SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

[ X ] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File No.: 33-62598

      Fairfield Manufacturing Company, Inc.      

(Exact name of Registrant as specified in its charter)

Delaware

63-0500160

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

U. S. 52 South, Lafayette, IN

 47909 

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code: (765) 772-4000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X  

No ___

        The number of shares outstanding of each of the issuer's classes of common stock as of
June 30, 2002 is as follows:

9,117,000 shares of Common Stock

FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-Q

June 30, 2002

Part I

FINANCIAL INFORMATION

Page

Item 1

Financial Statements:

Consolidated Balance Sheets, June 30, 2002 (Unaudited) and
  December 31, 2001

3

Consolidated Statements of Operations for the three and six months
  ended June 30, 2002 and 2001 (Unaudited)

4

Consolidated Statement of Stockholder's Equity (Deficit) for the
  six months ended June 30, 2002 (Unaudited)

5

Consolidated Statements of Cash Flows for the six months
  ended June 30, 2002 and 2001 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

7-11

Item 2

Management's Discussion and Analysis of Financial Condition
  and Results of Operations

11-15

Item 3

Quantitative and Qualitative Disclosures About Market Risk

15

Part II

OTHER INFORMATION

Item 1

Legal Proceedings

15

Item 6

Exhibits and Reports on Form 8-K

16

SIGNATURE

16

CERTIFICATIONS

17-18

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Stock-
Holder's
Equity (Deficit)

Balance, December 31, 2001

$91

$48,386

$(99,234)

$(105)

$(50,862)

Preferred stock dividends

--

--

(3,244)

--

(3,244)

Preferred stock discount accretion

--

--

(96)

--

(96)

Comprehensive income:

  Net loss

--

--

(51,006)

--

(51,006)

  Foreign currency translation

    --

         --

            --

    (14)

         (14)

  Total comprehensive income

    --

         --

    (51,006)

    (14)

    (51,020)

Balance, June 30, 2002

$91

$48,386

$(153,580)

$(119)

$(105,222)

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

1.

Interim Financial Information

The accompanying consolidated financial statements have been prepared by Fairfield Manufacturing Company, Inc. and subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2001.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments considered necessary for a fair presentation of the Company's financial position at June 30, 2002 and the results of operations and cash flows for the six months ended June 30, 2002 and 2001. However, interim financial results are not necessarily indicative of the results for a full year. Certain prior year information has been reclassified to conform to current year presentation.

As discussed in Note 5, the Company completed the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" during the second quarter of 2002. In accordance with this standard, the Company's first quarter 2002 results have been restated to reflect the effect of change in accounting principle.

2.

Parent Company of Registrant

The Company is wholly-owned by Lancer Industries Inc. ("Lancer").

The Company is included in the consolidated federal income tax return of Lancer. The Company and Lancer have entered into a Tax Sharing Agreement under which the Company is required to calculate its current federal income tax liability on a separate return basis and pay that amount to Lancer. To the extent such tax liability subsequently reduces Lancer's available tax benefits, Lancer is required to reimburse the Company in an amount equivalent to 50% of such reduction by making a capital contribution to the Company. Due to a pretax loss during the first six months of 2002 and 2001, Lancer did not make any capital contributions pursuant to the Tax Sharing Agreement.

3.

Inventory

Inventory, which is valued at the lower of last-in, first-out (LIFO) cost or market, consists of the following:

4.

Operations by Geographic Area

Revenues, loss from operations and total assets, net of eliminations, by domestic and foreign operations as of and for the six months ended June 30, 2002, are as follows:

5.

Goodwill

In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."

SFAS 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The Company believes that the adoption of SFAS 141 will have no impact on its results of operations and financial position.

SFAS 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, goodwill and indefinite life intangibles be tested for impairment at least annually (or more frequently if impairment indicators arise) and that the amortization period of intangible assets no longer be limited to forty years. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company adopted SFAS 142 beginning with the first quarter of fiscal year 2002. Accordingly, the Company has ceased amortization of all goodwill as of January 1, 2002.

Under SFAS 142, the impairment test for goodwill requires a two-step process. The first step is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the carrying amount exceeds the fair value then the second step is required to be completed, which involves the fair value of the reporting unit being allocated to each asset (recognized and unrecognized) and liability with the excess being implied goodwill. The impairment loss is the amount by which recorded goodwill exceeds the implied goodwill.

