exercise of an NSO, the Company shall be entitled to require as a condition of delivery that the Optionee remit or, in appropriate cases, agree to remit when due, an amount sufficient to satisfy all current or estimated future Federal, state and local withholding tax and employment tax requirements relating thereto. At the time of a disqualifying disposition, the Optionee shall remit to the Company in cash any applicable Federal and state withholding and employment taxes. 7. SURRENDER OF OPTIONS The Board may, under such terms and conditions as it deems appropriate, accept the surrender and termination by an Optionee of a right to exercise an Option to purchases shares of Common Stock granted under an Option and authorize a payment in consideration therefor of an amount equal to the difference obtained by subtracting the exercise price of such Option from the fair market value of the shares of Common Stock for which such Option is exercisable on the date of such surrender as determined in the discretion of the Board, such payment to be in cash, provided that the Board determines that such settlement is consistent with the purposes set forth in Section 1 hereof. The Company shall be entitled to withhold from any payment to the 10 11 Optionee pursuant to this Section 7, within sixty (60) days following the date of such settlement, any applicable Federal and state income and employment taxes due in respect of such settlement. 8. DURATION OF PLAN Except with respect to Options then outstanding, the Plan shall expire on the first to occur of (a) the tenth anniversary of the date on which the Plan is adopted by the Board, (b) the tenth anniversary of the date on which the Plan is approved by the stockholders of the Company or (c) the date as of which the Board, in its sole discretion, determines that the Plan shall terminate (the "Expiration Date"). Any Options outstanding as of the Expiration Date shall remain in effect until they have been exercised or terminated or have expired by their respective terms. 9. STOCKHOLDER RIGHTS An Optionee shall not have any privileges of a stockholder with respect to any shares of stock subject to his Option until the date of the issuance to the Optionee of a stock certificate evidencing such shares pursuant to his exercise of the Option. 10. AMENDMENT OR DISCONTINUANCE The Board at any time may terminate or amend this Plan; provided, however, that the approval of the holders of a majority of the votes that may be cast by all of the holders of shares of Common Stock and preferred stock of the Company, if any, entitled to vote (voting as a single class) shall be obtained prior to any such amendment becoming effective if such approval is required by law or is necessary to comply with regulations promulgated by the SEC under Section 16(b) of the 1934 Act or with Section 422A of the Code or the Treasury Regulations thereunder. 11. COMPLIANCE WITH SECURITIES LAWS No Options shall be granted under this Plan, and no shares shall be purchased upon the exercise of any Option and no Option may be surrendered in accordance with Section 7, unless and until any then applicable securities law or requirements of any regulatory agencies having jurisdiction and of any exchanges upon which stock subject to said Options of the Company may be listed shall have been fully complied with. 11 12 At the time of the exercise or surrender of any Option hereunder, the Board, in its discretion, may require assurances or representations satisfactory to it from the person exercising or surrendering the Option appropriate to satisfy the requirements of applicable Federal and state securities laws. 12. EMPLOYMENT OR DIRECTORSHIP RIGHTS Nothing contained in this Plan shall be deemed to give any Optionee a right to the continuation of his employment by, or retention as a consultant to, or directorship with, the Company or any of its subsidiaries to which he is not otherwise entitled, or to any increase or decrease in the compensation of the Optionee from the rate in existence at the time of the grant of the Option, nor shall the Company or its subsidiaries be under any obligation by virtue of this Plan to retain any Optionee as an employee, consultant or director for any period. 13. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, and vice versa, as the context requires. 14. INDEMNIFICATION In addition to any other rights to indemnification which they may have as members of the Board, the members of the Board administering the Plan shall be indemnified by the Company against reasonable expenses, including reasonable attorney's fees incurred, in connection with any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board member is liable for gross negligence or willful misconduct in the performance of his duties; provided, that within sixty (60) days after institution of any such action, suit or proceeding a Board member shall by written notice offer the Company the opportunity, at its own expense, to handle and defend such action, suit or proceeding. 12 13 15. EFFECTIVE DATE OF PLAN This Plan shall become effective upon adoption by the Board, provided, however, that no Option shall be exercisable unless and until the written consent of a majority (or such greater number as may be required by law or applicable government regulations or orders) of the holders of the securities of the Company entitled to vote, or approval by stockholders of the Company voting at a validly called stockholders meeting and holding a majority (or such greater number as may be required by law or applicable governmental regulations or orders) of the shares voting at such meeting, is obtained within twelve (12) months before or after adoption by the Board. 16. SEVERABILITY If any provision of the Plan or any Option Agreement shall be determined to be illegal and unenforceable by any court or law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 17. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Options shall be governed by the laws of the State of Delaware. 18. ARBITRATION All disputes arising out of, or in connection with, the validity, interpretation, construction, meaning, or execution of the Plan shall be finally settled by arbitration to be held in New York City and conducted in accordance with the Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of the award and an order of enforcement, as the case may be. 13 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 6,844,000 0 36,237,000 247,000 70,296,000 113,803,000 155,867,000 80,587,000 420,099,000 74,964,000 485,125,000 0 0 7,000 (215,617,000) 420,099,000 345,447,000 345,447,000 196,190,000 196,190,000 20,050,000 140,000 45,186,000 45,104,000 5,744,000 39,360,000 0 0 0 39,360,000 0 0
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