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 [No Fee Required] For the fiscal year ended December 31, 2000
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
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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
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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 28, 2001 was $1,899,780.
The number of shares outstanding of the registrant's common stock as of March
28, 2001 was 5,230,061 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 12, 2001
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 42 and 43
Page 1 of 51
PART I
ITEM 1 - BUSINESS
General
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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
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The Company's business objectives are to increase market share in
relatively slow-growth, cyclical markets by broadening its product range and
continuing to strengthen its market position. 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.
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
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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 the growth or decline 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.
Page 2 of 51
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. 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. Since 1998, the Company's sales have
declined significantly. In 1998, the Company's net sales were $98.3 million
which compares to net sales of $64.2 million in 2000.
Products and Services
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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
12/31/00 12/31/99 12/31/98
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New Machines/Related Services ........ 45.1% 44.6% 57.0%
Aftermarket .......................... 54.9% 55.4% 43.0%
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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
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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 essentially the same.
Segment information for new equipment sales, aftermarket sales, geographic sales
and operating results for fiscal 2000, 1999, and 1998 are reported in Note 16 to
the Consolidated Financial Statements.
Page 3 of 51
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 and Rochdale, England. The
Company has additional sales and service offices strategically located in the
United States and Asia. In certain geographic areas outside the United States,
sales are facilitated by independent representatives who assist employees of the
Company.
Process Laboratory Services
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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.
Competition
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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
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The Company's backlog of orders considered firm by management at
December 31, 2000, 1999 and 1998 was approximately $28 million, $29 million and
$33 million, respectively. Substantially all of the orders included in the
December 31, 2000 backlog have contractual ship dates in fiscal 2001. Firm
backlog at March 26, 2001 and March 27, 2000 was $29 million and $33 million,
respectively.
Page 4 of 51
Manufacturing
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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
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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
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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
12/31/00 12/31/99 12/31/98
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(Dollars in thousands)
Research and development expense pertaining to
new products or significant improvements to
existing products ........................... $1,580 $1,570 $1,485
All other product development and engineering
expenditures related to ongoing refinements,
improvements of existing products, and custom
engineering ................................. 3,224 3,580 3,700
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Total ......................................... $4,804 $5,150 $5,185
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Percent of net sales .......................... 7.5% 6.9% 5.3%
Page 5 of 51
Patents and Trademarks
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The Company possesses rights under a number of domestic and foreign
patents and trademarks relating to its products and business. The Company holds
approximately 197 patents which cover technology utilized in its products and
currently has approximately 16 patent applications pending. The Company's
patents have expiration dates ranging from 2001 through 2016. 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
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The Company and The Black & Decker Corporation ("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
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 Black & Decker. 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.
Employees
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As of December 31, 2000, the Company had 376 employees compared to 432
employees at December 31, 1999. The workforce reduction is primarily a result of
the Company's ongoing restructuring activities. Approximately 37 employees in
the U.S. are covered by a collective bargaining agreement which expires on June
15, 2003. In the U.K., the Company is a party to non-binding national and local
collective bargaining agreements with several U.K. unions which covers 66
employees.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company.
Location Principal Use Approx. Sq. Ft.
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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
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.
Page 6 of 51
ITEM 3 - LEGAL PROCEEDINGS
As of the date hereof, the Company is not aware of any contamination,
other than any pre-May 12, 1986 contamination (as described in Part I, Item 1,
Environmental), at any of its facilities which would require material
environmental 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. 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.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
Page 7 of 51
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 Company has
received notification from NASDAQ that the Company's common stock has failed to
maintain a minimum bid price of $1.00 for thirty (30) consecutive trading days
as required by NASDAQ rules. Therefore, in accordance with the NASDAQ rules, the
Company is provided until April 11, 2001, to regain compliance with this rule.
If, prior to April 11, 2001, the bid price of the Company's common stock is at
least $1.00 for a minimum of ten (10) consecutive trading days, NASDAQ's staff
will determine if the Company complies with NASDAQ's Marketplace Rule 4310
(c)(8)(b). If the Company is unable to demonstrate compliance with such rule on
or before April 11, 2001, NASDAQ will notify the Company that its common stock
will be de-listed. As of March 28, 2001, the bid price for the Company's common
stock has not been at least $1.00 for ten (10) consecutive trading days. The
Company's management is considering measures to avoid de-listing. The following
chart sets forth the high and low prices for the Common Stock and dividends
declared for the last two fiscal years:
Fiscal 2000 High Low Dividend
- ----------- ---- --- --------
First Quarter .......... $2.22 $1.75 $0.04
Second Quarter ......... $1.87 $1.38 $0.04
Third Quarter .......... $1.62 $1.25 $0.04
Fourth Quarter ......... $1.46 $0.69 --
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
(b) As of March 19, 2001 the approximate number of record holders of
the Company's common stock was 1,100.
(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. No cash dividends
were declared for the quarters ended October 1, 2000 and December 31, 2000.
(d) There were no sales or issuance's of the Company's equity shares
that were not registered under the Securities Act.
Page 8 of 51
ITEM 6 - Selected Consolidated Financial Data
Year Year Year Year Year
ended ended ended ended ended
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
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Statement of Operations Data: (In thousands, except per share data)
Net sales (1) ....................................... $ 64,223 $ 74,455 $ 98,267 $ 85,550 $ 76,040
======== ======== ======== ======== ========
Gross margin ........................................ $ 15,158 $ 18,156 $ 22,772 $ 17,711 $ 18,123
======== ======== ======== ======== ========
As a percent of net sales ........................ 23.6% 24.4% 23.2% 20.7% 23.9%
======== ======== ======== ======== ========
Operating income (loss) ............................. ($ 837) $ 1,204 $ 4,521 $ 1,542 $ 608
Other income (expense), net (2) .................. (129) 1,671 (698) 542 (128)
-------- -------- -------- -------- --------
Income (loss) before income taxes ................... (966) 2,875 3,823 2,084 480
Provision for income taxes ......................... 17 1,115 1,546 727 154
-------- -------- -------- -------- --------
Net income (loss) ................................... ($ 983) $ 1,760 $ 2,277 $ 1,357 $ 326
======== ======== ======== ======== ========
Net income (loss) per share - Basic and Diluted ..... ($ 0.19) $ 0.32 $ 0.38 $ 0.23 $ 0.05
======== ======== ======== ======== ========
Dividends per share of Common Stock ................. $ 0.12 $ 0.24 $ 0.08 $ 0.64 $ 0.06
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Basic (000's) 5,249 5,448 5,942 5,950 5,970
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Diluted (000's) 5,249 5,454 5,966 5,951 5,972
======== ======== ======== ======== ========
Balance Sheet Data:
Current assets ................................... $ 30,581 $ 34,445 $ 48,273 $ 37,104 $ 40,187
Current liabilities .............................. $ 16,277 $ 16,930 $ 28,893 $ 23,286 $ 19,841
Working capital ratio ............................ 1.9 2.0 1.7 1.6 2.0
Total assets ..................................... $ 43,932 $ 48,862 $ 63,265 $ 56,381 $ 50,731
Long-term debt ................................... $ 1,194 $ 2,584 $ 3,983 $ 5,283 $ 214
Stockholders' equity ............................. $ 23,963 $ 25,864 $ 26,301 $ 25,782 $ 28,553
Other Data:
Backlog .......................................... $ 27,680 $ 28,929 $ 33,269 $ 46,554 $ 50,225
(1) Restated to reflect the adoption of Emerging Issues Task Force consensus
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs". The
restatement has resulted in an increase to net sales of $401,000, $231,000,
$168,000 and $204,000 in 1999, 1998, 1997 and 1996, respectively. In
addition, in each of these years, costs of sales has been increased by the
same corresponding amount.
