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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended JANUARY 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
__________________ to ___________________
Commission file number: 1-5190
VARITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3091314
- -------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation)
672 DELAWARE AVENUE, BUFFALO, NEW YORK 14209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 888-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common stock U.S.A. New York Stock Exchange, Inc.
Unlisted trading privileges:
Boston Stock Exchange
Midwest Stock Exchange
Pacific Stock Exchange
Canada The Toronto Stock Exchange
Holland Amsterdam Stock Exchange
In the form of Dutch Bearer
Certificates
Securities registered pursuant to Section 12(g) of the Act:
None
--------------------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K./ /
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 AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 31, 1994 WAS APPROXIMATELY $1,841.1 MILLION.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31, 1994 WAS
43,966,162 SHARES.
Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
on June 2, 1994 are incorporated by reference in Part III of this report.
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VARITY CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business............................................................................. 2
Item 2. Properties........................................................................... 12
Item 3. Legal Proceedings.................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.................................. 14
Executive Officers of the Registrant............................................................. 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 16
Item 6. Selected Financial Data.............................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 8. Consolidated Financial Statements and Supplementary Data............................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 57
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 57
Item 11. Executive Compensation............................................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 57
Item 13. Certain Relationships and Related Transactions....................................... 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 58
SIGNATURES......................................................................................... 72
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UNLESS OTHERWISE INDICATED REFERENCES TO "COMPANY" MEAN VARITY CORPORATION AND
ITS SUBSIDIARIES AND REFERENCES TO "FISCAL" MEAN THE COMPANY'S YEAR ENDED
JANUARY 31 (E.G. FISCAL 1993 REPRESENTS THE PERIOD FEBRUARY 1, 1993 TO JANUARY
31, 1994).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Varity Corporation and its subsidiaries (the Company), founded in 1847, is a
major international industrial company with core manufacturing and distribution
businesses in automotive components, diesel engines and farm equipment. The
Company conducts and manages its businesses under three separate operating
groups: the Kelsey-Hayes Group (automotive components), the Perkins Group
(diesel engines), and the Massey Ferguson Group (farm equipment). The Company's
products are marketed in more than 160 countries.
KELSEY-HAYES GROUP
AUTOMOTIVE PRODUCTS
The Company's automotive products segment primarily supplies systems and
components to domestic and foreign manufacturers of passenger cars and light
trucks, as well as medium and heavy duty trucks and trailers. The Company
acquired Dayton Walther, a major manufacturer of engineered products for the
medium and heavy duty truck and trailer industries in December 1986. On
November 30, 1989, the Company acquired K-H Corporation and its subsidiary,
Kelsey-Hayes Company (Kelsey-Hayes). Following the acquisition, the Company
took actions to reduce employment levels, reorganize the business unit and
management structure of Kelsey-Hayes and strengthen its international business
operations. The acquisition of Kelsey-Hayes expanded the Company's automotive
segment as part of a plan to reduce its dependence on the farm equipment
business. Kelsey-Hayes and Dayton Walther comprise the automotive products
segment and are referred to herein as the Kelsey-Hayes Group. The most
significant automotive products manufactured and marketed by the Kelsey-Hayes
Group are anti-lock braking systems (ABS), disc and drum brakes, disc brake
rotors, hubs, drums, electromechanical sensors and power door lock actuators for
passenger cars and light trucks.
Kelsey-Hayes is a leading producer of brake components for passenger cars and
light trucks. The Company believes that Kelsey-Hayes is one of the leaders in
the production of ABS, supplying both two-wheel and four-wheel systems. Kelsey-
Hayes is the leading manufacturer of two-wheel ABS in North America for light
trucks. Kelsey-Hayes has been successful in developing new ABS products for
both light trucks and passenger cars and recently introduced a new generation of
four-wheel ABS that is compatible with virtually any size passenger car or light
truck and any brake configuration. In order to meet increased North American
ABS demand, the Company commenced construction of a new plant in Fowlerville,
Michigan during fiscal 1993 which is expected to begin production in mid-1994.
In addition, the Company believes that Kelsey-Hayes is also one of the leaders
in the production of foundation (conventional) brakes, and benefits from its
strategic position as a major supplier of both ABS and foundation brakes for
light trucks, vans and sport utility vehicles as North American production of
these vehicles grew 15% in fiscal 1993.
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The Company owns 46.3% of the outstanding common stock of Hayes Wheels
International, Inc. (Hayes Wheels), which the Company believes is the largest
supplier of cast aluminum wheels in Europe, the second largest supplier of cast
aluminum wheels in North America and the largest independent supplier of
fabricated steel wheels in North America. Prior to December 1992, Hayes Wheels
conducted its automotive wheels systems business jointly with the automotive
brakes systems business of Kelsey-Hayes. In December 1992, Hayes Wheels sold,
in separate public offerings, debt securities and common stock, decreasing the
Company's ownership interest in Hayes Wheels from 100% to 46.3%. As a result,
Hayes Wheels is no longer consolidated with the Company for accounting purposes
and the Company accounts for its investment in Hayes Wheels using the equity
method of accounting. The Company believes that its ownership in Hayes Wheels
comprises an important and continuing portion of the Kelsey-Hayes Group.
AFTERMARKET PARTS
The aftermarket parts business consists of the Kelsey Parts business, which
supplies maintenance and repair parts for many brands of passenger cars and
light truck products. In connection with the Company's divestiture of certain
non-core businesses, on December 31, 1992 the Company sold Dayton Parts, Inc., a
supplier of maintenance and repair parts for heavy trucks.
INTERNATIONAL
The operations outside the U.S., including those of Hayes Wheels, are conducted
through various foreign companies in which the Group's interest ranges from
minor to complete control. International manufacturing operations are located
in Canada, Italy, Mexico, Spain, Venezuela and the Czech Republic. The Kelsey-
Hayes Group licenses its patents, designs, manufacturing technology and know-how
in a number of other foreign countries.
During the first quarter of fiscal 1993, the Company sold its majority
interest in Brembo Kelsey-Hayes, S.p.A., an Italian specialty producer of high
performance disc brakes and rotors, in connection with the Company's program to
divest non-core businesses. Expanding its international position during fiscal
1993, Kelsey-Hayes established a European ABS marketing and technical center in
Wiesbaden, Germany and commenced construction of a new plant in Heerlen,
Netherlands for production of ABS. Production at this plant is scheduled to
commence in mid-1994.
COMPETITION
Suppliers to original equipment manufacturers (OEMs) operate under highly
competitive conditions. Certain OEMs are capable of producing products supplied
by the Kelsey-Hayes Group. The Kelsey-Hayes Group competes directly with the
OEMs as well as many other suppliers with respect to price, quality, delivery
and technical ability in developing products. The Company believes that, as a
result of its manufacturing and engineering expertise, combined with an ongoing
emphasis on cost control and quality, it has the ability to compete effectively
with the OEMs and with other suppliers. With respect to brake components, the
Kelsey-Hayes Group has over 15 substantial competitors, most of which are large
and diversified concerns. Kelsey-Hayes estimates that its share of the North
American four-wheel ABS market grew from 16% in 1992 to 20% in 1993 and is
projected to increase in future years in this growth market, based on awarded
contracts. Kelsey-Hayes estimates that its share of the North American
foundation brake market (excluding OEM captive manufacturers) on a unit basis
grew marginally to approximately 35% in 1993.
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MARKETING AND DISTRIBUTION
Most of the Kelsey-Hayes Group's sales of automotive products are made directly
to OEMs, with the remainder sold largely to replacement part distributors.
Sales by the Kelsey-Hayes Group to its three major customers, General Motors
Corporation (GM), Ford Motor Company (Ford) and Chrysler Corporation (Chrysler),
accounted for 80% of the Kelsey-Hayes Group's consolidated net sales in fiscal
1993, with Ford being the largest customer during this period (34% of the
Kelsey-Hayes Group's consolidated net sales). Sales to all OEMs accounted for
approximately 99% of the Kelsey-Hayes Group's fiscal 1993 revenues. Although
the loss of all or a substantial portion of sales to its major customers, GM,
Ford or Chrysler, would have a serious adverse effect on its business,
management believes that such a loss is unlikely because: the Kelsey-Hayes Group
has been doing business with each of these companies for many years; sales to
these companies are comprised of a number of different products and models or
types of the same products, the sales of which are not dependent on each other;
and sales of many products are made to individual divisions and subsidiaries of
each of these companies and are not dependent upon sales to other divisions or
subsidiaries of the same company.
MARKET OVERVIEW
Sales of the Kelsey-Hayes Group's automotive products are primarily dependent on
the overall level of North American passenger car and light truck production,
which, in turn, is sensitive to the overall level of United States economic
activity. Moreover, sales of passenger cars and light trucks have, in the past,
been adversely affected by recessionary business conditions and increases in the
general level of interest rates. The level of economic activity in the United
States was generally strong during 1993 as interest rates declined while North
American production of cars and light trucks continued its recovery from the
depressed 1991 levels. A prolonged downturn in the overall level of United
States economic activity or a significant increase in the general level of
interest rates or increased competition from imported products or a prolonged
strike at one or more of its major customers would adversely affect the Kelsey-
Hayes Group. The Kelsey-Hayes Group continues its efforts to increase its
global presence and to lessen dependence on North American car and light truck
production.
PERKINS GROUP
DIESEL ENGINES
Through the Perkins Group, the Company designs, produces and markets a
comprehensive array of multi-cylinder water-cooled diesel engines in the 50 to
1,500 horsepower range and markets small diesel engines in the 7 to 45
horsepower range purchased from independent Japanese suppliers. The intended
uses and markets for the engines vary widely among the configurations of the
particular engines. The Company adapts these basic engines to meet the specific
requirements of its diverse customer base. The Perkins Group's engines are used
as original equipment in virtually every application for which diesel engines
are suitable, including agricultural tractors, industrial and construction
machinery, material handling equipment, generators, passenger cars, trucks,
vans, buses and other commercial vehicles, pleasure and commercial boats,
armored personnel carriers and battle tanks. The Perkins Group, together with
its associate companies and licensees, is one of the leading producers of diesel
engines other than those used as original equipment in passenger cars.
Fully assembled engines, all of which are manufactured by the Perkins Group
in the United Kingdom, are widely marketed by the Perkins Group, primarily to
OEMs and are installed in the Company's agricultural tractors. In fiscal 1993,
10% of the Perkins Group's net sales were to the Massey Ferguson Group. These
sales are made at approximately the same prices charged to OEMs. In addition,
the Company has associate companies and licensees in 13 countries that
manufacture or assemble Perkins engines, often from kits sold to them by the
Company.
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The Perkins Group's customer base includes over 300 OEMs. The Company
believes that its associate companies and licensees sell to a similar number of
additional OEMs. The Perkins Group's 10 largest customers accounted for
approximately 47% of its net third party sales in fiscal 1993, including one
customer which accounted for approximately 12%.
In 1993, Perkins continued to build on a ten year supply agreement, commenced
in 1992, with Caterpillar Inc. (Caterpillar), the world's largest construction
and earth-moving machinery producer, as current year sales increased from the
first year of the agreement covering a range of engines for back-hoe and wheeled
loaders, road pavers and excavators. Aggregate sales over the ten year term of
the agreement could be up to $1.0 billion.
PARTS
The Company provides replacement parts for all of the engines that it sells.
The Company carries over 27,000 different replacement parts for diesel engines,
many of which it manufactures or assembles and the balance of which it obtains
from independent suppliers. In 1993, Perkins consolidated its parts warehouses
and opened a new parts distribution center in Manchester, England, managed by
Caterpillar Logistics Systems. The center, believed to be the most efficient of
its kind in Europe, operates its computerized order processing, retrieval and
shipment services 24 hours a day for customers around the world. Sales of parts
accounted for 17% of the Perkins Group's net sales in fiscal 1993.
COMPETITION
Most diesel engines are used by the engine manufacturer in other products
produced by it or its affiliates, including cars and trucks, agricultural
equipment and industrial machinery. Consequently, competition in the diesel
engine market is primarily for those customers that do not manufacture engines
for their own use. The Company competes for third-party sales directly with
other producers of diesel engines, which are either large companies conducting
business on an international scale, with full product ranges, or small or
medium-sized companies conducting business locally, often with a limited range
of products. The Company also competes indirectly with manufacturers of
gasoline engines. The Perkins Group's major competitors for third-party sales
of diesel engines worldwide are Klockner-Humboldt-Deutz AG (Deutz), Cummins
Engines Co. Inc., Caterpillar (generally for products not covered by the supply
agreement described above), Detroit Diesel Corporation and several Japanese
producers. Perkins estimates that its share of the Western Europe diesel engine
market, its primary market, has averaged approximately 12% of units sold over
the three year period from fiscal 1991 to fiscal 1993. The Company believes
that the most important competitive factor in the diesel engine market is the
ability to design and manufacture engines specially adapted to the needs of an
individual customer for a particular application. Quality, fuel efficiency,
after-sale servicing and pricing are also important, as is the ability to meet
increasingly stringent environmental requirements. The Company believes that
the Perkins Group competes effectively on all of these bases and compares
favorably with many of its competitors in its ability to design and manufacture
specialized engines and in its ability to meet environmental requirements.
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MARKETING AND DISTRIBUTION
Third-party sales of fully assembled diesel engines (mostly to OEMs) and third-
party sales of diesel engines replacement parts are made both directly by the
Company (primarily through sales offices in eight countries) and through a
worldwide network of approximately 4,000 independent distributors and dealers in
160 countries. To facilitate direct sales by the Perkins Group, and to a lesser
extent by its distributors and dealers, four of the Perkins Group's sales
offices also provide engine finishing services and other support. The Company
has a distributorship agreement covering North America with Detroit Diesel
Corporation which has significant distribution capabilities in North America.
Diesel engines manufactured or assembled by associate companies or licensees are
distributed by them, generally in their home countries. Distribution
arrangements in certain countries, which may involve those countries'
governments, prohibit the Company from effecting sales other than through
designated national distributors.
MASSEY FERGUSON GROUP
AGRICULTURAL TRACTORS
The Massey Ferguson Group's farm equipment operations principally involve the
design, manufacture and sale of agricultural tractors. The Massey Ferguson
Group offers a full line of agricultural tractors in the 16 to 190 horsepower
range. The Massey Ferguson Group and its competitors offer tractors in four
general sizes, based primarily on horsepower: compact, small, mid-sized and
large. The intended uses and markets for agricultural tractors vary
significantly among these sizes. With some overlap, the Massey Ferguson Group
has models targeted for each of these sub-markets.
The Massey Ferguson Group manufactures small, mid-sized and large tractors in
the United Kingdom and France and purchases compact tractors from an independent
Japanese producer. It also purchases certain tractors from an associate company
in Italy and from licensees in Brazil and Poland. These fully assembled units
are sold by the Massey Ferguson Group worldwide, with Western Europe comprising
its largest market. In North America, the Company appointed AGCO Corporation
(AGCO) as its exclusive, independent distributor in January 1993. Prior thereto
the Company marketed its products in North America through 1,350 independent
dealers. In addition, the Massey Ferguson Group has associate companies and
licensees in 15 countries that manufacture or assemble Massey Ferguson tractors,
which are generally sold locally.
The Company's tractors are marketed under the "Massey Ferguson" trade name
and are painted the Company's traditional red.
PARTS AND OTHER PRODUCTS
The Company provides replacement parts for all of the agricultural equipment
that it sells. The Company carries over 200,000 different parts for tractors
and other farm equipment, some of which it manufactures or assembles and the
balance of which it obtains from independent suppliers. In fiscal 1993, net
sales of these replacement parts represented 13% of the Massey Ferguson Group's
net sales.
Other products marketed by the Massey Ferguson Group include combine
harvesters, balers and other implements. The Company purchases small and mid-
sized combines from two European manufacturers, which it markets primarily in
Western Europe and in North America through AGCO under the "Massey Ferguson"
trade name. Additionally, the Company markets a rotary combine in North America
through AGCO which is sourced from an independent supplier in the United States.
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ASSOCIATE COMPANIES AND LICENSEES
Retail unit sales by associate companies and licensees represented approximately
70% of worldwide retail sales of Massey Ferguson branded tractors in fiscal
1993. Associate companies and licensees purchase components from the Company
ranging from a few parts to a substantially complete tractor. Substantially all
of the Company's revenue earned from its associate companies and licensees
arises from sales of these components.
The contractual arrangements between the Company and these other companies
generally provide that the associate company or licensee has the exclusive right
to sell the Massey Ferguson Group's tractors in its home country, but may not
sell these products in other countries. The Company generally licenses to these
associate companies and licensees certain technology, as well as the right to
use the Massey Ferguson Group's trade names.
FINANCE
In its farm equipment operations in Europe, the Company, like its competitors,
provides retail financing programs, primarily through its associate companies.
In January 1993, the Company formed a joint venture with AGCO which acquired
substantially all of the net assets of the Company's former North American
finance subsidiary (Agricredit) which provides retail financing to end users.
Subsequent to January 31, 1994, the Company sold its remaining 50% interest in
the joint venture to AGCO.
Most of the Company's sales of tractors and farm equipment outside North
America are made on payment terms customary in the industry, which generally
range from 60 to 90 days, although a limited amount of more extended wholesale
financing for distributors and dealers is provided by the Company in certain
instances.
COMPETITION
The Company's major competitors in the European tractor markets are New Holland
(the merged tractor operations of Fiat S.p.A. and Ford), Case IH, a subsidiary
of Tenneco Inc. (Case) and Deere & Company (Deere). In certain European
countries Xaver Fendt & Co., Regie Nationale des Usines Renault, Deutz and
Valmet Tractors Inc. have significant competitive positions. The Massey
Ferguson Group's major competitors in the North American tractor market are
Deere, Case and Ford. The Company, New Holland, Deere and Case generally are
the principal suppliers to the tractor markets in other regions of the world in
which the Company competes. The Company and its licensees are the leading
distributors of tractors in the developing third world. The Massey Ferguson
brand of tractors accounts for approximately 19% of the worldwide market for
agricultural tractors (excluding sales in the former Soviet Union, Eastern
Europe, China and under 40 horsepower units in Japan).
The Company believes that the principal competitive factors in farm equipment
sales are pricing, product performance, reliability and durability, the
availability of strong and conveniently located dealers, a reputation for after-
sale service and brand loyalty. The Company believes that the Massey Ferguson
Group is able to compete effectively in each of these areas.
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MARKETING AND DISTRIBUTION
Sales of fully assembled tractors and related spare parts outside of North
America are made through a network of approximately 3,000 independent dealers,
primarily in Western Europe, who effect retail sales to end users, and
approximately 100 independent national distributors, primarily located in the
rest of the world, who sell to dealers or, in some cases, directly to end users.
In North America, sales are made through the network of 1,100 independent
dealers of AGCO, the Company's exclusive, independent distributor, who sell to
end users. Tractors manufactured or assembled by associate companies or
licensees are distributed by them, generally in their home countries, and, in
some cases, the Company sells agricultural equipment directly to government
agencies. In certain countries where distribution is made through national
distributors, including associate companies or licensees, the distribution
arrangements, which sometimes involve the national government, prohibit the
Company from selling in that country except through the designated distributor
or prohibit the distributor from selling outside its country. Some dealers also
carry competing or complementary products of other manufacturers. Combines,
balers and other implements sold by the Massey Ferguson Group are distributed in
a similar manner through an overlapping network of dealers and distributors.
MARKET OVERVIEW
Since 1977, the agricultural equipment business experienced ten years of market
declines with worldwide industry retail unit sales of agricultural tractors
decreasing sharply from an estimated 887,500 units in fiscal 1977 to 611,000
units in fiscal 1986 (excluding sales in the former Soviet Union, Eastern
Europe, China and under 40 horsepower units in Japan). Between 1986 and 1990,
the worldwide agricultural tractor market remained relatively flat at
approximately 600,000 units but has declined each year since to approximately
520,000 units in 1993. As a result, the agricultural equipment market has been
characterized by overcapacity and periodic excess dealer and manufacturer
inventories. These developments have led to intense competition and periodic
price discounting which have further depressed profit margins throughout the
industry. The decline in the demand for agricultural equipment over these
periods has been due to various factors which have resulted in depressed farm
incomes and have discouraged farmers from replacing their farm equipment with
the same regularity as in the past. These factors have included a worldwide
recession and high interest rates in the early 1980s, changes in and uncertainty
as to various government agricultural policies and programs, limitations on the
availability of hard currency in certain countries, and generally falling
agricultural commodity prices and decreasing farm land prices in the United
States, Canada and parts of Western Europe.
The Company believes that the markets for agricultural equipment have
fundamentally changed over the last decade and does not expect that demand will
return to the levels of the late-1970s. Massey Ferguson is implementing a
strategic plan designed to improve earnings and asset performance over the next
few years. This plan includes an emphasis on Massey Ferguson's strength in
developing countries, strategic initiatives, such as the January 1993
distributorship agreement with AGCO, which will strengthen distribution
capabilities in North America, and continued aggressive cost reduction programs.
OTHER OPERATIONS
HYDRAULIC COMPONENTS
The Company also manufactures, through its Pacoma components operations,
hydraulic cylinders and hydraulic valves and, to a lesser degree, allied
equipment for producers of construction machines, agricultural and industrial
equipment and, more recently, for the automotive passenger car industry.
Pacoma's products, all of which are manufactured in Germany, are marketed by
Pacoma to over 80 OEMs and are installed in the Massey Ferguson Group's
agricultural tractors. In fiscal 1993, intercompany sales of Pacoma's products
accounted for 7% of Pacoma's total sales.
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In recent years, Pacoma has substantially decreased its dependence on the
agricultural equipment business by diversifying applications of its products and
expanding its third-party customer base. All third-party sales of components
are made directly by the Company to OEMs.
The principal competitive factors in the sale of hydraulic cylinders to third
parties vary by geographic area and application. In North America, where
hydraulic cylinders have generally been standardized, competition, particularly
in the agricultural equipment market, is based primarily on price. In Western
Europe, where most components purchased by third parties are manufactured
according to specific product requirements, competition is based primarily on
product performance, pricing and reputation in the industry. The Company
believes that, although there are many manufacturers of hydraulic cylinders for
the OEM agricultural equipment markets, it is one of a small number of
manufacturers with the ability to meet the more stringent quality and durability
standards of the OEM construction machinery market and the passenger car
industry.
POLYGON REINSURANCE
The Company's captive insurance subsidiary, Polygon Reinsurance Company Limited,
a Bermuda corporation, provides reinsurance for product liability, property,
business interruption and other risks arising from the Company's operations.
Because it offers reinsurance, the Company believes that primary insurance
coverage is more readily available to it and that, in certain instances, its
insurance premiums may be favorably affected.
BACKLOG
There is no significant backlog of unfilled equipment orders. Substantially all
of the unfilled equipment orders at any time are expected to be filled within
the following year.
INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
Information about the Company's operations and assets by industry segment and
geographic area for the years ended January 31, 1994, 1993, and 1992 appears in
Note 16 of the Notes to Consolidated Financial Statements and is included in
Part II on pages 47 through 49 of this Form 10-K. Sales by product are included
in Part II on page 56 of this Form 10-K.
EMPLOYEES AND LABOR RELATIONS
At January 31, 1994, the Company had approximately 13,000 full-time employees.
The Company's worldwide labor force is represented by approximately 30 labor
organizations. Employee-management relations vary from country to country.
Certain of the Company's production facilities are located in areas where
organized labor has traditionally been very active. The Company has experienced
strikes generally varying in length from two days to a month over the past three
years, primarily in Europe in connection with the renewal of collective
bargaining agreements and the Company's efforts to downsize or shut down
manufacturing facilities and to increase the efficient use of its labor force.
Due to the interdependence of the Company's diesel engine, agricultural tractor
and component operations, a strike at any single production facility could have
adverse effects on other Company operations.
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SOURCES AND AVAILABILITY OF COMPONENTS AND RAW MATERIAL
The Company purchases numerous components in its manufacturing operations. A
number of other significant components utilized in the Company's farm equipment
operations are supplied in large measure by other divisions of the Company,
including diesel engines manufactured in the United Kingdom and hydraulic
cylinders manufactured in Germany. While most components not produced by the
Company are available from a variety of sources, certain critical components are
produced by a small number of suppliers and may, in certain cases, be purchased
from a single source of supply. The unplanned loss of any of these single
sources of supply could have a significant adverse effect on those operations.
There are many sources of the raw materials and other component parts
essential to the conduct of the Company's operations readily available in
reasonable proximity to those plants utilizing such materials. The Company has
not experienced any significant supply problems for its operations for many
years and the Company does not anticipate any significant supply problems in the
foreseeable future.
RESEARCH AND DEVELOPMENT; PATENTS; TRADEMARKS
During fiscal 1993, 1992 and 1991 the Company expended $48.5 million, $41.4
million and $38.1 million, respectively, on research and development. Such
research and development expenditures have enabled the Company to upgrade its
existing product lines and introduce new products. The Company has a history of
developing new technology jointly with its suppliers or customers, particularly
for diesel engines. The cost of such programs with suppliers is reflected
mainly in unit costs and not necessarily in research and development
expenditures.
