SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission 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 identification no.)
incorporation or organization)
25 Main Street, Ansonia, Connecticut 06401
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (203) 736-5500
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant
to Section 12(g) of the Act:
Common Stock $.01 Par Value NASDAQ
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(Title of Class)
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
incor- porated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 2000
Was $4,707,706.
The number of shares outstanding of the registrant's common stock as of March
17, 2000 was 5,250,061 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on June 14, 2000
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 42 - 43
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PART I
ITEM 1 - BUSINESS
GENERAL
Farrel Corporation (the "Company") designs, manufactures, sells and
services machinery and associated equipment for the rubber and plastics
industries worldwide. The Company's principal products are batch and continuous
mixers, single and twin-screw extruders, pelletizers, gear pumps, calenders and
mills. In conjunction with sales of capital equipment, the Company provides
process engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment and equipment upgrade services, spare parts sales and field
services. The Company also provides laboratory services and facilities for
product demonstrations and for the development and testing of rubber and
plastics equipment and processes.
The Company's rubber processing equipment is primarily sold to tire
manufacturers, custom compounders and manufacturers of rubber goods, such as
sheet products, molded products, automotive components, footwear, wire and cable
and hoses. In the plastics processing industry, the Company's equipment is
primarily sold to large plastic resins producers and compounders of plastics.
The Company markets its products through its strategically located domestic and
international sales and service organization.
COMPANY STRATEGY
The Company's business objectives are to increase market share in
relatively slow-growth markets by broadening its product range, to continue
strengthening its market position, particularly in Asia, and competitive
displacement. The Company continues to pursue manufacturing cost reductions by
continually reevaluating its current operating practices and by purchasing,
rather than manufacturing, a significant number of equipment components and
maintaining overhead and manpower levels in line with prevailing economic
conditions. The Company has taken measures in the recent past to achieve these
objectives by transferring U.S. parts manufacturing from Connecticut to its U.K.
subsidiary and moving U.S. assembly operations from its Derby, Connecticut plant
to its Ansonia, Connecticut facility. (As a result, the Derby facility became
surplus and was sold in January 1999.)
In line with this strategy, in December 1997, the Company acquired the
assets of the Francis Shaw Rubber Machinery ("Shaw") business in England for the
production of INTERMIX(R) internal mixers with intermeshing rotors, extruders
and related equipment. The products serve principally the technical rubber goods
manufacturers and the tire industry. The internal mixers produced by Shaw are
essentially similar to the Company's BANBURY(R) internal mixers, differing only
in the configuration of the mixing rotors. The combined complimentary product
lines provide the Company with global access to all rubber products
manufacturers, thereby increasing markets served. The Shaw operations were
transferred to the Farrel Limited facility beginning in the fall of 1998 and
were totally integrated by the end of the second quarter of 1999.
INDUSTRY OVERVIEW
The Company's products are used primarily by manufacturers of rubber
and plastic materials and products. The rubber and plastics processing
industries are global in nature and intensely competitive. Both industries are
cyclical in nature, with capital equipment purchases characterized by long lead
times between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers, custom compounders and manufacturers of rubber goods such as
sheet products, molded products, automotive components, footwear and wire and
cable. The Company considers the non-tire sector its primary market for growth
opportunities. There are approximately 50 tire manufacturers in the world, six
of which account for a majority of total worldwide tire production. Demand in
the tire and rubber industry is influenced by, among other things, general
economic conditions and growth in sales of automobiles and trucks as well as
overall truck tonnage and mileage driven. The industry trend is to shift
production capacities into low cost and emerging regions, creating potential
opportunities in the future.
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In the plastics industry, the Company serves two primary groups of
customers: commodity plastics producers (typically large petrochemical
companies) and value-added compounders of plastics. The commodity plastics
processed by machinery manufactured by the Company are primarily polyethylene,
polypropylene, polyvinyl chloride and polystyrene. A large portion of the market
is controlled by a few major producers who license their technologies to other
producers worldwide. These licensees are potential customers for the Company's
products and services. The plastics compounding market consists of those
companies that mix large volumes of plastics in a relatively small number of
formulations, companies which perform specialty mixing for end users, and end
users that mix largely for their internal use.
Many manufacturers in the industries and markets served by the
Company's products and services are impacted by local political and economic
events. In particular, in the Asia Pacific Region, many of the Company's
customers have suspended projects for increased capacity and growth until the
region resumes a level of financial stability. Other areas of the Far East
continue to experience growth, however, business is extremely competitive. The
Company's equipment is supplied to manufacturers and represents capital
commitments for new plants, expansion or modernization. New capital and
marketing expenditures in the Company's markets depend, in large part, on an
increase in market demand, which may require the need for additional capacity.
Overall the Company is part of the capital goods industry. The capital
goods industry in which the Company operates is cyclical in nature and is
subject to significant changes in demand. Capital goods demand is influenced by
many factors, including but not limited to, general economic conditions, factory
capacity utilization and availability of financing. The Company can not predict
when cyclical changes will occur or the extent that demand for its products will
change as a result of cyclical changes.
PRODUCTS AND SERVICES
The Company's products are used to mix and process materials produced
by the Company's rubber and plastics producing customers. The Company's
principal capital equipment product lines are batch and continuous mixers,
single and twin-screw extruders, pelletizers, gear pumps, calenders and mills.
The Company also provides process engineering, installation and commissioning
services for its equipment. The Company's customer service division repairs,
refurbishes and provides upgrade services and spare parts for the Company's
installed base of machines worldwide.
The following table illustrates the percentage breakdown of the
Company's sales between new machines/related services and aftermarket business
(spare parts, repairs and rebuild) in the last three fiscal years:
Year Year Year
ended ended ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
New Machines/Related Services........ 44.8% 56.9% 57.1%
Aftermarket.......................... 55.2% 43.1% 42.9%
----- ----- -----
Total................................ 100.0% 100.0% 100.0%
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The Company does not publish a standard price list. Prices for the
Company's new equipment are based upon a customer's specifications and/or
production requirements. Unit prices for the Company's new equipment products
range from approximately $50,000 to more than $4 million.
CUSTOMERS AND MARKETING
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastic materials. The Company's customers often
purchase significant equipment for new plants, plant expansion or plant
modernization. Purchases by any single customer typically vary significantly
from year to year according to each customer's capital equipment needs. As a
result, the composition of the Company's customers may vary from one year to the
next. The Company considers its operations to be one operating segment. The
sales, manufacturing, assembly and distribution are
Page 3 of 49
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essentially the same. Segment information for new equipment sales, aftermarket
sales, geographic sales and operating results for fiscal 1999, 1998 and 1997 are
reported in Note 16 to the Consolidated Financial Statements.
The Company's products are sold primarily by its direct sales and
support staff augmented by agents in certain countries. The Company's sales
organization is headquartered in Ansonia, Connecticut; Rochdale, England and
Singapore. The Company has additional sales and service offices strategically
located in the United States, Europe and Taiwan. In certain geographic areas
outside the United States, sales are facilitated by independent representatives
who assist employees of the Company.
PROCESS LABORATORY SERVICES
The Company maintains two process laboratories in Ansonia, Connecticut
and one laboratory in Rochdale, England. In addition, the Company entered into
an agreement with a research and development organization in Taiwan to use and
demonstrate the Company's technology. This contractual arrangement provides the
Company with laboratory facilities in Asia to complement the U.S. and U.K.
laboratories in that important market area. The Company uses its laboratories to
demonstrate the capabilities of its processing equipment and to provide
customers with production-sized equipment in order to experiment with new
processing techniques and formulations. The Company considers its process
laboratories to be vital contributors to its continuing technology development
and marketing efforts and routinely modernizes its process laboratories and
related equipment. The Company has experienced an increased trend to test its
plastics processing machinery, such as the continuous mixer, twin screw and
large pelletizing systems, as more new materials are developed by the Company's
customers which require testing to determine processing procedures and machine
design parameters.
In 1998, demonstration and laboratory capabilities were enhanced with
the installation of the Farrel Twin Screw Extruder (FTX) in two University
laboratories: Akron University, Akron, Ohio, USA and the German Rubber Institute
in Hanover, Germany. The Company expects to benefit from the installation and
operation of these machines by providing exposure of Farrel machinery and
technology to new graduates and access to process application development.
COMPETITION
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in both the
rubber and plastics processing markets. Numerous competitors of varying sizes
compete with the Company in one or more of its product lines. A number of the
Company's competitors are former licensees of the Company, divisions or
subsidiaries of larger companies with financial and other resources greater than
those of the Company or copycats who mimic the Company's technology and designs.
The Company has historically faced, and will continue to face, considerable
competitive pressures, particularly predatory price competition and
nationalistic preferences. The Company believes that the principal competitive
factors affecting its business are price, performance, technology, breadth of
product line, product availability, reputation and customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
BACKLOG
The Company's backlog of orders considered firm by management at
December 31, 1999, 1998 and 1997 was approximately $29 million, $33 million and
$47 million, respectively. Substantially all of the orders included in the
December 31, 1999 backlog have contractual ship dates in fiscal 2000. Firm
backlog at March 17, 2000 and March 19, 1999 was $33 million and $38 million,
respectively.
Page 4 of 49
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MANUFACTURING
The Company's manufacturing facility in Rochdale, England provides the
Company with fully integrated manufacturing capability including a complete
range of machining and fabrication equipment used to produce proprietary
components. Final assembly, product testing and quality control activities are
performed by Company personnel in both the U.S. and U.K.. The Company also has
repair and rebuild operations in Ansonia, Connecticut; Deer Park, Texas; and
Rochdale, England and contracts for such services in Australia and Singapore.
The Company's consolidation of its Derby and Ansonia, Connecticut
assembly, repair and spare parts operations, into available space in Ansonia was
completed in 1998 and yielded significant reductions in operating costs. The
Derby, Connecticut facility was sold in January 1999.
