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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 0-4723
FARR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1288401
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2201 Park Place, El Segundo, CA 90245
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 727-6300
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class Name of Exchange on Which Registered
Common Stock, $.10 Par Value NASDAQ
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __x__
The aggregate market value of voting common stock held by non-affiliates of
Registrant on March 6, 1998, based on the closing sale price on such date, was
$94,966,839.
The number of shares of common stock outstanding on March 6, 1998 was 5,755,566.
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DOCUMENTS INCORPORATED BY REFERENCE
PART I AND II:
The Annual Report to Stockholders for the fiscal year ended January 3, 1998.
PART I AND III:
The Proxy Statement for the Annual Meeting of Stockholders to be held April 28,
1998.
PART I
Item 1. Business
Farr Company and its subsidiaries (hereinafter collectively referred to as
the "Company" or "Registrant") are engaged in the design, development,
manufacture, sale and service of filters and filtration systems. These
products are used for a wide variety of applications, including heating,
ventilation and air conditioning systems, manufacturing and process
cleanrooms, special application filters for original equipment
manufacturers, diesel-powered truck engines, railroad locomotives, dust
collection systems and gas turbines. Air filter efficiencies range from 20
percent in disposable products to 99.9999+ percent in cleanroom products.
Products are available as standard items or may be custom engineered. They
range in size and complexity from a small throwaway air filter to large gas
turbine systems with a single filter component module weighing in excess of
twenty tons.
All of the Company's filter products incorporate at least one of five basic
methods of filtration. These include strainer type filters which block the
passage of particles through the use of various types of materials such as
paper, non-woven cotton fabric, fiberglass and metal screening; impingement
and diffusion type filters which consist of layers of various types of
screening materials sometimes with an oil coating that traps dust
particles; inertial separators which filter high velocity air by changing
its direction; and activated carbon filters which absorb odors and gases.
Paper, fabric, fiberglass and carbon filters are disposable and the Company
sells replacements.
Many products manufactured by the Company are enclosed in hardware ranging
from simple frames to large component modules weighing in excess of twenty
tons. The percentage of the Company's total sales involving the fabrication
of large enclosures used in special filtration was 5 percent, 7 percent and
4 percent in 1997, 1996 and 1995, respectively. These products are sold
primarily for use with gas turbine installations in applications in the
electrical generating, oil and gas industries.
The Company also maintains and services air filtration systems and
accessory equipment in buildings and industrial plants in Southern
California, Detroit, Michigan and Phoenix, Arizona. Services include
replacing disposable filters.
The Company was organized in California in 1938 and reincorporated in
Delaware in 1987.
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Materials
---------
The principal materials used in manufacturing the Company's products are
ferrous and non-ferrous materials, plastisols, urethanes, adhesives and
certain finished and semi-finished filter materials, including screen,
activated carbon, cotton fibers, paper and fiberglass. The Company does not
depend on any single materials supplier for a significant portion of its
raw materials.
Product Engineering and Development
-----------------------------------
At January 3, 1998, the Company employed approximately 43 engineers,
draftsmen and technicians in the United States, Canada and England to
improve and develop existing products, to design, develop and test new
products and to improve production equipment and techniques. The Company
spent approximately $2,129,000, $2,217,000 and $2,251,000 for product
engineering and development in 1997, 1996, and 1995, respectively.
The Company owns a number of United States and foreign patents. Although
the Company considers these patents to be of value in its operations, its
business is not dependent on any single patent or group of patents.
Sales and Distribution
----------------------
The Company's products are sold throughout the United States and in over 40
foreign countries through salesmen working out of field sales offices and
through various distributors and manufacturers' representatives.
Certain of the Company's products are manufactured and sold under licensing
agreements with manufacturers located in Argentina, Australia, France, Hong
Kong, India, Indonesia, Italy, Japan, Malaysia, Mexico, New Zealand,
Singapore, Taiwan and Venezuela.
During 1997, no customer accounted for more than 10 percent of net sales.
Backlog
-------
The Company's backlog at January 3, 1998 was $14,631,000 as compared to
$13,899,000 at December 28, 1996.
Historically, backlog has not been a significant measure of the Company's
future business activities since the majority of orders are shipped within
forty-five to sixty days of receipt. During 1997, approximately 11 percent
of the Company's business was derived from products with lead times longer
than 60 days.
These products are primarily heavy fabrication products such as gas turbine
equipment. The backlog of orders relating to heavy fabrication products was
approximately $3,006,000 and $3,679,000 at January 3, 1998 and December 28,
1996, respectively. All of the January 3, 1998 backlog is scheduled for
delivery during 1998.
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International Operations
------------------------
The Company engages in operations in foreign countries as described above.
For information regarding the geographic distribution, revenue, operating
profit and identifiable assets of the Company's domestic and international
operations, see Note 13 of Notes to Consolidated Financial Statements,
included in the Company's Annual Report to Stockholders, which is
incorporated herein by reference.
The Company's international operations are subject to the additional risks
inherent in doing business in countries whose governments have policies
different than those of the United States. To date the Company has
experienced no material problems in foreign countries arising from
political instability or currency restrictions or fluctuations.
Competition
-----------
The fields in which the Company operates are highly competitive with
numerous other companies manufacturing and selling competing products.
While information with respect to the industry ranking of the Company among
manufacturers of similar products is not available, the Company believes
that its principal competitors in most of its major product areas are
Flanders Corporation, American Air Filter Company, Inc., a wholly owned
subsidiary of Snyder General Corporation, Donaldson Company, Inc. and
Clarcor, Inc. A number of the Company's competitors have greater financial
and marketing resources than the Company. The Company believes the
principal competitive factors in the sale of its products are technical
competence, quality and the ability to respond to the individual
requirements of its customers.
Employees
---------
At March 6, 1998, the Company had approximately 1,319 employees as compared
to approximately 1,307 on March 7, 1997.
The Company's four drivers and warehouse operators at its El Segundo
service office are covered by a collective bargaining agreement with the
Teamsters Union that expires on February 6, 2000. Twenty-five employees at
the Company's Delano plant are covered by a collective bargaining agreement
with the Sheet Metal Workers International Association that expires June
30, 1998. At March 6, 1998, 133 employees at the Company's Montreal, Canada
plant were covered by a three year collective bargaining agreement expiring
August 31, 2000, and 53 employees at the Company's Birmingham, England
plant were covered by a collective bargaining agreement that expires on
December 31, 1998.
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Executive Officers of the Registrant
- ------------------------------------
================================================================================
Position Held and
Business Experience During
Name Age Past Five Years
Kenneth W. Gerstner 54 Senior Vice President, Secretary and Chief
Financial Officer of the Company (since January
1995), Vice President, Secretary and Chief
Financial Officer of the Company (from June 1993 to
January 1995), Controller, Archive Technology, Inc.
(from June 1990 to May 1993), Assistant Corporate
Controller, Archive Corporation (from March 1989 to
June 1990).
John C. Johnston 54 Director of the Company (since September 1996),
President and Chief Operating Officer (since
February 1996), Senior Vice President of the
Company (from January 1995 to February 1996);
President of Easton Aluminum, Inc. (from January
1986 to December 1994).
Richard C. Larson 48 Senior Vice President of the Company (since
February 1998), Vice President of the Company (from
June 1997 to February 1998), President and Chief
Executive Officer of Mac Equipment, Inc. from May
1994 to May 1997.
H. Jack Meany 75 Chairman and Chief Executive Officer of the Company
(since February 1996), Chairman, President, and
Chief Executive Officer (from April 1994 to
February 1996), Director of the Company (from June
1976 to March 1994); Chairman of the Board and
Chief Executive Officer (from October 1975 to March
1988) of NI Industries, Inc., a manufacturer of
building, industrial, and defense products;
Director, APS Corp. and BWP International, Inc.
Myron G. Rasmussen 60 Vice President of the Company (since March 1990),
Director of Engineering of the Company (from August
1977 to May 1990).
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Item 2. Properties
-------------------
The location and general description of the Company's principal properties
at March 6, 1998 are set forth in the following tables. All such properties
are owned by the Company except as noted:
Floor Area
Location (Square Feet) Principal Uses
Jonesboro, AR 220,000 Manufacturing
El Segundo, CA 40,000 Corporate Offices
Delano, CA 39,000 Manufacturing
Corcoran, CA 80,000 Manufacturing
Crystal Lake, IL 120,000 Manufacturing
Holly Springs, MS 208,000 Manufacturing
Conover, NC 107,000 Manufacturing
Washington, NC (leased) 15,000 Manufacturing
Montreal, Canada 146,000 Manufacturing
Birmingham, England 82,000 Manufacturing
Selangor, Malasia (leased) 14,000 Manufacturing
The Company leases sales office and warehouse space in or near San Diego,
California; Phoenix, Arizona; Detroit, Michigan; Toronto, Ontario, Canada;
British Columbia, Canada; Manitoba, Canada; Quebec, Canada; and Singapore.
The Company believes that its facilities and manufacturing equipment are
well maintained and adequate for current operations. During 1997, the
Company believes that utilization of its various production facilities
ranged from 50 to 90 percent, depending upon product mix.
Item 3. Legal Proceedings
--------------------------
The Company is involved in several claims and suits that arise out of the
ordinary course of business, and has tax returns under review. Management
believes that these matters are either adequately reserved, covered by its
insurance, or would not have a material adverse effect on the financial
position or operations of the Company if disposed of unfavorably.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not applicable.
Incorporation by Reference
--------------------------
The following portion of the Company's Annual Report to Stockholders for
the year ended January 3, 1998 ("Annual Report") is hereby incorporated by
reference.
Form 10-K Item No. Document Portion of Document
---------------------- ------------- -------------------
Part I -- Item 1 and 2 Annual Report Pages 7 through 19
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
---------------------------------------------------------------------
Matters
-------
The Company's Common Stock trades on the Nasdaq National Market under the
symbol FARC. At March 6, 1998, there were approximately 444 stockholders of
record of the Company's Common Stock.
Dividends
---------
The Company did not pay any dividends on its Common Stock over the last two
years.
On February 18, 1997, The Company's Board of Directors declared a dividend
in the form of a 3 for 2 stock split and paid on March 28, 1997, to
stockholders of record on March 7, 1997.
This Item 5 should be read in conjunction with information appearing under
the captions "Consolidated Statements of Stockholders' Investment",
"Selected Financial Data" and "Summary of Stock Quotations" on pages 8, 21
and 26, respectively, of the Annual Report.
Item 6. Selected Financial Data
-------------------------------
The five year summary under "Selected Financial Data" included on page 21
of the Annual Report is incorporated herein by this reference. The
five-year summary should be read in conjunction with the Company's
consolidated financial statements and accompanying notes included under
Item 8, Consolidated Financial Statements and Supplementary Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------------
Results of Operations
---------------------
"Management's Discussion and Analysis" on pages 22 through 25 of the Annual
Report is incorporated herein by this reference.
Item 8. Consolidated Financial Statements and Supplementary Data
----------------------------------------------------------------
Pages 7 through 20 of the Annual Report, which include the consolidated
financial statements, and the Report of Independent Public Accountants as
listed in Item 14 (a) (1), are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
--------------------
Not applicable.
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PART III
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Information appearing under the caption "Compliance With Section 16(a) of
the Exchange Act" in the Company's 1997 Proxy Statement is incorporated
herein by this reference.
Item 10. Directors and Executive Officers of the Registrant.
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Information appearing under the caption "Election of Directors" in the
Company's 1997 Proxy Statement is incorporated herein by this reference.
Item 11. Executive Compensation
-------------------------------
Information appearing under the caption "Executive Compensation" in the
Company's 1997 Proxy Statement is incorporated herein by this reference.
Information appearing under the captions "Compensation Committee Report"
and "Performance Graph" in the Company's 1997 Proxy Statement is not
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Information appearing under the caption "Ownership of the Company's
Securities" in the Company's 1997 Proxy Statement is incorporated herein by
this reference.
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
Note 1 to the consolidated financial statements, included on page 10 of the
Annual Report, and the caption "Independent Public Accountants" in the
Company's 1997 Proxy Statement contain information about certain
relationships and are incorporated herein by this reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
------------------------------------------------------------------------
(a) Financial Statements, Schedules and Exhibits:
(1) Index to Financial Statements and Supplementary Data.
The financial statements listed below are set forth in the
Annual Report for the fiscal year ended January 3, 1998 and are
incorporated herein by this reference.
Annual Report
Page No.
Consolidated Balance Sheets at January 3,
1998 and December 28, 1996. 7
Consolidated Operations Statements and
Consolidated Statements of Stockholders'
Investment for the three years ended January
3, 1998, December 28, 1996 and December 30,
1995. 8
Consolidated Statements of Cash Flows for the
three years ended January 3, 1998, December
28, 1996 and December 30, 1995. 9
Notes to the Consolidated Financial
Statements 10-19
Report of Independent Public Accountants 20
(2) The exhibits filed as part of this report are listed in the
Exhibit Index which follows the Supplemental Schedules referred
to above. Management contracts and compensatory plans and
arrangements listed in the Exhibit Index are denoted with an
asterisk (*).
(b) 8-K Reports:
None
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SIGNATURES
Pursuant to the requirements of Section 13 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.
FARR COMPANY
Dated: March 25, 1998 By: /s/ H. Jack Meany
------------------------ -------------------------------
H. Jack Meany
Chief Executive Officer
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.
Dated: March 25, 1998 By: /s/ H. Jack Meany
------------------------ -------------------------------
H. Jack Meany
Chairman and Chief Executive Officer
Dated: March 25, 1998 By: /s/ Robert G. Batinovich
------------------------ -------------------------------
Robert G. Batinovich
Director
Dated: March 25, 1998 By: /s/ Richard P. Bermingham
------------------------ -------------------------------
Richard P. Bermingham
Director
Dated: March 25, 1998 By: /s/ Denis R. Brown, Jr.
------------------------ -------------------------------
Denis R. Brown, Jr.
Director
Dated: March 25, 1998 By: /s/ David J. Farr
------------------------ -------------------------------
David J. Farr
Director
Dated: March 25, 1998 By: /s/ John C. Johnston
------------------------ -------------------------------
John C. Johnston
Director
Dated: March 25, 1998 By: /s/ John J. Kimes
------------------------ -------------------------------
John J. Kimes
Director
Dated: March 25, 1998 By: /s/ John A. Sullivan
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John A. Sullivan
Director
Dated: March 25, 1998 By: /s/ Kenneth W. Gerstner
------------------------ -------------------------------
Kenneth W. Gerstner
Sr. Vice President, Secretary
and Chief Financial Officer
10
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FARR COMPANY AND SUBSIDIARIES
List of Exhibits
Item Description
3.1 Certificate of Incorporation of Registrant as currently in
effect. Filed as Exhibit 3.1 on Form 10-K dated December
30, 1995 and incorporated herein by this reference.
3.2 Amended By-Laws of Registrant as currently in effect. Filed
as Exhibit 3.2 on Form 10-K dated December 30, 1995 and
incorporated herein by this reference.
4.31 Rights Agreement, dated as of April 3, 1989, between Farr
Company and Chase Mellon Shareholder Services (formerly
Bank of America NT & SA). Filed as Exhibit 1 on Form 8K
dated April 18, 1989 and incorporated herein by this
reference.
4.64 Credit Agreement dated February 15, 1996 between Farr
Company, as borrower, and Bank of America National Trust
and Savings Association, as lender. Filed as Exhibit 4.64
to Annual Report on Form 10-K for the year ended December
30, 1995 and incorporated herein by this reference.
4.65 Amendment, dated September 24, 1996 between Farr Company,
as borrower, and Bank of America National Trust and Savings
Association, as lender.
Registrant agrees that it will furnish to the Commission
upon request copies of any other instruments with respect
to the long-term debt of Registrant and its subsidiaries;
under none of such other instruments does the total amount
of securities authorized exceed 10 percent of the total
assets of Registrant and its subsidiaries on a consolidated
basis.
*10.1 Non-Qualified Deferred Compensation Plan, dated July 31,
1987. Filed as Exhibit 10.1 to Annual Report on Form 10-K
for the year ended January 2, 1988 and incorporated herein
by this reference.
*10.3 Deferred Compensation Plan for Directors dated November 5,
1980. Filed as Exhibit 10.5 to Annual Report on Form 10-K
for the year ended January 3, 1981 and incorporated herein
by this reference.
