Back to GetFilings.com
WASHINGTON, D.C. 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
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 47905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (765) 474-3474
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$85,000,000 11-3/8% Senior Subordinated Notes
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 December 31, 1996 is as follows:
7,805,000 shares of Common Stock
Index for exhibits is located on page 18
FAIRFIELD MANUFACTURING COMPANY, INC.
Annual Report on Form 10-K
December 31, 1996
Table of Contents
Item Page
Number Number
PART I
1 Business 1
2 Properties 5
3 Legal Proceedings 5
4 Submission of Matters to a Vote of Security 5
Holders
PART II
5 Market for the Registrant's Common Equity and 7
Related Stockholder Matters
6 Selected Financial Data 7
7 Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
8 Financial Statements and Supplementary Data 10
9 Changes in and Disagreements with Accountants 10
on Accounting and Financial Disclosure
PART III
10 Directors and Executive Officers of the 11
Registrant
11 Executive Compensation 13
12 Security Ownership of Certain Beneficial Owners 16
and Management
13 Certain Relationships and Related Transactions 17
PART IV
14 Exhibits, Financial Statement Schedules, and 18
Reports on Form 8-K
Signatures 24
Index to Consolidated Financial Statements and
Schedule
FAIRFIELD MANUFACTURING COMPANY, INC.
Form 10-K
Fiscal Year Ended December 31, 1996
PART I
ITEM 1. BUSINESS
General
Fairfield Manufacturing Company, Inc. (the "Company") believes that it is
the leading independent manufacturer (based on sales) of high precision custom
gears and planetary gear systems in North America, with an estimated market
share in each of the custom gear and planetary gear system markets of more than
two times that of its nearest competitors. The majority of the Company's custom
gears and planetary gear systems are used by original equipment manufacturers
("OEMs") as components in various kinds of heavy mobile equipment. The
Company's customers include many industry leaders. For the year ended December
31, 1996, the Company had net sales of $195.2 million.
Custom gears, which accounted for $112.3 million, or 57.5%, of the
Company's 1996 net sales, are components of larger systems such as axles, drive
differentials and transmission units. The Company's custom gear customers
consist principally of OEMs of rail (such as locomotives), mining, agricultural
(such as tractors and specialty harvesting equipment), industrial, construction
and materials-handling equipment, for many of whom the Company is the sole
independent supplier of selected gear products.
Planetary gear systems, which accounted for $82.9 million, or 42.5% of the
Company's 1996 net sales, are integrated, self-contained power transmission and
torque conversion systems that provide propulsion, swing and/or rotation to
wheels, axles and other components in applications where the use of axles would
otherwise present design difficulties. The Company markets its planetary gear
systems under its Torque-Hub name ("Torque-Hub"). The Company believes that, as
a result of the performance history and reputation for quality of the Company's
Torque-Hub products, the Torque-Hub name has become closely identified with
planetary gear systems. Customers for the Company's Torque-Hub products include
OEMs of access platform (such as aerial-lift), road rehabilitation (such as
pavers and road rollers), construction (such as excavators), forestry and
agricultural (such as crop sprayers) equipment.
The Company has been certified as a "preferred supplier" (based on systems
compliance and on-site inspections) by all of its major customers that have
certification procedures. The Company has also been certified as meeting "ISO-
9001" standards, which are increasingly being used by OEMs in lieu of individual
certification procedures. In addition, the Company expects to receive "QS-9000"
certification by the end of 1997, which is the level of certification expected
to be required by automotive OEMs beginning in 1998. The Company believes that
certification provides it with a competitive advantage because a number of OEMs
require certification as a condition to doing business.
The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)
state-of-the-art engineering and manufacturing technology, including its in-
house heat treating facilities, computer-aided design and manufacturing systems
and computer numerically-controlled machine tools and gear grinders, (iv)
ability to deliver products within short lead times, (v) cost competitiveness,
(vi) experienced engineering staff, which together with the Company's sales
force, works closely with customers in designing and developing products to meet
customers' needs and (vii) stable, knowledgeable sales force, many of whose
members have engineering degrees and have worked with the same customers for
many years. In addition, the Company believes that its management team, which
has an average of over 25 years of experience in general manufacturing, will be
instrumental in further strengthening the Company's market position.
The Company was founded in 1919 as a manufacturer of custom gear products
and was family-owned until 1977. At that time, the Company was purchased by
Rexnord Corporation, which subsequently sold the Company in 1987 to Neoax Inc.
Lancer Industries Inc. ("Lancer") purchased the Company in 1989. Fairfield's
principal executive offices are located at U.S. 52 South, Lafayette, Indiana
47905. The Company's telephone number is (765) 474-3474.
Products
Custom Gears. Custom gears accounted for approximately $112.3 million or
57.5% of the Company's net sales in 1996. The Company manufactures a wide
variety of custom gears, ranging in type (e.g. helical, spiral bevel, spur and
HYPOID) and size (from one inch to five feet), and has manufacturing
capabilities which the Company believes are the broadest in the custom gear
business. The Company's custom gears are manufactured according to customers'
specifications, sometimes developed by or with the assistance of the Company,
for use as component parts in various types of heavy mobile equipment. Custom
gears are engineering-intensive and, although such products represent a
relatively small portion of the cost of the equipment in which they are used,
are critical to the operation of such equipment.
Historically, the Company has focused on high margin custom gears. Such
products, which are design- and engineering-intensive, are used in rail, mining,
agricultural, construction, and materials-handling and other equipment demanding
a high degree of product quality and reliability. Many customers in these
markets do not have the necessary engineering and/or manufacturing facilities,
and/or personnel to design and manufacture their gear requirements in-house. In
addition, there is a trend among OEMs to focus on their core competencies rather
than produce gears in-house.
Torque-Hub Products. Torque-Hub products accounted for approximately $82.9
million or 42.5% of the Company's net sales in 1996. The Company believes that
the Torque-Hub name has become closely identified with planetary gear systems,
which provide drive, swing, and/or rotation to the equipment in which they are
used and are primarily employed in cases where the use of axles present design
difficulties. The Company produces a broad line of planetary gear systems under
its Torque-Hub trade name, including wheel drives (used to propel off-highway
equipment), shaft outputs (used to power remote in-plant machinery like mixers
as well as mobile aerial lifts and cranes) and spindle outputs (which power the
drive wheels of vehicles with small diameter wheels such as small lift trucks
and mowers).
The Company has introduced a number of new Torque-Hub products in recent
years, including two-speed drives (Torque II series) and compact drives (CW and
CT series) for wheeled or tracked vehicles. The Company believes that the two-
speed drive is ideal for machinery requiring low- and high-speed settings, such
as road paving equipment. The compact drive incorporates the brakes and
hydraulic drive systems into a single compact unit, which the Company believes
allows for better flexibility and is well-suited for a variety of applications.
These products are used in a wide range of industrial and construction
equipment, including excavators, crawler dozers and loaders, rubber-tired pavers
and multi-speed winches.
Marketing and Distribution
The Company's customers are OEMs and include many industry leaders with
whom the Company has had relationships of 20 years or more. No single customer
accounted for more than 10% of the Company's 1996 net sales.
The Company has been certified as a "preferred supplier" by each of its
major customers that have certification procedures. The Company has also been
certified as meeting "ISO-9001" standards, which are increasingly being used by
OEMs in lieu of individual certification procedures. In addition, the Company
expects to receive "QS-9000" certification by the end of 1997, which is the
level of certification expected to be required by automotive OEMs beginning in
1998. The Company believes that certification provides it with a competitive
advantage because a number of OEMs require certification as a condition to doing
business.
The Company believes its stable, experienced sales force is a primary
reason for the Company's success in maintaining customer loyalty and building
new customer relationships. The Company's sales department is organized
geographically and consists of 14 sales engineers, who have an average of over
15 years of service and most of whom have worked with the same customers for
many years. In addition, each sales engineer has substantial expertise
concerning the Company's products and product applications. Application
engineers work closely with the Company's sales department and provide customers
with guidance concerning product applications and specific design problems. By
becoming a part of the customer's purchasing, and design decisions, the Company
has developed close working relationships with many of its customers. Customer
loyalty to the Company is further enhanced by the development, tooling and
production costs associated with changing gear sources, as such costs are
typically borne by the customer.
All of the Company's custom gear products and approximately 70% of its
Torque-Hub products are sold directly to OEMs. Since Torque-Hub products can be
sold to more than one customer, the Company uses distributors to increase its
penetration of the planetary gear systems market. The Company sells
approximately 30% of its Torque-Hub line through a network of approximately 40
distributors located in the United States and abroad. International sales
accounted for approximately $11 million, or approximately 6% of the Company's
1996 net sales.
Design and Manufacturing
The Company believes that its state-of-the-art technology and experienced
engineering staff provide it with a competitive advantage and are major factors
behind the Company's strong market position.
Technology. The Company has selectively invested in state-of-the-art
manufacturing technology in recent years to improve product quality and price
competitiveness, and to reduce lead time. The Company's manufacturing
technology includes the latest computer-aided design and manufacturing (CAD/CAM)
systems, and over one hundred computer numerically controlled (CNC) machine
tools and gear grinders.