The production equipment acquired in the 1997 Shaw acquisition, located
in Manchester, England, was transferred to Farrel Limited's facility in nearby
Rochdale, England. The facility integration was completed during the second
quarter of 1999 and has generated substantial cost reductions and production
efficiencies.
The Company believes the Ansonia Connecticut, and Rochdale, England
facilities provide the Company with the cost structure to maintain its
competitive position.
COMPONENTS AND RAW MATERIALS
The Company purchases most of the components used in producing its
machines from reliable domestic and international suppliers. The basic raw
materials used by the Company are steel plates, bars, castings, forgings and
hard-surfacing alloys. Principal components and raw materials are available from
a number of sources. The Company is not dependent on any supplier that cannot be
replaced in the normal course of business. The Company's U.K. subsidiary is a
major source of large-scale components of proprietary designs.
RESEARCH AND DEVELOPMENT AND ENGINEERING
The Company's research and development and engineering staffs are
located in Ansonia, Connecticut and Rochdale, England. Their major activities
are: application engineering for specific customer orders; standardization of
existing machinery as part of the Company's ongoing cost reduction measures; and
development of new products and product features. The Company's twin screw
rubber sheeter is an example of the collaborative success of the research and
development and product engineering staffs to produce a new product as well as
the recent development of a new very large-scale pelletizing system for the
petrochemical industry. Current development activities are in the batch mixing
process. The acquisition of the INTERMIX(R) intermeshing technology and rotor
design development provides opportunities to strengthen our business with batch
mixer customers. A summary of research and development and engineering
expenditures incurred during the last three fiscal years is as follows:
Year Year Year
ended ended ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
(Dollars in thousands)
Research and development expense
pertaining to new products or significant
improvements to existing products $1,570 $1,485 $1,567
All other product development and
engineering expenditures related to
ongoing refinements, improvements
of existing products, and custom
engineering 3,580 3,700 2,874
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Total $5,150 $5,185 $4,441
====== ====== ======
Percent of net sales 6.9% 5.3% 5.2%
Page 5 of 49
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PATENTS AND TRADEMARKS
The Company possesses rights under a number of domestic and foreign
patents and trademarks relating to its products and business. The Company holds
approximately 200 patents which cover technology utilized in its products and
currently has approximately 20 patent applications pending. The Company's
patents have expiration dates ranging from 2000 through 2015. Although the
Company believes that its patents provide some competitive advantage, the
Company also depends upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain its competitive
advantage.
The Company considers the following trademarks to be material to its
business: FARREL(R); BANBURY(R); INTERMIX(R); ST(TM); MVX(TM); CP-SERIES II(TM);
FTX(TM); and TSS(TM).
ENVIRONMENTAL
The Company's operations are subject to normal environmental protection
regulations. Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, is not expected to
have a material effect upon the capital expenditures, earnings or the
competitive position of the Company. However, environmental requirements are
constantly changing, and it is difficult to predict the effect of future
requirements on the Company.
As described in Part I, Item 3, Legal Proceedings, the Company and The
Black & Decker Corporation 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 facilities as required by the Connecticut Department of
Environmental Protection ("DEP"). A preliminary environmental assessment of the
Company's properties in Ansonia and Derby, Connecticut has been conducted by The
Black & Decker Corporation. Although this assessment is still being evaluated by
the DEP, on the basis of the preliminary data available there is no reason to
believe that any activities which might be required as a result of the findings
of the assessment will have a material effect upon the capital expenditures,
results of operations, financial position or the competitive position of the
Company.
During January 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 furtherance of which the Company assigned to the purchaser, and the purchaser
assumed the rights and obligations, respectively, of the Company under the
Settlement Agreement insofar as they relate to the Derby property. In addition,
the Company has been named an additional insured on a $5 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. The Company's
potential exposure has not changed by this transaction.
EMPLOYEES
As of December 31, 1999, the Company had 432 employees compared to 498
employees at December 31, 1998. The workforce reduction is primarily a result of
the consolidation of the operations in the United Kingdom. The Company has
collective bargaining agreements in the U.S. and the U.K. which cover
approximately 125 employees. The U.S. agreement expires on June 15, 2000. The
agreement in the U.K. expires April 1, 2000.
Page 6 of 49
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ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company.
<TABLE>
<CAPTION>
Location Principal Use Approx. Sq. Ft.
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<S> <C> <C>
Ansonia, Connecticut........... Office, research, laboratory, 520,000
repair, rebuild, assembly and
storage
Deer Park, Texas............... Repair and rebuild 22,000
Rochdale, England.............. Office, research, laboratory, 210,000
manufacturing, repair and rebuild,
and storage
</TABLE>
The Company believes that the facilities used in its operations are in
satisfactory condition and adequate for its present and anticipated future
operations. In addition to the facilities listed above, the Company leases space
in various domestic and international locations, primarily for use as sales
offices.
ITEM 3 - LEGAL PROCEEDINGS
As previously described in Part I, in Item 1, Environmental, in
February 1995, the Company and The Black & Decker Corporation settled litigation
as to the environmental conditions at the Ansonia and Derby facilities at the
time of the Company's purchase of them from USM in May, 1986. Under the
Settlement Agreement, Black & Decker has assumed full responsibility for all
investigation and any remediation of pre-May 12, 1986 contamination at the
Company's Ansonia and Derby facilities in accordance with a Consent Decree
entered into between Black & Decker and the Connecticut Department of
Environmental Protection. In accordance with the Settlement Agreement, a
Withdrawal and Joint Stipulation of and Motion for Dismissal was filed with the
Court. The Court who originally heard this matter has continuing jurisdiction
over it, but no issues are now pending with the court.
As of the date hereof, the Company is not aware of any contamination,
other than any pre-May 12, 1986 contamination, at any of its facilities which
would require material remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company or by companies that manufactured similar
machinery prior to the Company's acquiring the right to manufacture and sell
that equipment in May 1986. The previous owner of the technology, which the
Company acquired in May, 1986, is obligated to defend and indemnify the Company
for any claims or liabilities arising out of pre-May 12, 1986, activities. While
the outcome of lawsuits or other proceedings against the Company cannot be
predicted with any certainty, the Company does not expect that these matters
will have a material adverse effect on the Company's financial position or
results of operations.
Page 7 of 49
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 8 of 49
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
(a) Price Range of Common Stock and Dividends
The Company's Common Stock is traded over the counter and quoted on the
NASDAQ Small Cap Market System under the symbol "FARL". The following chart sets
forth the high and low prices for the Common Stock and dividends declared for
the last two fiscal years:
Fiscal 1999 High Low Dividend
- ----------- ---- --- --------
First Quarter $3.25 $1.88 $0.16
Second Quarter $2.88 $2.00 -
Third Quarter $2.25 $1.63 $0.04
Fourth Quarter $2.31 $1.31 $0.04
Fiscal 1998 High Low Dividend
- ----------- ---- --- --------
First Quarter $6.50 $4.38 -
Second Quarter $6.13 $3.25 $0.04
Third Quarter $3.78 $1.88 $0.04
Fourth Quarter $2.94 $2.00 -
(b) As of March 17, 2000 the approximate number of record holders of the
Company's common stock was 1029.
(c) Dividends
The Company intends to pay quarterly cash dividends on its Common Stock
as its Board of Directors deems appropriate, after consideration of the
Company's operating results, financial condition, cash requirements, general
business conditions, compliance with covenants in the credit facility (see
Management's Discussion and Analysis of Liquidity and Capital Resources) and
such other factors as the Board of Directors deems relevant.
(d) There were no sales or issuance's of the Company's equity shares
that were not registered under the Securities Act.
Page 9 of 49
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended ended ended ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Statement of Operations Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net Sales $ 74,054 $ 98,036 $ 85,382 $ 75,836 $ 80,067
======== ======== ======== ======== ========
Gross margin $ 18,156 $ 22,772 $ 17,711 $ 18,123 $ 19,760
======== ======== ======== ======== ========
As a percent of net sales 24.5% 23.2% 20.7% 23.9% 24.7%
======== ======== ======== ======== ========
Operating income $ 1,287 $ 4,622 $ 1,635 $ 654 $ 1,591
Other income (expense), net (2) 1,588 (799) 449 (174) (135)
-------- -------- -------- -------- --------
Income before income taxes 2,875 3,823 2,084 480 1,456
Provision for income taxes 1,115 1,546 727 154 554
-------- -------- -------- -------- --------
Net income $ 1,760 $ 2,277 $ 1,357 $ 326 $ 902
======== ======== ======== ======== ========
Net income per share - Basic and diluted (1) $ 0.32 $ 0.38 $ 0.23 $ 0.05 $ 0.15
======== ======== ======== ======== ========
Dividends per share of Common Stock $ 0.24 $ 0.08 $ 0.64 $ 0.06 $ 0.20
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Basic (000's) (1) 5,448 5,942 5,950 5,970 6,027
======== ======== ======== ======== ========
Weighted Average Shares outstanding - Diluted (000's) (1) 5,454 5,966 5,951 5,972 6,030
======== ======== ======== ======== ========
Balance Sheet Data:
Current Assets $ 34,445 $ 48,273 $ 37,104 $ 40,187 $ 41,991
Current Liabilities $ 16,930 $ 28,893 $ 23,286 $ 19,841 $ 22,878
Working Capital Ratio 2.0 1.7 1.6 2.0 1.8
Total assets $ 48,862 $ 63,265 $ 56,381 $ 50,731 $ 53,412
Long-term debt $ 2,584 $ 3,983 $ 5,283 $ 214 $ 388
Stockholders' equity $ 25,864 $ 26,301 $ 25,782 $ 28,553 $ 27,814
Other Data:
Backlog $ 28,929 $ 33,269 $ 46,554 $ 50,225 $ 29,745
</TABLE>
(1) Restated to reflect the adoption of statement of Financial Accounting
Standards No. 128, "Earnings per Share".
(2) 1999 Other Income includes $1.9 million gain from the sale of real
estate.