The Company owns numerous patents and trademarks and has patent licenses from
third parties relating to products and manufacturing methods. The Company also
grants patent and trademark licenses to others throughout the world. The
Company is the sole owner of certain advanced diesel engine fuel injection
technology and rights, in part by patent license. The Perkins Group is
obtaining additional patent protection with respect to this technology. The
Company believes that continued development of this technology will aid the
Perkins Group in its engineering design, production and sale of advanced diesel
engines. Various patents relating to the anti-lock brakes business have been
issued to Kelsey-Hayes and others, including its competitors. The Company
examines its own and its competitors' products to guard against infringement,
both on its own initiative and, where appropriate, in response to inquiries or
comments of others. The Company views its own patents and patent applications
as significant. Based on examination of its own and others' patents, available
existing technology and the ability to avoid infringement issues by engineering
design, the Company does not believe its business is materially impacted by
patents of others.
The Company regards its many trademarks as having significant value and as
being an important factor in the marketing of its products. The Company
believes that its most significant trademarks are "Kelsey-Hayes," "Perkins,"
"Massey Ferguson," "Dayton" and "Pacoma," as well as Massey Ferguson's triple
triangle and Kelsey-Hayes' design trademarks. The foregoing trademarks are
generally registered in the United States, Canada, the United Kingdom and a
number of other countries where the Company operates. In addition, the Company
owns numerous minor trademarks that are registered or for which a registration
application is pending. The Company's policy is to pursue trademark
registration wherever possible and to oppose infringement of its trademarks.
10
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ENVIRONMENTAL PROTECTION AND SAFETY LAWS
Environmental protection and safety laws in the countries in which the Company
manufactures and sells its products have a significant effect on product design,
but apply equally to competitors and have not had, nor are they expected to
have, a material adverse effect on the Company's competitive position. The
Company does not anticipate that the costs it expects to incur in order to meet
environmental and safety standards for its products or to satisfy environmental
standards relating to operation of its manufacturing and other facilities
imposed by various legislative bodies around the world will be materially
adverse to the Company.
IMPACT OF GOVERNMENT AGRICULTURAL POLICIES
Government agricultural policies and programs, particularly those of the United
States, Canada and the European Community (the EC), have had a substantial
impact on commodity prices and the levels of farm production and income in North
America and Western Europe which, in turn, have significantly affected demand
for farm equipment. Demand has also been affected by uncertainty as to whether
existing government programs will be continued. Generally, the United States,
Canada and the EC have attempted to respond to the depressed conditions in their
respective farm economies by instituting programs designed to reduce production,
through direct and indirect subsidies, selective sales of government-held
surpluses, "payment-in-kind" programs and the elimination from production of
acreage and livestock. The terms and duration of specific programs are
dependent on continued support by sponsoring governments and their
constituencies. The effect of these and other government policies on future
sales of agricultural equipment is uncertain.
The Company believes that the recent resolution of the General Agreement on
Trade and Tariffs (GATT) negotiations between the United States, the EC and
other countries may have a stabilizing influence on agricultural commodity
prices, and lead to a firming of some prices and a possible improvement in
agricultural incomes and demand for tractors. However, the Company views such
an improvement, if it occurs, as a longer term beneficial effect, with
relatively little short-term impact.
IMPACT OF OTHER GOVERNMENT POLICIES
The operations of the Company and its competitors are affected by other
government policies, such as those relating to interest rates, trade, the price
and availability of oil, and exchange and price controls.
The Company's production facilities are located principally in the United
States, the United Kingdom, France, Canada and Germany. There is a substantial
interdependence among some of the Company's facilities for finished products,
components and services, and therefore adverse local conditions in one country
could have an adverse effect on a substantial portion of the Company's
operations.
The Company's production costs are affected by conditions prevailing in the
countries in which its production facilities are located. The Company is
exposed to currency exchange risks in the transfer of goods and services between
countries. Exchange rate fluctuations also affect the Company's consolidated
financial reporting as a result of the translation of its financial statements
into U.S. dollars. The Company's production costs, profit margins, and
competitive position are materially affected by the strength of the currencies
in the countries where it manufactures goods relative to the strength of the
currencies in the countries where its goods are sold. To protect against
fluctuations in foreign currencies, the Company from time to time enters into
foreign exchange contracts, primarily to purchase or sell European currencies,
for periods generally consistent with the underlying transaction exposures.
11
<PAGE>
ITEM 2. PROPERTIES
The Company and its subsidiaries operate 17 manufacturing facilities in the
United States and Canada with aggregate space of approximately 3.0 million
square feet. There are also 5 facilities located in Europe with a total
manufacturing area of approximately 4.9 million square feet. All of these
facilities are owned by the Company. All of the Company's Canadian and European
manufacturing facilities are pledged to its lenders as well as facilities in the
United States related to the production of systems and components for the medium
and heavy duty truck and trailer industries.
The automotive products segment manufactures its range of products (e.g.
brake components, electromechanical auto components, etc.) at 17 locations in
North America aggregating approximately 3.0 million square feet and ranging in
size from approximately 500,000 square feet in Detroit, Michigan to 56,000
square feet in Carrollton, Kentucky. The locations of this segment's plants are
as follows:
Brighton, Michigan Kingsway, Ohio
Camden, Tennessee Milford, Michigan
Carrollton, Kentucky-2 Moraine, Ohio
Detroit, Michigan Mt. Vernon, Ohio
Fayette, Ohio Portsmouth, Ohio
Fenton, Michigan St. Catherines, Ontario
Fremont, Ohio Woodstock, Ontario-2
Jackson, Michigan
The engines segment manufactures diesel engines at two locations in England
(Peterborough and Shrewsbury) with a total space of approximately 2.1 million
square feet, the largest of which is approximately 1.8 million square feet.
The farm equipment segment has two plants, one in Coventry, England and one
in Beauvais, France. These facilities are used for manufacturing agricultural
tractors and occupy a total space of approximately 2.5 million square feet.
The other products segment, which presently includes the hydraulic cylinder
and valve manufacturing business, operates from a 313,000 square foot facility
in Eschwege, Germany.
The Company also operates 13 major parts warehouses in 9 countries, 9 of
which are leased. In addition, the Company owns or leases a number of other
properties in the United States, Canada, the United Kingdom and certain other
countries.
In general, the Company believes that its facilities are in good operating
condition and are suitable for their intended use. The Company's productive
capacity in the farm equipment segment currently exceeds demand and consequently
the facilities in this segment are not fully utilized. In order to meet
increased ABS demand in the United States and Europe within the automotive
products segment, the Company commenced construction of two new plants in fiscal
1993. These facilities, located in Heerlen, Netherlands and Fowlerville,
Michigan, are scheduled to begin production in mid-1994. In the remaining
segments, productive facilities are adequate for current production needs and
provide a reasonable margin for further growth and expansion in the underlying
businesses. The Company believes that its plants and equipment are adequately
insured.
Over the last five years, the Company has disposed of a number of its
manufacturing facilities as part of the rationalization of its businesses. It
continues to own several facilities no longer used in its operations which are
being held for development or sale.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
MASSEY COMBINES CORPORATION
In the case Howe et al. v. Varity Corporation and Massey-Ferguson Inc. (United
States District Court, Southern District of Iowa), plaintiffs, purporting to
represent a class of former salaried employees and retirees of Massey-Ferguson
Inc. (MF Inc.), commenced an action in October 1988 alleging that the defendant
corporations sought to avoid their contractual obligations to provide health and
insurance benefits and employment termination allowances by transferring the
plaintiffs to Massey Combines Corporation (MCC), a Canadian corporation, in
1986, which subsequently entered receivership in 1988.
The action asserts violations of the Employee Retirement Income Security Act
of 1974, breach of fiduciary duty, breach of contract, promissory estoppel,
wrongful interference with protected rights, and fraudulent misrepresentation.
Plaintiffs' motion for a preliminary injunction requiring extension of benefits
to retirees and disabled persons pending trial was granted by the lower court
but reversed by the appellate court as to retirees. The plaintiffs seek to
compel reinstatement of benefits, compensatory damages, punitive damages and
costs of the action. The jury on September 23, 1991 awarded two subclasses of
former employees of MCC and ten individuals formerly employed by MF Inc., $9.8
million in compensatory damages and $36 million in punitive damages against
Varity and MF Inc. On March 26, 1993, the court struck completely the punitive
damage award and reduced the compensatory damage award to $8.3 million. The
Company and plaintiffs have each appealed.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders for the quarter ended
January 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets out the names and ages of each of the executive
officers of the Company, their positions as of January 31, 1994, the date on
which they were appointed to such positions and their business experience during
the past five years:
<TABLE>
<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- ---- ----- --- ------------------- --------------------------
<S> <C> <C> <C> <C>
V.A. Rice..................... Chairman of the... 53... May 1980........... Same
Board & Chief
Executive Officer
V.D. Laurenzo................. Vice Chairman..... 54... March 1988......... Same
of the Board
& President
N.D. Arnold................... Senior Vice....... 45... August 1990........ Senior Vice President & Chief
President & Chief Administrative Officer --
Financial Officer March 1988 - July 1990.
P.N. Barton................... Vice President,... 54... March 1988......... Same
Strategic
Planning
& Development
F.J. Chapman.................. Vice President,... 54... March 1990......... Treasurer -- February 1989 -
Treasurer February 1990.
D.M. Chauvin.................. Group Chief....... 55... November 1993...... General Manager, Massey
Executive, Massey Ferguson Tracteurs
Ferguson Group Compagnie -- March 1990 -
November 1993. President
Directeur General, A.M.P. de
France -- February 1985 -
March 1990.
J.A. Gilroy................... Group Chief....... 57... February 1989...... Same
Executive,
Perkins Group
D.W. Gutow.................... Vice President,... 55... September 1990..... Vice President Tax, Norton
Tax Planning Co. -- June 1980 - August 1990.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- ---- ----- --- ------------------- --------------------------
<S> <C> <C> <C> <C>
B.E. Harvey.................. Vice President,.... 45... February 1991...... Vice President & Controller,
Executive Planning Operations -- March 1990 -
January 1991. Controller,
Operations -- February 1989 -
February 1990.
A.S. Rosen................... Vice President,.... 39... March 1991......... Vice President and Director,
Shareholder Value Wood Gundy -- July 1986 -
March 1991.
K.C. Shanahan................ Vice President,.... 45... January 1992....... Assistant Controller, Textron
Controller - Inc. -- June 1987 - January
Principal 1992.
Accounting
Officer
J.E. Utley................... Group Chief........ 53... August 1992........ Vice Chairman, K-H Corporation
Executive, & Vice President Strategic
Kelsey-Hayes Group Planning, Kelsey-Hayes
Company -- December 1989 -
August 1992. President and
Chief Operating Officer,
Kelsey-Hayes Company -- April
1988 - November 1989.
K.L. Walker.................. Vice President,.... 45... September 1991..... Senior Counsel, TRW, Inc.,
Legal and Secretary Engine Components Group
-- July 1984 - August 1991.
A.T. Williams................ Vice President,.... 47... February 1991...... Director Financial Analysis
Business -- November 1986 -
Performance January 1991.
</TABLE>
- ----------
(1) All positions shown are with the Company unless otherwise indicated.
(2) All executive officers are appointed by the Board of Directors of the
Company and serve at its pleasure.
(3) There are no family relationships between any of the executive officers,
directors or persons nominated for such positions and there is no
arrangement or understanding between any of the executive officers and any
other person pursuant to which he or she was selected as an officer.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WORLD HEADQUARTERS
672 Delaware Avenue
Buffalo, New York 14209-2202
Telephone: 716 888-8000
ANNUAL MEETING
The annual meeting of the Company's shareholders will be held on Thursday, June
2, 1994 in the Albright-Knox Art Gallery, 1285 Elmwood Avenue, Buffalo, New
York.
STOCK TRADING SYMBOL
Common: VAT
STOCK EXCHANGE LISTINGS
Common: New York, Toronto
Common stock has unlisted trading privileges on Boston, Midwest and Pacific
stock exchanges.
TRANSFER AGENT AND REGISTRAR
Mellon Securities Trust Company
120 Broadway
New York, New York 10271
Telephone 1 800 526-0801
1 412 236-8000
Telecommunications Devices for the Deaf
1 800 231-5469
DIVIDENDS
As long as any shares of Class II Series A Preferred Stock are outstanding,
unless all cumulative and "additional" dividends then payable on these shares
have been declared and paid or amounts set aside for payment, the Company may
not, without the prior approval of the holders of these shares:
1) declare or pay any dividends (other than stock dividends in shares of the
Company ranking junior to these shares) on any common or junior shares;
2) redeem, purchase or make any capital distribution in respect of any equal or
junior shares; or
3) issue any additional shares ranking as to capital or dividends prior to or
on a parity with these shares.
At this time all dividends now payable have been paid or set aside for payment.
STATISTICAL DATA
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
Number of registered
shareholders:
Common........................ 21,544 33,054
Preferred..................... 8 573
Shares outstanding
(thousands):
Common........................ 43,957 30,999
Preferred:
Class I..................... - 11,806
Class II.................... 2,001 2,001
</TABLE>
MARKET PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
Year ended January 31, 1994
----
Quarters HIGH LOW
------- -------
<S> <C> <C>
First $34 3/4 $25 3/4
Second $34 3/8 $26 7/8
Third $39 1/8 $33 1/8
Fourth $47 7/8 $36 1/4
<CAPTION>
Year ended January 31, 1993
----
Quarters High Low
------- -------
<S> <C> <C>
First $15 1/4 $12 1/8
Second $19 5/8 $13 5/8
Third $22 1/4 $17 3/8
Fourth $30 1/4 $18 1/2
</TABLE>
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA /(1)(2)/
The following selected financial data has been derived from the Consolidated
Financial Statements of the Company for the fiscal years 1993, 1992, 1991, 1990
and 1989.
The selected financial data should be read in connection with the Consolidated
Financial Statements and Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
Years ended January 31, 1994 1993/(3)/ 1992 1991 1990/(4)/
- -------------------------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Total sales and revenues.. $2,726 $3,375 $3,169 $3,616 $2,426
Income (loss) before
extraordinary loss and
cumulative effect of
changes in accounting
principles............... $ 76 $ 33 $ (178) $ 94 $ 94
- -------------------------- ------ ------ ------ ------ ------
Per share income (loss)
before extraordinary
loss and cumulative
effect of changes in
accounting principles:
Primary................. $ 1.80 $ .56 $(7.87) $ 3.06 $ 3.57
Fully diluted........... $ 1.73 $ .56 $(7.87)* $ 2.77 $ 3.11
* Anti-dilutive
- -------------------------- ------ ------ ------ ------ ------
Total assets.............. $2,028 $2,087 $3,180 $3,470 $3,352
Long-term debt............ $ 186 $ 305 $ 864 $ 793 $ 904
- -------------------------- ------ ------ ------ ------ ------
</TABLE>
(1) See Note 13 to the Consolidated Financial Statements included herein for
discussion of contingent liabilities and commitments.
(2) No cash dividends on common stock have been paid in any of the years in the
five-year period ended January 31, 1994.
(3) Amounts reported for January 31, 1993 reflect the sale of a majority
ownership in Hayes Wheels, the sale of substantially all of the net assets
of Massey Ferguson's North American distribution operations and the
formation of a joint venture that acquired substantially all of the net
assets of Agricredit.
(4) Amounts reported for January 31, 1990 reflect the acquisition of K-H
Corporation effective November 30, 1989.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Varity Corporation's consolidated financial results for the year ended January
31, 1994 (fiscal 1993) reflected a net loss of $71.5 million ($2.23 per share)
compared to net income of $27.0 million ($.32 per share) for fiscal 1992 and a
net loss of $178.0 million ($7.87 per share) for fiscal 1991. During the first
quarter of fiscal 1993, the Company recognized a one-time, non-cash $146.1
million charge ($3.98 per share) in connection with the adoption of two new
accounting standards as described in Note 1 of the Notes to Consolidated
Financial Statements. In addition, during fiscal 1993 the Company incurred an
extraordinary loss of $1.7 million ($.05 per share) with respect to the early
redemption of debt.
Fiscal 1992 results also were affected by several unusual items, including a
$23.6 million loss associated with the sale of a Massey Ferguson unit, a $17.3
million gain from the sale of a majority ownership in a Kelsey-Hayes subsidiary
and a $6.4 million extraordinary loss resulting from the early redemption of
debt. Excluding the effects of the aforementioned one-time accounting changes
and other non-recurring gains or charges, fiscal 1993 earnings rose to $76.3
million compared with $39.7 million in fiscal 1992.
Foreign exchange rate fluctuations between various European currencies and the
United States dollar can significantly affect the Company's reported results, as
a substantial volume of farm equipment products are sold into the United States
from Europe. A significant portion of costs associated with the farm equipment
segment and the engines segment are incurred at European manufacturing locations
in the United Kingdom and France. This cross-trading gives rise to exchange
gains and losses on individual transactions in different currencies.
As a result of exchange rate volatility, principally during fiscal 1992, the
average value of the U.S. dollar (utilized to translate foreign currency
revenues and expenses) for fiscal 1993 was 13% higher against the British pound
and approximately 7% higher against the other major European currencies compared
to such average values in fiscal 1992. As a result, the Company's sales and
related costs transacted in the foreign countries where the Company primarily
operates were at lower relative values than in the prior year, based on the
lower translation value of such foreign currencies. At January 31, 1994, the
value of the U.S. dollar was relatively stable against the British pound and
approximately 7% higher against the other major European currencies as compared
to values at the previous year-end. Accordingly, the Company's consolidated
assets and liabilities located in foreign countries (which are translated using
the respective year-end rates of exchange) are affected by the lower translation
value of such foreign currencies in comparison to the prior year, the impact of
which is reflected in the foreign currency translation adjustment account in
stockholders' equity in the Company's consolidated balance sheet.
The accompanying fiscal 1993 consolidated statement of operations is not
readily comparable to fiscal 1992 or fiscal 1991 as a result of the Company's
dispositions in the fourth quarter of fiscal 1992 of all or a portion of certain
businesses which are no longer included in the Company's consolidated results,
as is described more fully in Notes 14 and 15 of the Notes to Consolidated
Financial Statements. Significant declines in sales and revenues, cost of goods
sold, marketing, general and administration and interest, net are a direct
result of such dispositions. The ensuing segment operating review for fiscal
1993 as compared with fiscal 1992 addresses each group's remaining core
businesses in the context of its segment results.
18
<PAGE>
SEGMENT OPERATING REVIEW
<TABLE>
<CAPTION>
(Dollars in millions)
Fiscal 1993 Fiscal 1992 Fiscal 1991
----------- -------------------------------- ---------------
Actual Pro Forma/(2)/ Historical/(1)/ Historical/(1)/
----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales and revenues:
Automotive products (Kelsey-Hayes) $1,149 $ 969 $1,516 $1,354
Engines (Perkins) 702 744 744 717
Farm equipment (Massey Ferguson) 898 996 1,141 1,132
Other (Pacoma) 51 60 60 45
Eliminations (74) (86) (86) (79)
------ ------ ------ ------
Total $2,726 $2,683 $3,375 $3,169
====== ====== ====== ======
Operating income (loss):
Automotive products (Kelsey-Hayes) $ 90 $ 66 $ 133 $ 56
Engines (Perkins) 46 42 42 20
Farm equipment (Massey Ferguson) 8 10 4 (55)
Other (Pacoma) (2) (5) (5) (16)
------ ------ ------ ------
Total $ 142 $ 113 $ 174 $ 5
====== ====== ====== ======
</TABLE>
(1) Historical amounts reflect the fiscal 1993 presentation of no longer
reporting the finance companies as a separate segment, but
incorporating the limited remaining third party business directly into
the related manufacturing segment. This change in presentation had no
effect on total consolidated sales and revenues or on consolidated net
income, as reported, for fiscal 1992 or fiscal 1991.
(2) Automotive products segment information for fiscal 1992 is presented on
a pro forma basis to exclude $547 million of sales and revenues and $56
million of operating earnings of Hayes Wheels International, Inc.
(Hayes Wheels), Brembo Kelsey Hayes, S.p.A. (Brembo) and Dayton Parts,
Inc. (Dayton Parts). Subsequent to the Company's sale of its majority
ownership in Hayes Wheels, during the fourth quarter of fiscal 1992,
such operations are not consolidated and accordingly are not included
in the above segment information. The Company's 46% share of the
earnings of Hayes Wheels for the last month of fiscal 1992 and all of
fiscal 1993, excluding charges associated with first quarter fiscal
1993 accounting changes, is included in equity in earnings of
associated companies in the consolidated statements of operations.
Brembo and Dayton Parts were sold and as a result, did not contribute
to the Company's fiscal 1993 results. Automotive products results have
also been adjusted to reflect the impact of the incremental costs
associated with Statement of Financial Accounting Standard (SFAS) No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which was adopted in the first quarter of fiscal 1993, as if
it had been adopted at the beginning of fiscal 1992.
Farm equipment segment information for fiscal 1992 is presented on a
pro forma basis to exclude $145 million of sales and revenues and $3
million of operating losses of Massey Ferguson's North American
distribution operations which were sold during the fourth quarter of
fiscal 1992 and Agricredit, a diversified wholly-owned North American
equipment finance subsidiary, which was sold to a 50% owned joint
venture, during the fourth quarter of fiscal 1992. Pro forma amounts
have also been adjusted to reflect the impact of the incremental costs
associated with SFAS No. 106 as if it had been adopted at the beginning
of fiscal 1992.
19
<PAGE>
AUTOMOTIVE PRODUCTS
United States automobile and light truck demand during fiscal 1993 continued
to improve, as measured by a 9% increase in vehicle sales over the comparable
fiscal 1992 period, reflecting increased consumer confidence and a generally
stronger overall business environment. Correspondingly, North American
production of these vehicles, which incorporate Kelsey-Hayes' products and
influences the Company's automotive products segment, increased 12% during the
same period. Varity's automotive products segment benefitted from its
strategic position as a major supplier of anti-lock braking systems (ABS) and
foundation (conventional) brakes for light trucks, vans and sport utility
vehicles, as North American industry production of these vehicles increased
15% during fiscal 1993. As a result, the Company's automotive products
segment recorded sales of $1.1 billion in the current year, reflecting an
increase of 19% over pro forma fiscal 1992 levels, as adjusted for business
divestitures.
In addition to increased North American light vehicle production, higher
sales also resulted from expanded ABS installation rates in new vehicles,
replacement of two-wheel ABS with higher value four-wheel systems and strong
demand for foundation brake products, including the full year impact of
certain vehicle platforms launched in the fall of fiscal 1992.
The automotive products segment also includes sales of products for the
heavy duty truck and trailer market, which are produced by the heavy duty
brake group of Dayton Walther, a wholly-owned subsidiary of Kelsey-Hayes.
Sales of this unit benefitted from higher industry sales of 33% and 11% for
heavy duty and medium duty trucks, respectively, during calendar year 1993 as
compared to 1992.
Segment operating income in 1993 for the automotive products segment was
$90 million, up 36% from 1992 pro forma results of $66 million. Earnings
improved over the prior year as a direct result of the aforementioned
increased sales and the continued focus on implementing cost reductions and
productivity improvements. The current year's results were tempered, however,
by expenses associated with expanding capacity and pursuing new ABS business.
These expenditures included costs for establishment of the European ABS
marketing and technical center in Wiesbaden, Germany and the initial start-up
activities at the Heerlen, Netherlands and Fowlerville, Michigan ABS
manufacturing facilities, which are scheduled to commence production in mid-
1994. The majority of these expenditures were associated with product
engineering and vehicle testing activities to support customer programs.
In addition, operating margins in Kelsey-Hayes' foundation and heavy duty
brakes business were negatively influenced by higher costs from overtime and
outsourcing penalties as a result of increased demand for certain high-volume
vehicle platforms.
North American Kelsey-Hayes automotive segment engineering and product
development costs increased 9% during fiscal 1993, in support of various new
programs scheduled for launch in 1994 and beyond. These programs include the
four-wheel EBC-10 (tm) ABS system scheduled for production in mid-1994 and
another significant vehicle platform program which commences production in
early 1994 and encompasses both ABS and conventional brake products.
During fiscal 1992, United States automobile and light truck retail sales
increased 5% over the prior period, as consumer and business uncertainty
concerning the economy lessened. Correspondingly, industry vehicle production
increased 10% during the same period, with light truck production increasing
18%.
20
<PAGE>
As a result of the automotive products segment's concentration in light
truck products, sales increased 12% to $1.5 billion (before pro forma
adjustments) in fiscal 1992 from the prior year. Such sales increased 14%
when adjusted to include the sales of the segment's wheels business for the
full year in fiscal 1992. During the fourth quarter of fiscal 1992, the
Company sold a majority ownership in its Hayes Wheels business to the public.