The Company's CAD/CAM systems, which enable hundreds of design solutions to
be visualized quickly and easily, facilitate product design and manufacturing.
The Company's computer systems are capable of finite element analysis and
simulation which allows many aspects of a design to be evaluated prior to
production, resulting in lower tooling costs, reduced testing requirements and
quicker time to market. In addition, the Company's CNC gear cutting machines
allow for many different styles and sizes of gears to be run quickly in small
lot sizes with a high degree of accuracy. The Company is in the process of
installing an enhanced computer program designed to improve customer order
scheduling and inventory management.
The Company has its own comprehensive heat treating facilities. These in-
house facilities allow the Company to control the annealing and carburizing
processes that determine the load-carrying capacity of the final product. The
Company's heat treating operations help ensure proper development and
maintenance of gear tooth characteristics. As a result, the Company believes
that it is able to provide its customers with improved quality and reduced lead
times in filling orders. In-line dual frequency induction hardening equipment
will be added in 1997, continuing the Company's practice of selectively adding
advanced technology in its manufacturing processes.
Engineering Staff. The Company's engineering department consists of
approximately 70 engineers and technicians, including specialists in product,
tool, manufacturing and industrial engineering. In addition, the Company has a
metallurgy laboratory which determines the appropriate metallurgy for a specific
gear application. These engineering groups, with their distinct specialties,
work together as a team to develop solutions to specific customer requirements.
These capabilities enable the Company to service clients who demand high
quality, creative solutions to their product needs.
Materials and Supply Arrangements
The Company generally manufactures its custom gear and Torque-Hub products
to its customers' specifications and, as a result, does not generally contract
for or maintain substantial inventory in raw materials or components. The
Company purchases its three principal raw material needs (steel forgings, steel
bars and castings) on a spot basis based on specific customer orders. No single
supplier accounted for more than 10% of purchases of the Company's raw material
purchases in 1996. In addition, alternative sources are available to fulfill
each of the Company's major raw material requirements. The Company has never
experienced a delay in production as a result of a supply shortage of a major
raw material.
Competition
The North American custom gear business is highly competitive but very
fragmented. Competition can be broken down into four principal groups: major
domestic manufacturers, regional domestic manufacturers, foreign producers and
captive gear manufacturers. Although captive gear manufacturers supply all or a
portion of their internal gear requirements and constitute a significant portion
of the custom gear market, the Company believes there is a trend among such
manufacturers to outsource, or purchase their gears from independent
manufacturers such as the Company. The North American planetary gear market is
also highly competitive and is concentrated among several large competitors,
with the remaining market divided among a large number of relatively small
suppliers. The Company competes with other manufacturers based on a number of
factors, including delivery capability, quality and price. The Company believes
that its breadth of manufacturing, engineering and technological capabilities
provide it with a competitive advantage.
Employees
At December 31, 1996, the Company had 1,195 permanent employees, of whom
approximately 83% were employed in manufacturing, approximately 6% were
engineers employed in the engineering department, and the remainder were office
and managerial employees. The Company's production and maintenance employees
became members of the United Auto Workers (UAW) union in October 1994 and the
Company entered into a labor contract with the union in October 1995, which is
scheduled to expire in October 1998. The Company considers its relations with
its employees to be satisfactory.
Backlog
As of December 31, 1996 and December 31, 1995, the Company had total order
backlog of approximately $77.0 million and $85.0 million, respectively, for
shipments due to be delivered by the Company for the six-month period following
such dates. This reduction was attributable to the Company's ongoing business
strategy of reducing lead times for its products.
Environmental Matters
The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent environmental laws. As such, the nature of
the Company's operations exposes it to the risk of claims with respect to such
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. The Company believes its
operations and properties are in substantial compliance with such environmental
laws. Based upon its experience to date, the Company believes that the future
cost of compliance with existing environmental laws, and liability for known
environmental claims pursuant to such environmental laws, will not have a
material adverse effect on the Company's business, financial condition or
operating results. However, future events, such as changes in existing
environmental laws or their interpretation and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities that could be material.
Recent Developments
The Company's loan agreement with a senior lending institution was amended
during December 1996. The amendment increased the Company's term loan to $33.0
million and is payable quarterly through December 31, 2000. The revolving
credit facility permits the Company to borrow up to $20.0 million subject to
borrowing base availability (as defined) and, at the option of the Company
(subject to satisfaction of certain conditions), may be increased by an
additional $2.0 million at any time and by an additional $3.0 million following
repayment of $3.0 million of term loans (which is scheduled to occur by December
1997). The revolving credit facility matures July 1, 2001.
On December 5, 1996, the Company distributed $20.0 million to Lancer in the
form of a $17.0 million dividend and a $3.0 million advance.
Susceptibility to General Economic Conditions
The Company's revenues and results of operations will be subject to
fluctuations based upon general economic conditions. If there were to be a
general economic downturn or a recession in the United Sates or certain other
markets, the Company believes that certain of its customer may reduce or delay
their demand for the Company's products which may have a negative effect on the
Company's revenues. Most of the factors that might influence customers and
prospective customers to reduce their capital budgets under these circumstances
are beyond the Company's control. During prior recessionary periods, the
Company's operating performance has been negatively affected, and there can be
no assurance that any future economic downturn would not materially and
adversely affect the Company's business, financial condition and operating
results. In addition, there can be no assurance that growth in the markets from
the Company's products will occur or that such growth will result in increased
demand for the Company's products.
Intellectual Property
The trade name Torque-Hub ("Torque-Hub") is a registered trademark. The
Company's planetary gear systems are sold under the Torque-Hub trade name. The
Company, directly and through its wholly-owned subsidiary, T-H Licensing, Inc.,
owns numerous patents worldwide. None of such patents is considered material to
the Company's business.
Item 2. PROPERTIES
The Company owns and operates a single facility in Lafayette, Indiana
consisting of 39 acres of land, approximately 520,000 square feet of
manufacturing space and approximately 60,000 square feet of office space. The
Lafayette facility is well maintained and is in good condition.
Item 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to the conduct of
its business, much of which is covered by insurance and none of which is
expected to have a material adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fiscal year ended December 31, 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
There is currently no established public trading market for the Company's
common stock which is wholly-owned by Lancer.
Dividends:
On December 5, 1996, in connection with the Company's 1996 senior debt
amendment, a dividend of $17.0 million was paid to Lancer.
Issuance of Common Stock:
The Company issued 25,000 additional shares of its common stock on March
31, 1996, 51,000 shares on June 30, 1996, 23,000 shares on September 30, 1996
and 30,000 shares on December 31, 1996 to Lancer in consideration of certain
capital contributions made by Lancer to the Company pursuant to the Tax Sharing
Agreement (as defined in Item 13).
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the Company for the five years
ended December 31, 1996 has been derived from the audited consolidated financial
information for the Company for such periods. The following selected financial
data should be read in connection with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and is qualified in its entirety
by reference to, the Consolidated Financial Statements and Notes thereto of the
Company and contained elsewhere herein.
Year Ended December 31,
1996 1995 1994 1993 1992
(dollars in thousands, except share and per share data)
Income Statement Data:
Net sales $195,205 $192,111 $150,689 $124,779 $108,613
Cost of sales 158,668 151,890 123,092 103,603 90,583
Selling, general and 16,868 14,759 15,924 12,323 12,451
administrative expenses
Operating income 19,669 25,462 11,673 8,853 5,579
Interest expense 11,930 12,905 12,377 11,345 11,493
Other expense, net 90 127 199 227 136
Income (loss) before income 7,649 12,430 (903) (2,719) (6,050)
taxes, extraordinary
item and cumulative
effect of change in
accounting principle
Provision (benefit) for 3,730 5,520 (164) (935) (1,898) (1,898)
income taxes
Income (loss) before 3,919 6,910 (739) (1,784) (4,152)
extraordinary item and
cumulative effect of
change in accounting
principle
Extraordinary loss on early -- -- -- (4,455) --
extinguishment of debt,
net of tax (1)
Cumulative effect of change
in accounting principle, -- -- (1,554) (4,625) --
net of tax (2)
Net income (loss) $3,919 $6,910 $(2,293) $(10,864) $(4,152)
Net income (loss) per common $0.51 $1.15 $(0.77) $(3.65) $(2.01)
share
Dividend declared per common $2.19 -- -- $.67 --
share
Weighted average common 7,726,557 6,018,072 2,976,471 2,976,471 2,064,303
shares outstanding
Balance Sheet Data (at period
end):
Working capital $ 12,123 $ 17,280 $8,348 $ 18,125 $ 5,826
Total assets 176,370 183,155 170,581 174,470 169,396
Long-term debt (including 118,000 113,000 115,000 121,444 109,585
current maturities)
Stockholder's equity (4,570) 9,958 45 1,278 14,142
(deficit)
Other Data:
EBITDA(3) $ 32,016 $ 36,971 $ 22,621 $ 19,475 $ 17,774
Depreciation 10,830 10,027 9,540 9,242 10,724
Amortization(4) 2,277 2,245 2,310 2,604 3,037
Cash interest expense, net(5) 11,260 12,269 11,674 10,348 10,063
Capital expenditures 9,986 15,090 9,164 4,145 3,151
(1) During 1993, the Company recorded an extraordinary loss of $4.5 million,
net of tax, relating to the early extinguishment, and refinancing of, the
outstanding debt at June 30, 1993.