*10.4 Farr Company Management Incentive Bonus Plan. Filed as
Exhibit 10.6 to Annual Report on Form 10-K for the year
ended January 3, 1981 and incorporated herein by this
reference.
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*10.5 Deferred Compensation Plan for Officers dated April 30,
1981. Filed as Exhibit 10.7 to Annual Report on Form 10-K
for the year ended January 2, 1982 and incorporated herein
by this reference.
*10.6 Amendments to Stock Option Plan for Key Employees. Filed as
Exhibit 10.8 to Annual Report on Form 10-K for the year
ended January 2, 1982 and incorporated herein by this
reference.
*10.7 1983 Stock Option Plan for Key Employees as amended. Filed
as Exhibit A to registrant's definitive proxy statement for
the annual meeting of stockholders held on May 4, 1988 and
incorporated herein by this reference.
*10.12 Farr Company Supplemental Executive Benefits Plan dated
July 24, 1990. Filed as Exhibit 10.12 on Form 10-K for the
year ended December 29, 1990 and incorporated herein by
this reference.
*10.14 Non-Employee Directors Stock Option Plan, filed as Exhibit
10.14 on Form 10-K for the year ended December 29, 1990 and
incorporated herein by this reference.
*10.21 The 1993 Stock Option Plan for Key Employees of Farr
Company. Filed as Exhibit 10.21 on Form 10-K for the year
ended December 31, 1994 and incorporated herein by this
reference.
*10.22 First Amendment to the 1993 Stock Option Plan by key
employees of Farr Company dated September 20, 1994. Filed
as Exhibit 10.22 on Form 10-Q for the quarter ended October
1, 1994 and incorporated herein by this reference.
*10.23 Amendment to the Company's 1991 Stock Option Plan for
Non-Employee Directors dated September 20, 1994, filed as
Exhibit 10.23 on Form 10-Q for the quarter ended October 1,
1994 and incorporated herein by this reference.
*10.33 Second Amendment to the 1991 Stock Option Plan for
Non-Employee Directors dated September 12, 1995. Filed as
Exhibit 10.33 on Form 10-K dated December 30, 1995 and
incorporated herein by this reference.
*10.34 Employee contract agreement between John Johnston and Farr
Company dated Novembers 28, 1994. Filed as Exhibit 10.34 on
Form 10-K dated December 30, 1995 and incorporated herein
by this reference.
*10.35 The Farr Company 401(k)/Retirement Plan dated December 15,
1995. Filed as Exhibit 10.35 on Form 10-K dated December
30, 1995 and incorporated herein by this reference.
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*10.36 The Farr Company Supplemental Executive Savings Plan
Adoption Agreement, dated November 21, 1995. Filed as
Exhibit 10.36 on Form 10-K dated December 30, 1995 and
incorporated herein by this reference.
*10.37 The Corporate Plan for Retirement Select Plan, Fidelity
Basic Plan Document dated April 11, 1994 (SESP). Filed as
Exhibit 10.37 on Form 10-K dated December 30, 1995 and
incorporated herein by this reference.
10.38 Trust Agreement for Farr Company 401K/Retirement Plan,
dated December 15, 1995. Filed as Exhibit 10.38 on Form
10-K dated December 30, 1995 and incorporated herein by
this reference.
10.39 Trust Agreement for Farr Company Supplemental Executive
Savings Plan between Farr Company as sponsor and Fidelity
Management Trust Company as trustee dated November 21,
1995. Filed as Exhibit 10.39 on Form 10-K dated December
30, 1995 and incorporated herein by this reference.
*10.40 Approved salary arrangement for Farr Company's Chairman and
Chief Executive Officer compensation. Filed as Exhibit
10.40 on Form 10-Q dated June 29, 1996 and incorporated
herein by this reference.
10.41 Joint Venture Agreement between Farr Company and Quest
Technology SDN.BHD dated as of April 15, 1997.
10.42 Metalcraft Stock Purchase Agreement dated October 28, 1997.
13 Annual Report to Stockholders. With the exception of the
information incorporated by reference into Items 1, 2, 5,
6, 7 and 8 of this Form 10-K, the 1997 Annual Report to
Stockholders is not deemed to be filed as a part of this
report.
21 A list of all subsidiaries of registrant.
23 Consent of Independent Public Accountants.
27.1 Financial Data Schedule - Fiscal year end 1997.
27.2 Financial Data Schedule - Fiscal year ends 1995, 1996 and
Quarters 1, 2 and 3 of 1996.
27.3 Financial Data Schedule - Quarters 1, 2, 3 of 1997.
* Management contract or compensatory arrangements.
Copies of Exhibits are available, on prepayment of 15 cents per page, by
writing to the Secretary of the Company at the address set forth on the
cover page of this Annual Report and Form 10-K.
13
Exhibit 10.41
JOINT VENTURE AGREEMENT
between
FARR COMPANY
and
QUEST TECHNOLOGY SDN. BHD
Dated as of April 15, 1997
<PAGE>
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT is dated as of April 15,1997 by and
between Farr Company, a Delaware corporation ("Farr"), and Quest Technology SDN.
BHD, a Malaysian SDN. BED ("Quest").
RECITALS
A. Farr and Quest desire to pursue jointly the production and sale of
air filtration products in Pacific Rim markets with the objective of increasing
market share of Farr brand filter products in that region;
B. Farr and Quest desire to carry out such joint activities through QF
FILTERS SDN. BHD, a Malaysian corporation which is being formed to conduct the
business operations contemplated by this Joint Venture Agreement ("QF"); and
C. Farr and Quest wish to memorialize their mutual understanding and
agreement to participate as shareholders in QF for the purposes of, and on the
terms set out in, this Joint Venture Agreement.
AGREEMENT
In consideration of the premises and in reliance upon the
representations, warranties, covenants and agreements set forth herein, Farr and
Quest agree as follows:
Section 1. Formation of QF.
1.01. Initial Capitalization. As soon as practicable after the
execution and delivery of this Joint Venture Agreement and before QF commences
business or enters into any agreement or arrangement of whatever kind, Farr and
Quest will cause to be taken all necessary steps to ensure that:
(a) Inception. QF is duly formed and this Joint Venture Agreement is
adopted by QF;
(b) Authorized Capital Stock. The authorized capitalization of QF
consists of 1,500,000 shares of capital stock, (the "Stock");
(c) Shares Purchased by Farr. 250,000 shares of Stock are issued to
Farr in consideration for the payment by Farr to QF of RM 250,000 in available
funds, and Farr shall have agreed to purchase an additional 500,000 shares of
Stock for RM 1.00 per share concurrently with the dates of purchase of an equal
number of shares by Quest;
(d) Shares Purchased by Quest. 250,000 shares of Stock are issued to
Quest in consideration for the payment by Quest to QF of RM 250,000 in available
funds, and Quest shall have agreed to purchase an additional 500,000 shares of
Stock for RM 1.00 per share concurrently with the dates of purchase of an equal
number of shares by Farr.
<PAGE>
1.02. Loans. On a date or dates mutually agreed upon by the parties
hereto, but in any event not later than August 1, 1997, Farr and Quest each
agrees to make non-interest bearing loans to QF in the aggregate amount of RM
500,000 by each party. The loans shall be repaid in full prior to any
distribution of dividends on the Stock.
1.03. Transfer of Technology. As soon as practicable after the
formation and initial capitalization of QF, but in any event not later than
August 1, 1997, Farr agrees to enter into a license agreement with QF whereby
Farr transfers, licenses and makes available to QF the right to use the brand
name "Farr" and related intellectual property, patents and proprietary
technology and practices involved in the design, development and production of
air filtration products and filter media systems and components for the
applicable licensed product lines described in Section 1.04 below.
1.04 Product Lines. The product lines to be produced by QF for sale
pursuant to this Joint Venture Agreement shall be the following:
(a) ASHRAE filters and hardware
(b) HEPA filters and hardware
(c) Cleanroom products (excluding ceiling grid)
(d) Gas and vapors absorbers
1.05. Payment for Technical, Manufacturing, Production Services and
Support. In consideration of the regular and ongoing services in product
research and development, testing, evaluation and reporting; product engineering
service; manufacturing engineering service; equipment, machinery and tooling
design, procurement and testing; parts and materials specifications, testing and
reporting; quality control procedures, maintenance and surveillance; production
control system design, maintenance and surveillance; and financial system design
maintenance and surveillance to be provided to QF, Farr shall be compensated by
QF in an amount to be determined by Farr and billed to QF quarterly. Such
amounts billed to QF by Farr during the first 24 months of operation shall not
exceed 7.5% of total net sales adjusted from time to time to reflect return of
excess profits to both Quest and Farr under the provision of Section 3.04, if
any and thereafter in accordance with the following schedule:
Fiscal Year Sales RM x Million Rate %
First 2.5 7.5
Next 2.57 7
Next 2.56 6
Thereafter 5
1.06. Timing for Technical Service and Support Payments. QF shall make
the payments contemplated by Section 1.05 above in full to Farr no later than 15
days after receipt of invoices.
2
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Section 2. Corporate Governance.
2.01. QF's Board of Directors.
(a) Number of Directors. During the term of this Joint Venture
Agreement, QF shall be governed by a Board of Directors (the "Board") consisting
of three members.
(b) Board Representation. Farr and Quest shall take such action as may
be necessary to cause the nomination, election and continuance as the members of
the Board one person designated by Farr and one person designated by Quest. The
third director shall be selected by the Farr and Quest director-designees by a
process of alternately striking all but one name from a slate of candidates
submitted for consideration by a mutually agreed upon third party such as a
bank, accounting firm or law firm.
(c) Initial Board of Directors. The initial Board shall consist of the
following members:
Peng Yew Wong
H. Jack Meany
(d) Compensation. The directors designated by Farr and by Quest shall
not be compensated for their service as directors, except that travel expenses
to and from the plant location shall be reimbursed. The third director selected
pursuant to the process outlined above shall be compensated at prevailing market
rates for such service.
(e) Term of Office. Each of the Board members shall be elected for a
term of one year and shall hold office until the next annual meeting of
shareholders of QF or until his respective successor is otherwise duly elected
as provided under this Joint Venture Agreement.
(f) Vacancies. At any time a vacancy is created on the Board by the
death, removal or resignation of any one of the directors, a replacement shall
be selected in the same manner the departing director was selected through
Section 2.0l(b) above. Any director may be removed for cause by a vote of a
majority of the remaining directors. Any director may be removed for any reason
by the party who has designated such director.
2.02. Management.
(a) Plant Manager. Plant operations conducted by the Joint Venture
shall be managed initially by an individual selected by the Board of Directors
of QF with competency and expertise as a plant superintendent/mechanic, plant
manager and general manager in that order of importance. The individual so
selected (the "Plant Manager") will report directly to QF's Board of Directors,
and the Board of Directors of QF shall review and approve the total compensation
of the Plant Manager no less than once each year.
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(b) Quest's Primary Responsibilities. Quest shall bear primary
responsibility for (i) providing direction and oversight of the Plant Manager,
(ii) reviewing of financial performance and (iii) providing periodic reports to
the Board of Directors on these areas of responsibility.
(c) Farr's Primary Responsibilities. Farr shall bear primary
responsibility for (i) developing a material and production system and a
financial reporting system which will be followed by QF without exception, (ii)
periodically reviewing the financial performance and operations of QF, product
quality, plant efficiency and capacity utilization and (iii) providing periodic
reports to the Board of Directors on these areas of responsibility.
2.03. Operations Budget. As soon as practicable after the execution
and delivery of this Joint Venture Agreement and not less than 30 days prior to
the commencement of each fiscal year thereafter, Farr and Quest shall together
prepare a business plan reflecting the estimated receipts and expenditures
(operating and capital) of QF for each such fiscal year (an "Operations
Budget"). Such Operations Budget shall be updated and modified from time to time
as agreed by both Farr and Quest.
2.04. Books and Records. QF will keep and maintain complete and
accurate books and records in accordance with generally accepted accounting
principles and on such other basis as may be required by law. QF shall provide
Farr and Quest (i) within 90 days after the end of each fiscal year of QF,
audited statements of income for such preceding fiscal year and balance sheets
as at the end of such fiscal year, (ii) within 30 days after each calendar
quarter of QF, unaudited statements of income for such preceding calendar
quarter and balance sheets as at the end of such quarter, and (iii) from time to
time, such other information as Farr or Quest may reasonably request. QF shall
afford Farr and Quest and their respective agents or representatives access, at
all reasonable times, upon reasonable prior notice, to inspect the books,
records and operations of QF and to discuss with management of QF the business
and affairs of QF.
2.05. Supermajority Stockholder Vote. In addition to obtaining the
authorization and approval of QF's Board of Directors to undertake certain
corporate actions and transactions, the affirmative vote and approval of both
Farr and Quest in their capacity as the stockholders which own 100% of the
issued and outstanding capital stock of QF shall be required for the following:
(i) amendment of the charter documents of QF;
(ii) increase or decrease in the number of QF directors;
(iii) any merger, consolidation, sale of all or substantially
all of the assets or liquidation of QF;
(iv) dissolution of QF;
(v) issuance of any capital stock of QF or any warrants,
convertible securities or other rights to acquire shares of capital
stock of QF;
(vi) granting of any dividends or other distributions to
shareholders of QF;
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(vii) encumbering any of the assets of QF;
(viii) a change in QF's Operations Budget as contemplated by
Section 2.03 above;
(ix) any significant transaction directly or indirectly with or
for the benefit of either of the parties to this Joint Venture
Agreement; provided that QF may enter into transactions with either of
the parties providing for the leasing of property, the rendering or
receipt of services or the purchase or sale of inventory and other
assets in the ordinary course of business if the monetary or business
consideration arising therefrom would be substantially as advantageous
to QF as the monetary or business consideration which QF would obtain
in a comparable arm's length transaction with a person not a party to
this Joint Venture Agreement; and
(x) any change in the signatories to QF bank accounts.
Section 3. Factory Start-Up and Operations.
3.01. Selection of Plant Location. A plant location shall be selected
as soon as practicable following execution of this Joint Venture Agreement. Upon
receipt of funds from the sale of Stock contemplated by Sections 1.01(c) and
1.01(d) of this Joint Venture Agreement, Farr and Quest shall immediately
undertake all necessary steps to adapt the plant for production of the products
contemplated by this Joint Venture Agreement.
3.02 Equipment and Machinery. Not later than 10 days after the receipt
of funds under Sections 1.01(c) and 1.01(d) above, Farr shall commence work on
production of all of the necessary equipment, machinery and tooling (the
"Equipment") which are necessary for the production of Farr products. Sales of
the Equipment by Farr to QF shall be made at Farr's book or replacement cost
plus applicable overhead so that no profit inures to Farr as a result of sale of
the Equipment. Farr will invoice QF monthly for progress payments for the
Equipment, and QF will pay Farr not later than 15 days after receipt of
invoices. Other assets required for operation of the plant which are not
furnished by Farr will be acquired in arm's length transactions from third party
suppliers.
3.03. Parts and Materials. All parts and materials purchased by QF
shall satisfy all criteria and specifications of Farr's Engineering and Quality
Control Departments. Pleated filter media with wire backing and pleated filter
frames will be purchased from Farr, and other parts and materials will be
purchased from the most viable sources which satisfy Farr criteria.
3.04. Pricing Policy. The plant shall be operated in an efficient
manner so as to produce high quality products at the lowest possible prices to
its two customers, Quest and Farr. The prices will be established at a level
that will provide enough profit for approximately a 10% return to QF before
interest costs, if any, on sales at forecasted 1997 sales volume. Prices will be
adjusted annually to reflect a 10% profit on forecasted sales at manufacturing
efficiency levels at
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least equal to Farr's U.S. plants. However any profit in excess of 20% of
average assets, less cash, will be returned pro rata to Farr and Quest.
3.05 Charges and Reimbursements. Neither Farr nor Quest shall be
entitled to any fees, commissions or other remuneration or consideration with
respect to any purchase, acquisition, service, contract or consultancy for which
QF may contract with other parties. There shall be no charges for employee time
provided to QF by either Farr or Quest except as agreed to in advance by both
parties. Reasonable travel and living expenses, at out of pocket costs, will be
reimbursed to Farr by QF for those Farr employees who travel to QF for the
purpose of assisting or training in the set up and operations of the factory.
