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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 AND
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission file number 33-29035
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K & F Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 34-1614845
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
600 Third Avenue, New York, NY 10016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 297-0900
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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]
As of June 1, 1994 the number of shares issued and outstanding of the
Company's $.01 par value common stock is 4,846,164. Documents
Incorporated by Reference: None
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PART I
Item 1. Business
General
K & F Industries, Inc. ("K & F" or the "Company") was incorporated in Delaware
on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's
leading manufacturers of aircraft wheels, brakes and anti-skid systems for
commercial transport, general aviation and military aircraft. Aircraft
Braking Systems' products are marketed directly to airframe manufacturers,
airlines and governments worldwide, as well as through a distributor network
comprising approximately 130 outlets, and are used on over 30,000 commercial
transport, general aviation and military aircraft. The Company also maintains
nine product support offices located in four countries. During the fiscal
year ended March 31, 1994, approximately 86% of the Company's total revenues
were derived from sales made by Aircraft Braking Systems. In addition, K & F,
through its wholly owned subsidiary, Engineered Fabrics Corporation
("Engineered Fabrics"), believes it is the leading worldwide manufacturer of
aircraft fuel tanks, supplying approximately 90% of the worldwide general
aviation and commercial transport market and nearly one-half of the domestic
military market. Engineered Fabrics also manufactures and sells iceguards,
inflatable oil booms and various other products made from coated fabrics, for
commercial and military uses. During the fiscal year ended March 31, 1994,
approximately 14% of the Company's total revenues were derived from sales made
by Engineered Fabrics.
Aircraft Braking Systems and its predecessors have been leaders in the design
and development of aircraft wheels, brakes and anti-skid systems, investing
significant resources refining existing braking systems, developing new
technologies and designing braking systems for new airframes. As is customary
in the industry, Aircraft Braking Systems supplies original wheels and brakes
for commercial aircraft to the aircraft manufacturers at or substantially below
the production cost of such equipment. Once a manufacturer's wheels and brakes
have been certified and installed on an aircraft, FAA regulations and similar
requirements in foreign countries generally require that all replacement parts
for such systems be provided by such manufacturer. Since most modern aircraft
have a useful life of 25 years or longer and require periodic replacement of
certain components of the braking system, the Company typically recoups its
initial investment in original equipment and generates significant profits from
sales of replacement parts over the life of the aircraft. During the fiscal
year ended March 31, 1994, approximately 75% of Aircraft Braking Systems' total
revenues were derived from the sale of replacement parts to service braking
systems previously installed by Aircraft Braking Systems.
K & F currently sells its products to virtually all major airframe
manufacturers and most commercial airlines and to the United States and certain
foreign governments. The Company has carefully directed its efforts toward
expanding Aircraft Braking Systems' presence in the commercial and general
aviation segments of the aircraft industry, focusing particularly on medium-
and short-range commercial aircraft. These aircraft typically make more
frequent landings than long-range commercial aircraft and correspondingly
require more frequent replacement of brake parts. The Company has been
successful in having its wheels and brakes selected for use on a number of new
airframe designs that serve this market, including the McDonnell Douglas MD-90
program, the Airbus A-321, the Fokker Fo-100 and Fo-70, the Canadair Regional
Jet, the Saab 340 and 2000, the Fairchild Metro 23 and the Indonesian commuter
IPTN-250. The Company has also been chosen to supply products for use on a
number of long-range commercial transport, general aviation and military
aircraft, including: wheels and brakes for the Airbus A-330 and A-340
programs; wheels, brakes and fuel tanks for the Beech 400 and its military
counterpart, the T-1A "Jayhawk"; and wheels and brakes for the Lear 60. The
Company's management believes that these new airframes will broaden the
portfolio of aircraft using the Company's products and that the revenue
generated from these aircraft will eventually replace the revenue generated by
those aircraft in the Company's current portfolio which are reaching maturity.
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The Aircraft Wheel and Brake Industry
During fiscal year 1993, the latest data available to the Company, K & F
believes the aircraft wheel, brake and anti-skid business generated
approximately $960 million in sales worldwide. Furthermore, the Company
believes that the three largest competitors, Aircraft Braking Systems, Allied
Signal's Aircraft Landing Systems Division and B. F. Goodrich Aerospace, Inc.
("B.F. Goodrich") accounted for approximately 70% of the worldwide sales of
aircraft wheels, brakes, anti-skid systems and replacement parts in fiscal year
1993.
Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels and
braking system, to demonstrate that the airframe in operation complies with
relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals, sales of replacement parts are expected to provide a long
and steady source of revenues for the manufacturer of the braking system.
Due to the cost and time commitment associated with the aircraft certification
process, competition among aircraft wheel and brake suppliers most often occurs
at the time the airframe manufacturer makes its initial installation decision.
Generally, competing suppliers submit proposals in response to requests for
bids from manufacturers. Selections are made by the manufacturer on the basis
of technological superiority, conformity to design criteria established by the
manufacturer and pricing considerations. Typically, general aviation aircraft
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be
"dual sourcing" of wheels and brakes. In such case, an airframe manufacturer
may approve and receive FAA certification to configure a particular airframe
with equipment provided by two or more wheel and brake manufacturers. Where
two suppliers have been certified, the aircraft customer, such as a major
airline, will designate the original equipment to be installed on the
customer's aircraft. Competition among two certified suppliers for that
airline's initial installation decision generally focuses on such factors as
the system's "cost-per-landing," given certain assumptions concerning the
frequency of replacements required and the impact that the weight of the system
has on the airline's ability to load the aircraft with passengers, freight or
fuel, and the technical operating and performance characteristics of the wheel
and brake system. Once selected, airlines infrequently replace entire wheel
and brake systems because of the expense.
In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
equipment below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through
the sale of replacement parts. Recovery of pricing concessions and design
costs for each airframe's wheels and brakes is contingent on a number of
factors but generally occurs prior to the end of the useful life of the
particular aircraft. Price concessions on original wheel and brake equipment
are not customary in the military market. Although manufacturers of military
aircraft generally select only one supplier of wheels and brakes for each
model, the Government has approved at times the purchase of specific component
replacement parts from suppliers other than the original supplier of the wheel
and brake system.
Operations
AIRCRAFT BRAKING SYSTEMS. Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, steel and carbon brakes and anti- skid systems
for commercial transport, general aviation and military aircraft. As of March
31, 1994, the Company's products had been installed on over 30,000 aircraft,
including the following aircraft for which K&F is the sole-source supplier:
DC-9, DC-10, Fokker Fo-100, Fokker F-28, Canadair Regional Jet and Saab 340.
In addition, the Company supplies spare parts for the MD-80 program on a
dual-source wheel and brake program. For the fiscal year ended March 31, 1994,
approximately 86% of the Company's total revenues were derived from sales made
by Aircraft Braking Systems. Sales of replacement brake parts account for
approximately 75% of Aircraft Braking Systems' total revenues.
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The Company's anti-skid systems, which are integrated into a braking system,
are designed to minimize the distance required to stop an aircraft by utilizing
sensors, mounted on the wheel and brake, to maximize the braking force while
also preventing the wheels from locking and skidding. Of the three principal
competitors in the wheel and brake industry, Aircraft Braking Systems is the
only significant manufacturer of anti-skid systems. Because of the sensitivity
of anti-skid systems to variations in brake performance, the Company's
management believes that the ability to control the design and performance
characteristics of both the anti-skid system and its integrated brakes gives
Aircraft Braking Systems a competitive advantage over its two largest
competitors. Other products manufactured by the Company include helicopter
rotor brakes and brake temperature monitoring equipment for various types of
aircraft.
The following table shows the distribution of sales of aircraft wheels, brakes
and anti-skid systems to total sales of the Company:
Fiscal Years Ended March 31,
----------------------------
1994 1993 1992
---- ---- ----
Wheels and brakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76% 75% 78%
Anti-skid systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10% 10% 10%
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86% 85% 88%
=== === ===
Aircraft Braking Systems has a long history of establishing and maintaining its
relationships with major airframe manufacturers in the commercial transport
sector, having sold its products to McDonnell Douglas since the early 1930s,
Aerospatiale and Fokker since the early 1960s and Canadair since 1974.
Similarly, in the general aviation market, Aircraft Braking Systems has
supplied braking systems to Beechcraft since the early 1940s, Cessna since the
1940s, Lear since its inception in the 1960s and Gulfstream Aerospace since it
was founded in 1970.
The Company has carefully directed its efforts toward expanding Aircraft
Braking Systems' presence in the commercial transport and general aviation
segments of the aircraft industry, focusing particularly on medium- and
short-range commercial aircraft. As a result of this increased focus, the
Company has been successful in having its products selected on a number of new
airframe designs, including the Airbus A- 321, the McDonnell Douglas MD-90 and
the Fokker Fo-70. In August 1991, Aircraft Braking Systems was selected as a
basic supplier of wheels and carbon brakes on the Airbus A-321, the European
consortium's new 186-seat "stretch" version of its popular A-320 standard body
twin-jet. Equipped with Aircraft Braking Systems' wheels and carbon brakes,
the first A-321 was delivered to Lufthansa German Airlines on January 27, 1994
in ceremonies in Hamburg, Germany. Based on airline supplier selections to
date, Aircraft Braking Systems has captured more than 80% of the A-321 aircraft
orders including Alitalia and Swissair in addition to Lufthansa. Airbus has
booked orders for 141 aircraft to date and projects the program to be in
production beyond the year 2000.
In December 1990, Aircraft Braking Systems was awarded a sole-source contract
to supply wheels, carbon brakes and anti-skid equipment on the McDonnell
Douglas MD-90 twin-jet. The MD-90 adds new performance characteristics to a
product line that began as the DC-9 model jet that first flew in 1965 and
evolved later into the popular MD-80 series. Development of the MD-90 has
remained on schedule since the program was formally launched in the late 1980s
with orders from Delta Air Lines. The first MD-90 was officially rolled out
February 13, 1993 and just nine days later, on February 23, completed its
maiden flight. Following flight testing, full certification is slated for
completion in September 1994. A technologically innovative design, the MD-90
is equipped with an advanced turbofan engine that complies with the FAA's
restrictive Stage III noise restrictions and offers fuel savings over competing
engines. The first MD-90 is scheduled for delivery to Delta Air Lines in the
first quarter of calendar year 1995.
Aircraft Braking Systems has also been selected as the basic supplier of wheels
and brakes for the Saab 2000, the Canadair Regional Jet, the Lear 60, the
Fairchild Metro 23, the Indonesian IPTN-250 and as a supplier of wheels and
carbon brakes for the Airbus A-330 and A-340 wide- body jets.
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ENGINEERED FABRICS. Engineered Fabrics is the largest aircraft fuel tank
manufacturer in the world, serving approximately 90% of the worldwide general
aviation and commercial transport market and nearly one-half of the domestic
military market. For the fiscal year ended March 31, 1994, approximately 14%
of the Company's total revenues were derived from sales made by Engineered
Fabrics.
Fuel tanks, manufactured by combining multiple layers of coated fabrics and
adhesives, are sold for use in commercial transport, military and general
aviation aircraft. During the fiscal year ended March 31, 1994, sales of fuel
tanks accounted for approximately 60% of Engineered Fabrics' total revenues.
For military helicopter applications, Engineered Fabrics' fuel tanks feature
encapsulated layers of natural rubber which expand in contact with fuel thereby
sealing off holes or gashes caused by bullets or other projectiles penetrating
the walls of the fuel tank. The Company uses this "self-sealing" technology to
manufacture crash-resistant fuel tanks for helicopters, military aircraft and
race cars that significantly reduce the potential for fires, leaks and spilled
fuel following a crash. Engineered Fabrics is the only known supplier of
polyurethane fuel tanks for aircraft, which are lighter than their metal or
nitrile counterparts and therefore cost-advantageous.
In addition to fuel tanks, Engineered Fabrics produces iceguards, which are
heating systems made out of layered composite materials that are applied on
engine inlets, propellers, rotor blades and tails. Encapsulated in the
material are heating elements which are connected to the electrical system of
the aircraft and, when activated by the pilot, heat the composite to inhibit
the formation of ice.
The Company also produces a variety of products utilizing coated fabrics such
as oil containment booms, heavy lift bags and pillow tanks. Oil containment
booms are air-inflated cylinders that are used to confine oil spilled on the
high seas and along coastal waterways. Engineered Fabrics has recently
developed towable storage bladders for storage and transportation of the
recovered oil after removal from the water. Heavy lift bags, often used in
emergency situations, are inserted into tight spaces and inflated to lift heavy
loads short distances. Pillow tanks are collapsible rubberized containers used
as an alternative to steel drums and stationary storage tanks for the storage
of liquids.
Sales and Customers
K & F sells its products to more than 150 airlines, airframe manufacturers,
governments and distributors representing each of the commercial transport,
general aviation and military aircraft markets. Sales to the U.S. government
represented approximately 15%, 23% and 31% of total sales for the fiscal years
ended March 31, 1994, 1993 and 1992, respectively. No other customer accounted
for more than 10% of sales.
In the commercial transport and general aviation markets, airframe
manufacturers issue requests for formal proposals for various subsystems,
including braking systems, to be included in new airframes. Producers of the
various subsystems then prepare and submit competing proposals which are
evaluated based on technological merit, conformity to design criteria
established by the manufacturer and pricing considerations. After negotiations
between an airframe manufacturer and the potential supplier, airframe
manufacturers in the general aviation market generally choose one supplier of
wheels and brakes for an aircraft. Where wheels and brakes are dual sourced in
the commercial transport market, suppliers of approved products compete to have
their brakes and wheels chosen by the ultimate customer, such as an airline,
for use on such customer's aircraft. Competition for an aircraft customer
focuses generally on the maintenance costs associated with the particular
manufacturer's braking system, relationship with the customer and ongoing
ability to provide technical support after the aircraft has been equipped with
the manufacturer's product.
In the military aircraft market, suppliers work in conjunction with airframe
manufacturers to design complete airframes in response to requests for
proposals issued by branches of the military through the Department of Defense.
Generally, two or three teams of airframe manufacturers and suppliers will be
selected to build prototypes of the aircraft. The aircraft are then evaluated
for overall technological merit, conformity to design criteria and pricing
considerations. Military aircraft are not generally dual sourced for parts by
the airframe manufacturer.