(2) During 1993, the Company recorded a one time non-cash charge of
$4.6 million, net of tax, relating to the cumulative effect of adopting
Statement of Financial Accounting Standard No. 106 "Employers Accounting for
Postretirement Benefits Other Than Pensions."
During 1994, the Company recorded a one-time non-cash charge of $1.6 million,
net of tax, relating to the cumulative effect of adopting Statement of
Financial Accounting Standards No. 112, "Employers Accounting for
Postemployment Benefits."
(3) EBITDA represents income (loss) before income taxes, extraordinary item,
cumulative effect of a change in accounting principle, interest expense, net,
depreciation and amortization. EBITDA is not presented herein as an
alternative measure of operating results or cash flow but rather to provide
additional information related to debt service capability.
(4) Includes the amortization of deferred financing costs and the amortization
of the excess of investment over net assets acquired.
(5) Cash interest expense, net includes interest income, but excludes
amortization of deferred financing costs of $0.7 million for fiscal 1996, $0.6
million for fiscal 1995, $0.7 million for fiscal 1994, $1.0 million for fiscal
1993 and $1.4 million for fiscal 1992.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 1996 Compared with Fiscal Year 1995
Net sales for 1996 increased by $3.1 million, or 1.6%, to $195.2 million
compared to $192.1 million in 1995. This increase was primarily due to an
increase in planetary gear sales of $8.8 million, partially offset by a decrease
in custom gear sales of $5.7 million.
Cost of sales for 1996 increased by $6.8 million, or 4.5%, to $158.7
million, or 81.3% of net sales, compared to $151.9 million, or 79.1% of net
sales in 1995. This increase primarily resulted from the increased sales of
planetary gear systems, which have a higher material cost component compared to
custom gear products, as well as increased costs associated with the Company's
investment in new processes that reduced manufacturing cycle times from 50 days
in 1995 to 32 days at the end of 1996, and resulted in a reduction in inventory.
Selling, general and administrative expenses, including goodwill
amortization, increased to $16.9 million in 1996, compared to $14.8 million in
1995. This increase resulted primarily from investments in marketing, sales and
design engineering and the write-off of a $0.5 million receivable due to a
customer's bankruptcy.
Earnings from operations for 1996 decreased $5.8 million to $19.7 million,
compared to $25.5 million in 1995, primarily due to the factors mentioned above.
Interest expense, including amortization of deferred financing costs, was
$11.9 million for 1996, compared to $12.9 million for 1995. The principal
reason for the decrease was lower average outstanding debt levels due to
improvements in working capital management and the reduction in inventory
described above.
Income before income taxes was $7.6 million for 1996, compared to $12.4
million for 1995.
The effective tax rates for 1996 and 1995 were 48.8% and 44.4%,
respectively. See the Notes to the Consolidated Financial Statements for a
further discussion of income taxes.
The Company's net income was $3.9 million for 1996, compared to $6.9
million for 1995.
Fiscal Year 1995 Compared with Fiscal Year 1994
Net sales for 1995 increased by $41.4 million, or 27.5%, to $192.1 million,
compared to $150.7 million in 1994. Increased sales volumes of the Company's
products were the result of a variety of factors including additional
outsourcing by captive gear manufacturers, continued growth in sales of products
and applications developed over the last few years, improvements in
manufacturing capabilities, and improvements in the markets served by the
Company's customers.
Cost of sales for 1995 increased by $28.8 million, or 23.4%, to $151.9
million, or 79.1% of net sales, compared to $123.1 million, or 81.7% of net
sales, in 1994. This increase primarily resulted from volume growth, a change
in the Company's product mix and investments in manufacturing personnel.
Selling, general and administrative expenses, including goodwill
amortization, decreased to $14.8 million, or 7.7% of net sales, in 1995,
compared to $15.9 million, or 10.6% of net sales, in 1994. This decrease
resulted primarily from one-time re-engineering and consulting fees incurred in
1994.
Earnings from operations for 1995 increased $13.8 million, or 118.1%, to
$25.5 million, or 13.3% of net sales, compared to $11.7 million, or 7.7% of net
sales, in 1994.
Interest expense, including amortization of deferred financing costs, for
1995 was $12.9 million, compared to $12.4 million for 1994. Despite declining
interest rates in 1995 and a $2.0 million decrease in outstanding debt from
December 31, 1994, the average outstanding debt during 1995 exceeded 1994,
resulting in higher interest costs for the year.
Income before income taxes, extraordinary item and cumulative effect of
change in accounting principle was $12.4 million for 1995, compared to a loss of
$0.9 million for 1994.
The effective tax rates for 1995 and 1994 were 44.4% and 18.2%,
respectively. The provision for income taxes for 1995 is primarily the result
of current year income. The benefit for income taxes for 1994 is principally
the result of the reversal of previously recorded deferred tax liabilities. See
the Notes to the Consolidated Financial Statements for a further discussion of
income taxes.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers Accounting for Postemployment Benefits" ("SFAS No.
112"). SFAS No. 112 requires employers to account for postemployment benefits
under the accrual, rather than the pay-as-you-go, method of accounting, such
that the expected benefits to be paid in future years are recorded during the
period in which the employee renders the service necessary to qualify for these
benefits. The Company implemented SFAS No. 112 by recognizing the total prior
service obligation immediately. As a result of the adoption of SFAS No. 112,
the Company recorded a one-time non-cash charge of $1.6 million ($1.9 million
less a deferred tax benefit of $0.3 million) for the cumulative effect of the
change in accounting principle.
The Company's net income was $6.9 million for 1995 compared to the $2.3
million net loss for 1994. The increase in the net income is primarily due to
the higher sales volume and productivity improvements in 1995, combined with the
cumulative effect of the change in accounting principle adjustment in 1994.
Liquidity and Capital Resources
On July 7, 1993, the Company completed the sale of $85.0 million of 11 3/8%
Senior Subordinated Notes (the "Notes"). The Notes mature on July 1, 2001 and
are redeemable at the option of the Company, in whole or in part, on or after
July 1, 1998, at certain specified redemption prices. Concurrent with the
issuance of the Notes, the Company entered into a loan agreement with a senior
lending institution which provides for a revolving credit facility and a term
loan. The loan agreement was amended in December 1996 to, among other things,
increase the term loan to $33.0 million (with quarterly amortization through
December 2000) and subject to certain conditions, provide for a $5.0 million
increase in the revolving credit facility commitment at the option of the
Company (from $20.0 million to $25.0 million). The revolving credit facility
matures on July 1, 2001.
Net cash provided by operating activities was $23.2 million in 1996
compared to $13.9 million in 1995 and $9.6 million in 1994. The increase in
cash flow from operating activities in 1996 was principally due to the impact of
improved manufacturing cycle times reducing inventory.
Capital expenditures totaled $10.0 million, $15.1 million and $9.1 million
in 1996, 1995 and 1994, respectively. The level of capital spending during 1994
to 1996 was primarily a result of increased manufacturing requirements due to
increased sales volume.
Net cash from financing activities was a net usage of $13.6 million in
1996, a net source of $0.7 million in 1995, and a net usage of $5.4 million in
1994. The 1996 net usage funded a portion of the $17.0 million dividend paid to
Lancer and the $3.0 million advance made to Lancer in December 1996.
Under the Tax Sharing Agreement (as defined), Lancer made capital
contributions to the Company of $1.6 million, $2.5 million, and $1.1 million in
1996, 1995 and 1994, respectively. See Notes to the Consolidated Financial
Statements for a further discussion of capital contributions made pursuant to
the Tax Sharing Agreement.
Inflation
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements beginning at
page F-1 herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1996.
Name Age Position
W.B. Lechman 64 Director, Chairman of the Board
Kenneth A. Burns 44 President and Chief Operating Officer
Peter A. Joseph 44 Director, Vice President and Secretary
Paul S. Levy 49 Director, Vice President and Assistant
Secretary
Richard A. Bush 39 Vice President Finance
James R. Dammon 53 Vice President Engineering
Michael M. Manty 53 Vice President Human Resources
Frederick G. Sharp 42 Vice President Marketing and Sales
Jess C. Ball 55 Director
Mr. Lechman was appointed Chairman of the Board effective October 1994.
Prior to his appointment, Mr. Lechman had been President of the Company from
1983 to October 1994 and was Chief Executive Officer from 1989 to October 1994.
Mr. Lechman has been a Director of the Company since 1989. Mr. Lechman serves
on the Board of Directors of Bank One Lafayette, Lafayette Life Insurance Co.,
Lafayette Community Foundation, Lafayette Junior Achievement, The Salvation Army
and Lafayette Chamber of Commerce and is President Emeritus of the American Gear
Manufacturers Association.