The Company was required to complete a "transitional" impairment test for goodwill as of the beginning of the fiscal year in which the statement was adopted on a "reporting unit" basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the "component" level), discrete financial information is prepared and regularly reviewed by management. However, SFAS 142 requires that two or more component-level reporting units with similar economic characteristics be combined into a single reporting unit. The Company believes it should use one reporting unit in applying the provisions of this standard.

Upon adoption of SFAS 142, the Company recorded a one-time, non-cash charge of $46.451 million, which represents the Company's full, unamortized balance of goodwill and is reported in the caption, "Effect of change in accounting principle." In calculating the impairment charge, the Company estimated the fair value of its reporting unit by applying three valuation approaches: the market value of the Company's capital structure, discounted cash flow analysis, and public company capitalization multiples. For purposes of determining both the carrying value and fair value of the reporting unit, the obligations assigned to the reporting unit exclude the Company's long-term debt and preferred stock. The Company believes that a willing buyer in a hypothetical sale transaction would acquire the net operating assets of the Company, excluding the long-term debt and preferred stock. Accordingly, the carrying value used by the Company to assess the application of SFAS 142 is the Company's common stock valu e as adjusted to exclude the effects of its long-term debt and preferred stock.

The primary factors resulting in the impairment charge were the continued softness in the Company's core markets and increased competition from foreign competitors. These factors have had a negative impact on revised earnings forecasts. No impairment charge was appropriate under the FASB's previous goodwill impairment standard, which was based on undiscounted cash flows.

In accordance with this standard, the Company's first quarter 2002 results have been restated to reflect the effect of change in accounting principle. SFAS 142 does not provide for restatement of the Company's results of operations for periods ending prior to January 1, 2002. Goodwill amortization for the three and six months ended June 30, 2001 was $0.4 and $0.9 million, respectively. The effects on net income of excluding such goodwill amortization expense from the three and six months ended June 30, 2001 were as follows:

6.

Other Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement creates one accounting model, based on the framework established in SFAS 121, to be applied to all long-lived assets including discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In addition to amending and rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

7.

Credit Facility Amendment

The Company and its senior lender entered into an amendment to its Credit Facility on September 5, 2002 to, among other matters, eliminate certain restrictive financial covenants.  The amendment also provides consent from the senior lender for the Company to obtain $5 million of additional senior term loans with the option of transferring these funds to Fairfield Atlas Limited ("FAL"), the Company's subsidiary in India.  Furthermore, the amendment requires that the Company's borrowing base for borrowings of revolving loans (which borrowing base is based on eligible accounts receivable and inventory) exceed revolving loans by at least $7 million, which may have the effect of reducing the Company's availability under the revolving credit facility. The Company's availability under the revolver is subject to additional restrictions should the Company pay preferred stock dividends. Also, the Company's aggregate borrowings under the Credit Facility are capped by the sum of the Company's eligible accoun ts receivable and appraised values of inventory, real property and machinery and equipment. In connection with the amendment, the interest rates on the Company's borrowings were increased, and the Company will incur an amendment fee of $0.1 million.

As discussed in Note 5, the Company recorded a transitional impairment loss on goodwill of $46.451 million effective January 1, 2002 in accordance with SFAS 142. In conjunction with the amendment, the Company obtained confirmation from its senior lender that the impairment loss would not result in the assertion of a default under the existing material adverse effect clause stated in the credit agreement. Per the credit agreement, the senior lender reserves the right to deem the Credit Facility in default, and in those limited circumstances, could accelerate payment of the outstanding loan balances under the Credit Facility, should the Company undergo a material adverse effect. While the criteria defining a material adverse effect are not objectively determinable, the Company does not believe its exercise is probable. In addition, the Company believes that the credit agreement entered into with its senior lender in form and intent is long-term in nature. Accordingly, the Company continues to consider cla ssification of its senior term loans as long-term to be appropriate.

8.

Legal Proceedings

On or about February 26, 2002, Peter Joseph, a director and Vice President of the Company, commenced a lawsuit against the Company, the Company's sole shareholder, Lancer, and Paul Levy (also a director, Chairman of the Board and Vice President of the Company) in the Delaware Chancery court, challenging certain corporate actions by Lancer and the Company. Both Messrs. Levy and Joseph are also directors, officers and shareholders of Lancer. The Company does not expect that the lawsuit will have a material adverse effect on the Company.