The Company no longer consolidates the results of Hayes Wheels as it now
accounts for its 46.3% share of earnings on the equity basis. (Hayes Wheels'
sales amounted to $377.6 million during the approximately eleven month period
they were consolidated in fiscal 1992).
Underlying the increase in segment sales were higher ABS sales due to
increased vehicle production, improved market installation rates
(approximately 30% in 1992 as compared to approximately 16% in 1991) and a
mid-year conversion from two-wheel to higher value four-wheel ABS on several
vehicle platforms.
Foundation brake group sales also experienced significant growth during
fiscal 1992, due to higher industry automobile and light truck production and
the commencement of sales for several new brake component programs.
Additionally, a strong trailer market and gradually improving heavy and medium
duty industry truck sales favorably affected the heavy duty brakes group's
sales during fiscal 1992.
The automotive products segment recorded operating income of $133 million
during fiscal 1992 as compared to fiscal 1991 operating income of $56 million.
After eliminating the special fiscal 1991 restructuring charge for employment
reductions and other related actions, operating income was $106 million.
Earnings improvement to $133 million is primarily due to higher volumes and
benefits from the fiscal 1991 restructuring program.
ENGINES
Demand for diesel engines in the major market sectors in which the Company's
Perkins engines segment participates (agricultural, construction, industrial,
marine and automotive) remained soft during fiscal 1993 as manufacturers that
incorporate such equipment in their products experienced little increase in
demand, particularly in Europe. For Perkins this was largely offset by
increased United Kingdom sales, specifically in the agricultural and power
generation sectors, reflecting both sales to new customers, including several
international equipment producers, and increased sales to certain existing
accounts in connection with new applications for its engines. As a result,
total engines segment sales, adjusted to neutralize the effects of differing
foreign exchange rates between the periods, increased 8% to $702 million in
fiscal 1993 as compared with the prior year. (Reported engines segment sales
declined $42 million due to the lower translation value of the British pound
during fiscal 1993 versus fiscal 1992). Higher sales in the United Kingdom,
United States, Middle East and Far East offset lower volumes attributable to
the continuing difficult economic conditions in continental Europe, including
a prolonged downturn in its economy and an industrial slowdown affecting
demand in several key markets. In addition, sales of engines parts increased
approximately $11 million from the prior year primarily as a result of an
increase in military equipment repair activity.
Operating income in fiscal 1993 for the engines segment increased 10% to
$46 million as a result of higher exchange adjusted sales, productivity
improvements and continuing efforts to control costs, despite certain non-
recurring military sales in the prior year.
21
<PAGE>
Engines segment sales increased 4% to $744 million in fiscal 1992 as
compared to fiscal 1991. Despite relatively high exchange rate volatility
during fiscal 1992, the average value of the U.S. dollar (utilized to
translate foreign currency revenues) for fiscal 1992 was only 1% higher
against the British pound compared to the average rate in fiscal 1991. As a
result, fiscal 1992 sales, adjusted to neutralize the effects of differing
foreign exchange rates between the periods, increased only marginally more
than the 4% absolute dollar increase as compared to fiscal 1991. Sales to new
customers, wider applications for certain existing customers and sales of
engines for military equipment in connection with the United Nations Bosnian
relief efforts offset sluggish demand for engines due to recessionary economic
conditions.
Operating income in fiscal 1992 improved to $42 million from $20 million in
fiscal 1991 ($32 million after eliminating the fiscal 1991 restructuring
provision for employment reductions and other related actions). Operating
income benefitted from marginally higher sales, results from the fiscal 1991
restructuring program and ongoing cost reduction efforts. In addition, fiscal
1991 operating earnings were depressed due to a four week strike at Perkins'
main diesel engine factory in Peterborough, England.
FARM EQUIPMENT
Sales of farm equipment declined $243 million to $898 million in fiscal 1993,
as a result of certain transactions affecting comparability with the prior
year. During the fourth quarter of fiscal 1992, the Company sold
substantially all of the net assets of Massey Ferguson's North American farm
equipment distribution operations to AGCO Corporation (AGCO), primarily dealer
accounts receivable and inventories. Additionally, the Company and AGCO
formed a 50% joint venture that acquired substantially all of the net assets
of Agricredit, a diversified North American equipment finance company which
was previously wholly-owned by Varity. During fiscal 1992, the former North
American distribution operations contributed $103.0 million to consolidated
sales and revenues (primarily wholesale sales to dealers) for which the
Company had no corresponding sales in fiscal 1993. Similarly, Agricredit
contributed $42.0 million of revenue in fiscal 1992 for which no corresponding
current year revenue exists.
After adjusting fiscal 1992 sales and revenues for such business
divestitures, sales in the current year decreased $98 million. Further
adjusted to neutralize the effects of differing foreign exchange rates between
the periods, sales declined marginally by approximately $6 million, reflecting
the continuing decline in demand for agricultural tractors in many markets,
partially offset by an increase in aggregate market share.
Demand for tractors in Europe, the most significant market for the
Company's agricultural products, declined by 8% in fiscal 1993. The resultant
impact on Massey Ferguson was mitigated by relatively stable demand in France
and significant improvement in United Kingdom farm incomes and related
purchasing power. As a result of the Company's strong position in the United
Kingdom, Massey Ferguson's European market share rose from 9.6% in 1992 to
10.6% in 1993. Sales of unassembled tractor kits to licensees declined 13% in
1993 primarily as a result of economic downturns in Iran, Mexico and Pakistan,
partially offset by gains in Turkey. Third world markets continue to be
affected by a combination of political instability, funding availability
constraints and climate conditions. In North America, Massey Ferguson's
market share increased to 8% during the year, reflecting benefits of the 1992
distribution agreement with AGCO.
Operating income declined to $8 million in fiscal 1993 from $10 million in
1992 principally as a result of marginally lower exchange adjusted sales and
certain one-time charges relating to disposed operations and product lines.
22
<PAGE>
Total sales of farm equipment increased marginally in fiscal 1992 from the
prior year despite contracting worldwide demand, global economic recessionary
conditions and uncertainty over reforms in agricultural support programs.
Underlying market share increases in North America and increased sales of
unassembled tractor kits to licensees, most notably in Pakistan and Turkey,
contributed to the modest sales improvement. Foreign exchange translation
values were relatively constant between the two periods.
Farm equipment recorded operating income of $4 million in fiscal 1992 as
compared with an operating loss of $55 million in the prior year (income of
$28 million and a loss of $11 million after eliminating unusual charges for
business dispositions, employment reductions and other related actions,
respectively). Improved earnings were a function of marginally higher sales
and improved margins reflecting initial benefits of the fiscal 1991
restructuring program in addition to ongoing cost reduction efforts.
NON-SEGMENT OPERATING REVIEW
As a result of the adoption of several new accounting standards in fiscal
1993, the Company incurred a non-cash, one-time charge of $146.1 million,
primarily pertaining to postretirement benefits other than pensions.
In connection with the use of proceeds generated from a common equity
offering during fiscal 1993, the Company incurred an extraordinary loss of
$1.7 million on the early redemption of indebtedness consisting of redemption
premiums and the write-off of related unamortized debt issuance costs.
Similarly, the Company incurred a $6.4 million loss on the early redemption of
debt in fiscal 1992.
As a result of such debt redemptions, other repayments and business
divestitures during fiscal 1993 and the latter portion of fiscal 1992, the
Company significantly reduced its interest expense during the current year.
Interest expense in fiscal 1993 amounted to $35.8 million compared with $139.0
million in the prior year.
During the fourth quarter of 1992, the Company recognized a gain from the
sale of a majority ownership in a Kelsey-Hayes subsidiary amounting to $17.3
million. In accordance with SFAS No. 96, no provision for taxes was made at
the time of the transaction with respect to the gain due to the Company's
existing tax loss carryforwards. Subsequent to the transaction the Company
accounts for its investment in Hayes Wheels on the equity method of
accounting. Additionally, in fiscal 1992 the Company sold Agricredit to a 50%
owned joint venture and now accounts for this investment on the equity method.
As a result, equity in earnings of associated companies rose to $16.4 million
in fiscal 1993. Hayes Wheels and Agricredit contributed $11.5 million and
$4.3 million, respectively. Subsequent to January 31, 1994, the Company sold
its remaining 50% ownership in Agricredit to AGCO for an amount which
approximated the Company's carrying value of the investment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1993, the Company continued a series of actions, commenced in
the prior year, to strengthen its balance sheet, improve shareholder value and
enhance its competitive position in markets around the world. These actions
included a second quarter equity offering of previously unissued common stock
and the conversion, in the third quarter, of all the outstanding shares of
Class I Preferred Stock into common stock, eliminating an annual dividend
requirement of approximately $16 million.
A substantial portion of the proceeds of the 4.6 million share equity
offering at $32.75 a share was used to reduce long-term debt, primarily the
remaining public debt of Kelsey-Hayes. The remainder of the proceeds was used
to reduce short-term indebtedness in order to improve the Company's financial
flexibility to fund increased investment in its Kelsey-Hayes businesses.
23
<PAGE>
As a result of debt repayments in connection with funds from the equity
offering and the sale of Kelsey-Hayes' majority interest in Brembo, which was
completed during fiscal 1993, long-term debt outstanding at January 31, 1994
(including current maturities) decreased to $191.1 million from $334.6 million
at January 31, 1993. Short-term notes payable decreased by $59.4 million to
$68.0 million at January 31, 1994 from $127.4 million at January 31, 1993 as a
result of the use of proceeds from the aforementioned equity offering, further
increasing the Company's liquidity.
Unused long-term and short-term lines of credit at January 31, 1994 were
$97.6 million and $185.6 million, respectively. Management believes that
Varity, as a result of its continued strategic initiatives, will have improved
access to credit markets and that its credit facilities and cash flow from
operations will continue to be sufficient to meet its operating needs.
Certain of the Company's loan agreements provide for financial covenants
relating to such matters as the maintenance of specified financial ratios and
minimum net worth. Certain loan agreements also contain cross-default
provisions. At January 31, 1994 the Company and each of its subsidiaries were
in compliance with their financial covenants. Management expects that the
Company and each of its subsidiaries will remain in compliance during the year
ending January 31, 1995.
Receivables declined $12.3 million to $540.7 million at January 31, 1994
from $553.0 million at January 31, 1993. After adjusting for the sale of
Brembo and to a lesser extent, foreign exchange fluctuations, receivables
actually increased by approximately $20 million primarily due to strong sales
in the fourth quarter of fiscal 1993.
Inventories of raw materials, work-in-process and finished products
decreased to $257.6 million at January 31, 1994 from $271.1 million at January
31, 1993. After adjusting for the sale of Brembo and, to a lesser extent,
foreign exchange fluctuations, inventories actually increased by approximately
$13 million primarily due to routine adjustments in manufacturing schedules in
response to customer demand.
Net fixed assets increased $5.2 million to $602.3 million at January 31,
1994 from $597.1 million at January 31, 1993 due to capital additions
exceeding depreciation and disposals (primarily Brembo), partially offset by
marginal declines due to foreign exchange. Capital expenditures during fiscal
1993 and 1992 were $154.8 million and $105.9 million, respectively, and
depreciation and amortization were $84.8 million and $123.4 million,
respectively, for the same periods. Capital expenditures for fiscal 1994
should approximate $220 million, of which $74.0 million has been committed.
These expenditures will be mainly for the completion of construction of new
plants in the United States and the Netherlands for the production of ABS, in
addition to normal equipment replacements and operating improvements related
to reducing costs and increasing output.
Other long-term liabilities increased by $77.2 million to $382.4 million at
January 31, 1994 from $305.2 million at January 31, 1993, primarily due to the
recognition of the liability for postretirement benefits other than pensions
in the current year as is further described in Note 1 of the Notes to
Consolidated Financial Statements, offset in part by a decrease in certain
pension liabilities as a result of funding contributions made in fiscal 1993.
Pension and other postretirement benefit costs will increase in fiscal 1994
due to lower discount rates necessitated by declining interest rates in the
U.S. and elsewhere.
24
<PAGE>
Stockholders' equity increased by $82.2 million to $630.7 million at
January 31, 1994, as the increase in common stock of $143.7 million, resulting
from the current year equity offering was partially offset by the $71.5
million net loss due principally to the adoption of two new accounting
standards as described in Note 1 of the Notes to Consolidated Financial
Statements, in addition to preferred dividends paid of $10.4 million. The
decrease in preferred stock resulting from the current year conversion of
Class I Preferred Stock into common stock was offset by the issuance of
8,085,000 shares of common stock, net of transaction expenses.
Varity is primarily dependent on its subsidiaries to meet its cash
requirements. Varity's ability to obtain cash from its subsidiaries or to
transfer cash between subsidiaries is governed by the financial condition and
operating requirements of these subsidiaries, and in certain instances the
terms of loan agreements or similar agreements to which its subsidiaries are
parties. The Company has ongoing short-term cash requirements for working
capital, capital expenditures, dividends, interest and debt payments. The
Company believes that its cash requirements will be met through internally and
externally generated sources, existing cash balances and utilization of
available borrowing facilities.
As a result of the Company's actions over the past two years to reduce debt
and increase operating efficiencies, the Company's financial position and
liquidity have improved markedly. The Company believes these actions have
improved its access to capital markets and will better posture the Company to
finance investment in and expansion of the growth areas of its businesses. The
Company is exploring further opportunities to divest operations that do not
meet its strategic objectives, including farm equipment. The Company
anticipates any such transactions would further improve its liquidity and
financial flexibility, if and to the extent that such opportunities might be
realized in the future.
During the next five years the Company believes that its cash requirements
for working capital, capital expenditures, dividends, interest and debt
repayments will continue to be met through internally and externally generated
sources and utilization of available borrowing sources.
The Company, primarily through its automotive products segment, is involved
in a limited number of remedial actions under various federal and state laws
and regulations relating to the environment which impose liability on parties
to clean up, or contribute to the cost of cleaning up, sites on which their
hazardous wastes or materials were disposed or released. The Company believes
that it has made adequate provision for costs associated with known
remediation efforts in accordance with generally accepted accounting
principles and does not anticipate the future cash requirements of such
efforts to be significant. The Company has made no provision for any
unasserted claims as it is not possible to estimate the potential size of such
future claims, if any.
OUTLOOK
The Company believes that its automotive products segment is positioned to
benefit in fiscal 1994 from the improving conditions in the North American
automotive industry. The Company is also addressing the incremental cost
burdens it is experiencing as a result of increased production schedules.
Continued management actions and cost reduction efforts have positioned both
the engines and farm equipment segments to benefit when the European economy
improves, although the Company does not expect a major upturn in Europe during
fiscal 1994.
25
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts) Varity Corporation and subsidiaries
- --------------------------------------------- ------------------------------------
Years ended January 31, 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Total sales and revenues............................... $2,725.8 $3,374.5 $3,169.1
-------- -------- --------
Expenses:
Cost of goods sold................................... 2,261.3 2,744.5 2,636.1
Marketing, general and administration................ 277.2 358.1 350.7
Engineering and product development.................. 81.4 80.1 75.7
Interest, net (Note 8).............................. 35.8 139.0 150.6
Exchange losses ..................................... 0.3 3.2 9.8
Other (income) expense, net.......................... (2.7) (0.4) 3.0
Losses on sales of businesses and
other restructuring charges (Note 14).............. - 23.6 108.3
Non-recurring gain (Note 15)......................... - (17.3) -
-------- -------- --------
2,653.3 3,330.8 3,334.2
-------- -------- --------
Income (loss) before income taxes, earnings of
associated companies, extraordinary loss and
cumulative effect of changes in accounting
principles........................................... 72.5 43.7 (165.1)
Income tax provision (Note 3)......................... (12.6) (11.6) (12.9)
-------- -------- --------
Income (loss) before earnings of associated companies,
extraordinary loss and cumulative effect of
changes in accounting principles..................... 59.9 32.1 (178.0)
Equity in earnings of associated companies (Note 17)... 16.4 1.3 -
-------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles........... 76.3 33.4 (178.0)
Extraordinary loss (Note 8)............................ (1.7) (6.4) -
Cumulative effect of changes in accounting principles
(Note 1)............................................. (146.1) - -
-------- -------- --------
Net income (loss)...................................... $ (71.5) $ 27.0 $ (178.0)
======== ======== ========
Income (loss) attributable to
common stockholders................................. $ (81.9) $ 8.5 $ (196.5)
Per share data (Note 4):
Before extraordinary loss and cumulative effect
of changes in accounting principles:
Primary .......................................... $ 1.80 $ 0.56 $ (7.87)
Fully diluted .................................... $ 1.73 $ 0.56 $ (7.87)*
Extraordinary loss:
Primary .......................................... $ (0.05) $ (0.24) $ -
Fully diluted .................................... $ (0.05)* $ (0.24)* $ -
Cumulative effect of changes in accounting principles:
Primary .......................................... $ (3.98) $ - $ -
Fully diluted .................................... $ (3.98)* $ - $ -
Net income (loss):
Primary .......................................... $ (2.23) $ 0.32 $ (7.87)
Fully diluted .................................... $ (2.23)* $ 0.32 $ (7.87)*
</TABLE>
* Anti-dilutive
See accompanying notes to consolidated financial statements.
26
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- ------------------------------------------------------------ -----------------------------------
As of January 31, 1994 1993
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 55.2 $ 118.8
Marketable securities (Note 2)........................... 58.0 34.8
Receivables (Note 5)..................................... 540.7 553.0
Inventories (Note 2)..................................... 257.6 271.1
Prepaid expenses and other............................... 32.5 30.8
-------- --------
Total current assets........................................ 944.0 1,008.5
-------- --------
Investments in associated and
other companies (Note 17)................................ 129.5 130.5
Fixed assets:
Land and buildings....................................... 250.6 247.4
Machinery, equipment and tooling......................... 858.0 841.9
-------- --------
1,108.6 1,089.3
Accumulated depreciation and amortization................... (506.3) (492.2)
-------- --------
Net fixed assets............................................ 602.3 597.1
Other assets and intangibles (Note 6)....................... 352.6 350.4
-------- --------
$2,028.4 $2,086.5
======== ========
Liabilities
Current liabilities:
Notes payable............................................ $ 68.0 $ 127.4
Current portion of long-term debt (Note 8)............... 5.6 29.4
Accounts payable and accrued liabilities (Note 7)........ 752.2 758.3
-------- --------
Total current liabilities................................... 825.8 915.1
-------- --------
Long-term debt (Note 8)..................................... 185.5 305.2
Other long-term liabilities (Note 9)........................ 382.4 305.2
Minority interest in subsidiaries........................... 4.0 12.5
Contingent liabilities and commitments (Note 13)............
-------- --------
Stockholders' equity (Note 12)
Preferred stock - at stated value
(Liquidation value: 1994 - $37.6; 1993 - $275.6)........... 6.8 222.1
Common stock - at stated value
(Shares issued: 1994 - 43,957,126; 1993 - 30,998,848)...... 637.4 277.0
Contributed surplus......................................... 656.3 656.3
Deficit..................................................... (561.3) (479.4)
Foreign currency translation adjustment..................... (79.8) (75.3)
Pension liability adjustment (Note 10)...................... (30.5) (46.0)
Unrealized gains on marketable securities (Note 2).......... 1.8 -
Notes receivable from officer stockholders.................. - (6.2)
-------- --------
Total stockholders' equity.................................. 630.7 548.5
-------- --------
$2,028.4 $2,086.5
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Thousands of
shares outstanding Equity (Dollars in millions)
- ---------------------------------------------------- ------------------------------- ----------------------------
Preferred Stock Preferred Stock
-------------------- Common ----------------------------
Class I Class II stock Class I Class II
------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1991........................... 11,816 2,001 24,930 $ 215.5 $6.8
Officer notes receivable............................
Shares issued under Performance Equity Plan......... 47
Purchase of dissenting
shareholders' stock............................. (10) (2) (0.2)
Exercise of stock options........................... 13
Foreign currency translation adjustment.............
Dividends on Class I Preferred Stock................
Dividends on Class II Preferred Stock...............
Pension liability adjustment .......................
Net loss............................................
------- ----- ------ ------- ----
Balance, January 31, 1992........................... 11,806 2,001 24,988 215.3 6.8
Sale of common stock................................ 5,750
Shares issued under Performance Equity Plan......... 194
Exercise of stock options........................... 67
Foreign currency translation adjustment.............
Dividends on Class I Preferred Stock................
Dividends on Class II Preferred Stock...............
Pension liability adjustment .......................
Net income..........................................
------- ----- ------ ------- ----
Balance, January 31, 1993........................... 11,806 2,001 30,999 215.3 6.8
Officer notes receivable............................
Sale of common stock................................ 4,600
Exercise of stock options........................... 273
Class I Preferred Stock converted
to common stock................................. (11,806) 8,085 (215.3)
Foreign currency translation adjustment.............
Dividends on Class I Preferred Stock................
Dividends on Class II Preferred Stock...............
Pension liability adjustment .......................
Unrealized gain on marketable securities............
Net loss............................................
------- ----- ------ ------- ----
Balance, January 31, 1994........................... - 2,001 43,957 $ - $6.8
======= ===== ====== ======= ====
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Notes
Unrealized receivable
Trans- Pension gain on from Total
lation liability market- officer stock-
Common Contributed adjust- adjust- able stock- holders'
stock surplus Deficit ment ment securities holders equity
- ------ ----------- ------- ------- --------- ---------- ---------- --------
<C> <C> <C> <C> <C> <C> <C> <C>
$149.3 $656.3 $(291.4) $ 1.3 $(11.4) $ - $(6.4) $ 720.0
0.2 0.2
0.8 0.8
(0.2)
0.3 0.3
(30.1) (30.1)
(15.7) (15.7)
(2.8) (2.8)
0.6 0.6
(178.0) (178.0)
- ------ ------ ------- ------ ------ ---- ----- -------
150.4 656.3 (487.9) (28.8) (10.8) - (6.2) 495.1
119.6 119.6
6.2 6.2
0.8 0.8
(46.5) (46.5)
(15.9) (15.9)
(2.6) (2.6)
(35.2) (35.2)
27.0 27.0
- ------ ------ ------- ------ ------ ---- ----- -------
277.0 656.3 (479.4) (75.3) (46.0) - (6.2) 548.5
6.2 6.2
143.7 143.7
4.5 4.5
212.2 (3.1)
(4.5) (4.5)
(7.9) (7.9)
(2.5) (2.5)
15.5 15.5
1.8 1.8
(71.5) (71.5)
- ------ ------ ------- ------ ------ ---- ----- -------
$637.4 $656.3 $(561.3) $(79.8) $(30.5) $1.8 $ - $ 630.7
====== ====== ======= ====== ====== ==== ===== =======
</TABLE>
29
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- --------------------- -----------------------------------
Years ended January 31, 1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(71.5) $ 27.0 $(178.0)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization........................... 84.8 123.4 120.2
Gain on sales of fixed assets........................... (0.3) (3.8) (4.1)
Losses on sales of businesses and other
restructuring charges.................................. - 23.6 108.3
Non-recurring gain...................................... - (17.3) -
Deferred income taxes................................... 7.5 2.2 4.1
Equity in earnings of associated companies
in excess of dividends received........................ (15.9) (1.3) -
Extraordinary loss ..................................... 1.7 6.4 -
Cumulative effect of changes in accounting principles... 146.1 - -
Changes in:
Receivables........................................... (19.6) (53.3) 85.9
Inventories........................................... (13.3) 20.0 88.8
Prepaid expenses and other............................ 6.8 0.9 14.1
Accounts payable and accrued liabilities.............. 24.1 (37.5) (117.9)
Other long-term liabilities........................... (5.3) (20.7) (7.5)
----- ------ -------
Cash provided by operating activities.................... 145.1 69.6 113.9
----- ------ -------
Cash flows from investing activities:
Purchases of marketable securities........................ (52.9) (28.3) (52.1)
Proceeds from sales of marketable securities.............. 40.4 22.8 58.4
Origination of retail finance receivables................. - (209.9) (187.6)
Proceeds from retail finance receivables.................. - 197.5 194.2
Additions to fixed assets................................. (154.8) (105.9) (117.5)
Proceeds from sales of fixed assets....................... 14.1 15.4 13.8
Proceeds from sales of businesses......................... 33.6 146.4 -
Additions to investments.................................. (4.1) (20.3) (3.3)
Additions to other assets and intangibles................. (26.2) (15.2) (16.6)
Other..................................................... 0.5 (6.5) -
------ ------ -------
Cash used by investing activities........................ (149.4) (4.0) (110.7)
------ ------ -------
Cash flows from financing activities:
Proceeds from bank borrowings ............................ 108.7 335.6 260.7
Repayments of bank borrowings............................. (164.6) (392.6) (253.5)
Proceeds from long-term debt.............................. 89.3 661.5 814.4
Repayments of long-term debt.............................. (225.8) (822.3) (770.1)
Proceeds from sale of common stock........................ 143.7 119.6 -
Dividends paid............................................ (10.4) (18.5) (18.5)
Other..................................................... 0.1 (3.9) 0.8
------ ------ -------
Cash provided (used) by financing activities............. (59.0) (120.6) 33.8
------ ------ -------
Effect of foreign currency translation on
cash and cash equivalents.................................. (0.3) (11.8) (10.4)
------ ------ -------
Increase (decrease) in cash and cash equivalents
during the year............................................ (63.6) (66.8) 26.6
Cash and cash equivalents at beginning of year.............. 118.8 185.6 159.0
------ ------ -------
Cash and cash equivalents at end of year.................... $ 55.2 $118.8 $ 185.6
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Notes to Consolidated Financial Statements
Years ended January 31, 1994, 1993 and 1992
(Fiscal 1993, 1992 and 1991, respectively)
(Dollars in millions unless otherwise stated)
1. CHANGES IN ACCOUNTING PRINCIPLES
During fiscal 1993 the Company changed its method of accounting for income
taxes, postretirement benefits other than pensions, postemployment benefits and
marketable securities in accordance with several new Statements of Financial
Accounting Standards. Prior years' financial statements were not restated for
these changes.