Farr will be reimbursed, at cost only, for all charges and expenses for
non-employee contract labor provided to QF. There shall be no charges by Farr to
QF for time, travel or expenses of Farr employees' work in the U.S. in
connection with purchase of equipment, coordination, and training of QF
personnel in the U.S. There shall be no charges by Farr to QF for license fees,
use of intellectual property, patents or proprietary technology, and there shall
be no charges to QF by either Farr or Quest for management fees. In the event of
any governmental levy of withholding tax on monies paid by QF to Farr under this
Joint Venture Agreement, then such payments shall be made to Farr in the net
amount after withholding.
3.06. Working Capital. QF will be adequately financed such that it can
meet its obligations in a timely manner. It will take into stock only those
materials, parts and supplies necessary to sustain production of finished
filters. It will not at any time purchase, own, take on consignment or sell any
other finished products or parts of materials.
Section 4. Sales and Marketing.
4.01. Initial Marketing Objective. Projected sales results for the
first year of operations of the Joint Venture is estimated at $1 million, it
being understood and agreed that the estimated sales levels are not intended to
be binding on the parties.
4.02. Market Area Exclusions. Farr agrees not to sell licensed Farr
brand products in Malaysia but may sell all Farr brand products in any country
other than Malaysia. Quest agrees not to sell any Farr brand products in any
country other than Malaysia but may sell other than Farr brand products in
Malaysia or in any other country.
4.03. Other Marketing Activities. Nothing contained in this Joint
Venture Agreement shall either (i) preclude Quest from purchasing and reselling
other than Farr brand products in Malaysia or in any other country, or (ii)
preclude Farr from manufacturing or selling Farr brand products in any country
other than Malaysia or non-Farr brand products in any country whatsoever
including Malaysia.
4.04. Sales by QF. QF will not sell products to any customer other
than Farr or Quest. Farr and Quest shall pay QF for their respective purchases
of product no later than 15 days after shipment to them by QF. QF will pay for
all purchases from Farr no later than 15 days after shipment by Farr.
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Section 5. Term of Joint Venture Agreement.
5.01 Initial Term. The initial term of these joint venture
arrangements between Farr and Quest shall be a period of ten years, provided,
however, that the term may be extended or shortened by mutual agreement of the
parties.
5.02. Early Termination for Change of Control. Notwithstanding the
provisions of Section 5.01 above, in the event that one of the parties to this
Joint Venture Agreement has a change of control in its ownership, the other
party may elect to terminate this Joint Venture Agreement. The Party which has
not had a change in control shall, for a period of sixty days after learning of
the change in control in the other party, have the right to submit to the other
party an offer to either purchase or sell a 50% 6wnership interest in QF for a
specified price. The party receiving the offer or purchase or sale shall
thereupon have a period of thirty days to notify the other whether it will be a
buyer or seller for the specified price, and the closing of the purchase and
sale shall be effected five business days following the expiration of the thirty
day notice period or on such other date as is mutually agreed between Farr and
Quest.
5.03. Early Termination for Cause. In the event that either of the
parties materially breaches the terms of this Joint Venture Agreement, the other
party shall have the right to terminate the Joint Venture Agreement and cause
the operations of QF to be liquidated and wound up not later than ninety days
after a notice of termination is given by the non-defaulting party. In the event
of termination under this Section 5.03, Farr shall have the right, but not the
obligation, to purchase all of the equipment and machinery of QF for a purchase
price which is the greater of book value or 25% of original cost.
5.04. Early Termination for Non-Performance. In the event that the
operations of QF result in an operating deficit during two of any three
consecutive fiscal years after the first full year of operations, either party
shall have the right to terminate this Joint Venture Agreement and cause the
operations of QF to be liquidated and wound up. An election to liquidate under
this Section 5.04 must be made within a thirty day period following receipt of
QF financial statements for the fiscal year last ended, and the operations of QF
shall thereupon be liquidated and wound up not later than ninety days after a
notice of termination under this Section 5.04. Farr shall have the right, but
not the obligation, to purchase all of the equipment and machinery of QF for a
purchase price which is the greater of book value or 25% of original cost.
Section 6. Representations and Warranties.
Farr and Quest each hereby represents and warrants to the other that
(a) it is a corporation duly organized and validly existing under the laws of
its jurisdiction of organization; (b) it is qualified to conduct business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure to qualify would have a material
adverse effect on its business, financial condition or operations; (c) it has
full corporate power and authority to enter into this Joint Venture Agreement;
(d) the execution, delivery and performance of this Agreement have been fully
authorized by all necessary corporate action; (e) this Joint Venture Agreement
constitutes a legal, valid and binding obligation, enforceable in accordance
with its terms (except to the extent enforcement may be limited by applicable
bankruptcy,
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insolvency, reorganization or similar laws affecting creditors' rights generally
and by general principles of equity); (f) this Joint Venture Agreement does not
violate, conflict with or constitute a default under its by-laws or other
charter document, or any indenture, mortgage, deed of trust or other material
contractual covenant or any restriction to which it is a party or by which it or
its assets are bound, nor does it violate any provision of any law, rule,
regulation, order, writ, judgment, decree, determination, or award presently in
effect having applicability to it; and (g) there are no actions, suits, or
proceedings pending or, to its knowledge, threatened in any court or by or
before any government authority or any arbitrator, in which there is a
reasonable possibility of an adverse decision that could reasonably be expected
to materially and adversely affect its business, operations, properties, assets,
or condition (financial or otherwise) or its ability to perform its obligations
under this Joint Venture Agreement.
Section 7. Survival and Indemnification.
The representations and warranties and commitments of Farr and Quest
made in this Joint Venture Agreement shall survive the execution and delivery of
this Joint Venture Agreement and the consummation of the transactions
contemplated herein, and shall continue in effect thereafter. Farr and Quest
each agrees to indemnify and hold harmless the other from and against any
losses, damages or expenses that are caused by or arise out of any breach of
warranty or commitment or inaccurate or erroneous representation made by it.
Section 8. Transfers of Stock.
Farr and Quest each agree not to sell, assign, pledge, encumber or
otherwise transfer any shares of Stock to any person, regardless of the method
of transfer. Any attempt to transfer or encumber shares of Stock without first
obtaining the written consent of the other party to this Joint Venture Agreement
shall be null and void, and QF shall not give any effect to such attempted
transfer or encumbrance in its books and records.
Section 9. Sale and Purchase of a Joint Venture Interest
If either Farr or Quest desires to sell and dispose of all its Stock
to a third patty, then Farr or Quest (as the case may be, referred to herein as
the "Proposed Seller") shall notify the other party to this Joint Venture
Agreement in writing of its determination to sell and the price for which it
proposes to sell its Stock. The patty receiving notice of disposition shall
thereupon have a period of thirty days to advise the Proposed Seller of whether
it elects to either (i) purchase the Stock of the Proposed Seller at the stated
price or (ii) sell the Stock owned by it at the stated price to either the
Proposed Seller or to a willing third party purchaser identified by the Proposed
Seller. The closing of the purchase and sale of Stock shall be effected five
business days following the expiration of the thirty day notice period, or on
such other date as is mutually agreed between Farr and Quest.
Section 10. Miscellaneous Provisions.
10.01. Publicity. Press releases and other announcements to be made by
or about the Joint Venture shall be approved by both Farr and Quest prior to
release.
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10.02. Entire Agreement. This Joint Venture Agreement contains the
entire agreement between Farr and Quest with respect to the transactions
contemplated herein, and it supersedes all prior written agreements and
negotiations and oral understandings between the parties.
10.03. Amendment. This Joint Venture Agreement may not be amended,
supplemented or discharged except by an instrument in writing signed by both
Farr and Quest.
10.04. Counterparts. This Joint Venture Agreement is being executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
10.05. Notices. All notices, statements, instructions or other
documents required to be given hereunder, shall be in writing and shall be given
either (i) by mailing the notice in a sealed envelope, first-class mail, postage
prepaid and either certified or registered, return receipt requested or (ii) by
confirmed telecopy addressed to the principal office of the party to which it is
sent. All notices, statements, instructions and other documents hereunder that
are mailed shall be deemed to have been given five days after deposited in the
mail system or the respective appropriate country or on the receipt confirmation
date of the telecopy, as the case may be. Either party may change the address to
which notices, statements, instructions or other documents are to be sent to it
by giving notice of such changes in the manner prescribed in this Section 10.05.
10.06. Injunctive Relief. It is acknowledged that it will be
impossible to measure in money the damages that would be suffered if the parties
fail to comply with any of the obligations herein imposed on them and that in
the event of any such failure, an aggrieved party will be irreparably damaged
and will not have an adequate remedy at law. Any such party shall, therefore, be
entitled to injunctive relief, including specific performance, to enforce such
obligations, and if any action should be brought in equity to enforce any of the
provisions of this Joint Venture Agreement, none of the parties hereto shall
raise the defense that there is an adequate remedy at law.
10.07. Governing Law. This Joint Venture Agreement shall be governed by
and construed in accordance with the laws of Malaysia without regard to
principles of conflicts of law.
10.08. Arbitration. Any controversy or claim arising out of or
relating to this Joint Venture Agreement, or the breach thereof, shall be
settled by arbitration in accordance with the rules then prevailing of the
International Chamber of Commerce. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. Any
proceeding hereunder shall be held in English at a place designated by the
arbitrator, and the arbitrator, in rendering his decision as to any law claims,
shall apply the laws of the state and country which the arbitrator deems
appropriate under the circumstances. The arbitrator shall assess all expenses of
arbitration, including arbitration fees, costs, and reasonable attorneys' fees,
in favor of or against the parties in such proportions as the arbitrator shall
determine.
10.09. Headings. Section headings are inserted herein for convenience
only and do not form a part of this Joint Venture Agreement.
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10.10. Non-Assignability. Neither party shall be entitled to assign
this Joint Venture Agreement or its rights or obligations hereunder without the
express written consent of the other party.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Joint Venture Agreement to be duly executed as of the date first written above.
FARR COMPANY,
a Delaware corporation
By: /s/ H. J. Meany
Name: H. J. Meany
Title: Chairman and CEO
QUEST TECHNOLOGY SDN. BHD,
A Malaysian SDN. BHD.
By: /s/ P.Y. Wong
Name: P. Y. Wong
Title: Director
10
Exhibit 10.42
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is entered into as of the
28th day of October, 1997 by and between Farr Company, a Delaware corporation
("Purchaser"), and Jimmy Cherry ("Cherry") and Michael Skocz ("Skocz"), the two
individuals who own all of the issued and outstanding capital stock of
Metalcraft Air Filtration, Inc. a North Carolina corporation (the "Company").
WHEREAS, Cherry and Skocz (collectively referred herein to as the
"Shareholders") desire to sell, and Purchaser desires to purchase, all of the
issued and outstanding capital stock of the Company (the "Shares");
NOW, THEREFORE, in consideration of and in reliance upon the respective
representations, warranties, covenants and agreements contained in this
Agreement, Purchaser and the Shareholders hereby agree as follows:
SECTION I
SALE AND PURCHASE OF THE SHARES
1.1. The Transaction. On the terms and conditions set forth herein,
Shareholders agree to sell and deliver the shares to Purchaser, and Purchaser
agrees to acquire and pay for the Shares.
l.2. Purchase Price. The total consideration to be paid by Purchaser for
the Shares will be an aggregate of 12,500 shares of the common stock of
Purchaser issued and delivered to the Shareholders at the closing described in
Section l.3 below. The said 12,500 shares are referred to herein as the "Farr
Stock." 10,000 shares of Farr Stock will be issued and delivered to Cherry, and
2,500 shares of Farr Stock will be issued and delivered to Skocz.
1.3. Closing Date. Unless changed by mutual agreement of the parties, the
closing of the purchase and sale at the Shares and issuance and delivery of the
Farr Stock will be consummated on the date of signing of this Agreement on
October 28, 1997.
SECTION II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
The Shareholders hereby represent and warrant to Purchaser as follows:
2.1. Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing
<PAGE>
under the laws of the state of North Carolina and has full corporate power and
authority to own and operate its assets and properties and to carry on its
business as presently being conducted.
2.2. Power and Authorization. The Shareholders have all requisite legal
power and authority to execute and deliver this Agreement and to take all of the
actions contemplated by this Agreement to enable them to sell and transfer the
Shares hereunder. This Agreement constitutes a valid and binding obligation of
the Shareholders and is enforceable in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or limiting the rights of creditors
general1y.
2.3. Title to Shares. Upon payment for the Shares pursuant to this
Agreement, Purchaser will acquire the Shares .free and clear of all claims,
liens, charges, encumbrances and rights of-third parties.
2.4. Consents and Approvals. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, including the sale
and delivery of the Shares to Purchaser, will not conflict with or result in a
breach of the provisions of (a) any agreement or other instrument to which
either the Shareholders or the Company is a party or by which the Shareholders
or the Company is bound; (b) the Articles of Incorporation or Bylaws of the
Company; (c) any judgment, decree, order or award of-any court, governmental
body or arbitrator applicable to the Company or the Shareholders, or (d) any
law, rule or regulation applicable to the Company or the Shareholders. No
consent, approval, authorization or filing with, any governmental or regulatory
authority or any other person (either governmental or private) is required in
connection with the execution and delivery of this Agreement by the Shareholders
and the consummation of the transactions contemplated hereby, including the sale
of the Shares to Purchaser.
2.5. Capitalization. The authorized capitalization of the Company consists
solely of 100 shares of capital stock, (the "Company Stock"). The Company
presently has issued and outstanding all 100 shares of Company Common Stock, 80
shares of which are owned by Cherry and 20 shares of which are owned by Skocz.
All of the Shares are duly and validly authorized and issued, fully paid and
non-assessable. There are no options, warrants or rights to purchase or
subscribe for any equity securities of the Company, nor are there outstanding
any indebtedness or securities directly or indirectly convertible into any
equity securities of the Company.
2.6. Agreements. Schedule A sets forth a list of all of the agreements,
leases, notes, and commitments of the Company as of the date of this Agreement
("Agreements"), true and correct
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copies of all of which have been furnished to or made available for inspection
by Purchaser. All of the Agreements are enforceable and in full force and
effect, and, to the best knowledge of the Shareholders, there are no liabilities
of any party to any Agreement arising from any breach or default thereunder, and
no event has occurred which with the passage of time or the giving of notice or
both would constitute a material breach or default by any party hereto.
2.7. Compliance with Laws. To the best knowledge of the Shareholders, the
business of the Company is being conducted in compliance with all current
federal, state and local laws, rules, regulations and ordinances and all
judgments and orders of any court applicable to it.
2.8. Litigation. There is no legal, administrative, arbitration or other
proceeding, or any governmental investigation, pending or, to the best knowledge
of the Shareholders, threatened against the Company or any of its assets.
2.9. Taxes. The Company has duly filed or caused to be filed all tax
returns Federal, state, local and foreign) required to be filed, and paid all
amounts of taxes shown or required to be shown thereon to be due, including
interest and penalties, if any. The Shareholders do not possess knowledge of any
actual or proposed additional tax assessments which, singly or in the aggregate,
could have a material adverse effect on the business, property, financial
condition or operations of the Company.
2.10. Charter Documents. True and correct copies of (i) the Articles of
Incorporation, and all amendments thereto, of the Company and (ii) the Bylaws,
and all amendments thereto, of the Company have been furnished to or made
available for inspection by Purchaser.
2.11 Absence of Undisclosed Liabilities. There are no liabilities or
obligations of the Company, whether absolute, accrued, contingent or otherwise
and whether due or to become due which have not been disclosed to Purchaser
during the course of its due diligence examination of the Company. All of the
liabilities, loans and obligations of the Company for which Purchaser will
become responsible by virtue of its purchase of the Shares are set forth on
Schedule B to this Agreement.
2.12. No Brokerage Fees. No broker or finder has acted for the Shareholders
or the Company in connection with this Agreement or the transactions
contemplated hereby, and no broker or finder is entitled to any brokerage or
finder's fee or other commission from the Company with respect to this Agreement
or any such transactions.
2.13. Nature of Investment. The Shareholders are capable of evaluating the
merits and risks of their investment in
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Purchaser and have the capacity to protect their own interests. The Shareholders
are acquiring the Farr Stock for investment for their own respective accounts,
not as nominees or agents, and not with the view to, or for resale in connection
with, any distribution thereof. They understand that the Farr Stock has not been
registered under the Securities Act of 1933 in reliance upon a specific
exemption from the registration provisions thereunder, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of the Shareholders' representations as expressed herein. The
Shareholders understand and agree that the stock certificates they receive
evidencing the Farr Stock will bear a legend prohibiting their sale or transfer
for a period of five years without the express written consent of Purchaser.