Page 10 of 49
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in the Company's public documents,
included in 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; changes in business
conditions, in general, and, in particular, in the businesses of the Company's
customers and competitors and other factors which might be described from time
to time in the Company's filings with the Securities and Exchange Commission.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales in 1999 and 1998 were $74.0 million and $98.0 million,
respectively, a decrease of $24.0 million. The decrease in net sales is due in
part to lower sales of new machines in the European markets resulting from weak
market demand. The timing of the Company's sales, particularly sales of new
machines, is highly dependent on when an order is received, the amount of
lead-time from receipt of order to delivery and specific customer requirements.
The Company operates in markets that are extremely competitive with cyclical
demand. Many of our customers and markets operate at less than full capacity and
certain markets remain particularly competitive and are subject to local
economic conditions.
The Company received $70.0 million in orders in 1999 compared to $84.7
for 1998. The decrease is primarily due to lower orders received in the European
and Asian 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 are
normally recognized in a later accounting period than the one in which the order
was received. 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 increased
competition which is resulting in customer orders with lower margins. The
Company believes these problems are industry wide.
Gross margin in 1999 was $18.2 million compared to $22.8 million for
1998, a decrease of $4.6 million. The margin percentage increased to 24.5% from
23.2%. The increase in comparative periods margin as a percent of sales is
primarily attributed to lower manufacturing overheads resulting from the
consolidation of the U.K. operations from two facilities to one, which was
completed in the first six months of 1999, and to changes in product mix.
Shipments for 1999 compared to 1998 shipments include a higher proportion of
aftermarket and spare parts, rebuild and repair sales, which generate higher
margins than new machine sales.
Operating expenses in 1999 were $16.9 million compared to $18.1 million
in 1998, a decrease of $1.2 million. Selling expense decreased approximately
$1.1 due to lower trade show and exhibition expenses and employee compensation
and related benefit costs. General and administrative expenses decreased
approximately $0.3 million primarily due to lower employee compensation and
related benefit costs.
Interest expense for 1999 was $0.4 million compared to $1.1 million for
1998. The decrease is due to lower average borrowings.
Net other expense in 1999 was $226,000 compared to $203,000 for 1998.
The gain from the sale of real estate was excess property in Derby CT, which was
disposed of in January 1999.
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 income before income taxes was 38.8% for 1999,
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compared to 40.4% for 1998. The decline in the effective income tax rate is a
result of changes in the percent of income generated in the U.S. versus the U.K.
FISCAL 1998 COMPARED TO FISCAL 1997:
Net sales in 1998 and 1997 were $98.0 million and $85.4 million,
respectively. The 1998 amount includes net sales of approximately $13.2 million
by Farrel Shaw Limited ("Shaw") which was acquired on December 19, 1997. The
timing of the Company's sales are highly dependent on when an order is received,
lead time and the customers requirements. The 1998 shipments in the fourth
quarter were $35.5 million, or 36.2% of the shipments for the full year. A
substantial portion of the 1997 shipments reflected several individually large
orders received in 1996. 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, in particular, the Far East, remain
especially competitive and are subject to local economic events.
The Company received $84.7 million in orders including approximately
$13.7 million by the newly acquired Shaw operations during 1998 compared to
$77.0 million during the same period of 1997. 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 might represent orders received
in the current or previous period.
Gross margin in 1998 and 1997 was $22.8 million and $17.7 million,
respectively. The margin percentage increased to 23.2% in 1998 from 20.7% in
1997 largely due to the mix of products sold in the two periods and cost
reduction actions. The 1997 results included several large new machine shipments
with relatively lower gross margins.
Operating expenses increased $2.0 million to $18.1 million in 1998
compared to 1997. The 1998 amount includes selling expenses of $0.7 million and
general and administrative expenses of $1.4 million at the newly acquired Shaw
operations. Excluding the impact of the Shaw operations, operating expenses
decreased by $0.1 million to $16.0 million during 1998. The Company consolidated
the operations of Shaw into manufacturing and administrative facilities in
Rochdale, England, in the second quarter of 1999 thereby, reducing a significant
portion of the Shaw overhead expenses.
Interest expense for 1998 was $1.1 million, an increase of $1.0 million
from 1997. The increase is due to borrowings associated with the acquisition of
the Shaw operations. Interest income was $0.5 million for 1998 and $0.3 million
for 1997.
Net other expense for 1998, was $0.2 million compared to net other
income of $0.2 million in 1997. Included are gains from the disposal of
machinery and equipment the Company will no longer use of $0.3 million and $0.7
million during the years ended 1998 and 1997, respectively.
The effective income tax rate in 1998 and 1997 was 40.4% and 34.9%,
respectively. The increase in the effective tax rate during 1998 is attributed
to a higher portion of the 1998 taxable income earned in the United States which
has a higher effective tax rate. 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
As described in Part 1, Item 3, 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.
Page 12 of 49
<PAGE>
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, results of operations, financial position 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.
ORDERS AND BACKLOG
Orders received by the Company during 1999 decreased approximately
$14.7 million, or approximately 17.4%, to approximately $70.0 million compared
to $84.7 million in fiscal 1998. The decrease is primarily in the European and
Asian markets and is a result of weak market demand.
The Company's products are primarily supplied to manufacturers and
represent capital commitment for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's customers and markets
are operating with excess capacity thereby reducing the number of projects in
our traditional markets for plant expansion and modernization. The Company is
experiencing increased pricing pressures from our competitors in an overall
smaller market. Further, the cyclical nature of industry demand and, therefore,
the timing of order intake may effect the Company's quarterly results in the
current and future fiscal quarters. The Company's ability to maintain and
increase net sales depends upon a strengthening and stability in the Company's
traditional markets and our ability to control costs to effectively compete in
the current market. There can be no assurance that the level of orders
experienced in 1999 will continue, that market conditions will not worsen, or
that improvements in the Company's traditional markets will lead to increased
orders for the Company's products.
The level of backlog considered firm by management at December 31, 1999
and 1998 is $28.9 million and $33.3 million, respectively. The contractual ship
dates for substantially all of the December 31, 1999 backlog is in 2000. The
backlog at March 17, 2000 and March 19, 1999 was $33.0 million and $38.0
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES
Working capital and the working capital ratio at December 31, 1999 were
$17.5 million and 2.0 to 1.0, respectively, compared to $19.4 million and 1.7 to
1.0 at December 31, 1998, respectively. During the year ended December 31, 1999
the Company paid dividends of $0.24 per share. On January 10, 2000, the Company
declared a dividend of $0.04 per share which was paid on February 4, 2000. The
Company's ability to pay dividends in the future is limited under the 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.
During 1999, the Company extended its discretionary open market stock
repurchase program, increasing the amount to be used to repurchase common stock
by $2.5 million to $4,750,000. During 1999 the Company has repurchased 694,300
shares of common stock at varying times and in varying amounts totaling
approximately $1.5 million. The repurchased shares are held in treasury (See
Note 10 to the Consolidated Financial Statements).
Page 13 of 49
<PAGE>
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 from
time to time and may result in significant fluctuations in cash provided from
operating activities. Historically, the Company has not experienced significant
problems regarding the collection of accounts receivable. The Company has
historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
At December 31, 1999, the Company had 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 December 31, 1999, the maximum borrowing and/or letter of
credit issuance available under the revolving credit facility to the Company and
subsidiaries based upon borrowing formula was $14.1 million. At December 31,
1999 and 1998, there was $3.9 million and $5.3 million outstanding under the
term loan, respectively. There were $3.8 million and $5.1 million of letters of
credit outstanding at December 31, 1999 and 1998, respectively.
The revolving credit facility expires December 31, 2002. The term note
is payable in equal quarterly payments of (pound)200,000 (approximately
$322,000) through December 31, 2002.
Management anticipates that its cash balances, operating cash flows and
available credit line will be adequate to fund its anticipated capital
commitments and working capital requirements for at least the next twelve
months. The Company made capital expenditures of approximately $1.1 million and
$2.1 million, during fiscal 1999 and 1998, respectively.
In fiscal 2000, new legal minimum funding guidelines become effective
in the U.K. which are significantly different than the prior guidelines. Based
upon preliminary discussions with the Company's actuaries, the new guidelines
will most likely require the Company to make significant cash contributions to
the Company's U.K. pension plans. In recent years, the Company has not been
required to make contributions to the U.K. pension plans.
The Company manufactures and assembles its products in the U.K.,
assembles its products in the U.S. and sells its products in the U.S., U.K. and
other foreign markets. The Company's financial position and results are affected
by changes in foreign currency exchange rates in the foreign markets in which
its operates. When the value of the U.S. dollar or U.K. sterling strengthens
against other currencies, the value of the transaction in the foreign currency
decreases. The Company, from time to time, enters into foreign exchange forward
and option contracts to hedge foreign currency transactions. Foreign currency
transactions generally are for short periods of no more than six months. In
addition, the Company maintains foreign currency bank accounts in other
currencies in which it regularly transacts business.
The Company's interest income and expense are sensitive to changes in
the market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
YEAR 2000
The Company undertook a 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 transition to the year 2000 and
thereafter.
The Company has not experienced any significant operational problems
related to the year 2000. The total amount expended, relating to the Company's
internal information systems was approximately $1.0 million. Other expenses,
primarily manufacturing and office equipment replacement and employee costs of
the year 2000 readiness
Page 14 of 49
<PAGE>
project were not material. During January 2000, the Company applied software
changes for year 2000 issues which occurred. The Company will continue to
monitor its operations for year 2000 issues.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union (EMU)
entered into a three-year transition phase during which a common currency, the
"EURO" was introduced in participating countries. The Company does not have
operations in the participating countries and the conversion to the EURO is not
expected to have a material impact on the Company's financial position, results
of operations or cash flows. However, uncertainty exists as to the effects the
EURO will have on the marketplace.
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 7A - 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 are generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies 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 usually involve
little complexity and are generally for short periods of less than six months.