Effective February 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 replaced SFAS No. 96 which the Company previously followed in
accounting for income taxes. The principal difference between SFAS No. 109 and
SFAS No. 96 is the ability, under SFAS No. 109, to record a deferred tax asset
for net operating loss and credit carryforwards, when its ultimate realization
is more likely than not. The adoption of SFAS No. 109 had no effect on the
Company's results of operations or financial condition.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective February 1, 1993. This standard
requires that the cost of postretirement benefits, primarily health care
benefits, be recognized over employees' active working lives. In prior years,
these costs were expensed as paid. The Company recorded the transition
obligation, which represents costs related to service already rendered by both
active and retired employees prior to fiscal 1993, as a cumulative effect of a
change in accounting principle. This one-time, non-cash charge was $126.7
million. (The Company did not record an associated income tax benefit from the
charge as tax operating losses in prior years diminish the Company's immediate
ability to demonstrate that it is more likely than not that such benefits will
be realized.) The Company will continue to follow its policy of funding
postretirement benefits when due. The adoption of this new standard had the
effect of increasing ongoing postretirement benefit expense for the year ended
January 31, 1994 by $4.8 million. In addition to the Company's adoption of SFAS
No. 106, the cumulative effect of changes in accounting principles in the
consolidated statement of operations includes a similar one-time charge ($11.4
million, net of tax benefit) for Hayes Wheels International, Inc. (Hayes
Wheels), a 46.3% owned affiliate.
Effective February 1, 1993, the Company changed its method of accounting for
postemployment benefits, in accordance with SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," to recognize a charge for such benefits when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. The adoption of SFAS No. 112 resulted in a one-time, non-cash $8.0
million charge which has been included within the cumulative effect of changes
in accounting principles in the Company's consolidated statement of operations.
Effective January 31, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 supersedes SFAS No. 12 which the Company previously followed in
accounting for marketable securities. SFAS No. 115 requires that debt and
equity securities not classified as either held-to-maturity securities or
trading securities be classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. The Company has
determined that its marketable securities portfolio at January 31, 1994 is
available-for-sale, as defined within the pronouncement, and has presented the
unrealized net gain on such portfolio as a separate component of stockholders'
equity.
31
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of all wholly and
majority-owned subsidiaries. Investments in associated companies in which the
Company's ownership interest ranges from 20 to 50% and over which the Company
exercises influence on operating and financial policies are accounted for using
the equity method (see Note 17). Other investments are accounted for using the
cost method. Significant intercompany balances and transactions have been
eliminated in consolidation.
Historically, the Company has presented detailed supplemental information
with respect to its finance subsidiaries. Such information is no longer
presented due to changes in the composition of finance subsidiaries owned by the
Company, which are now immaterial.
Certain reclassifications have been made to the fiscal 1992 and 1991
consolidated financial statements and notes to conform with the fiscal 1993
presentation.
(b) Cash Equivalents
Cash equivalents consist of liquid instruments with an original maturity of
three months or less.
(c) Marketable Securities
Effective January 31, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as described
in Note 1. The Company has determined that its marketable securities portfolio
at January 31, 1994 is available-for-sale, as defined within the pronouncement,
and has presented the unrealized net gain on such portfolio as a separate
component of stockholders' equity. Prior to the adoption of SFAS No. 115,
marketable securities were carried at cost, which approximated market value.
The cost, gross unrealized gains and losses and fair value of the Company's
marketable securities at January 31, 1994 follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair
Cost gains losses value
---------- ----------- ---------- -----
<S> <C> <C> <C> <C>
United States government bonds.. $15.0 $ .5 $ - $15.5
Corporate bonds................. 31.4 1.2 (.2) 32.4
Foreign government bonds........ 9.8 .3 - 10.1
----- ----- ----- -----
$56.2 $ 2.0 $ (.2) $58.0
===== ===== ===== =====
</TABLE>
The Company's marketable securities generally have contractual maturities
that are long-term in nature, the majority of which are due after January 31,
1997.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value with cost
determined primarily on the first-in, first-out basis. Cost includes the cost
of material, direct labor and an applicable share of manufacturing overhead.
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
Raw materials and work in process............ $107.4 $126.2
Finished goods............................... 150.2 144.9
------ ------
$257.6 $271.1
====== ======
</TABLE>
The Company's inventory systems do not permit the disaggregation of raw
materials from work in process.
32
<PAGE>
(e) Fixed Assets
Additions to fixed assets are recorded at cost. Depreciation of fixed assets is
generally provided on a straight-line basis at rates which are intended to
depreciate the assets over their estimated useful lives as follows:
Buildings ...................................................... 10 to 50 years
Machinery, equipment and tooling ............................... 3 to 12 years
Expenditures for maintenance, repairs and minor replacements of $36.6, $62.3,
and $59.3 million for fiscal 1993, 1992 and 1991, respectively, were charged to
expense as incurred.
(f) Goodwill
The excess of the acquisition cost over the aggregate fair value of the
underlying net assets of businesses acquired is amortized on a straight-line
basis over 40 years.
(g) Revenue Recognition
Sales are recorded by the Company when products are shipped.
(h) Research and Development Costs
Research and development costs, the majority of which are included in
engineering and product development expenses, are charged to expense as incurred
($48.5, $41.4, and $38.1 million for fiscal 1993, 1992 and 1991, respectively).
(i) Foreign Currency Translation
For most foreign subsidiaries, the local currency is considered the functional
currency. Assets and liabilities of these subsidiaries are translated at year-
end rates of exchange. Revenue and expense items are translated at average
rates of exchange for the year. Translation adjustments, including the
translation effect of intercompany transactions deemed permanent in nature, that
arise due to fluctuations in exchange rates are recorded directly in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the statements of operations.
(j) Income Taxes
Effective February 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes," as described in Note 1.
Deferred income taxes are provided on all significant temporary differences
and represent the tax effect of transactions recorded for financial reporting
purposes in periods different than for tax purposes.
(k) Financial Instruments
The carrying values of the Company's financial instruments at January 31, 1994
approximate their estimated fair values. The carrying amounts of cash and cash
equivalents and notes payable approximate fair value due to the short-term
maturity of such instruments. The carrying amount of marketable securities is
based on quoted market prices. The carrying amount of foreign exchange
contracts approximates fair value as all such contracts are revalued monthly
based on current exchange or forward rates, as applicable, and substantially all
have remaining contractual terms of six months or less. The carrying amount of
long-term debt approximates fair value based on the quoted market prices for the
same or similar issues, or the current rates offered to the Company for debt
with similar maturities and characteristics.
33
<PAGE>
3. INCOME TAXES
Effective February 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes," as described in Note 1.
Income tax provisions have been recorded in respect of the Company's results
of operations as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1994 1993 1992
----- ----- -------
<S> <C> <C> <C>
Income (loss) before income taxes, earnings
of associated companies, extraordinary
loss and cumulative effect of changes
in accounting principles:
United States.............................. $61.4 $20.7 $ (45.3)
Foreign.................................... 11.1 23.0 (119.8)
----- ----- -------
$72.5 $43.7 $(165.1)
===== ===== =======
Income taxes currently payable:
United States.............................. $ 1.3 $ .3 $ .5
Foreign.................................... 3.8 9.1 8.3
----- ----- -------
5.1 9.4 8.8
Deferred income taxes:
Foreign.................................... 7.5 2.2 4.1
----- ----- -------
Income tax provision......................... $12.6 $11.6 $ 12.9
===== ===== =======
</TABLE>
United States taxes represent federal income taxes. State income taxes are
not material.
The following table reconciles the 35%, 34% and 34% statutory United States
federal income tax rates for the years ended January 31, 1994, 1993 and 1992,
respectively, to the Company's effective tax rates:
<TABLE>
<CAPTION>
Years ended January 31, 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Income tax provision (benefit) at the
statutory rate.................................. $ 25.4 $ 14.9 $(56.1)
Increase (decrease) in income tax provision
attributable to:
Net effect of foreign tax rates................ (.7) 2.3 2.2
Permanent differences resulting from
purchase accounting........................... 2.2 4.4 3.6
Translation exchange adjustments............... (.7) (1.5) .4
Operating losses for which no benefit has
been provided................................. 13.4 14.5 68.4
Utilization of prior years' net operating
loss carryforwards............................ (30.9) (19.1) (9.5)
Other.......................................... 3.9 (3.9) 3.9
------ ------ ------
Income tax provision............................. $ 12.6 $ 11.6 $ 12.9
====== ====== ======
Effective tax rate............................... 17.4% 26.5% -
====== ====== ======
</TABLE>
34
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities recorded on the balance sheet as of January
31, 1994 and February 1, 1993, the date of adoption of SFAS No. 109, are as
follows:
<TABLE>
<CAPTION>
JANUARY 31, February 1,
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards....... $268.6 $290.3
Benefit plans................ 105.4 93.9
Liabilities and reserves..... 7.0 14.1
Other........................ 21.0 23.9
------ ------
Gross deferred tax assets... 402.0 422.2
Less: valuation allowance... 283.4 323.2
------ ------
Total....................... 118.6 99.0
------ ------
Deferred tax liabilities:
Fixed assets................. 81.9 79.7
Intangible assets............ 20.2 5.9
Investments and other........ 36.3 32.6
------ ------
Total....................... 138.4 118.2
------ ------
Net deferred tax liability.. $ 19.8 $ 19.2
====== ======
</TABLE>
The valuation allowance results principally from tax operating losses in
prior years which diminish the Company's immediate ability to demonstrate that
it is more likely than not that future benefits will be realized.
The Company's fiscal 1993 sale of its majority interest in Brembo Kelsey-
Hayes, S.p.A. substantially offsets the expected increase in net deferred tax
liability resulting from the current year's deferred income tax expense.
No provision has been made for United States federal or foreign taxes on that
portion of foreign subsidiaries' undistributed earnings ($57.7 million at
January 31, 1994) considered to be permanently reinvested. There would have
been no United States federal income tax liability had such earnings actually
been repatriated due to the Company's existing tax loss carryforwards, however,
upon repatriation, certain foreign countries would impose income and withholding
taxes, which in the aggregate would be immaterial.
Deferred income taxes for fiscal 1992 and 1991 resulted primarily from
differences in the depreciation methods used for financial reporting and tax
purposes, and certain business acquisition adjustments. Deferred income taxes
included in the consolidated balance sheets for those years are not material.
35
<PAGE>
At January 31, 1994, the Company had net operating loss carryforwards for tax
purposes aggregating approximately $740 million. These loss carryforwards are
principally in the United States, the United Kingdom and France, and expire as
follows: January 31, 1995 - $16 million; 1996 - $86 million; 1997 - $114
million; 1998 - $21 million and 1999 and beyond - approximately $503 million.
Applicable tax laws of the United States and other countries may limit
utilization of these losses, including United States federal operating loss
carryforwards in the amount of $96 million generated by certain subsidiaries
prior to their acquisition.
Cash payments for income taxes were $5.6, $6.1, and $15.2 million for fiscal
years 1993, 1992 and 1991, respectively.
4. PER SHARE DATA
Primary earnings per share of common stock have been calculated after deducting
dividend entitlements on preferred stock and using the weighted average number
of shares of common stock and dilutive common stock equivalents (stock options
and awards) outstanding. Fully diluted earnings per share of common stock have
been calculated using the fully diluted weighted average number of shares of
common stock outstanding, and include the dilutive effect, if any, of
convertible preferred stock outstanding.
In October 1993, the Company called for redemption all of the outstanding
Class I Preferred Stock at a redemption price of $20.00 a share. As each share
of Class I Preferred Stock was convertible into .6849 shares of the Company's
common stock and as the market price of such common stock was greater than
$29.20 per share, substantially all of the holders of such Class I Preferred
Stock converted their shares into the Company's common stock in lieu of
redemption. As a result of the foregoing the Company issued 8,085,000
additional shares of common stock. The fully diluted weighted average number of
shares of common stock outstanding assumes the conversion had taken place on the
first day of fiscal 1993.
Additionally, in June 1993 and December 1992, the Company sold, through
separate public offerings, 4,600,000 and 5,750,000 shares, respectively, of
previously unissued common stock. A substantial portion of the proceeds served
to reduce short-term and long-term debt. The primary and fully diluted weighted
average number of shares outstanding include shares from such offerings from the
actual transaction dates. The weighted average shares outstanding are
summarized as follows:
<TABLE>
<CAPTION>
(Thousands of shares)
Years ended January 31, 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Primary.................. 36,700 26,264 24,955
====== ====== ======
Fully diluted............ 42,753 26,436 24,955*
====== ====== ======
* Anti-dilutive
</TABLE>
36
<PAGE>
5. RECEIVABLES
Receivables are presented net of allowances for doubtful accounts of $18.1
million and $20.4 million at January 31, 1994 and 1993, respectively.
Credit risk is generally concentrated within the Company's primary business
segments. Geographically, such concentrations are principally within the United
States and Western Europe. The Company performs ongoing credit evaluations of
its customers' financial condition and, in certain circumstances, retains as
collateral a security interest in products financed or sold.
6. OTHER ASSETS AND INTANGIBLES
Other assets and intangibles consist of the following:
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
Goodwill......................... $226.1 $232.8
Other............................ 126.5 117.6
------ ------
$352.6 $350.4
====== ======
</TABLE>
Other assets and intangibles are presented net of accumulated amortization of
$68.4 million and $56.3 million at January 31, 1994 and 1993, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
Accounts payable................. $437.2 $400.7
Employee costs................... 107.9 92.4
Captive reinsurance reserves..... 44.6 39.5
Accrued restructuring charges.... 15.6 53.9
Other accrued liabilities........ 146.9 171.8
------ ------
$752.2 $758.3
====== ======
</TABLE>
37
<PAGE>
8. LONG-TERM DEBT
Debt is repayable in United States dollars unless otherwise indicated.
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
11.375% Senior Notes due November 15, 1998 (a).......... $148.0 $147.7
Term loan maturing September 1998
interest at LIBOR plus 1%
(6.54% at January 31, 1994) secured by
all assets of the borrowing subsidiary................. 23.8 -
French State loan maturing 1991-98
interest at 8.0% plus an additional fluctuating
interest charge or credit based on cash flow
(9.8% at January 31, 1994)
secured by land and buildings (French francs).......... 7.1 9.2
9.75% Senior Notes due February 15, 1996 (b)............ - 50.0
Term loan maturing 1993-98
interest at LIBOR plus 2.5% or bank
base rate plus 1.25% (b)............................... - 45.0
Term loan maturing 1991-95
interest at LIBOR plus 1.25% (b)....................... - 29.9
13.5% Senior Subordinated Notes due
December 15, 1996 (b).................................. - 16.0
Subordinated loan maturing May 15, 1998
interest at EuroDollar interbank rate plus
1.5%................................................... - 9.2
Other (b)............................................... 12.2 27.6
------ ------
Total debt.............................................. 191.1 334.6
Less: current portion of long-term debt................ 5.6 29.4
------ ------
Long-term debt.......................................... $185.5 $305.2
====== ======
</TABLE>
(a) Varity's 11.375% Senior Notes due November 15, 1998 are redeemable at the
option of the Company, in whole or in part, at any time on or after November 15,
1996, at 100% of the principal amount thereof plus accrued interest to the date
of redemption. The related indenture, among other things, restricts the Company
and its subsidiaries' ability to make certain cash distributions, requires
minimum levels of net worth, as defined, places restrictions on the use of
proceeds from asset sales and limits the incurrence of additional indebtedness.
See Note 12(b) (ii).
38
<PAGE>
(b) In connection with the Company's equity offering in June 1993, as described
in Note 4, the 9.75% Senior Notes, 13.5% Senior Subordinated Notes, various term
loans and other indebtedness including the 13.75% Senior Subordinated Debentures
were retired. The indentures for the 13.5% Senior Subordinated Notes and the
13.75% Senior Subordinated Debentures subjected early debt redemptions to a
premium of 3% and 5%, respectively, over the face amount. The redemption
premiums and the write-off of related unamortized debt issuance costs resulted
in an extraordinary loss of $1.7 million.
(c) Certain of the Company's loan agreements provide for financial covenants
affecting the Company and its principal subsidiaries. These covenants relate to
such matters as the maintenance of specified financial ratios and minimum net
worth. Certain loan agreements also contain cross-default provisions. At
January 31, 1994 the Company and each of its subsidiaries were in compliance
with their financial covenants. Management expects that the Company and each of
its subsidiaries will remain in compliance during the year ending January 31,
1995.
(d) As of January 31, 1994, debt maturities for long-term debt during the next
five fiscal years are as follows: 1994 - $5.6 million; 1995 - $4.9 million; 1996
- - $3.2 million; 1997 - $3.1 million and 1998 - $174.3 million.
(e) The Company maintains numerous short-term credit facilities with lenders in
various countries for which related amounts outstanding are classified as notes
payable in the consolidated financial statements. These credit facilities are
generally restricted only in terms of a predefined maximum utilization and are
subject to renewal annually or ongoing lender review. The facilities are
generally secured by assets of the respective subsidiaries and bear interest at
rates ranging from 6.5% to 12.5% at January 31, 1994.
Unused long-term and short-term lines of credit at January 31, 1994 were
$97.6 million and $185.6 million, respectively (January 31, 1993 - $46.0 million
and $232.7 million, respectively). Approximately $880 million of consolidated
assets secure such lines at January 31, 1994.
(f) Interest, net includes interest income of $12.0, $11.2 and $17.1 million for
fiscal 1993, 1992 and 1991, respectively. Cash payments of interest were $47.0,
$146.4 and $166.2 million for fiscal 1993, 1992 and 1991, respectively.
(g) Certain subsidiaries' debt agreements and various regulatory requirements
restrict approximately $510 million of subsidiary net assets from being loaned,
advanced or dividended to the Company.
(h) During fiscal 1992 the Company's wholly-owned subsidiary, Dayton Walther,
called its 14% Senior Subordinated Notes. The redemption premium and write-off
of related unamortized debt issuance costs resulted in an extraordinary loss of
$6.4 million.
39
<PAGE>
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
January 31, 1994 1993
------ ------
<S> <C> <C>
Accrued pension cost............. $113.1 $129.0
Other accrued employee benefits.. 180.2 81.0
Deferred tax liabilities......... 28.3 20.9
Other............................ 60.8 74.3
------ ------
$382.4 $305.2
====== ======
</TABLE>
10. PENSION BENEFITS
The Company and its subsidiaries have established pension plans in the principal
countries where they operate. The majority of its employees are covered by
either government or Company sponsored pension plans. Most of the Company's
defined benefit plans provide pension benefits that are based on the employee's
highest average eligible compensation. Plan assets consist primarily of
exchange-listed stocks and bonds. The Company's funding policy is to contribute
at least the amount required by law in the various jurisdictions in which the
pension plans are domiciled.
Pension expense consists of the following:
<TABLE>
<CAPTION>
Years ended January 31, 1994 1993 1992
------- ------ -------
<S> <C> <C> <C>
Service cost for the year........... $ 11.0 $ 15.5 $ 17.5
Interest cost on projected benefit
obligations........................ 61.8 73.1 70.5
Actual return on plan assets........ (114.8) (17.7) (124.1)
Net amortization and deferral....... 60.8 (47.2) 55.3
------- ------ -------
Net pension expense................. $ 18.8 $ 23.7 $ 19.2
======= ====== =======
</TABLE>
In connection with the fiscal 1992 divestitures of certain non-core
businesses, the Company recognized $4.6 million of curtailment and settlement
losses which are included in the net amortization and deferral component of net
pension expense for that year.
As a result of company induced early retirement and other programs, the
Company recognized expenses totalling $3.2 million and $11.1 million in fiscal
1993 and 1991, respectively. Such amounts are not included in the above table.
40
<PAGE>
The funded status of pension plans is as follows:
<TABLE>
<CAPTION>
January 31, 1994 1993
------------------------- -------------------------
Underfunded Overfunded Underfunded Overfunded
plans plans plans plans
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested benefit obligation.................... $ 289.7 $ 409.1 $ 576.0 $ 90.0
Nonvested benefit obligation................. 16.1 7.3 19.1 2.7
------- ------- ------- -------
$ 305.8 $ 416.4 $ 595.1 $ 92.7
======= ======= ======= =======
Projected benefit obligation.................. $ 315.0 $ 461.5 $ 606.4 $ 97.6
Plan assets at market value................... (193.3) (482.6) (465.4) (109.1)
------- ------- ------- -------
Projected benefit obligation
in excess of (less than) plan assets......... 121.7 (21.1) 141.0 (11.5)
Unrecognized net losses....................... (30.8) (14.2) (59.1) (6.6)
Unrecognized transition assets (liabilities).. (12.6) 5.0 (.9) 5.3
Additional minimum liability recognized....... 33.9 - 51.9 -
------- ------- ------- -------
Pension costs accrued (prepaid)
in the consolidated balance sheets........... $ 112.2 $ (30.3) $ 132.9 $ (12.8)
======= ======= ======= =======
</TABLE>
The fiscal 1993 additional minimum pension liability is a non-cash item which
is offset by an intangible asset of $7.2 million and a direct reduction in
stockholders' equity of $26.7 million (corresponding offsets in fiscal 1992 were
$5.9 million and $46.0 million, respectively). The Company's consolidated
fiscal 1993 direct reduction in stockholders' equity also includes a component
for equity investee Hayes Wheels' additional minimum liability.
The actuarial assumptions used to develop pension expense reflect prevailing
economic conditions and interest rate environments of the different countries
wherein the respective pension plans are domiciled. For the three years ended
January 31, 1994, the annual discount rates range from 7.5% to 10.0% (7.5% in
fiscal 1993 for plans domiciled in the United States), the remuneration
increases range from 4.0% to 8.5% and the expected annual long-term rates of
return on assets range from 8.25% to 11.5%.
11. OTHER POSTRETIREMENT BENEFITS
Effective February 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" as described in Note
1. This standard requires that the cost of postretirement benefits, primarily
health care benefits, be recognized over employees' active working lives. In
prior years, these costs were expensed as paid. The Company will continue to
follow its policy of funding postretirement benefits when due. The adoption of
this new standard had the effect of increasing ongoing postretirement benefit
expense for the year ended January 31, 1994 by $4.8 million.
41
<PAGE>
The Company provides medical and group life benefits to substantially all
North American retirees who elect to participate in the Company's medical and
group life plans. Medical plan contributions of the participating employees are
adjusted periodically; the life insurance plan is non-contributory.
The components of postretirement benefits expense are as follows:
<TABLE>
<CAPTION>
Year ended January 31, 1994
-----
<S> <C>
Service cost - benefits earned during the period................ $ 2.0
Interest cost on accumulated postretirement benefit obligation.. 17.6
-----
Postretirement benefit expense.................................. $19.6
=====
</TABLE>
The recorded actuarial liabilities for postretirement benefits, including
those previously recorded in connection with the fiscal 1989 acquisition of K-H
Corporation (the parent of Kelsey-Hayes), are as follows:
<TABLE>
<CAPTION>
January 31, 1994
------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $184.1
Fully eligible active participants............................ 30.1
Other active participants..................................... 15.1
------
229.3
Unrecognized net loss.......................................... (31.1)
------
Accrued postretirement benefit liability....................... $198.2
======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.67% (7.5% in the United States). The
assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10% and was assumed to decrease by 1% per
annum to an ultimate rate of 6%. An increase in the assumed health care cost
trend rate of 1 percentage point per year would increase the accumulated
postretirement benefit obligation as of January 31, 1994 by approximately $18.0
million and the aggregate of the service and interest cost components of
postretirement benefit expense for the year then ended by approximately $2.0
million.
During the years ended January 31, 1993 and 1992, $13.6 million and $12.2
million, respectively, were charged to expense with respect to health care
claims and life insurance premiums for retired employees based on the Company's
previous cash-based method of accounting for these costs.