Mr. Burns was named President and Chief Operating Officer of the Company
effective May 1996. Prior to his appointment, Mr. Burns had served as Vice
President Operations since January 1996. From 1987 through July 1995, Mr. Burns
served as an executive officer of Abex/NWL Aerospace and its predecessors,
including Executive Vice President.
Mr. Joseph has been Vice President and Secretary and a Director of the
Company since 1989. Mr. Joseph has been a General Partner of Joseph Littlejohn
& Levy since its inception in 1988. Mr. Joseph has served as President of
Lancer since April 1992 and as Secretary and Director of Lancer since July 1989.
Mr. Joseph is also on the Board of Directors of Freedom Chemical Company,
Foodbrands America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and
Tenet Healthcare Corporation.
Mr. Levy has been Vice President and Assistant Secretary and a Director of
the Company since 1989. Mr. Levy has been a General Partner of Joseph
Littlejohn & Levy since its inception in 1988. Mr. Levy has served as Chief
Executive Officer and Chairman of the Board of Directors of Lancer since July
1989. Mr. Levy is also on the Board of Directors of Freedom Chemical Company,
Foodbrands America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and
Tenet Healthcare Corporation.
Mr. Bush has been Vice President Finance of the Company since November
1994. From 1990 to 1994, Mr. Bush was Controller for two different aerospace
units of Abex Inc. From 1980 to 1990, Mr. Bush was with Arthur Andersen & Co.
in the audit and financial consulting practice.
Mr. Dammon has been Vice President Engineering since 1987. Prior to his
present position, Mr. Dammon was Director of Engineering, Manager of New Product
Development, Manager of Customer Engineering Service and Gear Design Engineer.
Mr. Dammon has been with the Company for over 30 years.
Mr. Manty has been Vice President of Human Resources of the Company since
February 1995 and Vice President Total Quality and Human Resources since January
1997. From 1990 to 1995, Mr. Manty was Director of Human Resources for Allied
Signal Aerospace. Prior to 1990, Mr. Manty performed labor relations consulting
work with Modern Management, Inc. and held senior level human resource positions
with Pneumo Corporation and Chrysler Corporation.
Mr. Sharp has been Vice President of Marketing and Sales of the Company
since August, 1996. From 1991 to July 1996, Mr. Sharp served as Director of
Program Management for United Defense L.P. and its predecessor BMY Combat
Systems Division. Prior to 1991, Mr. Sharp held senior level positions with
General Electric and NWL Control Systems.
Mr. Ball was President and Chief Executive Officer of the Company from
October 1994 to May 1996. Mr. Ball has been a Director of the Company since
1991. From February 1991 through November 1991, Mr. Ball served as President
and Chief Executive Officer of Alford Industries (a company which filed for
bankruptcy protection and has been liquidated). From December 1991 through
September 1994, Mr. Ball was President and Chief Executive Officer of Golding
Industries, Inc. From January 1988 through January 1991, Mr. Ball served as
President and Chief Executive Officer of DelCorp.
Compensation of Directors
Except for the period October 1994 to December 1996, Mr. Ball receives an
annual fee of $30,000 per year for services as a director. No other director
receives any additional compensation for services as a director or for serving
on committees of the Board of Directors of the Company or for meeting
attendance.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth for each of the fiscal years ending December
31, 1996, 1995 and 1994, the compensation paid to or accrued by (i) the Chairman
of the Board (the "Chairman") of the Company and (ii) each of the four most
highly compensated executive officers other than the Chairman.
Summary Compensation Table
Name and Annual Compensation All Other
Principal Position Year Salary Bonus(1) Compensation(2
)
W. B. Lechman 1996 $256,668 $50,000 $135,720
Chairman of the 1995 253,891 -- 131,363
Board 1994 253,860 50,803 130,250
Kenneth A. Burns 1996 $185,279 $100,000 $3,325
President and Chief
Operating
Officer
James R. Dammon 1996 $114,437 $57,000 $4,988
Vice President 1995 110,431 65,467 5,524
Engineering
1994 104,268 21,992 6,364
Richard A. Bush 1996 $103,537 $52,000 $5,950
Vice President 1995 100,031 59,300 4,399
Finance
Michael M. Manty 1996 $102,257 $52,000 $24,981
Vice President 1995 93,495 94,154 5,234
Human Resources
(1) Amounts shown were earned under the Fairfield Manufacturing Company
Management Incentive Compensation Plan.
(2) Amounts shown include contributions by the Company to The Savings Plan For
Employees of Fairfield Manufacturing Company, Inc. for the benefit of the
named executives, imputed income on life insurance provided by the Company,
reimbursement of relocation expenses for Mr. Manty, imputed income on an
automobile for Mr. Lechman, and contributions to an insurance company of
$110,000 for each of the years shown above to fund a supplemental
retirement annuity policy for Mr. Lechman.
FY- End SAR Values
Name No. of Value of
Unexercised Unexercised
SARs at SARs at
FY-End FY-End
Exercisable/ Exercisable/
Unexercisable (1) Unexercisable
W.B. Lechman 0/63,000 $0/0
James R. Dammon 0/10,800 0/0
(1) Equity Participation Rights (the "Rights" issued to participants in the
Fairfield Manufacturing Company, Inc. Equity Participation Plan (the
"Equity Participation Plan"). Mr. Lechman and Mr. Dammon hold 63,000 and
10,800 Rights, respectively, under the Equity Participation Plan, all of
which are fully vested. Each Right entitles Mr. Lechman and Mr. Dammon to
receive, upon the occurrence of a Trigger Event (as defined in the Equity
Participation Plan), an amount in cash equal to the difference between the
Fair Market Value of a Right (as of the Trigger Event) and $16.67, the
initial value assigned to each Right.
Pension Plan Table
The Company maintains the Retirement Plan for Employees of Fairfield
Manufacturing Company, Inc., a qualified defined benefit pension plan intended
to be qualified under the Internal Revenue Code (the "Pension Plan").
Estimated Annual Benefits for
Years of Benefit Service Indicated(2)
Remuneratio 5 10 15 20 25 30 35
n (1)
$100,000 $6,796 $13,593 $20,389 $27,186 $33,982 $40,778 $42,028
$125,000 8,609 17,218 25,827 34,436 43,044 51,653 53,216
$150,000 10,421 20,843 31,264 41,686 52,107 62,528 64,403
and over
(1) The preceding table illustrates the aggregate pension benefits provided by
the Pension Plan calculated on a straight life annuity basis. The amounts
set forth in the table are subject to reduction for any Social Security
offset. Average annual compensation covered under the Pension Plan is the
highest average annual total compensation received from the Company for any
60 month period during the 120 months immediately preceding the
participant's separation from service. Annual total compensation for
Pension Plan purposes includes all compensation disclosed in the Summary
Compensation Table.
(2) At December 31, 1996, Messrs. Lechman, Burns, Dammon, Bush, and Manty had
13, 1, 31, 2 and 2 whole years of credited service, respectively, for
purposes of calculating their benefits under the Pension Plan.
Employment and Change in Control Agreements
The Company entered into an employment agreement with Kenneth A. Burns,
effective June 1, 1996.
Mr. Burns employment agreement provides that he will serve as President and
Chief Operating Officer of the Company. The agreement is for a term that
expires on June 1, 1998. The agreement provides for Mr. Burns to receive a base
salary of $200,000 or such greater amount as may be determined by the Board of
Directors of the Company. In addition, Mr. Burns is eligible to participate in
any benefit plan that the Company provides to its executives from time to time.
Mr. Burns' employment agreement contains restrictions on disclosure by him
of confidential information and generally restricts his right to compete with
the Company during the term of his employment and for two years thereafter. Mr.
Burns' employment pursuant to the agreement is terminable upon his death or
disability or by the Company or Mr. Burns for cause (as defined therein) or
without cause. Upon Mr. Burns' death or disability prior to June 1, 1998, he or
his estate will receive any salary accrued through the termination date.
If, prior to June 1, 1998, Mr. Burns' employment is terminated by the Company
for cause, or he terminates his employment other than for cause, he will receive
his salary accrued through the termination date. In the event Mr. Burns
terminates his employment for cause or the Company terminates his employment
without cause prior to June 1, 1998, he will be entitled to his base salary
through June 1, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the common stock of the Company by (i) each director of the
Company, (ii) the executive officers of the Company listed under the caption
"Management" and (iii) each person known by the Company to beneficially own in
excess of 5% of the outstanding shares of the Company's common stock as of
December 31, 1996.