(2) 1999 Other Income includes $1.9 million gain from the sale of real estate.
Page 9 of 51
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
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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 2000 Compared to Fiscal 1999
- -----------------------------------
Net sales in 2000 and 1999 were $64.2 million and $74.4 million,
respectively, a decrease of $10.2 million. The decrease in net sales is
primarily due to lower sales in the European markets resulting from weak demand
and the detrimental effect of the strength of the US dollar and British Pound
Sterling versus the Euro. The weakness of the Euro provides substantial
advantages to our competitors located in the Euro-zone. 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 $62.7 million in orders in 2000 compared to $70.0
million for 1999. The decrease is primarily due to lower new machine orders
received in North America offset to some extent by increased new machine orders
received in the European markets.
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 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 time economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's traditional customers
and markets are operating with excess capacity thereby reducing the number of
projects for plant expansion and modernization. The Company is experiencing
increased pricing pressures from our competitors in an overall smaller market.
In addition, the decline in the value of the Euro versus the US dollar and
British pound sterling has increased pricing pressures. These conditions are
resulting in customer orders with lower margins and lost business. 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 2000 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.
Gross margin in 2000 was $15.2 million compared to $18.2 million for
1999, a decrease of $3.0 million. The margin percentage decreased to 23.6% from
24.4%. The decrease in comparative periods margin as a percent of sales is
primarily attributed to changes in product mix, competitive pricing pressures
and higher warranty costs. New machine shipments in 1999 included more Compact
Processing machines which tend to have higher margins than other new machines.
Operating expenses in 2000 were $16.0 million compared to $17.0
million in 1999, a decrease of $1.0 million. Approximately half the decrease is
due to lower employee compensation and related benefit costs with the remaining
decline due to small decreases in numerous expenses.
Page 10 of 51
During 2000, the Company incurred $326,000 of severance payments
related to headcount reductions, predominately in the Company's UK operations.
Of these payments, $77,000 was charged to cost of sales and $249,000 was charged
to selling, general and administrative expenses.
Interest expense in 2000 was $0.3 million compared to $0.4 million in
1999. The decrease is due to lower average borrowings. Interest income in 2000
was $0.2 million compared to $0.4 million in 1999. The decrease is due to lower
average cash balances available for investment.
Net other expense in 2000 and 1999 was $0.1 million.
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 provision for income taxes is comprised
of $498,000 of income tax expense related to pretax income generated by the
Company's U.S. operations offset by a $481,000 income tax benefit related to a
pre-tax loss generated by the Company's UK operations.
Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------
Net sales in 1999 and 1998 were $74.4 million and $98.3 million,
respectively, a decrease of $23.9 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 24.4% 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 $17.0 million compared to $18.3
million in 1998, a decrease of $1.3 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 $143,000 compared to $102,000 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,
Page 11 of 51
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.
Material Contingencies
- ----------------------
As described in Part I, Item 1, Environmental, on the basis of the
preliminary data now available there is no reason to believe that any
remediation activities which might be required by the DEP as a result of the
findings of the assessment at the Ansonia and Derby, Connecticut facilities 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 2000 decreased approximately
$7.3 million, or approximately 10.4%, to approximately $62.7 million compared to
$70.0 million in fiscal 1999. The decrease is primarily in the North American
market 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. In addition, the decline in the value of the Euro versus the US
dollar and British pound sterling has increased pricing pressures. These
conditions are resulting in customer orders with lower margins and lost orders.
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 2000 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,
2000 and 1999 is $27.7 million and $28.9 million, respectively. The contractual
ship dates for substantially all of the December 31, 2000 backlog is in 2001.
The backlog at March 26, 2001 and March 27, 2000 was $29.0 million and $33.0
million, respectively.
Liquidity and Capital Resources; Capital Expenditures
- -----------------------------------------------------
Working capital and the working capital ratio at December 31, 2000
were $14.3 million and 1.88 to 1.0, respectively, compared to $17.5 million and
2.0 to 1.0 at December 31, 1999, respectively. During the year ended December
31, 2000 the Company paid dividends of $0.12 per share. 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 2000 and 1999 the Company has repurchased
20,000 and 694,300 shares of common stock, respectively, at varying times and in
varying amounts totaling approximately $16,000 and $1.5 million, respectively.
The repurchased shares are held in treasury (See Note 10 to the Consolidated
Financial Statements).
Page 12 of 51
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.
For some time the Company has been contemplating supplementing its
current banking arrangement with a new or second bank and is continuing
discussions on this matter. The Company has a worldwide multi-currency credit
facility with a major U.S. bank, as amended on March 28, 2001, consisting of a
$7.5 million revolving credit facility for direct borrowings and letters of
credit, a (pound)3.0 million foreign exchange contracts facility and a term
note. Interest varies based upon prevailing market rates. 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. Under the facility, there were $4.9 million and $3.8 million of letters
of credit outstanding at December 31, 2000 and 1999, respectively. At December
31, 2000 and 1999, there was $2.4 million and $3.9 million outstanding under the
term loan, respectively. The term loan is payable in equal quarterly payments of
(pound)200,000 (approximately $294,000) through December 31, 2002. The revolving
credit facility expires February 15, 2002.
Management anticipates that its cash balances, operating cash flows
and the 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 during fiscal
2000 and 1999.
In fiscal 2000, new legal minimum funding guidelines for pension plans
became effective in the U.K. which are significantly different than the prior
guidelines. Based upon the new guidelines the Company is required to make
significant cash contributions to the Company's U.K. pension plan even though
pension obligations are overfunded under U.S. generally accepted accounting
principles. Prior to 2000, the Company has not been required to make substantial
contributions to the U.K. pension plans. In 2000, the Company contributed
approximately $946,000 to the U.K. pension plan. The Company anticipates
contributions in 2001 to the U.K. pension plan to be approximately the same as
2000.
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
contracts to hedge foreign currency transactions. Foreign currency transactions
generally are for periods of no more than twelve 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.
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, except as it relates to the previously described
competitive price disadvantages due to the relative weakness of the Euro versus
the U.S. dollar and British Pound Sterling.
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
Page 13 of 51
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.
In the fourth quarter of 2000, the Company was required to adopt the
Emerging Issues Task Force Consensus Issue 00-10 "Accounting for Shipping and
Handling Fees and Costs" ("EITF00-10"), and SEC Staff Accounting Bulletin 101
"Revenue Recognition" ("SAB-101"). As a result of EITF00-10, prior year
financial statements have been restated to reflect as revenue, amounts received
from customers as reimbursement for freight costs paid by the Company on their
behalf. Such reimbursement had previously been reflected as a reduction to the
related expenses. The adoption of SAB-101 did not have a material impact on the
annual financial statements but it did result in changes in the timing of when
certain revenues were recognized within a fiscal year. See Note 17 to the
Consolidated Financial Statements.
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 revenues 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 contracts to hedge foreign
currency transactions. These derivative instruments usually involve little
complexity and are generally for periods of less than twelve 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 these interest rates are not expected
to have a material impact on the Company's results of operations.
