SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to Commission
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file number 0 -19703
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Farrel Corporation
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(Exact name of registrant as specified in its charter)
Delaware 22-2689245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Main Street, Ansonia, Connecticut, 06401
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(Address of principal executive offices) (Zip Code)
(203) 736-5500
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(Registrant's telephone number, including area code)
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 5, 1999
Common Stock (Voting), $.01 par value 5,250,061
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<PAGE>
Farrel Corporation
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Index
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Page
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Part I. Financial Information
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Consolidated Balance Sheets -
October 3, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
Three and Nine months ended October 3, 1999
and September 27, 1998 4
Consolidated Statements of Cash Flows -
Nine months ended October 3, 1999
and September 27, 1998 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 14
Part II. Other Information
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Exhibit 11 - Computation of Earnings Per Share 15
Page 2 of 17
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<TABLE>
Part I - Financial Information
FARREL CORPORATION
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CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
<CAPTION>
October 3, December 31,
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1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents ........................ $ 4,040 $ 5,786
Accounts receivable, net of allowance for
doubtful accounts of $264 and $297, ........... 13,495 20,708
respectively
Inventory ........................................ 16,539 14,542
Asset purchase agreement receivable .............. 0 5,284
Other current assets ............................. 1,611 1,953
-------- --------
Total current assets ................ 35,685 48,273
Property, plant and equipment - net of
accumulated depreciation of $12,900 and
$11,648 respectively ........................... 11,384 11,614
Goodwill ......................................... 2,229 1,555
Other Assets ..................................... 649 1,281
-------- --------
Total Assets ................................................... $ 49,947 $ 62,723
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current Liabilities:
Accounts payable ................................. $ 7,093 $ 14,039
Accrued expenses & taxes payable ................. 2,341 4,284
Advances from customers .......................... 3,902 7,017
Accrued installation & warranty costs ............ 1,859 1,683
Short - term debt ................................ 2,487 1,328
-------- --------
Total current liabilities .......... 17,682 28,351
Long - term debt ..................................... 3,310 3,983
Postretirement benefit obligation .................... 1,147 1,171
Long-term pension obligation ......................... 2,429 2,429
Deferred income taxes ................................ 478 488
Commitments and contingencies ........................ -- --
-------- --------
Total Liabilities .................. 25,046 36,422
-------- --------
Stockholders' Equity:
Preferred stock, par value $100, 1,000,000
shares authorized, no shares issued .......... -- --
Common stock, par value $.01,
10,000,000 shares authorized,
6,142,106 shares issued ...................... 61 61
Paid in capital .................................. 19,295 19,295
Treasury stock, 867,645 and 202,620 shares at
October 3, 1999 and December 31, 1998, ... (2,492) (990)
respectively
Retained earnings ................................ 9,672 9,576
Accumulated other comprehensive expense .......... (1,635) (1,641)
-------- --------
Total Stockholders' Equity ......... 24,901 26,301
-------- --------
Total Liabilities and Stockholders' Equity ..................... $ 49,947 $ 62,723
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 3 of 17
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<TABLE>
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands, except per share and share data)
-----------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
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October 3, September 27, October 3, September 27,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales ........................... $ 20,091 $ 21,626 $ 50,667 $ 62,556
Cost of sales ....................... 13,926 17,285 37,560 47,879
----------- ----------- ----------- -----------
Gross margin ........................ 6,165 4,341 13,107 14,677
Operating expenses:
Selling ......................... 1,689 2,005 5,072 5,683