Number of Percent of Number of
Shares shares Fully Percent
Name Owned Outstanding Diluted of
Shares Fully
Diluted
Shares
Lancer Industries Inc. 7,805,000 100% 7,805,000 100%
(1)
450 Lexington Avenue,
Suite 3350
New York, New York 10017
Chase Manhattan Bank, as -- (2) -- -- --
Trustee of the Lancer
Industries Inc. Employee
Stock Ownership Plan, 1
Chase Manhattan Plaza,
New York, New York 10005
Peter A. Joseph -- (2) -- -- --
Paul S. Levy -- (2) -- -- --
W.B. Lechman -- -- -- --
Jess C. Ball -- -- -- --
Kenneth A. Burns -- -- -- --
Richard A. Bush -- -- -- --
James R. Dammon -- -- -- --
Michael M. Manty -- -- -- --
Frederick G. Sharp -- -- -- --
All directors and executive -- -- -- --
officers as a group
(9 persons)
(1) 100% of the capital stock of CAG is owned by Lancer. Lancer has pledged
such shares to the lender under the GE Credit Agreement (as defined) as
security for the Company's obligations thereunder.
(2) Lancer, which is currently the owner of 100% of the capital stock of the
Company, has one class of common stock, Class B Common Stock, with a par
value of $478.44 per share. 10.05 shares, or approximately 57.10%, of the
Class B Common Stock are held by the ESOP. Messrs. Joseph and Levy are
participants in the ESOP. Each of Messrs. Joseph and Levy have sole voting
power with respect to approximately 4.12 shares of the Class B Common Stock
held by the ESOP; and other participants in the ESOP have sole voting power
with respect to approximately 1.81 shares of such stock. Messrs. Joseph
and Levy, and in limited circumstances the ESOP trustee, have shared
investment power with respect to 10.05 shares of such stock.
Messrs. Joseph and Levy have been allocated an aggregate of approximately
8.24 shares, or approximately 46.8%, of the Class B Common Stock held by
the ESOP. Each of Messrs. Joseph and Levy disclaim beneficial ownership of
any shares of Class B Common Stock held by the ESOP that have been
allocated to other parties. In addition, Messrs. Joseph and Levy have the
right to purchase approximately 0.26 shares of Class B Common Stock, or
approximately 3.0% of Class B Common Stock in the aggregate.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Controlling Stockholders
The Company is a wholly-owned subsidiary of Lancer. A majority of Lancer's
voting stock is owned by the ESOP. Two participants in the ESOP, Messrs. Peter
A. Joseph and Paul S. Levy, collectively have the power to direct the voting of
approximately 46.8% of Lancer's common stock. In addition, each of Messrs.
Joseph and Levy have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock. As a result, these two participants in the ESOP have the
ability to exercise control over the current and future business and affairs of
the Company, including the ability to cause or prevent a change of control of
the Company, through their ability to elect the Company's Board of Directors and
their voting power with respect to actions requiring stockholder approval.
Tax Sharing Agreement
The Company is included in the affiliated group of which Lancer is the
common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax return filed by Lancer. The Company
and Lancer have entered into a tax sharing agreement (the "Tax Sharing
Agreement") pursuant to which the Company has agreed to pay to Lancer amounts
equal to the taxes that the Company would otherwise have to pay if it were to
file separate federal, state or local tax returns (including amounts determined
to be due as a result of a redetermination of the tax liability of Lancer). In
addition, pursuant to the Tax Sharing Agreement, to the extent that the
Company's separate return liability is absorbed by net operating losses or other
credits and deductions of Lancer or its subsidiaries (other than the Company and
its subsidiaries), Lancer will make a capital contribution to the Company in an
amount equal to 50% of such separate return liability. Under certain
circumstances, however, such as the Company ceasing to be a member of the Lancer
consolidated group or the disallowance by the IRS of the use of Lancer's net
operating losses, Lancer no longer would be required to make capital
contributions under the Tax Sharing Agreement. See the Notes to the
Consolidated Financial Statements for a further discussion of income taxes.
Other Arrangements with Lancer
From time to time, Lancer incurs legal, accounting and miscellaneous other
expenses on behalf of the Company. In fiscal 1996, 1995 and 1994, the Company
made aggregate payments to Lancer in respect of such expenses incurred by Lancer
on the Company's behalf in the amounts of approximately $0.6 million, $0.6
million and $0.5 million, respectively.
On December 5, 1996, the Company declared and paid a $17.0 million dividend
to Lancer and made a $3.0 million advance to Lancer. On February 10, 1997, the
Company declared and paid a dividend to Lancer of approximately $3.1 million,
the proceeds of which dividend were used by Lancer to repay in full the
principal amount of the 1996 advance, together with all interest accrued thereon
through the repayment date.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) and (2):
See Index to Consolidated Financial Statements and Financial Statement
Schedule appearing on page F-1.
(3) The following is a list of exhibits hereto required to be filed
by Item 601 of Regulation S-K of the Securities and Exchange Commission:
Exhibit No. Description
(2) (a) Articles of Merger and related Plan of Merger under
the state of Indiana of Fairfield Manufacturing
Company, Inc. ("Fairfield") with and into Central
Alabama Grain Company, Inc. ("CAG") dated March 31,
1995, incorporated by reference from Exhibit 2(a) to
Fairfield's Form 10-K as filed with the Securities
and Exchange Commission on March 22, 1995 (the "1994
Form 10-K").
(2) (b) Certificate of Ownership and Merger, merging
Fairfield into CAG, incorporated by reference from
Exhibit 2(b) to the 1994 Form 10-K.
(3) (a) Restated Certificate of Incorporation of Fairfield,
formally known as CAG, incorporated by reference
from Exhibit 3(b) to the 1994 Form 10-K.
(3) (c) By-Laws of CAG, incorporated by reference from
Exhibit 3(c) to the 1994 Form 10-K.
(4) (a) Indenture, dated as of July 7, 1993, between
Fairfield and First Fidelity Bank, National
Association, New York, as trustee, incorporated by
reference from Exhibit 4(a) to Fairfield's Form 10-Q
as filed with the Securities and Exchange Commission
on August 16, 1993 (the "Second Quarter 1993 Form 10-
Q").
(4) (b) Supplemental Indenture No. 1, dated March 31, 1995,
between CAG as successor-in-interest to Fairfield and
First Fidelity Bank, National Association, as
trustee, incorporated by reference from Exhibit 4(b)
to the 1994 Form 10-K.
(9) Voting Trust Agreement
Not Applicable.
(10) (a) Loan Agreement, dated as of July 7, 1993, among
Fairfield, the lenders named therein and General
Electric Capital Corporation ("GECC"), as agent,
incorporated by reference from Exhibit 10(a) to the
Second Quarter 1993 Form 10-Q.
(10) (b) Amended and Restated Warrant Agreement, dated as of
July 7, 1993, among Fairfield, Mitsui Nevitt Capital
Corporation and Principal Mutual Life Insurance
Company, incorporated by reference from Exhibit 10(b)
to the Second Quarter 1993 Form 10-Q.
(10) (c) Security Agreement, dated as of July 7, 1993, between
Fairfield and GECC, as agent, incorporated by
reference from Exhibit 10(c) to the Second Quarter
1993 Form 10-Q.
(10) (d) Security Agreement, dated as of July 7, 1993, between
T-H Licensing, Inc. ("T-H Licensing") and GECC, as
agent, incorporated by reference from Exhibit 10(d)
to the Second Quarter 1993 Form 10-Q.
(10) (e) Stock Pledge Agreement, dated as of July 7, 1993,
between Fairfield and GECC, as agent, incorporated by
reference from Exhibit 10(e) to the Second Quarter
1993 Form 10-Q.
(10) (f) Stock Pledge Agreement, dated as of July 7, 1993,
between Fairfield Holdings, Inc. and GECC, as agent,
incorporated by reference from Exhibit 10(f) to the
Second Quarter 1993 Form 10-Q.
(10) (g) Trademark Security Agreement, dated as of July 7,
1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(g) to the
Second Quarter 1993 Form 10-Q.
(10) (h) Trademark Security Agreement, dated as of July 7,
1993, between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(h) to the
Second Quarter 1993 Form 10-Q.
(10) (i) Patent Security Agreement, dated as of July 7, 1993,
between Fairfield and GECC, as agent, incorporated
by reference from Exhibit 10(i) to the Second Quarter
1993 Form 10-Q.
(10) (j) Patent Security Agreement, dated as of July 7, 1993,
between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(j) to the
Second Quarter 1993 Form 10-Q.
(10) (k) Subsidiary Guaranty, dated as of July 7, 1993,
between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(k) to the
Second Quarter 1993 Form 10-Q.
(10) (l) Mortgage, Assignment of Leases, Rents and Profits,
Security Agreement and Fixture Filing, dated as of
July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(l) to the
Second Quarter 1993 Form 10-Q.
(10) (m) Collection Account Agreement, dated as of July 7,
1993, among Fairfield and GECC, and acknowledged by
Bank One, Lafayette, N.A., incorporated by reference
from Exhibit 10(m) to the Second Quarter 1993 Form 10-
Q.
(10) (n) Used Machinery Account Agreement, dated as of July 7,
1993, among Fairfield and GECC, and acknowledged by
Bank One, Lafayette, N.A., incorporated by reference
from Exhibit 10(n) to the Second Quarter 1993 Form 10-
Q.
(10) (o) Quitclaim Grant of Security Interest, dated as of
July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(o) to the
Second Quarter 1993 Form 10-Q.