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The following table shows the distribution of total Company revenues by
respective market, as a percentage of total revenues:
Fiscal Years Ended March 31,
---------------------------------
1994 1993 1992
---- ---- ----
Commercial transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60% 55% 48%
Military (U.S. and foreign) . . . . . . . . . . . . . . . . . . . . . . . . 22% 28% 35%
General aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18% 17% 17%
---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
==== ==== ====
COMMERCIAL TRANSPORT. Customers for the Company's products in the commercial
transport market include most airframe manufacturers and major airlines. The
Company's products are used on a broad range of large commercial transports (60
seats or more) and commuter aircraft (20 to 60 seats). Where multiple braking
systems are certified for a particular aircraft, it is generally the airline
and not the airframe manufacturer that decides which of the approved wheel and
brake suppliers will originally equip such airlines fleet. Some of the
Company's airline customers include American Airlines, Delta Air Lines,
Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines, United
Airlines and USAir. The Company provides replacement parts for certain
aircraft designed by The Boeing Company ("Boeing") including the Boeing 707,
but does not produce products for any commercial aircraft currently
manufactured by Boeing.
MILITARY. The Company believes it is the largest supplier of wheels, brakes
and fuel tanks to the U.S. military and also supplies the militaries of certain
foreign governments. The Company's products are used on a variety of fighters,
training aircraft, transports, cargo planes, bombers and helicopters. Some of
the military aircraft using these products are the F-4, F-14, F-16, F-117A,
A-10, B-1B and the C-130. Substantially all of the Company's military products
are sold to the Department of Defense or to airframe manufacturers including
Lockheed, McDonnell Douglas, Boeing, Sikorsky, Bell and Rockwell. In 1990, the
Department of Defense selected Beech Aircraft, in potentially the largest
military contract for a general aviation aircraft in history, to supply the
T-1A Tanker Transport Training System to be used to train Air Force pilots for
in-flight refueling and transport duties. The Company will supply the wheels,
brakes, fuel tanks and iceguards for this aircraft. Beechcraft expects to
receive orders for a total of over two hundred aircraft before the program is
completed. Anti-skid systems, manufactured for the military, are used on the
F-16, F-117A, B-2, Panavia Toronado, British Aerospace Hawk, JAS-39 and Jaguar
aircraft.
GENERAL AVIATION. The Company believes it is the industry's largest supplier
of wheels, brakes and fuel tanks for general aviation aircraft. This market
includes personal, business and executive aircraft. Customers include airframe
manufacturers, such as Gulfstream, Beech Aircraft, Lear, Canadair, Cessna,
Dassault and distributors, such as Aviall. Anti-skid systems are supplied by
the Company to Gulfstream, Canadair, Dassault and a variety of other aircraft
manufacturers. General aviation aircraft using the Company's equipment
exclusively include the Beech Starship and Beech 400 series of aircraft, the
Lear series 20, 30, 50 and 60 and the Gulfstream G-IV, G-III, G-II and G-I.
Foreign Customers
The Company supplies products to a number of foreign aircraft manufacturers,
airlines and foreign governments. The following table shows sales of the
Company to both foreign and domestic customers for the last three fiscal years:
Fiscal Years Ended March 31,
-----------------------------
1994 1993 1992
---- ---- ----
Domestic sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63% 68% 72%
Foreign sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37% 32% 28%
---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
==== ==== ====
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Independent Research and Development
The Company employs scientific, engineering and other personnel to improve its
existing product lines and to develop new products and technologies in the same
or related fields. At March 31, 1994, the Company employed approximately 164
engineers (of whom 32 held advanced degrees); approximately 27 of such
engineers (including 14 holding advanced degrees) devoted all or part of their
effort toward a variety of projects including: refining carbon processing
techniques to create more durable braking systems; upgrading existing braking
systems to provide enhanced performance; and developing new technologies to
improve the Company's products.
The costs incurred relating to independent research and development for the
fiscal years ended March 31, 1994, 1993, and 1992 were $12.9 million, $11.4
million and $14.1 million, respectively.
Patents and Licenses
The Company has a large number of patents related to the products of its
subsidiaries. In addition, the Company has pending a substantial number of
patent applications and is licensed under several patents of others. While in
the aggregate its patents are of material importance to its business, the
Company believes no single patent or group of patents is of material importance
to its business as a whole.
Competition
The Company faces substantial competition from a few suppliers in each of its
product areas. Its principal competitors that supply wheels and brakes are
Allied Signal's Aircraft Landing Systems Division and B.F. Goodrich. Both
significant competitors are larger and have greater financial resources than
the Company. The principal competitor for anti-skid systems is the Hydro-Aire
Division of Crane Co. The principal competitor for fuel tanks is American Fuel
Cell & Coated Fabrics Company.
Backlog
Backlog at March 31, 1994 and 1993 amounted to approximately $141.5 million and
$134.6 million, respectively. Backlog consists of firm orders for the
Company's products which have not been shipped. Approximately 62% of total
Company backlog at March 31, 1994 is expected to be shipped during the fiscal
year ended March 31, 1995, with the balance expected to be shipped over the
subsequent two-year period. No significant seasonality exists for sales of
the products manufactured by the Company.
Of the total Company backlog at March 31, 1994, approximately 26% was directly
or indirectly for end use by the United States Government (the "Government"),
substantially all of which was for use by the Department of Defense. For
certain risks associated with Government contracts, see "Government Contracts"
discussed below.
Government Contracts
Recent political developments in some regions of the globe have led to
reconsideration of the United States' military objectives and requirements and
a resultant decline in spending on defense related products. Reduced
Government demand for products supplied by the Company has and may continue to
have adverse effects on sales, income and cash flow. For the fiscal years
ended March 31, 1994, 1993 and 1992, approximately 15%, 23% and 31%,
respectively, of the Company's total sales were made to agencies of the
Government or to prime contractors or subcontractors of the Government.
All of the Company's defense contracts are firm, fixed-price contracts under
which the Company agrees to perform for a predetermined price. Although the
Company's fixed-price contracts generally permit the Company to keep unexpected
profits if costs are less than projected, the Company does bear the risk that
increased or unexpected costs may reduce profit or cause the Company to sustain
losses on the contract. All
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domestic defense contracts and subcontracts to which the Company is a party are
subject to audit, various profit and cost controls and standard provisions for
termination at the convenience of the Government. Upon termination, other than
for a contractor's default, the contractor will normally be entitled to
reimbursement for allowable costs and to an allowance for profit. Foreign
defense contracts generally contain comparable provisions relating to
termination at the convenience of the government. To date, no significant
fixed-price contract of the Company has been terminated.
Companies supplying defense-related equipment to the Government are subject to
certain additional business risks peculiar to that industry. Among these risks
are the ability of the Government to unilaterally suspend the Company from new
contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in
advance of design completion. A reduction in expenditures by the Government
for aircraft using products of the type manufactured by the Company, or lower
margins resulting from increasingly competitive procurement policies, or a
reduction in the volume of contracts or subcontracts awarded to the Company or
substantial cost overruns would have an adverse effect on the Company's cash
flow.
Supplies and Materials
The principal raw materials used in the Company's wheel and brake manufacturing
operations are steel, aluminum forgings and carbon compounds. The Company
purchases steel and aluminum forgings from several sources. Historically,
substantially all of the Company's carbon was purchased from HITCO, a division
of British Petroleum Company, p.l.c., pursuant to a multi-year supply contract.
During the fiscal year ended March 31, 1991, Aircraft Braking Systems completed
installation of a continuous carbon furnace to internally manufacture carbon
material. The Company intends to fabricate its entire carbon requirements for
the A-330, A-340, MD-90 and CL-604 programs, using in-house production
facilities. The Company also recently developed a new European source of
carbon to supply a portion of the carbon which will be used to produce braking
systems for use on the A-321. The principal raw materials used by Engineered
Fabrics to manufacture fuel tanks and related coated fabric products are nylon
cloth, forged metal fittings and various adhesives and coatings, whose formulae
are internally developed and proprietary.
The Company has not experienced any difficulty obtaining sources of supplies or
adequate supplies of these raw materials, and believes that sufficient
supplies and alternative sources of supply will be available in the foreseeable
future.
Personnel
At March 31, 1994, the Company had 1,141 full-time employees, of which 825 were
employed by Aircraft Braking Systems (373 hourly and 452 salaried employees)
and 316 were employed by Engineered Fabrics (195 hourly and 121 salaried
employees). All 373 of Aircraft Braking Systems' hourly employees are
represented by the United Auto Workers' Union and all 195 of Engineered
Fabrics' hourly employees are represented by the United Textile Workers' Union.
Engineered Fabrics has entered into a three-year contract with its union that
expires on February 5, 1995. Aircraft Braking Systems' three- year contract
with the United Auto Workers' Union expired on August 10, 1991. Aircraft
Braking Systems has not had a ratified collective bargaining agreement since
August 10, 1991, but has operated under Company implemented terms and
conditions of employment.
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
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733,000 square feet of manufacturing, engineering and office space. Engineered
Fabrics' facility is located in Rockmart, Georgia, and consists of
approximately 564,000 square feet of manufacturing, engineering and office
space. The Company believes that its property and equipment are generally
well-maintained, in good operating condition and adequate for its present
needs.
Foreign Facilities. The Company occupies approximately 13,000 square feet of
leased office and warehouse space in Slough, England, under a lease expiring in
2017. During the fiscal year ended March 31, 1992, foreign distribution
activities were consolidated from Moerfelden, Germany, into the Slough
facility. The facility is used to distribute the Company's products to foreign
purchasers. The Company also maintains sales and service offices in London,
Rome, Tokyo and Toulouse, France.
Akron Facility Arrangements. The Aircraft Braking Systems manufacturing plant
acquired from Loral Corporation ("Loral") was a part of a larger complex owned
and operated by Loral. Since complete physical separation of the Aircraft
Braking Systems facility from the balance of the complex was impractical at the
time of the Acquisition, Loral and Aircraft Braking Systems entered into
various agreements covering occupancy arrangements and shared easements and
services (including utility services). As an occupant of space within the
Loral complex of approximately 433,000 square feet, Aircraft Braking Systems is
subject to annual occupancy payments to Loral. During the fiscal year ended
March 31, 1994 Aircraft Braking Systems made occupancy payments to Loral of
$1.2 million. While most of the agreements are temporary (having terms ranging
from two to 10 years from the closing date of the Acquisition), certain access
easements and easements regarding water, sanitary sewer, storm sewer, gas,
electricity and telecommunication are perpetual. In addition, as a condition
to obtaining governmental approval to divide the real property following the
Acquisition, Loral and Aircraft Braking Systems jointly formed and equally
control Valley Association Corporation, an Ohio corporation, thereby
establishing a single legal entity to deal with the City of Akron and utility
companies concerning governmental and utility services furnished to Loral's and
Aircraft Braking Systems' facilities and to receive and comply with remedial
requests issued by such institutions.
Item 3. Legal Proceedings
Aircraft Braking Systems is a defendant in a patent infringement suit filed on
January 31, 1991, by the B.F. Goodrich Company in the United States District
Court for the District of Delaware. The suit alleges infringement by Aircraft
Braking Systems of two Goodrich patents related to the structure and method of
overhaul of aircraft brake assemblies and seeks damages of approximately $75
million. Aircraft Braking Systems is vigorously defending the suit on the
grounds that the patents are invalid and unenforceable, that Aircraft Braking
Systems' brake assemblies do not infringe the patents and that the damage claim
is speculative and inflated. The trial court concluded hearing testimony in
October 1993, final arguments before the court were concluded on March 31,
1994, and a decision is expected in the second half of calendar year 1994.
Although the final result in this lawsuit cannot be predicted with certainty,
management believes based on its assessment of the facts and circumstances, as
well as advice from counsel, that it is remote that the Company would suffer a
material liability as a result of the above mentioned lawsuit.
In addition to the foregoing, there are various lawsuits and claims pending
against the Company incidental to its business. Although the final results in
such suits and proceedings cannot be predicted with certainty, in the opinion
of management, the ultimate liability, if any, will not have a material adverse
effect on the Company.
-9-
10
Environmental Matters
The Company's manufacturing operations are subject to regulation by various
federal, state and local agencies concerned with environmental control. The
Company believes that its manufacturing facilities are in substantial
compliance with all existing federal, state and local environmental
regulations, but it cannot predict whether more burdensome air, water or solid
waste disposal requirements will be imposed in the future by governmental
authorities.
The Company currently discharges wastewater from its manufacturing operations
at the Akron facility into the Akron municipal waste water system. There is
currently no wastewater pretreatment system employed on site. As specified in
the existing governmental permit to discharge such waste water, sampling of the
Akron facility sanitary wastewater streams is performed at one location after
all sources throughout the facility have been combined. Samples taken at this
location indicate substantial compliance with all existing federal, state and
local environmental regulations. Aircraft Braking Systems has been notified by
the City of Akron that separate waste stream sampling may be required in the
future. When this occurs, anodizing facilities will require pretreatment.
The Company estimates that the cost of installation of pretreatment equipment
is not likely to exceed $200,000. The Company has received notice of
potential liability for EPA Superfund clean-up costs for a hazardous waste
disposal site previously utilized. Total expenses at this time are estimated
to be $150,000. Beginning in fiscal year 1996, the Company believes it will
incur compliance expenditures at its Rockmart, Georgia, facility as a result of
recent amendments to the Clean Air Act. The Company does not believe that such
expenditures will have a material adverse effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-10-
11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters
There is no trading market for the Company's common stock. All of the common
stock of the Company except 10 shares (which are owned by CBC Capital Partners,
Inc., an affiliate of Chemical Banking Corporation) are owned by Bernard L.
Schwartz ("BLS"), Chairman of the Company. See Note 7 to the consolidated
financial statements for a description of the Amended and Restated Revolving
Credit Agreement (the "Revolving Loan"), the 11 7/8% Senior Secured Notes due
2003 (the "Senior Notes"), the 13 3/4% Senior Subordinated Debentures due 2001
(the "Subordinated Debentures") and the Subordinated Convertible Debentures due
2004 (the "Convertible Debentures"). (See "Security Ownership of Certain
Beneficial Owners and Management.")
-11-
12
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.