General & administrative ........ 2,210 2,118 6,629 6,193
Research & development .......... 398 396 1,166 1,080
----------- ----------- ----------- -----------
Total operating expenses ............ 4,297 4,519 12,867 12,956
----------- ----------- ----------- -----------
Operating income/(loss) ............. 1,868 (178) 240 1,721
Interest income ..................... 34 40 341 98
Interest expense .................... (92) (160) (364) (561)
Gain from sale of real estate ....... 0 0 1,879 0
Other income/(expense), net ......... (116) 56 (122) (90)
----------- ----------- ----------- -----------
Income/(loss) before income ......... 1,694 (242) 1,974 1,168
taxes
Provision/(benefit) for income ...... 598 (40) 713 523
taxes
----------- ----------- ----------- -----------
Net income/(loss) ................... $ 1,096 ($ 202) $ 1,261 $ 645
=========== =========== =========== ===========
Per share data:
Basic and Diluted
income/(loss) per
common share ...................... $ 0.20 $ (0.03) $ 0.23 $ 0.11
=========== =========== =========== ===========
Average shares outstanding:
Basic ............................. 5,460,902 5,942,338 5,506,497 5,942,664
=========== =========== =========== ===========
Diluted ........................... 5,460,902 5,942,338 5,506,497 5,948,952
=========== =========== =========== ===========
Dividends per share ............... $ 0.04 $ 0.04 $ 0.20 $ 0.08
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 4 of 17
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<TABLE>
FARREL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
<CAPTION>
Nine Months Ended
-----------------
October 3, September 27,
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1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income ............................................. $ 1,261 $ 645
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Gain on disposal of fixed assets ..................... (1,942) (227)
Depreciation and amortization ........................ 1,658 1,795
Decrease (increase) in accounts receivable ........... 7,152 (2,572)
Increase in inventory ................................ (2,377) (3,775)
Decrease in accounts payable ......................... (6,836) (339)
(Decrease) increase in customer advances ............ (3,084) 4,431
(Decrease) increase in accrued expenses & taxes ...... (1,674) 163
Increase in accrued installation and warranty costs... 181 407
Increase in deferred income taxes .................... 181 106
Increase in other receivable ......................... -- (2,900)
Decrease in goodwill ................................. -- 2,387
Other ................................................. (286) (98)
------- -------
Total adjustments .................................... (7,027) (622)
------- -------
Net cash provided by operating activities ............ (5,766) 23
------- -------
Cash flows from investing activities:
Refund of Shaw asset purchase price .................. 4,405 2,701
Proceeds from disposal of fixed assets ............... 2,608 647
Purchases of property, plant and equipment ........... (835) (1,318)
------- -------
Net cash provided by investing activities ............ 6,178 2,030
Cash flows from financing activities:
Repayment of long-term borrowings .................... (647) (663)
Proceeds from short-term borrowings, net ............. 1,137 195
Issuance of treasury stock ........................... 9 2
Purchase of treasury stock ........................... (1,511) --
Used for dividends paid .............................. (1,165) (1,427)
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Net cash used in financing activities ................ (2,177) (1,893)
Effect of foreign currency exchange rate changes on cash.. 19 (14)
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Net increase/(decrease)in cash and cash equivalents ...... (1,746) 146
Cash and cash equivalents - Beginning of period ...... 5,786 1,447
------- -------
Cash and cash equivalents - End of period ............ $ 4,040 $ 1,593
======= =======
Income taxes paid ........................................ $ 1,152 $ 148
======= =======
Interest paid ............................................ $ 200 $ 407
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 5 of 17
<PAGE>
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly in accordance with generally
accepted accounting principles, the consolidated financial position of Farrel
Corporation ("Farrel" or "the Company") as of October 3, 1999, the consolidated
results of its operations for the three and nine-month periods ended October 3,
1999 and September 27, 1998, and its consolidated cash flows for the nine-month
periods ended October 3, 1999 and September 27, 1998. These results are not
necessarily indicative of results to be expected for the full fiscal year. The
statements should be read in conjunction with the financial statements and notes
thereto, included in the Company's Annual Report and Form 10-K for the year
ended December 31, 1998.