42
<PAGE>
12. STOCKHOLDERS' EQUITY
(a) Authorized, Issued and Outstanding Stock
The Company is authorized to issue the following shares of stock:
(i) Class I Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series. Two
series had been designated: 11,816,309 shares were designated as U.S. $1.30
Senior Cumulative Redeemable Convertible Exchangeable Preferred Class I Stock,
Series A, par value $.01 per share; and 11,816,309 shares were designated as
U.S. $1.30 Senior Cumulative Redeemable Convertible Exchangeable Preferred Class
I Stock, Canadian Series A, stated value $5.00 per share (collectively, the
Class I Preferred Stock). In October 1993 the Company called for redemption all
of the previously outstanding shares of Class I Preferred Stock (see Note 4).
No shares of Class I Preferred Stock are designated or outstanding at January
31, 1994.
(ii) Class II Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series.
Currently, one series of 2,001,000 shares has been designated the Cdn. $1.625
Cumulative Redeemable Convertible Exchangeable Preferred Class II Stock, Series
A (Class II Preferred Stock). As of January 31, 1994, 2,001,000 shares of Class
II Preferred Stock were outstanding.
The holders of the Class II Preferred Stock are entitled to receive, as and
when declared by the Board of Directors, fixed, cumulative, preferential
dividends at an annual rate of Canadian $1.625 per share, payable quarterly.
The Class II Preferred Stock is junior to the Class I Preferred Stock in
dividend and liquidation rights. Each share is convertible at any time into
common stock at a conversion price of Canadian $75.00 per share of common stock
(equivalent to .3333 shares of common stock per share of Class II Preferred
Stock), subject to adjustment under certain conditions. Shares are redeemable
at the Company's option. Each share is redeemable at, and has a liquidation
value of, Canadian $25 plus accrued and unpaid cumulative dividends.
Holders of Class II Preferred Stock have voting rights limited to a
fractional vote per share. The fraction is determined by dividing 5% of the
total number of shares of common stock entitled to vote by the total number of
shares of Class I and Class II Preferred Stock entitled to vote.
(iii) Class III Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series. No
series has been designated or issued.
(iv) Special Purpose Preferred Stock:
9,000,000 shares of U.S. $1.30 Redeemable Reset Special Purpose Preferred Stock
authorized, par value $.01 per share, were issued for Canadian tax purposes in
connection with the reincorporation of the Company from Canada to the United
States in 1991. The shares do not have any financial impact on the Company. At
January 31, 1994, 8,160,000 shares of this stock were outstanding and held by a
wholly-owned subsidiary of the Company. These shares pay dividends at an annual
rate of $1.30 per share, have no voting rights, and have a redemption and
liquidation value of $20 per share. The shares are junior to the Class I Stock,
Class II Preferred Stock and Class III Stock and are entitled to preference over
the common stock as to dividends and the distribution of assets in the event of
a liquidation of the Company.
43
<PAGE>
(v) Common Stock and Options:
150,000,000 shares authorized, par value $.01 per share.
In June 1993, the Company sold 4,600,000 shares of previously unissued common
stock through a public offering. As a result of this offering and the
conversion of the Class I Preferred Stock described herein, 43,957,126 common
shares were outstanding at January 31, 1994.
During fiscal 1992, $6.2 million of common stock was issued pursuant to the
termination of the Performance Equity Plan in a non-cash transaction.
Under the Executive Stock Option Plan, the Company may from time to time
grant options to purchase common stock of up to an aggregate of 5 percent of the
common stock outstanding. Historically, option exercise prices have been
generally equal to market value or in one instance a slight discount to market
value at the date of grant. However, the majority of fiscal 1993 grants were at
a 35% premium to market value. The following table summarizes common stock
option activity during each of the years in the three year period ended January
31, 1994:
<TABLE>
<CAPTION> (Thousands of shares)
Years ended January 31, 1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Options outstanding, beginning of period.. 851 696 590
Granted................................... 980 837 133
Exercised (1)............................. (273) (67) (13)
Expired or cancelled...................... (56) (615) (14)
----- ---- ----
Options outstanding, end of period (2).... 1,502 851 696
===== ==== ====
</TABLE>
(1) Options have been exercised at average prices of $15.50, $11.59 and $22.77
for fiscal 1993, 1992 and 1991, respectively.
(2) Options to purchase 586,000, 837,000, and 510,000 common shares were
exercisable at January 31, 1994, 1993 and 1992, respectively. Options
outstanding at January 31, 1994 were exercisable at prices ranging from $11.59
to $81.40 ($11.59 to $81.40 at January 31, 1993 and $17.50 to $81.40 at January
31, 1992).
(b) Restrictions on Dividends, Issue and Reduction of Capital
(i) As long as any Class II Preferred Stock is outstanding, and unless all
dividends then payable on such shares have been declared and paid or amounts set
aside for payment, the Company may not, without the prior approval of the
holders of these shares:
(1) declare or pay any dividends (other than stock dividends in shares of the
Company ranking junior to such shares) on any common stock or junior ranking
shares;
(2) redeem, purchase, or make any capital distribution in respect of any
equal or junior ranking shares; or
(3) issue any additional shares ranking as to capital or dividends prior to
or in parity with these shares.
As of January 31, 1994, all dividends payable on the Class II Preferred Stock
have been paid or set aside for payment.
44
<PAGE>
(ii) The indenture governing the Company's 11.375% Senior Notes due in 1998
limits the Company's ability to make certain cash distributions to its
stockholders. As of January 31, 1994, the Company could pay up to approximately
$298 million of cash dividends on its common stock under the most restrictive
dividend covenant in such indenture.
13. CONTINGENT LIABILITIES AND COMMITMENTS
(a) Investment in Hayes Wheels
The Company currently owns 46.3% of Hayes Wheels. If such ownership becomes
less than 40%, the Company is required to offer to replace existing creditors
under the current Hayes Wheels revolving credit agreement.
(b) Capital Expenditure Programs
Approved capital expenditure programs outstanding at January 31, 1994
approximated $95.0 million, including capital commitments of approximately $74.0
million.
(c) Discounted Obligations
The Company has contingent liabilities relating to accounts receivable
discounted, bills guaranteed and similar obligations amounting to $8.5 million
and $34.0 million at January 31, 1994 and 1993, respectively.
(d) Foreign Exchange Contracts
To protect against fluctuations in foreign currencies, the Company from time to
time enters into foreign exchange contracts for periods generally consistent
with the underlying transaction exposures. At January 31, 1994, the Company had
approximately $206.0 million of contracts outstanding, primarily to purchase or
sell European currencies (approximately $73.0 million at January 31, 1993).
Substantially all of such contracts mature within a period of six months.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the outstanding contracts. The Company does not anticipate
nonperformance by any counterparty, and as the contracts are principally hedges
of underlying transactions, the market risk associated with fluctuations in
exchange rates is not significant.
(e) Leases
The Company leases certain property and equipment under noncancellable operating
leases. Payments due under these leases during the next five fiscal years and
thereafter are as follows: 1994 - $16.4 million; 1995 - $13.9 million; 1996 -
$10.4 million; 1997 - $7.3 million; 1998 - $2.4 million and $10.7 million
thereafter.
(f) Environmental
The Company, primarily through its automotive products segment, is involved in a
limited number of remedial actions under various federal and state laws and
regulations relating to the environment which impose liability on parties to
clean up, or contribute to the cost of cleaning up, sites on which their
hazardous wastes or materials were disposed or released. The Company believes
that it has made adequate provision for costs associated with known remediation
efforts in accordance with generally accepted accounting principles and does not
anticipate the future cash requirements of such efforts to be significant in
terms of its financial condition or liquidity. The Company has made no
provision for unasserted claims as it is not possible to estimate the potential
size of such future claims, if any.
(g) Litigation
The Company is party to various litigation, certain of which involve significant
claims. Management believes that the outcome of these lawsuits will not have a
material adverse effect on the consolidated financial statements.
45
<PAGE>
14. LOSSES ON SALES OF BUSINESSES AND OTHER RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1992, the Company entered into an agreement
with AGCO Corporation (AGCO) whereby AGCO was appointed exclusive distributor of
farm equipment in North America for Massey Ferguson. AGCO acquired
substantially all the net assets, primarily dealer accounts receivable and
inventories, of Massey Ferguson's North American operations.
In a related transaction, AGCO and the Company formed a joint venture that
acquired substantially all the net assets of Agricredit, a diversified North
American equipment finance company, which prior to the formation of the joint
venture was wholly-owned by the Company. As a result of this transaction, the
Company's ownership percentage was reduced to 50%, and accordingly the Company's
investment is accounted for on the equity method of accounting (see Note 17 for
summarized financial information). (Subsequent to January 31, 1994, the Company
sold its remaining 50% ownership in the joint venture to AGCO for an amount
which approximated the Company's carrying value of the investment).
The Company recognized losses of $23.6 million on the sales of these
businesses during the fourth quarter of fiscal 1992, which included employee
termination costs and anticipated losses on real property not acquired by AGCO.
During the fourth quarter of fiscal 1991 the Company commenced a series of
restructuring actions, and recorded provisions for employment reductions and
anticipated losses on the divestment of certain non-core businesses. As a
result of such actions the Company recorded restructuring charges of $108.3
million, consisting of approximately $40 million and $68 million relating to
employment reductions and asset dispositions, respectively.
15. NON-RECURRING GAIN
During the fourth quarter of fiscal 1992, the wheels business of Kelsey-Hayes
was reorganized as Hayes Wheels and the non-wheel businesses and assets of
Kelsey-Hayes, principally its automotive brake systems business, were
transferred to, and the liabilities related thereto were assumed by, a newly-
formed, wholly-owned subsidiary of the Company.
The Company reduced its ownership percentage in Hayes Wheels to 46.3% through
a public offering of approximately 9.4 million common shares by Hayes Wheels in
December, 1992. Subsequent to the closing date of the offering, the Company has
accounted for its investment in Hayes Wheels on the equity method of accounting
(see Note 17 for summarized financial information).
The proceeds to Hayes Wheels from the offering at $19.00 per share, after
deducting commissions and related expenses, were approximately $162.0 million.
The Company recognized a non-cash gain from this transaction amounting to $17.3
million which reflects the net increase in value of the Company's investment in
Hayes Wheels at that date. In accordance with SFAS No. 96, no provision for
taxes was made at the time of the transaction with respect to the gain due to
the Company's existing tax loss carryforwards. An appropriate liability for
such deferred taxes was included at the time of adoption of SFAS No. 109.
46
<PAGE>
16. BUSINESS SEGMENT INFORMATION
The principal industry segments and geographic regions in which the Company
operates are set forth below. The automotive products segment manufactures and
sells brakes and other components primarily to the original equipment
manufacturers (OEMs) of the motor vehicle industry. Prior to the sale of a
majority ownership in Hayes Wheels, this segment also included the manufacture
and sale of aluminum and steel wheels to OEMs and the aftermarket. In fiscal
1993, this segment had sales to two domestic OEM customers that individually
comprised more than 10% of consolidated total sales and revenues. The fiscal
1993 sales to these customers were $358 million and $396 million, respectively
(the amounts related to these customers in fiscal 1992 were $393 million and
$421 million, respectively and in fiscal 1991 were $340 million and $317
million, respectively). The engines segment manufactures and sells multi-
cylinder, multi-purpose diesel engines. The farm equipment segment manufactures
and sells agricultural tractors and, prior to the divestiture of a non-core
business during fiscal 1992, industrial machinery. This segment also sells
certain other farm equipment purchased from associated companies and third
parties. "Other" consists of the hydraulic components business. Intersegment
sales are made at transfer prices which the Company believes approximate market.
Due to the fiscal 1992 sale of Agricredit (see Note 14), the financing
activities segment is no longer reported separately. The limited remaining
third party business is incorporated directly into the related manufacturing
segment. Fiscal 1992 and 1991 amounts have been restated to conform with the
current period's presentation.
The Company's consolidated financial statements include charges for losses on
sales of businesses and other restructuring costs in fiscal 1992 and 1991 as
discussed in Note 14. The segment operating income presented below reflects
each segment's share of such charges as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1993 1992
----- ------
<S> <C> <C>
Automotive products............. $ - $ 49.6
Engines......................... - 11.9
Farm equipment.................. 23.6 44.5
Other........................... - 2.3
----- ------
$23.6 $108.3
===== ======
</TABLE>
47
<PAGE>
INDUSTRY SEGMENT
<TABLE>
<CAPTION>
Auto- Adjustments
Fiscal motive Farm and
years products Engines equipment Other eliminations Consolidated
------ -------- -------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers..... 1993 $1,149 $ 631 $ 898 $ 48 $ - $2,726
1992 1,516 668 1,141 50 - 3,375
1991 1,354 647 1,132 36 - 3,169
Intersegment sales
and revenues............... 1993 - 71 - 3 (74) -
1992 - 76 - 10 (86) -
1991 - 70 - 9 (79) -
Total sales and revenues..... 1993 1,149 702 898 51 (74) 2,726
1992 1,516 744 1,141 60 (86) 3,375
1991 1,354 717 1,132 45 (79) 3,169
Operating income (loss) (1).. 1993 90 46 8 (2) - 142
1992 133 42 4 (5) - 174
1991 56 20 (55) (16) - 5
Identifiable assets (2)...... 1993 929 346 457 28 - 1,760
1992 937 343 487 32 - 1,799
1991 1,459 498 1,065 36 - 3,058
Depreciation and
amortization................ 1993 41 16 20 3 - 80
1992 69 21 24 3 - 117
1991 65 23 28 3 - 119
Capital expenditures......... 1993 113 17 21 3 - 154
1992 66 18 17 2 - 103
1991 72 15 20 2 - 109
</TABLE>
48
<PAGE>
GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Europe Adjustments
Fiscal United and and
years States other Canada eliminations Consolidated
------ ------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers...... 1993 $1,075 $1,556 $ 95 $ - $ 2,726
1992 1,439 1,825 111 - 3,375
1991 1,346 1,723 100 - 3,169
Intersegment sales
and revenues................ 1993 - 74 - (74) -
1992 - 86 - (86) -
1991 - 79 - (79) -
Total sales and revenues..... 1993 1,075 1,630 95 (74) 2,726
1992 1,439 1,911 111 (86) 3,375
1991 1,346 1,802 100 (79) 3,169
Operating income (loss) (1).. 1993 85 51 6 - 142
1992 79 84 11 - 174
1991 25 (27) 7 - 5
Identifiable assets (2)...... 1993 848 835 77 - 1,760
1992 835 926 38 - 1,799
1991 1,734 1,233 91 - 3,058
</TABLE>
Reconciliation to consolidated financial statements:
<TABLE>
<CAPTION>
Fiscal years 1993 1992 1991
------ ------ -------
<S> <C> <C> <C> <C>
(1) Operating income..................................... $ 142 $ 174 $ 5
Interest expense, net (a)............................ (36) (115) (122)
General and corporate expense, net (b)............... (33) (15) (48)
------ ------ ------
Income (loss) before income taxes, earnings of
associated companies, extraordinary loss and
cumulative effect of changes in accounting
principles.......................................... $ 73 $ 44 $ (165)
====== ===== ======
(2) Identifiable assets.................................. $1,760 $1,799 $3,058
Investments.......................................... 130 131 26
Corporate assets..................................... 138 157 96
------ ------ ------
$2,028 $2,087 $3,180
====== ====== ======
</TABLE>
(a) Excludes interest expense pertaining to financing activities which is
included in the operating income of the related manufacturing segments.
(b) Includes exchange adjustments, non-recurring gain and general corporate
expense net of miscellaneous income.
49
<PAGE>
17. INVESTMENTS IN ASSOCIATED AND OTHER COMPANIES
Varity's investments in associated and other companies as of January 31, 1994
and 1993 primarily include a 46.3% interest in Hayes Wheels, a 50% interest in
Agricredit and a 49% interest in Massey Ferguson Finance Limited, a European
agricultural and industrial equipment finance company. During fiscal 1993 the
Company received $.5 million of dividends from Hayes Wheels. No dividends were
received from these companies during fiscal 1992. As of January 31, 1994 and
1993, the Company's investment in Hayes Wheels, a publicly traded company, had a
market value of approximately $264 million and $171 million, respectively.
Varity's consolidated statements of operations for fiscal 1992 and 1991
include 100% of the revenues and expenses of Hayes Wheels prior to the
completion of the public offering as described in Note 15 and 100% of the
revenues and expenses of Agricredit prior to the transactions described in Note
14.
Summarized financial information of these investee companies, as of and for
the years ended January 31, 1994 and 1993, including Hayes Wheels and Agricredit
operations prior to their deconsolidation, is presented below:
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended January 31, 1994 1993
------ ------
<S> <C> <C>
Net sales and revenues..................................... $484.9 $470.0
Cost of goods sold......................................... 345.3 337.0
------ ------
Gross profit............................................... 139.6 133.0
Other costs and expenses................................... 85.9 113.3
------ ------
Income before taxes and cumulative effect of
changes in accounting principles........................ 53.7 19.7
Income tax provision....................................... (18.8) (4.3)
------ ------
Income before cumulative effect of changes
in accounting principles................................ 34.9 15.4
Cumulative effect of changes in accounting principles (1).. (24.6) -
------ ------
Net income................................................. $ 10.3 $ 15.4
====== ======
</TABLE>
(1) Primarily relates to an investee company's adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
50
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1994 1993
-------- ------
<S> <C> <C>
Current assets................... $ 492.2 $391.0
Fixed assets..................... 269.0 258.5
Other............................ 356.4 328.3
-------- ------
$1,117.6 $977.8
======== ======
Current liabilities.............. $ 470.6 $391.0
Non-current liabilities.......... 405.4 346.1
Shareholders' equity............. 241.6 240.7
-------- ------
$1,117.6 $977.8
======== ======
</TABLE>
Certain investees' indebtedness restrict approximately $211 million of
investee net assets from being loaned, advanced or dividended to the Company by
such investees.
Varity's consolidated retained earnings (deficit) at January 31, 1994 and
1993 includes $5.8 million and $1.3 million, respectively, of undistributed
earnings of the above investees.
51
<PAGE>
Independent Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VARITY CORPORATION
We have audited the consolidated financial statements of Varity Corporation and
subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K for the
fiscal year 1993. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules listed in
Item 14(a)(2) of the Annual Report on Form 10-K for the fiscal year 1993. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules 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 financial position of Varity
Corporation and subsidiaries as of January 31, 1994 and 1993 and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 31, 1994 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 of the Notes to Consolidated Financial Statements in
the year ended January 31, 1994, the Company changed its methods of accounting
for income taxes to adopt the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," postretirement benefits to
adopt the provisions of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
postemployment benefits to adopt the provisions of Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," and marketable securities to adopt the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
/s/ KPMG PEAT MARWICK
Buffalo, New York
March 7, 1994
52
<PAGE>
Management's Report on Financial Statements
The accompanying consolidated financial statements of the Company have been
prepared by management in accordance with generally accepted accounting
principles. Management is responsible for all information in the Annual Report.
All financial and operating data in the Annual Report are consistent with that
contained in the consolidated financial statements.
Management is also responsible for the integrity and objectivity of the
consolidated financial statements. In the preparation of these statements,
estimates are sometimes necessary when transactions affecting the current
accounting period are dependent on the outcome of future events. Such estimates
are based on careful judgements and have been appropriately reflected in the
accompanying consolidated financial statements. Management has established
systems of internal control which are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use and to produce
reliable accounting records.
The Board of Directors is responsible for ensuring that management fulfills
its responsibilities for financial reporting and internal control. The Board
exercises these responsibilities principally through the Audit Committee. The
Audit Committee meets periodically with management and the internal and the
external auditors to satisfy itself that their responsibilities are properly
discharged and to review the consolidated financial statements.
The Company's independent external auditors have audited the consolidated
financial statements. Their audit was conducted in accordance with generally
accepted auditing standards, which includes consideration of the Company's
internal controls to the extent necessary to form an independent opinion on the
financial statements prepared by management. The internal and external auditors
have had, and continue to have, full and free access to the Audit Committee of
the Board.
Management recognizes its responsibility for conducting the Company's
affairs in compliance with established financial standards and applicable laws,
and for the maintenance of proper standards of business conduct in its
activities.
March 7, 1994
/s/ Victor Rice
Victor Rice
Chief Executive Officer
/s/ Vince D. Laurenzo
Vince D. Laurenzo
President
/s/ N. D. Arnold
N. D. Arnold
Senior Vice President
Chief Financial Officer
53
<PAGE>
Supplementary Information
(Unaudited)
<TABLE>
<CAPTION>
Quarterly condensed unaudited statements of operations for the years ended January 31, 1994 and 1993 are presented below.
(Dollars in millions except per share amounts) 1993 Quarters 1992 Quarters
- ---------------------------------------------- ------------- -------------
1 2 3 4 1 2 3 4
-------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total sales and revenues.......... $ 645.0 $ 660.9 $ 692.2 $ 727.7 $ 823.8 $ 891.4 $ 844.4 $ 814.9
-------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... $ 108.5 $ 113.5 $ 115.6 $ 126.9 $ 149.5 $ 164.1 $ 161.9 $ 154.5
Expenses (1)...................... 98.7 98.4 93.3 104.3 148.2 145.2 148.2 145.1
Other (income) expense, net....... - (.3) .2 (2.6) .3 1.3 - (2.0)
-------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes,
earnings of associated companies,
extraordinary loss and cumulative
effect of changes in accounting
principles....................... 9.8 15.4 22.1 25.2 1.0 17.6 13.7 11.4
Income tax provision.............. (2.5) (3.0) (3.1) (4.0) (3.4) (3.5) (3.2) (1.5)
Equity in earnings of associated
companies........................ 3.7 3.7 3.2 5.8 - - - 1.3
-------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
loss and cumulative effect of
changes in accounting principles... 11.0 16.1 22.2 27.0 (2.4) 14.1 10.5 11.2
Extraordinary loss (2)............ - (1.7) - - - - - (6.4)
Cumulative effect of changes in
accounting principles (3)........ (146.1) - - - - - - -
-------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $ (135.1) $ 14.4 $ 22.2 $ 27.0 $ (2.4) $ 14.1 $ 10.5 $ 4.8
======== ======= ======= ======= ======= ======= ======= =======
Per share data (4):
Before extraordinary loss and
cumulative effect of changes in
accounting principles:
Primary......................... $ .20 $ .34 $ .58 $ .59 $ (.28) $ .37 $ .23 $ .23
Fully diluted................... $ .20 $ .34 $ .49 $ .59 $ (.28)* $ .37 $ .23 $ .23
Net income (loss):
Primary......................... $ (4.50) $ .29 $ .58 $ .59 $ (.28) $ .37 $ .23 $ .01
Fully diluted................... $ (4.50)* $ .29 $ .49 $ .59 $ (.28)* $ .37 $ .23 $ .01
* Anti-dilutive
</TABLE>
(1) Includes fiscal 1992 fourth quarter losses on sales of businesses of $23.6
million and a $17.3 million non-recurring gain from the Company's sale of
a majority ownership of a subsidiary.
(2) Each extraordinary loss arose on the early extinguishment of debt as
described in Note 8 to the Consolidated Financial Statements.
(3) Primarily relates to the Company's adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective
February 1, 1993, as described in Note 1 to the Consolidated Financial
Statements.
(4) Per share calculations for each of the quarters is based on the weighted
average number of shares outstanding for each period; the sum of the
quarters may not necessarily be equal to the full year per share amount.