FOR THE YEARS ENDED
MARCH 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990(A)
---- ---- ---- ---- ------
(In Thousands)
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . . . . . $226,131 $277,107 $295,490 $314,635 $300,210
Cost of sales . . . . . . . . . . . . . . 159,751 199,002 209,552 223,360 215,872
Independent research and development . . 12,858 11,417 14,130 11,781 10,902
Selling, general and administrative expenses 22,421 24,154 24,047 25,345 20,682
Amortization . . . . . . . . . . . . . . 10,884 10,258 10,306 10,233 9,380
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . . 20,217 32,276 37,455 43,916 43,374
Interest expense, net . . . . . . . . . . 51,953 53,486 52,179 54,196 58,580
-------- -------- -------- -------- --------
Loss before extraordinary charge and cumulative
effect of accounting changes . . . . (31,736) (21,210) (14,724) (10,280) (15,206)
Extraordinary charge (b) . . . . . . . . -- (2,477) (992) -- --
Cumulative effect of accounting changes (2,305)(c) (73,540)(d) -- -- --
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . $(34,041) $(97,227) $(15,716) $(10,280) $(15,206)
======== ======== ======== ======== ========
BALANCE SHEET DATA (at end of period):
Working capital . . . . . . . . . . . . . $ 53,091 $ 70,028 $ 77,606 $ 52,312 $ 79,755
Total assets . . . . . . . . . . . . . . 446,880 489,968 518,938 536,781 529,975
Long-term obligations . . . . . . . . . . 484,407 480,580 405,111 404,871 415,033
Stockholders' equity (deficiency) . . . . (90,355) (51,868) 48,331 38,172 49,794
OTHER DATA (for the period):
Capital expenditures, net . . . . . . . . 3,127 4,670 3,986 8,718 8,878
Depreciation and amortization . . . . . . 20,527 19,862 19,501 18,683 16,403
Non-cash interest - Convertible Debentures 8,443 7,282 6,213 5,237 4,245
Non-cash interest - financing costs . . . 1,480 1,507 2,467 1,692 7,089
(a) Consists of the results of operations for the period April 28, 1989 to
March 31, 1990 (338 days).
(b) The extraordinary charge of $2,477 and $992 relates to the accelerated
amortization of unamortized financing costs associated with the
prepayment in full of the Term Loan in fiscal year 1993 and the partial
prepayment of the Term Loan in fiscal year 1992. (See Note 7 to the
consolidated financial statements.)
(c) Represents cumulative effect of the change in method of accounting for the
discounting of liabilities for workers' compensation losses. (See Note
2 to the consolidated financial statements.)
(d) Includes cumulative effect of accounting change for SFAS No. 106 and the
change in method of accounting for certain overhead costs in inventory.
(See Notes 11 and 4 to the consolidated financial statements.)
-12-
13
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 previously
manufactured by the Company and its predecessors and installed on over 30,000
commercial, general aviation and military aircraft. As is customary in the
industry, Aircraft Braking Systems incurs substantial expenditures to research,
develop, design and supply original wheel and brake equipment to aircraft
manufacturers at or below the cost of production ("program investments"). Such
expenditures are charged to operations when incurred, or in the case of program
investments, when delivered to the aircraft manufacturer. Since most modern
aircraft have a useful life of 25 years or longer and require periodic
replacement of certain components of the braking system, the Company typically
recoups its initial investment in original equipment and generates significant
profits from the sales of replacement parts over the life of the aircraft. The
Company has invested and will continue to invest significant resources to have
its products selected for use on new commercial airframes, focusing
particularly on medium-and short-range aircraft. During the three years ended
March 31, 1994, the Company spent an aggregate of $104 million for research,
development, design and program investments. As a result of these efforts, the
Company has been selected as a basic supplier of wheels and carbon brakes on
the Airbus A-321, the sole supplier of wheels, carbon brakes and anti-skid
systems on the MD-90, Fo-100 and Fo-70, the sole supplier of wheels and brakes
for the Saab 2000, the Canadair Regional Jet, the Lear 60, the Fairchild Metro
23 and as a supplier of wheels and carbon brakes for the Airbus A-330 and
A-340. These programs are in the early stages of their life cycles and
represent significant future growth opportunities for the Company.
The Company believes that Department of Defense budget reductions have resulted
in a general reduction in the use and deployment of military aircraft and,
accordingly, sales to the United States military decreased from 23% of the
Company's total sales during the fiscal year ended March 31, 1993, to 15%
during the fiscal year ended March 31, 1994. The Company does not anticipate
any further significant reduction in sales to the United States military from
their fiscal year 1994 levels.
Results of Operations
Fiscal Year 1994 Compared with Fiscal Year 1993
SALES. Sales for fiscal year 1994 totaled $226.1 million compared with $277.1
million in the prior year. Military sales decreased $27.2 million primarily on
the F-16, F-14A, S-3A, F-117A and Saab J-35 and J-37 programs, reflecting the
overall decline in government procurements. Commercial sales decreased $23.8
million, of which approximately $7.0 million was attributable to replacement
parts of aircraft wheels and brakes, principally on the DC-10 program.
Additionally, demand for original equipment on the MD-11 and various Gulfstream
programs was down, reflecting what the Company believes is a temporary
industry-wide trend of aircraft operators deferring receipt of new airplanes.
Sales of oil spill containment booms were also below prior year levels.
GROSS MARGIN. The gross margin for fiscal year 1994 was 29.4% compared with
28.2% for fiscal year 1993. This increase was due primarily to lower
postretirement health care and life insurance costs in fiscal year 1994
resulting from various plan amendments (see Note 11 to the consolidated
financial statements) and a favorable sales mix, whereby higher
margin-commercial sales comprised a higher percentage of total sales, partially
offset by the overhead absorption effect relating to lower sales volume.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development
costs were $12.9 million in fiscal year 1994 compared with $11.4 million in
fiscal year 1993 or 5.7% and 4.1% of sales for fiscal year 1994 and 1993,
respectively. This increase was primarily due to the incurrence of higher
costs associated with the design and development of wheels and brakes for the
CL-604, Saab 2000 and Japan's FSX programs.
-13-
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.7 million in fiscal year 1994 compared
with fiscal year 1993. This decrease was primarily due to the Company's
continuous cost containment efforts and lower postretirement health care and
life insurance costs due to various plan amendments. (See Note 11 to the
consolidated financial statements.)
INTEREST EXPENSE, NET. Net interest expense decreased $1.5 million in fiscal
year 1994 compared with the prior year primarily due to a lower average
principal balance on the Revolving Loan. Partially offsetting this decrease
was a higher principal balance on the Convertible Debentures. The Company
issued $8.4 million and $7.3 million in additional Convertible Debentures
during fiscal years 1994 and 1993, respectively, in payment of non-cash
interest.
In the fourth quarter of fiscal year 1994, retroactive to April 1, 1993, in
response to recent Securities and Exchange Commission guidance, the Company
changed its method of accounting for the discounting of liabilities for
workers' compensation losses, to use a risk-free rate rather than its
incremental borrowing rate. The cumulative effect for periods prior to April
1, 1993, of this change amounted to $2,305,000, and is included as an increase
to the net loss for the fiscal year ended March 31, 1994. (See Note 2 to the
consolidated financial statements.)
Fiscal Year 1993 Compared with Fiscal Year 1992
SALES. Sales for fiscal year 1993 totaled $277.1 million reflecting a decrease
of $18.4 million compared with the prior year. This decrease was due to a
decline in military sales of $26.3 million, primarily attributable to reduced
sales of replacement parts for wheels and brakes on the Lockheed F-16 and S-3A
programs and for fuel tanks on the McDonnell Douglas F-15 program. Partially
offsetting this decline were higher commercial sales of oil containment booms.
GROSS MARGIN. The gross margin for fiscal year 1993 was 28.2% compared with
29.1% for fiscal year 1992. This decrease was primarily due to the fiscal year
1993 effect of adopting Statement of Financial Accounting Standards (SFAS) No.
106 (see Note 11 to the consolidated financial statements) and a change in
accounting for inventory (see Note 4 to the consolidated financial statements),
lower sales volume and higher shipments of original equipment to airframe
manufacturers at or below the cost of production. Partially offsetting this
decrease was a favorable sales mix, whereby higher margin-commercial sales
comprised a higher percentage of total sales and enhanced operating
efficiencies.
INDEPENDENT RESEARCH AND DEVELOPMENT. Independent research and development
costs were $11.4 million in fiscal 1993 compared with $14.1 million in fiscal
year 1992 or 4.1% and 4.8% of sales for fiscal years 1993 and 1992,
respectively. This decrease was primarily due to the incurrence of higher
costs during the prior fiscal year 1992, associated with the design and
development of wheels and brakes for the Airbus A-330 and A-340, the Canadair
Regional Jet and the Saab 2000 programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.1 million in fiscal year 1993 compared
with fiscal year 1992. This increase was primarily due to the fiscal year 1993
effect of adopting SFAS No. 106, offset by the Company's continuous cost
containment efforts as well as the consolidation of the Moerfelden, Germany,
distribution warehouse into the product support facility in Slough, England,
during fiscal year 1992.
INTEREST EXPENSE, NET. Net interest expense increased $1.3 million in fiscal
year 1993 compared with the prior year. This increase was attributable to the
higher interest rate on the Senior Notes issued June 10, 1992 compared with the
senior term loan that was prepaid (see Note 7 to the consolidated financial
statements) and a higher interest rate and principal balance on the Convertible
Debentures. Partially offsetting this increase was a lower interest rate and
average principal balance on the Revolving Loan. The Company issued $7.3
million and $6.2 million in additional Convertible Debentures during fiscal
years 1993 and 1992, respectively, in payment of non-cash interest.
-14-
15
In the fourth quarter of fiscal year 1993, the Company adopted, retroactive to
April 1, 1992, SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires accrual of these benefits during
an employee's service period. The effect of adopting SFAS No. 106 was a
cumulative charge of $77.9 million and an increase in fiscal year 1993
operating expenses of $6.2 million ($5.5 million included in cost of sales and
$.7 million included in selling, general and administrative expenses). (See
Note 11 to the consolidated financial statements.) Prior year results have not
been restated to reflect this accounting change.
Liquidity and Financial Condition
The Company's primary source of funds for conducting its business activities
and servicing its indebtedness has been from cash generated from operations and
borrowings under the Revolving Loan. The Company's long-term indebtedness
increased from $379.5 million at March 31, 1993, to $381.4 million at March 31,
1994. This increase was primarily due to the accrual of non-cash interest on
the Convertible Debentures of $8.4 million, partially offset by $6.5 million of
repayments on the Revolving Loan.
The Company expects that its principal use of funds for the next several years
will be to pay interest on indebtedness, fund capital expenditures and make
investments in original equipment for new airframes. Debt principal
amortization commences August 1, 1999. The Company's management believes that
it will have adequate resources to meet its cash requirements through funds
generated from operations and borrowings under its $80 million Revolving Loan
(maturing April 27, 1997 and subject to a borrowing base of eligible accounts
receivable and inventory). At March 31, 1994, the Company had $38.2 million
available to borrow under its Revolving Loan.
Capital Expenditures
The Company had additions to fixed assets of $3.1 million and $4.7 million for
the fiscal years ended March 31, 1994 and 1993, respectively. These additions
were primarily for manufacturing equipment. Capital spending for fiscal year
1995 is expected to be approximately $5.0 million.
Inflation
The effect of inflation on the Company's sales and earnings is minimal because
a majority of the Company's sales are conducted through long-term contracts or
established price lists. The selling prices of such contracts and price lists,
established for deliveries in the future, generally reflect estimated costs to
be incurred in these future periods. In addition, some contracts provide for
price adjustments through escalation clauses.
Accounting Pronouncement
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," which requires that the costs of benefits provided to
employees after employment but before retirement be recognized in the financial
statements on an accrual basis. The Company will adopt Statement of Financial
Accounting Standards No. 112 in the first quarter of fiscal year 1995. The
impact of this new statement has not been fully determined, but the Company
believes its adoption will not have a material effect on its financial position
or results of operations. (See Note 2 to the consolidated financial
statements.)
Item 8. Financial Statements and Supplementary Data
See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-18 hereof.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
-15-
16
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors are
duly elected and qualified, and all executive officers hold office at the
pleasure of the Board of Directors. The following executive officers or
directors of the Company are related by blood or marriage: Kenneth M. Schwartz
is the nephew of Bernard L. Schwartz, Ronald H. Kisner's wife is the niece of
Bernard L. Schwartz and John R. Paddock's wife is the daughter of Bernard L.
Schwartz. No other executive officer or director of the Company is related by
blood, marriage or adoption.
NAME AGE POSITION(S)
---- --- -----------
Bernard L. Schwartz* 68 Chairman of the Board
and Chief Executive Officer
Herbert R. Brinberg* 68 Director
Ronald H. Kisner* 45 Director
John R. Paddock* 40 Director
James A. Stern** 43 Director
A. Robert Towbin** 58 Director
Alan H. Washkowitz** 53 Director
Kenneth M. Schwartz 43 Chief Financial Officer,
Treasurer and Secretary
- -----------------------
* Designated as director by BLS pursuant to the Stockholders Agreement.
** Designated as director by Lehman Brothers Holdings Inc. ("LBH")
pursuant to the Stockholders Agreement.
Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of the
Company since 1989. Mr. Schwartz has been Chairman and Chief Executive Officer
of Loral Corporation since 1972. Mr. Schwartz is a Director of Reliance Group
Holdings, Inc. and certain subsidiaries, Director of Sorema North American
Reinsurance Company, Director of First Data Corporation and Trustee of New York
University Medical Center.
Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. Dr. Brinberg received an A.B. from Cornell University, an M.S. from
Columbia University and a Ph.D. in Economics from New York University. He is
also currently an Adjunct Professor of Management at Baruch College City
University of New York.
Mr. Kisner has been a member of the law firm of Chekow & Kisner, P.C., since
1984. From 1973 to 1982, he was Associate General Counsel of APL Corporation,
where he held such offices as Secretary, Vice President and Director. From
1982 to 1984, Mr. Kisner was a sole practitioner. Mr. Kisner received a B.A.
from Syracuse University in 1970 and a J.D. from Washington College of Law,
American University, in 1973.
Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia
since 1982. He has also been Director of Training for the Georgia School of
Professional Psychology, Adjunct Associate Professor of Psychology at Emory
University, Assistant Professor of Psychology at Kennesaw State College, and
Southern Region Coordinator for National Employee Assistance Services. Dr.
Paddock received his B.A. from Williams College and his M.A. and Ph.D. in
Clinical Psychology from Emory University. Currently, he has clinical faculty
appointments at both Emory's Department of Psychology and in the medical
school.
-16-
17
Mr. Stern is Chairman of The Cypress Group, a private merchant bank. He was a
Managing Director of Lehman Brothers from 1984 to 1994. Lehman Brothers is a
division of a direct subsidiary of LBH, a company whose common stock is
principally owned by American Express Company. Since 1989, Mr. Stern has also
been head of the Merchant Banking Group of Lehman Brothers. He was a Managing
Director of Lehman Brothers Kuhn Loeb, Inc. from 1982 to 1984. Mr. Stern is
also a director of Infinity Broadcasting Corporation, Loral Aerospace Holdings,
Inc., R.P. Scherer Corp., Noel Group Inc. and Lear Seating Corporation.