NOTE 2 - INVENTORY
Inventory is comprised of the following:
October 3, December 31,
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1999 1998
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(In thousands)
Stock and raw materials..... $ 5,459 $ 7,279
Work-in process ............ 11,080 7,263
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Total ...................... $16,539 $14,542
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NOTE 3 - ASSET PURCHASE
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary
of the Company, acquired certain assets and the operations of the Francis Shaw
Rubber Machinery ("Shaw") operations from EIS Group PLC of the United Kingdom
("Seller"). The purchase and sale agreement ("Agreement") between the Company
and the Seller required subsequent adjustment to the purchase price if the Shaw
operations did not produce a minimum profit, as defined in the Agreement, of
approximately $1.7 million for the year ended December 31, 1998 (the "Profit
Guaranty"). The operations of Shaw produced a loss (as computed under the terms
of the Agreement) of approximately $3.6 million for the year ended December 31,
1998.
Accordingly, the Company recorded a receivable from the Seller at
December 31, 1998 of approximately $5.3 million under the terms of the Profit
Guaranty provisions of the Agreement and reduced the purchase price. On May 7,
1999, the Company received a cash payment of $4.4 million in settlement of its
claim under the Profit Guaranty. The difference between the amount recorded at
December 31, 1998 and amount received from the Seller was recorded as an
increase in goodwill.
The Agreement also required the transfer of the pension liability for
the Shaw employees together with the pension assets related to those employees.
The assets for the Shaw employees were transferred to the Company's pension plan
on May 5, 1999. The consolidated financial statements do not include any amounts
related to the net of the actuarially determined excess of the pension assets
compared with the projected benefit obligation as of the date of acquisition for
transferred Shaw employees as the actuarial
Page 6 of 17
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amounts have not yet been determined. The net amount of the actuarially
determined excess of the pension assets compared with the projected benefit
obligation for the Shaw employees will be recorded as an additional purchase
price adjustment when determined.
NOTE 4 - COMPREHENSIVE INCOME
The components of other comprehensive income, for the nine-month
periods ended are as follows:
October 3, September 27,
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1999 1998
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(In thousands)
Net income ............................. $1,261 $ 645
Foreign currency translation adjustments 6 224
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Other comprehensive income ............. $1,267 $ 869
====== ======
The components of accumulated other comprehensive expense, net of
related tax, are as follows:
October 3, December 31,
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1999 1998
---- ----
(In thousands)
Minimum pension liability .............. $(1,577) $(1,577)
Foreign currency translation adjustments (58) (64)
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Accumulated other comprehensive expense $(1,635) $(1,641)
======= =======
NOTE 5 - SEGMENT INFORMATION
The Company's operations are considered one operating segment. The
Company's products consist of new machines, aftermarket and spare parts and
repair related services. The Company's products and services are sold to
commercial manufacturers in the plastic and rubber industries. The
manufacturing, assembly and distribution of the Company's products are
essentially the same.
NOTE 6 - GAIN FROM SALE OF REAL ESTATE
During January 1999, the Company completed the sale of excess real
estate held for sale for $2.4 million. The Company recorded a gain of $1.9
million from the sale.
Page 7 of 17
<PAGE>
PART I - ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
Safe Harbor For Forward-Looking Statements Under Private Securities Litigation
- --------------------------------------------------------------------------------
Reform Act of 1995
- ------------------
Certain statements contained in the Company's public documents,
including this report and in particular, in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" may be forward
looking and may be subject to a variety of risks and uncertainties. Various
factors could cause actual results to differ materially from these statements.
These factors include, but are not limited to, pricing pressures from
competitors and/or customers; continued economic and political uncertainty in
certain of the Company's markets; the Company's ability to maintain and increase
gross margin levels; the Company's ability to generate positive cash flow;
changes in business conditions, in general, and, in particular, in the
businesses of the Company's customers and competitors; assessment of the impact
of the Year 2000, and other factors which might be described from time to time
in the Company's filings with the Securities and Exchange Commission.