On or about March 8, 2002, Kaydon Corporation ("Kaydon") commenced a lawsuit against the Company and several of the Company's employees who were formerly employed by Kaydon. Kaydon alleges that the Company and certain of its employees have appropriated Kaydon trade secrets, induced Kaydon employees to leave their employment at Kaydon, and are now competing with Kaydon unfairly. On March 14, 2002, the Ann Arbor court rejected Kaydon's motion for an injunction against the Company.  The court ruled that Kaydon had not established any of the requirements for an injunction, and that Kaydon had failed to establish it was likely to succeed on the merits of its allegations. The Company believes that the lawsuit is without merit and does not expect it to have a material adverse effect on the Company.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Developments

Goodwill

In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."

SFAS 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The Company believes that the adoption of SFAS 141 will have no impact on its results of operations and financial position.

SFAS 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, goodwill and indefinite life intangibles be tested for impairment at least annually (or more frequently if impairment indicators arise) and that the amortization period of intangible assets no longer be limited to forty years. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company adopted SFAS 142 beginning with the first quarter of fiscal year 2002. Accordingly, the Company has ceased amortization of all goodwill as of January 1, 2002.

Under SFAS 142, the impairment test for goodwill requires a two-step process. The first step is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the carrying amount exceeds the fair value then the second step is required to be completed, which involves the fair value of the reporting unit being allocated to each asset (recognized and unrecognized) and liability with the excess being implied goodwill. The impairment loss is the amount by which recorded goodwill exceeds the implied goodwill.

The Company was required to complete a "transitional" impairment test for goodwill as of the beginning of the fiscal year in which the statement was adopted on a "reporting unit" basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the "component" level), discrete financial information is prepared and regularly reviewed by management. However, SFAS 142 requires that two or more component-level reporting units with similar economic characteristics be combined into a single reporting unit. The Company believes it should use one reporting unit in applying the provisions of this standard.

Upon adoption of SFAS 142, the Company recorded a one-time, non-cash charge of $46.451 million, which represents the Company's full, unamortized balance of goodwill and is reported in the caption, "Effect of change in accounting principle." In calculating the impairment charge, the Company estimated the fair value of its reporting unit by applying three valuation approaches: the market value of the Company's capital structure, discounted cash flow analysis, and public company capitalization multiples. For purposes of determining both the carrying value and fair value of the reporting unit, the obligations assigned to the reporting unit exclude the Company's long-term debt and preferred stock. The Company believes that a willing buyer in a hypothetical sale transaction would acquire the net operating assets of the Company, excluding the long-term debt and preferred stock. Accordingly, the carrying value used by the Company to assess the application of SFAS 142 is the Company's common stock valu e as adjusted to exclude the effects of its long-term debt and preferred stock.

The primary factors resulting in the impairment charge were the continued softness in the Company's core markets and increased competition from foreign competitors. These factors have had a negative impact on revised earnings forecasts. No impairment charge was appropriate under the FASB's previous goodwill impairment standard, which was based on undiscounted cash flows.

In accordance with this standard, the Company's first quarter 2002 results have been restated to reflect the effect of change in accounting principle. SFAS 142 does not provide for restatement of the Company's results of operations for periods ending prior to January 1, 2002. Goodwill amortization for the three and six months ended June 30, 2001 was $0.4 and $0.9 million, respectively.

Other Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement creates one accounting model, based on the framework established in SFAS 121, to be applied to all long-lived assets including discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In addition to amending and rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

Credit Facility Amendment

The Company and its senior lender entered into an amendment to its Credit Facility on September 5, 2002 to, among other matters, eliminate certain restrictive financial covenants.  The amendment also provides consent from the senior lender for the Company to obtain $5 million of additional senior term loans with the option of transferring these funds to Fairfield Atlas Limited ("FAL"), the Company's subsidiary in India.  Furthermore, the amendment requires that the Company's borrowing base for borrowings of revolving loans (which borrowing base is based on eligible accounts receivable and inventory) exceed revolving loans by at least $7 million, which may have the effect of reducing the Company's availability under the revolving credit facility. The Company's availability under the revolver is subject to additional restrictions should the Company pay preferred stock dividends. Also, the Company's aggregate borrowings under the Credit Facility are capped by the sum of the Company's eligible accounts receivable and appraised values of inventory, real property and machinery and equipment. In connection with the amendment, the interest rates on the Company's borrowings were increased, and the Company will incur an amendment fee of $0.1 million.