Mr. Towbin was elected President and Chief Executive Officer of the
Russian-American Enterprise Fund in January of 1994 and has taken a leave of
absence from Lehman Brothers where he had been a Managing Director of the High
Technology Investment Banking Group since 1987. Prior to joining Lehman
Brothers, Mr. Towbin was Vice Chairman, Member of the Executive Committee and
Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. from 1986 to
1987. From 1983 to 1986, Mr. Towbin was Vice Chairman, and from 1977 to 1983
he was General Partner of L.F. Rothschild, Unterberg, Towbin. From 1959 to
1977, Mr. Towbin was General Partner of C.E. Unterberg, Towbin Co. Mr. Towbin
received a B.A. from Dartmouth College in 1957. Mr. Towbin is also a Director
of Columbus New Millennium Fund, Gerber Scientific, Inc. and the Russian-
American Enterprise Fund.
Mr. Washkowitz has been a Managing Director of Lehman Brothers since 1984. He
was a Managing Director of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1984.
Mr. Washkowitz began in the Corporate Finance Department of Kuhn Loeb & Co. in
1968 and became a general partner of the firm in 1975. Mr. Washkowitz received
an A.B. from Brooklyn College, an M.B.A. from Harvard Business School and a
J.D. from Columbia Law School. Mr. Washkowitz is also a director of Illinois
Central Corporation and Lear Seating Corporation.
Mr. Kenneth M. Schwartz has been Chief Financial Officer, Treasurer and
Secretary of the Company since June 1989. Previously he was the Corporate
Director of Internal Audit for Loral since late 1987. From 1984 to 1987, Mr.
Schwartz held the position of Director of Cost and Schedule Administration for
Loral Electronic Systems. Prior to 1984, Mr. Schwartz held various other
positions with Loral Electronic Systems and the accounting firm of Deloitte &
Touche. Mr. Schwartz received a B.B.A. in accounting from the University of
Miami in 1973.
Executive Officers of Aircraft Braking Systems
Corporation and Engineered Fabrics Corporation
Set forth below are the names, ages and positions of the executive officers of
Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.
Aircraft Braking Systems Corporation
------------------------------------
NAME AGE POSITION
---- --- --------
Donald E. Fogelsanger 68 President
Ronald E. Welsch 59 Executive Vice President
Robert Crawford 50 Senior Vice President-Operations
Frank P. Crampton 50 Vice President-Marketing
Richard W. Johnson 50 Vice President-Finance and Controller
-17-
18
Engineered Fabrics Corporation
------------------------------
NAME AGE POSITION
---- --- --------
Roger C. Martin 57 President
Terry L. Lindsey 49 Vice President-Marketing
Anthony G. McCann 34 Vice President-Operations
John A. Skubina 39 Vice President-Finance
Mr. Fogelsanger has been President of Aircraft Braking Systems Corporation
since 1989. From 1987 to 1989 he was President of Loral's Aircraft Braking
Systems Division. January 1986 to March 1987 he was Vice President and General
Manager of Goodyear Aerospace Corporation's ABS division. From 1980 to 1986 he
was General Manager of Goodyear's Aircraft Tire Operations. In 1968, Mr.
Fogelsanger directed Goodyear's development of a crash-resistant fuel system
for helicopters that was credited with saving hundreds of lives during the
Vietnam War. He joined Goodyear in 1951 after graduating from Pennsylvania
State University with a bachelor's degree in industrial engineering.
Mr. Welsch joined Aircraft Braking Systems Corporation in September 1993 as
Executive Vice President. Prior to joining Aircraft Braking Systems, Mr.
Welsch was General Manager of the GE 90 Commercial Engine program at General
Electric Aircraft Engines and held various positions in management, including
engineering, product support, marketing, product planning and program
management, over the course of 26 years. Mr. Welsch started his aviation
career at Douglas Aircraft in 1958 and joined Northrop Corporation in 1961. He
entered the U.S. Marine Corp Aviation following graduation from Purdue
University with a bachelor's degree in mechanical engineering. Mr. Welsch also
attended Massachusetts Institute of Technology-Sloan School in 1983.
Mr. Crawford was named Senior Vice President of Operations at Aircraft Braking
Systems in April 1988. He joined Loral's ABS division as Vice President of
Operations in June 1987 after 26 years working for prime aircraft
manufacturers. Mr. Crawford has been involved in the building and delivery of
both military and commercial aircraft. Prior to joining ABS, he was Vice
President of Operations at the Fairchild plant on Long Island, General Manager
of the Fairchild facility in Hagerstown and of the Precision Fabrication Center
in Columbus, Georgia. Mr. Crawford had extensive experience in Industrial
Engineering, Manufacturing Engineering, and Manufacturing at Canadair prior to
leaving there in 1981 as Director of Manufacturing to join Fairchild
Industries. He studied mechanical engineering at Sir George Williams
University and also studied Business Administration at Alexandria Hamilton
Institute.
Mr. Crampton was named Vice President of Marketing at Aircraft Braking Systems
in March 1987. He had been Director of Business Development for Goodyear
Aerospace Corporation's Wheel and Brake Division since 1985. Prior to that
assignment, he was the divisional manager of Program Operations since 1983.
Mr. Crampton joined Goodyear in 1967 following his graduation from the
University of Akron with a bachelor's degree in electrical engineering. He
became Section Manager in Commercial Sales in 1977, a product marketing manager
in 1978, and Divisional Sales Manager in 1979. In August of 1982, he joined
manufacturing as the manager of the manufacturing process organization. Mr.
Crampton completed the executive management program at Northwestern University
in 1982 and received an M.B.A. from Kent State University in 1983. He also
worked for NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966.
Mr. Johnson has been Vice President of Finance and Controller at Aircraft
Braking Systems since April 1989. From 1987 to 1989 he was Vice President of
Finance and Controller of Loral's Aircraft Braking Systems Division. Prior to
this assignment, he had spent 22 years with Goodyear Aerospace Corporation,
including one year as the Controller of the wheel and brake division. Mr.
Johnson joined Goodyear Aerospace Corporation in 1966 following his graduation
from Kent State University with a bachelor's degree in accounting. He became
Manager of Accounting in 1979 for the Centrifuge Equipment Division of Goodyear
Aerospace Corporation after holding various positions in the Defense Systems
Division.
-18-
19
Mr. Martin has been President of Engineered Fabrics Corporation since 1987.
From June 1984 until 1987, he was General Manager of GAC's Engineered Fabrics
Division. Mr. Martin has been continuously employed by Goodyear, GAC and Loral
for the past 32 years. Other positions Mr. Martin held with Goodyear include
General Manager, Program Manager and a number of research positions. He holds
a patent for elastomeric protective coating for metal storage reels. Mr.
Martin received a B.S. and a B.Ch.E. in 1958 and 1962, respectively, from
Auburn University.
Mr. Lindsey has served as Vice President of Business Development since 1989.
He has been with Goodyear Aerospace Corporation, Loral and K & F Industries
since 1977. Prior to this he had 12 years of federal service with the US Army.
He joined GAC as Contract Administrator of the Industrial Brake Operation in
Berea, Kentucky, and transferred to Engineered Fabrics in 1979 as Manager of
Contracts. He received a B.S. in Industrial Technology from Berea College in
1967.
Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production
Support from April 1990 to June 1993. He joined Engineered Fabrics Corporation
in August 1988 as Manager of Production. From January 1984 to August 1988, Mr.
McCann worked for Aircraft Braking Systems as Manager of Manufacturing
Engineering, Manager of Assembly and as a Manufacturing Engineer. He received
a BSME in 1984 from the University of Akron.
Mr. Skubina has been Vice President of Finance and Administration since
February 1991. Prior to that, he was made Vice President of Finance on April
1, 1990. He joined Engineered Fabrics Corporation in 1988 as Accounting
Manager. From 1985 until 1988, Mr. Skubina was the Assistant Controller and
Controller of MPD, a division of M/A-Com. He received a B.S. in Accounting in
1979 from New York Institute of Technology.
-19-
20
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the past three years paid
to the chief executive officer and each of the other four most highly
compensated executive officers of the Company and the Company's subsidiaries
whose aggregate current remuneration exceeded $100,000.
Annual Long-Term
Compensation Compensation
- -----------------------------------------------------------------------------------------------------------------
All Other
Options LTIP Compen-
Fiscal Salary Bonus Granted Payouts sation(b)
Name and Principal Position Year ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------
Bernard L. Schwartz 1994 1,859,800(a) -- -- -- --
Chairman of the Board and Chief 1993 1,840,650(a) -- -- -- --
Executive Officer 1992 1,739,000(a) -- -- -- (c)
- -----------------------------------------------------------------------------------------------------------------
Kenneth M. Schwartz 1994 176,418 37,500 -- -- 3,404
Chief Financial Officer - K & F 1993 167,809 75,000 7,500 10,000 3,322
Industries, Inc. 1992 135,000 50,000 -- 10,000 (c)
- ------------------------------------------------------------------------------------------------------------------
Donald E. Fogelsanger 1994 185,000 -- -- -- 18,949
President of Aircraft 1993 178,340 85,000 5,000 13,333 19,032
Braking Systems 1992 172,337 70,000 -- 13,333 (c)
- -----------------------------------------------------------------------------------------------------------------
Robert Crawford 1994 145,000 -- -- -- 2,848
Senior Vice President - 1993 137,293 47,500 -- 8,333 2,985
Operations - Aircraft Braking 1992 132,372 38,000 -- 8,333 (c)
Systems
- -----------------------------------------------------------------------------------------------------------------
Roger C. Martin 1994 127,000 -- -- -- 10,545
President of Engineered Fabrics 1993 120,231 38,000 5,000 6,667 10,237
Corporation 1992 110,938 25,364 -- 6,667 (c)
- -----------------------------------------------------------------------------------------------------------------
(a) Comprised of amounts paid to BLS under the Advisory Agreement.
(b) Includes the following Company contributions to individual 401(k) plan
accounts for fiscal year 1994 and 1993, respectively: Mr. K. Schwartz
- $3,225 and $3,152; Mr. Fogelsanger - $2,719 and $2,977; Mr. Crawford
- $2,848 and $2,985; Mr. Martin $3,161 and $2,985. Also includes the
value of supplemental life insurance programs for fiscal year 1994 and
1993, respectively: Mr. K. Schwartz - $179 and $170; Mr. Fogelsanger -
$16,230 and $16,055; Mr. Martin - $7,384 and $7,252
(c) In accordance with the transitional provisions applicable to the
revised rules on executive compensation adopted by the Securities and
Exchange Commission, amounts of all other compensation are not
disclosed for fiscal years ending prior to December 15, 1992.
-20-
21
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options by the Company, during fiscal year
1994, to the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)(1)
-----------------------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
--------------------------------------------------------------------------------------------------------------
Bernard L. Schwartz 0 0 0/0 0/0
Kenneth M. Schwartz 0 0 5,625/9,375 0/0
Donald E. Fogelsanger 0 0 15,000/10,000 0/0
Robert Crawford 0 0 3,750/1,250 0/0
Roger C. Martin 0 0 7,500/7,500 0/0
--------------------------------------------------------------------------------------------------------------
(1) None of the Company's stock is currently publicly traded. All
options were granted at book value computed as of the date of
Acquisition.
-21-
22
LONG-TERM INCENTIVE PLAN AWARDS
Under the Company's long-term incentive plan designed to provide an incentive
to encourage attainment of Company objectives and retain and attract key
executives of the Company, a limited number of persons participate in a
Deferred Bonus Plan. Under the terms of the plan, no awards are allocated to
any participant unless the Company has achieved at least a 10% growth in
earnings before interest, taxes and amortization over the prior fiscal year.
Awards vest and are paid (unless deferred by recipient direction)in three equal
annual installments starting on January 15th following each fiscal year-end.
All nonvested amounts to an executive are forfeited upon termination of
employment for any reason other than death or disability prior to the vesting
date. Awards earned in fiscal year 1990 were paid in fiscal years 1991, 1992
and 1993. No awards have been earned since fiscal year 1990.
THE RETIREMENT PLAN
The Company established, effective May 1, 1989, as amended, the K & F
Industries Retirement Plan for Salaried Employees (the "Company Retirement
Plan"), a defined benefit pension plan. The Company intends to apply for a
determination letter from the Internal Revenue Service that the Company
Retirement Plan is a qualified plan under the Internal Revenue Code. The terms
of the Company Retirement Plan are as follows: a non-contributory benefit and a
contributory benefit. The cost of the former is borne by the Company; the cost
of the latter is borne partly by the Company and partly by the participants.
Salaried employees who have completed at least six months of service and
satisfied a minimum earnings level are eligible to participate in the
contributory portion of the Company Retirement Plan; salaried employees become
participants in the non-contributory portion on their date of hire. The Plan
provides a benefit of $20.00 per month for each year of credited service. For
participants who contribute to the Plan, in addition to the benefit of $20.00
per month for each year of credited service, the Plan provides an annual
benefit equal to the greater of: 60% of the participant's aggregate
contributions; or, average compensation earned (while contributing) during the
last 10 years of employment in excess of 90% of the Social Security Wage Base
amount multiplied by: (a) 2.4% times years of continuous service up to 10,
plus, (b) 1.8% times additional years of such service up to 20, plus, (c) 1.2%
times additional years of such service up to 30, plus, (d) 0.6% times all
additional such service above 30 years.
Effective January 1, 1990, the Plan was amended for eligible employees of the K
& F Industries and Aircraft Braking Systems to provide an annual benefit equal
to (a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of continuous service on and after
January 1, 1990, a contributory benefit of (i) for 14 years of continuous
service or less, 1.05% of annual earnings between $19,800 and the Social
Security Wage Base plus 2.25% of annual earnings above the Social Security Wage
Base, (ii) for more than 14 years of continuous service, 1.35% of annual
earnings between $19,800 and the Social Security Wage Base plus 2.65% of annual
earnings above the Social Security Wage Base. In no event will the amount
calculated in (c) above be less than 60% of the participant's aggregate
contributions made on and after January 1, 1990. Benefits are payable upon
normal retirement age at age 65 in the form of single life or joint and
survivor annuity or, at the participant's option with appropriate spousal
consent, in the form of an annuity with a term certain. A participant who has
(a) completed at least 30 years of continuous service, (b) attained age 55 and
completed at least 10 years of continuous service, or (c) attained age 55 and
the combination of such participant's age and service equals at least 70 years,
is eligible for early retirement benefits. If a participant elects early
retirement before reaching age 62, such benefits will be reduced except that
the non-contributory benefits of a participant with at least 30 years of
credited service will not be reduced. In addition, employees who retire after
age 55 but before age 62 with at least 30 years of service are entitled to a
supplemental non-contributory benefit until age 62. Annual benefits under the
Company Retirement Plan are subject to a statutory ceiling of $118,800 per
participant. Participants are fully vested in their accrued benefits under the
Company Retirement Plan after five years of credited service with the Company.