54
<PAGE>
Financial Statistics
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
- ----------------------------------------------
Fiscal years 1993 1992(1) 1991 1990 1989(2)
- ------------ -------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Summary of operations
Total sales and revenues............................ $ 2,726 3,375 3,169 3,616 2,426
Gross profit........................................ $ 465 630 533 710 494
Net expenses (excluding interest)................... $ 356 423 439 421 286
Interest expense (net).............................. $ 36 139 151 156 93
Losses on sales and other restructuring charges..... $ - 24 108 18 -
Income tax provision................................ $ 13 12 13 21 21
Income (loss) before earnings of associated
companies, extraordinary loss and cumulative
effect of changes in accounting principles......... $ 60 32 (178) 94 94
Equity in earnings of associated companies.......... $ 16 1 - - -
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles......................................... $ 76 33 (178) 94 94
Extraordinary loss (3).............................. $ (2) (6) - - -
Cumulative effect of changes in accounting
principles......................................... $ (146) - - - -
Net income (loss)................................... $ (72) 27 (178) 94 94
Preferred stock dividends........................... $ 10 19 19 18 18
-------- ------- ------ ------ -------
Financial condition
Working capital..................................... $ 118 93 91 272 439
Additions to fixed assets .......................... $ 155 106 118 141 76
Depreciation and amortization....................... $ 85 123 120 114 86
Total assets........................................ $ 2,028 2,087 3,180 3,470 3,352
-------- ------- ------ ------ -------
Liabilities and stockholders' equity
Current............................................. $ 826 915 1,441 1,510 1,341
Other............................................... $ 567 610 1,223 1,217 1,348
Minority interest in subsidiaries................... $ 4 13 21 23 45
Stockholders' equity................................ $ 631 549 495 720 618
Return on closing total stockholders' equity........ (11.3)% 4.9 (36.0) 13.1 15.2
-------- ------- ------ ------ -------
As a percent of sales and revenues
Cost of goods sold.................................. 83.0 % 81.3 83.2 80.4 79.6
Gross profit........................................ 17.0 % 18.7 16.8 19.6 20.4
Marketing, general and administration............... 10.2 % 10.6 11.1 9.7 11.4
Engineering and product development................. 3.0 % 2.4 2.4 2.2 1.4
Net income (loss)................................... (2.6)% 0.8 (5.6) 2.6 3.9
-------- ------- ------ ------ -------
Per common share
Total sales and revenues............................ $ 74.27 128.48 126.99 145.06 113.50
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles......................................... $ 1.80 0.56 (7.87) 3.06 3.57
Net income (loss)................................... $ (2.23) 0.32 (7.87) 3.06 3.57
New York Stock Exchange quotes:(4)
High.............................................. $ 47.88 30.25 28.75 33.75 32.50
Low............................................... $ 25.75 12.13 10.50 16.25 20.00
-------- -------- ------- ------- --------
Stockholders/employees (at year end)
Stockholders - Common............................... 21,544 33,054 34,237 41,464 54,325
- Preferred............................ 8 573 419 361 293
Employees........................................... 13,110 14,026 17,523 18,731 20,375
Common stock outstanding (thousands) (4)............ 43,957 30,999 24,988 24,930 24,695
Preferred stock outstanding (thousands)............. 2,001 13,807 13,807 13,817 13,843
======== ======== ======= ======= ========
</TABLE>
(1) Amounts reported for fiscal 1992 reflect the sale of a majority ownership
of Hayes Wheels, the sale of substantially all of the net assets of
Massey Ferguson's North American distribution operations and the
formation of a joint venture that acquired substantially all of the net
assets of Agricredit.
(2) Amounts reported for fiscal 1989 reflect the acquisition of K-H Corporation
effective November 30, 1989.
(3) Extraordinary loss for fiscal 1993 and 1992 consist of $1.7 million and
$6.4 million, respectively, associated with the early extinguishment of
debt.
(4) Amounts have been restated to reflect the one for 10 reverse stock split as
of the earliest period presented.
55
<PAGE>
Sales and Revenues Statistics
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions)
- ---------------------
Fiscal years 1993 1992 1991 1990 1989
- ------------ ------- ------- ------- ------- -------
% of Total Amount $ $ $ $ $
----------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales and revenues by markets
North America
United States............................ 45.5 1,239.8 1,355.7 1,208.2 1,402.4 685.5
Canada................................... 3.0 82.9 190.2 186.4 182.1 99.5
----- ------- ------- ------- ------- -------
Total...................................... 48.5 1,322.7 1,545.9 1,394.6 1,584.5 785.0
----- ------- ------- ------- ------- -------
Europe
United Kingdom........................... 18.2 495.6 493.3 483.1 536.5 498.4
France................................... 5.7 155.1 204.6 198.4 274.1 230.1
Germany.................................. 4.4 119.7 261.4 241.9 224.6 111.6
Scandinavia.............................. 3.6 97.9 100.8 123.6 175.9 111.3
Italy.................................... 2.0 54.3 151.3 158.5 168.0 127.7
Other.................................... 4.7 128.5 133.4 120.9 133.5 152.8
----- ------- ------- ------- ------- -------
Total...................................... 38.6 1,051.1 1,344.8 1,326.4 1,512.6 1,231.9
----- ------- ------- ------- ------- -------
Africa..................................... 2.8 75.6 72.8 125.4 117.9 133.6
East Asia.................................. 2.8 75.4 81.4 77.5 92.1 55.3
Latin America.............................. 2.4 66.9 105.0 97.4 91.5 53.7
Near East.................................. 1.9 52.7 100.4 48.2 82.0 47.5
Australasia................................ 1.7 46.4 45.5 29.8 46.8 68.6
West Asia.................................. 1.3 35.0 78.7 69.8 88.9 50.4
----- ------- ------- ------- ------- -------
Total...................................... 100.0 2,725.8 3,374.5 3,169.1 3,616.3 2,426.0
===== ======= ======= ======= ======= =======
Net sales and revenues by product
Automotive products........................ 42.1 1,148.8 1,516.3 1,354.4 1,449.5 436.8
----- ------- ------- ------- ------- -------
Engines
Engines ................................. 21.5 585.3 616.2 572.9 698.0 610.0
Parts and other.......................... 4.3 117.0 127.7 144.1 142.6 110.0
Elimination of intercompany net sales.... (2.6) (71.2) (76.3) (70.0) (104.3) (98.7)
----- ------- -------- ------- ------- -------
Total...................................... 23.2 631.1 667.6 647.0 736.3 621.3
----- ------- -------- ------- ------- -------
Farm equipment
Tractors................................. 24.7 674.3 705.2 673.1 841.4 834.2
Parts.................................... 4.5 120.9 205.2 225.2 247.0 246.0
Other products........................... 3.6 97.9 128.9 100.5 120.8 65.6
Industrial machines...................... 0.2 5.3 57.3 84.4 123.9 138.2
Financing activities..................... - - 43.9 48.8 51.2 43.9
----- ------- ------- ------- ------- -------
Total...................................... 33.0 898.4 1,140.5 1,132.0 1,384.3 1,327.9
----- ------- ------- ------- ------- -------
Other products
Components............................... 1.8 50.7 59.9 44.7 65.6 58.4
Elimination of intercompany net sales.... (0.1) (3.2) (9.8) (9.0) (19.4) (18.4)
----- ------- ------- ------- ------- -------
Total...................................... 1.7 47.5 50.1 35.7 46.2 40.0
----- ------- ------- ------- ------- -------
Total...................................... 100.0 2,725.8 3,374.5 3,169.1 3,616.3 2,426.0
===== ======= ======= ======= ======= =======
</TABLE>
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the fiscal year ended January 31, 1994, there have been no disagreements
with accountants on accounting or financial disclosure.
PART III
The following information contained in Varity Corporation's Proxy Statement
relating to the Annual Meeting of Stockholders, is incorporated herein by
reference:
Caption or Location
in Proxy
Statement
---------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE Election of
REGISTRANT...................................... Directors
(Information covering the Executive Officers
is included in Part I, on pages 14 through
15 of this Form 10-K)
ITEM 11. EXECUTIVE COMPENSATION.......................... Executive
Compensation
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................... Election of
Directors-
Directors'
and Officers'
Share
Ownership
and Other
Stockholder
Ownership
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Schedule II (pages 62 and 63).
Mr. William A. Corbett, a Director, is a partner of Fraser & Beatty (Barristers
& Solicitors), who have provided and continue to provide legal advice to the
Company.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
Included in Part II, Item 8. of this report: Page
----
<S> <C>
Consolidated Statements of Operations for the years ended January 31,
1994, 1993 and 1992....................................................... 26
Consolidated Balance Sheets as at January 31, 1994 and 1993................ 27
Consolidated Statements of Changes in Stockholders' Equity for the years
ended January 31, 1994, 1993 and 1992..................................... 28
Consolidated Statements of Cash Flows for the years ended January 31,
1994, 1993 and 1992....................................................... 30
Notes to Consolidated Financial Statements................................. 31
Auditors' Report........................................................... 52
Management's Report on Financial Statements................................ 53
Supplementary Information (Unaudited):
Quarterly Condensed Unaudited Statements of Operations for
the years ended January 31, 1994 and 1993............................... 54
Financial Statistics for the years ended January 31, 1994, 1993,
1992, 1991 and 1990..................................................... 55
Sales and Revenues Statistics for the years ended January 31, 1994,
1993, 1992, 1991 and 1990............................................... 56
</TABLE>
58
<PAGE>
2. Financial Statement Schedules for the years ended January 31, 1994,
1993 and 1992.
<TABLE>
<CAPTION>
Included in Part IV of this report: Schedule
Number Page
-------- ----
<S> <C> <C>
Amounts Receivable from Related Parties,
Underwriters, Promoters, and Employees other
than Related Parties...................................... II 62
Condensed Financial Statements of Varity
Corporation (Unconsolidated):
Condensed Statements of Operations
and Deficit (Unconsolidated) for the
years ended January 31, 1994, 1993 and 1992............. III 64
Condensed Balance Sheets (Unconsolidated)
as at January 31, 1994 and 1993......................... III 65
Condensed Statements of Cash Flows (Unconsolidated)
for the years ended January 31, 1994, 1993 and 1992..... III 66
Notes to Condensed Financial Statements (Unconsolidated). III 67
Property, Plant and Equipment for the years ended
January 31, 1994, 1993 and 1992............................. V 68
Accumulated Depreciation of Property, Plant and
Equipment for the years ended January 31, 1994,
1993 and 1992............................................... VI 69
Valuation and Qualifying Accounts............................ VIII 70
Short-Term Borrowings........................................ IX 71
</TABLE>
Other schedules are omitted because they are not applicable, not required or
because the information required is included in the Consolidated Financial
Statements and Notes thereto (see Part II).
59
<PAGE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and Exchange
Commission (SEC) subsequent to those listed in the Quarterly Report on Form 10-Q
for the three months ended October 31, 1993, filed on December 10, 1993.
(c) Exhibits
(G) 3.1 -- Restated Certificate of Incorporation of Varity Corporation.
(H) 3.2 -- By-laws.
(F) 4.1 -- Indenture, dated as of October 8, 1991 between Varity
Corporation and Manufacturers & Traders Trust Company, as trustee,
relating to 11 3/8% Senior Notes due 1998.
10.0 -- MATERIAL CONTRACTS
10.1 -- LOAN AGREEMENTS
(L) (a) -- Amended and restated Credit Agreement dated as of June 9,
1993 between Dayton Walther Corporation, The Bank of Nova
Scotia and NBD Bank, N.A.
(i) Varity Corporation Guarantee dated June 9, 1993 to The
Bank of Nova Scotia and NBD Bank, N.A.
(L) (b) -- Amended and restated Credit Agreement dated as of August 31,
1993 between Kelsey-Hayes Company, The Chase Manhattan Bank
N.A., as agent, and The Bank of Nova Scotia, as co-agent.
(L) (c) -- Facility Agreement dated as of September 30, 1993 among
Perkins Limited and others, various banks and Lloyds Bank
Plc, as agent.
(i) Guarantee Agreement dated September 30, 1993.
(ii) Trust Agreement dated September 30, 1993.
(iii) Composite Security Assignment and Deposit Charge
dated September 30, 1993.
(L) (d) -- Facility Agreement dated as of September 30, 1993 among
Perkins Group Limited and others, and Lloyds Bank Plc.
(i) Composite Debenture dated September 30, 1993.
(ii) Guarantee dated September 30, 1993.
(iii) Omnibus Guarantee dated September 30, 1993.
(L) (e) -- Facility Agreement dated as of September 30, 1993 among
Massey Ferguson (United Kingdom) Limited, and Midland Bank
Plc.
(L) (f) -- Facility Agreement dated as of September 30, 1993 among
Massey Ferguson (United Kingdom) Limited, Massey Ferguson
Manufacturing Limited, and Midland Bank Plc.
(L) (g) -- Facility Agreement dated as of September 30, 1993 among
Massey Ferguson Group Limited, Massey Ferguson (United
Kingdom) Limited, Massey Ferguson Manufacturing Limited, and
Midland Bank Plc.
(L) (h) -- Joint and several Guarantee dated as of September 30, 1993
between Massey Ferguson Group Limited, Massey Ferguson
Manufacturing Limited, Massey Ferguson (United Kingdom)
Limited and Midland Bank Plc, reference (e), (f) and (g).
(i) Legal Charge dated September 30, 1993 with Massey
Ferguson Manufacturing Limited and Midland Bank Plc.
(ii) Legal Charge dated September 30, 1993 with Massey
Ferguson (United Kingdom) Limited and Midland Bank Plc.
(iii) Fixed and Floating Charge dated September 30, 1993
with Massey Ferguson Manufacturing Limited and Midland
Bank Plc.
(iv) Fixed and Floating Charge dated September 30, 1993 with
Massey Ferguson (United Kingdom) Limited and Midland
Bank Plc.
(v) Fixed and Floating Charge dated September 30, 1993 with
Massey Ferguson Group Limited and Midland Bank Plc.
(L) (i) -- Varity Holdings Limited Guarantee dated as of September 30,
1993 to Midland Bank Plc, reference (e), (f) and (g).
60
<PAGE>
(L) (j) -- Varity Corporation Guarantee dated as of September 30, 1993
to Midland Bank Plc, reference (e), (f) and (g).
10.2 - OTHER MATERIAL CONTRACTS
(C) (a) -- Class II Share Exchange Agreement dated April 30, 1986 among
MF Limited, CDIC, ODC, Canadian Imperial Bank of Commerce
("CIBC") and The Secretary of State for Trade and Industry
acting by the Export Credits Guarantee Department ("ECGD").
(J) *(b) -- Form of Executive Termination Arrangements.
(I) *(c) -- Executive Stock Option Plan.
(J) *(d) -- Varity Corporation Retirement Equity and Deferred
Compensation Plan.
(K) *(e) -- Form of Employment Agreement and Supplement to Retirement
Equity and Deferred Compensation Plan of Varity Corporation.
(B) *(f) -- Canadian Retirement Income Plan for Designated Employees.
(B) *(g) -- United Kingdom Executive Pension Scheme.
(E) (h) -- Agreement dated December 17, 1990 between Varity Corporation
and the Government of Canada, Canada Development Investment
Corporation, the Government of Ontario and Ontario Development
Corporation replacing the Governments Foundation Agreement
dated as of January 27, 1986.
(D) (i) -- Agreement between Varity Corporation and National
Automobile, Aerospace and Agricultural Implement Workers
Union of Canada and its Locals 439 and 458 dated as of
October 18, 1990.
(A) *(j) -- Shareholder Value Incentive Plan
(A) 11. -- Earnings Per Share Computations.
(A) 21. -- Subsidiaries of the Registrant.
(A) 23. -- Consent of KPMG Peat Marwick, Independent Auditors.
- ----------
LEGEND FOR EXHIBITS (PAGES 60 THROUGH 61)
(A) Filed herewith.
(B) Incorporated by reference from the Registrant's Registration Statement No.
33-7716 on Form S-1, filed with the SEC on July 15, 1986, as amended.
(C) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1986 filed with the SEC on May 15, 1986.
(D) Incorporated by reference from the Registrant's Quarterly Report on Form 10-
Q, for the quarter ended October 31, 1990 filed with the SEC on December 13,
1990.
(E) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended January 31, 1991 filed with the SEC on April 30, 1991.
(F) Incorporated by reference from the Registrant's Registration Statement No.
33-42401 on Form S-3 filed with the SEC on August 23, 1991.
(G) Incorporated by reference from the Registrant's Registration Statement on
Form 8-B filed with the SEC on September 24, 1991.
(H) Incorporated by reference from the Registrant's Registration Statement No.
41125 on Form S-4 filed with the SEC on June 13, 1991.
(I) Incorporated by reference from the Registrant's Registration Statement No.
33-44266 on Form S-8 filed with the SEC on November 29, 1991.
(J) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended January 31, 1992 filed with the SEC on April 30, 1992.
(K) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended January 31, 1993 filed with the SEC on April 29, 1993.
(L) Incorporated by reference from the Registrant's Quarterly Report on Form 10-
Q, for the quarter ended October 31, 1993 filed with the SEC on December 10,
1993.
* Represents compensatory plans or arrangements for directors or executive
officers of the Registrant.
- ----------
(d) Financial Statements of Significant Subsidiary
Financial statements and notes thereto and the financial statement schedules
required by Articles 3 and 5 of Regulation S-X, of a 50 percent or less owned
company, as defined, Hayes Wheels International, Inc. (Hayes Wheels), are
incorporated herein by reference from Hayes Wheels' Annual Report on Form 10-K
for the year ended January 31, 1994.
61
<PAGE>
SCHEDULE II
VARITY CORPORATION
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
Years ended January 31, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
January 31, January 31,
Name of Debtor 1993 Additions Repayments 1994
- -------------- ----------- --------- ---------- -----------
<S> <C> <C> <C>
V.A. Rice....... $2,146 $(2,146)
V.D. Laurenzo... 1,683 (1,683)
N.D. Arnold..... 487 (487)
J.F. Devaney.... 232 (232)
J.D. Sword...... 232 (232)
J.A. Gilroy..... 182 (182)
P.N. Barton..... 177 (177)
J.R. Nowling.... 172 (172)
B.E. Harvey..... 145 (145)
R. Harman....... 131 (131)
Other........... 610 (610)
------ ------- -----------
Total...... $6,197 $(6,197) Nil
====== ======= ===========
</TABLE>
<TABLE>
Balance at Balance at
January 31, January 31,
Name of Debtor 1992 Additions Repayments 1993
- -------------- ---------- --------- ----------- -----------
<S> <C> <C> <C>
V.A. Rice....... $ 2,146 $ $ 2,146
V.D. Laurenzo... 1,683 1,683
N.D. Arnold..... 487 487
J.F. Devaney.... 232 232
J.D. Sword...... 232 232
J.A. Gilroy..... 182 182
P.N. Barton..... 177 177
J.R. Nowling.... 172 172
B.E. Harvey..... 145 145
R. Harman....... 131 131
Other........... 652 (42) 610
---------- ------- -----------
Total...... $ 6,239 $ (42) $ 6,197
========== ======= ===========
</TABLE>
62
<PAGE>
SCHEDULE II (continued)
VARITY CORPORATION
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
Year ended January 31, 1992
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
January 31, January 31,
Name of Debtor 1991 Additions Repayments 1992
- ---------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
V.A. Rice....... $ 2,146 $ $ $ 2,146
V.D. Laurenzo... 1,683 1,683
N.D. Arnold..... 487 487
J.F. Devaney.... 232 232
J.D. Sword...... 232 232
J.A. Gilroy..... 182 182
P.N. Barton..... 177 177
J.R. Nowling.... 172 172
V. De Mesquita.. 161 (161) -
B.E. Harvey..... 145 145
R. Harman....... 131 131
Other........... 708 108 (164) 652
----------- ----------- ---------- -----------
Total...... $ 6,456 $ 108 $ (325) $ 6,239
=========== =========== ========== ===========
</TABLE>
63
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND DEFICIT
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Income:
Net sales...................................... $ 20.8 $ 194.3 $ 200.3
Interest income:
Subsidiary companies......................... 6.9 16.0 5.4
Other........................................ .7 2.5 4.0
Other income (expense), net.................... - (.8) (2.2)
Equity in earnings (losses) of subsidiaries.... 101.4 66.4 (151.0)
-------- -------- --------
129.8 278.4 56.5
-------- -------- --------
Expense:
Cost of goods sold............................. 24.3 167.7 171.3
Interest expense:
Subsidiary companies......................... .1 .2 1.8
Other........................................ 18.5 24.5 12.7
Marketing, general and administration.......... 12.0 40.6 44.1
Exchange (gains) losses........................ .2 (4.2) 4.6
Losses on sales of businesses and other
restructuring charges......................... - 22.6 -
-------- -------- --------
55.1 251.4 234.5
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of changes in accounting principles...... 74.7 27.0 (178.0)
Income tax provision............................. (.1) - -
-------- -------- --------
Income (loss) before cumulative effect of changes
in accounting principles........................ 74.6 27.0 (178.0)
Cumulative effect of changes in accounting
principles...................................... (146.1) - -
-------- -------- --------
Net income (loss)................................ (71.5) 27.0 (178.0)
Dividends on preferred stock..................... (10.4) (18.5) (18.5)
Deficit at beginning of year..................... (479.4) (487.9) (291.4)
-------- -------- --------
Deficit at end of year........................... $ (561.3) $ (479.4) $ (487.9)
======== ======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
64
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED BALANCE SHEETS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
At January 31,
1994 1993
------- --------
<S> <C> <C>
ASSETS
Cash.................................................................. $ 26.4 $ 39.4
Receivables:
Subsidiary companies................................................ 53.3 131.4
Other............................................................... 9.1 10.6
Other current assets.................................................. .7 1.0
Fixed assets, net..................................................... 15.9 16.7
Investments:
Subsidiary companies:
Shares, at equity in net assets................................... 718.3 549.0
Long-term advances................................................ 70.6 45.2
Associated companies and other...................................... - 3.9
Other assets.......................................................... 12.3 10.1
------- --------
$ 906.6 $ 807.3
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt..................................... $ .1 $ .2
Accounts payable and accrued charges.................................. 35.4 46.8
Due to subsidiaries................................................... 30.3 18.1
Long-term debt........................................................ 148.0 147.7
Other long-term liabilities........................................... 62.1 46.0
Contingent liabilities and commitments (Notes 6 and 7)
Stockholders' equity:
Preferred stock - at stated value (Liquidation value: 1994 - $37.6;
1993 - $275.6).................................................... 6.8 222.1
Common stock - at stated value (Shares issued: 1994 - 43,957,126;
1993 - 30,998,848)................................................ 637.4 277.0
Contributed surplus................................................. 656.3 656.3
Deficit............................................................. (561.3) (479.4)
Foreign currency translation adjustment............................. (79.8) (75.3)
Pension liability adjustment........................................ (30.5) (46.0)
Unrealized gains on marketable securities........................... 1.8 -
Notes receivable from officer stockholders.......................... - (6.2)
------- -------
630.7 548.5
------- -------
$ 906.6 $ 807.3
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
65
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (71.5) $ 27.0 $ (178.0)
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization.................................. 5.1 5.9 2.3
Losses on sales of businesses and other restructuring charges.. - 22.6 -
Equity in (earnings) losses of subsidiaries in excess
of dividends received......................................... (80.7) (21.4) 151.0
Cumulative effect of changes in accounting principles.......... 146.1 - -
Changes in:
Receivables.................................................. 18.6 (88.7) (86.5)
Other current assets......................................... .3 1.4 6.8
Accounts payable and accrued charges......................... (18.6) 1.3 (22.7)
Payables to subsidiary companies............................. (36.3) 17.8 16.2
Other long-term liabilities.................................. .1 (13.7) (.7)
------- ------- --------
Cash used by operating activities................................ (36.9) (47.8) (111.6)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets........................................ (.1) (2.5) (3.4)
Proceeds from sales of fixed assets.............................. - - .1
Additions to investments......................................... (106.5) (96.6) (46.0)
Proceeds from disposal of investments............................ - 94.9 -
(Additions) reductions in other assets........................... (4.3) 4.8 2.4
------- ------- --------
Cash provided (used) by investing activities..................... (110.9) .6 (46.9)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings.................................... - 121.0 162.5
Repayments of bank borrowings.................................... - (138.5) (145.0)
Proceeds from long-term debt..................................... - - 147.2
Dividends paid on preferred shares............................... (10.4) (18.5) (18.5)
Proceeds from sale of stock...................................... 143.7 119.6 -
Other............................................................ 1.5 1.0 1.1
------- ------- --------
Cash provided by financing activities............................ 134.8 84.6 147.3
------- ------- --------
INCREASE (DECREASE) IN CASH DURING THE YEAR........................ (13.0) 37.4 (11.2)
CASH AT BEGINNING OF YEAR.......................................... 39.4 2.0 13.2
------- ------- --------
CASH AT END OF YEAR................................................ $ 26.4 $ 39.4 $ 2.0
======= ======= ========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
66
<PAGE>
SCHEDULE III
VARITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unconsolidated)
(Dollars in millions)
1. These notes should be read in conjunction with the accounting policies and
other significant accounting matters contained in the Notes to Consolidated
Financial Statements (see Part II).
2. During fiscal 1993 Varity changed its method of accounting for income taxes,
postretirement benefits other than pensions, postemployment benefits and
marketable securities in accordance with several new Statements of Financial
Accounting Standards. A one-time, non-cash charge of $146.1 million was
recorded as a cumulative effect of changes in accounting principles and
includes the cumulative effect relating to Varity's subsidiaries and associated
companies. The details of these changes in accounting principles are discussed
in Note 1 to the Consolidated Financial Statements (see Part II).
3. In fiscal 1992, Varity entered into an agreement with AGCO Corporation (AGCO)
whereby AGCO was appointed exclusive distributor of farm equipment in North
America for Massey Ferguson. As a result, AGCO acquired substantially all the
net assets, primarily dealer accounts receivable and inventories of Massey
Ferguson's North American distribution operations, which operated as a division
of Varity. Significant declines in sales, cost of goods sold and marketing,
general and administration in fiscal 1993 are a direct result of this business
divestiture.
4. In fiscal 1993 and fiscal 1992, Varity increased its investment in
subsidiaries through non-cash transactions by approximately $60 million and
$149 million, respectively, by capitalizing intercompany loans and receivables.
During fiscal 1992, $6.2 million of common stock was issued pursuant to the
termination of the Performance Equity Plan in a non-cash transaction.