SECTION III
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
Purchaser hereby represents and warrants to the Shareholders as follows:
3.1. Organization and Good Standing. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Delaware and has full corporate power and authority to own its assets and
properties and to carry on its business as presently being conducted.
3.2. Power, Authorization and Validity of Agreement. Purchaser has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the performance by Purchaser of its obligations hereunder
including issuance and delivery of the Farr Stock to the Shareholders, have been
duly authorized by all requisite corporate action of Purchaser. This Agreement
(a) constitutes a valid and binding obligation of Purchaser enforceable against
it in accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or limiting the rights of creditors generally and (b) does not
conflict with or result in a breach of any agreement, instrument or
understanding to which Purchaser is a party or by which it is bound.
3.3. The Farr Stock. Upon delivery to the Shareholders in accordance with
the provisions of this Agreement, the Farr Stock will be duly authorized and
validly issued, fully paid and nonassessable and will not have been issued by
Purchaser in violation of or subject to any preemptive rights of any person.
3.4. No Brokerage Fees. No .broker or finder has acted for Purchaser in
connection with this Agreement or the transactions contemplated hereby, and no
broker or finder is entitled to any
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brokerage or finder's fee or other commission from Purchaser in respect of this
Agreement or any such transactions.
3.5. Nature of Investment. Purchaser is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. Purchaser is acquiring the Shares for investment for its own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. It understands that the Shares have
not been registered under the Securities Act of 1933 in reliance upon a specific
exemption from the registration provisions thereunder, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of the Purchaser's representation as expressed herein.
SECTION IV
CONDUCT OF BUSINESS
4.1. Reasonable Access. The Shareholders and the Company shall afford
Purchaser and its counsel, accountants, and other authorized representatives,
during reasonable business hours, full access to the business, properties, books
and records of the Company in order that Purchaser may have -full opportunity to
make such investigations as it shall reasonably desire to make of the Company,
and the Shareholders and the Company shall furnish such financial and operating
data and other information as Purchaser shall reasonably request for such
purposes.
4.2. Confidentiality. Purchaser shall maintain the confidentiality of (and
not use or disclose to third parsons for any purpose) and return to the Company
at the Company's request, all confidential, proprietary or trade secret
information of the Company which is obtained by Purchaser at any time. The
Company shall use reasonable efforts to designate information as confidential,
proprietary or trade secret. Notwithstanding the foregoing, (i) Purchaser may
disclose such information (a) at the request of any applicable regulatory
authority or in connection with an examination of the Company by such authority,
(b) pursuant to subpoena or other court process, (c) when required to do so in
accordance with the provisions of any applicable law, (d) at the express
direction of any other agency or regulatory authority having jurisdiction over
the Company or Purchaser, provided that in each of the other cases identified in
(a) through (d) Purchaser has promptly notified the Company in writing prior to
such disclosure and cooperated with the Company, at the Company's expense, in
any proceeding to maintain such information under seal or to otherwise prevent
the public disclosure thereof; and (ii) the obligations of this paragraph shall
not apply to information that has entered the public domain through no fault of
the Purchaser or which Purchaser has rightfully acquired from third persons not
known by Purchaser to be under an obligation of confidence to the Company.
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4.3. Public Announcements. Purchaser and the Shareholders agree to consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
hereby and will not issue any such press release or make any such public
statement prior to such consultation and reaching agreement of the parties as to
the content and timing of any public announcements. Notwithstanding the
foregoing, Purchaser and the Shareholders and the Company shall not be
prohibited from issuing any press release or making any public statement as may
be required under applicable law, but in-any such event, Purchaser and the
Shareholders or the Company, as the case may be, shall notify the other party
and provide to the other party a copy thereof prior to taking such action.
SECTION V
POST-CLOSING COMMITMENTS OF INTENTION OF PURCHASER
Following the Closing, Purchaser agrees to use its best efforts to
accomplish the following:
5.1. Growth Capital. Purchaser will provide capital for growth of the
Company's business (as it is operated as a division or subsidiary of Purchaser)
to the extent that the Shareholders are able to reasonably forecast and to
produce a level of profit compatible with Purchaser's other businesses.
5.2. Executive Positions. Cherry will be the president of the MCF division
of Purchaser and report to the President of Purchaser. Skocz will be the
division Vice President of Sales of the MCF division of Purchaser and report to
the MCF division president.
5.3 Nondisturbance. Purchaser will not cause the transfer of the Company's
operations so as to create the need for the then current employees to move their
places of residence. Purchaser will not, either regularly or normally, have
other personnel from its engineering, sales, marketing or manufacturing
departments involved in the Company's business operations with respect to
product designs, methods of manufacture or product specification, leaving those
matters generally to the Company's management. Purchaser will generally retain
the Company's employees in their respective positions.
5.4. Accounting Procedures. Purchaser will establish financial, accounting
and operating procedures, systems and policies to be employed by the Company's
division.
5.5. Benefits. Purchaser will extend its health and life insurance benefits
program to all qualified Company employees, and Purchaser will extend its
investment and retirement programs to all qualified employees of the Company.
6
<PAGE>
SECTION VI
POST-CLOSING COMMITMENTS OF INTENTION OF THE
SHAREHOLDERS
Following the Closing, Shareholders agree to use their best efforts to
accomplish the following:
6.1. Continuation of Employment. The Shareholders will remain indefinitely
in their respective positions at the MCF division of Purchaser land work
diligently to expand the business of the MCF division at Purchaser to a
satisfactory profit level.
6.2. Cooperation. The Shareholders will cooperate with Purchaser's
management toward the goal of smoothly integrating the MCF division into the
procedures, practices and policies of the Purchaser's overall business so as to
create an efficient and harmonious business environment for all operations.
SECTION IX
MISCELLANEOUS
7.1. Governing Law. This Agreement shall be governed in all respects by the
internal lawn at the State of North Carolina.
7.2. Survival. The representations, warranties, covenants and agreements
made herein shall survive the Closing Date.
7.3. Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
7.4. Entire Agreement Amendment. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject hereof, and it expressly supersedes any and all prior understandings and
agreements between- the parties. No party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein. Except as expressly provided herein, neither this
Agreement nor any term hereof maybe amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
7.5. Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, recognized
express courier, or by messenger with a receipt of delivery, addressed (a) if to
the Purchaser, to 2221 Park Place, El Segundo, California 90245, or (b) if to
Shareholders, to attention: Lloyd C. Smith, Esq.,
7
<PAGE>
Pritchett, Cooke & Burch, P.O. Box Drawer 100, Windsor, North Carolina 27983.
7.6. Expenses. Purchaser and the Shareholders shall each bear the
respective expenses incurred on its respective behalf with respect to this
Agreement and the transactions contemplated hereby and any amendments or waivers
hereto.
7.7. Attorneys' Fees. In the event of any arbitration or litigation arising
in connection with this Agreement and the transactions contemplated hereby, the
prevailing party in judgment shall be-entitled to recover reasonable legal fees
and costs in connection with such action.
7.8. Counterparts. This Agreement: may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.9. Severability. Whenever possible, each provision of this Agreement will
be interpreted in such a manner as to be effective and valid under applicable
law, but in the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illega1, unenforceable or
void, this Agreement shall continue in full force and effect without said
provisions; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
7.10. Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not considered in construing or
interpreting this Agreement.
7.11 Indemnification Agreement. As a condition for, and as an inducement
to, Purchaser to enter into this Stock Purchase Agreement and consummate the
transactions contemplated hereby, Cherry is executing and delivering to
Purchaser at the closing the Indemnification Agreement in the form attached
hereto as Schedule C.
8
<PAGE>
IN WITNESS WHEREOF, the foregoing agreement is hereby executed as of the
date first above written.
"PURCASER"
FARR COMPANY
By: /s/ John C. Johnston By: /s/ Kenneth W. Gerstner
Title: President Title: SRVP & CFO
"SHAREHOLDERS"
By: /s/ Hugh James Cherry By: /s/ Michael Skocz
Title: President Title: Vice President
9
<PAGE>
SCHEDULE A
(SECTION 2.6
METALCRAFT AIR FILTRATION, INC.
AGREEMENTS, LEASES, NOTES, AND COMMITMENTS)
1. Lease of 1997 Mercury Village Automobile between Metalcraft Air
Filtration, Inc., and East Carolina Auto and Truck Center dated
January 11, 1997 requiring monthly payments for twenty (24) months of
$465.32.
2. All notes owing are shown on Schedule B.
<PAGE>
SCHEDULE B
(SECTION 2.11
METALCRAFT AIR FILTRATION, INC.
LIABILITIES, LOANS, AND OBLIGATIONS AS OF
THE DATE OF THE STOCK PURCHASE AGREEMENT)
DATE OF NOTE AMOUNT OWED CREDITOR DATE DUE
- ------------ ----------- -------- --------
Feb. 3, 1997 $ 20,000.00 Fred A. Bissette Feb. 3, 1999
Aug. 14, 1997 $ 25,000.00 William M. Dawson, Jr. Oct. 14, 1997
and Juanita C. Dawson
April 3, 1997 $ 50,000.00 William H. Dawson, Jr. April 3, 2000
and Fred A. Bissette
Aug. 12, 1996 $ 10,000.00 Juanita C. Dawson Sept. 1, 1998
June 25, 1996 $ 25,000.00 Juanita C. Dawson July 1, 1998
Feb. 26, 1996 $ 50,000.00 Juanita C. Dawson March 1, 1997
June 4, 1996 $ 5,000.00 William H. Dawson June 4, 1998
June 12, 1996 $ 25,000.00 William H. Dawson June 12, 1998
June 11, 1996 $ 10,000.00 William H. Dawson June 11, 1998
June 19, 1996 $ 2,000.00 William H. Dawson June 19, 1998
July 19, 1996 $ 2,000.00 William H. Dawson July 19, 1998
July 25, 1996 $ 3,000.00 William H. Dawson July 25, 1998
Aug. 6, 1996 $ 7,000.00 William H. Dawson Aug. 6, 1998
Oct. 6, 1996 $ 5,000.00 William H. Dawson Oct. 6, 1998
Nov. 15, 1996 $ 4,000.00 William H. Dawson Nov. 15, 1998
March 17, 1997 $ 7,000.00 William H. Dawson March 17, 1999
April 17, 1997 $ 1,000.00 William H. Dawson April 17, 1999
May 15, 1997 $ 10,000.00 William H. Dawson May 15, 1999
July 3, 1997 $ 1,000.00 William H. Dawson July 3, 1999
Nov. 21, 1996 $ 25,000.00 William H. Dawson Dec. 5, 1999
Sept. 25, 1997 $ 6,000.00 William H. Dawson Oct. 25, 1997
Sept. 11, 1997 $ 1,500.00 William H. Dawson Nov. 11, 1997
-----------
Subtotal $294,500.00
===========
Personal Credit Card on personal loans ( *no notes)
*Sept. 13, 1996 $ 3,000.00 Juanita C. Dawson
*Sept. 13, 1996 1,200.00 Juanita C. Dawson
*Oct. 3, 1996 2,000.00 Juanita C. Dawson
*Dec. 12, 1996 550.00 Juanita C. Dawson
*July 3, 1997 2,000.00 Juanita C. Dawson
*July 1, 1997 20,000.00 Juanita C. Dawson
BankLine 14,250.00 Juanita C. Dawson owing to
--------- Wachovia Bank & Trust Co.
Subtotal $ 43,000.00
Accounts Payable as shown
on attached two pages 250,000.00
----------
GRAND TOTAL $587,500.00
===========
<PAGE>
ACCOUNTS PAYABLE OF
METALCRAFT AIR FILTRATION, INC.
AC PARTS $ 83.41
ALL THINGS DIG. $ 53.79
AMETCO $ 249.44
AIR CHAIN $ 167.43
AIM SUPPLY $ 4,069.77
ACTION $ 281.96
ALL SECURE $ 111.56
APPLIED IND. $ 112.44
AMERICA SHIPP $ 197.67
AAA COOPER $ 253.83
BISCO $ 2,122.45
AAL INT. $ 506.96
BOATWRIGHT $ 669.62
BAX $ 4,079.51
CAROLINA FILTER $ 18.64
CF FREIGHT $ 11,717.97
COLE PARMER $ 182.67
ANCIENTS FANS $ 13,966.00
CROSS $ 162.35
DP SYS $ 700.00
DUNN & BRAD $ 136.74
DYNATORQUE $ 1,758.40
ESSEX $ 220.40
EAST GROUP $ 1,087.50
EMORY $ 395.67
DEBBLE $ 950.00
FRISCKORN $ 1,614.31
FASTNEL $ 7,420.50
FARR $ 24,327.75
FED-EX $ 776.63
GLOBAL ENG. $ 179.11
GRONDYKE $ 4,034.51
HAMILTON $ 601.00
HOBART $ 192.88
HAMMONS $ 57.60
KABOR $ 1,013.16
ICE $ 1,450.86
LOWE'S $ 5,704.52
LEGGETT'S $ 3,132.50
MCMASTER $ 2,110.58
MORRIS $ 4,575.42
NATIONAL WELD. $ 5,266.94
NORTHWEST $ 2,875.18
NATIONAL AIR $ 8,237.84
NEW SOUTH VISA $ 3,772.52
OFFICE DEPOT $ 1,010.78
OVERNITE $ 2,400.84
<PAGE>
ACCOUNTS PAYABLE OF
METALCRAFT AIR FILTRATION, INC.
PAMILICO $ 5,757.00
PAUL STERN $ 546.15
PIEDMONT $ 911.01
LAPCON $ 40.00
PARROTT $ 646.50
PHOENIX $ 16,374.42
NITA $ 2,195.23
PACER $ 2,500.00
P&G $ 5,983.60
PACOR $ 363.10
QULITY $ 197.09
MIDATLA $ 270.00
QUALITY PARTS $ 160.73
QUEENSBORO $ 683.67
R&L $ 199.88
RIDDLE $ 1,616.14
ROADWAY $ 5,551.13
RL KUNZ $ 6,835.20
RALIGH $ 1,458.28
RUBATEX $ 981.46
SAM'S $ 380.00
SERVICE AIR $ 1,083.25
STA $ 773.28
SUMMER $ 96.95
TAB ELEC $ 6,408.12
TOUCH TRANS $ 243.24
THARR. $ 3,383.70
THYPIN STEEL $ 15,462.60
UPS $ 4,322.34
VENCENT ME $ 7,123.18
US IND. CUT $ 219.00
ULINE $ 50.49
WENZLE META $ 1,937.96
WACH. VISA $ 9,965.97
BANK LINE NITA $ 7,450.96
SMITH ASS. $ 80.00
SPECIALTY $ 669.62
IND. RUBBER $ 129.75
MID. TOOL $ 270.00
WAS. SPECIALTY $ 1,724.67
ECEMC $ 475.21
SPRINT $ 610.72
CHAMBER $ 200.00
NS BANK NOTE INT. $ 4,180.39
PAGE EAST $ 90.00
PAY. TAXES $ 4,386.71
-----------
$250,000.00
===========
Farr
1997 Annual Report
KNOW YOUR DUST! Our customers' dusts come in all Shapes and sizes and we need
to know exactly what the parameters are to advise them on the correct
collector and media. Our video microscope allows Farr's customers and
representatives to see what they need to collect. This is part of our new
state of the art dust collection laboratory located in Jonesboro, Arkansas.
(On the cover there are three color pictures depicting dust
particulate magnified at various levels.)
<PAGE>
MISSION STATEMENT
To be a highly successful company providing filtration products and
services of premium value that protect people, equipment
and their environment from contaminants.
To produce acceptable rewards to those having a stake in
the success of the enterprise.