The Company does not enter into derivative contracts for trading in 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 15 of 49
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors...............................................17
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998.................18
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 ...........................................19
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.......................................20
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.............................................21
Notes to Consolidated Financial Statements..............................22 - 38
Page 16 of 49
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Farrel Corporation
We have audited the accompanying consolidated balance sheets of Farrel
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Stamford, Connecticut
February 14, 2000
Page 17 of 49
<PAGE>
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 6,069 $ 5,786
Accounts receivable, net of allowance for doubtful
accounts of $185 and $297, respectively 15,027 20,708
Inventory 11,975 14,542
Asset purchase agreement receivable -- 5,284
Other current assets 1,374 1,953
-------- --------
Total current assets 34,445 48,273
Property, plant and equipment, net of accumulated
depreciation of $13,186 and $11,648, respectively 10,995 11,614
Goodwill, net of accumulated amortization of $40 -- 1,555
Prepaid pension costs 2,881 542
Other assets 541 1,281
-------- --------
Total assets $ 48,862 $ 63,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,837 $ 14,039
Accrued expenses and taxes 2,157 4,826
Advances from customers 4,015 7,017
Accrued installation and warranty costs 1,629 1,683
Short-term debt 1,292 1,328
-------- --------
Total current liabilities 16,930 28,893
Long-term debt 2,584 3,983
Postretirement benefit obligation 1,138 1,171
Minimum pension obligation 1,030 2,429
Deferred income taxes 1,316 488
Commitments and contingencies -- --
-------- --------
Total liabilities 22,998 36,964
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, 892,045 and 202,620 shares at December
31, 1999 and 1998, respectively, at cost (2,513) (990)
Retained earnings 9,943 9,576
Accumulated other comprehensive expense (922) (1,641)
-------- --------
Total stockholders' equity 25,864 26,301
-------- --------
Total liabilities and stockholders' equity $ 48,862 $ 63,265
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 18 of 49
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 74,054 $ 98,036 $ 85,382
Cost of sales 55,898 75,264 67,671
-------- -------- --------
Gross margin 18,156 22,772 17,711
Operating expenses:
Selling 6,791 7,869 7,076
General and administrative 8,508 8,796 7,433
Research and development 1,570 1,485 1,567
-------- -------- --------
Total operating expenses 16,869 18,150 16,076
Operating income 1,287 4,622 1,635
Interest income 384 544 291
Interest expense (449) (1,140) (71)
Gain from sale of real estate 1,879 -- --
Other (expense)/income, net (226) (203) 229
-------- -------- --------
Income before income taxes 2,875 3,823 2,084
Provision/(benefit) for income taxes:
Current 1,143 1,010 811
Deferred (28) 536 (84)
-------- -------- --------
Total 1,115 1,546 727
-------- -------- --------
Net income $ 1,760 $ 2,277 $ 1,357
======== ======== ========
Per share data:
Basic and diluted net income per share $ 0.32 $ 0.38 $ 0.23
======== ======== ========
Average shares outstanding (000's):
Basic 5,448 5,942 5,950
======== ======== ========
Diluted 5,454 5,966 5,951
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Page 19 of 49
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Paid Other Total
Common stock in Treasury Retained comprehensive Stockholders'
Shares Amount capital stock earnings expense equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 6,142,106 $ 61 $ 19,295 ($ 987) $ 10,228 ($ 44) $ 28,553
Comprehensive Income:
Net income -- -- -- -- 1,357 -- 1,357
----------
Other Comprehensive income, net of tax
Foreign currency translation -- -- -- -- -- (295) (295)
Minimum pension liability -- -- -- -- -- (27) (27)
----------
Other Comprehensive loss (322)
----------
Comprehensive income 1,035
----------
Treasury stock transactions -- -- -- 3 (3) -- --
Cash dividend declared
at $.64 per common share -- -- -- -- (3,806) -- (3,806)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 6,142,106 $ 61 $ 19,295 ($ 984) $ 7,776 ($ 366) $ 25,782
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive Income:
Net income -- -- -- -- 2,277 -- 2,277
----------
Other Comprehensive income, net of tax
Foreign currency translation -- -- -- -- -- (1) (1)
Minimum pension liability -- -- -- -- -- (1,274) (1,274)
----------
Other Comprehensive loss (1,275)
----------
Comprehensive income 1,002
Treasury stock transactions -- -- -- (6) (2) -- (8)
Cash dividend declared
at $.08 per common share -- -- -- -- (475) -- (475)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 6,142,106 $ 61 $ 19,295 ($ 990) $ 9,576 ($ 1,641) $ 26,301
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive Income:
Net income -- -- -- -- 1,760 -- 1,760
----------
Other Comprehensive income, net of tax
Foreign currency translation -- -- -- -- -- (245) (245)
Minimum pension liability -- -- -- -- -- 964 964
----------
Other Comprehensive income 719
----------
Comprehensive income 2,479
Treasury stock transactions -- -- -- (1,523) (17) -- (1,540)
Cash dividend declared
at $.24 per common share -- -- -- -- (1,376) -- (1,376)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 6,142,106 $ 61 $ 19,295 ($ 2,513) $ 9,943 ($ 922) $ 25,864
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to Consolidated Financial Statements
Page 20 of 49
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Year Year
ended ended ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,760 $ 2,277 $ 1,357
Adjustments to reconcile net income to net
cash used in/provided by operating activities:
Gain on disposal of fixed assets (1,930) (288) (746)
Depreciation and amortization 2,362 2,311 1,667
Decrease / (increase) in accounts receivable 5,456 (6,259) 4,471
Decrease in inventory 2,143 1,569 261
(Decrease) / increase in accounts payable (5,986) 5,660 (2,514)
(Decrease) / increase in advances from customers (2,945) 590 608
(Decrease) / increase in accrued expenses and taxes (2,342) (1,145) 1,075
(Decrease) / increase in accrued installation and warranty costs (25) 354 (4)
(Decrease) / increase in long-term employee benefit obligations (128) 181 6
Other 457 207 (500)
------- ------- -------
Total adjustments (2,938) 3,180 4,324
------- ------- -------
Net cash (used in) provided by operating activities (1,178) 5,457 5,681
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 2,279 1,193 1,027
Purchases of property, plant and equipment (1,092) (2,113) (1,878)
Refund of Shaw asset purchase price 4,405 2,701 --
Acquisition of Shaw assets -- -- (10,855)
------- ------- -------
Net cash provided by (used in) investing activities 5,592 1,781 (11,706)
Cash flows from financing activities:
Proceeds from long term borrowings -- -- 6,680
Repayment of long term borrowings (1,293) (1,536) (196)
(Purchase) issuance of treasury stock (1,523) (6) 3
Dividends paid (1,376) (1,427) (2,856)
------- ------- -------
Net cash (used in) provided by financing activities (4,192) (2,969) 3,631
Effect of foreign currency exchange rate changes on cash 61 70 9
------- ------- -------
Net increase / (decrease) in cash and cash equivalents 283 4,339 (2,385)
Cash and cash equivalents--
Beginning of period 5,786 1,447 3,832
------- ------- -------
End of period $ 6,069 $ 5,786 $ 1,447
======= ======= =======
Income taxes paid $ 2,760 $ 870 $ 746
======= ======= =======
Interest paid $ 445 $ 474 $ 76
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
Page 21 of 49
<PAGE>
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Farrel Corporation and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
The Company designs, manufactures, sells and services machinery to
customer specifications for the rubber and plastics industry. The Company's
principal products are batch and continuous mixers, extruders, pelletizers,
calenders and mills. The Company also provides process engineering services,
process design and related services for rubber and plastics processing
installations in conjunction with its sales of capital equipment. The Company's
new machinery and related services generally represents slightly more than half
of its revenues. The Company's aftermarket business consists of contractual
repair, refurbishment and equipment upgrade services, spare parts sales and
field services.
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastics. Foreign customers are primarily located
throughout Europe, Asia and the Middle East.
Due to the nature of the Company's products, which can individually
cost up to $4.0 million, the percent of sales of any product line can change
significantly from year to year. However, the more significant products are the
Company's batch and continuous mixers.
(a) Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, amounts due from banks,
and any other highly liquid investments with a maturity of three months or less
when purchased. The carrying amount approximates fair value because of the short
maturity of those instruments.
(b) Other Financial Instruments:
The carrying amount of the Company's trade receivables and payables
approximates fair value because of the short maturity of these instruments. The
carrying value of long term debt approximates fair value. The interest rate on
the long-term debt is variable and approximates current market rates.
(c) Inventory:
Inventory is valued at the lower of cost or market. Inventory is
accounted for on the last-in, first-out (LIFO) basis in the U.S. and first-in,
first-out (FIFO) basis in the U.K.
(d) Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Improvements are
capitalized and expenditures for normal maintenance and repairs are charged to
expense. Depreciation is computed on a straight line basis based on the
estimated useful lives of the related assets which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets. See Note 3 to these financial
statements.
(e) Goodwill:
On December 19, 1997, the Company acquired certain assets of the
Francis Shaw Rubber Machinery operations. The transaction was accounted for as a
purchase. Goodwill represents the excess purchase price over the estimated fair
value of the assets acquired and was being amortized on a straight line basis
over 20 years (see Note 2).
Page 22 of 49
<PAGE>
(f) Patents and Acquired Technology:
Other assets includes acquired patents and technical know-how and a
technology license agreement which represents the cost of licensed and purchased
technology, know how, and trade secrets including technology which is patented
or for which a patent has been applied for. Such costs are amortized over
periods from 5 to 7 years.
(g) Revenue Recognition:
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with the shipment. Revenue on
repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
The Company typically requires advances from customers upon entering a
contract and at times will require progress payments during the manufacturing
process. Generally, letters of credit are required on contracts with export
customers to minimize credit and currency risk.
(h) Product Installation and Warranty Obligations:
Estimated costs to be incurred under product installation and warranty
obligations relating to products which have been sold are provided for at the
time of sale.