As discussed in Note 5, the Company recorded a transitional impairment loss on goodwill of $46.451 million effective January 1, 2002 in accordance with SFAS 142. In conjunction with the amendment, the Company obtained confirmation from its senior lender that the impairment loss would not result in the assertion of a default under the existing material adverse effect clause stated in the credit agreement. Per the credit agreement, the senior lender reserves the right to deem the Credit Facility in default, and in those limited circumstances, could accelerate payment of the outstanding loan balances under the Credit Facility, should the Company undergo a material adverse effect. While the criteria defining a material adverse effect are not objectively determinable, the Company does not believe its exercise is probable. In addition, the Company believes that the credit agreement entered into with its senior lender in form and intent is long-term in nature. Accordingly, the Company continues to consider cla ssification of its senior term loans as long-term to be appropriate.

The Company did not timely file its quarterly report on Form 10-Q for the quarter ended June 30, 2002 because the foregoing amendment was not finalized by the due date for the filing of the Form 10-Q and such amendment is necessary for the Company to be in compliance with its covenants in the Credit Facility during the next four quarterly periods.

Legal Proceedings

On or about February 26, 2002, Peter Joseph, a director and Vice President of the Company, commenced a lawsuit against the Company, the Company's sole shareholder, Lancer, and Paul Levy (also a director, Chairman of the Board and Vice President of the Company) in the Delaware Chancery court, challenging certain corporate actions by Lancer and the Company. Both Messrs. Levy and Joseph are also directors, officers and shareholders of Lancer. The Company does not expect that the lawsuit will have a material adverse effect on the Company.

On or about March 8, 2002, Kaydon Corporation ("Kaydon") commenced a lawsuit against the Company and several of the Company's employees who were formerly employed by Kaydon. Kaydon alleges that the Company and certain of its employees have appropriated Kaydon trade secrets, induced Kaydon employees to leave their employment at Kaydon, and are now competing with Kaydon unfairly. On March 14, 2002, the Ann Arbor court rejected Kaydon's motion for an injunction against the Company.  The court ruled that Kaydon had not established any of the requirements for an injunction, and that Kaydon had failed to establish it was likely to succeed on the merits of its allegations. The Company believes that the lawsuit is without merit and does not expect it to have a material adverse effect on the Company.

Results of Operations

The Company's net sales and profits have been adversely affected by the general slowdown in the economy and the recent recession, as well as a result of pricing pressure from foreign competitors, principally due to the strong U.S. dollar. In addition, the Company's profitability has suffered due to an unfavorable product mix, which is a result of the Company's decision to take on new business at lower margins to get through the economic downturn coupled with a decrease in volume on higher margin sales. The Company's current level of sales and profits has strained its liquidity and capital resources, and the present market conditions are expected to continue for the foreseeable future.

Net sales for the three months ended June 30, 2002 were $42.1 million, an increase of $9.4 million, or 28.8%, from the same period in 2001. For the six months ended June 30, 2002, the Company's net sales increased by $4.6 million, or 6.3%, to $77.1 million compared to $72.5 million for the six months ended June 30, 2001. The increases in sales for the three and six months ended June 30, 2002 compared to such periods in 2001 were primarily driven by an increase in new business in the on-highway and industrial markets. In addition, the Company continues to experience a slight recovery in the agriculture market, and some recovery is apparent in the road rehabilitation and rail markets. The access platform market continues to remain depressed when compared to sales levels of similar periods in 2001. Although the Company has experienced an increase in second quarter and year-to-date net sales compared to 2001, the Company continues to be hampered by renewed softness in its customers' markets.

The Company believes that the downturn in several of its core markets is a direct result of the slowdown in the U.S. economy, tight lending and capital policies, and pricing pressure from foreign competition, principally due to the strong U.S. dollar. In addition, while the Company continues to execute its expansion plans at Fairfield Atlas Limited ("FAL") to gain access to new markets and to develop a low cost manufacturing and procurement base for certain products, those operations are growing slower than anticipated and recent world and regional events will likely delay and/or further disrupt the expansion plans. Completion of the FAL expansion plans requires further capital resources.

Cost of sales for the three months ended June 30, 2002 increased by $7.9 million to $38.6 million compared to $30.7 million for the same period in 2001. Gross margin was 8.5% for the second quarter of 2002 compared to 6.1% for the second quarter of 2001. For the first half of 2002, cost of sales were $71.2 million, compared to $64.7 million for the first half of 2001. Gross margin was 7.7% for the first half of 2002 compared to 10.7% for the first half of 2001. The decrease in gross margin, on a year-to-date comparison, relates to production inefficiencies due to the launch of new business, higher healthcare costs, unfavorable product mix and continued pricing pressure.