Results of Operations
- ---------------------
Nine Months Ended October 3, 1999 Compared To The Nine Months Ended September
- --------------------------------------------------------------------------------
27, 1998
- --------
Net sales for the nine month period ended October 3, 1999 were $50.7
million compared to $62.6 million for the nine month period ended September 27,
1998, a decrease of $11.9 million. The decrease in net sales is primarily due to
lower new machine sales. The timing of the Company's sales, particularly new
machines sales, is highly dependent on when an order is received, the amount of
lead time from receipt of order to delivery and specific customer requirements.
Management believes the Company operates in markets which are extremely
competitive. Many of our customers and markets operate at less than full
capacity and certain markets remain particularly competitive and are subject to
local economic events.
The Company received $51.8 million in orders for the nine month period
ended October 3, 1999 compared to $59.4 for the nine month period ended
September 27, 1998. The decrease is primarily due to lower orders received in
the European markets for both new machine and after market sales. The Company's
products are primarily supplied to manufacturers and represent capital
commitments for new plants, expansion or modernization. In the case of major
equipment orders, up to 12 months are required to complete the manufacturing
process. Accordingly, revenues reported in the statement of operations may be
recognized in a later accounting period than the one in which the order was
received. In addition, the cyclical nature of industry demand and, therefore,
order intake, may affect the Company's quarterly results of operations. The
Company's ability to maintain and increase net sales depends in large measures
upon a strengthening and stability in the Company's traditional markets. In
addition, current market conditions have resulted in increased price competion
which is resulting in customer orders with lower margins. The Company believes
these reduced margins are an industry-wide problem. Firm backlog at October 3,
1999 was $34.2 million compared to $33.0 million at December 31, 1998 and $44.8
million at September 27, 1998. Firm backlog as of November 5, 1999 was $32.5
million.
Gross margin for the nine month period ended October 3, 1999 was $13.1
million compared to $14.7 million for the nine month period ended September 27,
1998, a decrease of $1.6 million. The margin percentage increased to 25.9% from
23.5%. The increase in comparative periods margin as a
Page 8 of 17
<PAGE>
percent of sales is primarily attributed to lower manufacturing overheads
resulting from the consolidation of the UK operations from two facilities to one
which was completed in the first six months of 1999 and to changes in product
mix. Year-to-date 1999 shipments compared to 1998 shipments for the comparable
period include a higher proportion of aftermarket and spare parts, rebuild and
repair sales, which generate higher margins than new machine sales.
Operating expenses for the nine month period ended October 3, 1999
were $12.9 million compared to $13.0 million for the nine month period ended
September 27, 1998, a decrease of $0.1 million. Selling expense decreased $0.6
million, primarily due to lower trade show and exhibition expenses, offset
partially by higher general and administrative expense for employee
compensation, benefit costs and professional services.
Interest expense for the nine month period ended October 3, 1999 was
$0.4 million compared to $0.6 million for the nine month period ended September
27, 1998, a decrease of $0.2 million. The decrease is due to lower borrowings.
The Company provides for income taxes in the jurisdictions in which it
pays income taxes at the statutory rates in effect in each jurisdiction,
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes. The effective income tax rate, as a
percentage of pre-tax results of operations, was 36.1% for the nine month period
ended October 3, 1999, compared to 44.8% for the nine month period ended
September 27, 1998.
Results of Operations
- ---------------------
Three Months Ended October 3, 1999 Compared To The Three Months Ended September
- --------------------------------------------------------------------------------
27, 1998
- --------
Net sales for the three month period ended October 3, 1999 was $20.1 million
compared to $21.6 million for the three month period ended September 27, 1998, a
decrease of $1.5 million. Order intake for the three month period ended October
3, 1999 was $19.6 million compared to $9.1 million for the three month period
ended September 27, 1998. Sales, orders and backlog levels varied when comparing
the two quarters due to the same reasons previously stated in the results of
operations for the nine month period on page 8.