(10) (p) Supplemental Quitclaim Grant of Security Interest
(Patents only), dated as of July 7, 1993, between
Fairfield and GECC, as agent, incorporated by
reference from Exhibit 10(p) to the Second Quarter
1993 Form 10-Q.
(10) (q) First Amendment to Loan Agreement, dated as of
September 30, 1994, among Fairfield, the lenders
named therein and GECC, as agent, incorporated by
reference from Exhibit 10 (q) as filed with the
Securities and Exchange Commission on November 14,
1994.
(10) (r) Second Amendment to Loan Agreement, dated as of March
30, 1995, among Fairfield, the lenders named therein
and GECC, as agent, incorporated by reference from
Exhibit 10(r) to the 1994 Form 10-K.
(10) (s) Third Amendment to Loan Agreement, dated as of March
31, 1995, among Fairfield, the lenders named therein
and GECC, as agent, incorporated by reference from
Exhibit 10(s) to the 1994 Form 10-K.
(10) (t) First Amendment to Mortgage Assignment of Leases,
Rents and Profits, Security Agreement and Fixture
Filing, dated as of March 31, 1995, between Fairfield
and GECC, as agent, incorporated by reference from
Exhibit 10(t) to the 1994 Form 10-K.
(10) (u) Stock Pledge Agreement, dated as of March 31, 1995,
between Lancer Industries Inc. ("Lancer") and GECC,
as agent, incorporated by reference from Exhibit
10(u) to the 1994 Form 10-K.
(10) (v) Amended and Restated Security Agreement, dated as of
March 31, 1995, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(v) to the
1994 Form 10-K.
(10) (w) The Employment and Non-Competition Agreement, dated
as of January 1, 1992, between Fairfield and W. B.
Lechman, as amended on February 22, 1994 and December
19, 1995, incorporated by reference from Exhibit 10
(w) to Fairfield's Form 10-K as filed with the
Securities and Exchange Commission on (the "1995 Form
10-K").
(10) (x) The Fairfield Manufacturing Company, Inc. Equity
Participation Plan, dated August 21, 1989
incorporated by reference from Exhibit 10 (x) to the
1995 Form 10-K.
(10) (y) The Collective Bargaining Agreement, ratified October
28, 1995, between Fairfield and United Auto Workers'
Local 2317 incorporated by reference from Exhibit 10
(y) to the 1995 Form 10-K.
(10) (z) The Tax Sharing Agreement, dated as of July 18, 1990,
between Fairfield and Lancer, incorporated by
reference from Exhibit 10 (z) to the 1995 Form 10-K.
(10) (aa) The Fairfield Manufacturing Company, Inc. (1992)
Supplemental Executive Retirement Plan incorporated
by reference from Exhibit 10 (aa) to the 1995 Form 10-
K.
(10) (bb) Letter Agreement, dated December 29, 1989, granting
exclusive license from T-H Licensing to Fairfield
incorporated by reference from Exhibit 10 (bb) to the
1995 Form 10-K.
(10) (cc) Fourth Amendment to Loan Agreement, dated as of
December 5, 1996, among Fairfield, the lenders named
therein and GECC, as agent.
(10) (dd) Second Amendment to Mortgage Assignment of Leases,
Rents and Profits, Security Agreement and Fixture
Filing, dated as of December 5, 1996, between
Fairfield and GECC, as agent.
(10) (ee) The Employment Agreement, dated as of June 1, 1996,
between Fairfield and K. A. Burns.
(11) Statement re computation of per share earnings.
Not Applicable.
(12) Statement re Computation of ratios.
Not Applicable.
(13) Annual Report to Security Holders, Form 10-Q or
Quarterly Report to Security Holders.
Not Applicable.
(16) Letter re Change in Certifying Accountant.
Not Applicable.
(18) Letter re change in accounting principles.
Not Applicable.
(21) Subsidiaries of Fairfield Manufacturing Company, Inc.
T-H Licensing, Inc.
(22) Published report regarding matters submitted to vote
of security holders.
Not Applicable.
(23) Consents of experts and counsel.
Not Applicable.
(24) Power of attorney.
Not Applicable.
(28) Information from Reports Furnished to State Insurance
Regulatory Authorities.
Not Applicable.
(99) Additional exhibits.
Not Applicable.
(b) No reports on Form 8-K have been filed during the
last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 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 on the 21st day of
February, 1997.
FAIRFIELD MANUFACTURING
COMPANY, INC.
By: /s/ Richard A. Bush
Richard A. Bush
Vice President Finance
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
/s/ Kenneth A. Burns
Kenneth A. Burns President and Chief Operating Officer February 21, 1997
/s/ Peter A. Joseph
Peter A. Joseph Director February 21, 1997
/s/ Paul S. Levy
Paul S. Levy Director February 21, 1997
/s/ W. B. Lechman
W.B. Lechman Director and Chairman of the Board February 21, 1997
/s/ Jess C. Ball
Jess C. Ball Director February 21, 1997
FAIRFIELD MANUFACTURING COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Accountants F - 2
Consolidated Balance Sheets, December 31, 1996 and 1995 F - 3
Consolidated Statements of Operations for the three years F - 4
ended December 31, 1996
Consolidated Statements of Stockholder's Equity (Deficit) F - 5
for the three years ended December 31, 1996
Consolidated Statements of Cash Flows for the three years F - 6
ended December 31, 1996
Notes to Consolidated Financial Statements F - 7
Report of Independent Accountants on Consolidated Financial F - 17
Statement Schedule
Schedule:
II. Valuation and Qualifying Accounts and Reserves, for the F - 18
three years ended December 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Fairfield Manufacturing Company, Inc.
We have audited the accompanying consolidated balance sheets of Fairfield
Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fairfield Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
January 31, 1997
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,185 $ 4,324
Trade receivables, less allowance of $600 in 24,696 24,328
1996 and in 1995
Inventory 18,918 24,912
Prepaid expenses 897
853
Total current assets 50,652 54,461
PROPERTY, PLANT AND EQUIPMENT, NET 70,211 71,056
OTHER ASSETS:
Excess of investment over net assets 52,491 54,098
acquired, less accumulated amortization
of $11,868 in 1996 and $10,261 in 1995
Deferred financing costs, less accumulated 3,016 3,540
amortization of $2,355 in 1996 and
$1,685 in 1995
Total other assets 55,507 57,638
Total assets $176,370 $183,155
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,000 $ 3,000
Accounts payable 13,260 11,150
Due to parent 287 807
Accrued liabilities 18,182 17,524
Deferred income taxes 3,800 4,700
Total current liabilities 38,529 37,181
ACCRUED RETIREMENT COSTS 15,423 14,758
DEFERRED INCOME TAXES 11,988 11,258
LONG-TERM DEBT, NET OF CURRENT MATURITIES 115,000 110,000
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, par value $.01 per share; 78 77
10,000,000 shares authorized; 7,805,000
and 7,676,000 issued and outstanding in
1996 and 1995, respectively
Additional paid-in capital 36,788 35,209
Accumulated deficit (41,436) (25,328)
Total stockholder's equity (deficit) (4,570) 9,958
Total liabilities and stockholder's $176,370 $183,155
equity (deficit)
The accompanying notes to consolidated financial statements
are an integral part of these statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
(In thousands, except per share data)
1996 1995 1994
Net sales $195,205 $192,111 $150,689
Cost of sales
158,668 151,890 123,092
Selling, general and administrative
expenses 16,868 14,759 15,924
OPERATING INCOME 19,669 25,462 11,673
Interest expense, net 11,930 12,905 12,377
Other expense, net
90 127 199
INCOME (LOSS) BEFORE INCOME TAXES AND 7,649 12,430 (903)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Provision (benefit) for income taxes
3,730 5,520 (164)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT 3,919 6,910 (739)
OF CHANGE IN ACCOUNTING PRINCIPLE
Cumulative effect of change in
accounting principle, net of -- -- (1,554)
benefit for income taxes of $346 in
1994
NET INCOME (LOSS)
$3,919 $6,910 $(2,293)
INCOME (LOSS) PER SHARE DATA:
Before cumulative effect of change $0.51 $1.15 $(0.25)
in accounting principle
Cumulative effect of change in
accounting principle -- -- $(0.52)
Net income (loss) per common share
$0.51 $1.15 $(0.77)
Weighted average common shares 7,726,557 6,018,072 2,976,47
outstanding 1
The accompanying notes to consolidated financial statements
are an integral part of these statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Years Ended December 31, 1996
(In thousands)
Common Additiona Accumulate Stockhold
Stock l Paid- d Deficit er's
In Equity
Capital (Deficit)
BALANCE, January 1, 1994 $30 $31,193 $(29,945) $1,278
Contributed capital -- 1,060 -- 1,060
Net loss -- - (2,293) (2,293)
-
BALANCE, DECEMBER 31, 1994 30 32,253 (32,238) 45
Contributed capital 47 2,956 -- 3,003
Net income -- - 6,910 6,910
-
BALANCE, DECEMBER 31, 1995 77 35,209 (25,328) 9,958
Contributed capital 1 1,579 -- 1,580
Dividend -- -- (17,000) (17,000)
Advance to Parent -- -- (3,027) (3,027)
Net income -- - 3,919 3,919
-
BALANCE, DECEMBER 31, 1996 $78 $36,788 $(41,436) $ (4,570)
The accompanying notes to consolidated financial statements
are an integral part of these statements.