(i) Income Taxes:
Deferred income taxes are provided on temporary differences between the
financial statement and tax basis of the Company's assets and liabilities in
accordance with the liability method of accounting for income taxes. Provision
has not been made for U.S. income taxes or additional foreign taxes on
approximately $10.4 million of undistributed earnings of foreign subsidiaries
because it is expected that those earnings will be reinvested indefinitely.
(j) Earnings Per Share:
Basic earnings per share is determined by dividing net income by the
weighted average shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options to issue common
stock (see Note 10) were exercised and converted to common stock. (See Note 14
to the financial statements.)
(k) Foreign Currency Translation:
Assets and liabilities denominated in foreign currencies are translated
into United States dollars at current exchange rates. Income and expense
accounts are translated at average rates of exchange prevailing during the year.
Adjustments resulting from these translations are included in the accumulated
other comprehensive expense in stockholders' equity.
Transaction gains and losses are included in earnings. The Company
experienced a foreign currency transaction gain of $63,000 in 1999 and foreign
currency transaction losses of $71,000 and $131,000 in fiscal 1998 and 1997,
respectively, which amounts are included in cost of goods sold in the
accompanying financial statements.
The Company, from time to time, enters into foreign exchange contracts
for non-trading purposes, exclusively to minimize its exposure to currency
fluctuations on trade receivables and payables. As a result, changes in the
values of foreign currency contracts offset changes in the values of the
underlying assets and liabilities due to changes in foreign exchange rates,
effectively deferring gains and losses on trade receivables and payables and the
related hedges until the date the transactions are settled in cash. At December
31, 1999, the Company has entered into $0.5 million of forward exchange
contracts for transactions related to amounts to be received for sales
commitments. A gain of approximately $5,000 has been deferred on these
transactions to be offset against the exchange earnings to be recognized on the
hedged transaction. The Company is exposed to loss in the event of
nonperformance by the Company's bank, the other party to the foreign exchange
contracts. The Company does not anticipate nonperformance by its bank.
Page 23 of 49
<PAGE>
(l) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
(m) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company expects to adopt the new Statement effective January 1, 2001. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. The Company does not anticipate the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
(n) Advertising:
Advertising costs are expensed in the period the advertising takes
place. Advertising expense for the years ended December 31, 1999, 1998 and 1997
was $248,000, $296,000 and $198,000, respectively.
(o) Reclassifications:
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no impact on previously reported results of operations.
NOTE 2 - 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 estimated purchase price, including costs of the acquisition,
was approximately $13.9 million. The purchase and sale agreement ("Agreement")
between the Company and the Seller required subsequent adjustment to the
purchase price if (1) the inventory value of Shaw at the transfer date was less
than approximately $5 million and (2) 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").
In June 1998, the Company and the Seller reached agreement on the
inventory value transferred resulting in a payment to the Company by the Seller
of approximately $2.7 million , which amount was used to reduce the purchase
price. 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. In May 1999, the
Company reached an agreement with the seller and received a cash payment of $4.4
million under the Profit Guaranty provisions of the Agreement. The difference
between the amount recorded at December 31, 1998 for the Profit Guaranty
receivable and the amount received from the Seller in May 1999 resulted in an
adjustment of the purchase price allocation.
The Agreement also required the transfer of the pension liability for
the Shaw employees together with the pension assets related to those employees.
The Agreement called for the Seller to appoint an actuary who, together with the
Company's actuary and the third party that holds the pension assets, were to
determine the related pension amounts to be transferred. In February 1999, the
Seller agreed to appoint an actuary to fulfill the obligations under the
Agreement. The consolidated financial statements as of December 31, 1998 do not
include any amounts related to the transferred Shaw employees as those amounts
were not determinable. In the fourth quarter of 1999, the data for the net
amount of the actuarially determined excess of the pension assets compared with
the projected benefit obligation for the Shaw employees was finalized and was
recorded as an additional purchase price adjustment, which resulted in the
elimination of the amount of goodwill previously recorded.
Page 24 of 49
<PAGE>
The revised purchase price of $7.8 million has been allocated as
follows:
(In thousands)
Inventory $2,312
Machinery & Equipment 2,505
Prepaid pension costs 2,161
Patents and trademarks 835
------
$7,813
======
Included in the allocation above were estimated liabilities of
approximately $2.3 million for costs of consolidating the Shaw operations with
the Company's existing Rochdale, England facility including moving, employee
separation and other costs. The majority of this has been expended by December
31, 1999.
The results of Shaw are included in the consolidated financial
statements for the years ended December 31, 1999 and 1998 and for the period
from December 19, 1997 to December 31, 1997. The Seller did not maintain, and
the Company was not provided, separate historical financial information for
Shaw. Accordingly, the Company is not able to estimate the pro forma revenue and
net income for the year ended December 31, 1997.
NOTE 3 - OTHER ASSETS
12/31/99 12/31/98
-------- --------
(In thousands)
Technology license................................... - $167
Assets held for disposal............................. - 240
Acquired patents and technical know how.............. $484 664
Other................................................ 57 210
----- -------
Total.............................................. $541 $1,281
==== ======
Included in other assets at December 31, 1998 are assets held for
disposal that represent the remaining book value of the Company's Derby,
Connecticut manufacturing facility and machinery and equipment of Shaw at the
Manchester, England facilities no longer expected to be used. In January 1999,
the Company completed the sale of the Derby property for $2.4 million.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company is a party to an agreement with First Funding Corporation
(the "Financial Services Agreement"), pursuant to which the Company retains
First Funding as its exclusive investment adviser. Charles S. Jones, a director
of the Company and owner of over 5% of the Company's outstanding Common Stock,
is an executive officer of First Funding. The Financial Services Agreement may
be terminated by either party upon twelve months written notice or by the
Company in the event that Mr. Jones is no longer an officer or employee of First
Funding.
Under the Financial Services Agreement, the Company pays First Funding
an annual retainer of $450,000 for Mr. Jones' services. The Company also pays
for advisory services provided by other First Funding employees on an hourly
basis and out-of-pocket expenses. The Company also pays transaction fees in the
event of certain successful transactions. The Company recorded amounts due to
First Funding of $719,000, $866,000, and $894,000 in fiscal 1999, 1998 and 1997,
respectively. In addition, the Company also reimbursed First Funding $160,000,
$236,000, and $319,000 for out-of-pocket costs during the same three periods,
respectively. The 1998 and 1997 amounts include $177,000 and $460,000,
respectively, for services related to the Shaw Asset Purchase Agreement (see
Note 2). Also included during 1998 is $205,000 related to restating and amending
the Company's credit facility to include a term note to finance the Shaw Asset
Purchase, to increase the amount available under the credit facility and to
lengthen the term of the credit facility (see Note 8).
Page 25 of 49
<PAGE>
NOTE 5 - INVENTORY
Inventory is comprised of the following:
12/31/99 12/31/98
-------- --------
(In thousands)
Stock and raw materials.................. $7,934 $7,279
Work-in-process.......................... 4,041 7,263
----- -------
Total.................................... $11,975 $14,542
======= =======
Of the above inventories at December 31, 1999 and 1998, $6.8 million
and $7.2 million, respectively are valued using the LIFO method. Current
replacement costs of those inventories as of these dates were greater than the
LIFO carrying amounts by approximately $0.4 million and $0.5 million at December
31, 1999 and 1998, respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
12/31/99 12/31/98
-------- --------
(In thousands)
Land and buildings........................ $4,033 $4,081
Machinery, equipment and other............ 19,794 18,546
Construction in progress.................. 354 635
------ --------
24,181 23,262
Accumulated depreciation................ (13,186) (11,648)
-------- --------
Property, plant and equipment, net...... $10,995 $11,614
======= =======
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years. The amounts indicated here exclude the assets held for resale which are
included in Other Assets. See Note 3 to these financial statements.
NOTE 7 - ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes includes accrued wages and benefits of
approximately $1.2 million and $1.3 million at December 31, 1999 and 1998,
respectively. Also included are income taxes payable of $0.5 million and $1.0
million, at December 31, 1999 and 1998.
NOTE 8 - BANK CREDIT ARRANGEMENTS
The Company has a worldwide multi-currency $25 million credit facility
with a major U.S. bank 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. The revolving credit
facility expires on December 31, 2002. Interest varies based upon prevailing
market interest rates (7.8% and 8.4% at December 31, 1999 and 1998,
respectively). The facility contains limits on direct borrowings and letters of
credit combined 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 investments, borrowings
and the sale of assets. The Company's ability to pay dividends is limited to (a)
25% of the Company's cumulative 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. At December
31, 1999, the maximum borrowing and/or letter of credit issuance available under
the revolving credit facility to the Company and subsidiaries based upon the
borrowing base formula was $14.1 million. The weighted averaged interest rate
incurred on short-term
Page 26 of 49
<PAGE>
borrowings was 7.58%, 8.6% and 8.18% in fiscal 1999, 1998 and 1997,
respectively. There were $3.8 million and $5.1 million of letters of credit
outstanding at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, there was $3.9 million and $5.3 million
outstanding under the term loan. The term note is payable in equal quarterly
payments of (pound)200,000 through December 31, 2002. Approximately, $1,292,000
((pound)800,000) and $1,328,000 is classified as current and $2,584,000 and
$3,983,000 was classified as long term at December 31, 1999 and 1998,
respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
(a) Commitments:
Aggregate future lease commitments under operating leases, principally
for office space, equipment and vehicles, are as follows:
Year ending December 31, (In thousands)
- ------------------------ --------------
2000 $383
2001 208
2002 78
2003 23
2004 and thereafter 25
Rental expense for the year ended December 31, 1999, 1998 and 1997 was
$464,000, $594,000, $332,000, respectively.
(b) Contingencies:
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company. While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with certainty, the Company
does not expect that these matters will have a material adverse effect on the
Company's financial position or results of operations.
NOTE 10 - STOCK PLANS
The Company sponsors a Stock Option Plan and an Employees' Stock
Purchase Plan, both established in 1997.