TOTAL MARKET CAPITALIZATION SHORT-TERM & LONG TERM DEBT
(bar graph showing 1994, 1995, (bar graph showing 1994, 1995,
1996 and 1997 quarterly 1996 and 1997 end of quarter
market capitalization, debt, in millions)
in millions)
NET INCOME TREND SALES TREND
(bar graph showing 1994, 1995, (bar graph showing 1994, 1995,
1996 and 1997 quarterly 1996 and 1997 end of quarter
quarterly net income, quarterly sales, in millions)
in thousands)
<TABLE>
<CAPTION>
Short-Term
Measurement Market & Long-
Period Capitalization Term Debt Income Trend Sales Trend
(quarter) (millions) (millions) (thousands) (millions)
- ----------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
1994 - Q1 $ 23.0 $24.1 $ (415) $25.2
- Q2 $ 18.0 $22.6 $ (625) $26.5
- Q3 $ 26.1 $22.1 $ 275 $27.5
- Q4 $ 23.5 $21.0 $ 410 $27.8
1995 - Q1 $ 24.7 $17.7 $ 633 $27.3
- Q2 $ 27.0 $18.1 $ 675 $28.7
- Q3 $ 31.4 $16.7 $ 726 $28.4
- Q4 $ 29.5 $10.5 $1,090 $28.9
1996 - Q1 $ 35.2 $ 8.8 $1,178 $30.1
- Q2 $ 49.2 $ 6.6 $1,499 $31.4
- Q3 $ 53.8 $ 5.2 $1,595 $30.0
- Q4 $ 61.7 $ 3.0 $1,618 $29.6
1997 - Q1 $ 68.4 $ 1.7 $1,700 $30.3
- Q2 $ 89.0 $ .6 $1,826 $31.6
- Q3 $105.0 $ .4 $1,892 $31.6
- Q4 $ 82.7 $ .1 $1,957 $32.2
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(In thousands, except per share items) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................................. $125,762 $122,021 $113,275
Income before income taxes ................. 11,240 9,680 5,163
Income tax provision ....................... 3,865 3,790 2,039
Net Income ................................. 7,375 5,890 3,124
Diluted Earnings per common share .......... 1.32 1.07 .57
Current assets ............................. 41,007 37,679 38,928
Current liabilities ........................ 19,270 17,873 18,745
Working capital ............................ 21,737 19,806 20,183
Long-term debt, net of current portion ..... -- 2,068 9,412
Property, plant, and equipment, net ........ 17,619 15,611 16,406
Stockholders' Investment ................... 38,507 31,210 24,785
- ------------------------------------------------------------------------------
</TABLE>
ABOUT THE COMPANY
Farr Company's basic business is the control of particulate and vapor
contaminants in air and liquids. The Company is engaged in the design,
development, manufacture, sale and service of filters and filtration systems.
These products are used for a wide variety of applications including heating,
ventilation and air conditioning systems, manufacturing and process cleanrooms,
special filters for original equipment manufacturers, natural gas, gasoline and
diesel-powered engines, railroad locomotives, dust collection systems and gas
turbines. Air filter efficiencies range from 20 percent (on outdoor air) in
disposable products to 99.9999+ percent (@ .12 microns particulate) in cleanroom
products. Products are available as standard items or may be custom engineered.
They range in size and complexity from a small throwaway air filter to a large
gas turbine system with a single filter component module weighing in excess of
twenty tons. Products are sold throughout the world. Sales are made through
direct Company salesmen, manufacturer's representatives, distributors and
foreign licensees.
- 3 -
<PAGE>
TO OUR SHAREHOLDERS:
Your company continued to make operating improvements throughout 1997. Breakeven
points in our plants trended lower as we became more efficient in the use of
materials and assets. This has enabled Farr to maintain prices with only minimal
selected increases during the year.
Both sales and net income for the year again set all time records at
$125,762,000 and $7,375,000 or $1.32 per share. The sales increased 3% and net
income, 25% over the prior year. Other financial highlights are inventories
decreased $1,725,000, total short and long term debt decreased $2,849,000, and
at year-end we had $7,140,000 in cash and short term investments. This is the
first operating year without long term debt since 1947.
Additional operational improvements include the consolidation of some
manufacturing so as to eliminate the transport of parts among two or more
plants. Higher efficiency, better quality and lower costs have resulted. The
costs of these changes were absorbed in current operations.
Our media production facilities at Crystal Lake, Illinois and Conover, North
Carolina, were overhauled and the processes refined to further improve the
uniformity and quality of this non-woven media which is used in Farr's 30/30(R)
line of pleated HVAC filters.
Farr is the only producer of medium efficiency air filters to manufacture its
own proprietary media. This allows complete control of product performance for
which the 30/30(R) line is so well known throughout the air filtration industry.
This year we took actions to ensure a better long-term strategic position in
Asia by establishing a new plant in Malaysia to provide HVAC filters to eastern
Pacific Rim markets. This plant is owned by a joint venture of Farr and Quest
Technology of Malaysia. It started up at year-end and will be fully operational
during the second quarter of 1998.
While no immediate gains are anticipated from this endeavor, it will support
markets that have growth potential. We believe it will prove to be a long term
source of growth for Farr as the benefits of faster delivery, local content and
lower freight costs become increasingly important.
The Asian financial crises, which developed in the fall of 1997, is hurting
business in most of those markets but we do not see this as a particular
long-term threat to this new joint venture facility.
Another strategic action was the acquisition in November 1997, of MCF, Inc.
located in Washington, North Carolina. This acquisition, from the owner managers
who are staying on, under Farr's ownership, is a small, high quality, specialty
manufacturer of housings and bags used for filtering and then containing
hazardous waste dust from certain biological, chemical, nuclear and medical
facilities having special air handling and filtration system requirements,
operating in contaminated environments.
- 4 -
<PAGE>
This is a small but fast growing market which Farr's industrial/commercial
distributors and agents serve, so it fills a strategic need in our product line
up. We will continue to look for other such strategic fits, which will enhance
our product lines and add to earnings.
A third area in which we have taken action to ensure continued long term
improvement and to accelerate sales is new and improved products. A number of
these were introduced during the year including an entirely new cartridge for
air pollution control equipment, such as Farr's Tenkay(R) line of dust
collectors. A new line of class 7 and class 8 truck filters and mounting
hardware was introduced to selected truck original equipment manufacturers. The
market reaction has been very good. Farr has done very little in this market in
recent years. Our strategy is to re-establish a niche position with this
specialized line.
We continue to provide our railroad customers and locomotive builders with
solutions to problems, which arise from the industry's trend toward larger,
higher horsepower engines.
The introduction of new products is just one of the ways we have begun to
address the significant challenge mentioned in last year's letter, that of
increased sales. We have also been addressing this challenge through
organizational improvements including the addition of Richard Larson, 48, Senior
Vice President, Sales and Marketing. Joining Farr with many years of filtration
experience he was able to take immediate charge with little orientation. This is
an important position in the organization, which had been vacant for some time.
We previously reported that the dust collection operations were being combined
with engineered systems into a single strategic marketing unit, in Jonesboro,
Arkansas, to be directed by a single on-site manager. We feel fortunate in
bringing Lee Morgan to Farr as the manager of these consolidated lines, which we
believe, will show significant growth under his leadership.
Our HVAC, sales and marketing specialists have been reorganized into more
specific roles under Sales and Marketing Director, Todd McKinney. They are now
positioned to better and more quickly understand opportunities and challenges so
as to be much more responsive, as well as proactive to the market place.
Finally, transportation and engine products engineering, sales and marketing
functions were brought together under the direction of manager, Samuel Benson.
This includes all engine, railroad and marine products with specialists assigned
to specific products and markets and will be located in Memphis, Tennessee,
close to the two Farr plants which produce these products in the United States.
Memphis is centrally located to serve most of our markets and customers.
Transportation products have been showing good growth which we believe will be
enhanced by this "management alignment."
As mentioned earlier, sales growth posed management's greatest challenge. We
have vigorously addressed that challenge through the planning, staffing and
reorganization discussed above and we believe results will begin to be evident
in the current year with momentum building as successes are realized and
strategies are further refined.
- 5 -
<PAGE>
While we are encouraged by some of the sales gains that have been made, we are
not pleased with the overall performance, which has been tempered by actual
sales reductions in certain markets.
We have set some high standards for the company's growth so as to preclude the
trap of growth for growth's sake alone, which usually results in prolonged
profit erosion.
We remain convinced that there are substantial markets for Farr's good products
which meet user needs for quality and performance at a fair price and we
continue to pursue a course to that end.
We should also report on our new headquarters facility. As you are aware, over
the past four years there has been continuous movement within Farr to
decentralize certain functions. This required the actual relocation of people
and positions closer to our plants and customers. Eventually our headquarters
facility became too large, inefficient and outdated. At year-end a new, smaller
more efficient corporate headquarters facility with state of the art
communications was completed. This Farr owned building, next to the former
headquarters, had been vacated by our Los Angeles branch operation in favor of
leased facilities in a more appropriate location.
As our service, quality and product offering have improved, new challenges have
been placed on our distributors, suppliers and employees. They have met those
challenges with excellent results for which we thank them.
As we begin 1998 we are optimistic for Farr's continued success and growth
during the coming year and for the years ahead as well.
/s/ H. Jack Meany /s/ John C. Johnston
- ---------------------------------- -----------------------------------
H. Jack Meany John C. Johnston
Chairman & Chief Executive Officer President & Chief Operating Officer
- 6 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS FARR COMPANY AND SUBSIDIARIES
January 3, 1998 December 28, 1996
- ----------------------------------------------------------------------------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents ............................ $ 5,109,000 $ 1,997,000
Short term investments ............................... 2,031,000 --
Accounts receivable, less allowances of $254,000
in 1997 and $297,000 in 1996 ....................... 20,267,000 20,551,000
Inventories
Raw materials ..................................... 4,812,000 5,380,000
Work in progress .................................. 3,307,000 3,979,000
Finished goods .................................... 2,690,000 3,175,000
----------------------------
10,809,000 12,534,000
Prepaid expenses ..................................... 904,000 790,000
Income taxes receivable .............................. 666,000 --
Deferred income tax benefit .......................... 1,221,000 1,807,000
----------------------------
Total current assets ............................... 41,007,000 37,679,000
----------------------------
Property, plant and equipment at cost
Land ................................................. 2,098,000 2,107,000
Buildings and improvements ........................... 17,429,000 15,247,000
Machinery and equipment ................................ 35,935,000 34,907,000
----------------------------
55,462,000 52,261,000
Less accumulated depreciation and amortization ....... 37,843,000 36,650,000
----------------------------
17,619,000 15,611,000
Investments and other .................................. 2,202,000 397,000
----------------------------
$60,828,000 $53,687,000
============================
Liabilities & Stockholders' Investment
Current Liabilities:
Notes payable to banks ............................... $ 93,000 $ 874,000
Current portion of long-term debt .................... -- 23,000
Accounts payable ..................................... 9,701,000 8,665,000
Accrued liabilities .................................. 8,726,000 7,566,000
Income taxes payable and current deferred income taxes . 750,000 745,000
----------------------------
Total current liabilities .......................... 19,270,000 17,873,000
----------------------------
Long-term debt, net of current portion ................. -- 2,068,000
Deferred income taxes .................................. 2,196,000 2,350,000
Other noncurrent liabilities ........................... 855,000 186,000
Commitments and contingencies
Stockholders' investment
Common stock, $.10 par value -
Authorized - 10,000,000 shares
Outstanding 5,752,754 shares at January 3, 1998
and 5,707,404 shares at December 28, 1996 ......... 551,000 544,000
Additional paid-in capital ............................. 12,061,000 11,603,000
Cumulative translation adjustments ..................... ( 1,749,000) ( 1,206,000)
Retained earnings ...................................... 27,644,000 20,269,000
----------------------------
Total stockholders' investment ......................... 38,507,000 31,210,000
----------------------------
$60,828,000 $53,687,000
============================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED OPERATIONS STATEMENTS FARR COMPANY AND SUBSIDIARIES
For the Years Ended ...................... January 3, 1998 December 28, 1996 December 30, 1995
=========================================================================================================
<S> <C> <C> <C>
Net Sales ........................................ $125,762,000 $122,021,000 $113,275,000
Cost of Sales .................................... 92,792,000 91,276,000 85,496,000
-----------------------------------------------
Gross Margin ..................................... 32,970,000 30,745,000 27,779,000
Selling, general and administrative expenses ... 21,692,000 20,419,000 20,956,000
Interest expense ............................... 197,000 687,000 1,796,000
Interest income ................................ ( 159,000) ( 41,000) --
Restructuring costs ............................ -- -- 540,000
Gain on sale of assets ......................... -- -- ( 676,000)
-----------------------------------------------
Total Expenses ................................... 21,730,000 21,065,000 22,616,000
-----------------------------------------------
Income Before Income Taxes ....................... 11,240,000 9,680,000 5,163,000
Income Tax Provision ........................... 3,865,000 3,790,000 2,039,000
-----------------------------------------------
Net Income ....................................... $ 7,375,000 $ 5,890,000 $ 3,124,000
===============================================
Diluted Earnings per Common Share ................ $ 1.32 $ 1.07 $ .57
===============================================
Basic Earnings per Common Share .................. $ 1.35 $ 1.08 $ .57
===============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Cumulative
For the Years Ended January 3, 1998, .... Common Additional Retained Translation Loans to
December 28, 1996 and December 30, 1995 . Stock Paid-in Capital Earnings Adjustments ESOPs
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance-- December 31, 1994 ............. $ 552,000 $11,821,000 $11,281,000 ($ 1,847,000) ($ 635,000)
Exercised and Granted Stock Option .... 1,000 174,000 -- -- --
Cumulative Translation Adjustment ..... -- -- -- 223,000 --
Principal Loan Payments from ESOP's ... -- -- ( 26,000) -- 635,000
Treasury Stock Acquired - 99,050 shares ( 10,000) ( 508,000) -- -- --
Net Income ............................ -- -- 3,124,000 -- --
----------------------------------------------------------------------
Balance-- December 30, 1995 ............. 543,000 11,487,000 14,379,000 ( 1,624,000) 0
Exercise of Stock Options ............. 1,000 98,000 -- -- --
Cumulative Translation Adjustment ..... -- -- -- 418,000 --
Treasury Stock Sold - 1,974 shares .... -- 18,000 -- -- --
Net Income ............................ -- -- 5,890,000 -- --
----------------------------------------------------------------------
Balance-- December 28, 1996 ............. 544,000 11,603,000 20,269,000 ( 1,206,000) 0
Exercise of Stock Options ............. 5,000 252,000 -- -- --
Cumulative Translation Adjustment ..... -- -- -- ( 543,000) --
Treasury Stock Issued - 12,500 shares . 2,000 206,000 -- -- --
Net Income ............................ -- -- 7,375,000 -- --
----------------------------------------------------------------------
Balance-- January 3, 1998 ............... $ 551,000 $12,061,000 $27,644,000 ($1,749,000) $ 0
======================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED OPERATIONS STATEMENTS FARR COMPANY AND SUBSIDIARIES
For the Years Ended January 3, 1998 December 28, 1996 December 30, 1995
====================================================================================================================
Operating Activities:
<S> <C> <C> <C>
Net Income ........................................... $ 7,375,000 $ 5,890,000 $ 3,124,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................... 2,360,000 2,392,000 3,299,000
Provision for loss on accounts receivable ........ 206,000 109,000 151,000
Benefit retirement trust ......................... 635,000 186,000 --
Equity in loss of affiliate ...................... 30,000 -- --
Changes in deferred income taxes ................. 402,000 86,000 1,501,000
Exchange loss (gain) ............................. ( 131,000) 97,000 14,000
Net (gain) loss on sale/retirement of
property, plant and equipment ................ 38,000 49,000 ( 701,000)
Provision for (gain) loss on investments ......... -- -- ( 115,000)
Change in assets and liabilities
Inventories .................................. 1,586,000 3,048,000 ( 734,000)
Receivables and prepaid expenses ............. ( 126,000) ( 600,000) 1,186,000
Accounts payable and accrued expenses ........ 2,250,000 ( 960,000) 1,104,000
Income taxes payable ......................... ( 603,000) 2,000 ( 100,000)
-------------------------------------------------------
Net cash provided by operating activities ........ 14,022,000 10,299,000 8,729,000
-------------------------------------------------------
Investing Activities:
Purchases of property, plant and equipment ........... ( 4,508,000) ( 1,465,000) ( 1,163,000)
Purchases of short term investments .................. ( 2,031,000) -- --
Proceeds from sale of property, plant and
equipment .......................................... -- 6,000 2,945,000
Investment in joint venture .......................... ( 250,000) -- --
Prepaid pension costs ................................ ( 586,000) -- --
Proceeds from sale of investments .................... -- -- 567,000
Purchase of investments, benefit trust ............... ( 635,000) ( 186,000) --
-------------------------------------------------------
Net cash provided by (used in) investing activities ( 8,010,000) ( 1,645,000) 2,349,000
-------------------------------------------------------
Financing Activities:
Proceeds from revolving line of credit and
long-term debt ...................................... -- 8,603,000 432,000
Principal payments on revolving line of credit
and long-term debt .................................. ( 3,114,000) ( 16,195,000) ( 10,893,000)
Principal payments received on ESOP loans ............. -- -- 635,000
Proceeds from sale of stock, stock option plans ....... 257,000 99,000 175,000
Treasury stock sold (acquired) ........................ -- 18,000 ( 518,000)
Other ................................................. 28,000 7,000 ( 167,000)
-------------------------------------------------------
Net cash used in financing activities ............. ( 2,829,000) ( 7,468,000) ( 10,336,000)
-------------------------------------------------------
Effect of Exchange Rate Changes on Cash ................. ( 71,000) ( 1,000) ( 57,000)
-------------------------------------------------------
Increase in cash and cash equivalents ................. 3,112,000 1,185,000 685,000
Cash and Cash Equivalents at Beginning of Year .......... 1,997,000 812,000 127,000
-------------------------------------------------------
Cash and Cash Equivalents at End of Year ................ $ 5,109,000 $ 1,997,000 $ 812,000
=======================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES
1. Significant Accounting Policies
Farr Company and its wholly-owned subsidiaries (the "Company") has
prepared its financial statements in accordance with generally
accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Following are the Company's significant accounting
policies:
Basis of Presentation -- Farr Company is a multinational company engaged
principally in the design, development, manufacture, sale and service
of air and liquid filters. The principal market for the Company's
products and services are North American based commercial wholesale
distributors, HVAC OEMs and contractors and transportation businesses.