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
(In thousands)
1996 1995 1994
OPERATING ACTIVITIES:
Net income (loss) $ 3,919 $6,910 $(2,293
)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Cumulative effect of change in accounting -- -- 1,554
principle, net
Depreciation and amortization 13,108 12,272 11,850
Loss on disposal of equipment -- -- 768
Deferred income tax benefit (170) (1,178) (2,700)
Decrease (increase) in accrued retirement 665 2,079
costs (864)
(Increase) decrease in current assets:
Trade receivables (368) (7,886) (1,922)
Receivable from parent -- 1,097 155
Inventory 5,994 681 (2,714)
Prepaids 44 (434) (42)
Increase (decrease) in current
liabilities:
Accounts payable (156) (2,418) 3,316
Due to parent (520) 807 --
Accrued liabilities 658 1,926
2,482
Net cash provided by operating activities 23,174 13,856
9,590
INVESTING ACTIVITIES:
Additions to plant and equipment, net (7,720) (11,645)
(9,164)
Net cash used by investing activities (7,720) (11,645)
(9,164)
FINANCING ACTIVITIES:
Proceeds from additional capital contribution 1,580 3,003 1,060
Payment of dividend (17,000) -- --
Advance to Parent (3,027) -- --
Proceeds of long-term debt 20,000 11,000 3,000
Payment of long-term debt (15,000) (13,000) (9,444)
Payment of debt issuance costs (146) (340)
(50)
Net cash provided (used) by financing (13,593) 663
activities (5,434)
INCREASE (DECREASE) IN CASH AND CASH 1,861 2,874 (5,008)
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of year 4,324 1,450
6,458
End of year $ 6,185 $ 4,324 $
1,450
Supplemental Disclosures:
Cash paid for:
Interest $11,627 $12,387 $11,298
Taxes to parent $ 2,450 $ 1,650 $ 904
Non-cash activities:
Additions to plant and equipment included in accounts payable at
December 31, 1996 and 1995 are excluded from operating activities above.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
1. Summary of Significant Accounting Policies
Organization
Fairfield Manufacturing Company, Inc. ("the Company") is wholly-owned by
Lancer Industries Inc. ("Lancer"). The Company, its subsidiary and Lancer
are Delaware corporations. The Company has one subsidiary, T-H Licensing,
Inc., which owns certain of the Company's intangible assets. These
consolidated financial statements include the accounts of Fairfield
Manufacturing Company, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated.
The Company manufactures high precision custom gears and planetary gear
systems at its Lafayette, Indiana facility. Customers consist of original
equipment manufacturers serving diverse markets which include rail,
industrial, construction, road rehabilitation, mining, materials handling,
forestry, and agricultural.
Concentration of Credit Risk
During 1996, no single customer accounted for more than 10% of consolidated
net sales. Net sales to one customer were $21,109 in 1995 and $19,601 in
1994. Foreign sales are not material.
Revenue Recognition
Sales are recognized at the time of shipment to the customer.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Inventory
Inventory is valued at the lower of last-in, first-out (LIFO) cost or
market.
Property, Plant and Equipment, Net
Property, plant and equipment, net are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets ranging from 3 to 30 years.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The liability method measures
the expected tax impact of future taxable income or deductions resulting
from differences in the tax and financial reporting bases of assets and
liabilities reflected in the consolidated balance sheets and the expected
tax impact of carryforwards for tax purposes.
Excess of Investment Over Net Assets Acquired
Excess of investment cost over net assets acquired is amortized using the
straight-line method over 40 years. The Company's criteria for
periodically evaluating the carrying value of the excess of investment over
net assets acquired includes evaluation of products and markets as well as
current and expected levels of undiscounted cash flow from operations. The
Company has concluded the excess of investment over net assets acquired is
not impaired and the products and markets continue to support a 40-year
life.
Deferred Financing Costs
Debt issuance costs are being amortized by the use of the effective
interest method over the expected term of the related debt agreement.
Computation of Net Income (Loss) Per Share
Income (loss) per share is based upon the weighted average number of shares
of common stock outstanding.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair value of financial assets held by the Company approximate their
carrying value. The fair value of the financial liabilities which consist
of senior and subordinated debt, also approximate their carrying value.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements and
notes to consolidated financial statements have been reclassified to
conform with the 1996 presentation.
2. Inventory
Inventory at December 31, consists of:
1996 1995
Raw materials $ 4,178 $4,039
Work in process 8,070 10,978
Finished products 7,490 10,350
19,738 25,367
Less: Excess of FIFO cost over LIFO (820) (455)
cost
$18,918 $24,912
3. Property, Plant and Equipment, Net
Property, plant and equipment, net at December 31, includes the following:
1996 1995
Land and improvements $ 1,312 $ 1,211
Buildings and improvements 11,869 11,567
Machinery and equipment 129,747 121,819
142,928 134,597
Less: Accumulated depreciation (72,717) (63,541)
$70,211 $71,056
4. Advance to Parent
On December 5, 1996, the Company advanced $3,000 to Lancer and anticipates
repayment during February 1997. This advance has been classified as a
component of stockholder's equity (deficit) at December 31, 1996, at which
date the related accrued interest was $27.
5. Accrued Liabilities
Accrued liabilities at December 31, are as follows:
1996 1995
Compensation and employee $5,970 $6,602
benefits
Accrued retirement and 3,002 1,750
postemployment costs
Interest payable 5,021 5,187
Other 4,189
3,985
$18,182 $17,524
6. Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. The benefits are based on years of
service and the employee's earnings preceding retirement. The Company's
funding policy is to contribute each year an amount at least equal to the
minimum required contribution as defined by the Employee Retirement Income
Security Act of 1974. Assets of the plan are principally deposit
administration insurance contracts. The projected benefit obligation has
been determined by using the projected unit credit method.
Net pension cost for years ended December 31, consists of:
1996 1995 1994
Service cost - benefits earned $1,387 $1,180 $1,427
during the period
Interest cost 2,862 2,626 2,440
Actual return on plan assets (2,043) (3,061) (764)
Net amortization and deferral (317) 906 (1,438)
Net pension cost $1,889 $1,651 $1,665
The plan's funded status and amounts included in the December 31 balance
sheets based upon actuarial valuations at October 1, 1996 and 1995 are:
1996 1995
Actuarial present value of benefit obligation:
Vested benefits $27,420 $25,115
Nonvested benefits 1,984 1,651
Accumulated benefit obligation 29,404 26,766
Effect of projected future compensation 13,568 12,995
increases
Projected benefit obligation 42,972 39,761
Plan assets at fair value 31,349 30,493
Projected benefit obligation in excess of plan 11,623 9,268
assets
Unrecognized gain 33 1,084
Unrecognized prior service cost (1,921) (2,111)
Accrued liability included in balance sheet $9,735 $8,241
Assumed discount rate 7.25% 7.25%
Assumed long-term return on plan assets 8.5% 8.5%
The Company has a contributory defined contribution savings plan which
covers all of its eligible employees. Eligibility in the plan is obtained
the month following hire with no minimum age requirement. A participant
may make a basic contribution to the plan ranging from 2% to 6% of the
participant's salary and a supplemental contribution of 2%, 4%, or 6% of
the participant's salary. The Company matches 70% of the participant's
basic contribution. Expense recognized each of the years ended December
31, 1996, 1995 and 1994 was $1,356, $1,238 and $909, respectively.
In addition to pension and savings plan benefits, the Company provides
limited health care and life insurance benefits for certain retired
employees.
Effective January 1, 1994, the Company amended its postretirement medical
plan. The plan amendment changed the eligibility provisions to be age 60
with 15 years of service for all active employees.
Net periodic postretirement benefit cost for years ended December 31,
includes the following components:
1996 1995 1994
Service cost $ 332 $257 $251
Interest cost 656 587 534
Unrecognized net loss 214 78 48
Prior service cost (63)
(63) (63)
$1,139 $859 $770
The actuarial and recorded liabilities for these postretirement benefits,
none of which have been funded, are as follows at December 31:
1996 1995
Actuarial present value of postretirement
benefit obligation
Retirees and dependents $5,817 $5,023
Active employees eligible to retire and receive 840 654
benefits
Active employees not yet eligible to retire and 2,939 2,390
receive benefits
Total accumulated postretirement benefit 9,596 8,067
obligation
Unrecognized loss (3,118) (1,941)
Unrecognized prior service cost 314 376
Accrued postretirement benefit liability $6,792 $6,502
included in balance sheet
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for both 1996 and 1995. The
health care cost trend rate is not a factor in the calculation of the
accumulated postretirement benefit obligation as the plan limits benefits
paid to retirees to a lifetime maximum amount per retiree. Claims in
excess of this amount are the responsibility of the retiree.