Gross margin in the three month period ended October 3, 1999 was $6.2
million compared to $4.3 million for the three month period ended September 27,
1998, an increase of $1.9 million. The margin percentage increased to 30.7% from
20.1%. The increase in comparative periods margin as a percent of sales is
primarily attributed to lower manufacturing overheads resulting from the
consolidation of the UK operations from two facilities to one which was
completed in the first six months of 1999 and to changes in product mix. 1999
shipments compared to 1998 include higher aftermarket and spare parts, rebuild
and repair sales which generate higher margins than new machine sales.
Operating expenses for the three month period ended October 3, 1999
were $4.3 million compared to $4.5 million for the three month period ended
September 27, 1998, a decrease of $0.2 million. The decrease is primarily due to
lower expenses resulting from the consolidation of the UK operations from two
facilities to one which was completed in the first six months of 1999.
Interest expense for the three month period ended October 3, 1999 was
$0.1 million compared to $0.2 million for the three month period ended September
27, 1998, a decrease of $0.1 million from 1998. The decrease is due to lower
borrowings.
Page 9 of 17
<PAGE>
Other expense for the three month period ended October 3, 1999 was $0.1
million compared to other income for the three month period ended September 27,
1998 of $0.1 million.
The effective income tax rate for the third quarter in 1999 and 1998
was 35.3% and 16.5%, respectively. The low tax rate in 1998 is due to the effect
of consolidating pretax income and pretax losses from different tax
jurisdictions. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes for financial reporting
and income tax purposes.
Material Contingencies
- ----------------------
In February 1995, the Company and Black & Decker entered into a
Settlement Agreement pursuant to which Black & Decker agreed to assume full
responsibility for the investigation and remediation of any pre-May 12, 1986
environmental contamination at the Company's Ansonia and Derby, Connecticut
facilities, as required by the Connecticut Department of Environmental
Protection ("DEP"). As part of the settlement, the Company transferred by quit
claim deed a vacant surfaced parking lot to the City of Ansonia. As required by
the Settlement Agreement, environmental assessments of the Ansonia and Derby
properties are being conducted by Black & Decker.
On January 19, 1999, the Company sold all of its Derby, Connecticut,
real estate and facilities. By the terms of that sale, the purchaser committed
to cooperate with Black & Decker in any additional investigation of the Derby
property and any remediation of that property that might be required by the DEP.
In addition, the Company has been named an additional insured on a $5.0 million
environmental policy obtained by the purchaser and the purchaser is obligated to
name the Company an additional insured on any and all other environmental
insurance policies obtained by the purchaser related to the Derby property.
On the basis of the preliminary data now available there is no reason
to believe that any remediation activities which might be required as a result
of the findings of the assessment will have a material effect upon the capital
expenditures, earnings or the competitive position of the Company. This forward
looking statement could, however, be influenced by any findings of environmental
contamination attributable to post-May 12, 1986 activities, the results of any
further investigation which the DEP might require, by DEP's conclusions and
requirements based upon its review of complete information when such is
available, unanticipated discoveries, the possibility that new or different
environmental laws might be adopted, and the possibility that further regulatory
review or litigation might become necessary or appropriate.
Liquidity and Capital Resources; Capital Expenditures
- -----------------------------------------------------
Working capital and the working capital ratio at October 3, 1999 were
$18.0 million and 2.0 to 1, respectively, compared to $19.9 million and 1.7 to 1
at December 31, 1998, respectively. During 1999, the Company paid dividends of
$0.20 per share of common stock. On October 4, 1999, the Company declared a
dividend of $.04 per share of common stock to be paid in the fourth quarter of
1999. On July 9, 1999, the Company extended its discretionary open market stock
repurchase program, increasing the amount by $2.5 million. During the first nine
months of 1999, the Company repurchased 669,900 shares of common stock at
varying times and in varying amounts totaling approximately $1.5 million. These
shares are held in treasury. Subsequent to the end of the third quarter the
Company repurchased 24,400 shares of common stock in the amount of $36,012. The
Company's ability to pay dividends in the future is
Page 10 of 17
<PAGE>
generally limited under its credit facility described below to the aggregate of
(a) 25% of net income during the most recently completed four fiscal quarters
after deducting distributions previously made and (b) purchases by the Company
of its common stock during the same period, without the consent of and/or waiver
by the Company's bank.