The accompanying consolidated financial statements include the
accounts of Farr Company and its wholly-owned subsidiaries. A
functional currency has been determined for each foreign entity of the
Company, and the exchange gain or loss from translating the foreign
currency statements to their U.S. dollar equivalents at the rates of
exchange in effect at the end of each period is charged or credited to
cumulative translation adjustments within stockholders' investment.
Differences from converting nonfunctional to functional currencies and
transaction gains and losses are included in income. During 1997,
1996, and 1995, $131,000 was credited to income, $97,000 and $14,000
was charged to income, respectively.
AccountingPeriod -- The Company's fiscal year ends on the Saturday closest to
December 31. The fiscal years ended January 3, 1998, December 28, 1996
and December 30, 1995 comprise 53, 52 and 52 weeks, respectively.
Cash and Cash Equivalents -- Cash includes currency on hand, demand
deposits with financial institutions and investments with original
maturities of three months or less.
Short-TermInvestments -- Short-term investments, consisting principally of
certificates of deposit and repurchase agreements secured by
government obligations, are held to maturity and are carried at cost,
which approximates fair value.
Inventories -- Inventories include material, labor and factory overhead.
Domestic inventories are stated at cost, determined by the last-in,
first-out method. All other inventories are stated at the lower of
cost, using the first-in, first-out method, or market.
Property, Plant and Equipment -- The cost of property, plant and equipment is
depreciated over the estimated useful lives of the respective assets,
using declining-balance and straight-line methods, based upon the
following lives.
Building and improvements 10 - 40 years
Machinery and equipment 3 - 12 years
Maintenance and repairs are charged to expense as incurred and the
cost of additions and betterments are capitalized. When assets are
retired or otherwise disposed of, the assets and the related
accumulated depreciation accounts are relieved, and any resulting
gains or losses from sales or retirements, are reflected in income.
In 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 - "Accounting for the Impairment of Long Lived
Assets to Be Disposed Of " (FASB No. 121), effective for 1996. The
Company's adoption of FASB No. 121 resulted in no impact on the
Company's results of operations or financial position.
Investments and Other -- Investments and other include intangible assets that
are amortized on a straight-line basis over a five year period.
Product Engineering and Development -- Engineering and development costs
aggregating $2,129,000, $2,217,000 and $2,251,000 in 1997, 1996, and
1995, respectively, for new products or improvements of existing
products, were expensed as incurred.
Revenue Recognition -- Revenue is recognized at the time the product is
shipped to the customer.
Income Taxes -- The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards No. 109, "Accounting for
Incomes Taxes," which requires the use of the liability method of
accounting for deferred income taxes. The provision for income taxes
includes Federal, foreign, state and local income taxes currently
payable and those deferred due to temporary differences between the
financial statement and tax bases of assets and liabilities.
Certain reclassifications have been made to the prior years' financial
statements to conform with current year presentation.
- 10 -
<PAGE>
2. Inventories
Domestic inventories totaling $6,103,000 and $7,375,000 at January 3,
1998 and December 28, 1996, respectively, are stated at cost
determined by the last-in, first-out method. If the first-in,
first-out method of inventory valuation had been used, inventories
would have been $6,613,000 and $6,801,000 higher than reported at
January 3, 1998 and December 28, 1996, respectively.
During 1997 and 1996, inventory quantities were reduced
resulting in the disposition of last-in, first-out inventory
quantities carried at cost prevailing in a prior year. Charging these
lower costs to operations had no material effect on net income in 1997
and 1996.
3. Restructuring Costs
In the fourth quarter of 1995, the Company recorded a restructuring
charge of $360,000 related to the costs associated with the
reorganization of its manufacturing and distribution operations in
North America. This reorganization was implemented as part of the
Company's effort to consolidate manufacturing and distribution
operations and increase production efficiency, asset utilization and
profitability. The charge was comprised of $230,000 of work force
related costs (approximately 40 people) and $130,000 for facility
related costs. The majority of the costs associated with this
restructuring were incurred during the first quarter of 1996. At
December 28, 1996, the balance of this restructuring charge was
$103,000 and was included as a component of accrued liabilities in the
accompanying Consolidated Balance Sheets.
The Company recorded a restructuring charge of $1,500,000 in
the fourth quarter of 1992 related to anticipated costs associated
with the closures of two manufacturing plants. The two United States
plants located in Pryor, Oklahoma and Eatonton, Georgia were closed in
1993 as part of the Company's efforts to consolidate manufacturing
operations and increase production efficiency, asset utilization and
profitability. The remaining $332,000 balance of this restructuring
charge is included as a component of accrued liabilities in the
accompanying Consolidated Balance Sheet as of January 3, 1998. If the
present weak real estate market in Eatonton, Georgia continues beyond
2000, the Company may need to record an additional provision to cover
the costs of leasing and maintaining the facility beyond the estimated
disposition date.
4. Gain on Sale of U.S. Plant
In November 1995, the Company sold its plant located in Rialto,
California for $3,050,000 which resulted in a gain of $676,000. The
entire amount of the net proceeds were received in cash and were
primarily used to retire secured debt on the subject property.
5. Common Stock
On April 3, 1989, the Company's Board of Directors declared a dividend
distribution of one common share purchase right for each share of
common stock outstanding on April 18, 1989. An exercisable right will,
under certain conditions, entitle its holder to purchase from the
Company one-half of one share of common stock at the exercise price,
subject to adjustment, at a price of $40 per whole share, subject to
adjustment. The exercise price as of January 3, 1998 is $21.33 per
whole share of common stock. The rights will become exercisable ten
days after any person acquires 20 percent or more of the Company's
outstanding common stock, or announces an offer which would result in
such person acquiring 30 percent or more of the Company's common
stock. The rights will expire on April 3, 1999, and may be redeemed by
the Company for $.01 per right at any time until ten business days
after a person acquires 20 percent or more of the Company's common
stock. Under certain circumstances after a person acquires 20 percent
or more of the Company's common stock, or after a merger or other
business combination involving the Company, an exercisable right will
entitle its holder to purchase shares of common stock (or shares of an
acquiring company) having a market value of twice the exercise price
of one right.
In 1997, the Company issued 12,500 treasury shares to
acquire Metalcraft Air Filtration, Inc. In 1996, the Company
transferred 1,974 shares to the Employee Stock Ownership Plan. In
1995, the Company received 99,050 shares from the Employee Stock
Ownership Plans as payment against the Company's outstanding loans to
the Plans. As of January 3, 1998 and December 28,1996 the Company held
in treasury 238,556 and 251,057 shares of its common stock at a cost
of $1,191,000 and $1,399,000, respectively. Outstanding stock amounts
are reflected net of outstanding treasury shares in the Consolidated
Statements of Stockholder's Investment. Per share amounts and shares
outstanding in the current and prior periods have been restated to
reflect a 3 for 2 stock split paid in the form of a stock dividend
(see note 6).
- 11 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES
(continued)
6. Dividend and Stock Split
On February 18, 1997, the Company's Board of Directors declared a
dividend that was paid in the form of a 3 for 2 stock split, payable
on March 28, 1997, to stockholders of record on March 7, 1997.
7. Notes Payable and Long-term Debt
The Company's foreign subsidiaries utilize overdraft facilities that
aggregate to approximately $2,280,000 of which $93,000 was utilized as
of January 3, 1998. As of December 28, 1996, total foreign overdraft
facilities aggregated approximately $2,326,000 of which $874,000 was
utilized. The weighted average interest rate was 7.9% in 1997 and 7.3%
in 1996.
The Company utilizes a $10,000,000 revolving credit facility
for its domestic needs. As of January 3, 1998, the Company had no
borrowings outstanding under this facility. This facility will expire
on June 1, 1999 when the then outstanding loan balance, if any, will
be due. Interest is payable on the loan at a floating rate equal to
the Prime rate or the bank's Offshore rate plus 1.75 percent.
Long-term debt as of December 28, 1996 was as follows:
January 3, 1998 December 28, 1996
==========================================================================
Revolving credit facility $ -- $ 2,000,000
Term loan -- 91,000
----------------------------------
-- 2,091,000
Less current portion -- ( 23,000)
----------------------------------
Net long-term debt $ -- $ 2,068,000
==================================
At January 3, 1998, no real, personal or intangible property was
pledged as security for long-term debt.
Under the Company's domestic credit agreement, the Company
is required to maintain certain financial covenants.
Interest paid on outstanding debt and obligations net of
amounts capitalized were $210,000, $788,000 and $1,839,000 in 1997,
1996, and 1995, respectively.
No future principal payments are scheduled as long-term debt
was all retired in 1997.
- 12 -
<PAGE>
8. Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1998 December 28, 1996 December 30, 1995
==========================================================================================
<S> <C> <C> <C>
Current -- Federal $ 2,441,000 $ 2,772,000 $ 81,000
State 231,000 432,000 171,000
Foreign 791,000 282,000 286,000
------------------------------------------------------
3,463,000 3,486,000 538,000
------------------------------------------------------
Deferred -- Federal 429,000 ( 96,000) 1,230,000
State 16,000 -- 173,000
Foreign ( 43,000) 400,000 98,000
------------------------------------------------------
402,000 304,000 1,501,000
------------------------------------------------------
$ 3,865,000 $ 3,790,000 $ 2,039,000
=====================================================
</TABLE>
The following is a reconciliation of income taxes at the Federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1998 December 28, 1996 December 30, 1995
=============================================================================================================
<S> <C> <C> <C>
Computed income taxes at statutory rate $ 3,618,000 $ 3,291,000 $ 1,755,000
State income taxes, net of federal income tax benefit 163,000 285,000 113,000
Taxes on foreign subsidiaries' net income in excess
of (less than) income taxes at statutory rates ( 61,000) 40,000 46,000
Other items, net 145,000 174,000 125,000
----------------------------------------------------
Provision for income taxes $ 3,865,000 $ 3,790,000 $ 2,039,000
====================================================
</TABLE>
Deferred taxes are recorded based upon differences between
the financial statement and tax bases of assets and liabilities and
available tax credit carryforwards. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1998 December 28, 1996
=============================================================================
<S> <C> <C>
Depreciation ($ 456,000) ($ 537,000)
Employee compensation accruals 567,000 716,000
Plant relocation and restructuring 168,000 184,000
DISC commission accrual ( 1,584,000) ( 1,782,000)
Acquisition reserves ( 526,000) ( 639,000)
Inventory 437,000 928,000
Other items, net 419,000 587,000
------------------------------------
($ 975,000) ($ 543,000)
=====================================
</TABLE>
Included in income taxes payable and current deferred income taxes at
January 3, 1998, and December 28, 1996 were $365,000 and $408,000,
respectively, of foreign deferred income taxes.
- 13 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES
(continued)
The consolidated income before income tax, by domestic and foreign
sources is as follows:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1998 December 28, 1996 December 30, 1995
================================================================================
<S> <C> <C> <C>
Domestic $ 8,859,000 $ 7,792,000 $ 4,170,000
Foreign 2,381,000 1,888,000 993,000
--------------------------------------------------
$11,240,000 $ 9,680,000 $ 5,163,000
==================================================
</TABLE>
Income taxes paid, net, were $3,806,000, $3,461,000 and $466,000 in
1997, 1996 and 1995, respectively.
9. Employee Benefit Plans
The Company has defined contribution retirement plans covering
domestic employees who meet eligibility requirements. Company
contributions are based on a formula as specified in the respective
plan agreements. Contributions, which aggregated $1,295,000 in 1997,
$851,000 in 1996 and $916,000 in 1995 were charged to expense in
accordance with the approved plan formulas.
Under one of the Company's domestic defined contribution
plans, covering key employees, Company contributions and employee
compensation deferrals are made to a Company trust under provisions of
the plan. The deferred compensation, contributions and earnings from
the trust are included in the Company's Consolidated Balance Sheets
both as a non-current asset and a non-current liability. The total
plan non-current assets and non-current other liabilities as of
January 3, 1998 and December 28, 1996, were $855,000 and $186,000,
respectively.
The Company had two employee stock ownership plans (ESOPs)
that operated in conjunction with the Company's prior defined
contribution plans. The ESOPs previously purchased outstanding shares
on a leveraged basis, with the Company making sufficient contributions
to cover the interest and principal payments resulting from the
borrowings. The Company contributed $133,000 to cover interest and
principal payments on outstanding borrowings in 1995. The Company
recognized expense for the ESOPs using the cash payments method, which
is subject to certain minimum amounts. The Company terminated the
ESOPs in 1996. Pension costs for the Company's defined benefit plans,
covering eligible employees in foreign operations, are determined by
independent actuarial valuations.
Pension (benefit) expense under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 87, "Employers'
Accounting for Pensions", was $98,000 in 1997, $31,000 in 1996 and
($17,000) in 1995. The components of the 1997, 1996 and 1995 net
periodic pension cost were as follows:
<TABLE>
<CAPTION>
For the Years Ended 1997 1996 1995
========================================================================================================
<S> <C> <C> <C>
Service cost $ 294,000 $ 232,000 $ 165,000
Interest cost on projected benefit obligation 389,000 337,000 302,000
Actual (return) on plan assets ( 783,000) ( 570,000) ( 696,000)
Net amortization and deferral 198,000 32,000 212,000
-------------------------------------------------
$ 98,000 $ 31,000 ($ 17,000)
=================================================
The assumptions used were:
Discount rate 7.8%-- 8.0% 7.8%-- 8.0% 8.0%-- 9.0%
Rate of compensation increase 5.0%-- 6.0% 5.0%-- 6.0% 5.0%-- 6.0%
Long-term rate of return on assets 9.0%-- 10.0% 9.0%-- 10.0% 9.0%-- 10.0%
</TABLE>
- 14 -
<PAGE>
The following table sets forth the funded status of the defined
benefit plans and amounts recognized in the Company's consolidated
balance sheets as of January 3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
For the Years Ended 1997 1996
==========================================================================================================
<S> <C> <C>
Actuarial present value of benefit obligations --
Vested benefit obligation $ 5,272,000 $ 4,660,000
Accumulated benefit obligation 5,273,000 4,660,000
================================
Projected benefit obligation 5,726,000 4,962,000
Plan assets at fair value 6,813,000 6,030,000
--------------------------------
Plan assets in excess of projected benefit obligation 1,087,000 1,068,000
Unrecognized net gain ( 516,000) ( 489,000)
Prior service cost not yet recognized in net periodic pension cost 108,000 135,000
Unrecognized net transition asset ( 62,000) ( 111,000)
--------------------------------
Prepaid pension cost obligation recognized in the
consolidated balance sheets $ 617,000 $ 603,000
================================
</TABLE>
The Company provides no post-retirement health care and life
insurance benefits or other post-employment benefits to its employees.