5. Varity received cash dividends from its consolidated subsidiaries amounting
to $20.7 million, $45.0 million and nil for the years ended January 31, 1994,
1993 and 1992, respectively.
Varity charges its subsidiaries for costs which it incurs on their behalf.
The amounts of such charges for the years ended January 31, 1994, 1993 and
1992, were $37.0 million, $35.3 million and $38.5 million, respectively.
6. Varity has guaranteed approximately $120 million of its subsidiaries'
indebtedness outstanding at January 31, 1994.
7. Varity and its subsidiaries have agreed to certain covenants and undertakings
with their lenders. There are also certain contingent obligations of the
Company and it subsidiaries. The details of these covenants and undertakings,
and compliance therewith, and contingent obligations are discussed in Notes 8
and 13 to the Consolidated Financial Statements (see Part II).
67
<PAGE>
SCHEDULE V
VARITY CORPORATION
PROPERTY, PLANT AND EQUIPMENT
Years ended January 31, 1994, 1993 and 1992
(Dollars in millions)
<TABLE>
<CAPTION>
Balance at Balance at
January 31, Additions Sales and Other Exchange January 31,
Classification 1993 at cost retirements/(1)/ changes adjustments 1994
- -------------- ----------- --------- ---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Land $ 25.1 $ 2.1 $ 1.1 $ - $ (.1) $ 26.0
Buildings 222.3 6.0 1.7 - (2.0) 224.6
Machinery, equipment
and tooling 841.9 146.7 122.1 - (8.5) 858.0
----------- --------- ---------------- ------------ ----------- -----------
$ 1,089.3 $ 154.8 $ 124.9 $ - $ (10.6) $ 1,108.6
=========== ========= ================ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance at
January 31, Additions Sales and Other Exchange January 31,
1992 at cost retirements/(2)/ changes/(3)/ adjustments 1993
----------- --------- ---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Land $ 46.8 $ .7 $ 2.6 $ 18.8 $ (1.0) $ 25.1
Buildings 318.1 6.4 20.5 63.7 (18.0) 222.3
Machinery, equipment
and tooling 1,123.0 98.8 72.5 231.6 (75.8) 841.9
----------- --------- ---------------- ------------ ----------- -----------
$ 1,487.9 $ 105.9 $ 95.6 $ 314.1 $ (94.8) $ 1,089.3
=========== ========= ================ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance at
January 31, Additions Sales and Other Exchange January 31,
1991 at cost retirements changes adjustments 1992
----------- --------- ---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Land $ 50.1 $ 1.0 $ 3.1 $ - $ (1.2) $ 46.8
Buildings 284.9 45.2 .7 - (11.3) 318.1
Machinery, equipment
and tooling 1,163.0 71.3 48.8 - (62.5) 1,123.0
----------- --------- ---------------- ------------ ----------- -----------
$ 1,498.0 $ 117.5 $ 52.6 $ - $ (75.0) $ 1,487.9
=========== ========= ================ ============ =========== ===========
</TABLE>
(1) Includes $70.7 million in connection with the divestiture of a non-core
business.
(2) Includes $55.5 million in connection with the divestiture of certain non-
core businesses.
(3) Reflects the sale of a majority of the Company's investment in Hayes Wheels
as described in Note 15 to Consolidated Financial Statements (see Part II).
68
<PAGE>
SCHEDULE VI
VARITY CORPORATION
ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Years ended January 31, 1994, 1993 and 1992
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
January 31, costs and Sales and Other Exchange January 31,
Classification 1993 expenses retirements/(1)/ changes adjustments 1994
- -------------- ----------- ---------- ---------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buildings $ 89.5 $ 8.8 $ .6 $ - $ (2.1) $ 95.6
Machinery, equipment
and tooling 402.7 58.3 47.0 - (3.3) 410.7
----------- ---------- ---------------- -------- ----------- -----------
$ 492.2 $ 67.1 $ 47.6 $ - $ (5.4) $ 506.3
=========== ========== ================ ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
January 31, costs and Sales and Other Exchange January 31,
1992 expenses retirements/(2)/ changes/(3)/ adjustments 1993
----------- ---------- ---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buildings $ 104.7 $ 9.2 $ 9.5 $ 7.4 $ (7.5) $ 89.5
Machinery, equipment
and tooling 449.3 92.8 46.5 43.3 (49.6) 402.7
----------- ---------- ---------------- ------------ ----------- -----------
$ 554.0 $ 102.0 $ 56.0 $ 50.7 $ (57.1) $ 492.2
=========== ========== ================ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
January 31, costs and Sales and Other Exchange January 31,
1991 expenses retirements changes adjustments 1992
----------- ---------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buildings $ 99.3 $ 15.3 $ 2.5 $ - $ (7.4) $ 104.7
Machinery, equipment
and tooling 445.2 83.5 40.4 - (39.0) 449.3
----------- ---------- ---------------- ---------- ----------- -----------
$ 544.5 $ 98.8 $ 42.9 $ - $ (46.4) $ 554.0
=========== ========== ================ ========== =========== ===========
</TABLE>
(1) Includes $17.0 million in connection with the divestiture of a non-core
business.
(2) Includes $30.8 million in connection with the divestiture of certain non-
core businesses.
(3) Reflects the sale of a majority of the Company's investment in Hayes Wheels
as described in Note 15 to Consolidated Financial Statements (see Part II).
69
<PAGE>
SCHEDULE VIII
VARITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 1994, 1993 and 1992
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
-------------------------
Description Balance at Charged Deductions Balance at
- ----------- January 31, Charged to to other from January 31,
1993 income accounts/(1)/ reserves 1994
----------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts.. $ 20.4 $ 4.8 $ (.5) $ (6.6) $ 18.1
Discounts, volume and performance bonuses,
returns and other allowances.............. 1.8 - - (1.6) .2
----------- ---------- ------------- ----------- -----------
$ 22.2 $ 4.8 $ (.5) $ (8.2) $ 18.3
=========== ========== ============= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged Deductions Balance at
January 31, Charged to to other from January 31,
1992 income accounts/(1)/ reserves/(2)/ 1993
----------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts.. $ 27.9 $ 10.5 $ (1.5) $ (16.5) $ 20.4
Discounts, volume and performance bonuses,
returns and other allowances.............. 15.1 20.8 (.6) (33.5) 1.8
----------- ---------- -------------- ------------- ------------
$ 43.0 $ 31.3 $ (2.1) $ (50.0) $ 22.2
=========== ========== ============== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged Deductions Balance at
January 31, Charged to to other from January 31,
1991 income accounts/(1)/ reserves 1992
----------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts.. $ 25.9 $ 11.8 $ (.5) $ (9.3) $ 27.9
Discounts, volume and performance bonuses,
returns and other allowances.............. 19.9 24.3 (.6) (28.5) 15.1
----------- ---------- -------------- ------------- ------------
$ 45.8 $ 36.1 $ (1.1) $ (37.8) $ 43.0
=========== ========== ============== ============= ============
</TABLE>
(1) Charges to other accounts arise on translation of reserves of companies
outside the United States and are reflected in the currency translation
adjustment account.
(2) Includes reduction due to the sale of Massey Ferguson's North American
distribution operations and a North American finance company of $9.3 million for
allowance for doubtful notes and accounts and $9.0 million for discounts, volume
and performance bonuses, returns and other allowances.
70
<PAGE>
SCHEDULE IX
VARITY CORPORATION
SHORT-TERM BORROWINGS
Years ended January 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Short-term bank and other
borrowings outstanding(1)
(Dollars in millions) Interest rates(2)
------------------------------------- -------------------
Maximum Average Weighted Weighted
Outstanding outstanding outstanding average average
at end during during at during
of year year year year end year
----------- ----------- ----------- -------- --------
<C> <C> <C> <C> <C>
January 31, 1994.......... $ 68.0 $ 149.0 $ 89.2 6.9% 8.5%
January 31, 1993.......... $ 127.4 $ 263.5 $ 229.2 8.8% 11.2%
January 31, 1992.......... $ 214.5 $ 334.0 $ 267.4 10.5% 11.7%
</TABLE>
- ----------
(1) Short-term bank and other borrowings relate mainly to loans secured by
inventories and receivables. Borrowings against overdraft and similar
facilities which have been committed for more than one year are classified as
long-term.
(2) The weighted average interest rate at year end relates to rates on
borrowings outstanding at the year end. The weighted average interest rate on
borrowings outstanding during the year is the interest expense for the year
relating to bank borrowings divided by the average bank borrowings outstanding
during the year.
71
<PAGE>
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.
Varity Corporation
By: /s/ Vince D. Laurenzo
Vince D. Laurenzo
Vice Chairman of the Board and President
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.
/s/ Victor Rice Chairman of the Board,
- ------------------------- Chief Executive Officer April 12, 1994
Victor Rice and Director
/s/ Vince D. Laurenzo Vice Chairman of the Board,
- ------------------------- President and Director April 12, 1994
Vince D. Laurenzo
Senior Vice President
/s/ N. D. Arnold and Chief Financial
- ------------------------- Officer April 12, 1994
N. D. Arnold (Principal Financial Officer)
/s/ Kevin C. Shanahan Vice President,
- ------------------------- Controller April 12, 1994
Kevin C. Shanahan (Principal Accounting Officer)
/s/ W. A. Corbett Director April 12, 1994
- -------------------------
W. A. Corbett
/s/ T. N. Davidson Director April 12, 1994
- -------------------------
T. N. Davidson
/s/ Robert M. Gates Director April 12, 1994
- -------------------------
Robert M. Gates
/s/ L. F. Kahl Director April 12, 1994
- -------------------------
L. F. Kahl
/s/ W. Darcy McKeough Director April 12, 1994
- -------------------------
W. Darcy McKeough
/s/ Sir Bryan Nicholson Director April 12, 1994
- -------------------------
Sir Bryan Nicholson
/s/ Warren S. Rustand Director April 12, 1994
- -------------------------
Warren S. Rustand
/s/ W. R. Teschke Director April 12, 1994
- -------------------------
W. R. Teschke
/s/ Robin Warrender Director April 12, 1994
- -------------------------
The Hon. Robin Warrender
72
<PAGE>
VARITY CORPORATION
INDEX TO EXHIBITS
FILED HEREWITH (1)
Exhibit
Number
- --------
10.2 (j) Shareholder Value Incentive Plan
11.1 Primary Earnings Per Share Computations for the years ended
January 31, 1994, 1993 and 1992
11.2 Fully Diluted Earnings Per Share Computations for the years ended
January 31, 1994, 1993 and 1992
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick, Independent Auditors
- ----------
(1) Complete listing of all exhibits can be found on pages 60-61.
<PAGE>
EXHIBIT 10.2(j)
VARITY CORPORATION
SHAREHOLDER VALUE INCENTIVE PLAN
Section I. Purpose
-------
The purpose of the Varity Corporation Shareholder Value Incentive Plan (the
"Plan") is to provide additional compensation incentives for superior
performance in the interest of shareholders by key employees of the Company, as
well as equity-based compensation for members of the Board of Directors. The
Plan is intended to strengthen the Company's long term financial performance and
its ability to attract and retain management employees and directors upon whose
judgment, initiative and efforts the continued success, growth and development
of the Company are dependent.
Section II. Definitions
-----------
When used herein, the following terms shall have the following meanings:
a. "Affiliate" means any company controlled by the Company, controlling
-----------
the Company or under common control with the Company.
b. "Award" means an award granted to any Eligible Employee in accordance
-------
with the provisions of the Plan.
c. "Award Agreement" means the written agreement or certificate evidencing
-----------------
an Award granted under the Plan.
d. "Beneficiary" means the beneficiary or beneficiaries designated
-------------
pursuant to Section XI to receive the amount, if any, payable under the Plan
upon the death of a Participant.
e. "Board" means the Board of Directors of the Company.
-------
f. "Code" means the Internal Revenue Code of 1986, as now in effect or as
------
hereafter amended. (All citations to Sections of the Code are to such Sections
as they are currently designated and reference to such Sections shall include
the provisions thereof as they may from time to time be amended or renumbered
and any successor provisions.)
g. "Committee" means the Committee appointed by the Board pursuant to
-----------
Section XII.
h. "Company" means Varity Corporation, and its successors and assigns.
---------
i. "Director" means a non-employee member of the Board.
----------
j. "Director's Option" means an option to purchase Stock, subject to the
-------------------
applicable provisions of Section IX and awarded to a Director in accordance with
the terms of the Plan.
k. "Effective Date" means March 31, 1993.
----------------
<PAGE>
l. "Eligible Employee" means an employee of any Participating Company
-------------------
whose responsibilities and decisions, in the judgment of the Committee,
significantly affect the management, growth, performance or profitability of any
Participating Company.
m. "Fair Market Value" means, unless another reasonable method for
-------------------
determining fair market value is specified by the Committee, the closing market
price of a share of Common Stock as reported on the New York Stock Exchange for
the trading date next preceding the date in question or the average of such
price for such period as may be specified by the Committee.
n. "Incentive Stock Option" means an Option which meets the requirements
------------------------
of an incentive stock option within the meaning of Section 422 of the Code.
o. "Nonqualified Stock Option" means an Option which is not an Incentive
---------------------------
Stock Option.
p. "Option" means an option to purchase Stock, subject to the applicable
--------
provisions of Section V and awarded to an Eligible Employee in accordance with
the terms of the Plan and which may be an Incentive Stock Option or a
Nonqualified Stock Option.
q. "Participant" means an Eligible Employee or Director who receives an
-------------
Award or Director's Option under the Plan.
r. "Participating Company" means the Company or any subsidiary or other
-----------------------
company related to the Company, provided, however, for Incentive Stock Options
only, "Participating Company" means the Company or any corporation which at the
time such option is granted under the Plan qualifies as a subsidiary of the
Company under the definition of "subsidiary corporation" contained in Section
424(f) of the Code.
s. "Performance Share Award" means a performance share award subject to
-------------------------
the requirements of Section IV and awarded in accordance with the terms of the
Plan.
t. "Plan" means the Varity Corporation Shareholder Value Incentive Plan,
------
as the same may be amended, administered or interpreted from time to time.
u. "Restricted Stock Incentive Shares" means Stock delivered under the
-----------------------------------
Plan subject to the requirements of Section VII and such other restrictions as
the Committee deems appropriate or desirable.
v. "Retirement" means termination of employment by an Eligible Employee on
------------
or after reaching age 55 or, with consent of the Committee, an earlier age with
the consent of the Committee.
w. "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the
------------
Securities Exchange Act of 1934, as amended, or any successor rule or
regulation.
x. "Stock" means the common stock of the Company.
-------
y. "Total Disability" means the complete and permanent inability of an
------------------
Eligible Employee to perform all of his or her duties under the terms of his or
2
<PAGE>
her employment with any Participating Company, as determined by the Committee
upon the basis of such evidence, including independent medical reports and data,
as the Committee deems appropriate or necessary.
Section III. Shares Subject to the Plan
--------------------------
a. The maximum number of shares of Stock which may be issued or issuable
pursuant to Awards and Director's Options under the Plan is 10% of the shares of
Stock outstanding from time to time; provided that no more than 1.0 million
shares of Stock may be issued pursuant to Incentive Stock Options under the
Plan. In the event that the number of shares of Stock issued or issuable
pursuant to Awards and Director's Options at any time is in excess of the above-
stated 10% limit, the number need not be reduced if such excess has resulted
solely from a reduction in the amount of outstanding shares of Stock subsequent
to the time that such Awards or Director's Options were granted. Such shares
shall be made available either from authorized and unissued shares, shares held
by the Company in its treasury or reacquired shares. The term "issued" shall
include all deliveries to a Participant of shares of Stock pursuant to Awards
and Director's Options under the Plan. The Committee may, in its discretion,
decide to award other shares issued by the Company that are convertible into
Stock or make such shares subject to purchase by an Option, in which event the
maximum number of shares of Stock into which such shares may be converted or
subject to such Option shall be used in applying the aggregate share limit under
this Section III and all provisions of the Plan relating to Stock shall apply
with full force and effect with respect to such convertible shares.
b. If, for any reason, any shares of Stock awarded or subject to purchase
or issuance under the Plan are not delivered or are reacquired by the Company
for reasons including, but not limited to, a forfeiture of Restricted Stock
Incentive Shares or termination, expiration or cancellation of an Option or
Director's Option or a Performance Share Award, such shares of Stock shall be
deemed not to have been issued pursuant to Awards or Director's Options under
the Plan except as otherwise required for exemption under Rule 16b-3.
c. Except as otherwise required for exemption under Rule 16b-3, shares of
Stock received by the Company in connection with the exercise of Options by
delivery of shares or in connection with the payment of withholding taxes shall
reduce the number of shares deemed to have been issued pursuant to Awards under
the Plan for the purpose of the 10% limit, but not for the purpose of the 1.0
million share limit, both discussed in Section III(a) hereof.
3
<PAGE>
Section IV. Grant of Awards and Award Agreements
------------------------------------
a. Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Eligible Employees or groups of
Eligible Employees to whom Awards are to be granted; (ii) grant Awards to
Eligible Employees; (iii) determine the form or forms of Award to be granted to
any Eligible Employee; (iv) determine the amount or number of shares of Stock,
if any, subject to each Award; (v) determine the terms and conditions (which
need not be identical) of each Award; (vi) establish and modify performance
objectives for Awards; (vii) determine whether and to what extent Eligible
Employees shall be allowed or required to defer receipt of any Awards or other
amounts payable under the Plan to the occurrence of a specified date or event;
(viii) determine the price at which shares of Stock may be offered under each
Award, which price may, except in the case of Options, be zero; (ix) interpret,
construe and administer the Plan as it applies to Awards and any related award
agreement and define the terms employed therein; and (x) make all of the
determinations necessary or advisable with respect to the Plan as it applies to
Awards or any Award granted thereunder. Awards may, in the discretion of the
Committee, be granted in tandem with any other Award or any award granted under
any other plan of the Company, either at the same time as or at a different time
from the grant of such other Award or award.
b. Each Award granted under the Plan shall be evidenced by a written Award
Agreement, in a form approved by the Committee. Such agreement shall be subject
to and incorporate the express terms and conditions, if any, required under the
Plan or as required by the Committee for the form of Award granted and such
other terms and conditions as the Committee may specify.
c. The Committee may modify or amend any Awards or waive any restrictions
or conditions applicable to any Awards or the exercise or realization thereof
(except that the Committee may not make any such modifications, amendments or
waivers if the effect thereof, taken as a whole, adversely affects the rights of
any recipient of previously granted Awards without his or her consent).
Section V. Stock Options
-------------
a. With respect to Options, the Committee shall (i) authorize the granting
of Incentive Stock Options, Nonqualified Stock Options, or a combination of
Incentive Stock Options and Nonqualified Stock Options; (ii) determine the
number of shares of Stock subject to each Option; and (iii) determine the time
or times when and the manner in which each Option shall be exercisable and the
duration of the exercise period; provided, however, that the aggregate Fair
-----------------
Market Value (determined as of the date an Option is granted) of the Stock for
which Incentive Stock Options granted to any Eligible Employee under this Plan
may first become exercisable in any calendar year shall not exceed $100,000.
b. The exercise period for an Option, including any extension which the
Committee may from time to time decide to grant, shall not exceed ten years from
the date of grant; provided, however, that in the case of an Incentive Stock
-----------------
Option granted to an Eligible Employee who, at the time of grant, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company (a "Ten Percent Stockholder"), such period,
including extensions, shall not exceed five years from the date of grant.
4
<PAGE>
c. The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value or,
in the case of an Incentive Stock Option granted to a Ten Percent Stockholder,
110 percent of the Fair Market Value, on the date the Option is granted, as
determined by the Committee; provided, however, that such price shall be at
least equal to the par value of one share of Stock.
d. No part of any Option may be exercised until (i) the Eligible Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period, if any, after the date on which the
Option is granted, or (ii) achievement of such performance or other criteria, if
any, by the Eligible Employee, the Company or any Participating Company or
division of the Company, as the Committee may specify, and the Committee may
further require exercisability in installments.
e. Subject to Section X(c), except as otherwise provided in the Plan, the
purchase price of the shares as to which an Option shall be exercised shall be
paid to the Company at the time of exercise either in cash or in such other
consideration as the Committee deems appropriate, including Stock already owned
by the optionee, having a total Fair Market Value, as determined by the
Committee, equal to the purchase price, or a combination of cash and such other
consideration having a total Fair Market Value, as so determined, equal to the
purchase price. The Committee may provide, in its discretion, that all or a
portion of the purchase price may be paid by the Eligible Employee's promissory
note, which may be secured or unsecured, bearing interest, if any, at a rate
specified by the Committee and subject to such other terms and conditions as the
Committee may specify.
f. At the discretion of the Committee, exercised at the time of grant of
the Option or thereafter, an Eligible Employee who exercises an Option using
shares of Stock to pay the exercise price or related withholding taxes may
receive a replacement Option for the same number of shares that the Eligible
Employee delivers to the Company in such payment. The exercise price per share
for the replacement Option will equal the Fair Market Value of a share of Stock
at the time the replacement Option is issued, and the term of the replacement
Option will be the same as the remaining balance of the term of the original
Option.
g. (a) If an Eligible Employee who has been granted an Option dies (A)
while an employee of any Participating Company or (B) within three months after
termination of his or her employment with all Participating Companies or (C)
after Retirement, all of his or her Options shall become fully exercisable at
the time of death and may be exercised by the person or persons to whom the
Eligible Employee's rights under the Option pass by will or, if no such person
has such right, by his or her executors or administrators, at any time, or from
time to time, subject to such terms and conditions as the Committee may specify,
but not later than the expiration date of the Option.
(b) If the Eligible Employee's employment by all Participating Companies
terminates because of his or her Total Disability, all of his or her Options
shall become fully exercisable at the time of termination of employment and may
be exercised at any time, or from time to time, subject to such terms and
conditions as the Committee may specify, but not later than the expiration date
of the Option.
5
<PAGE>
(c) If the Eligible Employee's employment by all Participating Companies
terminates because of his or her Retirement, his or her Options shall continue
to become exercisable in accordance with their existing exercisability schedule
notwithstanding such Eligible Employee's Retirement and, to the extent the
Options are or become exercisable, they may be exercised at any time, or from
time to time, subject to such terms and conditions as the Committee may specify,
but not later than the expiration date of the Option.
(d) If the Eligible Employee's employment by all Participating Companies
is terminated for cause or by voluntary resignation, he or she may exercise his
or her Options to the extent that he or she shall have been entitled to do so at
the date of termination of employment, at any time, or from time to time, within
one month after the date of termination of employment (or within such other
period not to exceed three months from termination as the Committee may
specify), and subject to such terms and conditions as the Committee may specify,
but not later than the expiration date of the Option. For purposes of this
Plan, a termination of employment of an Eligible Employee shall not be
considered voluntary if it occurs within six months after the compensation,
authority or responsibilities of the Eligible Employee are materially diminished
or if such termination is at the request of a Participating Company.
(e) If the Eligible Employee's employment by all Participating Companies
terminates for any other reason, he or she may exercise his or her Options to
the extent that he or she shall have been entitled to do so at the date of the
termination of his or her employment (and the Committee may, in its discretion,
specify that additional Options held by the Eligible Employee shall become
exercisable and may be exercised at such time or times as the Committee may
specify) at any time, or from time to time, within six months after the date of
the termination of his or her employment (or within such other period not to
exceed twenty-four months from termination as the Committee may specify), and
subject to such terms and conditions as the Committee may specify, but not later
than the expiration date of the Option.
h. No Option granted under the Plan shall be transferable other than by
will or by the laws of descent and distribution. During the lifetime of the
optionee, an Option shall be exercisable only by him or her or by his or her
guardian or legal representative.
i. With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an Incentive Stock Option.
6
<PAGE>
Section VI. Performance Share Awards
------------------------
a. The Committee shall determine a performance period (the "Performance
Period") of one or more years and shall determine the performance objectives for
grants of Performance Share Awards. Performance objectives may vary from
Eligible Employee to Eligible Employee and between groups of Eligible Employees
and shall be based upon such performance criteria or combination of factors as
the Committee may deem appropriate. Performance Periods may overlap and
Eligible Employees may participate simultaneously with respect to Performance
Share Awards for which different Performance Periods are prescribed.
b. At the beginning of a Performance Period, the Committee shall determine
for each Eligible Employee or group of Eligible Employees with respect to that
Performance Period the range of dollar values or number of shares, if any, which
may be fixed or may vary in accordance with such performance or other criteria
specified by the Committee, which shall be paid to an Eligible Employee as an
Award if the relevant measure of Company performance for the Performance Period
is met.
c. If during the course of a Performance Period there shall occur
significant events as determined by the Committee, including, but not limited
to, a reorganization of the Company, which the Committee expects to have a
substantial effect on a performance objective during such period, the Committee
may revise such objective.
d. If an Eligible Employee terminates service with all Participating
Companies during a Performance Period because of death, Total Disability,
Retirement or a significant event, as determined by the Committee (including,
but not limited to, a reorganization of the Company), that Eligible Employee
shall be entitled to payment in settlement of each Performance Share for which
the Performance Period was prescribed (i) based upon the performance objectives
satisfied at the end of such Performance Period and (ii) prorated for the
portion of the Performance Period during which the Eligible Employee was
employed by any Participating Company; provided, however, the Committee may
provide for an earlier payment in settlement of such Performance Share in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable with the consent of the Eligible Employee. If an Eligible Employee
terminates service with all Participating Companies during a Performance Period
for any other reason, then such Eligible Employee shall not be entitled to any
payment with respect to that Performance Period unless the Committee shall
otherwise determine.
e. Each Performance Share Award may be paid in whole shares of Stock
(together with any cash representing fractional shares of Stock), or cash, or a
combination of Stock and cash either as a lump sum payment or in annual
installments, all as the Committee shall determine, at the time of grant of the
Performance Share Award or otherwise (except that the terms of an outstanding
Performance Share Award may not be amended in a manner which taken as a whole
adversely affects the rights of the Participant without his or her consent),
commencing as soon as practicable after the end of the relevant Performance
Period.
f. Performance Shares may also be issued in satisfaction of awards made
7
<PAGE>
under the Company's 1990 Fiscal Year Group Long Term Incentive Plan.