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, the timing of recording such sales may cause the
balances in accounts receivable and/or inventory to fluctuate dramatically
between quarters and may result in significant fluctuations in cash provided by
operations. Historically, the Company has not experienced significant problems
regarding the collection of accounts receivable. The Company has also generally
financed its operations with cash generated by operations, progress payments
from customers and borrowings under its bank credit facilities. Management
anticipates that its cash balances, operating cash flows and available credit
line will be adequate to fund anticipated capital commitments and working
capital requirements for at least the next twelve months. The Company made
capital expenditures of $0.8 million and $1.3 million during the first nine
months of fiscal 1999 and 1998, respectively.
On May 7, 1999, the Company received a cash payment of $4.4 million
representing settlement of its claim under the Profit Guaranty provision of the
Asset Purchase Agreement for the purchase of the Francis Shaw Rubber Machinery
Business.
The Company has a worldwide multi-currency credit facility with a
major U.S. bank in the amount of $25.0 million consisting of an $18.5 million
revolving credit facility for direct borrowings and letters of credit and up to
(pound)3.0 million for foreign exchange contracts and a five year term note.
Interest varies based upon prevailing market interest. The facility contains
combined limits on direct borrowings and letters of credit based upon stipulated
percentages of accounts receivable, inventory and backlog. The facility also
contains covenants specifying minimum and maximum operating thresholds for
operating results and selected financial ratios. The agreement contains certain
restrictions on the making of investments, on borrowings and on the sale of
assets. At October 3, 1999, there was $1.2 million outstanding under the
revolving credit facility. At October 3, 1999, the maximum borrowing available
under the revolving credit facility to the Company and subsidiaries based upon
the borrowing base formula was $14.1 million. There were $6.1 million and $5.1
million of letters of credit outstanding at October 3, 1999 and December 31,
1998, respectively. At October 3, 1999 and December 31, 1998, there was $4.6
million and $5.3 million, respectively, outstanding under a term loan.
Market For Registrant's Common Stock
- ------------------------------------
The Company's common stock, $0.01 par value ("Common Stock"), has been
publicly traded on the Nasdaq National Market System ("NMS") since January 17,
1992 (the date of the Company's initial public offering) under the symbol
"FARL." Nasdaq listing standards for NMS exchange stocks require, among other
things, that the Market Value of Public Float ("MVPF") of the qualifying
outstanding shares of Common Stock of the Company that are available for trading
exceed $5,000,000.
MVPF of the Common Stock has fallen below the level required for NMS
issuers. The Company has been notified by NASDAQ that the Common Stock will be
delisted from the NASDAQ National Market as of the opening of business on
December 2, 1999 unless compliance with the MVPF requirement is maintained for a
minimum of ten consecutive trading days prior to November 20, 1999.
Alternatively, the Company may apply for listing on the NASDAQ "Small Cap"
Market to avoid de-listing.
Page 11 of 17
<PAGE>
The Company is considering an application for listing on the NASDAQ
Small Cap Market. The delisting of the Company's Common Stock could make it more
difficult for an investor to dispose of, or to obtain accurate quotations as to,
the market value of the Common Stock, and could affect future equity financing
by the Company.
Year 2000
- ---------
The Company has continued with its Year 2000 readiness project to
address the impact and risks related to the ability of the Company's computer
hardware, computer programs, equipment with embedded computer chips and critical
suppliers to operate and function properly during the year change from December
31, 1999 to January 1, 2000, and to process date information correctly
thereafter.
The project is divided into three components - Business Applications,
comprising the Company's internal information systems as well as the readiness
of third party suppliers of goods and services whose Year 2000 readiness could
potentially have significant impact on the Company's operations; Product
Applications, relating to micro-processors within the control equipment sold by
the Company; and Equipment Applications, which relate to micro-processors within
operating equipment utilized in the Company's day to day operations.