-22-
23
Estimated annual benefits upon retirement for the individuals named in the
Summary Compensation Table, who are participants in the amended plan of K & F
and Aircraft Braking Systems, are $11,441 for Mr. K. Schwartz (does not
currently participate in contributory portion of plan); $88,246 for Mr.
Fogelsanger; and $69,755 for Mr. Crawford. BLS does not participate in this
plan. The retirement benefits have been computed on the assumption that (a)
employment will be continued until normal retirement at age 65; and (b) current
levels of creditable compensation and the Social Security Wage Base will
continue without increases or adjustments throughout the remainder of the
computation period.
For purposes of eligibility, vesting and benefit accrual, participants receive
credit for years of service with Loral and Goodyear. At retirement, retirement
benefits calculated according to the benefit formula described above are
reduced by any retirement benefits payable from The Goodyear Tire & Rubber
Company Retirement Plan For Salaried Employees.
The following table sets forth the estimated annual retirement benefits
assuming a contributory formula applicable to eligible employees of Engineered
Fabrics payable in the form of a single life annuity under the Company
Retirement Plan to a salaried employee at various levels of credited
compensation upon retirement at age 65 with the indicated years of service.
FINAL YEARS OF SERVICE
AVERAGE
SALARY 15 20 25 30 35
------ ------ ------ ------ ------ ------
$125,000 $30,095 $38,521 $44,538 $50,556 $54,164
150,000 38,345 49,021 56,538 64,056 68,414
175,000 46,595 59,521 68,538 77,556 82,664
200,000 54,845 70,021 80,538 91,056 96,914
These figures have not been limited by the Section 415 dollar limitation of the
Internal Revenue Code, which was $115,641 in 1993 and is $118,800 in 1994.
Currently the Internal Revenue Code permits only $150,000 of annual
compensation to be taken into account for purposes of determining retirement
benefits.
At March 31, 1994, the credited service (as calculated under the Company
Retirement Plan for Engineered Fabrics to the nearest whole year) for Mr.
Martin was 32 years.
COMPENSATION OF DIRECTORS
The Board of Directors held four meetings during the fiscal year ended March
31, 1994. Nonequity members of the Board of Directors receive annual fees of
$12,000 per year. Messrs. Towbin, Washkowitz and Stern (three directors
designated by LBH pursuant to the Stockholders Agreement) waived any
compensation for services as a director for the fiscal year ended March 31,
1994. All directors are reimbursed for reasonable out-of-pocket expenses
incurred in that capacity.
-23-
24
EMPLOYMENT AGREEMENT
The Company has an Advisory Agreement with BLS which provides for the payment
of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain other executive officers of Loral who are
active in the management of the Company) in exchange for acting as directors
and providing advisory services to the Company and its subsidiaries. Such
agreement will continue until BLS dies or is disabled or ceases to own at least
1,350,000 shares of common stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not in the past used a compensation committee to determine
executive officer compensation. The annual salary and bonus paid to BLS, the
Company's Chairman and Chief Executive Officer, are determined in accordance
with his employment agreement with the Company as described above. All other
executive compensation decisions are made by BLS in accordance with policies
established in consultation with the Board of Directors.
-24-
25
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 at March 31, 1994:
Number of Shares Number of Shares Percentage
of Voting of Preferred Ownership of
Common Stock Stock(a) Capital Stock(b)
------------ -------- ----------------
Bernard L. Schwartz . . . . . . . . . 4,846,154(c) -- 35.00%
*Lehman Brothers Merchant Banking
Portfolio Partnership L.P. . . . . . -- 416,496(d) 30.08
*Lehman Brothers Offshore Investment
Partnership L.P. . . . . . . . . . . -- 112,730(e) 8.14
*Lehman Brothers Offshore Investment
Partnership - Japan L.P. . . . . . . -- 42,850(e) 3.10
*Lehman Brothers Capital Partners
II, L.P. . . . . . . . . . . . . . . -- 282,924(f) 20.43
CBC Capital Partners, Inc. . . . . . .
10 44,999 3.25
--------- ------- ------
4,846,164 899,999 100.00%
========= ======= ======
*Collectively referred to as the "Lehman Investors."
(a) The preferred stock is convertible into common stock on a one-for-ten
basis.
(b) Assumes that the preferred stock has been converted into voting common
stock.
(c) BLS has granted options to officers and directors of the Company and
its subsidiaries, at a per share exercise price of $4, for an
aggregate of 535,000 shares of the voting common stock owned by BLS.
The agreements pursuant to which such options are issued (i) provide
that the option is exercisable in whole or in part at any time prior
to the tenth anniversary of the date of such agreement and (ii)
restrict the transfer of the option and any shares purchased upon
exercise of the option. The option agreements further provide that
BLS will retain all voting rights with respect to shares sold to an
option holder upon exercise of an option.
(d) Lehman Brothers Merchant Banking Partners Inc. is the general partner
of the limited partnership and is an indirect wholly owned subsidiary
of LBH.
(e) Lehman Brothers Offshore Partners Ltd. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
(f) Lehman Brothers II Investment Inc. is the general partner of the
limited partnership and is an indirect wholly owned subsidiary of LBH.
The limited partnership is a fund for employees of LBH and its
affiliates.
Stockholders Agreement
The Company, BLS and LBH entered into (and the Lehman Investors and CBC Capital
Partners, Inc. have become parties to) a Stockholders Agreement (the
"Stockholders Agreement") dated as of April 27, 1989, which contains certain
restrictions with respect to the transferability of the Company's capital stock
by the parties thereunder, certain rights granted by the Company with respect
to such shares and certain voting and other arrangements. The Stockholders
Agreement will terminate as of such time as more than 75% of the shares of
common stock then outstanding have been
-25-
26
sold pursuant to one or more public offerings, except that the registration
rights continue as to any common stock held by parties thereto as long as they
own their shares, and the voting provisions contained in the Stockholders
Agreement terminate on April 27, 1999.
The Stockholders Agreement provides for the Company's Board of Directors to be
comprised initially of 7 members and for BLS to appoint the Chairman of the
Board and all of the directors to the Board (except for 3 directors to be
designated by LBH) for so long as BLS and his affiliates own at least 1,350,000
shares of the outstanding common stock. LBH is entitled to appoint three
designees to the Board of Directors and, if BLS dies or becomes disabled or
holds less than 1,350,000 shares of the common stock, to appoint a majority of
the directors to the Board so long as LBH and its affiliates hold at least
100,000 shares of capital stock. The Company's charter documents provide that
the following corporate actions will require the vote of at least one LBH
designated director including (with certain limited exceptions) (i) mergers,
consolidations or recapitalizations, (ii) issuances of capital stock or
preferred stock, (iii) repurchases of and dividends on capital stock, (iv)
issuance of employee options representing more than 50,000 shares of capital
stock, (v) dissolution or liquidation of the Company, (vi) acquisition, sale or
exchange of assets in excess of $5,000,000, (vii) the incurrence of debt or
liens in excess of $10 million in the aggregate, (viii) the making of loans,
investments or capital expenditures in excess of $10 million, (ix) transactions
with affiliates and (x) prepayments of or amendments to any amount of financing
in excess of $10 million. The Stockholders Agreement provides that the Charter
and By-laws of the Company in effect on the closing date of the Acquisition may
not be amended without the consent of an LBH designated director for so long as
LBH or its affiliates own at least 1,000,000 shares of the outstanding capital
stock.
The Stockholders Agreement provides BLS and LBH with a mutual right of first
offer, with certain exceptions, on all sales of such stock. In addition, sales
by a holder of capital stock who is a party or becomes a party to the
Stockholders Agreement (a "Stockholder") are subject to a right of first offer.
In the event that a Stockholder (or a group of Stockholders) sells more than
15% of the shares of capital stock subject to the Stockholders Agreement to a
third party, each other Stockholder has the right to elect to sell on the same
terms the same percentage of such other Stockholder's shares to the third party
as the first Stockholder is selling of its shares of capital stock.
The Stockholders Agreement provides that either BLS or LBH (the "Put Party")
may request an appraisal of the value of the capital stock of the Company (the
"Appraised Value") and may notify the other party of its desire to sell all of
its and its transferee's capital stock for a pro rata share of such Appraised
Value. The other party may elect to purchase such capital stock or arrange for
the purchase of such capital stock by a third party. If such election is made
such party must use its best efforts to purchase or arrange for the purchase of
such capital stock. If such capital stock is not purchased within a specified
period, BLS and LBH shall cause the Company to be sold if such sale can be
arranged for a price at least equal to the Appraised Value.
Stockholders of specified percentages of capital stock may demand registration
rights. The Stockholders Agreement also grants to all Stockholders incidental
registration rights with respect to shares of capital stock held by them;
provided that the Stockholders not exercising such rights have the right to
purchase the shares which are the subject of such registration rights pursuant
to the right of first offer provided in the Stockholders Agreement. The
Stockholders Agreement contains customary terms and provisions with respect to
such registration rights.
Pursuant to the Stockholders Agreement, Stockholders have certain preemptive
rights, subject to certain exceptions, with respect to future issuances of
shares or share equivalents of capital stock so that such Stockholders may
maintain their proportional equity ownership interest in the Company.
-26-
27
Item 13. Certain Relationships and Related Transactions
General
BLS owns 35% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral. Because BLS is Chairman of the
Board of Directors and has the right to designate a majority of the Directors
to the Board of the Company, he has operating control of the Company.
The Company has an Advisory Agreement with BLS which provides for the payment
of an aggregate of $200,000 per month of compensation to BLS and persons
designated by him (including certain other executive officers of Loral who are
active in the management of the Company) in exchange for acting as directors
and providing advisory services to the Company and its subsidiaries. Such
agreement will continue until BLS dies or is disabled or ceases to own at least
1,350,000 shares of common stock of the Company.
The Company has established a bonus plan pursuant to which the Company's Board
of Directors awards bonuses to BLS and other advisers ranging from 5% to 10% of
earnings in excess of $50 million before interest, taxes and amortization. No
bonuses were earned under this plan during fiscal years ended March 31, 1994
and 1993 and 1992.
Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers acts as exclusive financial adviser to the Company.
The Company pays Lehman Brothers customary fees for services rendered on an
as-provided basis. The agreement may be terminated by the Company or Lehman
Brothers upon certain conditions. In connection with the Senior Note Offering
on June 10, 1992, Lehman Brothers received underwriting discounts and a
commission of $2.25 million.
Pursuant to the Services Agreement, Loral provides the Company with certain
services which it previously provided to the subsidiaries. These services
include, among others, security, fire protection, yard service and road
maintenance, power plant and equipment calibration as well as other services on
an as needed basis (the "Loral Services"). Certain of the Loral Services are
used by the Company on a limited basis. The charge for these services is based
on actual costs incurred. Billings from Loral were $3.0 million, $3.7 million
and $4.5 million in fiscal years 1994, 1993 and 1992, respectively.
Billings to Loral were $1.1 million, $1.1 million and $1.1 million in fiscal
years 1994, 1993 and 1992. Purchases from Loral were $4.2 million, $3.7
million and $8.8 million in fiscal years 1994, 1993 and 1992. Included in
accounts receivable and accounts payable at March 31, 1994 is $.6 million and
$2.0 million. Included in accounts receivable and accounts payable at March
31, 1993 is $1.6 million and $3.7 million.
-27-
28
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) Index to Financial Statements:
Page
----
Independent Auditors' Report F-1
K & F Industries, Inc. - Consolidated Financial
Statements and Schedule:
Consolidated Balance Sheets as of March 31, 1994 and 1993 F-2
Consolidated Statements of Operations for the Years Ended
March 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended March 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-6
Supplementary Income Statement Information (Schedule X) F-18
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.
(b) No reports on Form 8-K were filed for the fiscal year ended March 31, 1994.
Exhibits: See exhibit index below.
No additional financial statements are required to be filed.
(c) Exhibits
2.01 - Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral Corporation and the
Registrant (1)
3.01 - Form of Certificate of Incorporation of the Registrant (1)
3.02 - By-Laws of Registrant (1)
4.01 - Indenture for the 13 3/4% Senior Subordinated Debentures due 2001 (1)
-28-
29
(c) Exhibits (continued):
4.02 - Indenture for the 14.75% Subordinated Convertible Debentures Due 2004 (1)
4.03 - First Supplemental Indenture dated as of July 22, 1991, to Convertible Debenture Indenture (4)
4.04 - Form of Indenture dated as of June 10, 1992 for the 11 7/8% Senior Secured Notes Due 2003 (5)
4.05 - Form of 11 7/8% Senior Secured Notes due 2003. (5)
4.06 - Form of Second Supplemental Indenture dated as of June 10, 1992, to Convertible Debenture Indenture (5)
9.01 - Stockholders Agreement dated April 27, 1989 among the Registrant, Lehman Brothers Holdings Inc. ("LBH")
and Bernard L. Schwartz ("BLS") (1)
10.01 - Credit Agreement dated as of April 27, 1989 among the Registrant, Manufacturers Hanover Trust Company, as
Agent and the Banks named therein (1)
10.02 - Revolving Credit Agreement dated as of April 27, 1989, among Aircraft Braking Systems Corporation,
Engineered Fabrics Corporation, the Agent and the Banks (1)
10.03 - Securities Purchase Agreement dated as of April 27, 1989, among the Registrant, BLS and LBH (1)
10.04 - Assumption Agreement dated as of April 27, 1989 (1)
10.07 - Director Advisory Agreement dated as of April 27, 1989, among the Registrant and BLS (1)
10.08 - Shared Services Agreement dated April 27, 1989, among Loral, the Registrant, Aircraft Braking Systems
Corporation and Engineered Fabrics Corporation (1)
10.09 - Non-Competition Agreement dated as of April 27, 1989, between the Registrant and BLS (1)
10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees (5)
10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees (5)
10.12 - Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees - Plan A (1)
10.13 - The Loral Systems Group Release and Separation Allowance Plan (1)
10.14 - Letter Agreement dated April 27, 1989, between the Registrant and Lehman Brothers Inc. (1)
10.15 - Amendment and Waiver dated as of July 14, 1989 (1)
10.16 - Amendment to Credit Agreement dated as of July 31, 1989, between K & F Industries, the Subsidiaries and the
banks (2)
10.17 - K & F Industries, Inc. 1989 Stock Option Plan (2)
10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.19 - Amendment to the Credit Agreement dated as of June 26, 1991 (3)
-29-
30
(c) Exhibits (continued):
10.21 - Securities Purchase Agreement dated as of July 22, 1991, among the Registrant, BLS and the Lehman
Investors (4)
10.22 - Interest Rate Protection Agreement between K & F Industries, Inc. and Lehman Brothers Special
Financing, Inc (4)
10.23 - Interest Rate Protection Agreement between K & F Industries, Inc. and Manufacturers Hanover Trust Company (4)
10.27 - Form of Amended and Restated Revolving Credit Agreement dated as of June 10, 1992, among Chemical Bank, the
Banks named therein, Aircraft Braking Systems Corporation and Engineered Fabrics Corporation (5)
12.01 - Statement of computations of ratio of earnings to fixed charges (5)
12.02 - Statement of computation of pro forma deficiency ratio of earnings to fixed charges (1)
21.01 - Subsidiaries of the Registrant (1)
24.01 - Powers of Attorney
- -------------------------
(1) Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035.