Selling, general and administrative expenses ("SG&A") were $3.5 million, or 8.3% of net sales, for the three months ended June 30, 2002, compared to $3.7 million, or 11.4% of net sales for the same period in 2001. For the six months ended June 30, 2002, SG&A decreased by $0.6 million, or 8.4%, to $6.9 million compared to $7.5 million for the six months ended June 30, 2001. The decrease in SG&A expenses reflects the fact that goodwill is no longer amortized under FAS 142. Goodwill amortization for the six months ended June 30, 2001 was $0.9 million.

Earnings from operations for the three months ended June 30, 2002 increased to $0.1 million, or 0.1% of net sales, compared to a loss of $(1.7) million, or (5.3)% of net sales, for the comparable 2001 period. For the six months ended June 30, 2002, the Company's earnings from operations were a loss of $(1.0) million, or (1.2)% of net sales, compared to $0.3 million, or 0.4% of net sales for the first six months of 2001. The reduction in earnings is directly attributed to the production inefficiencies, healthcare costs, product mix and pricing pressure as stated previously.

Interest expense, net in the second quarter of 2002 increased to $2.9 million from $2.8 million for the second quarter of 2001. For the first half of 2002 and 2001, interest expense, net was $5.8 million and $5.5 million, respectively. The increase reflects higher average debt outstanding and a lower level of short-term investments during the first half of 2002 versus the first half of 2001.

Liquidity and Capital Resources

The Company has the ability to obtain short-term borrowings under its credit agreement, which is described in Note 12 to the Company's 2001 consolidated financial statements included in the Annual Report on Form 10-K and updated in Note 7 of this quarterly report, to meet liquidity requirements. Availability under the Company's revolver was $19.2 million at June 30, 2002. Net cash used by operations for the six months ended June 30, 2002 was $(5.9) million, a decrease in cash flows from operations of $1.8 million compared with the same period in 2001 when net cash used by operations was $(4.1) million. Net cash used by operations in 2002 was lower due to an increase in accounts receivable during the second quarter of 2002 compared to the same quarter of 2001. Working capital less cash at June 30, 2002 increased to $19.5 million from $14.1 million at December 31, 2001 reflecting a higher investment in accounts receivable relative to sales, partially offset by an increase in ac counts payable.

Capital expenditures for manufacturing equipment, machine tools, and building improvements totaled $2.5 million and $4.1 million during the six months of 2002 and 2001, respectively, exclusive of $1.8 million and $0.4 million in 2002 and 2001, respectively, which was funded by accounts payable. Capital expenditures for 2002 have been primarily related to the expansion of FAL whereas expenditures in 2001 were primarily for replacement equipment. The FAL expansion is not yet complete and will require further capital expenditures. It is anticipated that the expansion will be completed by the end of 2002.

Net cash provided by financing activities was $1.7 million during the second quarter of 2002 compared to net cash provided of $3.2 million during the second quarter of 2001. The additional proceeds from issuance of long-term debt relates to additional term loans used to finance the Fairfield Atlas Limited expansion and operations.

Information Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements that are not simply statements of historical fact (such as when the Company describes what it believes, expects or anticipates will occur, and other similar statements), may not be correct, even though the Company currently believes they are reasonable. The Company does not guarantee that the transactions and events described in this report will happen as described (or that they will happen at all). The Company's actual results could differ materially from those set forth in the forward-looking statements.  This report should be read completely and with the understanding that actual future results may be materially different from what the Company expects. The Company will not update these forward-looking statements, even though its situation will change in the future. Some of the factors t hat might cause such a difference include those discussed in the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Information Concerning Forward-Looking Statements" contained in the Company's Form 10-K for the year ended December 31, 2001.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company does not own any interest in derivative financial or commodity instruments as of June 30, 2002. The effect of reasonably possible market movements in interest rates is not expected to have a material impact on the Company's future cash flows or earnings.

PART II

- OTHER INFORMATION

Item 1.

Legal Proceedings

The information set forth in Note 8 to the Notes to Consolidated Financial Statements set forth elsewhere in this Report is incorporated herein by reference.

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibit No.

Description

(10) (dd)

Fifth Amendment, dated as of September 5, 2002, an Amended and Restated Loan Agreement, dated as of December 30, 1999, between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent.

(b)

No reports on Form 8-K were filed during the period covered by this report.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on September 11, 2002.

FAIRFIELD MANUFACTURING COMPANY, INC.

By

/s/ Richard A. Bush

Richard A. Bush
Vice President and Chief Financial Officer

/s/ Stephen K. Clough

Stephen K. Clough
President and Chief Executive Officer

/s/ Richard A. Bush

Richard A. Bush
Vice President and Chief Financial Officer