The project team is made up of internal resources from various
disciplines, including operations, facility management, product engineering,
management information systems and finance. The major objectives for each
component are to: (1) identify and document Year 2000 issues which affect the
Company; (2) inventory systems, machines and processes affected by the Year
2000; (3) assess Year 2000 readiness for identified items; and (4) design and
implement a plan to achieve Year 2000 readiness for significant Year 2000
issues.
The Business Applications component of the Company's Year 2000 plan
relates primarily to the Company's principal internal information system, which
consists of a mainframe operated with third party purchased computer software.
The conversion to a Year 2000 compliant version of the software was completed
during the fourth quarter of 1998; however, system testing will continue. The
conversion included the replacement of hardware and software for one of the
Company's UK operations to provide consistency with the US operation. Similar
systems for our newly acquired subsidiary in the UK have not been upgraded due
to the consolidation of that facility into the other UK operation which has been
upgraded. The balance of the Company's computer based information systems
consist primarily of individual work stations and personal computers. Work
stations in the Engineering Department were upgraded in 1997. All personal
computer hardware and software has been tested. Modifications to the equipment
are being made and upgrades purchased for non-Year 2000 ready equipment. The
total amount expended in the current and prior year, related to the Company's
internal information system, was approximately $0.9 million. A significant
portion of these expenditures would have occurred without the Year 2000 issue
and, in general, these expenditures have not been accelerated.
The identification and assessment of critical suppliers of goods and
services is in process. Critical suppliers include suppliers of components used
in the Company's products as well as suppliers of goods and services used in the
Company's operations. Critical suppliers have been identified as suppliers of
goods or services that, if interrupted for an extended period, might impact the
Company's ability to provide goods and services to its customers, satisfy
obligations to its employees and vendors, and which might pose a risk of injury
or damage to individuals, property or the environment. Critical suppliers of
goods and services are being contacted to assess their readiness for the Year
2000. Due to the varying degree of impact the Year 2000 might cause and general
uncertainty inherent in the Year 2000 problem, the
Page 12 of 17
<PAGE>
Company is unable to determine if third party supplier readiness would
materially impact the Company's results of operations, liquidity or financial
condition.
The Product Applications component of the Company's Year 2000 plan
relates primarily to microprocessors within the control equipment sold by the
Company. The Company has identified auxiliary equipment and components which
were supplied with its products and which might pose a risk that the Company's
product will not function properly in the Year 2000. Some supplied components
require modification or upgrade. The extent of modifications required are
dependent on the use and extent of integration of the Company's equipment at a
customer's location. The Company's efforts are expected to continue to assist
the Company's customers to maximize serviceability of Company supplied
equipment. The cost of an upgrade or modification may result in a warranty
obligation and charge to results of operations of the Company. The Company is
unable to determine a reasonable estimate at this time. However, the Company
does not expect that these matters will have a material adverse effect on the
Company's financial position or results of operations and some of the cost might
be recovered from the Company's vendors.
Equipment Applications component of the Company's Year 2000 plan
relates to microprocessors within the operating equipment utilized in the
Company's day to day operations. The identification of equipment used in the
Company's operation has been completed. The equipment used in the Company's
manufacturing and other operations are not integrated systems, but consist
principally of individual stand alone machine tools and equipment. Failure of
one piece of equipment would not materially impact operations. The Company has
contacted suppliers to determine Year 2000 readiness. Individual pieces of
equipment identified for replacement has been completed. The cost of such
equipment identified to date for replacement is not significant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures might have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
critical suppliers of goods and services. The Company believes that with the
completion of the Project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The foregoing discussion contains forward-looking statements
including, without limitation, statements relating to the Company's plans,
strategies, objectives, expectations, intentions, and adequate resources, that
are made pursuant to the "Safe Harbor" statements of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that forward-looking
statements contained in this Year 2000 disclosure should be read in conjunction
with the "Safe Harbor For Forward-Looking Statements under the Private
Securities Litigation Reform Act of 1995" contained on page eight of this
report.