(2) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990.
(3) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991.
(4) Previously filed, as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1991.
(5) Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-47028.
The annual report has not been furnished to the holders of the 13 3/4% Senior
Subordinated Debentures and the 11 7/8% Senior Secured Notes. Upon completion,
such report will be sent to the Commission and holders of the aforementioned
debentures.
-30-
31
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: KENNETH M. SCHWARTZ
-------------------------
Kenneth M. Schwartz
Chief Financial Officer
Date: June 15, 1994
-------------
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 June 15, 1994
---------------------------- Executive Officer and Director
Bernard L. Schwartz (principal executive officer)
KENNETH M. SCHWARTZ Chief Financial Officer (principal June 15, 1994
--------------------- financial and accounting officer)
Kenneth M. Schwartz
* Director June 15, 1994
---------------------------
Herbert R. Brinberg
* Director June 15, 1994
---------------------------
Ronald H. Kisner
* Director June 15, 1994
---------------------------
John R. Paddock
* Director June 15, 1994
---------------------------
James A. Stern
* Director June 15, 1994
---------------------------
A. Robert Towbin
* Director June 15, 1994
---------------------------
Alan H. Washkowitz
*By: KENNETH M. SCHWARTZ June 15, 1994
------------------------
Kenneth M. Schwartz
Attorney-in-Fact
-31-
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
K & F Industries, Inc.:
We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of March 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period
ended March 31, 1994. Our audits also included the financial statement
schedule listed in the index at Item 14(a)1. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule 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 March 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1994, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for discounting of
certain liabilities. As discussed in Notes 4 and 11, respectively, to the
consolidated financial statements, effective April 1, 1992, the Company changed
its method of accounting for certain overhead costs included in inventory and
postretirement benefits other than pensions.
DELOITTE & TOUCHE
New York, New York
May 4, 1994
F-1
33
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
-----------------------------------
1994 1993
---- ----
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,327,000 $ 2,921,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 32,783,000 50,045,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,613,000 77,259,000
Other current assets . . . . . . . . . . . . . . . . . . . . . 1,196,000 1,059,000
------------ -------------
Total current assets . . . . . . . . . . . . . . . . . . . . 105,919,000 131,284,000
------------ -------------
Property, Plant and Equipment - Net . . . . . . . . . . . . . . . 68,740,000 76,262,000
Deferred Charges - Net of amortization of $8,328,000 and
$5,581,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 28,050,000 30,871,000
Cost in Excess of Net Assets Acquired - Net of amortization of
$30,036,000 and $23,927,000 . . . . . . . . . . . . . . . . . 214,340,000 220,449,000
Intangible Assets - Net of amortization of $17,244,000 and
$13,736,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 29,831,000 31,102,000
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $446,880,000 $489,968,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 9,028,000 $ 14,326,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . 8,818,000 9,256,000
Other current liabilities . . . . . . . . . . . . . . . . . . . 34,982,000 37,674,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . 52,828,000 61,256,000
------------ ------------
Postretirement Benefit Obligation Other Than Pensions . . . . . . 80,150,000 84,240,000
Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 22,836,000 16,862,000
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 381,421,000 379,478,000
Commitments and Contingencies
(Notes 12 and 13)
Stockholders' Deficiency:
Preferred stock, $.01 par value - authorized, 900,000 shares;
issued and outstanding, 899,999 shares (liquidation
preference of $76,154,000) . . . . . . . . . . . . . . . . . 9,000 9,000
Common stock, $.01 par value - authorized, 5,350,000 shares;
issued and outstanding, 4,846,164 shares . . . . . . . . . . .
48,000 48,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . 89,943,000 89,943,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,470,000) (138,429,000)
Adjustment to equity for minimum pension liability . . . . . . (7,467,000) (3,052,000)
Cumulative translation adjustment . . . . . . . . . . . . . . . (418,000) (387,000)
------------- -------------
Total stockholders' deficiency . . . . . . . . . . . . . . . (90,355,000) (51,868,000)
------------- -------------
Total Liabilities and Stockholders' Deficiency . . . . . . . . . $446,880,000 $489,968,000
============ ============
See notes to consolidated financial statements.
F-2
34
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
-----------------------------------------------------------
1994 1993 1992
---- ---- ----
Net sales . . . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000
Cost of sales . . . . . . . . . . . . . . . . . . . . . 159,751,000 199,002,000 209,552,000
Selling, general and administrative expenses . . . . . 22,421,000 24,154,000 24,047,000
Independent research and development . . . . . . . . . 12,858,000 11,417,000 14,130,000
Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000
------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . . . 20,217,000 32,276,000 37,455,000
Interest expense, net of interest income of $96,000,
$108,000 and $152,000 . . . . . . . . . . . . . . . . 51,953,000 53,486,000 52,179,000
------------ ------------ ------------
Loss before extraordinary charge and cumulative effect
of changes in accounting principles . . . . . . . . . (31,736,000) (21,210,000) (14,724,000)
Extraordinary charge from early extinguishment of debt -- (2,477,000) (992,000)
Cumulative effect of change in method of accounting
for the discounting of certain liabilities . . . . . (2,305,000) -- --
Cumulative effect of change in method of accounting
for postretirement benefits other than pensions . . . -- (77,902,000) --
Cumulative effect of change in method of accounting
for certain overhead costs in inventory . . . . . . . -- 4,362,000 --
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000)
============= ============ ============
See notes to consolidated financial statements.
F-3
35
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 1994, 1993 AND 1992
Common Stock Preferred Stock Adjustment
------------ --------------- to Equity for
Additional Minimum Cumulative
Shares Shares Paid-in Pension Translation
Issued Amount Issued Amount Capital Deficit Liability Adjustment
------ ------ ------ ------ ------- ------- ------------- ----------
Balance, March 31, 1991 . 3,500,010 $35,000 649,999 $6,000 $64,959,000 $(25,486,000) $(1,342,000) $ --
Issuance of common
stock . . . . . . . . 1,346,154 13,000 3,833,000
Issuance of preferred
stock . . . . . . . . 250,000 3,000 21,151,000
Net loss . . . . . . . (15,716,000)
Pension adjustment . . 875,000
--------- ------- ------- ------ ----------- ------------ ---------- ---------
Balance, March 31, 1992 . 4,846,164 48,000 899,999 9,000 89,943,000 (41,202,000) (467,000) --
Net loss . . . . . . . (97,227,000)
Pension adjustment . . (2,585,000)
Cumulative translation
adjustment . . . . . (387,000)
--------- ------- ------- ------ ----------- ------------ ---------- --------
Balance, March 31, 1993 . 4,846,164 48,000 899,999 9,000 89,943,000 (138,429,000) (3,052,000) (387,000)
Net loss . . . . . . . (34,041,000)
Pension adjustment . . (4,415,000)
Cumulative translation
adjustment . . . . . (31,000)
--------- ------- ------- ------ ----------- ------------ ---------- ---------
Balance, March 31, 1994 4,846,164 $48,000 899,999 $9,000 $89,943,000 $(172,470,000) $(7,467,000) $(418,000)
========= ======= ======= ====== =========== ============= =========== =========
See notes to consolidated financial statements.
F-4
36
K & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
-----------------------------------------------------
1994 1993 1992
---- ---- ----
Cash Flows From Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(34,041,000) $(97,227,000) $(15,716,000)
Adjustments to reconcile net loss to net cash provided by
operating activities: . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting for:
Discounting certain liabilities . . . . . . . . . . . 2,305,000 -- --
Postretirement benefits other than pensions . . . . . -- 77,902,000 --
Certain overhead costs in inventory . . . . . . . . . -- (4,362,000) --
Depreciation . . . . . . . . . . . . . . . . . . . . . 9,643,000 9,604,000 9,195,000
Amortization . . . . . . . . . . . . . . . . . . . . . 10,884,000 10,258,000 10,306,000
Non-cash interest expense-convertible debentures . . . 8,443,000 7,282,000 6,213,000
Non-cash interest expense-amortization of deferred
financing charges . . . . . . . . . . . . . . . . . 1,480,000 1,507,000 2,467,000
Provision for losses on accounts receivable . . . . . . 450,000 190,000 (331,000)
Extraordinary charge from early extinguishment of debt -- 2,477,000 992,000
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 16,797,000 5,110,000 666,000
Inventory . . . . . . . . . . . . . . . . . . . . . . 9,638,000 12,038,000 (469,000)
Other current assets . . . . . . . . . . . . . . . . (137,000) (262,000) (33,000)
Accounts payable . . . . . . . . . . . . . . . . . . (5,298,000) 1,141,000 (6,502,000)
Interest payable . . . . . . . . . . . . . . . . . . (438,000) 3,552,000 (245,000)
Other current liabilities . . . . . . . . . . . . . . (2,692,000) 4,567,000 (370,000)
Postretirement benefit obligation other than pensions (4,090,000) 6,338,000 --
Other long-term liabilities . . . . . . . . . . . . . (3,981,000) (1,289,000) 4,427,000
Deferred charges - financing costs . . . . . . . . . -- (3,256,000) (1,695,000)
----------- ----------- ------------
Net cash provided by operating activities . . . . . . 8,963,000 35,570,000 8,905,000
----------- ----------- ------------
Cash Flows From Investing Activities:
Capital expenditures, net . . . . . . . . . . . . . . . (3,127,000) (4,670,000) (3,986,000)
Deferred charges . . . . . . . . . . . . . . . . . . 74,000 258,000 (1,409,000)
----------- ----------- ------------
Net cash used in investing activities. . . . . . . . . (3,053,000) (4,412,000) (5,395,000)
----------- ----------- -----------
Cash Flows From Financing Activities:
Payments of senior revolving loan . . . . . . . . . . . . (43,500,000) (81,000,000) (56,000,000)
Borrowings under senior revolving loan . . . . . . . . . 37,000,000 47,000,000 59,000,000
Proceeds from sale and leaseback transaction. . . . . . . 1,996,000 -- --
Payments of senior term loan . . . . . . . . . . . . . . -- (95,875,000) (34,625,000)
Proceeds from issuance of senior secured notes . . . . . -- 100,000,000 --
Proceeds from issuance of common and preferred stocks . . -- -- 25,000,000
----------- ----------- ------------
Net cash used by financing activities . . . . . . . (4,504,000) (29,875,000) (6,625,000)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents . . . . 1,406,000 1,283,000 (3,115,000)
Cash and cash equivalents, beginning of year . . . . . . . . 2,921,000 1,638,000 4,753,000
------------ ------------ ------------
Cash and cash equivalents, end of year . . . . . . . . . . . $ 4,327,000 $ 2,921,000 $ 1,638,000
============ ============ ============
- ------------------------------
Supplemental Information:
Interest paid during the year . . . . . . . . . . . . . $42,564,000 $41,253,000 $ 43,896,000
=========== =========== ============
See notes to consolidated financial statements.
F-5
37
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development,
manufacture and distribution of wheels, brakes and anti-skid systems
for commercial, military and general aviation aircraft, and the
manufacture of materials for fuel tanks, iceguards, inflatable oil
booms and various other products made from coated fabrics for military
and commercial uses. The Company's activities are conducted through
its two wholly owned subsidiaries, Aircraft Braking Systems
Corporation ("Aircraft Braking Systems") and Engineered Fabrics
Corporation (collectively the "Subsidiaries").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation- The consolidated financial statements
include the accounts of the Company. All material intercompany
accounts and transactions between these entities have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash,
commercial paper and other investments that are readily convertible
into cash and have original maturities of three months or less.
Revenue and Expense Recognition- Sales are recorded as units are
shipped. The Company customarily sells original wheel and brake
equipment below cost as an investment in a new airframe which is
expected to be recovered through the subsequent sale of replacement
parts. These commercial investments (losses) are recognized when
original equipment is shipped. Losses on U.S. Government contracts
are immediately recognized in full when determinable.
Inventory- Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried
costs may contain amounts relating to contracts with long production
cycles, a portion of which will not be realized within one year.
During fiscal year 1993, the Company changed its method of accounting
for certain overhead costs. (See Note 4.)
Property, Plant and Equipment- Property, plant and equipment are
stated at cost. Maintenance and repairs are expensed when incurred;
renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation are
eliminated from the accounts, and any gain or loss is included in the
results of operations. Depreciation is provided on the straight-line
method over the estimated useful lives of the related assets as
follows: buildings and improvements - 8 to 40 years; machinery,
equipment, furniture and fixtures - 3 to 25 years; leasehold
improvements - over the life of the applicable lease or 10 years,
whichever is shorter.
Deferred Charges - Deferred charges consist primarily of financing
($11.2 million and $12.7 million, which is net of amortization
(non-cash interest expense) of $3.9 million and $2.9 million in fiscal
years 1994 and 1993, respectively), organization and program
participation costs ($15.8 million, net of vendor participations) paid
in connection with the sole-source award of wheels, brakes and
anti-skid equipment on the McDonnell Douglas Corporation's MD-90
twin-jet program. Program participation costs are being amortized on
a straight-line method over a period of 20 years. Deferred financing
charges are primarily being amortized on an effective interest method
over periods of eight to 12 years.
Cost in Excess of Net Assets Acquired - Cost in excess of net assets
acquired is being amortized on the straight-line method over a period
of 40 years.
F-6
38
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets - Intangible assets consist of patents, licenses and
computer software which are stated at cost and are being amortized on
a straight-line method over periods of five to 30 years.
Evaluation of Long-Lived Assets- Long-lived assets are assessed for
recoverability on an on-going basis. In evaluating the value and
future benefits of long-lived assets, their carrying value would be
reduced by the excess, if any, of the long-lived asset over
management's estimate of the anticipated undiscounted future net cash
flows of the related long-lived asset. There were no adjustments to
the carrying amount of long-lived assets in fiscal year 1994 resulting
from the Company's evaluations. Extraordinary charges of $2,477,000
and $992,000 were recorded relating to the accelerated amortization of
unamortized financing costs associated with the full prepayment of the
senior term loan in fiscal year 1993 and partial prepayment in fiscal
year 1992, respectively. (See Note 7.)