Page 14 of 51
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors................................................16
Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999..................17
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998 .........................................18
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998...............................19
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998.....................................20
Notes to Consolidated Financial Statements.................................21-38
Page 15 of 51
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Stamford, Connecticut
February 15, 2001
Except for Note 8,
as to which the
date is March 28, 2001
Page 16 of 51
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
12/31/00 12/31/99
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 2,486 $ 6,069
Accounts receivable, net of allowance for doubtful
accounts of $139 and $185, respectively ............. 13,607 15,027
Inventory ............................................ 12,411 11,975
Deferred income taxes ................................ 793 550
Other current assets ................................. 1,284 824
-------- --------
Total current assets ............................... 30,581 34,445
Property, plant and equipment, net of accumulated
depreciation of $14,037 and $13,186, respectively .... 9,538 10,995
Prepaid pension costs .................................. 3,514 2,881
Other assets ........................................... 299 541
-------- --------
Total assets ........................................... $ 43,932 $ 48,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................... $ 6,400 $ 7,837
Accrued expenses and taxes ........................... 1,660 2,157
Advances from customers .............................. 5,948 4,015
Accrued warranty costs .............................. 1,075 1,629
Short-term debt ...................................... 1,194 1,292
-------- --------
Total current liabilities ........................... 16,277 16,930
Long-term debt ......................................... 1,194 2,584
Postretirement benefit obligation ...................... 1,118 1,138
Minimum pension obligations ............................ -- 1,030
Deferred income taxes .................................. 1,380 1,316
Commitments and contingencies .......................... -- --
-------- --------
Total liabilities ................................... 19,969 22,998
-------- --------
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, 912,045 and 892,045 shares at December
31, 2000 and 1999, respectively, at cost ............ (2,529) (2,513)
Retained earnings .................................... 8,330 9,943
Accumulated other comprehensive loss ................. (1,194) (922)
-------- --------
Total stockholders' equity .......................... 23,963 25,864
-------- --------
Total liabilities and stockholders' equity ............. $ 43,932 $ 48,862
======== ========
See Notes to Consolidated Financial Statements
Page 17 of 51
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
--------------------------------
12/31/00 12/31/99 12/31/98
-------- -------- --------
Net sales ................................... $ 64,223 $ 74,455 $ 98,267
Cost of sales ............................... 49,065 56,299 75,495
-------- -------- --------
Gross margin ................................ 15,158 18,156 22,772
Operating expenses:
Selling .................................. 6,713 6,791 7,869
General and administrative ............... 7,702 8,591 8,897
Research and development ................. 1,580 1,570 1,485
-------- -------- --------
Total operating expenses ............... 15,995 16,952 18,251
-------- -------- --------
Operating income (loss) ..................... (837) 1,204 4,521
Interest income ............................. 222 384 544
Interest expense ............................ (265) (449) (1,140)
Gain from sale of real estate ............... -- 1,879 --
Other (expense) income, net ................. (86) (143) (102)
-------- -------- --------
Income (loss) before income taxes ........... (966) 2,875 3,823
Provision (benefit) for income taxes:
Current ................................ 499 1,143 1,010
Deferred ............................... (482) (28) 536
-------- -------- --------
Total .................................. 17 1,115 1,546
-------- -------- --------
Net income (loss) ........................... $ (983) $ 1,760 $ 2,277
======== ======== ========
Per share data:
Basic and diluted net income (loss) per share ($ 0.19) $ 0.32 $ 0.38
======== ======== ========
Average shares outstanding (000's):
Basic .................................... 5,249 5,448 5,942
======== ======== ========
Diluted .................................. 5,249 5,454 5,966
======== ======== ========
See Notes to Consolidated Financial Statements
Page 18 of 51
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated Total
Paid other Stock-
Common stock in Treasury Retained comprehensive holders'
Shares Amount capital stock earnings expense equity
------ ------ ------- -------- -------- ------------- ---------
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
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) ........................... -- -- -- -- (983) -- (983)
----------
Other Comprehensive income, net of tax
Foreign currency translation ....... -- -- -- -- -- (885) (885)
Minimum pension liability .......... -- -- -- -- -- 613 613
----------
Other Comprehensive (loss) ........... (272)
----------
Comprehensive (loss) ................. (1,255)
Treasury stock transactions .......... -- -- -- (16) -- -- (16)
Cash dividend declared
at $.12 per common share ........... -- -- -- -- (630) -- (630)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 ........... 6,142,106 $ 61 $ 19,295 ($ 2,529) $ 8,330 ($ 1,194) $ 23,963
========== ========== ========== ========== ========== ========== ==========
See Notes to Consolidated Financial Statements
Page 19 of 51
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
12/31/00 12/31/99 12/31/98
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ............................................. $ (983) $ 1,760 $ 2,277
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
(Gain) loss on disposal of fixed assets ...................... 8 (1,930) (288)
Depreciation and amortization ................................ 1,980 2,362 2,311
Decrease (increase) in accounts receivable ................... 972 5,456 (6,259)
Decrease (increase) in inventory ............................. (842) 2,143 1,569
Decrease (increase) in prepaid pension costs ................. (814) 290 290
(Decrease) increase in accounts payable ...................... (1,136) (5,986) 5,660
(Decrease) increase in advances from customers .............. 2,068 (2,945) 590
(Decrease) increase in accrued expenses and taxes ............ (1,018) (2,342) (1,145)
(Decrease) increase in accrued installation and warranty costs (506) (25) 354
(Decrease) increase in deferred income taxes ................. 128 (297) 319
Other ........................................................ (527) 336 (221)
------- ------- -------
Total adjustments ............................................ 313 (2,938) 3,180
------- ------- -------
Net cash (used in) provided by operating activities .......... (670) (1,178) 5,457
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets ...................... 276 2,279 1,193
Purchases of property, plant and equipment .................. (1,083) (1,092) (2,113)
Refund of Shaw asset purchase price ......................... -- 4,405 2,701
------- ------- -------
Net cash (used in) provided by investing activities ......... (807) 5,592 1,781
------- ------- -------
Cash flows from financing activities:
Repayment of long term borrowings ........................... (1,225) (1,293) (1,536)
Purchase of treasury stock .................................. (16) (1,523) (6)
Dividends paid .............................................. (630) (1,376) (1,427)
------- ------- -------
Net cash (used in) provided by financing activities ......... (1,871) (4,192) (2,969)
Effect of foreign currency exchange rate changes on cash ........ (235) 61 70
------- ------- -------
Net increase (decrease) in cash and cash equivalents ............ (3,583) 283 4,339
Cash and cash equivalents--
Beginning of period ......................................... 6,069 5,786 1,447
------- ------- -------
End of period ............................................... $ 2,486 $ 6,069 $ 5,786
======= ======= =======
Income taxes paid ............................................... $ 601 $ 2,760 $ 870
======= ======= =======
Interest paid ................................................... $ 259 $ 445 $ 474
======= ======= =======
See Notes to Consolidated Financial Statements
Page 20 of 51
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 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 approximately 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.
Page 21 of 51
(e) 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.
(f) 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 risk.
During the fourth quarter of 2000, the Company was required to adopt
SEC Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB-101"). SAB-101
provides guidelines on when revenue can be recognized. The adoption of SAB-101
did not have a material impact on the Company's annual financial statements but
it did result in changes in the timing of when certain revenues were recognized
within a fiscal year. (See Note 17 to the financial statements).