Section VII. Restricted Stock Incentive Shares
---------------------------------
a. Restricted Stock Incentive Shares shall be subject to a restriction
period (after which restrictions shall lapse), which shall mean a period
commencing on the date the Award is granted and ending on such date or upon the
achievement of such performance or other criteria as the Committee shall
determine (the "Restriction Period"). Except in the case of Restricted Stock
Incentive Shares received as the result of the exercise of an Option, as payment
for a Performance Share Award, or in exchange for cash compensation otherwise
payable to an Eligible Employee, the Committee shall include performance
criteria in determining the Restriction Period for Restricted Stock Incentive
Shares. The Committee may provide for the lapse of restrictions in installments
where deemed appropriate.
b. Except as otherwise provided in this Section VII, no Restricted Stock
Incentive Shares received by an Eligible Employee shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period; provided, however, the Restriction Period for any Eligible
-----------------
Employee shall expire and all restrictions on Restricted Stock Incentive Shares
shall lapse upon the Eligible Employee's death, Total Disability or Retirement,
or a significant event, as determined by the Committee (including but not
limited to) a reorganization of the Company.
c. If an Eligible Employee terminates employment with all Participating
Companies for any reason (other than the reasons specified in Section VII(b))
before the expiration of the Restriction Period, all Restricted Stock Incentive
Shares still subject to restriction shall, unless the Committee otherwise
determines, be forfeited by the Eligible Employee and shall be reacquired by the
Company, and, in the case of Restricted Stock Incentive Shares purchased through
the exercise of an Option, the Company shall refund the purchase price paid on
the exercise of the Option.
d. The Committee may require under such terms and conditions as it deems
appropriate or desirable that the certificates for Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any receipt of Restricted Stock Incentive Shares, that the Eligible Employee
shall have delivered a stock power endorsed in blank relating to the Restricted
Stock Incentive Shares.
Section VIII. Other Stock-Based Awards
------------------------
a. The Committee may grant other Awards under the Plan which are
denominated in stock units or pursuant to which shares of Stock or cash may be
acquired, including Awards that are valued based on the dividends payable with
respect to Stock or using measures other than market value, if deemed by the
Committee in its discretion to be consistent with the purposes of the Plan.
Subject to the terms of the Plan, the Committee shall determine the form of such
Awards, the number of shares of Stock or other units to be granted or covered
pursuant to such Awards and all other terms and conditions of such Awards. The
Committee may award additional shares of Stock without payment therefor (other
8
<PAGE>
than payment of an amount equal to the par value thereof if required by law) to
an Eligible Employee whose holding period for Stock received upon exercise of an
Option meets or exceeds the holding period specified by the Committee in order
to receive the additional Stock.
Section IX. Directors' Options
------------------
a. On the date of each annual meeting of the Company's shareholders,
beginning with the 1993 annual meeting, each Director in office immediately
following the meeting shall automatically be granted a Director's Option to
purchase 3,000 shares of Stock at a price equal to the higher of the par value
of the Stock or the sum of the following: (i) the average closing price of such
Stock for the final 20 trading days in the preceding January, as reported in the
New York Stock Exchange -- Composite Transaction Index; and (ii) a premium,
which is a percentage of the amount under (i) above equal to the percentage
(rounded up to the next full five percent in 1993 and the next full percent
thereafter) resulting from five compoundings of the five year United States
government bond average annual percentage yield during the last 20 trading days
in the preceding January.
b. Each Director's Option shall become fully exercisable one year after
the date of the grant, and shall expire on the fifth anniversary of the date of
grant. Exercisability of the Director's Option shall not be dependent upon the
Director's continuing service on the Board.
c. Subject to Section X(c), the purchase price of the Stock as to which a
Director's Option shall be exercised shall be paid to the Company at the time of
exercise either in cash or in shares of Stock already owned by the Director for
at least six months at the time of exercise (or such other period as the
Company's regular independent auditors may specify to avoid adverse accounting
treatment) and having a total Fair Market Value equal to the purchase price, or
in a combination of cash and such shares.
d. No Director's Option granted under the Plan shall be transferable other
than by will or by the laws of descent and distribution. During the lifetime of
the optionee, a Director's Option shall be exercisable only by him or her or by
his or her guardian or legal representative.
e. In the event that within a twelve (12) month period any person or
affiliated group of persons other than a trustee holding securities under an
employee benefit plan of the Company acquires or obtains the right to acquire
twenty-five percent (25%) or more of the Company's outstanding Stock, all
Director's Options that have not yet become exercisable shall become exercisable
immediately.
f. To the extent the Plan relates to Director's Options, it is intended to
operate automatically and not require administration. However, to the extent
that administration is necessary with respect to such grants, the Plan shall be
administered by the Secretary of the Company. However, since the Director's
Options are awarded automatically, this function will be limited to ministerial
matters. The plan administrator will have no discretion with respect to the
selection of Director optionees, the determination of the exercise price of
Director's Options, the timing of such grants or number of shares of Stock
covered by the Director's Options.
9
<PAGE>
Section X. Certificates for Awards of Stock
--------------------------------
a. Subject to Section VII(d), each Participant entitled to receive shares
of Stock under the Plan shall be issued a certificate for such shares. Such
certificate shall be registered in the name of the Participant, shall bear an
appropriate legend reciting the terms, conditions and restrictions, if any,
applicable to such shares and shall be subject to appropriate stop-transfer
orders.
b. The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to (i) the listing of such shares on any stock
exchange or quotation system on which the Stock may then be listed or quoted and
(ii) the completion of any registration, qualification, approval or
authorization of such shares under any federal or state law, or any ruling or
regulation or approval or authorization of any governmental body which the
Company shall, in its sole discretion, determine to be necessary or advisable.
c. All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
d. Except for the restrictions on Restricted Stock Incentive Shares under
Section VII, each Participant who receives an award of Stock shall have all of
the rights of a shareholder with respect to such shares, including the right to
vote the shares and receive dividends and other distributions. No Participant
awarded an Option, Director's Option or Performance Share Award shall have any
right as a shareholder with respect to any shares subject to such Award or
Director's Option prior to the date of issuance to him or her of a certificate
or certificates for such shares.
Section XI. Beneficiary
-----------
a. Each Participant shall file with the Committee a written designation of
one or more persons as the Beneficiary who shall be entitled to receive the
Award or Director's Option, if any, payable under the Plan upon his or her
death. A Participant may from time to time revoke or change his or her
Beneficiary designation without the consent of any prior Beneficiary by filing a
new designation with the Committee. The last such designation received by the
Committee shall be controlling; provided, however, that no designation, or
change or revocation thereof, shall be effective unless received by the
Committee prior to the Participant's death, and in no event shall it be
effective as of a date prior to such receipt.
b. If no such Beneficiary designation is in effect at the time of a
Participant's death, or if no designated Beneficiary survives the Participant or
if such designation conflicts with law, the Participant's estate shall be
entitled to receive the Award or Director's Option, if any, payable under the
Plan upon his or her death. If the Committee is in doubt as to the right of any
person to receive such Award or Director's Option, the Company may retain such
Award or Director's Option, without liability for any interest thereon, until
the
10
<PAGE>
Committee determines the right thereto, or the Company may deliver such Award or
Director's Option into any court of appropriate jurisdiction and such delivery
shall be a complete discharge of the liability of the Company therefor.
Section XII. Administration of the Plan
--------------------------
a. To the extent it relates to Awards, the Plan shall be administered by
the Committee, as appointed by the Board. Each member of the Committee shall be
both a member of the Board and a "disinterested person" within the meaning of
Rule 16b-3.
b. All decisions, determinations or actions of the Committee made or taken
pursuant to grants of authority in respect of Awards under the Plan shall be
made or taken in the sole discretion of the Committee and shall be final,
conclusive and binding on all persons for all purposes.
c. The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan to the extent it relates to Awards
and any related Award agreement and define the terms employed in the Plan to the
extent they relate to Awards or any Award agreement, and its interpretations and
constructions thereof and actions taken thereunder shall be final, conclusive
and binding on all persons for all purposes.
d. The Committee shall have full power, discretion and authority to
prescribe and rescind rules, regulations and policies for the administration of
the Plan to the extent it relates to Awards.
e. The Committee's decisions and determinations under the Plan and with
respect to any Award granted thereunder need not be uniform and may be made
selectively among Participants, whether or not such Participants are similarly
situated.
f. The Committee shall keep minutes of its actions under the Plan. The
act of a majority of the members present at a meeting duly called and held shall
be the act of the Committee. Any decision or determination reduced to writing
and signed by all members of the Committee shall be fully as effective as if
made by unanimous vote at a meeting duly called and held.
g. The Committee may employ such legal counsel, including without
limitation independent legal counsel and counsel regularly employed by the
Company, consultants and agents as the Committee may deem appropriate for the
administration of the Plan and may rely upon any opinion received from any such
counsel or consultant and any computations received from any such consultant or
agent. All expenses incurred by the Committee in interpreting and administering
the Plan, including without limitation, meeting fees and expenses and
professional fees, shall be paid by the Company.
h. No member or former member of the Committee or the Board shall be
liable for any action or determination made in good faith with respect to the
Plan or any Award or Director's Option granted under it. Each member or former
member of the Committee or the Board shall be indemnified and held harmless by
the Company against all cost or expense (including counsel fees and expenses) or
liability (including any sum paid in settlement of a claim with the approval of
the Board) arising out of any act or omission to act in connection with the Plan
11
<PAGE>
unless arising out of such member's or former member's own fraud or bad faith.
Such indemnification shall be in addition to any rights of indemnification or
insurance the members or former members may have as directors or under the by-
laws of the Company or otherwise.
Section XIII. Amendment or Discontinuance
---------------------------
The Board may, at any time, amend or terminate the Plan. The Plan or
Awards under the Plan may also be amended by the Committee, provided that all
such amendments shall be reported to the Board. No amendment shall become
effective unless approved by affirmative vote of the Company's stockholders if
such approval is necessary or desirable for the continued validity of the Plan
or if the failure to obtain such approval would adversely affect the compliance
of the Plan with Rule 16b-3 or any other rule or regulation. No amendment or
termination shall, when taken as a whole, adversely affect the rights of any
recipient of a previously granted Award or Director's Option without his or her
consent. Notwithstanding the other provisions of this Section XIII, Section IX
and the other provisions of this Plan applicable to Director's Options may not
be amended more than once every six months other than to comport with changes in
the Code, the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder.
Section XIV. Adjustments; Change in Control
------------------------------
a. In the event of any recapitalization, reclassification, split-up or
consolidation of shares of Stock, separation (including a spin-off), dividend on
shares of Stock payable in capital stock, or other similar change in
capitalization of the Company or a merger or consolidation of the Company or
sale by the Company of all or a portion of its assets, or other similar event,
the Committee may make such appropriate adjustments in the option prices of
outstanding Options and Director's Options, in the number and kind of
securities, cash or other property which may be issued pursuant to Awards or
Director's Options under the Plan, including Awards or Director's Options then
outstanding, and in the aggregate number of shares of Stock with respect to
which Awards and Director's Options may be granted as the Committee deems
equitable with a view toward maintaining the proportionate interest of the
Participant and preserving the value of the Awards or Director's Options.
b. The Committee in its discretion may include provisions in any Award
granted to an Eligible Employee that become effective upon a change in control
of the Company (as defined by the Committee) and that provide for the
acceleration of the exercisability of, the lapse of restrictions on, or the
payment under, the Award. In the case of Options, such provisions may also
include the right, in lieu of exercising such Option, to elect to surrender all
or part of such Option to the Company and to receive cash in an amount equal to
the excess of (i) the higher of (x) the Fair Market Value of a share of Stock on
the date such right is exercised and (y) the highest price paid for Stock or, in
the case of securities convertible into Stock or carrying a right to acquire
Stock, the highest effective price (based on the prices paid for such
securities) at which such securities are convertible into Stock or at which
Stock may be acquired, by any person or group whose acquisition of voting
securities has resulted in a change in control of the Company over (ii) the
exercise price per share under the Option, multiplied by the number of shares of
Stock with respect to which such right is exercised. The provisions authorized
by this Section
12
<PAGE>
XIV(b) may be included in an Award at the time of grant of the Award or
thereafter.
Section XV. Miscellaneous
-------------
a. Nothing in this Plan or any Award granted hereunder shall confer upon
any employee any right to continue in the employ of any Participating Company or
interfere in any way with the right of any Participating Company to terminate
his or her employment at any time.
b. No Award payable under the Plan shall be deemed salary or compensation
for the purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise.
c. No Participant shall have any claim to an Award or Director's Option
until it is actually granted under the Plan. To the extent that any person
acquires a right to receive payments from the Company under this Plan, such
right shall be no greater than the right of an unsecured general creditor of the
Company. All payments of Awards provided for under the Plan shall be paid by
the Company either by issuing shares of Stock or by delivering cash from the
general funds of the Company or other property of the Company; provided,
---------
however, that such payments shall be reduced by the amount of any payment made
- -------
to the participant or his or her dependents, beneficiaries or estate from any
trust or special or separate fund. The Company shall not be required to
establish a special or separate fund or other segregation of assets to assure
such payments, and, if the Company shall make any investments to aid it in
meeting its obligations hereunder, the Participant shall have no right, title,
or interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
Investments.
d. Absence on leave approved by a duly constituted officer of the Company
shall not be considered interruption or termination of employment for any
purposes of the Plan; provided, however, that no Award may be granted to an
-----------------
employee while he or she is absent on leave.
e. If the Committee shall find that any person to whom any Award or
Director's Option, or portion thereof, is payable under the Plan is unable to
care for his or her affairs because of illness or accident, or is a minor, then
any payment due him or her (unless a prior claim therefor has been made by a
duly appointed guardian or legal representative) may, if the Committee so
directs the Company, be paid to his or her spouse, a child, a relative, an
institution maintaining or having custody of such person, or any other person
deemed by the Committee to be a proper recipient on behalf of such person
otherwise entitled to payment. Any such payment shall be a complete discharge
of the liability of the Company therefor.
f. The right of any Participant or other person to any Award or Director's
Option payable under the Plan may not be assigned, transferred, pledged or
encumbered, either voluntarily or by operation of law, except as provided in
Section XI with respect to the designation of a Beneficiary or as may otherwise
be required by law. If, by reason of any attempted assignment, transfer,
pledge, or encumbrance or any bankruptcy or other event happening at any time,
any amount payable under the Plan would be made subject to the debts or
liabilities of the
13
<PAGE>
Participant or his or her Beneficiary or would otherwise devolve upon anyone
else and not be enjoyed by the Participant or his or her Beneficiary, then the
Committee may terminate such person's interest in any such payment and direct
that the same be held and applied to or for the benefit of the Participant, his
or her Beneficiary or any other persons deemed to be the natural objects of his
or her bounty, taking into account the expressed wishes of the Participant.
g. Copies of the Plan and all amendments, administrative rules and
procedures and interpretations shall be made available for review to all
Participants at all reasonable times at the Company's administrative offices.
h. The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the
Participant or his or her Beneficiary, for the withholding of any federal,
state, local or foreign taxes. The Committee may in its discretion permit the
payment of such withholding taxes by authorizing the Company to withhold shares
of Stock to be issued, or by delivering to the Company shares of Stock owned by
the Participant or Beneficiary, in either case having a Fair Market Value equal
to the amount of such taxes.
i. The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
governmental or regulatory agency as may be required.
j. All elections, designations, requests, notices, instructions and other
communications from a Participant, Beneficiary or other person to the Committee,
required or permitted under the Plan, shall be in such form as is prescribed
from time to time by the Committee and shall be mailed by first class mail or
delivered to such location as shall be specified by the Committee.
k. The terms of the Plan shall be binding upon the Company and its
successors and assigns.
l. Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
m. Nothing contained in this Plan shall prevent a Participating Company
from adopting or continuing in effect other or additional compensation
arrangements.
n. The Plan is not intended to cover any awards that are not payable in
shares of Stock (either by their terms or at the option of the Company or the
recipient), are not measured by referring to Stock prices or values or are not
considered derivative securities within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended.
Section XVI. Effective Date and Stockholder Approval
---------------------------------------
The Effective Date of the Plan shall be March 31, 1993, subject to approval
by the holders of a majority of the Company's common stock at the 1993 Annual
Meeting. No awards will be granted under the Plan after the expiration of ten
years from the Effective Date.
14
<PAGE>
EXHIBIT 11.1
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Years ended January 31,
---------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting principles.... $ 76.3 $ 33.4 $(178.0)
Preferred stock dividend entitlements..................... (10.4) (18.5) (18.5)
------- ------- -------
Income (loss) attributable to common stockholders before
extraordinary loss and cumulative effect of
changes in accounting principles (A)..................... 65.9 14.9 (196.5)
Extraordinary loss (B).................................... (1.7) (6.4) -
Cumulative effect of changes in accounting principles (C). (146.1) - -
------- ------- -------
Net income (loss) attributable to common stockholders (D). $ (81.9) $ 8.5 $(196.5)
======= ======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)......................... 36,311 25,978 24,955
Common stock equivalents:
Common stock options.................................... 369 272 -
Long-term incentive plans............................... 20 14 -
------- ------- -------
Adjusted weighted average shares of common stock
outstanding during the period (E)........................ 36,700 26,264 24,955
======= ======= =======
Primary income (loss) per share of common stock before
extraordinary loss and cumulative effect of changes
in accounting principles (A/E)........................... $ 1.80 $ .56 $ (7.87)
Extraordinary loss per share of common stock (B/E)........ $ (.05) $ (.24) $ -
Cumulative effect of changes in accounting principles per
share of common stock (C/E).............................. $ (3.98) $ - $ -
Primary income (loss) per share of common stock (D/E)..... $ (2.23) $ .32 $ (7.87)
</TABLE>
Note: If the actual conversion of Class I Preferred Stock into common stock in
the third quarter of fiscal 1993 was assumed to have occurred as of the first
day of fiscal 1993, primary income per share of common stock before
extraordinary loss and cumulative effect of changes in accounting principles
would have amounted to $1.73.
<PAGE>
EXHIBIT 11.2
VARITY CORPORATION
FULLY DILUTED EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Years ended January 31,
-----------------------------
1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Income (loss) before extraordinary loss and cumulative effect
of changes in accounting principles.......................... $ 76.3 $ 33.4 $ (178.0)
Dividend entitlements related to preferred stock,
the conversion of which is anti-dilutive (1)................. (2.5) (18.5) (18.5)
-------- -------- ---------
Income (loss) attributable to common stockholders before
extraordinary loss and cumulative effect of changes
in accounting principles (A)................................. 73.8 14.9 (196.5)
Extraordinary loss (B)........................................ (1.7) (6.4) -
Cumulative effect of changes in accounting principles (C)..... (146.1) - -
-------- -------- ---------
Net income (loss) attributable to common stockholders (D)..... $ (74.0) $ 8.5 $ (196.5)
======== ======== =========
Weighted average shares of common stock outstanding
during the period (in thousands) (1)......................... 42,107 25,983 24,955
Common stock equivalents:
Common stock options........................................ 625 428 -
Long-term incentive plans................................... 21 25 -
-------- -------- ---------
Fully diluted weighted average shares of common stock
outstanding during the period (E)............................ 42,753 26,436 24,955
======== ======== =========
Fully diluted income (loss) per share of common stock
before extraordinary loss and cumulative effect
of changes in accounting principles (A/E).................... $ 1.73 $ .56 $ (7.87)*
Extraordinary loss per share of common stock (B/E)............ $ (.05)* $ (.24)* $ -
Cumulative effect of changes in accounting principles
per share of common stock (C/E).............................. $ (3.98)* $ - $ -
Fully diluted income (loss) per share of common stock (D/E)... $ (2.23)* $ .32 $ (7.87)*
* Anti-dilutive
</TABLE>
(1) The calculation for the year ended January 31, 1994 assumes the actual
conversion of Class I Preferred Stock into common stock occurred as of the first
day of the period. See Note 4 to Consolidated Financial Statements.
<PAGE>
EXHIBIT 21
The following is a list at March 31, 1994 of all material subsidiaries of the
Company (including subsidiaries which if considered in the aggregate as a single
subsidiary would constitute a significant subsidiary), with information in
regard to each as to the jurisdiction under the laws of which it is organized
and the percentage of voting securities owned by its immediate parent. The
voting securities of all listed subsidiaries are 100% owned directly or
indirectly, through subsidiaries, by the Registrant, unless otherwise indicated.
The Registrant is not a subsidiary of any other company.
VARITY CORPORATION SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
Jurisdiction Percent
Name of Subsidiary of Incorporation Parent Ownership
- ------------------ ----------------- ------ ---------
<S> <C> <C> <C>
Massey-Ferguson Industries Limited Delaware (U.S.A.) Registrant 100.00
Massey-Ferguson Assets Corporation Delaware (U.S.A.) Massey-Ferguson Industries Limited 100.00
Polygon Reinsurance Company Limited Bermuda Massey-Ferguson Assets Corporation 100.00
Varity Nederland NV Netherlands Massey-Ferguson Assets Corporation 100.00
Massey-Ferguson Nederland Holding BV Netherlands Massey-Ferguson Group (International) Limited 100.00
Perkins Nederland Holding BV Netherlands Perkins Group Limited 88.00
Perkins Group (International) Ltd. 12.00
Varity GmbH Germany Perkins Nederland Holding BV 100.00
Pacoma Hydraulik GmbH Germany Varity GmbH 100.00
Massey-Ferguson GmbH Germany Varity GmbH 100.00
Varity Holdings Limited U.K. Massey-Ferguson Assets Corporation 100.00
Massey-Ferguson Group Limited U.K. Varity Holdings Limited 100.00
Massey-Ferguson Group (International) U.K. Massey-Ferguson Group Limited 100.00
Limited
Massey-Ferguson Manufacturing Limited U.K. Massey-Ferguson Group Limited 100.00
Massey-Ferguson (United Kingdom) U.K. Massey-Ferguson Manufacturing Limited 100.00
Limited
Perkins Group Limited U.K. Varity Holdings Limited 100.00
Perkins Group (International) Ltd. U.K. Perkins Group Limited 100.00
Perkins Engines Group Limited U.K. Perkins Group Limited 100.00
Perkins Engines Limited U.K. Perkins Group Limited 100.00
Perkins Limited U.K. Perkins Group Limited 100.00
Massey-Ferguson SA France Massey-Ferguson Nederland Holding BV 100.00
Massey-Ferguson (Delaware) Inc. Delaware (U.S.A.) Registrant 100.00
Massey-Ferguson Credit Corporation Maryland (U.S.A.) Registrant 100.00
Agricredit Acceptance Corporation Delaware (U.S.A.) Massey-Ferguson Credit Corporation 100.00
Varity (Delaware) Inc. Delaware (U.S.A.) Massey-Ferguson (Delaware) Inc. 100.00
Dayton Walther Corporation Ohio (U.S.A.) Varity (Delaware) Inc. 100.00
K-H Corporation Delaware (U.S.A.) Massey-Ferguson (Delaware) Inc. 100.00
Kelsey-Hayes Company Delaware (U.S.A.) K-H Corporation 100.00
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors and Stockholders
VARITY CORPORATION:
We consent to incorporation by reference in the registration statement (No. 33-
48135) on Form S-8 of Varity Corporation of our report dated March 7, 1994,
relating to the consolidated balance sheets of Varity Corporation and
subsidiaries as of January 31, 1994 and 1993, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows and
related schedules for each of the years in the three-year period ended January
31, 1994, which report is included in the January 31, 1994 annual report on Form
10-K of Varity Corporation. Our report refers to changes in accounting for
income taxes, postretirement benefits, post-employment benefits and securities.
/s/ KPMG PEAT MARWICK
Buffalo, New York
April 12, 1994