10. Stock Options
Under the 1983 and 1993 stock option plans, the Company may grant
non-qualified and incentive stock options to officers and employees.
Options are contingent upon continued employment, and become
exercisable from at least one year after date of grant at such times
and installments as the Compensation Committee of the Board shall
provide. All options outstanding at January 3, 1998 had an exercise
price equal to 100 percent of the fair market value on the date the
option was granted except for 118,500 shares that were granted in
1995. Compensation expense recorded under the plan was $27,000 in
1997, 1996 and 1995, respectively. Options expire ten years from the
date of grant, subject to earlier expiration under the terms of the
plan. The 1983 plan covered a total of 468,750 shares of the Company's
common stock of which at January 3, 1998, 68,137 shares were subject
to presently outstanding options. At January 3, 1998, 525,000 shares
of common stock were reserved for distribution under the 1993 plan, of
which 264,050 shares were subject to outstanding options.
As permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
effective for 1996, the Company continues to account for stock
compensation costs in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Had compensation cost for the Company's stock plans been
determined in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
For the Year Ended January 3, 1998 December 28, 1996 December 30, 1995
========================================================================================
<S> <C> <C> <C>
Net Income As Reported $ 7,375,000 $ 5,890,000 $ 3,124,000
Pro Forma $ 7,237,000 $ 5,814,000 $ 3,062,000
Diluted EPS As Reported $ 1.32 $ 1.07 $ .57
Pro Forma $ 1.29 $ 1.06 $ .55
</TABLE>
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to December 31, 1994, the resulting
pro forma compensation cost may not be representative of that to be
expected in future years.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997, 1996
or 1995: risk-free interest rates of 7.83, 7.13, 6.19 and 6.1 percent
for options granted in 1995, 6.28 and 6.76 percent for options granted
in 1996 and 6.26 percent for options granted in 1997; expected
dividend yields of 0 percent; expected volatility of 45; expected life
of 7 years for 1997, 1996 and 1995 options.
- 15 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES
(continued)
Activity under the 1983 and 1993 plans is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
=========================== =========================== ===========================
Weighted Weighted Weighted
Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price
-------- ----------------- -------- ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 333,917 $ 4.64 362,545 $ 4.69 250,117 $ 5.32
Granted 47,000 13.02 3,750 6.17 148,500 3.59
Exercised 45,467 5.67 17,400 5.26 9,795 4.11
Cancelled and expired 3,263 4.77 14,978 5.51 26,277 4.69
------- ------- ------- ------- ------- -------
Options outstanding
end of year 332,187 $ 5.69 333,917 $ 4.64 362,545 $ 4.69
======= ======= ======= ======= ======= =======
End of year shares exercisable 163,119 $ 5.11 167,231 $ 5.53 147,258 $ 5.93
======= ======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding as of January 3, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
============================================================== ===========================
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at Jan. 3 Contractual Life Exercise Price at Jan. 3 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 5.07 - $ 5.87 15,937 1.0 Years $ 5.68 15,937 $ 5.68
6.00 - 7.17 40,312 2.7 6.54 40,312 6.54
3.50 - 7.50 31,500 5.0 5.66 31,500 5.66
3.33 - 4.83 193,689 6.8 3.72 74,434 3.96
6.17 - 16.00 50,750 9.3 12.51 936 6.17
--------------- ------- --- ------ ------- ------
$ 3.33 - $16.00 332,187 6.2 $ 5.69 163,119 $ 5.11
=============== ======= === ====== ======= ======
</TABLE>
- --------------------------------------------------------------------------------
On January 22, 1991, the Company's Board of Directors
adopted and approved the 1991 Stock Option Plan for Non-Employee
Directors. Under the 1991 Stock Option Plan, the Company is authorized
to issue up to 72,000 shares of common stock to the Company's
non-employee directors of which 57,000 shares are subject to presently
outstanding options. In 1995 the Company amended this plan to increase
the number of shares issuable under the plan to 150,000 shares.
Activity for fiscal years 1997, 1996 and 1995 under the 1991 Plan are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
=========================== =========================== ===========================
Weighted Weighted Weighted
Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price
------ ----------------- ------ ----------------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 57,000 $ 5.26 42,000 $ 4.76 51,000 $ 4.89
Granted 18,000 11.50 15,000 6.63 12,000 4.96
Exercised -- -- -- -- 6,000 3.79
Cancelled and expired -- -- -- -- 15,000 5.75
------ ------ ------ ------ ------ ------
Options outstanding
end of year 75,000 $ 6.76 57,000 $ 5.26 42,000 $ 4.76
====== ====== ====== ====== ====== ======
End of year shares exercisable 57,000 $ 5.26 42,000 $ 4.76 30,000 $ 4.69
====== ====== ====== ====== ====== ======
</TABLE>
- 16 -
<PAGE>
The following table summarizes information about fixed stock options
outstanding as of January 3, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
============================================================== ===========================
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at Jan. 3 Contractual Life Exercise Price at Jan.3 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ $ 6.08 6,000 3.2 Years $ 6.08 6,000 $ 6.08
3.33 - 6.17 12,000 4.8 4.75 12,000 4.75
3.58 - 6.08 24,000 6.9 4.44 24,000 4.44
6.17 - 11.50 33,000 8.7 9.30 15,000 6.65
--------------- ------ --- ------ ------ ------
$ 3.33 - $11.50 75,000 7.1 $ 6.76 57,000 $ 5.26
=============== ====== === ====== ====== ======
</TABLE>
11. Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share" (EPS), which requires dual presentation of basic
EPS and diluted EPS, simplifies existing computational guidelines, and
increases the comparability of earnings per share on an international
basis. SFAS 128 was effective for periods ending after December 15,
1997. All prior periods have been restated.
Income, average weighted shares outstanding and earnings per share
data as restated for SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
For the Years Ended January 3, 1998 December 28, 1996 December 30, 1995
==============================================================================================================================
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS
Income available to
common stockholders $7,375,000 5,482,540 $1.35 $5,890,000 5,445,122 $1.08 $3,124,000 5,525,373 $.57
===== ===== ====
Options issued -- 106,276 -- 64,819 -- 8,024
-------------------- -------------------- --------------------
DILUTED EARNINGS PER SHARE
Income available to
common stockholders
plus assumed conversions $7,375,000 5,588,816 $1.32 $5,890,000 5,509,941 $1.07 $3,124,000 5,533,397 $.57
========== ========= ===== ========== ========= ===== ========== ========= ====
</TABLE>
The effect of this accounting change on previously reported earnings
per share (EPS) data was as follows:
<TABLE>
<CAPTION>
For the Years Ended December 28, 1996 December 30, 1995
================================================================================
PER SHARE AMOUNTS
<S> <C> <C>
Primary EPS as reported $ 1.08 $ .57
Effect of SFAS No. 128 -- --
Basic EPS as restated 1.08 .57
Fully diluted EPS as reported 1.06 .57
Effect of SFAS No. 128 .01 --
Diluted EPS as restated 1.07 .57
</TABLE>
- 17 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES
(continued)
As a result of the 3 for 2 stock split that was distributed
on March 28, 1997, per share amounts for the 1996 and prior years have
been restated to reflect the weighted average number of shares of
common stock outstanding increased by shares issued for the stock
split.
12. Commitments and Contingencies
The Company leases certain facilities and equipment under agreements,
the majority of which expire at various dates through 2004. The
majority of the Company's leases provide for the payment of real
estate taxes and insurance. Net rental expense was $ 1,227,000 for the
year ended January 3, 1998, $1,145,000 for the year ended December 28,
1996, and $1,274,000 for the year ended December 30, 1995. As of
January 3, 1998, approximate minimum rental commitments under
noncancelable leases which have not been capitalized were as follows:
<TABLE>
<CAPTION>
Year Ending Amount
==========================
<S> <C> <C>
1998 $ 1,012,000
1999 584,000
2000 396,000
2001 280,000
2002 211,000
Thereafter 289,000
-----------
Total $ 2,772,000
===========
</TABLE>
The Company is involved in several claims and suits that
arise out of the ordinary course of business, and has tax returns
under review. Management believes that these matters are either
adequately reserved, covered by insurance, or would not have a
material adverse effect on the financial position or operations of the
Company if disposed of unfavorably.
13. Segment Information
Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information" (SFAS No. 131), effective for
fiscal years beginning after December 15, 1997. The Company operates
in one principal market segment, air filtration. Accordingly, the
impact of SFAS No. 131 is not anticipated to have any significant
impact on the Company's existing business segment reporting disclosure
requirements.
Industry Segments: The Company is engaged in one line of
business - filtration. The Company's basic business is manufacturing
filters for the control of particulate and vapor contaminants in air
and liquids. Information about the Company's operations in different
geographic areas for the three years ended January 3, 1998, are
presented as follows:
<TABLE>
<CAPTION>
Net Sales Transfers
(In Thousands) Sales to Unaffiliated Customers Between Geographic Areas Total Net Sales
=====================================================================================================================
1997 1996 1995 1997 1996 1995 1997 1996 1995
------------------------------ -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $101,352 $100,008 $ 93,189 $ 4,662 $ 4,107 $ 3,540 $106,014 $104,115 $ 96,729
Canada 13,162 11,632 11,002 7,117 5,854 4,251 20,279 17,486 15,253
Europe 11,248 10,381 9,084 57 365 268 11,305 10,746 9,352
------------------------------ -------------------------------- --------------------------------
Total Segments 125,762 122,021 113,275 11,836 10,326 8,059 137,598 132,347 121,334
------------------------------ -------------------------------- --------------------------------
Adjustments &
Eliminations -- -- -- ( 11,836) ( 10,326) ( 8,059) ( 11,836) ( 10,326) ( 8,059)
------------------------------ -------------------------------- --------------------------------
Consolidated Totals $125,762 $122,021 $113,275 $ -- $ -- $ -- $125,762 $122,021 $113,275
============================== ================================ ================================
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Operating Profit
In thousands) Before Income Taxes Identifiable Assets
=========================================================================================================
1997 1996 1995 1997 1996 1995
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 7,974 $ 7,618 $ 5,239 $ 44,681 $ 39,261 $ 43,286
Canada 2,824 1,939 867 11,179 10,809 11,055
Europe 600 863 909 6,836 7,109 6,078
------------------------------------ ------------------------------------
Total Segments 11,398 10,420 7,015 62,696 57,179 60,419
Adjustments & Eliminations 39 ( 53) ( 56) ( 1,868) ( 3,492) ( 4,849)
Interest Expense ( 197) ( 687) ( 1,796) -- -- --
------------------------------------ ------------------------------------
Consolidated Totals $ 11,240 $ 9,680 $ 5,163 $ 60,828 $ 53,687 $ 55,570
==================================== ====================================
</TABLE>
Transfers between geographic areas are accounted for on an
"arms-length" basis. Operating profit is total net sales less costs
and expenses excluding interest. Identifiable assets are those of the
Company that are identified with the operations in each geographic
area. Corporate assets consist principally of real estate. To
reconcile geographic information with consolidated totals, the
following eliminations have been made: $11,836,000 in 1997,
$10,326,000 in 1996 and $8,059,000 in 1995 of intercompany sales; a
gain of $39,000 in 1997, a loss of $53,000 in 1996, a loss of $56,000
in 1995 relating to the net change in unrealized operating profit in
beginning and ending inventories; $1,868,000 in 1997, $3,492,000 in
1996, $4,849,000 in 1995 of intercompany accounts receivable and
unrealized operating profit in inventory at the end of each year.
14. Business Combinations and Investments in Partnership
In November 1997, the Company completed its acquisition of Metalcraft
Air Filtration, Inc. (MCF), a small, high quality specialty filtration
manufacturer of enclosed filter housings and bags used for filtering
and then containing hazardous waste dust from certain biological,
chemical, nuclear and medical facilities having special air handling
and filtration system requirements. MCF is located in Washington,
North Carolina. The Company issued 12,500 shares of its common stock
in exchange for all the shares of MCF. The transaction was accounted
for under the purchase method of accounting and the operating results
of this business has been included in the consolidated financial
statements since the date of acquisition. The purchase price exceeded
the fair value of the tangible net assets acquired by approximately
$412,000.
In June 1997, the Company entered into a joint venture
partnership with Quest Technology Sdn. Bhd., a Malaysian manufacturer
and distributor of air filtration products and licensee of certain
Farr products. Under the agreement, the Company will have a 50 percent
ownership interest in the operations of QF Filter Sdn. Bhd., a
manufacturing operation located in Malaysia and will only have limited
ability to control partnership's activities. Accordingly, this
investment will be accounted for using the equity method of
accounting. This operation was started up at year-end and will be
fully functional during the second quarter of 1998.
- 19 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FARR COMPANY AND SUBSIDIARIES
To the Board of Directors and Stockholders of Farr Company:
We have audited the accompanying consolidated balance sheets of Farr
Company (a Delaware corporation) and subsidiaries as of January 3, 1998 and
December 28, 1996, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended January 3, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Farr Company and
subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1998, in conformity with generally accepted accounting
principles.
Los Angeles, California Arthur Andersen LLP
January 30, 1998
- 20 -
<PAGE>
SELECTED FINANCIAL DATA FARR COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended (In thousands except share and per share data)
Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994 Jan. 1, 1994
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Sales $ 125,762 $ 122,021 $ 113,275 $ 106,989 $ 112,363
Income (Loss) from continuing operations 7,375 5,890 3,124 ( 355) 1,284
(Notes D, E, G & H)
Income (Loss) per diluted share from
continuing operations (H) 1.32 1.07 .57 ( .07) .23
Total Assets (Notes A & B) 60,828 53,687 55,570 59,269 60,905
Long-term Debt, net of current portion
(Notes A, B, C, F & G) -- 2,068 9,412 18,957 21,913
Cash Dividends per share -- -- -- -- --
Weighted average number of shares (H) 5,588,816 5,509,941 5,533,397 5,517,327 5,512,059
Capital expenditures 4,508 1,465 1,163 987 674
Net property, plant and equipment 17,619 15,611 16,406 17,930 21,914
Working Capital (Notes A & B) 21,737 19,806 20,183 21,782 20,853
======================================================================================================================
</TABLE>
Note A. In December 1985, the Company negotiated an agreement for $8,000,000 in
Industrial Revenue Bonds to finance the Company's facility in Jonesboro,
Arkansas. In December 1993 and February 1994, the Company redeemed a total
of $2,615,000 of the bonds with surplus cash held in trust. In January
1996, the Company fully retired these bonds.
Note B. In August 1991, the Company negotiated an agreement for $2,500,000 in
Industrial Revenue Bonds to finance the Company's facility in Holly
Springs, Mississippi. In August 1996, the Company fully retired these
bonds.
Note C. In February 1996, the Company completed refinancing of its domestic
long-term debt with a new lending institution, including a $15,000,000
revolving credit facility that was subsequently amended and reduced to
$10,000,000 commensurate with the Company's financing requirements.
Note D. In 1995 and 1994, pretax income (loss) included provisions of $540,000
and $1,000,000 respectively for the estimated cost of closing and
reorganizing U.S. manufacturing facilities.
Note E. In 1993, the Company recorded a $149,000 extraordinary charge relating
to the write off of deferred financing costs as a result of refinancing its
long-term debt with new lending institutions.
Note F. In 1994, the Company completed refinancing of its long-term debt with
new lending institutions including a $22,000,000 revolving credit facility
and $7,500,000 of term loan credit facilities.
Note G. In November 1995, the Company sold its plant located in Rialto,
California for $3,050,000 which resulted in a gain of $676,000. The entire
amount of the net proceeds were received in cash and were primarily used to
retire secured debt on the subject property.
Note H. As a result of the 3 for 2 stock split declared on February 18, 1997
paid on March 28, 1997, per share amounts for prior years have been
restated to reflect the weighted average number of shares of common stock
outstanding, increased by shares to be issued for the stock split.
- 21 -
<PAGE>
Management's Discussion and Analysis
RESULTS OF OPERATIONS
- ---------------------
1997 COMPARED TO 1996
Record 1997 sales of $125,762,000 were up $3,741,000 or 3.1 percent from prior
year sales of $122,021,000. For the year, sales improvement reflected growth in
Railroad, Engine and HVAC products which offset declines in Custom OEM and
Engineered Systems products.