(g) Warranty Obligations:
Estimated costs to be incurred under warranty obligations relating to
products which have been sold are provided for at the time of sale.
(h) 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 $6.4 million of undistributed earnings of foreign subsidiaries
because it is expected that those earnings will be reinvested indefinitely.
(i) Earnings Per Share:
Basic earnings per share is determined by dividing net income (loss)
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.)
(j) 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 net foreign currency transaction loss of $64,000 and $71,000 in
2000 and 1998, respectively, and a net foreign currency transaction gain of
$63,000 in fiscal 1999. These amounts are included in cost of goods sold in the
accompanying financial statements.
Page 22 of 51
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, firm commitments 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, firm
commitments and payables and the related hedges until the date the transactions
are settled in cash. At December 31, 2000, the Company has entered into $1.6
million of forward exchange contracts for transactions related to amounts to be
received for sales commitments. A loss of approximately $11,000 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.
(k) 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.
(l) 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.
(m) Advertising:
Advertising costs are expensed in the period the advertising takes
place. Advertising expense for the years ended December 31, 2000, 1999 and 1998
was $238,000, $248,000 and $296,000, respectively.
(n) Reclassifications:
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation. Historically, the
Company reflected the amount received by customers as reimbursement for freight
costs paid by the Company on their behalf as a reduction to such expense. The
accompanying financial statements have been restated for all years presented to
reflect such reimbursed amount as revenues. This restatement has been done to
conform with Emerging Issues Task Force consensus issue 00-10, "Accounting for
Shipping and Handling Costs". The restatement has resulted in an increase to net
sales of $401,000 and $231,000 in 1999 and 1998, respectively. In addition, in
each of these years costs of sales has been increased by the same corresponding
amount. This restatement results in all shipping and handling costs being
classified as cost of sales.
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
Page 23 of 51
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 through September 30, 1999, 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.
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
NOTE 3 - OTHER ASSETS
12/31/00 12/31/99
-------- --------
(In thousands)
Acquired patents and technical know how, net
of accumulated amortization of $448 and $323,
respectively.......................................... $299 $484
Other................................................... - 57
------ ------
Total................................................. $299 $541
====== ======
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 $526,000, $719,000 and $866,000, in fiscal 2000, 1999 and 1998,
respectively. In addition, the Company also reimbursed First Funding $207,000,
$160,000, and $236,000 for out-of-pocket costs during the same three periods,
respectively. The 1998 amount includes $177,000 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
Page 24 of 51
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.
NOTE 5 - INVENTORY
Inventory is comprised of the following:
12/31/00 12/31/99
-------- --------
(In thousands)
Stock and raw materials......... $7,997 $7,934
Work-in-process................. 4,414 4,041
------- -------
Total........................... $12,411 $11,975
======= =======
Of the above inventories at December 31, 2000 and 1999, $7.0 million
and $6.8 million, respectively are valued using the LIFO method. Current
replacement costs were greater than the LIFO carrying amounts by approximately
$0.2 million and $0.4 million at December 31, 2000 and 1999, respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
12/31/00 12/31/99
-------- --------
(In thousands)
Land and buildings..................... $3,894 $4,033
Machinery, equipment and other......... 19,155 19,794
Construction in progress............... 526 354
-------- --------
23,575 24,181
Accumulated depreciation............. (14,037) (13,186)
-------- --------
Property, plant and equipment, net... $9,538 $10,995
======== ========
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years.
NOTE 7 - ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes includes accrued wages and benefits of
approximately $0.8 million and $1.2 million at December 31, 2000 and 1999,
respectively. Also included are income taxes payable of $0.3 million and $0.5
million, at December 31, 2000 and 1999.
NOTE 8 - BANK CREDIT ARRANGEMENTS
The Company has a worldwide multi-currency credit facility, as amended
on March 28, 2001, with a major U.S. bank consisting of a $7.5 million revolving
credit facility for direct borrowings and letters of credit, a (pound)3.0
million foreign exchange contracts facility and term note. The revolving credit
facility expires on February 15, 2002. Interest varies based upon prevailing
market interest rates (8.5% and 7.8% at December 31, 2000 and 1999,
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 the
aggregate of (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. The weighted averaged interest rate incurred on borrowings was 8.6%,
7.6% and 8.6% in fiscal 2000, 1999 and 1998, respectively. There were $4.9
million and $3.8 million of letters of credit outstanding at December 31, 2000
and 1999, respectively.
At December 31, 2000 and 1999, there was $2.4 million and $3.9 million
outstanding under the term loan. Approximately, $1,194,000 ((pound)800,000) and
$1,292,000 was classified as a current liability at December 31,
Page 25 of 51
2000, and 1999, respectively. At December 31, 2000 and 1999, $1,194,000 and
$2,584,000 was classified as a long-term liability, respectively. The term note
requires equal quarterly payments of (pound)200,000 through December 31, 2002.
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)
------------ --------------
2001 $322
2002 187
2003 104
2004 61
2005 25
Rental expense for the years ended December 31, 2000, 1999 and 1998
was $494,000, $464,000, $594,000, 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, 2000, 430,000
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, 2000, options to purchase 429,000 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 Financial Accounting Standard Number
123, "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.
Page 26 of 51
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
2000 1999 1998
-------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
-------------------- ---------------------- ----------------------
Outstanding, beginning of year 514 $5.32 515 $5.45 459 $5.86
Granted 10 2.13 85 2.00 60 2.19
Exercised - - - - - -
Forfeited 25 2.00 86 3.34 4 3.88
-------------------- --------------------- --------------------
Outstanding, end of year 499 $5.42 514 $5.32 515 $5.45
-------------------- --------------------- --------------------
Exercisable, end of year 472 $5.62 435 $5.83 420 $5.96
Weighted-average fair value of options
granted during the year $1.16 $1.18 $1.19
The following table summarizes information about stock options
outstanding at December 31, 2000:
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
- ---------------------------------------------------------------- -------------------------
$2.00 - $3.74 70,000 9.5 years $2.02 43,333 $2.01
x3.75 - 5.50 248,000 4 4.55 248,000 4.55
5.51 - 8.50 95,000 2.5 6.32 95,000 6.32
8.51 - 10.00 86,000 1.0 9.73 86,000 9.73
- ---------------------------------------------------------------- -------------------------
$2.19 - $10.00 499,000 4.0 years $5.42 472,333 $5.62
Page 27 of 51
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 2000, 1999
and 1998:
2000 1999 1998
----- ----- -----
Risk free interest rate 6.07% 6.52% 4.65%
Dividend yields 0.0% 2.0% 2.0%
Expected volatility factor of the expected
market price of the Company's common stock .379 .639 .595
Weighted average expected life of each option 8 yrs. 8 yrs. 8 yrs.
The weighted average fair value of options granted during 2000, 1999
and 1998 was $0.92, $1.18 and $1.19, respectively. 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:
Year ended
----------
12/31/00 12/31/99 12/31/98
-------- -------- --------
(In thousands, except per share data)
Pro forma net income (loss) $(1,001) $1,731 $2,237
Pro forma earnings (loss) per share -
basic and diluted $ (0.19) $0.32 $0.37
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 2000, 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 shares, for which retained earnings was adjusted. At December 31, 2000,
there were no shares subscribed to under these plans.
The Company may purchase up to $4,750,000 of its common stock under
its discretionary open market stock repurchase plan. During fiscal 2000, 1999
and 1998 the Company purchased 20,000, 694,300 and 3,500 shares of common stock,
respectively, under this plan for approximately $16,000, $1.5 million and
$9,000, respectively which are included in treasury stock.