The 1997 Omnibus Stock Incentive Plan authorizes the granting of
incentive stock options and non-qualified stock options to purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the discretion of the Compensation Committee subject to the following
limitations. The exercise price of an Incentive Stock Option may not be less
than the fair market value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant. At December 31, 1999, 415,000
shares are available for future issuance.
Prior to 1997 the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 1999, options to purchase 435,000 shares remain outstanding under that plan.
The Company accounts for stock options under Accounting Principles
Board Opinion No. 25 , "Accounting for Stock Issued to Employees" (APB 25) and
not the fair value method as provided by FAS 123,
Page 27 of 49
<PAGE>
"Accounting and Disclosure of Stock-Based Compensation." The Company's Stock
Option Plan requires options to be granted at the market price of the Company's
common stock on the date the options are granted, and as a result, under APB 25
no compensation expense is recognized.
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 515 $5.45 459 $5.86 459 $5.86
Granted 85 2.00 60 2.19 - -
Exercised - - - - - -
Forfeited 86 3.34 4 3.88 - -
------------------- ------------------- ----------------------
Outstanding, end of year 514 $5.32 515 $5.45 459 $5.86
------------------- ------------------- ----------------------
Exercisable, end of year 435 $5.83 420 $5.96 374 $6.32
Weighted-average fair value of options
granted during the year $1.18 $1.19 -
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- --------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2.00 - $3.74 85,000 10 years $2.00 28,333 $2.00
3.75 - 5.50 248,000 5 4.55 225,750 4.61
5.51 - 8.50 95,000 3.5 6.32 95,000 6.32
8.51 - 10.00 86,000 2.0 9.73 86,000 9.73
- --------------------------------------------------------------------------- -----------------------------
$2.19 - $10.00 514,000 5.3 years $5.32 435,083 $5.83
</TABLE>
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of FAS 123. The fair
value for these options granted under the Stock Option Plan was estimated at the
date of grant using the Black-Scholes option pricing model, one of the allowable
valuation models under FAS 123, with the following assumptions for 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk free interest rate 6.52% 4.65%
Dividend yields 2.0% 2.0%
Expected volatility factor of the expected
market price of the Company's common stock .639 .595
Weighted average expected life of each option 8 yrs. 8 yrs.
</TABLE>
Page 28 of 49
<PAGE>
The weighted average fair value of options granted during 1999 and 1998
was $1.18 and $1.19, respectively. There were no options granted during 1997.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics different than those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate, therefore, in management's judgment, applying
the provisions of FAS 123 does not necessarily provide a reliable single measure
of the fair value of its stock options. The current pro forma net income will
not necessarily be representative of pro forma net income in future years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
Year ended
----------
12/31/99 12/31/98 12/31/97
--------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Pro Forma Net Income $1,731 $2,237 $1,331
Pro Forma earnings per share - basic and diluted $0.32 $0.37 $0.22
</TABLE>
Under the 1997 Employees' Stock Purchase Plan, the Board of Directors'
may offer each eligible employee of the Company the right to purchase, in each
year through 2001, shares of common stock equivalent in value to not more than
5% of the employee's annual compensation, up to a maximum of $25,000 per year.
At the time of the offering by the Board of Directors the employees must
designate the amount to be withheld during the next 24 month purchase period.
The purchase price is the lower of 85% of the fair market value of the common
stock on the date of offering or 85% of the fair market value on the date the
applicable purchase period ends. Not more than an aggregate of 500,000 shares of
common stock may be purchased under the stock purchase plan. Any employee who,
after the purchase, would hold 5% or more of the common stock is ineligible. No
options to purchase shares were offered during 1999 and 1998.
During 1999 and 1998, approximately 11,700 and 5,400 shares,
respectively, were distributed to employees under this plan. The 1999 and 1998
distribution includes 4,875 and 404 shares respectively from the Company's
treasury account, for which retained earnings was adjusted. At December 31,
1999, there were no shares subscribed to under these plans.
The Company may reaquire up to $4,750,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 1999 and 1998 the
Company reacquired 694,300 and 3,500 shares of common stock, respectively, under
this plan for approximately $1.5 million and $9,000, respectively which are
included in treasury stock. There were no shares repurchased during 1997.
NOTE 11 - BENEFIT PLANS
The accounting for pensions and retiree health benefits, which will be
paid out over an extended period of time in the future, requires the use of
significant estimates concerning uncertainties about employee turnover, future
pay scales, interest rates, rates of return on investments and future medical
costs. The estimates of these future employee costs are allocated in a
systematic manner to the years when service is rendered to the Company by the
employee. The annual cost is comprised of the service cost component related to
current employee service, an interest cost related to the increase in the
benefit obligations due to the passage of time (the benefit obligations are
stated at a present value which increases each year as the discount period
decreases), less
Page 29 of 49
<PAGE>
the earnings achieved on assets invested in the employee benefit plan.
Differences between the estimates and actual experience are deferred and
amortized to expense over a period of time.
PENSION PLANS
The Company has retirement plans covering portions of domestic and
foreign employees. The Company funds the domestic plan in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plans in
accordance with appropriate governmental regulations in the United Kingdom.
Pension expense is actuarially determined in accordance with generally accepted
accounting principles and differs from amounts funded annually.
The Company has a domestic defined benefit pension plan for hourly
employees which provides benefits based on employees' years of service. Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has two foreign defined benefit pension plans covering substantially
all employees which provide stipulated amounts at retirement based on years of
service and earnings. Plan assets are invested in securities, real estate and
cash. The following table summarizes the components of domestic and foreign
pension expense:
<TABLE>
<CAPTION>
Year ended
----------
12/31/99 12/31/98 12/31/97
-------- -------- --------
Domestic pension expense: (In thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period..... $75 $62 $62
Interest cost on projected benefit obligation...... 146 136 124
Expected return on plan assets.................... (174) (147) (127)
Recognized net actuarial loss..................... 52 27 26
Amortization of transition, asset................. 2 7 7
Amortization of prior service cost................ 11 11 7
-- ----- ------
Net domestic pension expense $112 $96 $99
==== === ===
Foreign pension expense:
Service cost-benefits earned during the period..... $761 $641 $258
Interest cost on projected benefit obligation...... 1,265 762 728
Estimated return on plan assets.................... (1,568) (799) (802)
Recognized net actuarial loss...................... 32 6 -
Amortization of transition asset................... (39) (159) (152)
Amortization of prior service cost................. - - (7)
-------- ------- ---------
Net foreign pension expense $451 $451 $25
==== ===== =====
</TABLE>
The Company's funding policy is guided by government regulations and
the Company's desire to accumulate sufficient assets in the benefit plans to
meet obligations for retirement benefits. At any point in time there may be
differences between the estimates used in establishing pension cost for
accounting purposes, the criteria for funding amounts and actual experience,
thus there will always be an amount by which the Company is over or
under-funded.
Page 30 of 49
<PAGE>
The following table sets forth the funded status under U.S. accounting
standards of the domestic and foreign defined benefit plans and amounts
recognized in the balance sheets:
<TABLE>
<CAPTION>
Domestic Foreign
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
Change in Projected Benefit Obligation
<S> <C> <C> <C> <C>
Balance at the beginning of the year $ 2,387 $ 1,991 $ 12,366 $ 10,252
Service cost 75 62 761 294
Interest cost 146 136 1,265 762
Plan participant contributions -- -- 239 148
Actuarial (gain) losses (84) 305 982 1,543
Foreign currency exchange rates -- -- (328) 52
Benefits paid (117) (107) (808) (685)
Business combinations -- -- 9,189 --
-------- -------- -------- --------
Balance at the end of the period $ 2,407 $ 2,387 $ 23,666 $ 12,366
======== ======== ====================
Change in Fair Value Plan Assets
Balance at the beginning of the year $ 2,114 $ 1,780 $ 10,243 $ 9,800
Actual return on assets 120 184 5,064 929
Contributions - employer 162 257 111 --
Contributions - employee -- -- 239 148
Foreign currency exchange rates -- -- (273) 51
Benefits paid (117) (107) (808) (685)
Business combinations -- -- 12,212 --
-------- -------- -------- --------
Balance at the end of the period $ 2,279 $ 2,114 $ 26,788 $ 10,243
======== ======== ====================
Funded status of the plan
(Under)/over funded ($ 128) ($ 273) $ 3,122 ($ 2,123)
Unrecognized net actuarial (gain) loss 662 745 (832) 2,099
Unamortized prior service cost 57 68 -- --
Unamortized net transition obligation (asset) -- 2 -- (40)
-------- -------- -------- --------
Prepaid/(Accrued) Pension Expense $ 591 $ 542 $ 2,290 ($ 64)
======== ======== ====================
Discount rate 6.50% 6.25% 6.00% 6.00%
Rate of increase in future compensation levels N/A N/A 3.00% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 7.00% 8.00%
</TABLE>
The above 1999 amounts reflect the transfer of the pension liability
and pension assets related to the Farrel Shaw Rubber Machinery asset purchase
(see Note 2).
The funded status under regulatory guidelines used to determine legally
required minimum funding amounts will most likely vary from the funded status
for U.S. accounting purposes and the funded status could vary significantly.
The Company changed the domestic discount rate in 1999 and 1998 in
response to current and projected interest rates. The Company recorded a minimum
pension liability of $1,030,000 and $2,429,000 at December 31, 1999 and 1998,
respectively. The Company has also recorded intangible assets of $57,000 and
$70,000, the amounts allowable under FAS 87, at December 31, 1999 and 1998,
respectively, which are included in Other Assets. The minimum liability in
excess of the intangible asset has been recorded as comprehensive expense
included in stockholders' equity, net of applicable income taxes. Comprehensive
Page 31 of 49
<PAGE>
income was $1,399,000 in fiscal 1999 and comprehensive expense was $1,855,000
and $43,000 for fiscal 1998 and 1997, respectively (see Note 12).