Foreign subsidiary sales increased 10.9 percent in 1997 due to Engineered
Systems, Engine and HVAC products sales that were up 53, 22 and 12 percent,
respectively.
Net income reached record highs during 1997 totaling $7,375,000, up 25 percent
or $1,485,000 from $5,890,000 reported in the prior year as businesses continued
to grow and improve productivity. Increased sales volume, improved operating
efficiencies, lower interest expense and lower effective income tax rates were
all major contributing factors in improving 1997's net income performance over
the prior year.
Gross margins for 1997 improved to 26.2 percent, up 1 percent from 25.2 percent
in 1996. The improvement in gross margins was the result of continued
improvement in operating efficiencies and a better sales mix of products with
higher margins compared to the prior year. The Company anticipates that gross
margin percentage will continue to improve during 1998 as a result of continued
productivity improvement and sales mix albeit at a rate not as high as that
achieved in 1997.
Selling, general and administrative expenses as a percentage of sales for 1997
and 1996 were 17.2 and 16.7 percent, respectively. 1997 spending totaled
$21,692,000, up $1,273,000 compared to $20,419,000 in 1996. 1997's increase
reflected higher spending in the area of selling and marketing related expenses
directed toward increasing sales in existing and new product markets.
Interest expense during 1997 was reduced to $197,000 from $687,000 in the prior
year due to long and short-term borrowing reductions. As of the end of the
second quarter of 1997 the Company's domestic operations retired all previously
outstanding bank debt. In addition, due to the continued strong cash flow
provided by operations, the Company generated $159,000 in interest income from
investing cash. During 1998, the Company anticipates to significantly increase
interest income as a result of increasing cash balances.
The effective income tax rate for 1997 was 34.4 percent compared with 39.2
percent in 1996. The decrease in 1997's tax rate was primarily related to lower
effective tax rates being generated from the Company's Foreign Sales
Corporation. For 1998, the Company anticipates its effective tax rate will be
approximately 35 percent.
1996 COMPARED TO 1995
Record 1996 net sales of $122,021,000 were up $8,746,000 or 7.7 percent from
prior year sales of $113,275,000. For the year, Industrial Products sales were
up 14 percent, Commercial Products were up 5 percent and Engine Products were up
4 percent. The increase in Industrial Products sales was led by strong sales in
our Gas Turbine Filter House Market.
Foreign subsidiary sales increased 6.6 percent in 1996 due to Railroad Product
and Industrial Product sales that were up 28 and 31 percent, respectively.
Record net income for 1996 totaled $5,890,000, up significantly from $3,124,000
in the prior year. Increased sales volume, improved operating efficiencies and
lower interest expense were the primary reasons for the gain in 1996. Our
foreign consolidated subsidiaries totaled approximately 20 percent of our
consolidated net income, down from 21 percent in the prior year.
- 22 -
<PAGE>
Gross margin for 1996 increased to 25.2 percent, up .7 percent from 24.5 percent
in 1995. The increase in gross margins was the result of improved operating
efficiencies and a better sales mix of products with higher margins compared to
the prior year.
Selling, general and administrative expenses as a percentage of sales for 1996
and 1995 were 16.7 and 18.5 percent, respectively. 1996 spending totaled
$20,419,000 compared to $20,956,000 in 1995, which reflects a decrease of
$537,000, or 3 percent. Most of the decreased expense related to lower loan fee
amortization and sales and marketing related expenses.
Interest expense declined $1,109,000, or 62 percent in the year primarily due to
the significant decrease in long-term debt. The declining interest expense trend
is anticipated to continue in 1997.
1995 COMPARED TO 1994
Sales for 1995 were a record $113,275,000 up 6 percent from $106,989,000 in the
prior year. The 1995 increase was spread across all of the Company's products.
During 1995, net income increased to $3,124,000 up from a loss of $355,000 in
1994. The $3,479,000 improvement in net income was attributable to increased
sales volume, improved operating efficiencies resulting in higher gross margins,
lower interest expense, a reduction in reorganization costs from the prior year
and a gain on sales of assets recorded in 1996 of the Company's Rialto,
California facility.
Gross margins for 1995 increased to 24.5 percent, up 3.4 percent from 21.1
percent in 1994. The increase in gross margins was the result of improved
operating efficiencies and lower fixed manufacturing costs primarily associated
with closing the Company's Rialto, California plant in 1994.
Selling, general and administrative expenses as a percentage of sales for 1995
and 1994 were 18.5 and 18.8 percent, respectively. 1995 spending totaled
$20,956,000 compared to $20,065,000 in 1994 which reflects an increase of
$891,000 or 4.4 percent. Most of the increase in 1995 related to increased loan
fee amortization, selling and marketing and management performance based
incentive plan expenses.
Interest expense declined $333,000 or 16 percent during the year primarily due
to the significant decrease in long-term debt.
Restructuring cost charges were recorded in both 1995 and 1994 for closing and
consolidating manufacturing operations and increasing production efficiency,
asset utilization and profitability. Restructuring costs recorded during the
fourth quarter of 1995 amounted to $540,000 relating to the Company's
reorganization of its manufacturing and distribution operations in North America
and increased costs anticipated from the closure of its Eatonton, Georgia and
Pryor, Oklahoma plants. In 1994, the Company recorded a second quarter
restructuring cost charge of $1,000,000 for closing its Rialto, California
plant.
A gain of $676,000 was recognized during the fourth quarter of 1995 from the
sale of the Company's previously closed Rialto, California plant.
The effective income tax rate for 1995 was 39.5 percent, compared to 44.7
percent in 1994. The decrease in 1995 tax rates related to the Company's return
to profitability and the assumption that certain tax credit carry forwards would
be utilized in the future.
- 23 -
<PAGE>
FARR COMPANY AND SUBSIDIARIES
LIQUIDITY & CAPITAL RESOURCES
Financial Condition
As of January 3, 1998, the Company's capital structure included $93,000 of
current debt and $38,507,000 of stockholders' investment. The Company's 1996
short and long-term debt has been significantly reduced or eliminated.
Shareholders' equity increased 23.4 percent during 1997 from $31,210,000 to
$38,507,000.
Farr Company's balance sheet continues to exhibit liquidity and financial
strength. As of January 3, 1998, total assets reached $60,828,000 up $7,141,000
from prior year end levels primarily as a result of increases in cash and
short-term investment. Total debt as of January 3, 1998 was decreased by
$2,872,000 or 97 percent to $93,000 from $2,965,000 as of December 28, 1996.
During 1997, the Company's domestic operations were financed through a long-term
credit facility. In 1996 the Company also utilized Industrial Revenue Bonds for
major capital projects. During 1996, the Company retired both its Jonesboro,
Arkansas Industrial Revenue Bonds and Holly Springs, Mississippi Industrial
Revenue Bonds. The Company's domestic long-term credit facility is an unsecured
$10,000,000 revolving line of credit facility. As of January 3, 1998, no
borrowings were outstanding and unused borrowing availability was $10,000,000.
The Company's foreign subsidiaries borrow under overdraft credit facilities. As
of January 3, 1998, overdraft facilities amounted to $2,280,000 of which $93,000
was utilized. As of December 28, 1996, term borrowings were $91,000 and total
foreign overdraft facilities amounted to $2,326,000 of which $874,000 was
utilized.
Year 2000
For several years the Company has been reviewing Year 2000 issues related to the
impact on its computer systems. Project teams have been reviewing all computer
operated machinery and related software to assure that key financial information
and operational systems have been assessed. Information processing related to
the Company's major customers and suppliers has also been reviewed. Plans have
been developed to address systems modifications required by December 31, 1999,
and some of these modifications have already been implemented. The financial
impact of making the required systems changes is not expected to be material to
the Company's consolidated financial position, results of operations or cash
flows.
Cash Flow
During 1997, cash flows form operating activities increased to $14,022,000
compared to $10,299,000 in 1996 and $8,729,000 in 1995. The increase in 1997 was
primarily the result of increased earnings and a decrease in working capital
associated with decreased inventories and increased accounts payable and accrued
liabilities. Cash flow from operations were used to support $4,508,000 of
capital expenditures, reduce debt and invest in short-term investments.
Capital expenditures increased to $4,508,000 from $1,465,000 in 1996. The
increase in capital spending was used to support warehouse expansion in Canada,
remodel the Company's corporate offices and support operating needs. Capital
expenditures are anticipated to decrease in 1998 as facility related
expenditures should significantly decline.
The Company's cash flow generated from operating activities are anticipated to
generate adequate cash flow to meet planned operating needs, provide for capital
spending and meet current debt service requirements.
- 24 -
<PAGE>
As of January 3, 1998, the Company's 1992 restructuring reserve balance was
$332,000. This reserve is related to the anticipated cost associated with the
closures of two manufacturing plants and is included as a component under
accrued liabilities in the Company's Consolidated Balance Sheets. During 1997,
$122,000 in facility related costs were charged against this reserve.
During 1997, the Company invested $250,000 as a 50 percent partner in a
manufacturing joint-venture located in Malaysia. The Company anticipates that it
will invest another $100,000 in 1998 to support working capital needs of the
joint-venture. The joint venture is anticipated to help the Company maintain
competitive prices and support faster delivery of products in Malaysia and other
eastern Pacific Rim markets.
During the fourth quarter of 1997, the Company acquired Metalcraft Air
Filtration, Inc. (MCF) through a merger. Farr issued 12,500 shares of its common
stock for all of MCF's stock.
Inflation has not been a significant factor for the Company in a number of
years. Cost increases for labor and material have been generally low, and any
impact has been offset by productivity improvement and materials management.
Safe Harbor for Forward-Looking-Statements: Except for historical information
contained herein, the statements in this annual report are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Act of 1995. Forward-looking statements and the business
prospects of the Farr Company are subject to a number of risks and uncertainties
which may cause the Company's actual results in the future periods to differ
materially from the forward-looking statements. These risks and uncertainties
include, among other things, product supply and demand, competition, government
regulation or action, litigation, operations performance, the Company's ability
to implement its business plans, access to capital, and environmental risks.
These are described in the Company's reports on Forms 10-K and 10-Q and other
filings with the Securities and Exchange Commission.
- 25 -
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA FARR COMPANY AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data)*
1997 1996 1995
--------------------------------------- ------------------------------------- --------------------------------------
Net Gross Net Per Net Gross Net Per Net Gross Net Per
Quarter Sales Margin Income Share Sales Margin Income Share Sales Margin Income Share
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First $ 30, 341 $ 7,891 $ 1,700 $ .30 $ 31,079 $ 7,154 $ 1,178 $ .21 $ 27,253 $ 6,396 $ 633 $ .11
Second 31,569 8,576 1,826 .33 31,356 8,072 1,499 .27 28,682 6,956 675 .13
Third 31,612 8,269 1,892 .34 29,951 7,533 1,595 .30 28,444 6,752 726 .13
Fourth 32,240 8,234 1,957 .35 29,635 7,986 1,618 .29 28,896 7,675 1,090 .20
- ----------------------------------------------------------------------------------------------------------------------------------
Year $125,762 $ 32,970 $ 7,375 $ 1.32 $122,021 $ 30,745 $ 5,890 $ 1.07 $113,275 $ 27,779 $ 3,124 $ .57
==================================================================================================================================
</TABLE>
* Per share data has been restated for the 3 for 2 stock split declared in
February 1997 and is presented on a diluted basis.
<TABLE>
<CAPTION>
Summary of Stock Quotations
1997 1996 1995
-------------------- -------------------- --------------------
Quarter High Low High Low High Low
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
First $13.00 $10.94 $ 6.69 $ 5.00 $ 5.31 $ 3.94
Second 16.25 12.00 9.94 6.00 5.00 4.25
Third 19.00 15.50 10.00 7.81 6.31 4.44
Fourth 18.00 14.50 12.50 9.75 5.50 3.94
- --------------------------------------------------------------------------------------------
Year $19.00 $10.94 $12.50 $ 5.00 $ 6.31 $ 3.94
============================================================================================
</TABLE>
The above information was obtained from the National Association of Securities
Dealers, Inc. (NASD) Monthly Statistical Report. The Company's stock is traded
in the over-the-counter National Market System. Price per share has been
restated for the 3 for 2 stock split declared in February 1997.
No cash dividends were declared on the Company's common stock in 1997, 1996 or
1995.
- 26 -
<PAGE>
CORPORATE INFORMATION FARR COMPANY AND SUBSIDIARIES
DIRECTORS
- ---------
Farr Company
Robert Batinovich
Chairman and Chief Executive Officer
Glenborough Realty Trust Incorporated
Management of Commercial Real Estate (2)
Richard P. Bermingham
Retired Vice Chairman of the Board
American Golf Corporation
Golf Course Management (1) (3)
Denis R. Brown, Jr.
President and Chief Executive Officer
Pinkerton, Inc.
Security & Investigation Services (2)
David J. Farr
President
David J. Farr Insurance Services
Provider of Financial Planning Services (2)
John C. Johnston
President and Chief Operating Officer
Farr Company
John J. Kimes
Chairman and Chief Executive Officer
Computerized Security Systems, Inc.
Manufacturer of Electronic and
Mechanical Lock Hardware and Systems (1) (3)
H. Jack Meany
Chairman and Chief Executive Officer
Farr Company (3)
John A. Sullivan
Investor Advisor
Relational Investors, LLC (1)
(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
OFFICERS
- --------
Farr Company
H. Jack Meany
Chairman and Chief Executive Officer
John C. Johnston
President and Chief Operating Officer
Kenneth W. Gerstner
Senior Vice President,
Chief Financial Officer and Secretary
Richard Larson
Senior Vice President
Myron G. Rasmussen
Vice President
Farr Filtration, Ltd. (United Kingdom)
Clive P. C. Jones
Managing Director
Farr, Inc. (Canada)
Dominique Mignacco
Vice President and General Manager
- 27 -
<PAGE>
FARR COMPANY AND SUBSIDIARIES
Corporate Offices
2201 Park Place
El Segundo, California 90245
310-727-6300
Internet address: http://www.farrco.com Company's Internet home page offers
access to a variety of information including Farr's products and services,
worldwide operations, financial data, and stockholder-
related information.
Subsidiaries
Farr, Inc., Montreal, Canada
Farr Filtration, Ltd., Birmingham, England
QF Filter Sdn Bhd, Selangor, Malaysia
Manufacturing and Distribution Facilities
Jonesboro, Arkansas
Corcoran, California
Delano, California
Crystal Lake, Illinois
Holly Springs, Mississippi
Conover, North Carolina
Washington, North Carolina
Montreal, Canada
Birmingham, England
Singapore
Selangor, Malaysia
Manufacturing Licensees
Anfilco Ltd., Curgaon, India
Antung Trading Corp., Taipei, Taiwan
Boart MSA (PTY) Ltd. South Africa
Casiba S. A., Buenos Aires, Argentina
Clyde-Apac Ltd., Woodville, Australia
Genmech Engineering, Singapore
Industries Filvac S.A. de C.V., Mexico
Nihon Spindle Mfg., Co., Ltd.
Osaka, Japan
Quest Technology, SND. BHD, Malaysia
Taymac Ltd., Christchurch, New Zealand
Turbiparts, C.A., Caracas, Venezuela
Vibran Engineering (M) SDN. BHD.,
Petaling Jaya, Malaysia
Wilectec Co., Ltd., Kwai Chung, N.T.,
Hong Kong
Manufacturing Distributors
Genmech Engineering, Singapore
Registrar and Transfer Agent
Chemical Mellon Shareholder Services
Los Angeles, California
Legal Counsel
Gibson, Dunn & Crutcher LLP
Los Angeles, California
Auditors
Arthur Andersen LLP
Los Angeles, California
Form 10-K
Stockholders of record as of March 6, 1998 may obtain copies of the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
by writing to:
Kenneth Gerstner, 2201 Park Place,
El Segundo, California 90245
Exhibit 21
List of Subsidiaries
FARR COMPANY AND SUBSIDIARIES
Jurisdiction
Name of Subsidiary of Incorporation
----------------------------- ---------------------
Farr Filtration Limited England
Farr Company International California
Farr Inc. Canada
Farr International U.S. Virgin Islands
Farr Cayman Islands Cayman Islands
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our report incorporated by reference in this Form 10-K, into Farr
Company's previously filed Registration Statements on File Numbers
2-83890, 33-47836, 33-71400 and 33-64387.
Los Angeles, California /s/ Arthur Andersen LLP
March 25, 1998
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