Page 28 of 51
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 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 foreign plan consists of one defined benefit plan for the
Company's U.K. employees. The Company funds the domestic plan in accordance with
the Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plan
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 a foreign defined benefit pension plan 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:
Year ended
----------
12/31/00 12/31/99 12/31/98
-------- -------- --------
Domestic pension expense: (In thousands)
Service cost-benefits earned during the period $ 73 $ 75 $ 62
Interest cost on projected benefit obligation . 152 146 136
Expected return on plan assets ................ (177) (174) (147)
Recognized net actuarial loss ................. 44 52 27
Amortization of transition, asset ............. 0 2 7
Amortization of prior service cost ............ 10 11 11
------- ------- -------
Net domestic pension expense .............. $ 102 $ 112 $ 96
======= ======= =======
Foreign pension expense:
Service cost-benefits earned during the period $ 675 $ 761 $ 641
Interest cost on projected benefit obligation . 1,324 1,265 762
Estimated return on plan assets ............... (1,774) (1,568) (799)
Recognized net actuarial loss ................. 5 32 6
Amortization of transition asset .............. -- (39) (159)
------- ------- -------
Net foreign pension expense .............. $ 230 $ 451 $ 451
======= ======= =======
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 29 of 51
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:
Domestic Foreign
-------- -------
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Change in Projected Benefit Obligation
Balance at the beginning of the year ........... $ 2,407 $ 2,387 $ 23,666 $ 12,366
Service cost ................................... 73 75 675 761
Interest cost .................................. 152 146 1,323 1,265
Plan participant contributions ................. -- -- 196 239
Actuarial (gain) losses ........................ (270) (84) (316) 982
Foreign currency exchange rates ................ -- -- (1,852) (328)
Benefits paid .................................. (134) (117) (1,017) (808)
Business combinations .......................... 80 -- -- 9,189
-------- -------- -------- --------
Balance at the end of the period ............... $ 2,308 $ 2,407 $ 22,675 $ 23,666
======== ======== ======== ========
Change in Fair Value Plan Assets
Balance at the beginning of the year ........... $ 2,279 $ 2,114 $ 26,788 $ 10,243
Actual return on assets ........................ 26 120 (649) 5,064
Contributions - employer ....................... 200 162 946 111
Contributions - employee ....................... -- -- 196 239
Foreign currency exchange rates ................ -- -- (2,066) (273)
Benefits paid .................................. (134) (117) (1,017) (808)
Business combinations .......................... -- -- -- 12,212
-------- -------- -------- --------
Balance at the end of the period ............... $ 2,371 $ 2,279 $ 24,198 $ 26,788
======== ======== ======== ========
Funded status of the plan
(Under) over funded ............................ $ 63 ($ 128) $ 1,523 $ 3,122
Unrecognized net actuarial (gain) loss ........ 500 662 1,293 (832)
Unamortized prior service cost ................. 135 57 -- --
-------- -------- -------- --------
Prepaid Pension Expense ........................ $ 698 $ 591 $ 2,816 $ 2,290
======== ======== ======== ========
Discount rate .................................. 7.25% 6.50% 6.00% 6.00%
Rate of increase in future compensation levels . N/A N/A 3.00% 3.00%
Expected long-term rate of return on plan assets 8.00% 8.00% 7.00% 7.00%
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).
Page 30 of 51
The funded status under regulatory guidelines in the U.K. used to
determine legally required minimum funding amounts for the Company's foreign
plan varies significantly from the funded status for U.S. accounting purposes.
Based upon the last minimum funding computation dated April 1999 for the U.K.
plan, the Company is required to make annual contributions to the pension plan
for past service of approximately $265,000 a year. Based upon the nature of the
minimum funding computation this amount is subject to change the next time a
computation is performed. The Company is also required to make contributions to
the plan for current benefits earned. This amount was approximately $379,000 in
2000. U.K. government regulations require that by the year 2007, the plan be
fully funded under the statatory minimum funding computation. The Company also
made a special contribution in 2000 of approximately $302,000. The Company will
commission a new minimum funding computation for April 2001.
The Company changed the domestic discount rate in 2000 and 1999 in
response to year-end interest rates. The Company had a minimum pension liability
of $1,030,000 at December 31, 1999. No minimum pension liability was required at
December 31, 2000. The adjustments to the minimum liability were recorded in
1999 and 2000 as comprehensive income included in stockholders' equity, net of
applicable income taxes. Comprehensive income was $613,000 and $964,000 in
fiscal 2000 and 1999 respectively (see Note 12).
At December 31, 1999, for the 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.
The Company has a domestic 401(k) retirement plan for salaried
employees which includes matching and discretionary non-matching contributions
by the Company. Approximately $107,000, $112,000 and $78,000 of Company
contributions were expensed in fiscal 2000, 1999 and 1998, respectively.
Postemployment Benefits Other Than Pensions
- -------------------------------------------
The Company generally provides health care benefits to eligible
domestic union retired employees who retired prior to 1994 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.
The following table summarizes the Company's expense for
postemployment benefits other than pensions.
Year ended
12/31/00 12/31/99 12/31/98
-------- -------- --------
(In thousands)
Service cost- benefits earned during the period .. -- -- --
Interest cost on accumulated postretirement
benefit obligation ............................. $ 54 $ 49 $ 81
Amortization of net loss (gain) .................. (15) -- --
---- ---- ----
Net periodic postretirement benefit costs ........ $ 39 $ 49 $ 81
==== ==== ====
Page 31 of 51
The Company's non-pension postretirement benefit plans are not funded.
The status of the plans are as follows:
12/31/00 12/31/99
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
Beginning of the year $918 $1,248
Interest cost 54 57
Recognized actuarial (gain) loss (123) (309)
Benefits Paid (63) (78)
------ ------
End of the year 786 918
Unrecognized actuarial (gain) loss 332 220
------ ------
Accrued postretirement benefit obligation $1,118 $1,138
====== ======
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 6.50% at December 31, 2000 and
1999, 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% at December 31, 2000 and declines .5% per year to 5.5% by the
year 2005 and remains at that level thereafter. 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:
1-Percentage-Point
Increase Decrease
----------------------
(In thousands)
Increase (decrease) in the interest cost components in 2000 $57 $(50)
Increase (decrease) in postretirement benefit obligation as of 2000 $846 $(730)
NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
Foreign
Currency Minimum
Translation Pension
Adjustments Liability Total
----------- ---------- -----
(In thousands)
Balance at December 31, 1997 ....... ($ 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)
Cumulative translation adjustment .. (885) -- (885)
Minimum pension liability adjustment -- 1,005 1,005
Deferred taxes relating to minimum
Pension liability ................ -- (392) (392)
------- ------- -------
Balance at December 31, 2000 ....... ($1,194) $ 0 ($1,194)
======= ======= =======
Page 32 of 51
NOTE 13 - PROVISION FOR INCOME TAXES
Pre-tax income (loss) and provision (benefit) for income taxes for the
years ended December 31, 2000, 1999 and 1998 are as follows:
Year ended
12/31/00 12/31/99 12/31/98
-------- -------- --------
The domestic and foreign components of (In thousands)
income (loss) before income taxes are:
Domestic ........................ $ 1,203 $ 2,284 $ 3,325
United Kingdom .................. (2,169) 591 498
------- ------- -------
$ (966) $ 2,875 $ 3,823
======= ======= =======
The provision (benefit) for income taxes is:
Current:
United States ................... $ 392 $ 825 $ 918
United Kingdom .................. 0 110 9
State ........................... 107 208 83
------- ------- -------
499 1,143 1,010
------- ------- -------
Deferred:
United States .................. (1) (49) 127
United Kingdom ................. (481) 47 171
State .......................... 0 (26) 238
------- ------- -------
(482) (28) 536
------- ------- -------
$ 17 $ 1,115 $ 1,546
======= ======= =======
Deferred tax liabilities (assets) result from the following differences
between financial reporting and tax accounting.