Warranty - Estimated costs of product warranty are accrued when
individual claims arise with respect to a product. When the Company
becomes aware of such defects, the estimated costs of all potential
warranty claims arising from such defects are fully accrued.
Business and Credit Concentrations - The Company's customers are not
concentrated in any specific region, but are concentrated in the
airline industry. The United States Government accounted for
approximately 15%, 23% and 31% of sales for the fiscal years ended
March 31, 1994, 1993 and 1992, respectively. No other single customer
accounted for significant sales for the fiscal years then ended, and
there were no significant accounts receivable from a single customer,
except the United States Government, at March 31, 1994.
Changes in Accounting Methods-In the fourth quarter of fiscal year
1994, retroactive to April 1, 1993, in response to recent Securities
and Exchange Commission guidance, the Company changed its method of
accounting for the discounting of liabilities for workers'
compensation losses, to use a risk- free rate rather than its
incremental borrowing rate. The cumulative effect for periods prior
to April 1, 1993, of this change amounted to $2,305,000, and is
included as an increase to the net loss for the fiscal year ended
March 31, 1994. The effect of the change on the results of operations
for the fiscal years ended March 31, 1994 and pro forma 1993 and 1992
were not material. The effect of this change on previously reported
quarterly financial data for the three months ended June 30, 1993, was
to increase the net loss reported as $10,014,000 to $12,319,000.
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In
connection with such adoption, there was no impact to the financial
statements as the Company has provided a 100% valuation allowance
against its net deferred tax benefit. (See Note 14.)
In the fourth quarter of fiscal year 1993, the Company adopted,
retroactive to April 1, 1992, Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." (See Note 11.)
Accounting Pronouncement - In November 1992, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits," which
requires that employers who provide benefits to employees after
employment but before retirement recognize the obligation in the
financial statements. The Company will adopt Statement of Financial
Accounting Standards No. 112 in the first quarter of fiscal year 1995.
The impact of this new statement has not been fully determined, but
the Company believes its adoption will not have a material effect on
its financial position or results of operations.
F-7
39
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
March 31,
----------------------------------
1994 1993
---- ----
Accounts receivable, principally from commercial
customers . . . . . . . . . . . . . . . . . . . . . . $29,099,000 $42,836,000
Accounts receivable on U.S. Government and other
long-term contracts . . . . . . . . . . . . . . . . . 4,379,000 8,391,000
Allowances . . . . . . . . . . . . . . . . . . . . . . . (695,000) (1,182,000)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $32,783,000 $50,045,000
=========== ===========
4. INVENTORY
March 31,
----------------------------------
1994 1993
---- ----
Raw materials and work-in-process . . . . . . . . . . . $42,375,000 $46,027,000
Finished goods . . . . . . . . . . . . . . . . . . . . . 15,821,000 17,307,000
Inventoried costs related to U.S.
Government and other long-term contracts . . . . . . . 9,823,000 14,914,000
----------- -----------
68,019,000 78,248,000
Less: unliquidated progress payments received,
principally related to long-term government
contracts . . . . . . . . . . . . . . . . . . . . . . 406,000 989,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $67,613,000 $77,259,000
=========== ===========
During the fiscal year ended March 31, 1993, the Company's Aircraft
Braking Systems subsidiary changed its method of accounting, effective
April 1, 1992, to capitalize in inventory certain material related
overhead costs (such as procurement and receiving) at the raw
material, work-in-process and finished goods stages. Historically,
these costs were inventoried only in finished goods. This change is
preferable in that it provides a better matching of product costs with
related revenues.
The cumulative effect of this change in method of accounting for
periods prior to April 1, 1992, amounted to $4,362,000, and is
included as a reduction in the net loss for the fiscal year ended
March 31, 1993. The effect of the change on the results of
operations for the fiscal year ended March 31, 1993 was to increase
the loss before extraordinary charge and cumulative effect of changes
in accounting principles by $1,469,000 and to reduce the net loss by
$2,893,000. Pro forma net loss for the fiscal year ended March 31,
1992 would not be materially different had the change been applied
retroactively.
F-8
40
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
March 31,
----------------------------------
1994 1993
---- ----
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 662,000 $ 662,000
Buildings and improvements . . . . . . . . . . . . . . . 27,113,000 26,791,000
Machinery, equipment, furniture and fixtures . . . . . . 84,107,000 83,081,000
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . 111,882,000 110,534,000
Less: accumulated depreciation and amortization . . . . 43,142,000 34,272,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $68,740,000 $76,262,000
=========== ===========
During the fiscal year ended March 31, 1994, the Company sold and
leased back assets with a net book value of $1,006,000.
6. OTHER CURRENT LIABILITIES
March 31,
----------------------------------
1994 1993
---- ----
Accrued payroll costs . . . . . . . . . . . . . . . . . $11,687,000 $12,900,000
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 7,094,000 7,199,000
Accrued costs on long-term contracts . . . . . . . . . . 3,415,000 4,933,000
Accrued warranty costs . . . . . . . . . . . . . . . . . 4,502,000 6,158,000
Postretirement benefit obligation other than pensions . . 2,000,000 1,500,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,284,000 4,984,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $34,982,000 $37,674,000
=========== ===========
7. LONG-TERM DEBT
March 31,
----------------------------------
1994 1993
---- ----
Senior revolving loan (a) . . . . . . . . . . . . . . . $ 10,000,000 $ 16,500,000
11 7/8% Senior Secured Notes due 2003 (b) . . . . . . . 100,000,000 100,000,000
13 3/4% Senior Subordinated Debentures due 2001 (c) . . 210,000,000 210,000,000
14.75% Convertible Debentures due 2004 (d) . . . . . . . 61,421,000 52,978,000
----------- -------------
Total . . . . . . . . . . . . . . . . . . . . . $381,421,000 $379,478,000
============ ============
(a) Credit Agreements - On April 27, 1989, the Company entered into senior
term loan and senior revolving loan credit agreements (collectively
referred to as the "Credit Agreement") with a syndicate of banks. On
June 10, 1992, the Company issued $100 million aggregate principal
amount of 11 7/8% Senior Secured Notes due 2003 (the "Senior Notes").
The net proceeds from the Senior Notes were used to prepay the senior
term loan in full and reduce the outstanding amount of the senior
revolving loan. The Company recorded extraordinary charges of
$2,477,000 and $992,000 relating to the
F-9
41
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accelerated amortization of unamortized financing costs associated
with the full prepayment of the senior term loan in fiscal year 1993
and the partial prepayment of the senior term loan in fiscal year
1992, respectively.
In connection with the Senior Note offering, the original senior
revolving loan credit agreement was amended and restated pursuant to
an Amended and Restated Revolving Credit Agreement (the "Restated
Revolving Credit Agreement"). The Restated Revolving Credit Agreement
provides for revolving loans (the "Revolving Loan") in an aggregate
principal amount not to exceed $80 million (subject to a borrowing
base of a portion of eligible accounts receivable and inventory). The
Company's obligation under the Revolving Loan is secured by a first
priority lien on all accounts receivable and inventory of the
Subsidiaries. All borrowings under the Revolving Loan will mature on
April 27, 1997.
Borrowings under the Revolving Loan bear interest at floating rates.
At March 31, 1994 the interest rate on the Revolving Loan was 5.81%.
As part of the total commitment, the Restated Revolving Credit
Agreement provides for the issuance of letters of credit not to exceed
$11 million. As of March 31, 1994, the Company had outstanding
letters of credit of $7.5 million. At March 31, 1994, the Company had
$38.2 million available under the Revolving Loan.
The Restated Revolving Credit Agreement contains certain covenants and
events of default, including limitations on additional indebtedness,
liens, asset sales, dividend payments and other distributions from the
subsidiaries to K & F and contains financial ratio requirements
including cash interest coverage and consolidated net worth. The
Company was in compliance with all covenants at March 31, 1994.
(b) 11 7/8% Senior Secured Notes - On June 10, 1992, the Company issued
$100 million of 11 7/8% Senior Secured Notes which mature on December
1, 2003. The Senior Notes are not subject to a sinking fund. The
Senior Notes may not be redeemed prior to June 1, 1997. On and after
June 1, 1997, the Company may redeem the Senior Notes at descending
premiums from 5.28% in June 1997 to no premium after June 2001.
(c) 13 3/4% Senior Subordinated Debentures - On August 10, 1989, the
Company issued $210 million of 13 3/4% Senior Subordinated Debentures
which mature on August 1, 2001 (the "Subordinated Debentures"). The
Company is required to make sinking fund payments of $52.5 million
plus accrued interest on each of August 1, 1999 and August 1, 2000.
The Company may, at its option, receive credit against sinking fund
payments for the principal amount of Subordinated Debentures acquired
by the Company. However, the Senior Subordinated Debentures may not
be redeemed prior to August 1, 1994. On and after August 1, 1994, the
Company may redeem the Subordinated Debentures at descending premiums
ranging from 5% in August 1994 to no premium after August 1998.
(d) 14.75% Convertible Debentures - On April 27, 1989, the Company issued
$30 million aggregate principal amount of 14.75% Convertible
Debentures to Loral Corporation ("Loral") which mature on April 15,
2004 (the "Convertible Debentures") and pay interest semiannually on
October 15 and April 15. At any time prior to April 15, 1997, the
Company may, at its option, pay interest through the issuance of
additional Convertible Debentures. In accordance with an amendment to
the Credit Agreement, interest will continue to be paid in additional
debentures until all outstanding obligations under the Credit
Agreement have been paid in full or a substantial portion is
refinanced; the interest rate was increased to 15.35% with a future
change to 16.25% unless cash interest is paid with the April 15, 1997
interest payment. For any given six month period that the Company
pays interest in cash, the applicable interest rate is 14.75%.
F-10
42
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Convertible Debentures are convertible into 15% of the Company's
outstanding voting common stock on a fully diluted basis, provided
Loral delivers $5 million principal amount of the Convertible
Debentures to the Company for cancellation on or prior to January 31,
1995. The Convertible Debentures are convertible at the option of the
holders at any time on or after April 15, 1996, and prior to maturity
or upon the occurrence of a triggering event (as defined).
The Convertible Debentures are subordinate to the Subordinated
Debentures and to all other senior debt of the Company.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments reported on the
balance sheet at March 31, 1994 and 1993 approximate their fair value,
except as discussed below.
The fair value of the Company's total debt, excluding the Convertible
Debentures, based on quoted market prices or on current rates for
similar debt with the same maturities, was approximately $297,000,000
and $332,000,000 at March 31, 1994 and 1993, respectively. Because
the Convertible Debentures are not publicly traded their fair value is
not readily determinable. However, the Company believes that the
Convertible Debentures have a fair value less than the Subordinated
Debentures, which have rights superior to the Convertible Debentures
and pay interest currently, and are trading at approximately 92% of
face value.
9. CAPITAL STOCK
a. The Preferred Stock is convertible into voting Common Stock on
a one-for-ten basis. The Preferred Stock is entitled to vote
on all matters on which the voting Common Stock will vote and
is entitled to ten votes per share.
b. In November 1989, the Company adopted the 1989 Stock Option
Plan, which provides for the grant of nonqualified or
incentive stock options to acquire 500,000 authorized but
unissued shares of common stock. The options are exercisable
in four equal installments on the second, third, fourth and
fifth anniversaries of the date of grant, and shall remain
exercisable until the expiration of the option, 10 years from
the date of the grant, at an exercise price of $8.46.
Stock option activity is summarized as follows:
Years Ended March 31,
---------------------------------------------------
1994 1993 1992
---- ---- ----
Outstanding at April 1 . . . . . . . . . 137,500 116,000 116,000
Granted . . . . . . . . . . . . . . . . . 5,000 27,500 --
Cancelled . . . . . . . . . . . . . . . . (22,500) (6,000) --
------- ------- -------
Outstanding at March 31, . . . . . . . . 120,000 137,500 116,000
======= ======= =======
Exercisable options outstanding . . . . . 65,625 55,000 29,000
======= ======= =======
Available for future grants . . . . . . . 380,000 362,500 384,000
======= ======= =======
F-11
43
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company provides pension benefits to substantially all employees
through two pension plans (hourly and salaried). The plans provide
benefits based primarily on the participant's years of service. The
salaried plan also includes voluntary employee contributions.
Net pension cost included the following:
Years Ended March 31,
-------------------------------------------------
1994 1993 1992
---- ---- ----
Service cost-benefits earned during the
period . . . . . . . . . . . . . . . . . . . $1,361,000 $1,407,000 $ 988,000
Interest cost on projected benefit obligation 4,033,000 3,632,000 3,386,000
Actual return on plan assets . . . . . . . . . (3,683,000) (2,960,000) (4,323,000)
Net amortization and deferred gain . . . . . . 809,000 315,000 2,642,000
---------- ---------- -----------
Net pension cost . . . . . . . . . . . . . . $2,520,000 $2,394,000 $2,693,000
========== ========== ==========
The table below sets forth the funded status of the plans as follows:
March 31,
----------------------------
1994 1993
---- ----
Actuarial present value of benefit obligation:
Vested benefit obligation . . . . . . . . . . . . . . $53,088,000 $39,867,000
=========== ===========
Accumulated benefit obligation . . . . . . . . . . . . 53,535,000 42,353,000
Effect of projected future salary increases . . . . . 1,053,000 766,000
---------- ------------
Projected benefit obligation . . . . . . . . . . . . . 54,588,000 43,119,000
Plan assets at fair market value . . . . . . . . . . . . 40,347,000 33,928,000
----------- -----------
Unfunded projected benefit obligation . . . . . . . . . 14,241,000 9,191,000
Unrecognized prior service cost . . . . . . . . . . . . (2,786,000) (3,183,000)
Unrecognized net gain (loss) . . . . . . . . . . . . . . (7,971,000) 219,000
Adjustment for minimum liability . . . . . . . . . . . . 9,704,000 3,052,000
---------- ----------
Accrued pension cost recognized in the
consolidated balance sheet . . . . . . . . . . . . . . $13,188,000 $9,279,000
=========== ==========
F-12
44
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 87 requires
recognition in the balance sheet of an additional minimum pension
liability for underfunded plans with accumulated benefit obligations
in excess of plan assets. A corresponding amount is recognized as an
intangible asset or a reduction of equity. At March 31, 1994, the
Company's additional minimum liability was $9,704,000 with a
corresponding equity reduction of $7,467,000 and intangible asset of
$2,237,000. At March 31, 1993, the Company's additional minimum
liability and corresponding equity reduction was $3,052,000.
Investments held by the Company's pension plans consist primarily of
Fortune 500 equity securities and investment grade fixed income
securities.