For foreign pension plans with accumulated obligations in excess of
plan assets, the projected benefit obligation, accumulated benefit obligation
and fair value of plan assets were $3.9 million, $3.8 million and $3.3 million,
respectively, at December 31,1999.
The Company has a domestic 401(k) retirement plan for salaried
employees which includes matching and discretionary non-matching contributions
by the Company. Approximately $112,000, $78,000 and $119,000 of Company
contributions were expensed in fiscal 1999, 1998 and 1997, respectively.
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------
The Company generally provided health care benefits to eligible
domestic union retired employees and their dependents through age 65. The
Company is self-insured for claims prior to age 65 and pays these as incurred.
Retired employees and their dependents were entitled to select Supplemental
Medicare Coverage A and B only at age 65. The Company pays 75% of the monthly
Medicare premiums for most of these individuals. Eligibility for these retiree
health care benefits was attained upon reaching age 60 and completing 10 years
of service.
During 1994 the Company renegotiated its contract with domestic union
employees in which postemployment medical benefits were eliminated for future
retirees. Employees who retired prior to the signing of the new contract
maintain the postemployment medical benefits granted under prior contracts. The
following table summarizes the Company's expense for postemployment benefits
other than pensions.
<TABLE>
<CAPTION>
Year ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Service cost- benefits earned during the period --- --- ---
Interest cost on accumulated postretirement
benefit obligation $49 $81 $90
--- --- ---
Net periodic postretirement benefit costs $49 $81 $90
=== === ===
</TABLE>
The Company's non-pension postretirement benefit plans are not funded.
The status of the plans are as follows:
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Beginning of the year $1,248 $1,221
Interest cost 57 81
Recognized actuarial (gain) loss (309) 69
Benefits Paid (78) (123)
---- -----
End of the year 918 1,248
Unrecognized actuarial (gain) loss 220 (77)
--- --------
Accrued postretirement benefit obligation $1,138 $1,171
====== ======
</TABLE>
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 6.50% and 6.25% at December 31, 1999 and
1998, respectively. The change in assumptions did not have a material impact on
the obligation or net periodic postretirement benefit cost. The assumed health
care cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% at December 31, 1999 and declines .5% per year to 5.5% by
the year 2005 and remains at that level thereafter.
Page 32 of 49
<PAGE>
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
-------------------------------
(In thousands)
<S> <C> <C>
Increase (decrease) in the interest cost components in 1999 $4 $(4)
Increase (decrease) in postretirement benefit obligation as of 1999 $72 $(68)
</TABLE>
NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (EXPENSE)
The components of other comprehensive income (expense) are as follows:
<TABLE>
<CAPTION>
Foreign
Currency Minimum
Translation Pension
Adjustments Liability Total
----------- --------- -----
(In thousands)
<S> <C> <C> <C>
Balance at December 31, 1996 $232 ($276) ($44)
Cumulative translation adjustment (295) - (295)
Minimum pension liability adjustment - (43) (43)
Deferred taxes relating to minimum
pension liability - 16 16
------------ ------------ -----------
Balance at December 31, 1997 (63) (303) (366)
Cumulative translation adjustment (1) - (1)
Minimum pension liability adjustment - (1,855) (1,855)
Deferred taxes relating to minimum
pension liability - 581 581
------------ ------------ -----------
Balance at December 31, 1998 (64) (1,577) (1,641)
Cumulative translation adjustment (245) - (245)
Minimum pension liability adjustment - 1,399 1,399
Deferred taxes relating to minimum
pension liability - (435) (435)
------------ ------------ ----------
Balance at December 31, 1999 ($309) ($613) ($922)
============ ============ ==========
</TABLE>
Page 33 of 49
<PAGE>
NOTE 13 - PROVISION FOR INCOME TAXES
Pre-tax income and income taxes for the years ended December 31, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Year ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
(In thousands)
The domestic and foreign components of
income before income taxes are:
<S> <C> <C> <C>
Domestic $2,284 $3,325 $89
United Kingdom 591 498 1,995
--- ------- -----
$2,875 $3,823 $2,084
====== ====== ======
The provision/(benefit) for income taxes is:
Current:
United States $825 $918 $101
United Kingdom 110 9 658
State 208 83 52
--- ------ ------
1,143 1,010 811
----- ----- ------
Deferred:
United States (49) 127 (50)
United Kingdom 47 171 7
State (26) 238 (41)
------ ------ -------
(28) 536 (84)
------ ------- -------
$1,115 $1,546 $727
====== ====== =====
</TABLE>
Deferred tax liabilities/(assets) result from the following differences
between financial reporting and tax accounting.
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
(In thousands)
Deferred tax liabilities:
-------------------------
<S> <C> <C>
Fixed Assets $1,062 $1,396
Pension 562 -
Inventory valuation 86 78
Intangibles 145 249
--- -------
Total deferred tax liabilities 1,855 1,723
----- -------
Deferred tax assets:
--------------------
Non pension postretirement benefits (455) (469)
Installation and warranty cost accruals (334) (190)
Vacation reserve (98) (98)
Bad debt reserve (38) (53)
Pension - (686)
Redundancy reserve - (137)
Other reserves (114) (343)
Other (50) (28)
--------- --------
Total deferred tax assets (1,089) (2,004)
------ -------
Net deferred tax liability (asset) $ 766 $ (281)
====== =======
</TABLE>
Other current assets includes $550,000 and $769,000 of deferred tax
assets at December 31, 1999 and 1998, respectively.
Page 34 of 49
<PAGE>
A reconciliation from statutory U.S. federal income taxes to the actual income
taxes is as follows:
<TABLE>
<CAPTION>
Year ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Statutory provision $978 $1,300 $709
U.S.--U.K. rate differential (44) (20) (57)
State income taxes, net of federal benefit 120 212 7
Permanent differences 75 79 98
Other (14) (25) (30)
--------- --------- --------
Actual provision $1,115 $1,546 $ 727
====== ====== ======
</TABLE>
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Year Year
ended ended ended
12/31/99 12/31/98 12/31/97
-------- -------- --------
(In thousands, except share data)
Net income applicable to
common stockholders $1,760 $2,277 $1,357
=============== =============== ===============
<S> <C> <C> <C>
Weighted average number of common
shares outstanding - Basic earnings per Share 5,447,807 5,941,837 5,950,240
Effect of dilutive stock and
purchase options 6,195 24,539 1,403
--------------- --------------- ---------------
Weighted average number of
common shares outstanding - Diluted earnings per share 5,454,002 5,966,376 5,951,643
=============== =============== ===============
Net income per share-basic $0.32 $0.38 $0.23
=============== =============== ===============
Net income per share-diluted $0.32 $0.38 $0.23
=============== =============== ===============
</TABLE>
Page 35 of 49
<PAGE>
NOTE 15 - OTHER INCOME/(EXPENSE), NET
For the year ended December 31, 1998, and 1997 other income/expense
includes gains of approximately $0.3 million and $0.7 million, respectively,
from the disposal of fixed assets.
NOTE 16 - FOREIGN OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS
The Company's operations are considered one operating segment. The
Company's products consist of new machines, spares 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.
The following provides gross revenue by product and geographic area for
the years ended December 31, 1999, 1998 and 1997:
(In Thousands)
Sale by Product Line 1999 1998 1997
-------------------- ---- ---- ----
New Machines $33,192 $56,057 $48,745
Spares 18,981 20,206 19,735
Repairs 20,620 21,154 16,493
Other 1,261 619 409
------- ------- -------
Total $74,054 $98,036 $85,382
======= ======= =======
Geographic Sales by Destination
-------------------------------
United States $41,353 $51,274 $39,402
United Kingdom 4,889 9,915 6,122
Europe (excluding U.K.) 15,805 21,310 12,952
North America (excluding U.S.) 2,766 3,099 1,456
Asia 5,964 6,446 22,220
Middle East 432 4,271 1,058
Other 2,845 1,721 2,172
------- ------- -------
Total $74,054 $98,036 $85,382
======= ======= =======
Sales for 1997 included sales to one customer located in Korea totaling
$13 million. There were no other sales to a single customer which exceeded 10%
of the Company's revenue for the years ended December 31, 1999 and 1998.
The Company operates a global business with interdependent operations
and employs a global management approach. In consideration of certain economic
factors, the distribution of customer orders and associated revenues and
expenses between the U.S. or U.K. is at the discretion of management. As such,
the chart below should not be construed as indicative of U.S. and U.K. operating
results were the Company not to operate in such a manner.
Page 36 of 49
<PAGE>
Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K. operations for the years ended December 31, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
United United
States Kingdom Consolidated
---------------------------------------
(In thousands)
<S> <C> <C> <C>
Year ended 12/31/99:
Sales to unaffiliated Customers $47,970 $26,084 $74,054
Operating income $647 $640 $1,287
Long-lived assets $5,713 $8,704 $14,417
Total assets $24,451 $24,411 $48,862
Year ended 12/31/98:
Sales to unaffiliated Customers $57,387 $40,649 $98,036
Operating income $3,489 $1,133 $4,622
Long-lived assets $6,044 $8,948 $14,992
Total assets $29,006 $34,259 $63,265
Year ended 12/31/97:
Sales to unaffiliated Customers $60,594 $24,788 $85,382
Operating income $(310) $1,945 $1,635
Long-lived assets $5,920 $13,357 $19,277
Total assets $26,411 $29,970 $56,381
</TABLE>
Page 37 of 49
<PAGE>
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands except per share data)
Quarter
----------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ -------------
FISCAL 1999
<S> <C> <C> <C> <C>
Net Sales $13,294 $17,282 $20,091 $23,387
============ ============ ============ =============
Gross Margin $2,404 $4,538 $6,165 $5,049
============ ============ ============ =============
Other income / (expense) $1,835 $73 ($174) ($146)
============ ============ ============ =============
Net income/(loss) ($117) $282 $1,096 $499
============ ============ ============ =============
Basic and diluted net income/(loss) per common share ($0.02) $0.05 $0.20 $0.09
============ ============ ============ =============
Basic weighted average shares outstanding (000's) 5,813 5,387 5,461 5,293
============ ============ ============ =============
Diluted weighted average shares outstanding (000's) 5,813 5,392 5,461 5,293
============ ============ ============ =============
Quarter
----------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ -------------
FISCAL 1998
Net Sales $15,976 $24,954 $21,626 $35,480
============ ============ ============ =============
Gross Margin $4,236 $6,100 $4,341 $8,095
============ ============ ============ =============
Other expense ($234) ($255) ($64) ($246)
============ ============ ============ =============
Net income/(loss) $110 $737 ($202) $1,632
============ ============ ============ =============
Basic and diluted net income/(loss) per common share $0.02 $0.12 ($0.03) $0.27
============ ============ ============ =============
Basic weighted average shares outstanding (000's) 5,943 5,943 5,942 5,939
============ ============ ============ =============
Diluted weighted average shares outstanding (000's) 5,983 5,947 5,942 5,944
============ ============ ============ =============
</TABLE>
In the fourth quarter of 1999, the Company finalized the accounting for
the purchase of certain assets and the operations of Shaw, as more fully
discussed in Note 2. This resulted in the reversal of $100,000 of goodwill
amortization expensed in prior quarters. In addition, in the fourth quarter of
1999, the Company recorded an adjustment to write down the value of its U.K.
inventory by approximately $1,000,000.