12/31/00 12/31/99
-------- --------
(In thousands)
Deferred tax liabilities:
- -------------------------
Fixed Assets ........................................ $ 615 $ 1,062
Pension ............................................. 1,120 562
Inventory valuation ................................. 102 86
Intangibles ......................................... 89 145
Other ............................................... 24 --
------- -------
Total deferred tax liabilities ...................... 1,950 1,855
------- -------
Deferred tax assets:
- --------------------
Non pension postretirement benefits ................. (447) (455)
Installation and warranty cost accruals ............. (270) (334)
Vacation reserve .................................... (98) (98)
Bad debt reserve .................................... (36) (38)
Net operating loss carryforward ..................... (641) --
Other reserves ...................................... (71) (114)
Other ............................................... 3 (50)
------- -------
Total deferred tax assets ........................... (1,560) (1,089)
------- -------
Net deferred tax liability before valuation allowance 390 766
Valuation allowance ................................. 197 0
------- -------
Net deferred tax liability .......................... $ 587 $ 766
======= =======
A valuation allowance of $197,000 was established in 2000. The Net Operating
Loss Carry-forward relates to the Company's U.K. operations and can be carried
forward indefinitely.
Page 33 of 51
A reconciliation from statutory U.S. federal income taxes to the actual income
taxes is as follows:
Year ended
12/31/00 12/31/99 12/31/98
-------- -------- --------
(In thousands)
Statutory provision (benefit) ............ $ (328) $ 978 $ 1,300
U.S.--U.K. rate differential ............. 87 (44) (20)
State income taxes, net of federal benefit 71 120 212
Permanent differences .................... 2 75 79
Valuation allowance ...................... 197 -- --
Other .................................... (12) (14) (25)
------- ------- -------
Actual provision ......................... $ 17 $ 1,115 $ 1,546
======= ======= =======
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended
12/31/00 12/31/99 12/31/98
--------- ---------- ----------
(In thousands, except share data)
Net income (loss) applicable to
Common stockholders ................ ($ 983) $ 1,760 $ 2,277
========= ========== ==========
Weighted average number of common
Shares outstanding - basic ........ 5,249,228 5,447,807 5,941,837
Effect of dilutive stock and
Purchase options .................. -- 6,195 24,539
--------- ---------- ----------
Weighted average number of
Common shares outstanding - diluted 5,249,228 5,454,002 5,966,376
========= ========== ==========
Net income (loss) per share-basic .... $ (0.19) $ 0.32 $ 0.38
========= ========== ==========
Net income (loss) per share-diluted .. $ (0.19) $ 0.32 $ 0.38
========= ========== ==========
Page 34 of 51
NOTE 15 - OTHER INCOME(EXPENSE), NET
For the year ended December 31, 1998, other income (expense) includes
gains of approximately $0.3 million 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, 2000, 1999 and 1998:
Year ended
-------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Sale by Product Line
- --------------------
New Machines ............................. $29,000 $33,192 $56,057
Spares ................................... 17,471 18,981 20,206
Repairs .................................. 16,270 20,620 21,154
Other .................................... 1,482 1,662 850
------- ------- -------
Total .................................... $64,223 $74,455 $98,267
======= ======= =======
Geographic Sales by Destination
- -------------------------------
United States ............................ $41,365 $41,601 $51,416
United Kingdom ........................... 3,572 4,889 9,915
Europe (excluding U.K.) .................. 7,200 15,958 21,399
North America (excluding U.S.)............ 4,522 2,766 3,099
Asia ..................................... 5,049 5,964 6,446
Middle East .............................. 970 432 4,271
Other .................................... 1,545 2,845 1,721
------- ------- -------
Total ............................... $64,223 $74,455 $98,267
======= ======= =======
There are no sales to a single customer which exceeded 10% of the
Company's revenue for the years ended December 31, 2000, 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 35 of 51
Net sales to unaffiliated customers, operating income and assets of
the U.S. and U.K. operations for the years ended December 31, 2000, 1999 and
1998 are as follows:
United United
States Kingdom Consolidated
-------------------------------------
(In thousands)
Year ended 12/31/00:
Sales to unaffiliated Customers $ 48,427 $ 15,796 $ 64,223
Operating income (loss) ....... $ 1,131 $ (1,968) $ (837)
Long-lived assets ............. $ 5,472 $ 7,879 $ 13,351
Total assets .................. $ 22,592 $ 21,340 $ 43,932
Year ended 12/31/99:
Sales to unaffiliated Customers $ 48,218 $ 26,237 $ 74,455
Operating income .............. $ 564 $ 640 $ 1,204
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 $ 57,529 $ 40,738 $ 98,267
Operating income .............. $ 3,388 $ 1,133 $ 4,521
Long-lived assets ............. $ 6,044 $ 8,948 $ 14,992
Total assets .................. $ 29,006 $ 34,259 $ 63,265
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for fiscal 2000:
(In thousands except per share data)
Quarter
-------------------------------------------
First Second Third Fourth
------- ------- ------- -------
Fiscal 2000
- -----------
Net Sales .......................................... $11,555 $15,270 $17,488 $19,910
======= ======= ======= =======
Gross Margin ....................................... $ 2,077 $ 3,997 $ 4,066 $ 5,018
======= ======= ======= =======
Other income (expense) ............................. $ (87) $ 35 $ (92) $ 15
======= ======= ======= =======
Net income (loss) .................................. $(1,480) $ (132) $ (133) $ 762
======= ======= ======= =======
Basic and diluted net income (loss) per common share $ (0.28) $ (0.03) $ (0.03) $ 0.15
======= ======= ======= =======
Basic weighted average shares outstanding (000's) .. 5,250 5,250 5,250 5,243
======= ======= ======= =======
Diluted weighted average shares outstanding (000's) 5,250 5,250 5,250 5,243
======= ======= ======= =======
Page 36 of 51
Summarized quarterly financial data for fiscal 1999:
(In thousands except per share data)
Quarter
-------------------------------------------
First Second Third Fourth
------- ------- ------- -------
Fiscal 1999
- -----------
Net Sales .......................................... $13,029 $17,744 $20,193 $ 23,489
======= ======= ======= ========
Gross Margin ....................................... $ 2,316 $ 4,626 $ 6,165 $ 5,049
======= ======= ======= ========
Other income (expense) ............................. $ 1,873 $ 82 ($ 166) ($ 118)
======= ======= ======= ========
Net income (loss) .................................. ($ 179) $ 344 $ 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
======= ======= ======= ========
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.
The quarterly financial data has been restated to reflect the adoption
of Emerging Issues Task Force Consensus Issue 00-10, "Accounting for Shipping
and Handling Fees and Costs", and SEC Staff Accounting Bulletin 101, "Revenue
Recognition". The following tables summarize the effect of the restatement.