The assumptions used in accounting for the plans are as follows:
Years Ended March 31,
---------------------------------------------
1994 1993 1992
---- ---- ----
Discount rate . . . . . . . . . . . . . . . . . . . 7.75% 9.00% 9.00%
Rate of increase in compensation levels . . . . . . 4.50 5.50 5.50
Expected long-term rate of return on assets . . . . 9.50 9.50 9.50
The Company offered a voluntary early retirement opportunity in fiscal
year 1992, enabling eligible employees to elect early retirement. The
early retirement program resulted in charges, from a curtailment, in
fiscal year 1992 of $900,000.
Eligible employees having one year of service also participate in one
of the Company's Savings Plans (hourly or salaried). Under one of
these plans, the Company matches 35% of a participating employee's
contributions, up to 6% of compensation. The employer contributions
generally vest to participating employees after five years of service.
The matching contributions were $568,000, $582,000 and $631,000 for
the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance
benefits for all eligible employees and their dependents active at
April 27, 1989 and thereafter, and postretirement life insurance
benefits for retirees prior to April 27, 1989. Participants are
eligible for these benefits when they retire from active service and
meet the eligibility requirements of the Company's pension plans. The
health care plans are generally contributory and the life insurance
plans are generally noncontributory. Prior to the fiscal year ended
March 31, 1993, the costs of these benefits were recognized as claims
were paid. The total cost of postretirement benefits was $1,237,000
for the fiscal year ended March 31, 1992. In the fourth quarter of
fiscal year 1993, the Company adopted, retroactive to April 1, 1992,
the provisions of Statement of Financial Accounting Standards (SFAS)
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires accrual of these benefits during an
employee's service period. The Company elected to record the
transition obligation of $77,902,000 as a one-time charge against
earnings.
During the first quarter of fiscal year 1994, the Company adopted
various plan amendments which had the effect of reducing the
accumulated postretirement benefit obligation. This reduction is
being amortized as prior service cost over the average remaining years
of service to full eligibility of active plan participants.
F-13
45
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost included the following
components:
Years Ended March 31,
-------------------------------
1994 1993
---- ----
Service cost-benefits attributed to service during the period . . $ 458,000 $2,287,000
Interest cost on accumulated postretirement benefit obligation. . 2,749,000 7,100,000
Net amortization and deferral . . . . . . . . . . . . . . . . . . (4,677,000) --
----------- ----------
Net periodic postretirement benefit cost . . . . . . . . . . . . $(1,470,000) $9,387,000
=========== ==========
Included in the results of operations for the fiscal year ended March
31, 1994 is a $1,619,000 charge relating to net postretirement benefit
cost that was capitalized in inventory at March 31, 1993. The net
periodic postretirement benefit cost charged to operations was
$443,000 and $7,768,000 for the fiscal years ended March 31, 1994 and
1993, respectively.
Presented below are the total obligations and amounts recognized in
the Company's consolidated balance sheets, inclusive of the current
portion:
March 31, 1993
-----------------------------
1994 1993
---- ----
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $23,989,000 $31,716,000
Fully eligible active plan participants. . . . . . . . . . . 2,159,000 18,200,000
Other active plan participants. . . . . . . . . . . . . . . . 11,882,000 35,812,000
----------- -----------
Total accumulated postretirement benefit obligation. . . . . . . . 38,030,000 85,728,000
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . (7,416,000) --
Unrecognized prior service cost related to plan amendments . . . . 51,536,000 --
----------- -----------
Accrued postretirement benefit costs . . . . . . . . . . . . . . . $82,150,000 $85,728,000
=========== ===========
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 14.1% and 15.0% in fiscal year 1994 and 1993,
respectively. The rate was assumed to decrease gradually to 6.5% by
fiscal year 2002 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts
reported. A change in the assumed health care trend rates by 1% in
each year would change the accumulated postretirement benefit
obligation at March 31, 1994 by $3,400,000 and the aggregate of the
service and interest cost components of net postretirement benefit
cost for the fiscal years ended March 31, 1994 by $600,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of March 31, 1994 and 1993 was
7.75% and 9%, respectively.
F-14
46
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS
The Company is party to various noncancelable operating leases which
are longer than a one-year term for certain data processing, and other
equipment and facilities with minimum rental commitments payable as
follows:
Year Ending March 31, Amount
--------------------- ------
1995 $4,422,000
1996 4,195,000
1997 4,103,000
1998 4,155,000
1999 4,185,000
Thereafter 9,971,000
Rental expense was $4,190,000, $3,941,000 and $4,190,000 for the
fiscal years ended March 31, 1994, 1993 and 1992, respectively.
13. CONTINGENCIES
There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits
and proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate liability, if any, will not have a material
adverse effect on the Company.
14. INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In
connection with such adoption, there was no impact to the financial
statements as the Company has provided a 100 percent valuation
allowance against its net deferred tax benefit.
The components of the net deferred tax benefit are as follows:
March 31, April 1,
1994 1993
----------- --------
Tax net operating loss carryforwards . . . . . . . . . $43,135,000 $28,215,000
Temporary differences:
Postretirement and other employee
benefits . . . . . . . . . . . . . . . . . . . . 37,337,000 37,526,000
Intangibles . . . . . . . . . . . . . . . . . . . . 28,223,000 29,924,000
Program participation costs . . . . . . . . . . . . (6,651,000) (6,759,000)
Other . . . . . . . . . . . . . . . . . . . . . . . 7,179,000 7,938,000
------------- -----------
Net deferred tax benefit . . . . . . . . . . . . . . . $109,223,000 $96,844,000
============ ===========
In the event of future recognition of a 100 percent reduction of the
valuation allowance, income tax expense and goodwill would be reduced
by approximately $63 million and $46 million, respectively.
F-15
47
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's effective tax rate of zero percent results from
non-recognition of tax net operating losses and temporary differences
as compared to the federal statutory rate (benefit of 35%).
The Company has tax net operating loss carryforwards of approximately
$110 million at March 31, 1994. The tax net operating losses expire
from 2005 through 2009, with $16 million of carryforwards expiring in
2005.
15. GEOGRAPHIC SEGMENT INFORMATION
The Company operates primarily in one industry segment, the
manufacture of aircraft products. Sales and assets by geographic
location are as follows:
Years Ended March 31,
-------------------------------------
1994 1993 1992
---- ---- ----
Sales:
United States . . . . . . . . . . . . . . . . $224,053,000 $275,068,000 $284,002,000
Europe .. . . . . . . . . . . . . . . . . . 4,973,000 3,961,000 55,316,000
Eliminations of interdivisional sales. . . . (2,895,000) (1,922,000) (43,828,000)
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . $226,131,000 $277,107,000 $295,490,000
============ ============ ============
Operating income:
United States (*) . . . . . . . . . . . . . . . $ 20,409,000 $ 32,552,000 $ 29,606,000
Europe . . . . . . . . . . . . . . . . . . . . . (91,000) (311,000) 1,070,000
Eliminations of operating (loss) profit from
interdivisional sales . . . . . . . . . (101,000) 35,000 6,779,000
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 20,217,000 $ 32,276,000 $ 37,455,000
============ ============ ============
Identifiable assets:
United States . . . . . . . . . . . . . . . . . $444,827,000 $487,596,000 $514,813,000
Europe . . . . . . . . . . . . . . . . . . . . . 2,259,000 2,476,000 4,265,000
Adjustments and eliminations . . . . . . . . . . (206,000) (104,000) (140,000)
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . $446,880,000 $489,968,000 $518,938,000
============ ============ ============
Identifiable assets are all assets identified with operations in each
geographic area.
*Includes operating income in connection with Aircraft Braking Systems
Corporation's sales from the United States to foreign divisions at
transfer prices, which prices represent substantially all of the profit
recorded by Aircraft Braking Systems Corporation in connection with
such export sales.
Sales to U.S. Government agencies for the fiscal years ended March 31,
1994, 1993 and 1992 were $34,473,000, $62,784,000 and $92,405,000,
respectively.
During the fiscal year ended March 31, 1992, Aircraft Braking Systems
consolidated its Moerfelden, Germany, distribution warehouse operations
into the product support facility in Slough, England. The billings for
commercial product support sales previously billed from the Moerfelden
and Slough facilities, representing the majority of the Company's
foreign sales, are now generated from Aircraft Braking Systems' Akron
facility.
F-16
48
K & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS
Bernard L. Schwartz ("BLS") owns 35% of the common stock of the
Company and serves as Chairman of the Board of Directors and Chief
Executive Officer. BLS is also Chairman and Chief Executive Officer
of Loral. The Company has entered into an Advisory Agreement with BLS
which provides for the payment of an aggregate of $200,000 per month
of compensation to BLS and persons designated by him. Such agreement
will continue until BLS dies or is disabled or ceases to own at least
1,350,000 shares of Common Stock of the Company.
The Company has established a bonus plan pursuant to which the
Company's Board of Directors awards bonuses to BLS and other advisers
ranging from 5% to 10% of earnings in excess of $50 million before
interest, taxes and amortization. No bonuses were earned under this
plan during fiscal years ended March 31, 1994, 1993 and 1992.
Pursuant to a financial advisory agreement between Lehman Brothers and
the Company, Lehman Brothers acts as exclusive financial adviser to
the Company. The Company pays Lehman Brothers customary fees for
services rendered on an as-provided basis. The agreement may be
terminated by the Company or Lehman Brothers upon certain conditions.
In connection with the Senior Note Offering on June 10, 1992, Lehman
Brothers received underwriting discounts and a commission of $2.25
million.
Pursuant to the Services Agreement, Loral provides the Company with
certain services which it previously provided to the subsidiaries.
These services include, among others, security, fire protection, yard
service and road maintenance, power plant and equipment calibration as
well as other services on an as needed basis (the "Loral Services").
Certain of the Loral Services are used by the Company on a limited
basis. The charge for these services is based on actual costs
incurred. Billings from Loral were $3.0 million, $3.7 million and
$4.5 million in fiscal years 1994, 1993 and 1992, respectively.
Billings to Loral were $1.1 million, $1.1 million and $1.1 million in
fiscal years 1994, 1993 and 1992. Purchases from Loral were $4.2
million, $3.7 million and $8.8 million in fiscal years 1994, 1993 and
1992. Included in accounts receivable and accounts payable at March
31, 1994 is $.6 million and $2.0 million. Included in accounts
receivable and accounts payable at March 31, 1993, is $1.6 million and
$3.7 million.
F-17
49
K & F INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Column A Column B
- --------------------------------------------------------------------------------------------------------------------
Charges to costs
Item and expenses
- --------------------------------------------------------------------------------------------------------------------
Years ended March 31,
-------------------------------------------------------
1994 1993 1992
---- ---- ----
1. Maintenance and repairs $7,165,000 $8,374,000 $8,644,000
2. Taxes, other than payroll and income taxes 3,508,000 3,034,000 3,317,000
F-18
50
EXHIBIT INDEX
-------------
2.01 - Agreement for Sale and Purchase of Assets dated March 26, 1989 between Loral Corporation and the
Registrant (1)
3.01 - Form of Certificate of Incorporation of the Registrant (1)
3.02 - By-Laws of Registrant (1)
4.01 - Indenture for the 13 3/4% Senior Subordinated Debentures due 2001 (1)
4.02 - Indenture for the 14.75% Subordinated Convertible Debentures Due 2004 (1)
4.03 - First Supplemental Indenture dated as of July 22, 1991, to Convertible Debenture Indenture (4)
4.04 - Form of Indenture dated as of June 10, 1992 for the 11 7/8% Senior Secured Notes Due 2003 (5)
4.05 - Form of 11 7/8% Senior Secured Notes due 2003. (5)
4.06 - Form of Second Supplemental Indenture dated as of June 10, 1992, to Convertible Debenture Indenture (5)
9.01 - Stockholders Agreement dated April 27, 1989 among the Registrant, Lehman Brothers Holdings Inc. ("LBH")
and Bernard L. Schwartz ("BLS") (1)
10.01 - Credit Agreement dated as of April 27, 1989 among the Registrant, Manufacturers Hanover Trust Company, as
Agent and the Banks named therein (1)
10.02 - Revolving Credit Agreement dated as of April 27, 1989, among Aircraft Braking Systems Corporation,
Engineered Fabrics Corporation, the Agent and the Banks (1)
10.03 - Securities Purchase Agreement dated as of April 27, 1989, among the Registrant, BLS and LBH (1)
10.04 - Assumption Agreement dated as of April 27, 1989 (1)
10.07 - Director Advisory Agreement dated as of April 27, 1989, among the Registrant and BLS (1)
10.08 - Shared Services Agreement dated April 27, 1989, among Loral, the Registrant, Aircraft Braking Systems
Corporation and Engineered Fabrics Corporation (1)
10.09 - Non-Competition Agreement dated as of April 27, 1989, between the Registrant and BLS (1)
10.10 - K & F Industries, Inc. Retirement Plan for Salaried Employees (5)
10.11 - K & F Industries, Inc. Savings Plan for Salaried Employees (5)
10.12 - Goodyear Aerospace Corporation Supplemental Unemployment Benefits Plan for Salaried Employees - Plan A (1)
10.13 - The Loral Systems Group Release and Separation Allowance Plan (1)
10.14 - Letter Agreement dated April 27, 1989, between the Registrant and Lehman Brothers Inc. (1)
10.15 - Amendment and Waiver dated as of July 14, 1989 (1)
10.16 - Amendment to Credit Agreement dated as of July 31, 1989, between K & F Industries, the Subsidiaries and the
banks (2)
10.17 - K & F Industries, Inc. 1989 Stock Option Plan (2)
10.18 - K & F Industries, Inc. Executive Deferred Bonus Plan (2)
10.19 - Amendment to the Credit Agreement dated as of June 26, 1991 (3)
51
EXHIBIT INDEX (continued)
-------------------------
10.21 - Securities Purchase Agreement dated as of July 22, 1991, among the Registrant, BLS and the Lehman
Investors (4)
10.22 - Interest Rate Protection Agreement between K & F Industries, Inc. and Lehman Brothers Special
Financing, Inc (4)
10.23 - Interest Rate Protection Agreement between K & F Industries, Inc. and Manufacturers Hanover Trust Company (4)
10.27 - Form of Amended and Restated Revolving Credit Agreement dated as of June 10, 1992, among Chemical Bank, the
Banks named therein, Aircraft Braking Systems Corporation and Engineered Fabrics Corporation (5)
12.01 - Statement of computations of ratio of earnings to fixed charges (5)
12.02 - Statement of computation of pro forma deficiency ratio of earnings to fixed charges (1)
21.01 - Subsidiaries of the Registrant (1)
24.01 - Powers of Attorney
- -------------------------
(1) Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-29035.
(2) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1990.
(3) Previously filed, as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1991.
(4) Previously filed, as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1991.
(5) Previously filed, as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-47028.