Page 38 of 49
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 39 of 49
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1999 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 14, 2000.
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1999 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 14, 2000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1999 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 14, 2000.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1999 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 14, 2000. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Page 40 of 49
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-K Page
1. Financial Statements
Report of Independent Auditors.........................................17
Consolidated Balance Sheets as of December 31,
1999 and 1998.........................................................18
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997................................19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997..................20
Consolidated Statements of Cash Flows for years
ended December 31, 1999, 1998 and 1997................................21
Notes to Consolidated Financial Statements........................22 - 38
2. Financial Statement Schedule
Report of Independent Auditors on Financial Statement Schedule.........46
Schedule II - Valuation and Qualifying Accounts........................47
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Page 41 of 49
<PAGE>
3. Exhibits Page
----
Exhibits
- --------
Exhibit 3(a) Articles of Incorporation - Filed as an
exhibit to the Registrant's Registration
Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 3(b) By-laws - Filed as an exhibit to the
Registrant's Registration Statement as Form S-1
(No. 33-43539) and incorporated herein by
reference. N/A
Exhibit 4 Amended and restated Credit Agreement between
Farrel Corporation and Chase Manhattan Bank
dated January 23, 1998. Filed as an exhibit to
the Registrant's Form 10K for the year ended
December 31, 1997. N/A
Exhibit 4 First amendment to the amended and restated
Credit Agreement Between Farrel Corporation and
Chase Manhattan Bank dated November 30, 1998.
Filed as an exhibit to the Registrants's Form
10K For the year ended December 31, 1998. N/A
Exhibit 10(b) Employment Agreement between Rolf K.
Liebergesell and the Registrant, dated November
1, 1991. Filed as an exhibit to the
Registrant's Registration Statement as Form S-1
(No. 33-43539) and incorporated herein by
reference. N/A
Exhibit 10(b) First Amendment to Employment Agreement
between Rolf K. Liebergesell and registrant
effective as of December 1, 1997, filed as an
exhibit to the Registrants Form 10Q for the
quarter ended March 29, 1998. N/A
Exhibit 10(d) Standard Corporate Financial Services
contract between First Funding Corporation and
the Registrant, dated June 17, 1986, as amended
by a Letter Agreement dated November 1, 1991.
Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by reference. N/A
Exhibit 10(e) 1997 OMNIBUS Stock Incentive Plan - Filed
as an exhibit to the Registrant's definitive
Proxy Statement re: Annual Meeting on May 23,
1997 and incorporated herein by reference. N/A
Exhibit 10(f) 1997 Employee's Stock Purchase Plan - Filed
on the Registrant's registration Statement as
Form S-8 (No. 333-30735) and incorporated
herein by reference. N/A
Exhibit 10(g) Environmental Agreement between USM
Corporation and the Registrant dated as of May
12, 1986. Filed as an exhibit to the
Registrant's Registration Statement as Form S-1
(No. 33-43539) and incorporated herein by
reference. N/A
Page 42 of 49
<PAGE>
Exhibit 10(h) Form of Director Indemnification Agreement.
Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by reference. N/A
Exhibit 10(i) Environmental Settlement Agreement between
The Black & Decker Corporation and the
Registrant dated February 17, 1995. Filed as an
exhibit to the Registrant's Form 10-K for the
year ended December 31, 1994. N/A
Exhibit 10(j) Secondment Agreement between Karl N.
Svensson and the Registrant, dated March 3,
1995. Filed as an exhibit to the Registrant's
Form 10-Q for the quarter ended June 30, 1996. N/A
Exhibit 10(k) Agreement of Purchase and Sale of certain
property located in Derby, CT between National
RE/sources Acquisition, LLC and Farrel
Corporation dated July 17, 1998, and
reinstatement agreement dated October 15, 1998.
Filed as an exhibit to the Registrants's Form
10K for the year ended December 31, 1998. N/A
Exhibit 11 Statement re: Computation of per share
earnings. 35
Exhibit 21 Subsidiaries - Filed as an exhibit to the
Registrant's Registration Statement as Form S-1
(No. 33-43539) and incorporated herein by
reference. N/A
Exhibit 23 Consent of Ernst & Young LLP 48
Exhibit 27 Financial Data Schedule 49
(b) Reports on Form 8K.
No such reports were filed by the Company during the year ended December 31,
1999.
Page 43 of 49
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Farrel Corporation
/s/ Walter C. Lazarcheck
-----------------------------
Walter C. Lazarcheck
Vice President and Chief
Financial Officer
March 24, 2000
-----------------------------
Date
Page 44 of 49
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Rolf K. Liebergesell Chief Executive Officer, March 24, 2000
- ------------------------- President and --------------
Rolf K. Liebergesell Chairman of the Board
/s/Walter C. Lazarcheck Vice President - Chief March 24, 2000
- ------------------------- Financial Officer --------------
Walter C. Lazarcheck (Chief Accounting Officer)
/s/Charles S. Jones Director March 24, 2000
- ------------------------- --------------
Charles S. Jones
/s/James A. Purdy Director March 24, 2000
- ------------------------- --------------
James A. Purdy
/s/Howard J. Aibel Director March 24, 2000
- ------------------------- --------------
Howard J. Aibel
/s/Glenn Angiolillo Director March 24, 2000
- ------------------------- --------------
Glenn Angiolillo
/s/Alberto Shaio Director March 24, 2000
- ------------------------- --------------
Alberto Shaio
Page 45 of 49
<PAGE>
Report of Independent Auditors on
Consolidated Financial Statement Schedule
The Board of Directors and Stockholders
Farrel Corporation
We have audited the consolidated financial statements of Farrel Corporation as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated February 14,
2000 (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule for the years ended December 31, 1999,
1998 and 1997 listed in Item 14(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Stamford, Connecticut
February 14, 2000
Page 46 of 49
<PAGE>
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------------- ----------------------------- ---------------- --------------
Charged
Balance at Charged to (credited)
beginning costs and to other Balance at
Name of Debtor of period expenses accounts (1) Deductions (2) end of period
- ----------------------------------------- ---------------- -------------- ------------- ---------------- --------------
Year ended 12/31/97
- -------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivables $464 ($50) ($8) ($227) $179
Reserve for excess and obsolete
inventory items $1,091 $208 ($23) ($525) $751
Accrued installation and warranty
costs $1,360 $2,182 ($25) ($2,191) $1,326
Year ended 12/31/98
- -------------------
Allowance for doubtful
receivables $179 $261 --- ($143) $297
Reserve for excess and obsolete
inventory items $751 $916 $3 ($120) $1,550
Accrued installation and warranty
costs $1,326 $2,282 $2 ($1,927) $1,683
Year ended 12/31/99
- -------------------
Allowance for doubtful
receivables $297 $163 ($4) ($271) $185
Reserve for excess and obsolete
inventory items $1,550 $106 ($21) ($281) $1,354
Accrued installation and warranty
costs $1,683 $1,426 ($30) ($1,450) $1,629
</TABLE>
(1) Represents foreign currency translation adjustments charged or credited
to stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued installation and warranty costs to
reflect expenditures incurred.
The allowances for doubtful receivables and reserves for excess and obsolete
inventory items have been deducted in the balance sheets from the assets to
which they apply. The accrued installation and warranty costs are shown as
liabilities in the balance sheet.
Page 47 of 49
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30735) pertaining to the Farrel Corporation 1997 Employees' Stock
Purchase Plan of our reports dated February 14, 2000 with respect to the
consolidated financial statements and schedule of Farrel Corporation included in
the Annual Report on Form 10-K for the year ended December 31, 1999.
Ernst & Young LLP
Stamford, Connecticut
March 24, 2000
Page 48 of 49
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Farrel Corporation as of 12/31/99 and for the year
then ended and is qualified in its entirety by reference to such statements.
</LEGEND>
<CIK> 0000034645
<NAME> FARREL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,069
<SECURITIES> 0
<RECEIVABLES> 15,212
<ALLOWANCES> 185
<INVENTORY> 11,975
<CURRENT-ASSETS> 34,445
<PP&E> 24,181
<DEPRECIATION> 13,186
<TOTAL-ASSETS> 48,862
<CURRENT-LIABILITIES> 16,930
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 25,803
<TOTAL-LIABILITY-AND-EQUITY> 48,862
<SALES> 74,054
<TOTAL-REVENUES> 74,054
<CGS> 55,898
<TOTAL-COSTS> 55,898
<OTHER-EXPENSES> 14,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> 2,875
<INCOME-TAX> 1,115
<INCOME-CONTINUING> 1,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,760
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32
</TABLE>