(In thousands)
Quarter
---------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Fiscal 2000
- -----------
Increase (decrease) in net sales due to
EITF 00-10 .................................... $ 118 $ 133 $ 175 $ 135
SAB101 ........................................ -- (539) 426 113
------- ------- ------- -------
Increase (decrease) ............................. $ 118 ($ 406) $ 601 $ 248
======= ======= ======= =======
Increase (decrease) in gross margin due to SAB101 $- $ (232) $ 140 $ 92
======= ======= ======= =======
Net income (loss) prior to restatement .......... $(1,480) $ 52 $ (302) $ 747
Effect of SAB101 .............................. -- (184) 169 15
------- ------- ------- -------
Net income (loss) restated ...................... $(1,480) $ (132) $ (133) $ 762
======= ======= ======= =======
Page 37 of 51
(In thousands)
Quarter
---------------------------------------
First Second Third Fourth
----- ------ ----- ------
Fiscal 1999
- -----------
Increase (decrease) in net sales due to
EITF 00-10 .................................... $ 72 $ 125 $ 102 $ 102
SAB101 ........................................ (337) 337 -- --
------ ------ ------ ------
Increase (decrease) ............................. $ (265) $ 462 $ 102 $ 102
====== ====== ====== ======
Increase (decrease) in gross margin due to SAB101 $ (88) $ 88 -- --
====== ====== ====== ======
Net income (loss) prior to restatement .......... $ (117) $ 282 $1,096 $ 499
Effect of SAB101 .............................. (62) 62 -- --
------ ------ ------ ------
Net income (loss) restated ...................... $ (179) $ 344 $1,096 $ 499
====== ====== ====== ======
Page 38 of 51
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 39 of 51
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,
2000 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2001.
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,
2000 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2001.
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,
2000 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2001.
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,
2000 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2001. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Page 40 of 51
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.................................................................................16
Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................17
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.....................18
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998...........19
Consolidated Statements of Cash Flows for years ended December 31, 2000, 1999 and 1998.........................20
Notes to Consolidated Financial Statements................................................................21 - 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 51
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 N/A
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.
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 N/A
ended December 31, 1998.
Exhibit 4 Notice of commitment reduction between Farrel
Corporation and The Chase Manhattan Bank dated 48
October 16, 2000.
Exhibit 4 Second amendment to the amended an restated Credit
Agreement between Farrel Corporation and Chase 49
Manhattan Bank dated December 27, 2000.
Exhibit 4 Notice of commitment reduction between Farrel
Corporation and The Chase Manhattan Bank dated March 51
28, 2001.
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 N/A
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.
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
Page 42 of 51
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
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 N/A
Form 10K for the year ended December 31, 1998.
Exhibit 11 Statement re: Computation of per share earnings. 34
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
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8K.
No such reports were filed by the Company during the year ended December 31,
2000.
Page 43 of 51
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 29, 2001
-----------------------------------
Date
Page 44 of 51
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 29, 2001
- ------------------------- President and Chairman --------------------
Rolf K. Liebergesell of the Board
/s/ Walter C. Lazarcheck Vice President - Chief March 29, 2001
- ------------------------- Financial Officer --------------------
Walter C. Lazarcheck (Chief Accounting Officer)
/s/ Charles S. Jones Director March 29, 2001
- ------------------------- --------------------
Charles S. Jones
/s/ James A. Purdy Director March 29, 2001
- ------------------------- --------------------
James A. Purdy
/s/ Howard J. Aibel Director March 29, 2001
- ------------------------- --------------------
Howard J. Aibel
/s/ Glenn Angiolillo Director March 29, 2001
- ------------------------- --------------------
Glenn Angiolillo
/s/ Alberto Shaio Director March 29, 2001
- ------------------------- --------------------
Alberto Shaio
Page 45 of 51
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, 2000 and 1999, and for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated February 15,
2001, except for Note 8 as to which the date is March 28, 2001 (included
elsewhere in this Annual Report on Form 10-K). Our audits also included the
financial statement schedule for the years ended December 31, 2000, 1999 and
1998 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 15, 2001
Page 46 of 51
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
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.
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 12/31/98
- -------------------
Allowance for doubtful
Receivables ................... $ 179 $ 261 -- ($ 143) $ 297
Reserve for excess and obsolete
inventory items ............... $ 751 $ 916 $ 3 ($ 120) $ 1,550
Accrued 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 warranty costs .......... $ 1,683 $ 1,426 ($ 30) ($1,450) $ 1,629
Year ended 12/31/00
- -------------------
Allowance for doubtful
Receivables ................... $ 185 $ 194 $ 1 ($ 241) $ 139
Reserve for excess and obsolete
inventory items ............... $ 1,354 $ 379 ($ 18) ($ 271) $ 1,444
Accrued warranty costs .......... $ 1,629 $ 1,285 $ 22 ($1,861) $ 1,075
(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 warranty costs to reflect expenditures
incurred.
Page 47 of 51
EXHIBIT 4
NOTICE OF COMMITMENT REDUCTION
WHEREAS, Farrel Corporation, Farrel Limited, and Farrel Shaw Limited (each of
the foregoing entities is referred to herein individually as a "Borrower" and,
collectively, as the "Borrowers"), and the Chase Manhattan Bank ("Bank") are
parties to an Amended and Restated Credit Agreement dated as of January 23, 1998
(the "Credit Agreement").
WHEREAS, the Borrowers desire to reduce the amount of the Revolving Credit
Commitment (as used herein, capitalized terms shall have the meanings set forth
in the Credit Agreement).
NOW THEREFORE,
1. Each Borrower hereby gives notice to the Banks, pursuant to Section 2.07 of
the Credit Agreement, of the permanent reduction of the Revolving Credit
Commitment to the amount of $14,500,000.
2. Each Borrower hereby represents and warrants to the Banks that: (i) the
covenants, representations and warranties set forth in the Credit Agreement
and in each of the other Facility Documents are true and correct on and as
of the date hereof as if made on an as of said date; (ii) no Event of
Default specified in the Facility Document and no event which, with the
giving of notice or lapse of time or both, would become such as Event of
Default has occurred and is continuing; and (iii) since April 23, 1997,
there has been no materials adverse change in the financial condition or
business operations of the Borrower which has not been disclosed to the
Banks.
IN WITNESS WHEREOF, the Borrowers hereto have caused this Notice to be duly
executed of the 16th day of October, 2000.
FARREL CORPORATION FARREL LIMITED
By:/s/Rolf K. Liebergesell. By:/s/Rolf K. Liebergesell
------------------------ -------------------------
Rolf K. Liebergesell Rolf K. Liebergesell
President and CEO. Director
FARREL SHAW LIMITED THE CHASE MANHATTAN BANK
By:/s/Rolf K. Liebergesell. By:/s/ Thomas D. McCormick
------------------------ -----------------------
Rolf K. Liebergesell Name: Thomas D. McCormick
Director Title: Vice President
Page 48 of 51
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to an Amended and Restated Credit Agreement dated
as of January 23, 1998 (the "Credit Agreement") among Farrel Corporation, a
corporation organized under the laws of Delaware (the "U.S. Company"), Farrel
Limited, a corporation organized under the laws of England and Wales ("Farrel
Limited") and Farrel Shaw Limited, a corporation organized under the laws of
England and Wales ("Farrel Shaw" and together with Farrel Limited, the "U.K.