The Company provides postemployment benefits to certain former and inactive
employees. The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" as of the beginning of fiscal 1994. This
accounting standard requires the accrual of the cost of postemployment
benefits over the employees' years of service rather than accounting for
such costs on a cash basis. A one-time cumulative adjustment of $1,900
($1,554, net of tax) was recognized as of the beginning of fiscal 1994.
Net periodic postemployment benefit cost for years ended December 31,
included the following components:
1996 1995 1994
Service Cost $115 $131 $75
Interest Cost 157 349 98
$272 $480 $173
The recorded liabilities for these postemployment benefits, none of which
have been funded, are $1,894 and $1,765 at December 31, 1996 and 1995,
respectively.
7. Income Taxes
The Company files separate state income tax returns and is included in the
consolidated federal income tax return of its parent company, Lancer. The
Company and Lancer have entered into a Tax Sharing Agreement under which
the Company is required to calculate its federal income tax liability on a
separate return basis. Accordingly, the Company has also calculated its
credit/expense equivalent to benefit/provision for federal income taxes on
a separate return basis.
The (credit)/expense equivalent to (benefit)/provision for income taxes
each of the three years in the period ended December 31, consists of:
1996 1995 1994
Current, principally federal $3,900 $6,698 $2,545
Deferred, principally federal (170) (1,178) (3,055)
$3,730 $5,520 $(510)
The credit equivalent to benefit for income taxes for 1994 results
principally from the reversal of previously provided deferred taxes. The
expense equivalent to provision for income taxes for 1996 and 1995 results
principally from current year operating results.
A reconciliation of the expected (credit)/expense equivalent to
(benefit)/provision for income taxes at the statutory federal income tax
rate and the actual tax benefit/provision each of the three years ended
December 31, is as follows:
1996 1995 1994
Amount % Amount % Amount %
Expected total tax $2,677 35.0% $4,351 35.0% $(953) (34.0)%
benefit/provisio
n at statutory
rate
State taxes, net of 231 3.0 626 5.0 (277) (9.9)
federal
Non-deductible 555 7.3 555 4.4 540 19.3
amortization on
excess of
investment over
net assets
acquired
Other, net 267 3.5 (12) (0.0) 180 6.4
$3,730 48.8% $5,520 44.4% $(510) (18.2)%
Deferred income taxes applicable to temporary differences at December 31,
are as follows:
1996 1995
Current:
Inventory basis difference $(6,317) $(5,634)
Employee benefits 1,288 1,456
Other, net 1,229 (522)
Total current deferred tax liability, (3,800) (4,700)
net
Long-term:
Inventory basis difference 626 515
Property, plant and equipment basis (18,952) (18,547)
difference
Employee benefits 7,381 6,412
Other, net 362
(1,043)
Total long-term deferred tax liability, (11,988) (11,258)
net
Total deferred tax liability, net $(15,788 $(15,958)
)
Under the Tax Sharing Agreement between the Company and Lancer, the Company
is required to pay Lancer an amount equal to the Company's current federal
income tax liability calculated on a separate return basis. To the extent
such tax liability is reduced by the Company's utilization of Lancer's
available tax benefits, Lancer is required to reimburse the Company for 50%
of the amount of such reduction by making a capital contribution to the
Company. Lancer made capital contributions to the Company of $1,580,
$2,503, and $1,060 during 1996, 1995 and 1994, respectively.
8. Long-Term Debt
Long-term debt consists of the following at December 31:
1996 1995
Senior Term Credit $33,000 $21,000
Senior Revolving Credit -- 7,000
Senior Subordinated 85,000 85,000
Notes
118,000 113,000
Less current maturities
(3,000) (3,000)
$115,000 $110,000
The future maturities of long-term debt as of December 31, 1996 are as
follows:
1997 $3,000
1998 4,000
1999 7,000
2000 19,000
2001 85,000
$118,000
The Company's Senior Subordinated Notes (the "Notes") bear interest at a
rate of 11 3/8% and mature on July 1, 2001. The Notes are redeemable at
the option of the Company, in whole or in part, on or after July 1998 at
certain specified redemption prices.
Concurrent with the issuance of the Notes, the Company entered into a loan
agreement with a senior lending institution which provides for a Revolving
Credit Facility and a Term Loan (together, the "Credit Facilities"). The
loan agreement was amended during December, 1996. The amendment increased
the Term Loan to $33,000 and is payable quarterly through December, 2000.
The Revolving Credit Facility permits the Company to borrow up to $20,000
subject to borrowing base availability (as defined) and, at the option of
the Company (subject to certain conditions), may be increased by an
additional $2,000 at December 1996 increasing to $5,000 by December 1997.
The Revolving Credit Facility matures on July 1, 2001. Interest under the
Credit Facilities is payable at varying rates based on prime or Eurodollar
rates. At December 31, 1996, the Eurodollar rate loans ranged from 7.64%
to 7.91% resulting in a weighted average rate of 7.83%. The unused
Revolving Credit Facility at December 31, 1996, net of $698 of outstanding
letters of credit, was $19,302.
Borrowings under the Credit Facilities are collateralized by substantially
all the assets of the Company, including the assignment of all leases and
rents and a pledge of the outstanding common stock of the Company. The
Credit Facilities and the Notes contain various restrictive covenants that,
among other restrictions, require the Company to maintain certain financial
ratios. The December 1996 amendment provides for the payment of dividends
under the same provisions as the Notes.
9. Stockholder's Equity
Merger
On March 31, 1995 the Company and Holdings merged with and into Central
Alabama Grain Company, Inc. ("CAG"), a wholly-owned, non-operating
subsidiary of Lancer, with CAG continuing as the surviving corporation of
the mergers. Upon completion of the mergers, CAG vested in all of the
estate, property, rights, privileges, powers and franchises of the Company
including T-H Licensing, Inc., its wholly-owned subsidiary. CAG assumed
all obligations and liabilities of the Company. All of the Company's
officers and directors became officers and directors of CAG. Concurrent
with the merger, CAG changed its name to Fairfield Manufacturing Company,
Inc.
Issuance of Common Stock
The Company issued 25,000 additional shares of its common stock on March
31, 1996, 51,000 shares on June 30, 1996, 23,000 shares on September 30,
1996, and 30,000 shares on December 31, 1996, to Lancer in consideration of
certain capital contributions made by Lancer to the Company pursuant to the
Tax Sharing Agreement and other capital contributions.
Dividend
On December 5, 1996, the Company, with the approval of its senior lender,
declared and paid a dividend of $17,000 to Lancer.
10. Other Financial Data
Operating Leases
The Company is obligated to make payments under noncancellable operating
leases expiring at various dates through 2000.
Future minimum payments by year, and in the aggregate, under operating
leases consist of the following at December 31, 1996:
Year Minimum Rental
1997 $372
1998 355
1999 321
2000 241
$1,289
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$446, $698, and $974 respectively.
Equity Participation Plan
The Company maintains an Equity Participation Plan (the "Plan") which
provides for the award of up to an aggregate of 180,000 Equity
Participation Rights ("Rights") to certain current and past officers and
key employees. At December 31, 1996, all 180,000 rights were granted and
have vested.
Under the Plan, each participant is entitled to receive, upon the
occurrence of a Trigger Event, (as defined below) and exercise of a Right,
an amount in cash equal to the difference between the fair market value of
a share of the Company's common stock on the date the Trigger Event occurs
and the initial value assigned to each Right. A Trigger Event means (a)
any of the following transactions which results in a change in control:
(i) a merger or consolidation of the Company with or into another
corporation; (ii) the sale or exchange for cash, securities or other
consideration of all or substantially all of the assets of the corporation;
or (iii) the sale or exchange for cash, securities or any other
consideration of all or substantially all of the outstanding common equity
of the Company or (b) the later of the fifth anniversary of the date the
Right was granted or the date the participant retires from the Company at
or after age 60.
Payments under the Plan may not exceed $1,320 in any fiscal year and $5,280
in the aggregate.
During the period that a stock appreciation right (or Right) is
outstanding, the ultimate amount of compensation inherent in the Right is
indeterminate. APB Opinion No. 25 and FASB Interpretation No. 28 require
interim calculations of the amount of compensation inherent in the stock
appreciation right. This amount is generally equal to the increase in the
fair market value since date of grant or award multiplied by the total
number of share or rights outstanding, regardless of the exercisable status
of the rights.
At December 31, 1996, 1995 and 1994 the exercise price exceeds estimated
fair market value of the Company's common stock. Accordingly, there has
been no compensation charged to earnings for this plan.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Fairfield Manufacturing Company, Inc.
Our report on the consolidated financial statements of Fairfield Manufacturing
Company, Inc. is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statement taken as a whole,
represents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
January 31, 1997
FAIRFIELD MANUFACTURING COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the three years ended December 31, 1996
(in thousands)
Balance Charged Charged Balance at
Description at to to Deduction End of
Beginning Costs other s Period
of Period and Account
Expense s
s
1996
Allowance for $600 $520 -- $(520) $600
doubtful
accounts
1995
Allowance for $500 $197 -- $(97) $600
doubtful
accounts
1994
Allowance for $352 $151 $9 $(12) $500
doubtful
accounts