Taking into account the foregoing, the following are identified as
some, but not all of, important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company: the availability and cost of personnel; the
ability to locate and correct all non-compliant year 2000 items; and timely
responses to and corrections by third-parties and suppliers. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part
Page 13 of 17
<PAGE>
from the uncertainty of the Year 2000 readiness of third-parties and the
interconnection of global businesses, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its operations and business, or expose it to third-party
liability.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which must be adopted effective
January 1, 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
ITEM 2 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
and interest rates. The Company manufactures many of its products and components
in the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenue is generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies in which it regularly transacts
business and the use of foreign exchange forward contracts. The Company, from
time to time, enters into foreign exchange forward and option contracts to hedge
foreign currency transactions. These derivative instruments involve little
complexity and are generally for short periods of less than six months. The
Company does not enter into derivative contracts for trading or speculative
purposes. The amount of foreign exchange forward contracts are not considered
material to the Company's financial position or its operations.
The Company's cash equivalents and short-term investments and its
outstanding debt bear variable interest rates. The rates are adjusted to market
conditions. Changes in the market rate effects interest earned and paid by the
Company. The Company does not use derivative instruments to offset the exposure
to changes in interest rates. Changes in the interest rates are not expected to
have a material impact on the Company's results of operations.
Page 14 of 17
<PAGE>
Exhibit 11
<TABLE>
FARREL CORPORATION
------------------
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------
(In thousands, except per share and share data)
-----------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income/(loss) applicable to common stock .... $ 1,096 ($ 202) $ 1,261 $ 645
========= ========= ========= ==========
Weighted average number of common
shares outstanding - Basic earnings per share... 5,460,902 5,942,338 5,506,497 5,942,664
Effect of dilutive stock and purchase options... -- -- -- 6,288
--------- --------- --------- ----------
Weighted average number of common
shares outstanding - Diluted earnings per share.. 5,460,902 5,942,338 5,506,497 5,948,952
========= ========= ========= ==========
Net income/(loss) per common
share - Basic ................................. $ 0.20 ($ 0.03) $ 0.23 $ 0.11
========= ========= ========= ==========
share - Fully diluted ......................... $ 0.20 ($ 0.03) $ 0.23 $ 0.11
========= ========= ========= ==========
</TABLE>
Page 15 of 17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS None
ITEM 2 - CHANGES IN SECURITIES N/A
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 (Regulation S-K) Computation of Earnings Per Share.
(SEE PAGE 15)
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the periods
covered by this report.
Page 16 of 17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FARREL CORPORATION
------------------
REGISTRANT
DATE: November 17, 1999 /s/ ROLF K. LIEBERGESELL
------------------------ ---------------------------------------
ROLF K. LIEBERGESELL
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHAIRMAN OF THE BOARD
DATE: November 17, 1999 /s/ WALTER C. LAZARCHECK
------------------------ ---------------------------------------
WALTER C. LAZARCHECK
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
Page 17 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF FARREL
CORPORATION AS OF 10/3/99 AND FOR THE QUARTERLY PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<CIK> 0000034645
<NAME> FARREL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-03-1999
<CASH> 4,040
<SECURITIES> 0
<RECEIVABLES> 13,759
<ALLOWANCES> 264
<INVENTORY> 16,539
<CURRENT-ASSETS> 35,685
<PP&E> 24,284
<DEPRECIATION> 12,900
<TOTAL-ASSETS> 49,947
<CURRENT-LIABILITIES> 17,682
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 24,840
<TOTAL-LIABILITY-AND-EQUITY> 49,947
<SALES> 50,667
<TOTAL-REVENUES> 50,667
<CGS> 37,560
<TOTAL-COSTS> 37,560
<OTHER-EXPENSES> 10,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> 1,974
<INCOME-TAX> 713
<INCOME-CONTINUING> 1,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,261
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