Companies") (each of the foregoing entities is referred to herein individually
as a "Borrower" and, collectively, as the "Borrowers") and The Chase Manhattan
Bank, a New York banking corporation (the "Bank") is dated as of December 27,
2000 ("Agreement").
WHEREAS, the Borrowers and the Bank have entered into that certain
Credit Agreement pursuant to which the Bank has extended credit to the Borrowers
evidenced by certain Promissory Notes (as amended, the "Notes") issued by the
Borrowers;
WHEREAS, the Borrowers and the Bank have agreed to enter into this
Agreement to provide for the amendment to certain terms and covenants; and
WHEREAS, the Facility Documents, as amended and supplemented by this
Agreement and as each may be amended or supplemented from time to time, are
referred to herein as the "Amended Facility Documents".
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, each of the Borrowers and the Bank hereby
consent and agree to the amendments to the Credit Agreement set forth below:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS
Section 1.0.1 Definitions. The terms used herein and not defined herein
shall have the meanings assigned to such terms in the Credit Agreement.
"Revolving Credit Termination Date" is restated to mean February 15,
2002. The remainder of the definition remains unchanged.
"Variable Rate" means, for any day, (a) in the case of Dollar
borrowings, the higher of (i) the Federal Funds Rate for such day plus1/4of one
percent and (ii) the U.S. Prime Rate for such day, and (b) in the case of Pounds
Sterling borrowings, the U.K. Base Rate plus two and 1/4 percent.
ARTICLE 2. THE CREDIT
Section 2.01(iii)(A). LETTER OF CREDIT COMMISSION. The rate per annum
referenced in Section 2.01 (iii)(A) shall be changed from 7/8 of one percent to
1.25%.
ARTICLE 8. FINANCIAL COVENANTS
Section 8.03. INTEREST COVERAGE. The existing covenant is deleted in
its entirety and replaced by the following: Effective September 30, 2001, the
Borrowers shall maintain at all times a ratio of EBIT for the period of the four
cumulative consecutive fiscal quarters then ending to Interest Expense of not
less than 2.75 to 1. Effective December 31, 2001, the Borrowers shall maintain
at all times a ratio of EBIT for the period of the four cumulative consecutive
fiscal quarters then ending to Interest Expense of not less than 3.00 to 1.
Section 8.05. DEBT SERVICE COVERAGE. The existing covenant is deleted
in its entirety and replaced by the following: Effective December 31, 2001, the
Borrowers shall maintain for each fiscal year a ratio of (a) EBITDA minus
Capital Expenditures to (b) Debt Service Charges of not less than 1.00 to 1.
Page 49 of 51
All other terms and conditions of the Credit Agreement shall remain
unchanged.
1. REPRESENTATIONS. The Borrowers hereby represent and warrant to the
Bank that: (i) the covenants, representations and warranties set forth in the
Credit Agreement are true and correct on and as of the date of execution hereof
as if made on and as of said date and as if each reference therein to the Credit
Agreement were a reference to the Credit Agreement as amended by this Agreement;
(ii) no Event of Default specified in the Credit Agreement and no event, which,
with the giving of notice or lapse of time or both, would become such an Event
of Default has occurred and is continuing, (iii) since the date of the Credit
Agreement, there has been no material adverse change in the financial condition
or business operations of the Borrowers which has not been disclosed to Bank;
and (iv) the making and performance by the Borrowers of this Agreement have been
duly authorized by all necessary organizational action.
2. CONDITIONS OF EFFECTIVENESS. This Agreement shall become effective
when and only when Bank shall have received counterparts of this Agreement
executed by Borrowers and Bank, and Bank shall have additionally received the
following:
A. This Agreement fully executed by Borrowers.
B. Payment of a $5,000 Amendment Fee.
3. REFERENCE TO AND EFFECT ON FACILITY DOCUMENTS.
A. Upon the effectiveness hereof, each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like
import, and each reference in the other Facility Documents to the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended
hereby.
B. Except as specifically amended above, the Credit Agreement,
and all other Facility Documents shall remain in full force and effect and are
hereby ratified and confirmed.
C. The execution, delivery and effectiveness of this Agreement
shall not operate as a waiver of any right, power or remedy of Bank under any of
the Facility Documents, nor constitute a waiver of any provision of any of the
Facility Documents.
4. COSTS AND EXPENSES. Borrowers agrees to pay on demand all costs and
expenses of Bank in connection with the preparation, execution and delivery of
this Agreement and the other documents related hereto, including the fees and
out-of-pocket expenses of counsel for Bank.
5. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Connecticut without regard to any
conflicts-of-laws rules which would require the application of the laws of any
other jurisdiction.
6. HEADINGS. Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all or which taken together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day first above written.
FARREL CORPORATION FARREL LIMITED
By:/s/ Rolf K. Liebergesell By: /s/ Rolf K. Liebergesell
----------------------------------------- ------------------------------
Print Name: Rolf K. Liebergesell Print Name: Rolf K. Liebergesell
--------------------------------- ----------------------
Title: President and Chief Executive Officer Title: Director
-------------------------------------- ---------------------------
FARREL SHAW LIMITED THE CHASE MANHATTAN BANK
By: /s/ Rolf K. Liebergesell By: /s/ Thomas D. McCormick
---------------------------------------- ------------------------------
Print Name: Rolf K. Liebergesell Thomas D. McCormick
--------------------------------- Vice President
Title: Director
--------------------------------------
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NOTICE OF COMMITMENT REDUCTION
WHEREAS, Farrel Corporation, Farrel Limited, and Farrel Shaw Limited
(each of the foregoing entities is referred to herein individually as a
"Borrower" and, collectively, as the "Borrowers"), and The Chase Manhattan Bank
("Bank") are parties to an Amended and Restated Credit Agreement dated as of
January 23, 1998 (the "Credit Agreement"), as amended.
WHEREAS, the Borrowers desire to reduce the amount of the Revolving
Credit Commitment (as used herein, capitalized terms shall have the meanings set
forth in the Credit Agreement).
NOW THEREFORE,
1. Each Borrower hereby gives notice to the Bank, pursuant to Section
2.07 of the Credit Agreement, of the permanent reduction of the Revolving Credit
Commitment to the amount of $7,500,000.
2. Each Borrower hereby represents and warrants to the Bank that: (i)
the covenants, representations and warranties set forth in the Credit Agreement
and in each of the other Facility Documents are true and correct on and as of
the date hereof as if made on and as of said date; (ii) no Event of Default
specified in the Facility Document and no event which, with the giving of notice
or lapse of time or both, would become such an Event of Default has occurred and
is continuing; and (iii) since April 23, 1997 there has been no material adverse
change in the financial condition or business operations of the Borrower which
has not been disclosed to the Bank.
IN WITNESS WHEREOF, the Borrowers hereto have caused this Notice to be
duly executed as of the 28 day of March, 2001.
FARREL CORPORATION FARREL LIMITED
By:/s/ Rolf K. Liebergesell By: /s/ Rolf K. Liebergesell
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Print Name: Rolf K. Liebergesell Print Name: Rolf K. Liebergesell
--------------------------------- ----------------------
Title: President and Chief Executive Officer Title: Director
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FARREL SHAW LIMITED THE CHASE MANHATTAN BANK
By: /s/ Rolf K. Liebergesell By: /s/ Thomas D. McCormick
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Print Name: Rolf K. Liebergesell Thomas D. McCormick
--------------------------------- Vice President
Title: Director
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